Johnson and Johnson 2006 Annual Report Download - page 71

NOTES TO CONSOLIDATED FINANCIAL ST A TEMENTS69
projections discounted for the risk inherent in such projects.
The discount rate was 17%.
Certain businesses were acquired for $455 million in cash
and $15 million of liabilities assumed during 2004. These acqui-
sitions were accounted for by the purchase method and, accord-
ingly, results of operations have been included in the financial
statements from their respective dates of acquisition.
In addition, per the terms of the 2003 acquisition agree-
ment with the Link Spine Group, Inc., $125 million in cash was
paid to the owners of the Link Spine Group, Inc. in 2004 based
on the date the U.S. Food and Drug Administration (FDA)
approved the CHARITəArtificial Disc. Thus, the 2004 total
cash expenditures related to acquisitions were $580 million.
The 2004 acquisitions included: Merck’s 50% interest in
the Johnson & Johnson-Merck Consumer Pharmaceuticals Co.
European non-prescription pharmaceutical joint venture includ-
ing all of the infrastructure and brand assets managed by the
European joint venture; Egea Biosciences, Inc. through the exer-
cise of the option to acquire the remaining outstanding stock not
owned by Johnson & Johnson, which has developed a proprietary
technology platform called GENE WRITER, that allows for the
rapid and highly accurate synthesis of DNA sequences, gene
assembly, and construction of large synthetic gene libraries;
Artemis Medical, Inc., a privately held company with ultrasound
and x-ray visible biopsy site breast markers as well as hybrid
markers; U.S. commercial rights to certain patents and know-
how in the field of sedation and analgesia from Scott Lab, Inc.;
Biapharm SAS, a privately held French producer and marketer of
skin care products 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 of
tangible assets acquired amounted to $425 million and has been
assigned to identifiable intangible assets, with any residual
recorded to goodwill. The $125 million related to the U.S. FDA
approval of the CHARITəArtificial Disc was recorded as addi-
tional goodwill associated with the 2003 Link Spine Group, Inc.
acquisition. Thus, total additions to intangibles and goodwill in
2004 were $550 million. Approximately $18 million has been
identified as the value of IPR&D associated with the Scott Lab
acquisition. The value of the IPR&D was calculated using cash
flow projections discounted for the risk inherent in such projects.
The discount rate was 25%.
Supplemental pro forma information for 2005 and 2004
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 mate-
rial effect on the Company’s results of operations, cash flows or
financial position.
Divestitures in 2006, 2005 and 2004 did not have a mate-
rial 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 substan-
tial, and while the Company is confident of the adequacy of the
warnings and instructions for use that accompany such prod-
ucts, it is not feasible to predict the ultimate outcome of litiga-
tion. 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.
Multiple products of Johnson & Johnson subsidiaries are sub-
ject to numerous product liability claims and lawsuits, including
ORTHO EVRA®, RISPERDAL®, DURAGESIC®and the CHARITÉ™
Artificial Disc. As of December 31, 2006, there were approxi-
mately 1,500 claimants who have filed lawsuits or made claims
regarding injuries allegedly due to ORTHO EVRA®, 700 claimants
with respect to RISPERDAL®, 100 with respect to DURAGESIC®
and 100 with respect to CHARITÉ™. These claimants seek sub-
stantial compensatory and, where available, punitive damages.
Numerous claims and lawsuits in the United States relating to the
drug PROPULSID®, withdrawn from general sale by the Com-
pany’s Janssen Pharmaceutica Inc. subsidiary in 2000, have been
resolved or are currently enrolled in settlement programs with an
aggregate cap below $100 million in payments by the Company.
Litigation concerning PROPULSID®is pending in Canada, where a
class action of persons alleging adverse reactions to the drug was
recently certified. The Johnson & Johnson subsidiaries responsible
for marketing the above products are vigorously defending against
these claims except where settlement is deemed appropriate.
AFFIRMATIVE STENT PATENT LITIGATION
In patent infringement actions tried in Delaware Federal District
Court in late 2000, Cordis Corporation (Cordis), a subsidiary of
Johnson & Johnson, obtained verdicts of infringement and patent
validity, and damage awards against Boston Scientific Corpora-
tion (Boston Scientific) and Medtronic AVE, Inc. (Medtronic)
based on a number of Cordis vascular stent patents. In Decem-
ber 2000, the jury in the damage action against Boston Scientific
returned a verdict of $324 million and the jury in the Medtronic
action returned a verdict of $271 million. Multiple post-trial pro-
ceedings and appeals have ensued with respect to these verdicts,
with the ultimate outcome still subject to uncertainty.
Cordis also has an arbitration claim against Medtronic accus-
ing Medtronic of infringement by sale of stent products introduced
by Medtronic subsequent to its products subject to the earlier
action referenced above. Those subsequent products were found
to have been licensed to Medtronic pursuant to a 1997license by
an arbitration panel in March 2005. Further arbitration proceed-
ings will determine whether royalties are owed for those products.
In January 2003, Cordis filed a patent infringement action
against Boston Scientific in Delaware Federal District Court
accusing its Express2™, Taxus®and Liberte®stents of infringing
the Palmaz patent that expired in November 2005. The Liberte®
stent was also accused of infringing Cordis’ Gray patent that
expires in 2016. In June 2005, a jury found that the Express2™,
Taxus®and Liberte®stents infringed the Palmaz patent and that
the Liberte®stent also infringed the Gray patent. Motions filed
by Boston Scientific seeking to vacate the verdict or obtain a new
trial were denied in June 2006. Cordis expects Boston Scientific
will appeal to the U.S. Court of Appeals for the Federal Circuit.
PATENT LITIGATION AGAINST VARIOUS
JOHNSON & JOHNSON SUBSIDIARIES
The products of various Johnson & Johnson subsidiaries are
the subject of various patent lawsuits, the outcomes of which