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2005 Annual Report
Reaching more
people
Serving more
health needs

Table of contents

  • Page 1
    2005 Annual Repor t Reaching more people Serving more health needs

  • Page 2
    ... Financial Reporting ...64 Report of Independent Registered Public Accounting Firm ...65 Summary of Operations and Statistical Data 1995-2005 ...66 Reconciliation of Non-GAAP Measures ...67 Principal Global Businesses ...68 Worldwide Family of Companies ...73 Corporate and Shareholder Information...

  • Page 3
    ... OUR SHAREHOLDERS J ohnson & Johnson achieved record financial results stories in this year's annual report relate. Each of our businesses plays an important role in this regard. Let me provide a few examples. The Medical Devices and Diagnostics segment performed exceptionally well this past year...

  • Page 4
    ... affected by the impact of generic competition for DURAGESIC® and ULTRACET®, and by negative publicity related to NATRECOR®. Although declines in these categories largely offset the growth achieved in the balance of our pharmaceutical business this past year, our long-term record is one of strong...

  • Page 5
    ... skin care brand to generate revenue of more than $1 billion annually. JOHNSON'S® Baby, now 115 years young and still growing - delivered product innovations and geographic expansion with market entrants like JOHNSON'S® Soft line and JOHNSON'S® Soothing Naturals. Christine A. Poon Vice Chairman...

  • Page 6
    ... work and the leadership of our management and directors, we are in a good position to capitalize on the high and growing demand for products that meet serious unmet medical and personal needs. Across all our businesses, the leadership of Johnson & Johnson is looking into the future with a clear...

  • Page 7
    ...to consumers, the Johnson & Johnson companies are helping to transform the future of health care. Shown clockwise from top: Providing opportunities for more health care education and professional exchange at the Johnson & Johnson Medical (China) Ltd. Science Center Carrying out complex HIV research...

  • Page 8
    ... used to treat more than 1.7 million patients. Significant worldwide growth for the CYPHER® Stent in 2005 was driven by an impressive volume of new clinical data from wide-ranging drugeluting stent studies that underscore its unsurpassed long-term efficacy and trusted safety profile. Both company...

  • Page 9
    ... in Boston, uses this first-of-its-kind software to view an exact representation of his patient's heart and pinpoint the timing and voltage of the electrical signal, allowing for a more precise diagnosis of an irregular heartbeat. Right: Stephan H. Duda, M.D., of the Center for Diagnostic Radiology...

  • Page 10
    ... stroke victims new treatment options such as ST. JOSEPH® 81mg Adult Regimen Aspirin from McNeil Consumer Healthcare Division of McNeil-PPC, Inc. for secondary stroke prevention and development programs in carotid artery and intracranial stenting. The group has also worked with health care leaders...

  • Page 11
    ... sealants. Closure Medical's proprietary technology can be found in DERMABOND® Topical Skin Adhesive (2-octyl cyanoacrylate) products and BAND-AID® Brand Liquid Bandage. Recently, ETHICON OMNEX™ Surgical Sealant from Closure Medical received European CE Mark approval for use as an adjunct...

  • Page 12
    ... in India, communicate to other diabetes patients the benefits of regular blood glucose self-monitoring with products such as the ONETOUCH® ULTRA® and the ONETOUCH® HORIZON™ Blood Glucose Monitoring Systems. Advanced solutions from DePuy Spine, Inc. include the EXPEDIUM™ Spine System (right...

  • Page 13
    ... Implant and Instrument System, and the VIPERâ„¢ Fixation System provide less invasive access to the spine and controlled placement of implants that stabilize the spine as part of a spinal fusion or decompression procedure. Family with the ORTHOCORDâ„¢ Suture to offer three new products, which in...

  • Page 14
    ... capabilities across our businesses give Johnson & Johnson companies unparalleled opportunities to collaborate and pursue breakthroughs. Building upon the success of DePuy Biologics, a new center of excellence is expanding the scope of regenerative medicine activities from musculoskeletal products...

  • Page 15
    ... to actively transport drugs through intact skin without the use of needles or intravenous lines. Pending approval by the U.S. FDA, Ortho-McNeil, Inc. will market IONSYSâ„¢ in the U.S. IONSYSâ„¢ will be marketed in the European Union by Janssen-Cilag companies. Among recent pharmaceutical product...

  • Page 16
    ... & Johnson Pharmaceutical Research & Development, L.L.C. and ALZA collaborate on the clinical development of DOXIL®. In 2005, Ortho-McNeil Pharmaceutical, Inc., a leader in the fight against drug-resistant bacterial infections, acquired Peninsula Pharmaceuticals, Inc., a biopharmaceutical company...

  • Page 17
    ..., and, pending approval, Ortho-McNeil, Inc. will have U.S. marketing rights. Efforts to confront challenges in the evolving HIV/AIDS pandemic include the development of innovative new compounds, advanced technologies and new program/ policy initiatives. Tibotec Pharmaceuticals Ltd. submitted an...

  • Page 18
    ... a successful bake sale. The Illinois elementary school shown was one of the first to participate. Right: NEUTROGENA® products are becoming available in select premium department stores in India. Shown at a special counter in Mumbai, a beauty counselor offers personalized skin care recommendations...

  • Page 19
    ... care technologies from Johnson & Johnson Consumer Products Company Division of Johnson & Johnson Consumer Companies, Inc., the OrthoNeutrogena division of Ortho-McNeil Pharmaceutical, Inc., and Centocor, Inc. were showcased at the 63rd Annual Meeting of the American Academy of Dermatology in 2005...

  • Page 20
    ... calming benefits. The long-term leadership and growth of the JOHNSON'S® Baby brand is based on a commitment to continually find better ways to serve parents and their children. Building consumer knowledge is also key to greater opportunities in emerging markets, such as China, India, Russia and...

  • Page 21
    ... received related health information, from how the whole family can benefit from the use of TYLENOL® brand products, to the use of SPLENDA® Brand Sweetener in the kitchen and JOHNSON'S® Baby products in the nursery. The exhibit included an outdoor area for health assessments such as diabetes risk...

  • Page 22
    ... consumer, pharmaceutical, and medical devices and diagnostics companies and creates a unique platform for providing enhanced health education, services and care to people around the world. In sponsoring the Beijing 2008 Olympic Games, Johnson & Johnson reaffirms its long-term commitment to China...

  • Page 23
    ... 2005 by China Central TV, which reaches 84 percent of the Chinese population. Improving the scope and quality of health care for women, children and families affected by the global HIV/AIDS pandemic is a major focus of philanthropic activity for Johnson & Johnson companies. According to the United...

  • Page 24
    ... per year. ALZA Engineer Harry Lee inspects the unit prior to its going online. Left: Dedicated in October 2005, the 505-kilowatt solar tracking system at Johnson & Johnson Consumer Companies, Inc., in Skillman, New Jersey, is one of the largest ground-mounted solar energy systems in North America...

  • Page 25
    ... that give patients the best of care with reduced trauma is available at www.ethiconendo.com Find the right ACUVUE® Brand Contact Lenses for you by using the interactive ACUVUE® Lens Advisor at www.acuvue.com For diabetes help and support, join the free ONETOUCH® Gold program for expert articles...

  • Page 26
    ... Former Director, Social Services Department, Chicago Lying-In Hospital James G. Cullen Retired President and Chief Operating Officer, Bell Atlantic Corporation Third column, from top: Christine A. Poon Vice Chairman, Board of Directors, and Worldwide Chairman, Medicines & Nutritionals Group Leo...

  • Page 27
    ... the Company's long-term incentive plans and determines the compensation of the members of the Executive Committee. Additionally, the Committee reviews the management of the various retirement, pension, health and welfare plans that cover substantially all employees of the Company's domestic...

  • Page 28
    ... & Development Pharmaceuticals Group Executive Committee Robert J. Darretta Vice Chairman, Board of Directors Chief Financial Officer Executive Committee Kaye I. Foster-Cheek Vice President, Human Resources Executive Committee Colleen A. Goggins Worldwide Chairman, Consumer & Personal Care Group...

  • Page 29
    ...reporting was effective as of January 1, 2006. We refer you to Management's Report on Internal Control over Financial Reporting on page 64. We also require the management teams of our operating companies to certify their compliance with our Policy on Business Conduct and we have a systematic program...

  • Page 30
    ...on products related to human health and well-being. The Company is organized into three business segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The Consumer segment manufactures and markets a broad range of products used in the baby and child care, skin care, oral and wound...

  • Page 31
    ... the business until products containing pseudoephedrine are reformulated. The Skin Care franchise sales in 2005 were $2.4 billion, representing a 12.2% increase over 2004. This was attributable to sales growth in RoC®, AVEENO®, CLEAN & CLEAR® and NEUTROGENA® brand products. The Women's Health...

  • Page 32
    ... from the K-Y® and STAYFREE® product lines. The Baby & Kids Care franchise grew by 7 .9% to $1.6 billion in 2005. Growth in this franchise was led by the success of the JOHNSON'S® SOFTWASH® and SOFTLOTION™ product lines and BabyCenter.com®. Consumer segment sales in 2004 were $8.3 billion...

  • Page 33
    ... quarter of 2005, Biosense Webster received approval for the use of the CELSIUSâ„¢ RMT diagnostic ablation steerable tip catheter. In April and July of 2004, the Cordis Cardiology Division of Cordis Corporation received warning letters from the FDA regarding Good Manufacturing Practice regulations...

  • Page 34
    ... over the prior year. The ONETOUCH® ULTRA® product line achieved strong growth in 2005. The Vision Care franchise achieved $1.7 billion of sales in 2005, which was a growth rate of 10.7% over the prior year, led by the continued success of ACUVUE® ADVANCE™ Brand Contact Lenses with HYDRACLEAR...

  • Page 35
    ...Research and Development: In 2005, the Company recorded in-process research and development (IPR&D) charges of $362 million before tax related to the acquisitions of TransForm Pharmaceuticals, Inc., Closure Medical Corporation, Peninsula Pharmaceuticals, Inc., and the international commercial rights...

  • Page 36
    ... prior year. As a percent to sales, 2004 experienced a decrease of 0.5% from 2003, primarily due to additional investment in consumer promotions and advertising in the Over-the-Counter Pharmaceuticals and Nutritionals franchise. Provision for Taxes on Income: The worldwide effective income tax rate...

  • Page 37
    ...6 Capital Expenditures Operating Cash Flow 3 0 01 02 03 04 05 Financing and Market Risk The Company uses financial instruments to manage the impact of foreign exchange rate changes on cash ï¬,ows. Accordingly, the Company enters into forward foreign exchange contracts to protect the value...

  • Page 38
    ... employee benefit plans and accounting for stock options. Revenue Recognition: The Company recognizes revenue from product sales when goods are shipped or delivered and title and risk of loss pass to the customer. Provisions for certain rebates, sales incentives, trade promotions, coupons, product...

  • Page 39
    ... does not require compensation costs related to stock options to be charged against net income, as all options granted under the various stock options plans had an exercise price equal to the market value of the underlying common stock at grant date. Statement of Financial Accounting Standard (SFAS...

  • Page 40
    ...-looking statements as a result of new information or future events or developments. Risks and uncertainties include general industry conditions and competition; economic conditions, such as interest rate and currency exchange rate ï¬,uctuations; technological advances, new products and patents...

  • Page 41
    ... BALANCE SHEETS JOHNSON & JOHNSON AND SUBSIDIARIES At January 1, 2006 and January 2, 2005 (Dollars in Millions Except Share and Per Share Data) (Note 1) 2005 2004 Assets Current assets Cash and cash equivalents (Notes 1, 14 and 15) Marketable securities (Notes 1, 14 and 15) Accounts receivable...

  • Page 42
    ... 2.42 2.40 Sales to customers Cost of products sold Gross profit Selling, marketing and administrative expenses Research expense Purchased in-process research and development (Note 17) Interest income Interest expense, net of portion capitalized (Note 3) Other (income) expense, net Earnings before...

  • Page 43
    ... receivable from ESOP Balance, January 2, 2005 Net earnings Cash dividends paid Employee stock compensation and stock option plans Conversion of subordinated debentures Repurchase of common stock Other comprehensive income, net of tax: Currency translation adjustment Unrealized losses on securities...

  • Page 44
    ...short-term debt Proceeds from long-term debt Retirement of long-term debt Proceeds from the exercise of stock options Net cash used by financing activities Effect of exchange rate changes on cash and cash equivalents Increase in cash and cash equivalents Cash and cash equivalents, beginning of year...

  • Page 45
    ... on products related to human health and well-being. The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. The Consumer segment manufactures and markets a broad range of products used in the baby and child care, skin care, oral and wound...

  • Page 46
    ... unusual sales or return patterns due to dating, competition or other marketing matters are specifically investigated and analyzed as part of the accounting for sales return accruals. The Company also earns service revenue for co-promotion of certain products and includes it in sales to customers...

  • Page 47
    ... shows the estimated effect on net income and earnings per share if the Company had applied the fair value recognition provision of SFAS No. 123, Accounting for Stock-Based Compensation, to stockbased employee compensation. (Dollars in Millions Except Per Share Data) Product Liability Accruals for...

  • Page 48
    ... employee related obligations of $1,218 million and $1,001 million for 2005 and 2004, respectively, are included in other assets on the consolidated balance sheet. 6. BORROWINGS The components of long-term debt are as follows: 2005 Effective Rate% 2004 Effective Rate% The Company capitalizes...

  • Page 49
    ...of stock and cash, in the event of repurchase of the 3% Debentures. The Company, at its option, may also redeem any or all of the 3% Debentures after July 28, 2003 at the issue price plus accreted original issue discount. At January 1, 2006, and January 2, 2005, the fair value based on quoted market...

  • Page 50
    ...Statutory Puerto Rico and Ireland operations Research tax credits U.S. state and local International subsidiaries excluding Ireland Repatriation of International earnings IPR&D All other Effective tax rate (1,978) (1,980) The difference between the net deferred tax on income per the balance sheet...

  • Page 51
    ... Long Term Incentive Plan were 259.2 million at the end of 2005. The average fair value of options granted was $15.48 in 2005, $13.11 in 2004, and $13.58 in 2003. The fair value was estimated using the Black-Scholes option pricing model based on the weighted average assumptions of: 2005 Risk-free...

  • Page 52
    ... 138 $2,632 2004 227 1,197 630 2,054 121 2,175 Consumer Pharmaceutical Medical Devices and Diagnostics Segments total General corporate Worldwide total Sales to Customers (2) (Dollars in Millions) Long-Lived Assets (8) 2003 25,274 9,483 2,236 4,869 41,862 2005 $15,355 5,646 957 596 22,554 451 35...

  • Page 53
    ... with trustees, annuities are purchased under group contracts or reserves are provided. The Company does not fund retiree health care benefits in advance and has the right to modify these plans in the future. The Company uses the date of its consolidated financial statements (January 1, 2006 and...

  • Page 54
    ... market expectations of long-term returns. The following table displays the assumed health care cost trend rates, for all individuals: Health Care Plans Health care cost trend rate assumed for next year Rate to which the cost trend rate is assumed to decline (ultimate trend) Year the rate reaches...

  • Page 55
    ... Divestitures & acquisitions Curtailments & settlements Benefits paid from plan Effect of exchange rates Projected benefit obligation - end of year Change in Plan Assets Plan assets at fair value - beginning of year Actual return on plan assets Company contributions Plan participant contributions...

  • Page 56
    ...value of Johnson & Johnson common stock directly held in plan assets was $419 million (5.2% of total plan assets) and $440 million (6.2% of total plan assets) at January 1, 2006 and January 2, 2005, respectively. Amounts recognized in the Company's balance sheet consist of the following: Retirement...

  • Page 57
    ...20 10,904 Current marketable securities include $14.6 billion and $7 .2 billion that are classified as cash equivalents on the balance sheet at January 1, 2006 and January 2, 2005, respectively. 15. FINANCIAL INSTRUMENTS The Company follows the provisions of SFAS 133 requiring that all derivative...

  • Page 58
    ... centered around the leading brand BIAFINE®; the assets of Micomed, a privately owned manufacturer of spinal implants primarily focused on supplying the German market; and the acquisition of the AMBI® skin care brand for women of color. The excess of purchase price over the estimated fair value...

  • Page 59
    ... Disc. The value of the IPR&D was calculated using cash ï¬,ow projections discounted for the risk inherent in such projects. A probability of success factor of 95% was used to reï¬,ect inherent clinical and regulatory risk. The discount rate was 19%. The purchase price for the Link Spine Group, Inc...

  • Page 60
    ... to have died from use of the drug and 2,274 assert other personal injury claims. The nature of the claims of the tolled claimants are unknown. Of the remaining federal and state plaintiffs, 2,264 cases (94%) are venued in Mississippi. On December 15, 2005, Janssen reached agreement with the MDL...

  • Page 61
    ...in very substantial market share and revenue losses for the product of the Company's subsidiary. As previously communicated and noted from the following chart, 30-month stays are scheduled to expire during 2006 with respect to ANDA challenges regarding ORTHO TRI-CYCLEN® LO, RISPERDAL® and TOPAMAX...

  • Page 62
    ... USA (Mylan) involving the Company's subsidiary Ortho-McNeil Pharmaceutical, Inc.'s (Ortho-McNeil) product, DITROPAN XL® (oxybutynin chloride), the court on September 27 , 2005, found the DITROPAN XL® patent invalid and not infringed by Mylan's ANDA product. Ortho-McNeil and ALZA Corporation (ALZA...

  • Page 63
    ... in state and federal courts involving allegations that the pricing and marketing of certain pharmaceutical products amounted to fraudulent and otherwise actionable conduct because, among other things, the companies allegedly reported an inï¬,ated Average Wholesale Price (AWP) for the drugs at...

  • Page 64
    ... September 2005, Johnson & Johnson received a subpoena from the United States Attorney's Office, District of Massachusetts, seeking documents related to sales and marketing of eight drugs to Omnicare, Inc., a manager of pharmaceutical benefits for long- term care facilities. The Johnson & Johnson...

  • Page 65
    ... and 47 million shares underlying stock options for 2005, 2004 and 2003, respectively, as the exercise price of these options was greater than their average market value, which would result in an anti-dilutive effect on diluted earnings per share. 20. CAPITAL AND TREASURY STOCK Changes in treasury...

  • Page 66
    ...in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company's assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal controls over financial reporting. Based on...

  • Page 67
    ... on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States...

  • Page 68
    ... to customers - U.S. Sales to customers - International Total sales Cost of products sold Selling, marketing and administrative expenses Research expense Purchased in-process research and development Interest income Interest expense, net of portion capitalized Other (income) expense, net Earnings...

  • Page 69
    ...Tax cost associated with repatriation of undistributed international earnings Tax gain associated with a technical correction In-process research & development (IPR&D) Net Earnings - as adjusted Diluted net earnings per share - as reported American Jobs Creation Act of 2004: Tax cost associated with...

  • Page 70
    ...hygiene. ASP markets STERRAD ® Systems, the CIDEX® Family of Products, and PREVACARE® Antimicrobial Hand Gel. The company is focused on hospitals and surgery centers. www.sterrad.com www.alza.com ALZA Corporation develops drug delivery-based pharmaceuticals, precisely controlling the targeting...

  • Page 71
    ... Johnson & Johnson Health Care Systems Inc. provides account management and customer support services to key health care customers, including hospital systems and group purchasing organizations, leading health plans, pharmacy benefit managers, and government health care institutions. The company...

  • Page 72
    ...U.S. consumer companies, and leadership for an emerging global customer base in the areas of transportation, enterprise-wide systems, business processes and global customer development. www.jnjvision.com The Vistakon Division of Johnson & Johnson Vision Care, Inc. specializes in disposable contact...

  • Page 73
    ...), ORTHO TRI-CYCLEN® LO (norgestimate/ethinyl estradiol), DITROPAN XL® (oxybutynin chloride) and ELMIRON® (pentosan polysulfate sodium). www.itsmybody.com Personal Products Company Division of McNeil-PPC, Inc. is a leader in the consumer oral health market with REACH® toothbrushes, REACH...

  • Page 74
    ... staging, monitoring and therapeutic management of cancer patients. The company is initially commercializing two complementary product lines: CELLSEARCHâ„¢ assays that identify, enumerate and characterize circulating tumor cells directly from a single tube of blood; and GENESEARCHâ„¢ assays that use...

  • Page 75
    ... President Johnson & Johnson Wound Management Division of Ethicon, Inc. D. G. Wildman, Worldwide President Ethicon Endo-Surgery, Inc. Cincinnati, Ohio R. Salerno, President Global Pharmaceutical Supply Group Unit of Ortho-McNeil Pharmaceutical, Inc. and ALZA Corporation Bridgewater, New Jersey...

  • Page 76
    ... & Johnson Vision Care, Inc. Jacksonville, Florida N. G. Kelman, President, Vistakon Americas Vistakon Pharmaceuticals LLC Jacksonville, Florida R. W. Maiolo, Vice President C A N A DA Janssen-Ortho Inc. North York, Ontario Johnson & Johnson Inc. Montreal, Quebec Johnson & Johnson Medical Products...

  • Page 77
    ... Johnson G.m.b.H. Düsseldorf Johnson & Johnson Vision Care Norderstedt LifeScan G.m.b.H. Neckargemund McNeil Europe Bad Honnef Ortho-Clinical Diagnostics G.m.b.H. Neckargemund Greece Janssen-Cilag Pharmaceutical S.A.C.I. Athens Johnson & Johnson Hellas S.A. Athens Johnson & Johnson Medical Products...

  • Page 78
    ...& Johnson Vision Care Sydney Ortho-Clinical Diagnostics Mount Waverley, Victoria Tasmanian Alkaloids Pty. Limited Westbury, Tasmania China Johnson & Johnson China Ltd. Shanghai Johnson & Johnson Medical Ltd. Shanghai Shanghai Johnson & Johnson Ltd. Shanghai Shanghai Johnson & Johnson Pharmaceuticals...

  • Page 79
    CORPORATE AND SHAREHOLDER INFORMATION Principal Office One Johnson & Johnson Plaza New Brunswick, New Jersey 08933 (732) 524-0400 Common Stock Listed on New York Stock Exchange Stock Symbol JNJ Shareholder Relations Contact Annual Meeting The Annual Meeting of Shareholders will take place April 27...

  • Page 80
    ... and natural resources. Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products...