Johnson and Johnson 2006 Annual Report Download - page 44

approval in Europe for the CYPHER SELECT™Sirolimus-eluting
Stent for use in the treatment of severe arterial disease in the leg.
In April and July of 2004, the Cordis Cardiology Division of
Cordis Corporation received Warning Letters from the FDA
regarding Good Manufacturing Practice regulations and Good
Clinical Practice regulations. In response to the Warning Letters,
Cordis has made improvements to its quality systems and has
provided periodic updates to the FDA. The Clinical Warning
Letter issues have been resolved to the FDA’s satisfaction. With
respect to the Quality System Warning Letter, in addition to the
improvement updates, the Cordis Juarez, Mexico and stent sup-
plier locations were inspected with acceptable results. The FDA
inspected the Miami site and the Global Quality System, includ-
ing Design Control system, in August 2006, with acceptable
results; Cordis received no observations from the FDA during this
inspection. The FDA inspections were completed in Cordis LLC
in San German, Puerto Rico and Cordis laboratory operations in
Warren, New Jersey in January 2007, thereby completing all
scheduled follow up inspections. Cordis is in the process of
evaluating and reviewing the overall results of the inspections
with the FDA.
The Ethicon Endo-Surgery franchise achieved sales of
$3.4billion in 2006, an 8.7% increase over 2005. A major
contributor of growth continues to be endocutter sales, which
include products used in performing bariatric procedures for
the treatment of obesity, an important focus area for the fran-
chise. Strong results were achieved with the success of the
HARMONIC SCALPEL®, an ultrasonic cutting and coagulating
surgical device, which received approval in January 2006 for
expanded indications to include plastic surgery. There was also
strong growth in advanced sterilization products.
The Ethicon franchise sales grew 3.9% in 2006, reaching
$3.2 billion. This was a result of solid growth in mesh and
women’s health and urology products. Sales of both
GYNECARE®products and DERMABOND®had strong results in
2006. There was also continued growth in suture sales.
The LifeScan franchise achieved $2.1 billion in sales in 2006,
an increase of 8.6% over 2005. Animas Corporation, which was
acquired in the fiscal first quarter of 2006, provided LifeScan
with a platform for entry into the insulin pump segment of the
diabetes market, was a key contributor to this growth. Strong
performance was also achieved in the ONETOUCH®ULTRA®
product line in both U.S. and international markets.
Sales in the Vision Care franchise reached $1.9 billion in
2006, a growth rate of 10.9% over the prior year. This growth was
led by the global success of ACUVUE®OASYS™Brand Contact
Lenses with HYDRACLEAR™PLUS and ACUVUE®ADVANCE™
for ASTIGMATISM and the international success of 1-DAY
ACUVUE®MOIST™and ACUVUE®DEFINE.™
The Ortho-Clinical Diagnostics franchise achieved $1.5 bil-
lion in sales in 2006, a 5.7% increase over 2005. Growth was
achieved in clinical laboratory and immunohematology sales in
both the U.S. and international markets.
The Medical Devices and Diagnostics segment achieved
sales of $19.1 billion in 2005, representing an increase over the
prior year of 13.1%, with operational growth of 12.5% and a posi-
tive impact from currency of 0.6%. U.S. sales increased 10.6%
while international sales increased 15.7%, with 14.5% from oper-
ations and 1.2% from currency.
In 2004, the Medical Devices and Diagnostics segment
achieved sales of $16.9 billion, representing an increase over the
prior year of 13.2% with operational growth of 9.0% and a posi-
tive impact from currency of 4.2%. U.S. sales increased 6.9%
while international sales increased 20.7%, with 11.4% from
operations and 9.3% from currency.
Analysis of Consolidated Earnings
Before Provision for Taxes on Income
Consolidated earnings before provision for taxes on income
increased to $14.6 billion, or 11.2%, over the $13.1 billion earned in
2005. The increase in 2005 was 6.4% over the $12.3 billion
in 2004. As a percent to sales, consolidated earnings before
provision for taxes on income in 2006 was 27.4% which was an
improvement of 1.4% from 2005. There was no change as a percent
to sales between 2005 and 2004. For 2004, the improvement was
2.7% over the 23.3% in 2003. The sections that follow highlight the
significant components of the changes in consolidated earnings
before provision for taxes on income.
Cost of Products Sold and Selling, Marketing and Administra-
tive Expenses: Cost of products sold and selling, marketing and
administrative expenses as a percent to sales were as follows:
% of Sales 2006 2005 2004
Cost of products sold 28.2% 27.7 28.5
Percent point increase/(decrease) over the
prior year 0.5 (0.8) (0.7)
Selling, marketing and administrative
expenses 32.7 34.1 34.2
Percent point increase/(decrease) over the
prior year (1.4) (0.1) (0.3)
In 2006, there was an increase in the percent to sales of cost of
products sold. This was due to unfavorable product mix and higher
manufacturing costs in the Pharmaceutical and Consumer seg-
ments. There was a decrease in the percent to sales of selling, mar-
keting and administrative expenses in 2006. This was a result of
leveraging selling expenses and a reduction in advertising and
promotional spending. During 2006, the Company continued to
focus on controlling expenses.
In 2005, there was a decrease in the percent to sales of cost
of products sold. This was due to lower manufacturing costs pri-
marily related to the CYPHER®Sirolimus-eluting Stent, as well
as ongoing cost containment activity across the organization,
partially offset by the negative impact of pharmaceutical product
mix. There was also a decrease in the percent to sales of selling,
marketing and administrative expenses. This was due to cost
containment initiatives in the Pharmaceutical segment partially
offset by increases in investment spending in the Medical
Devices and Diagnostics segment.
In 2004, there was a decrease in the percent to sales of cost
of products sold. This was due to favorable mix, as well as cost
improvement initiatives. There was also a decrease in the per-
cent to sales of selling, marketing and administrative expenses.
This was due to the Company’s focus on managing expenses,
partially offset by an increase in investment spending across a
number of businesses focused on driving future growth.
42 JOHNSON & JOHNSON 2006 ANNUAL REPORT