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2014
ANNUAL
REPORT

Table of contents

  • Page 1
    A N N U A L R E P O R T 2 014

  • Page 2

  • Page 3
    MARCH 2015 TO OUR SHAREHOLDERS ALEX GORSKY Chairman, Board of Directors and Chief Executive Officer I am often asked what led me to work in health care and why I chose to spend most of my career at Johnson & Johnson. From my first job at Janssen, the flagship company of our Pharmaceutical segment...

  • Page 4
    ... markets by holistically addressing critical-need states in over-the-counter medicines, as well as oral care, baby and skin care markets. We will strengthen our position in medical devices. Our focus will be on accelerating growth with innovative products and by transforming our go-to-market models...

  • Page 5
    ...four long-term drivers of growth: creating value through innovation, expanding global reach with local focus, maintaining a laser focus on excellence in execution, and leading with purpose to make a difference in the world- investment in Johnson & Johnson. Sincerely, Alex Gorsky Chairman, Board of...

  • Page 6
    ... and brand portfolios to meet and exceed their expectations. Our strong pipelines are expected to yield; 20 key consumer product launches globally in 2015; 30 new major medical device product filings between 2014 and 2016; and 10 major new pharmaceutical filings and 25 line extensions between 2013...

  • Page 7
    ...in products and cash last year in support of over 500 programs that address major health-related issues in local communities in more than 50 countries around the world. We also made great progress toward our Healthy Future 2015 citizenship and sustainability goals, including efforts in global health...

  • Page 8
    ... business, are realizing the benefits of innovation, scale and breadth in our Medical Devices business and are continuing our market leadership with iconic brands in our Consumer business. We've achieved our near-term priorities, exceeding our financial targets with full-year operational* sales...

  • Page 9
    ... brands such as TYLENOL® PM. Our insight-driven innovation in the Consumer business is focused on addressing key consumer need states, led by our 12 megabrands, with 20 new product launches planned for 2015. CITIZENSHIP & SUSTAINABILITY Managing our social, environmental and economic impacts...

  • Page 10
    ... of patients and communities includes our contributions of approximately $1 billion in products and cash last year in support of over 500 programs that address major health-related issues in local communities in more than 50 countries around the world. 2015 goal. We remain committed to enhanced...

  • Page 11
    ... Consolidated Balance Sheets Consolidated Statements of Earnings Consolidated Statements of Comprehensive Income Consolidated Statements of Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Management...

  • Page 12
    ... of 2014 sales. In 2014, $8.5 billion, or 11.4% of sales, was invested in research and development, reflecting management's commitment to delivering new and differentiated products and services to meet evolving health care needs and sustain the Company's long-term growth. Our diverse businesses with...

  • Page 13
    ... to remain a leader in health care, the Company strives to maintain a purpose-driven organization and is committed to developing global business leaders who can achieve these growth objectives. Businesses are managed for the long-term in order to sustain market leadership positions and enable growth...

  • Page 14
    ... which included 2.3% operational growth offset by a negative currency impact of 3.7%. Major Consumer Franchise Sales: % Change (Dollars in Millions) 2014 2013 2012 '14 vs. '13 '13 vs. '12 OTC Skin Care Baby Care Oral Care Wound Care/Other Women's Health Total Consumer Sales $4,106 3,758 2,239...

  • Page 15
    ...) expire in February 2015. Loss of exclusivity will likely result in a reduction in sales as biosimilar versions are introduced to the market. See Note 21 to the Consolidated Financial Statements for legal matters regarding the REMICADE® patents. Johnson & Johnson 2014 Annual Report • 5

  • Page 16
    ...) were due to continued generic competition. Oncology products achieved sales of $4.5 billion in 2014, representing an increase of 18.1% as compared to the prior year. Major contributors to the growth were strong sales of ZYTIGA® (abiraterone acetate), as well as the recent launch of IMBRUVICA...

  • Page 17
    ... Ortho-Clinical Diagnostics business had a negative impact of 3.2% on the operational growth of the Medical Devices segment. Major Medical Devices Franchise Sales:* % Change (Dollars in Millions) 2014 2013 2012 '14 vs. '13 '13 vs. '12 Orthopaedics Surgical Care Specialty Surgery/Other Vision Care...

  • Page 18
    ... the divestiture of the Ortho-Clinical Diagnostics business, lower litigation expense of $1.0 billion, lower in-process research and development costs of $0.4 billion and lower expenses of $0.1 billion related to the DePuy ASRâ„¢ Hip program as compared to the fiscal year 2013. This was partially...

  • Page 19
    ... related to divestitures. Interest (Income) Expense: Interest income in 2014 was comparable to the prior year. A higher balance in cash, cash equivalents and marketable securities was offset by lower interest rates. Cash, cash equivalents and marketable securities Johnson & Johnson 2014 Annual...

  • Page 20
    ... terms in the capital markets. The proceeds of the borrowings were used for general corporate purposes. Segment Pre-Tax Profit Pre-tax profits by segment of business were as follows: Percent of Segment Sales (Dollars in Millions) 2014 2013 2014 2013 Consumer Pharmaceutical Medical Devices Total...

  • Page 21
    ... and associated tax benefits. On July 21, 2014, the Company announced that its Board of Directors approved a share repurchase program, authorizing the Company to purchase up to $5.0 billion of the Company's shares of common stock. As of December 28, 2014, $3.5 Johnson & Johnson 2014 Annual Report...

  • Page 22
    ... 28, 2014 and approximately $1.3 billion as of December 29, 2013 of the Southern European Region net trade accounts receivable balance related to the Company's Consumer, Vision Care and Diabetes Care businesses as well as certain Pharmaceutical and Medical Devices customers which are in line with...

  • Page 23
    ...2014 and 19.7% of total capital in 2013. Shareholders' equity per share at the end of 2014 was $25.06 compared to $26.25 at year-end 2013, a decrease of 4.5%. A summary of borrowings can be found in Note 7 to the Consolidated Financial Statements. Contractual Obligations and Commitments The Company...

  • Page 24
    ..., income taxes, legal and self-insurance contingencies, valuation of long-lived assets, assumptions used to determine the amounts recorded for pensions and other employee benefit plans and accounting for stock based awards. Revenue Recognition: The Company recognizes revenue from product sales when...

  • Page 25
    ...29, 2013, recorded as a contra asset. Pharmaceutical Segment Balance at Beginning of Period Payments/ Credits Balance at End of Period (Dollars in Millions) Accruals 2014 Accrued rebates(1) Accrued returns Accrued promotions Subtotal Reserve for doubtful accounts Reserve for cash discounts Total...

  • Page 26
    ...the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Management believes that changes in these estimates would not have a material effect on the Company's results of operations, cash flows or financial position. At December 28, 2014 and...

  • Page 27
    ... Consolidated Financial Statements for further details on these rates and the effect a rate change to the health care cost trend would have on the Company's results of operations. Stock Based Compensation: The Company recognizes compensation expense associated with the issuance of equity instruments...

  • Page 28
    ... adverse effect on the Company's results of operations and cash flows for that period. See Note 21 to the Consolidated Financial Statements for further information regarding legal proceedings. Common Stock Market Prices The Company's Common Stock is listed on the New York Stock Exchange under...

  • Page 29
    ... related to product liability claims; impact of business combinations and divestitures; significant changes in customer relationships or changes in behavior and spending patterns or financial distress of purchasers of health care products and services; changes to laws and regulations and global...

  • Page 30
    ...JOHNSON AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS At December 28, 2014 and December 29, 2013 (Dollars in Millions Except Share and Per Share Amounts) (Note 1) 2014 2013 Assets Current assets Cash and cash equivalents (Notes 1 and 2) Marketable securities (Notes 1 and 2) Accounts receivable trade...

  • Page 31
    ... & JOHNSON AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Dollars and Shares in Millions Except Per Share Amounts) (Note 1) 2014 2013 2012 Sales to customers Cost of products sold Gross profit Selling, marketing and administrative expenses Research and development expense In-process research...

  • Page 32
    ... respectively: Securities; $81 million, $48 million and $136 million, Employee Benefit Plans; $1,556 million, $1,421 million and $653 million, Derivatives & Hedges; $56 million, $128 million and $95 million. See Notes to Consolidated Financial Statements 22 • Johnson & Johnson 2014 Annual Report

  • Page 33
    ... Amount Total Retained Earnings Common Stock Issued Amount Balance, January 1, 2012 Net earnings attributable to Johnson & Johnson Cash dividends paid Employee compensation and stock option plans Issuance of common stock associated with the acquisition of Synthes, Inc. Repurchase of common stock...

  • Page 34
    ...during the year for: Interest Interest, net of amount capitalized Income taxes Supplemental schedule of non-cash investing and financing activities Issuance of common stock associated with the acquisition of Synthes, Inc. Treasury stock issued for employee compensation and stock option plans, net of...

  • Page 35
    ...related to human health and well-being. The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices (previously referred to as Medical Devices and Diagnostics). The Consumer segment includes a broad range of products used in the baby care, oral care, skin care...

  • Page 36
    ... accumulated other comprehensive income. Long-term debt securities that the Company has the ability and intent to hold until maturity are carried at amortized cost. Management determines the appropriate classification of its investment in debt and equity 26 • Johnson & Johnson 2014 Annual Report

  • Page 37
    ... the incentive period and are recorded as products are sold. The Company also earns service revenue for co-promotion of certain products and includes it in sales to customers. These arrangements are evaluated to determine the appropriate amounts to be deferred. Johnson & Johnson 2014 Annual Report...

  • Page 38
    ... on the Company's financial performance; (2) protect the Company's cash flow from adverse movements in foreign exchange rates; (3) ensure the appropriateness of financial instruments; and (4) manage the enterprise risk associated with financial institutions. See Note 6 for additional information on...

  • Page 39
    ... 28, 2014 and approximately $1.3 billion as of December 29, 2013 of the Southern European Region net trade accounts receivable balance related to the Company's Consumer, Vision Care and Diabetes Care businesses as well as certain Pharmaceutical and Medical Devices customers which are in line with...

  • Page 40
    ...the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Management believes that changes in these estimates would not have a material effect on the Company's results of operations, cash flows or financial position. At December 28, 2014 and...

  • Page 41
    ... excess cash in both deposits with major banks throughout the world and other high-quality money market instruments. The Company has a policy of making investments only with commercial institutions that have at least an "A" (or equivalent) credit rating. 3. Inventories At the end of 2014 and 2013...

  • Page 42
    ... product and third-party purchases of materials denominated in a foreign currency. The Company uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both types of derivatives are designated as cash flow hedges. 32 • Johnson & Johnson 2014 Annual Report

  • Page 43
    ... Income/Expense(2) 2014 2013 (Dollars in Millions) Cash Flow Hedges by Income Statement Caption Sales to customers(3) Cost of products sold(3) $(106) 58 39 21 80 $92 45 271 24 17 (13) 344 (3) 204 7 (15) 3 196 49 69 16 (10) (17) 107 (5) 2 - - - (3) 2 23 (4) - (4) 17 Research and development...

  • Page 44
    ... changes in fair value will have a material effect on the Company's results of operations, cash flows or financial position. The Company also holds equity investments which are classified as Level 1 because they are traded in an active exchange market. The Company did not have any other significant...

  • Page 45
    ... has access to substantial sources of funds at numerous banks worldwide. In September 2014, the Company secured a new 364-day Credit Facility. Total credit available to the Company approximates $10 billion, which expires on September 17, 2015. Interest charged on borrowings under the credit line...

  • Page 46
    ... rate of 35% in 2014, 2013 and 2012, to the Company's effective tax rate is as follows: (Dollars in Millions) 2014 2013 2012 U.S. International Earnings before taxes on income: Tax rates: U.S. statutory rate International operations excluding Ireland Ireland and Puerto Rico operations Research...

  • Page 47
    ... Financial Statements for additional information), and (ii) a settlement of substantially all issues related to the Company's U.S. Internal Revenue Service audit of tax years 20062009. The impact of the settlement is reflected in the U.S. tax on international income and the All other line...

  • Page 48
    ... the employee's compensation during the last three to five years before retirement and the number of years of service. In 2014, the Company announced that the U.S. Defined Benefit plan was amended to adopt a new benefit formula, effective for employees hired on or after January 1, 2015. The benefits...

  • Page 49
    ... obligation for the year listed and also the net periodic benefit cost for the following year. Retirement Plans 2014 2013 2012 Other Benefit Plans 2014 2013 2012 Worldwide Benefit Plans Discount rate Expected long-term rate of return on plan assets Rate of increase in compensation levels 3.78% 8.53...

  • Page 50
    ... Health Care Plans Total interest and service cost Post-retirement benefit obligation $45 560 $(34) (444) The following table sets forth information related to the benefit obligation and the fair value of plan assets at year-end 2014 and 2013 for the Company's defined benefit retirement plans...

  • Page 51
    ... or board considers factors including, local pension rules and regulations; local tax regulations; availability of investment vehicles (separate accounts, commingled accounts, insurance funds, etc.); funded status of the plans; ratio of actives to retirees; Johnson & Johnson 2014 Annual Report...

  • Page 52
    ... investments such as hedge funds. The Company's retirement plan asset allocation at the end of 2014 and 2013 and target allocations for 2015 are as follows: Percent of Plan Assets 2014 2013 Target Allocation 2015 Worldwide Retirement Plans Equity securities Debt securities Total plan assets...

  • Page 53
    ... Plan's Level 3 assets for the years ended December 28, 2014 and December 29, 2013: (Dollars in Millions) Debt Instruments Equity Securities Commingled Funds Insurance Contracts Other Assets Total Level 3 Balance December 30, 2012 Realized gains (losses) Unrealized gains (losses) Purchases, sales...

  • Page 54
    ... Shares Amount Balance at January 1, 2012 Employee compensation and stock option plans Issuance of common stock associated with the acquisition of Synthes, Inc. Repurchase of common stock(1) Balance at December 30, 2012 Employee compensation and stock option plans Repurchase of common stock Balance...

  • Page 55
    ... the dilutive effect of 19.6 million shares and 19.3 million shares, respectively, related to the accelerated share repurchase program, associated with the acquisition of Synthes, Inc. See Note 20 to the Consolidated Financial Statements for additional details. Johnson & Johnson 2014 Annual Report...

  • Page 56
    ... Long-Term Incentive Plan were 530 million at the end of 2014. The compensation cost that has been charged against income for these plans was $792 million, $728 million and $662 million for 2014, 2013 and 2012, respectively. The total income tax benefit recognized in the income statement for share...

  • Page 57
    ... operational earnings per share, and relative total shareholder return. The number of shares actually earned at the end of the three-year period will vary, based only on actual performance, from 0% to 200% of the target number of performance share units granted. Johnson & Johnson 2014 Annual Report...

  • Page 58
    ... share units vested in 2013 and 2012. 18. Segments of Business and Geographic Areas Sales to Customers (Dollars in Millions) 2014 2013 2012 Consumer - United States International Total Pharmaceutical - United States International Total Medical Devices - United States International Total Worldwide...

  • Page 59
    ... The Medical Devices segment includes a net gain of $1,899 million from the divestiture of the Ortho-Clinical Diagnostics business, Synthes integration costs of $754 million and $126 million expense for the cost associated with the DePuy ASRâ„¢ Hip program. Includes an additional year of the Branded...

  • Page 60
    ...Quarter(4) First Quarter(5) 2013 Second Quarter(6) Third Quarter(7) Fourth Quarter(8) Segment sales to customers Consumer Pharmaceutical Medical Devices Total sales Gross profit Earnings before provision for taxes on income Net earnings attributable to Johnson & Johnson Basic net earnings per share...

  • Page 61
    ...dates of acquisition. The 2012 acquisitions included: Synthes, Inc., a global developer and manufacturer of orthopaedics devices; Guangzhou Bioseal Biotech Co., Ltd., a developer of biologic combinations addressing moderate to severe hemostasis; Angiotech Pharmaceuticals, Inc., intellectual property...

  • Page 62
    ... plans to combine businesses, sales organizations, systems and locations as a result of which the Company has and will continue to incur integration costs. The operating results of Synthes were reported in the Company's financial statements beginning on June 14, 2012. Total sales and net earnings...

  • Page 63
    ...million and $1,028 million in 2014, 2013 and 2012, respectively, which were recorded in Other (income) expense and Cost of products sold. In connection with the Synthes acquisition, DePuy Orthopaedics, Inc. agreed to divest certain rights and assets related to its trauma business to Biomet, Inc. and...

  • Page 64
    ... Johnson & Johnson relating to DePuy's PINNACLE® Acetabular Cup System used in hip replacement surgery. The number of pending product liability lawsuits continues to increase, and the Company continues to receive information with respect to potential costs and the anticipated number of cases. Cases...

  • Page 65
    ...2007, Roche Diagnostics Operations, Inc., et al. (Roche) filed a patent infringement lawsuit against LifeScan, Inc. (LifeScan) in the United States District Court for the District of Delaware, alleging LifeScan's OneTouch® Line of Blood Glucose Monitoring Systems infringe two patents related to the...

  • Page 66
    .... In June 2014, My Health, Inc. (My Health) filed a patent infringement lawsuit against LifeScan, Inc. (LifeScan) in the United States District Court for the Eastern District of Texas, alleging LifeScan's OneTouch® Verio® IQ Blood Glucose Monitoring System infringes My Health's patent related to...

  • Page 67
    ...® Related Cases In March 2013, Hospira Healthcare Corporation (Hospira) filed an impeachment proceeding against The Kennedy Institute of Rheumatology (Kennedy) challenging the validity of a Canadian patent related to REMICADE® (a Feldman patent), Johnson & Johnson 2014 Annual Report • 57

  • Page 68
    ... 2015. In September 2013, JBI and NYU Langone Medical Center (NYU Medical Center) received an Office Action from the United States Patent and Trademark Office (USPTO) rejecting the claims in U.S. Patent No. 6,284,471 relating to REMICADE® (the '471 patent) in a reexamination proceeding instituted...

  • Page 69
    ... generic versions of the products at issue to the market, resulting in the potential for substantial market share and revenue losses for those products, and which may result in a non-cash impairment charge in any associated intangible asset. PREZISTA® A number of generic companies have filed ANDAs...

  • Page 70
    ... Court of New Jersey against Alkem asserting United States Patent No. 8,536,130 related to its ANDA seeking approval to market a generic version of NUCYNTA® ER. In August 2014, JPI amended the complaint against Alkem to add additional dosage strengths. In October 2013, JPI received a Paragraph IV...

  • Page 71
    ...a series of lawsuits in state and federal courts involving allegations that the pricing and marketing of certain pharmaceutical products amounted to fraudulent and otherwise actionable conduct because, among other things, the companies allegedly reported an inflated Average Wholesale Price (AWP) for...

  • Page 72
    ... case is scheduled for June 2015. McNeil Consumer Healthcare Starting in June 2010, McNeil Consumer Healthcare Division of McNEIL-PPC, Inc. (McNeil Consumer Healthcare) and certain affiliates, including Johnson & Johnson (the Companies), received grand jury subpoenas from the United States Attorney...

  • Page 73
    ... 2014, the Tennessee Attorney General Division of Consumer Affairs issued a Request for Information to JPI related to opioids marketing practices. Other In September 2011, Synthes, Inc. (Synthes) received a Civil Investigative Demand issued pursuant to the False Claims Act from the United States...

  • Page 74
    ...from the Atlanta Regional Office of the Department of Health and Human Services, Office of Inspector General, seeking production of documents and information regarding: (1) the sales, marketing and promotional practices, including the remuneration of healthcare providers, related to NUCYNTA® IR and...

  • Page 75
    ... not safe and/or effective or did not comply with Canadian Good Manufacturing Practices. The class certification hearing is scheduled for October 2015. In August 2014, United States Customs and Border Protection issued a Penalty Notice against Janssen Ortho LLC (Janssen Ortho), assessing penalties...

  • Page 76
    ... Registered Public Accounting Firm To the Shareholders and Board of Directors of Johnson & Johnson: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, statements of comprehensive income, statements of equity, and statements of cash flows...

  • Page 77
    ... LLP, an independent registered public accounting firm, as stated in their report, which appears herein. Alex Gorsky Chairman, Board of Directors Chief Executive Officer Dominic J. Caruso Vice President, Finance Chief Financial Officer Johnson & Johnson 2014 Annual Report • 67

  • Page 78
    ... to customers Diluted net earnings per share Supplementary balance sheet data: Property, plant and equipment, net Additions to property, plant and equipment Total assets Long-term debt Operating cash flow Common stock information Dividends paid per share Shareholders' equity per share Market price...

  • Page 79
    ... of the Company's Common Stock, the Standard & Poor's 500 Stock Index, the Standard & Poor's Pharmaceutical Index and the Standard & Poor's Health Care Equipment Index and that all dividends were reinvested. 5 Year Shareholder Return Performance J&J vs. Indices $240 Johnson & Johnson S&P 500 Index...

  • Page 80
    ... to Johnson & Johnson - as reported Ortho-Clinical Diagnostics divestiture net gain Litigation expenses Synthes integration/transaction costs and currency related Additional year of Branded Prescription Drug Fee In-process research and development DePuy ASRâ„¢ Hip program Tax benefit associated with...

  • Page 81
    Operational Sales Growth by Segment Excluding Acquisitions and Divestitures 2014 vs. 2013 Consumer Pharmaceutical Medical Devices Total Operational% (1) WW As Reported: Women's Health Sanitary Protection Women's Health K-Y® Diagnostics Ortho-Clinical Diagnostics All Other Acquisitions and ...

  • Page 82
    ... B. McCLELLAN Senior Fellow in Economic Studies and Director of the Initiative on Value and Innovation in Health Care, Brookings Institution ANNE M. MULCAHY Former Chairman and Chief Executive Officer, Xerox Corporation LEO F. MULLIN Retired Chairman and Chief Executive Officer, Delta Air Lines, Inc...

  • Page 83
    .... The Johnson & Johnson 2014 Annual Report contains many of the valuable trademarks and trade names owned and used by the Johnson & Johnson Family of Companies in the United States and internationally to distinguish products and services of outstanding quality. ©Johnson & Johnson 2015 SHAREHOLDER...

  • Page 84
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