Johnson & Johnson - Index

Johnson & Johnson - report - Index

activities, excluding in-process research and development
charges, were as follows:
(Dollars in Millions) 2007 2006 2005
Research and development expense $7,680 7,125 6,462
Percent increase over the prior year 7.8% 10.3 20.9
Percent of sales 12.6% 13.4 12.8
Research and development expense as a percent of sales for the
Pharmaceutical segment was 21.2% for 2007, 21.3% for 2006
and 20.2% for 2005. Research and development expense as a
percent of sales for the Medical Devices and Diagnostics segment
was 8.5% for 2007, 8.7% for 2006 and 8.2% for 2005.
Research and development expense as a percent of sales for the
Consumer segment was 3.9% for 2007, 4.0% for 2006 and
4.2% for 2005.
Research and development activities in the Pharmaceutical
segment increased to $5.3 billion, or 6.1%, over 2006. The
compound annual growth rate was approximately 13.8% for the
five-year period since 2002.
The increased investment in research and development in
all segments demonstrates the Company’s focus on knowledgebased
products, and reflects a significant number of projects in
late-stage development.
Restructuring: In 2007, the Company announced initiatives
that are expected to generate pre-tax, annual cost savings of
$1.3–$1.6 billion for 2008 in an effort to improve its overall
cost structure. The Company recorded $745 million in related
pre-tax charges. This action was taken to offset the anticipated
negative impacts associated with generic competition in the
Pharmaceutical segment and challenges in the drug-eluting
stent market.
The Company’s Pharmaceuticals segment will reduce its
cost base by consolidating certain operations, while continuing
to invest in recently launched products and its late-stage pipeline
of new products. The Cordis franchise is moving to a more integrated
business model to address the market changes underway
with drug-eluting stents and to better serve the broad spectrum
of its patients’ cardiovascular needs, while reducing its cost base.
This program will allow the Company to accelerate steps to standardize
and streamline certain aspects of its enterprise-wide
functions such as human resources, finance and information technology
to support growth across the business, while also leveraging
its scale more effectively in areas such as procurement to
benefit its operating companies. See Note 22 for more details.
In-Process Research and Development: In 2007, the Company
recorded a charge for in-process research and development
(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.
In 2006, the Company recorded IPR&D charges of $559 million
before tax related to the acquisitions of the Consumer Healthcare
business of Pfizer Inc., Vascular Control Systems, Inc., Ensure
Medical, Inc., ColBar LifeScience Ltd., Hand Innovations LLC and
Future Medical Systems S.A. The Consumer Healthcare business
of Pfizer Inc. accounted for $320 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. Vascular Control Systems, Inc., a privately
held company focused on developing medical devices to treat
fibroids and to control bleeding in obstetric and gynecologic
applications, accounted for $87 million before tax of the IPR&D
charges. Ensure Medical, Inc., a privately held company that develops
devices for post-catheterization closure of the femoral artery,
accounted for $66 million before tax of the IPR&D charges. ColBar
LifeScience Ltd., a privately held company specializing in reconstructive
medicine and tissue engineering, accounted for $49 million
before tax of the IPR&D charges. Hand Innovations LLC, a
privately held manufacturer of fracture fixation products for the
upper extremities, accounted for $22 million before tax of the
IPR&D charges. Future Medical Systems S.A., a privately held company
that primarily develops, manufactures and markets arthroscopic
fluid management systems, accounted for $15 million before
tax of the IPR&D charges.
In 2005, the Company recorded IPR&D charges of $362 million
before tax related to the acquisitions of TransForm Pharmaceuticals,
Inc., Closure Medical Corporation, Peninsula Pharmaceuticals, Inc.,
and the international commercial rights to certain patents and
know-how in the field of sedation and analgesia from Scott Lab, Inc.
TransForm Pharmaceuticals, Inc., a company specializing in the
discovery of superior formulations and novel crystalline forms of
drug molecules, accounted for $50 million before tax of the IPR&D
charges and was included in the operating profit of the Pharmaceutical
segment. Closure Medical Corporation, a company with expertise
and intellectual property in the biosurgicals market, accounted
for $51 million before tax of the IPR&D charges and was included in
the operating profit of the Medical Devices and Diagnostics segment.
Peninsula Pharmaceuticals, Inc., a biopharmaceutical company
focused on developing and commercializing antibiotics to treat
life-threatening infections, accounted for $252 million before tax of
the IPR&D charges and was included in the operating profit of the
Pharmaceutical segment. The $9 million before tax IPR&D charge
related to Scott Lab, Inc. referred to above was included in the
operating profit of the Medical Devices and Diagnostics segment.
Other (Income) Expense, Net: Other (income) expense, net
includes gains and losses related to the sale and write-down of certain
investments in equity securities held by Johnson & Johnson
Development Corporation, gains and losses on the disposal of
property, plant and equipment, currency gains and losses, minority
interests, litigation settlements and liabilities and royalty
income. The change in other (income) expense, net from 2007
to 2006 was an increase in expense of $1,205 million.
In 2007, other (income) expense, net included a charge of
$678 million before tax related to the NATRECOR® intangible
asset write-down. A gain of $622 million associated with the
Guidant acquisition agreement termination fee, less associated
expenses, was included in 2006. In addition, 2006 also included
expenses associated with the recording of additional product
liability reserves and the integration costs associated with the
acquisition of the Consumer Healthcare business of Pfizer Inc.
In 2005, other (income) expense, net included royalty
income partially offset by several expense items, none of which
were individually significant.
MANAGEMENT’S DISCUSSION AND ANALY SIS OF RESULT S OF OPERATIONS AND FINANCIAL CONDITION 41