Johnson and Johnson 2005 Annual Report Download - page 35

Research activities accelerated in the Pharmaceutical
segment, increasing to $4.4 billion, or 22.3%, over 2004. The
compound annual growth rate was approximately 16.4% for
the five-year period since 2000.
The increased investment in research and development in
all segments demonstrates the Company’s focus on knowledge
based products, and reflects a significant number of projects
in late stage development.
In-Process 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 Corpora-
tion, Peninsula Pharmaceuticals, Inc., and the international
commercial rights to certain patents and know-how in the
field of sedation and analgesia from Scott Lab, Inc. TransForm
Pharmaceuticals, Inc., a company specializing in the discovery
of superior formulations and novel crystalline forms of drug
molecules, accounted for $50 million before tax of the IPR&D
charges and was included in the operating profit of the Phar-
maceutical segment. Closure Medical Corporation, a company
with expertise and intellectual property in the biosurgicals mar-
ket, accounted for $51 million before tax of the IPR&D charges
and was included in the operating profit of the Medical Devices
and Diagnostics segment. Peninsula Pharmaceuticals, Inc.,
abiopharmaceutical company focused on developing and
commercializing antibiotics to treat life-threatening infections,
accounted for $252 million before tax of the IPR&D charges and
was included in the operating profit of the Pharmaceutical seg-
ment. The $9 million before tax IPR&D charge related to Scott
Lab, Inc. referred to above was included in the operating profit
of the Medical Devices and Diagnostics segment.
In 2004, the Company recorded IPR&D charges of $18
million before tax as a result of the acquisition of U.S. commer-
cial rights to certain patents and know-how in the field of
sedation and analgesia from Scott Lab, Inc. This charge was
included in the operating profit of the Medical Devices and
Diagnostics segment.
In 2003, the Company recorded IPR&D charges of $918 mil-
lion before tax related to the acquisitions of Scios Inc., Link
Spine Group, Inc., certain assets of Orquest, Inc. and 3-Dimen-
sional Pharmaceuticals, Inc. Scios Inc. is a biopharmaceutical
company with a marketed product for cardiovascular disease
and research projects focused on autoimmune diseases. The
acquisition of Scios Inc. accounted for $730 million before tax
of the IPR&D charges and was included in the operating profit
of the Pharmaceutical segment. Link Spine Group, Inc. was
acquired to provide the Company with exclusive worldwide
rights to the CHARITəArtificial Disc for the treatment of
spine disorders. The acquisition of Link Spine Group, Inc.
accounted for $170 million before tax of the IPR&D charges and
was included in the operating profit of the Medical Devices and
Diagnostics segment. Orquest, Inc. is a biotechnology company
focused on developing biologically-based implants for
orthopaedic spine surgery. The acquisition of certain assets of
Orquest, Inc. accounted for $11 million before tax of the IPR&D
charges and was included in the operating profit of the Medical
Devices and Diagnostics segment. 3-Dimensional Pharma-
ceuticals, Inc. is a company with a technology platform focused
on the discovery and development of potential new drugs in
early stage development for inflammation. The acquisition of
3-Dimensional Pharmaceuticals, Inc. accounted for $7 million
before tax of the IPR&D charges and was included in the
operating profit of the Pharmaceutical segment.
Other (Income) Expense, Net: Other (income) expense includes
gains and losses related to the sale and write-down of certain
investments in equity securities held by Johnson & Johnson
Development Corporation, gains and losses on the disposal of
property, plant and equipment, currency gains and losses,
minority interests, litigation settlement (income) expense and
royalty income. The change in net other (income) expense from
2004 to 2005 was an increase in income of $229 million.
For 2005, the other income balance of $214 million included
royalty income partially offset by several expense items, none
of which were individually significant.
For 2004, the other expense balance of $15 million included
several expense items, none of which were individually
significant, partially offset by royalty income.
In 2003, other income of $385 million included a favorable
ruling from a stent patent settlement of $230 million. This
amount was received during the fourth quarter of 2003
and was included in the Medical Devices and Diagnostics seg-
ment operating profit. Also included in the Medical Devices and
Diagnostics segment operating profit was the gain on the sale
of various product lines that were no longer compatible with
this segment’s strategic goals. Other income for 2003 also
included the recovery of a $40 million loan, previously written
off, included in the Pharmaceutical segment operating profit.
Operating Profit by Segment
Operating profits by segment of business were as follows:
Percent of
Segment Sales
(Millions of Dollars) 2005 2004 2005 2004
Consumer $1,667 1,514 18.3% 18.2
Pharmaceutical 6,610 7,608 29.6 34.4
Med Devices and Diag 5,418 4,091 28.4 24.2
Segments total 13,695 13,213 27.1 27.9
Less: Expenses not
allocated to
segments(1) 39 375
Earnings before
provision for taxes
on income $13,656 12,838 27.0% 27.1
(1) Amounts not allocated to segments include interest (income)/expense,
minority interest, and general corporate (income)/expense.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION PAGE 33