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growth of 8.3% and a negative currency impact of 4.1%. The acquisition of Synthes, Inc., net of the related trauma
business divestiture, increased both total sales growth and operational growth for the Medical Devices segment by 6.0%
and 7.9% in 2013 and 2012, respectively.
Analysis of Consolidated Earnings Before Provision for Taxes on
Income
Consolidated earnings before provision for taxes on income increased to $20.6 billion in 2014 as compared to $15.5
billion in 2013, an increase of 32.9%. Earnings before provision for taxes on income were favorable due to strong sales
volume growth, particularly sales of OLYSIO®/SOVRIAD®(simeprevir), positive mix from higher sales of higher margin
products in the Pharmaceutical business, divestitures of lower margin businesses and cost reduction efforts across many
of the businesses. Additionally, 2014 included higher net gains on divestitures of $2.3 billion, primarily the divestiture of
the Ortho-Clinical Diagnostics business, lower litigation expense of $1.0 billion, lower in-process research and
development costs of $0.4 billion and lower expenses of $0.1 billion related to the DePuy ASR™ Hip program as
compared to the fiscal year 2013. This was partially offset by the inclusion of an additional year of the Branded
Prescription Drug Fee of $0.2 billion and $0.1 billion of higher Synthes integration/transaction costs in 2014. The fiscal
year 2013 included a net gain of $0.4 billion on equity investment transactions, primarily the sale of Elan American
Depositary Shares.
Consolidated earnings before provision for taxes on income increased by $1.7 billion to $15.5 billion in 2013 as
compared to $13.8 billion in 2012, an increase of 12.3%. Earnings before provision for taxes on income were favorable
due to increased gross profit of $3.4 billion resulting from higher sales of higher margin products and cost containment
initiatives and a $0.4 billion net gain on equity investment transactions, primarily from the sale of Elan American Depositary
Shares. This was partially offset by higher litigation expenses of $1.1 billion and higher expenses of $0.1 billion related to
the DePuy ASR™ Hip program as compared to 2012. The fiscal year 2012 included $1.5 billion of higher write-downs of
intangible assets and in-process research and development and higher costs of $0.3 billion related to the Synthes
acquisition partially offset by higher gains of $0.8 billion related to divestitures.
As a percent to sales, consolidated earnings before provision for taxes on income in 2014 was 27.7% versus 21.7% in
2013.
Cost of Products Sold and Selling, Marketing and Administrative Expenses: Cost of products sold and selling,
marketing and administrative expenses as a percent to sales were as follows:
% of Sales 2014 2013 2012
Cost of products sold 30.6% 31.3 32.2
Percent point (decrease)/increase over the prior year (0.7) (0.9) 0.9
Selling, marketing and administrative expenses 29.5% 30.6 31.0
Percent point (decrease)/increase over the prior year (1.1) (0.4) (1.3)
In 2014, cost of products sold as a percent to sales decreased compared to the prior year. This was primarily the result of
positive mix from higher sales of higher margin products in the Pharmaceutical business, divestitures of lower margin
businesses and cost improvements across many of the businesses. This was partially offset by pricing and the impact of
negative transactional currency. In addition, 2013 included an inventory step-up charge of $0.1 billion related to the
Synthes acquisition. Intangible asset amortization expense included in cost of products sold for both 2014 and 2013 was
$1.4 billion. There was a decrease in the percent to sales of selling, marketing and administrative expenses in 2014
compared to the prior year primarily due to leveraged costs resulting from growth in the Pharmaceutical business,
particularly sales of OLYSIO®/SOVRIAD®(simeprevir), and cost containment initiatives across many of the businesses.
This was partially offset by the inclusion of an additional year of the Branded Prescription Drug Fee of $220 million in the
fiscal third quarter of 2014.
In 2013, cost of products sold as a percent to sales decreased compared to the prior year. This was primarily the result of
positive mix resulting from higher sales of higher margin products, lower costs associated with strong volume growth in the
Pharmaceutical business and cost reduction efforts across many of the businesses. The decrease was partially offset by
incremental intangible asset amortization expense primarily related to Synthes, the Medical Device Excise tax and
increased amortization expense as a result of the royalty buyout agreement with Vertex for INCIVO®. Intangible asset
amortization expense for 2013 and 2012 was $1.4 billion and $1.1 billion, respectively. Additionally, 2012 included $0.2
8•Johnson & Johnson 2014 Annual Report