Johnson and Johnson 2009 Annual Report Download - page 47

During the fiscal first quarter of 2008, in accordance with U.S.
GAAP, the Company adopted the standard related to fair value meas-
urements except for non-financial assets and liabilities recognized or
disclosed at fair value on a non-recurring basis, which became effec-
tive during the first fiscal quarter of 2009. The effect of adoption on
December 29, 2008 of this standard for non-financial assets and lia-
bilities recorded at fair value on a non-recurring basis did not have a
material impact on the Company’s financial position and results of
operations. This standard defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. During the fiscal first quarter of 2008, the Company
adopted the standard related to fair value option for financial assets
and financial liabilities. This standard permits the Company to meas-
ure certain financial assets and financial liabilities at fair value. The
Company assessed the fair value option made available upon adopting
this standard, and has elected not to apply the fair value option to any
financial instruments that were not already recognized at fair value.
U.S. GAAP defines fair value as the exit price that would be
received to sell an asset or paid to transfer a liability. Fair value is a
market-based measurement that should be determined using
assumptions that market participants would use in pricing an asset
or liability. The authoritative literature establishes a three-level hier-
archy to prioritize the inputs used in measuring fair value. The levels
within the hierarchy are described in the table below with level 1
having the highest priority and level 3 having the lowest.
The fair value of a derivative financial instrument (i.e. forward
exchange contract, currency swap) is the aggregation by currency of
all future cash flows discounted to its present value at the prevailing
market interest rates and subsequently converted to the U.S. dollar at
the current spot foreign exchange rate. The Company does not
believe that fair values of these derivative instruments materially dif-
fer from the amounts that could be realized upon settlement or matu-
rity, or that the changes in fair value will have a material effect on the
Company’s results of operations, cash flows or financial position.
The Company also holds equity investments which are classi-
fied as level 1 since they are traded in an active exchange market.
During 2009, the Company acquired substantially all of the assets
and rights of Elan’s Alzheimer’s Immunotherapy Program through a
newly formed company, JANSSEN Alzheimer Immunotherapy (JAI),
of which the Company owns 50.1% and Elan owns 49.9%. In addi-
tion, the Company purchased approximately 107 million newly
issued American Depositary Receipts (ADRs) of Elan, representing
18.4% of Elan’s outstanding ordinary shares. As part of this transac-
tion, the Company paid $885 million to Elan and committed to fund
up to $250 million of Elan’s share of research and development
spending by JAI. Of this total consideration of $1,135 million, $793
million represents the fair value of the 18.4% investment in Elan
based on Elan’s share price in an actively traded market as of the
date of this transaction. The IPR&D related to this transaction was
$679 million and is associated with bapineuzumab, a potential first-
in-class treatment that is being evaluated for slowing the progres-
sion of Alzheimer’s Disease. The value of the IPR&D was calculated
using cash flow projections discounted for the risk inherent in such
projects. Probability of success factors ranging from 40–50% were
used to reflect inherent clinical and regulatory risk. The discount
rate applied was 26%. The non-controlling interest related to this
transaction was $590 million, which the Company has recorded in
other non-current liabilities.
During 2009, the Company entered into a strategic collabora-
tion with Crucell N.V. which will focus on the discovery, develop-
ment and commercialization of monoclonal antibodies and vaccines
for the treatment and prevention of influenza and other infectious
and non-infectious diseases. In addition, the Company, through its
affiliate, purchased approximately 18% of Crucell’s outstanding
ordinary shares for an aggregate purchase price of $448 million.
Of the total consideration paid, $329 million represents the fair
value of the investment based on Crucell’s share price in an actively
traded market as of the date of the transaction with the excess
recorded to research and development expense in 2009.
The Company did not have any other significant financial
assets or liabilities which would require revised valuations under
this standard that are recognized at fair value.
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 45
The Company’s significant financial assets and liabilities measured at fair value as of January 3, 2010 and December 28, 2008 were as follows:
Significant
Quoted prices in other Significant
active markets for observable unobservable
identical assets inputs inputs 2009 2008
(Dollars in Millions) Level 1 Level 2 Level 3 Total Total*
Derivatives designated as hedging instruments:
Assets:
Foreign exchange contracts $—436 —436 1,238
Cross currency interest rate swaps —126** —126 110
Total —562 —562 1,348
Liabilities:
Foreign exchange contracts —608 —608 1,298
Cross currency interest rate swaps —571*** —571 1,033
Total —1,179 —1,179 2,331
Derivatives not designated as hedging instruments:
Assets:
Foreign exchange contracts —33 —33 84
Liabilities:
Foreign exchange contracts —40 —40 47
Other investments $1,134 ——1,134 41
* 2008 assets and liabilities are all classified as Level 2 with the exception of other investments of $41 million which are classified as Level 1.
** Includes $119 million of non-current assets.
*** Includes $517 million of non-current liabilities.
See Notes 2 and 7 for financial assets and liabilities held at carrying amount on the Consolidated Balance Sheet.