Johnson and Johnson 2005 Annual Report Download - page 59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PAGE 57
to the CHARITÉ™ Artificial Disc; Scios Inc., a biopharma-
ceutical company with a marketed product for cardiovascular
disease and research projects focused on auto-immune
diseases; 3-Dimensional Pharmaceuticals, Inc., a company
with a technology platform focused on the discovery and
development of therapeutic small molecules; OraPharma, Inc.,
a specialty pharmaceutical company focused on the develop-
ment and commercialization of unique oral therapeutics; and
certain assets of Orquest, Inc., a privately held biotechnology
company focused on developing biologically-based implants
for orthopaedics and spine surgery.
The excess of purchase price over the estimated fair value
of tangible assets acquired amounted to $1.8 billion and
has been assigned to identifiable intangible assets, with any
residual recorded to goodwill. Approximately $918 million has
been identified as the value of IPR&D primarily associated with
the acquisition of Link Spine Group, Inc. and Scios Inc.
The IPR&D charge related to the Link Spine Group, Inc.
acquisition was $170 million and is associated with the
CHARITÉ™ Artificial Disc. The value of the IPR&D was
calculated using cash flow projections discounted for the risk
inherent in such projects. A probability of success factor of
95% was used to reflect inherent clinical and regulatory risk.
The discount rate was 19%. The purchase price for the Link
Spine Group, Inc. acquisition was allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed
based on their estimated fair values at the acquisition date. The
excess of the purchase price over the fair values of assets and
liabilities acquired was approximately $84 million and was
allocated to goodwill. Substantially all of the amount allocated
to goodwill will not be deductible for tax purposes.
The IPR&D charge related to Scios Inc. was $730 million
and is largely associated with its p-38 kinase inhibitor pro-
gram. The value of the IPR&D was calculated using cash flow
projections discounted for the risk inherent in such projects
using a 16% probability of success factor and a 9% discount
rate. The purchase price for the Scios Inc. acquisition was allo-
cated to the tangible and identifiable intangible assets acquired
and liabilities assumed based on their estimated fair values at
the acquisition date. Identifiable intangible assets included
patents and trademarks valued at approximately $1.5 billion.
The excess of the purchase price over the fair values of assets
and liabilities acquired was approximately $440 million and
was allocated to goodwill. Substantially all of the amount allo-
cated to goodwill will not be deductible for tax purposes.
The remaining IPR&D was associated with Orquest, Inc.,
and 3-Dimensional Pharmaceuticals, Inc., with charges of
$11 million and $7 million, respectively.
Supplemental pro forma information for 2005, 2004 and
2003 per SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets, is not provided, as
the impact of the aforementioned acquisitions did not have a
material effect on the Company’s results of operations, cash
flows or financial position.
Divestitures in 2005, 2004 and 2003 did not have a material
effect on the Company’s results of operations, cash flows or
financial position.
18. LEGAL PROCEEDINGS
Product Liability
The Company is involved in numerous product liability cases
in the United States, many of which concern adverse reactions
to drugs and medical devices. The damages claimed are sub-
stantial, and while the Company is confident of the adequacy
of the warnings and instructions for use that accompany such
products, it is not feasible to predict the ultimate outcome of
litigation. However, the Company believes that if any liability
results from such cases, it will be substantially covered by
existing amounts accrued in the Company’s balance sheet,
and where available by third-party product liability insurance.
One group of cases against the Company concerns a product
of the Company’s subsidiary, Janssen Pharmaceutica Inc.
(Janssen), PROPULSID®(cisapride), which was withdrawn
from general sale and restricted to limited use in 2000. In the
wake of publicity about those events, numerous lawsuits were
filed against Janssen and the Company regarding PROPULSID®
in state and federal courts across the country.
These actions seek substantial compensatory and punitive
damages and accuse Janssen and the Company of inadequately
testing for and warning about the drug’s side effects, of
promoting it for off-label use and over promotion. In addition,
Janssen and the Company have entered into tolling agreements
with various plaintiffs’ counsel halting the running of the
statutes of limitations with respect to the potential claims of
a significant number of individuals while those attorneys
evaluate whether or not to sue Janssen and the Company
on their behalf.
On February 5, 2004, Janssen announced that it had
reached an agreement in principle with the Plaintiffs Steering
Committee (PSC) of the PROPULSID®Federal Multi-District
Litigation (MDL), to resolve federal lawsuits related to
PROPULSID®.The agreement was to become effective once
85% of the death claimants, and 75% of the remainder, agreed
to the terms of the settlement. In addition, 12,000 individuals
who had not filed lawsuits, but whose claims were the subject
of tolling agreements suspending the running of the statutes of
limitations against those claims, also had to agree to participate
in the settlement before it became effective.
On March 24, 2005, it was confirmed that the PSC of the
MDL had enrolled enough plaintiffs and claimants in the settle-
ment program to make the agreement effective. Of the 282
death plaintiffs subject to the program, 267 (94%) are con-
firmed enrolled. Of the 3,538 other plaintiffs subject to the pro-
gram, 3,189 (90%) are confirmed enrolled. In addition, 19,865
“tolled” claimants are confirmed as enrolled. Those participat-
ing in the settlement will submit medical records to an inde-
pendent panel of physicians who will determine whether the
claimed injuries were caused by PROPULSID®and otherwise
meet the standards for compensation. If those standards are
met, a court-appointed special master will determine compen-
satory damages. Janssen has paid into a compensation escrow
account $82.6 million, established an administrative fund of
$15 million, and paid legal fees to the PSC of $22.5 million,
which amount was approved by the court.