Johnson and Johnson 2009 Annual Report Download - page 32

30 J O H N S O N & J O H N S O N 2 0 0 9 A N N U A L R E P O R T
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 Administrative
Expenses: Cost of products sold and selling, marketing and
administrative expenses as a percent to sales were as follows:
% of Sales 2009 2008 2007
Cost of products sold 29.8% 29.1 29.1
Percent point increase over the prior year 0.7 —0.9
Selling, marketing and administrative expenses 32.0 33.7 33.5
Percent point (decrease)/increase over the
prior year (1.7) 0.2 0.8
In 2009, cost of products sold as a percent to sales increased
primarily due to the continued negative impact of product mix and
inventory write-offs associated with the restructuring activity. Addi-
tionally, 2008 included some non-recurring positive items. There was
a decrease in the percent to sales of selling, marketing and adminis-
trative expenses in 2009 primarily due to cost containment efforts
across all the businesses and the annualized savings recognized from
the 2007 restructuring program. Additionally, 2008 utilized the
proceeds associated with the divestiture of the Professional Wound
Care business of Ethicon, Inc. to fund increased investment spending.
In 2008, cost of products sold as a percent to sales remained
flat to the prior year. The change in the mix of businesses, with
higher sales growth in the Consumer business and a slight sales
decline in the Pharmaceutical business, had a negative impact on
the cost of products sold as a percent to sales. In 2008, this was off-
set by manufacturing efficiencies and non-recurring positive items
in 2008 and negative items in 2007. There was an increase in the
percent to sales of selling, marketing and administrative expenses in
2008 primarily due to the change in the mix of businesses, whereby
a greater proportion of sales were attributable to the Consumer
segment, which has higher selling, marketing and administrative
spending. Additionally, in 2008 the Company utilized the gain asso-
ciated with the divestiture of the Professional Wound Care business
of Ethicon, Inc. to fund increased investment spending. This was
partially offset by ongoing cost containment efforts.
In 2007, there was an increase in the percent to sales of cost of
products sold primarily due to the impact of newly acquired con-
sumer brands. There was an increase in the percent to sales of sell-
ing, marketing and administrative expenses in 2007 primarily due to
the impact of newly acquired consumer brands partially offset by
cost containment efforts.
Research and Development expense (excluding purchased in-process research and development charges) by segment
of business was as follows:
2009 2008 2007
_ _ ___________________ _____________________ _____________________
(Dollars in Millions) Amount % of Sales* Amount % of Sales* Amount % of Sales*
Consumer $ 632 4.0% 624 3.9 564 3.9
Pharmaceutical 4,591 20.4 5,095 20.7 5,265 21.2
Medical Devices and Diagnostics 1,763 7.5 1,858 8.0 1,851 8.5
Total research and development expense $6,986 11.3% 7,577 11.9 7,680 12.6
Percent (decrease)/increase over the prior year (7.8)% (1.3) 7.8
* As a percent to segment sales
Research and Development Expense: Research and development
activities represent a significant part of the Company’s business.
These expenditures relate to the development of new products,
improvement of existing products, technical support of products
and compliance with governmental regulations for the protection
of consumers and patients.
In 2009 and 2008, the reduction in the Pharmaceutical
research and development spending was primarily due to increased
efficiencies in Pharmaceutical research and development activities.
Restructuring: In 2009, the Company announced global restruc-
turing initiatives that are expected to generate pre-tax, annual cost
savings of $1.4 – $1.7 billion when fully implemented in 2011, with
$0.8 – $0.9 billion expected to be achieved in 2010. The associated
savings will provide additional resources to invest in new growth
platforms; ensure the successful launch of the Company’s many
new products and continued growth of the core businesses; and
provide flexibility to adjust to the changed and evolving global envi-
ronment. In the fiscal fourth quarter of 2009 the Company recorded
a pre-tax charge of $1.2 billion, of which $113 million is included in
cost of products sold.
The restructuring program announced in 2007 has been com-
pleted. See Note 22 to the Consolidated Financial Statements for
additional details related to the restructuring.
Purchased In-Process Research and Development: In 2009, in
accordance with U.S. GAAP for business combinations, purchased in-
process research and development (IPR&D) is no longer expensed but
capitalized and tested for impairment. The Company capitalized
$1.7 billion of IPR&D in 2009, primarily associated with the acquisi-
tions of Cougar Biotechnology, Inc. and substantially all of the assets
and rights of Elan’s Immunotherapy program.
In 2008, the Company recorded a charge for IPR&D of $181 mil-
lion before and after tax related to the acquisitions of Amic AB,
SurgRx, Inc., HealthMedia, Inc. and Omrix Biopharmaceuticals, Inc.
HealthMedia, Inc, a privately held company that creates web-based
behavior change interventions, accounted for $7 million before tax
of the IPR&D charges and was included in the operating profit of
the Consumer segment. The IPR&D charges for all of the following
acquisitions were included in the operating profit of the Medical
Devices and Diagnostics segment. Amic AB, a Swedish developer
of in vitro diagnostic technologies for use in point-of-care and
near-patient settings (outside the physical facilities of the clinical
laboratory), accounted for $40 million before tax of the IPR&D
charges. SurgRx, Inc., a privately held developer of the advanced
bipolar tissue sealing system used in the ENSEAL® family of devices,
accounted for $7 million before tax of the IPR&D charges. Omrix Bio-
pharmaceuticals, Inc., a fully integrated biopharmaceutical company
that develops and markets biosurgical and immunotherapy prod-
ucts, accounted for $127 million before tax of the IPR&D charges.
In 2007, the Company recorded a charge for IPR&D of
$807 million before and after tax related to the acquisition of Conor
Medsystems, Inc. The IPR&D charge was included in the operating
profit of the Medical Devices and Diagnostics segment.