JNJ | Q4 2010

Louise Mehrotra: Good morning, and welcome. I'm Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson, and it's my pleasure this morning to review our business results for the fourth quarter of 2010. Joining me on the podium today are Bill Weldon, Chairman of the Board of Directors and Chief Executive Officer of Johnson & Johnson; and Dominic Caruso, Vice President, Finance and Chief Financial Officer. A few logistics before we get into the details. The audio and visuals from this presentation are being made available to a broader audience via webcast, accessible through the Investor Relations section of the Johnson & Johnson website. I'll begin by briefly reviewing highlights of the fourth quarter for the corporation and highlights for our three business segments. Following my remarks, Bill Weldon will comment on 2010 results and provide a strategic outlook for the company. At the completion of Bill's remarks, Dominic Caruso will provide some commentary on the fourth quarter financial results and guidance for the full year of 2011. We will then open the floor to your questions. We will conclude our formal presentation at approximately 9

William Weldon: Thanks, Louise, and thank you, all, for being here today. Let me start by saying I'm pleased to report that Johnson & Johnson delivered innovation in healthcare and earnings growth in 2010, with many of our businesses performing well in light of the overall macroeconomic conditions. We're emerging stronger as an organization, while we deal with issues in our Consumer business. The results in our Consumer business were clearly a disappointment, heightened by the impact of the OTC recalls in the McNeil Consumer Healthcare business. While we will continue to see near-term pressures on the business for 2011, we remain committed to investing in the people, products, pipelines and global markets that will sustain our growth over the long term. We continue to build on the strong foundation of our credo and proven operating model, and we are well positioned to capitalize on our market leadership in one of the most important and rewarding industries in the world. I'd like to begin our presentation by looking back at 2010 and discussing our business results for the year. I'll also give you an update on our McNeil Consumer business and our priority of returning high-quality products back to our customers this year. After that, we'll discuss the state of the global healthcare market, our approach to growth at Johnson & Johnson, and the steps and investments we're making to extend market leadership across our enterprise. While we achieve many notable successes in 2010, it was clearly a year marked by very visible challenges that tested Johnson & Johnson on numerous fronts. Since I've received many questions regarding the McNeil situation, let me provide some perspective beyond the updates Louise has already shared with you. Our experience with the McNeil Consumer recalls has been difficult and disappointing for our business, for our employees and most importantly, for our customers. Consumer trust in our company and our products is fundamental to everything we do, and that trust has truly been tested. I visited many of our manufacturing locations around the world, and I can tell you that our people are dedicated to giving our customers the most trusted brands and highest quality products in the industry. I and all our people know it is our responsibility to learn from what happened, address any problems at the root causes and ensure only the highest quality products reach our customers and thus earn back the trust and respect. Last year, we've made a commitment to restore McNeil Consumer Healthcare to the highest levels of quality and compliance that people expect of all Johnson & Johnson companies and that we expect of ourselves. As part of this commitment, we accelerated the implementation of organizational changes to our supply chain, manufacturing, quality and compliance areas. We also undertook thorough review of how we operated these plans. We examined in detail the historical production records going back many years of McNeil Consumer Healthcare products that were sold in the United States and produced in McNeil's internal manufacturing network. We've now completed this interim, and we will continue to conduct reviews at external sites that manufacture McNeil products. If these reviews reveal any further issues, we will not hesitate to take whatever steps are needed, including further market action, to ensure that our products meet world-class quality standards. Moreover, the steps we have taken under the comprehensive action plan submitted to the FDA constitute an uncompromising effort to review quality and manufacturing practices at McNeil. To help us assure that moving forward any of our products in the marketplace live up to the trusted standards and expectations that consumers have for all of our products coming from Johnson & Johnson. At the appropriate time, we will be investing in market support for our over-the-counter brand such as TYLENOL, MOTRIN and many others. And we will be introducing product and packaging innovations for many products, especially for those for young children. As I indicated earlier, there were many successes and achievements in 2010 that have positioned us well for the future, and it is thanks to the dedicated and talented people of Johnson & Johnson that we continue to deliver results and advance the pipelines that will serve an array of unmet medical needs and sustain our long-term growth. For the year, we grew our adjusted earnings by 2.9% despite a sales decline and continued our long-term management focus. We maintained our financial discipline and strength in a tough global economy, we generated strong free cash flow and maintained our AAA-credit rating, and we executed a $1.1 billion debt offering at the lowest interest rate for long-term corporate debt in history. We continued launching many new products and growing our market leadership in some of the fastest-growing segments in healthcare. We invested nearly $7 billion in R&D to advance our newest technologies and pipeline compounds, many of which are truly breakthroughs in how we treat disease, improve people's health and save lives. We're also excited about the progress we saw in the emerging markets, with our sales growing 14% operationally in the BRIC markets

Dominic Caruso: Thank you, Bill, and good morning, everyone. Given the various challenges we faced in 2010, we are pleased that we were able to deliver earnings growth and strong free cash flow, while continuing to make investments that position us well for the future. I would like to highlight a few items in our fourth quarter results and then provide some guidance for you to consider in updating your models for 2011. Our fourth quarter results reflect a lower level of sales than we and you had expected. We also incurred additional expenses related to the remediation efforts at our McNeil Consumer Healthcare manufacturing and quality operations, putting further pressure on our gross profit for the quarter. However, we were able to offset this slower level of gross profit by positive impacts in the other income and expense line when excluding the special items that I will describe, as well as a lower effective tax rate. The lower effective tax rate reflects the implementation of the R&D tax credit retroactive to the beginning of 2010, which is consistent with our guidance for the year and the favorable mix in the business along with some additional tax claim strategies in the fourth quarter. Our fourth quarter 2010 results include charges in the other income and expense line that we have identified as special items. These are excluded from our adjusted earnings since they are not related to our current operations, a practice that we have consistently applied with these types of items. These special items amount to approximately $1.2 billion and consists of three types of charges to earnings. First, we recorded costs associated with the litigation settlements of approximately $375 million, primarily related to the arbitration ruling concerning ceftobiprole with Basilea and a settlement with Novartis concerning various patents in the vision care business. Additionally, we increased our reserves for product liability costs by approximately $570 million, primarily related to the DePuy ASR Hip recall, LEVAQUIN and RISPERDAL matters. And finally, we also recorded a reserve of approximately $280 million for costs associated with the DePuy ASR Hip recall program, where we have agreed to cover reasonable and customary costs of testing and treatment for ASR patients who need services related to the recall, including revision surgery, if necessary. Together, these special items negatively impacted our fourth quarter results by $0.33 per share. Excluding these special items, our earnings per share of $1.03 achieved the mean of the analysts' estimates for the quarter. To wrap up our formal presentation this morning, I would like to provide some guidance for you to consider as you refine your models for 2011. First, let me set some context around certain items that are reflected in my guidance but may not yet be reflected in your models. We expect to continue to incur significant costs in 2011, as we continue to address the manufacturing and quality issues related to our OTC recalls and our work to restore our McNeil Consumer Healthcare products in the marketplace. These costs will negatively impact earnings by approximately $0.06 per share. Additionally, as many of you know, the U.S. healthcare reform legislation requires that beginning in 2011, a fee is to be paid by each of the U.S. Pharmaceutical companies based on branded product sales. This fee is not tax deductible, and we estimate that it will negatively impact earnings by approximately $0.06 per share. As you have seen, the overall markets that we compete in have experienced significant pricing pressure in 2010, and we expect that this pressure will continue in 2011. When you consider U.S. healthcare reform, European austerity measures and general pricing pressure in the market, we estimate that, overall, such pricing pressure will have a negative impact to pretax operating margins of approximately 0.5% to nearly 1%. As we plan for 2011, we want to ensure that we make the proper investments to ensure that sustainability of the underlying strength we see in the business, while we continue to deal with some challenges. Finally, it is important to understand that the following guidance does not yet reflect the potential impact of the acquisition of Crucell. Assuming all closing conditions are met, we expect to close this transaction in the first quarter, and we will provide an update at that time, as is our normal practice. Let me begin now with a discussion of cash and interest income and expense. During 2010, we continue to generate strong cash flows. In fact, as Bill pointed out earlier, we generated free cash flow or operating cash flow after necessary capital expenditures of approximately $14 billion. At the end of 2010, we had approximately $11 billion of net cash. This consists of approximately $28 billion of cash and marketable securities, and $17 billion of debt. This is an improvement of $6 billion in our overall net cash position from year-end 2009. During 2010, we used approximately $1.1 billion to repurchase shares of our stock in connection with our $10 billion share repurchase program, which we have now completed. For purposes of your models, assuming no major acquisitions, I suggest you consider modeling net interest expense of between $300 million and $400 million. Turning to other income expense, as a reminder, this is the account where we record royalty income as well as one-time gains and losses arising from such items as litigation, investments by our development corporation and asset sales or write-offs. This account is difficult to forecast. But we would be comfortable with your models assuming approximately the same level of other income and expense as we saw in 2010 when excluding special items. Therefore, I would recommend that you consider modeling other income and expense for 2011 as a net gain ranging from approximately $600 million to $700 million. And now a word on taxes. For 2010, the company's effective tax rate excluding special items was 21.1%. During 2010, we recorded a number of tax adjustments in various jurisdictions that reduced our effective tax rate, which we do not expect to repeat in 2011. We suggest that you model our effective tax rate for 2011 in the range of 22% to 23%. As a reminder, the incremental healthcare reform fee is not tax deductible. As always, we will continue to pursue opportunities in this area to improve upon this rate throughout the year. Now turning to sales and earnings. As we have done for several years, our guidance will be based first on a constant-currency basis, reflecting our results from operations, assuming that average currency rates for 2011 will be the same as they were for 2010. This is the way we manage our business, and we believe this provides a good understanding of the underlying performance of our business, and we will also continue to provide an estimate of our sales and EPS results for 2011 that the impact to current exchange rates could have. As we've done in the past, we will use the euro as an example of the overall impact that currency fluctuations could have. And as of the end of last week, the euro was at $1.35 and have strengthened along with other major currencies versus 2010 levels. Turning to sales, we would be comfortable with your models reflecting an operational sales increase on a constant-currency basis of between 2% and 3% for the year. This reflects the impact of the previously announced transaction with Watson concerning CONCERTA, as well as the loss of market exclusivity for LEVAQUIN in June 2011. These two items have reduced our growth rate by approximately 1.5%. This would result in sales for 2011 on a constant-currency basis of approximately $63 billion. While we are not predicting the impact of currency movements, to give you an idea of the potential impact on sales, if currency exchange rates for all of 2011 were to remain where they were as of the end of last week as an example, then our sales growth rate would increase by approximately 1.5%. Thus, under this scenario, we would expect reported sales growth a range between 3.5% and 4.5%, for a total expected level of reported sales of approximately $64 billion. And now turning to earnings. As I indicated earlier, there will be an incremental U.S. healthcare reform fee as well as the cost to restore our McNeil Consumer Healthcare manufacturing and product quality to our high standards. That will negatively impact our earnings in 2011. Additionally, we expect to continue investing in our businesses to ensure the sustainability of the underlying growth we see in our businesses even in the face of slower market growth and pricing challenges that we expect to continue in 2011. We suggest that you consider full year 2011 EPS estimates, excluding the impact of special items, of between $4.72 and $4.82 per share on an operational basis. That is, assuming the same average exchange rates for 2011 as we saw in 2010. And while we are not predicting the impact of currency movements, to give you an idea of the potential impact on EPS, if currency exchange rates for all of 2011 were to remain where they are as of the end of last week, then our reported EPS, excluding special items, would be positively impacted by approximately $0.08 per share due to exchange rate fluctuation. We, therefore, suggest that you model our reported EPS in the range between $4.80 and $4.90 per share. At this early stage in the year, we would be comfortable with your models reflecting the midpoint of this range. As you update your models for the guidance that I just provided, you will see that our overall net income margin will contract by more than 0.5% versus 2010, partly due to the increase in our effective tax rate and partly due to a contraction in our pretax operating margins. For 2011, the continued and incremental pricing pressure across our business, the incremental cost associated with U.S. healthcare reform fee, as well as the cost of remediation activities in our McNeil Consumer healthcare business and the investments we are making across our businesses for sustainable growth will result in this pretax margin contraction. While we will have the incremental benefit associated with our restructuring efforts, these will not offset all such factors. In closing, Johnson & Johnson remains a company that is financially strong, and we are committed to expanding our market leadership and investing for sustainable growth in healthcare. While we see some challenges in 2011, we also feel positive about the underlying strength in our business as evidenced by strong core products, exciting new product launches, robust pipelines and extraordinary global expansion opportunities. I look forward to updating you on our progress throughout the year. Now, Louise, back to you.

Louise Mehrotra: [Operator Instructions] Over here, Catherine. [Catherine Arnold, Credit Suisse]

Catherine Arnold - Crédit Suisse AG: I think guidance is probably a good place to start, and I wanted to ask a strategic question, and then one for Dominic on some specifics. So, Bill, for the strategic question, if you step back and you think about what your guidance is aspiring, and then you think about the growth over the last two years, it would suggest that the last three years have sort of been low single-digit flattish growth. And I guess, I'm wondering if your aspirations are that going into 2012 and beyond, we should return to a more typical J&J growth trajectory in the high single digits based on transition, based on investments and some challenges that go away, or if what we've seen in the last three years is really more about the way the business is going to be delivering longer term?

William Weldon: No, I think as you get into 2012, actually, we ended 2011 into '12, you'll start to see things start to accelerate back to what we would expect normal terms to be. And I think if you look at the new products, putting the OTC issues completely behind us, that we feel very, very comfortable on a go-forward basis.

Catherine Arnold - Crédit Suisse AG: And, Dominic, if I think about the moving parts for 2011 and things that could impact guidance, like there is five or six variables that the Street might have gotten wrong and estimated 2011, which is why the disparity between your guidance or what consensus estimates were or maybe some things are tougher than what you spoke of last time. And if I could just share this with you and you can react. In terms of EU pricing, for instance, you have made a comment that overall pricing was going to impact 1.5% to 1%. I just want to clarify if that was on a sales level or earnings level. I thought it was on earnings level. In the past, you've talked about mid-single-digit effects in 2011, and I thought that was on the sales also. So I want to try to understand if there's any difference or it's just given in a different way in terms of EU pricing. And healthcare reform in the past, I think you had said 5% to 6% of U.S. sales, where you just mentioned a $0.06 EPS impact. So again, is there any change that we could have gotten wrong or maybe both of those factors just weren't incorporated well into consensus estimates and there's no change? Do you want to comment?

Dominic Caruso: Let me comment on those two items first. So with respect to pricing, what I provided was an overall estimation that pricing pressure in the industry, when you take into consideration healthcare reform, European austerity measures and just overall market pricing conditions, would negatively impact pretax operating margins by 0.5% to 1%. That's what I said in my script. But that's the overall pricing contraction in the broad markets around the world. Now in addition to that, the healthcare reform fee that I'm discussing is incremental to that, and healthcare reform fee, as many of you know, will not be reflected in sales by corporations. It's actually a cost. And that healthcare reform fee, that incremental fee that takes place in 2011, which is non-tax deductible, that's an incremental impact to earnings, which we estimate to be worth about $0.06 per share. Hopefully, that clarifies it.

Catherine Arnold - Crédit Suisse AG: You have given some directional guidance on both of those factors in the past. So I just want to be sure that -- is there any change in the impact of those items in 2011 guidance versus when you spoke in the past about directionally what you expected from 2011 from healthcare reform and EU just pricing pressures in general?

Dominic Caruso: Right. Well, with respect to healthcare reform, there's really no change. We've talked earlier about the fact that in 2010, healthcare reform impacted the industry by about 2% of sales. Our impact was about 3% in 2011. The healthcare reform impact is somewhere in the neighborhood of 4% to 4.5% of sales. That would be our impact on sales. In addition, in 2011, the healthcare reform fee is another 1% to 1.5% of sales, impacting all companies in the industry. And that's reasonably consistent with our earlier guidance back in the early part of 2010 when healthcare reform was established. With respect to overall pricing, we did see acceleration in price pressure throughout the back half of the year. So the overall pricing comments that I made are slightly more intense pricing pressure in 2011 than we have previously indicated.

Catherine Arnold - Crédit Suisse AG: And I appreciate your patience. Just to wrap it up. If you think about pricing, healthcare reform, consumer recall, investment and launches, you got four or five potentially this year I think. Gross margin challenges that you mentioned and procedure pricing pressures from the MD&D business, are any of those jump out of you as you observe the models in the street that are inadequately being forecast and that you would encourage us to be more conservative about?

Dominic Caruso: I think generally speaking, the model of the street have gross margin not as impacted as we would expect it to be. So the gross margin seems to be optimistic, I guess, in the model. And also, all the factors that we just discussed, price and healthcare reform and costs associated with McNeil remediation, all those things together, including an effective tax rate that's higher, as I said, impact of our margins, our net income margin by contracting it from 2010 levels to 2011 by at least half a point, whereas most of the street's estimates are a slight increase in margin from 2010 levels.

Louise Mehrotra: Matthew?

Matthew Dodds - Citigroup Inc: Matt Dodds from Citigroup. For R&D, Bill, I think three years ago, we talked about a lot of products to the pipeline, and your R&D in pharma as percentage of sales has actually not dropped that all. I'm wondering as kind of broadly as we look out, should it remain above levels? I think we look at versus your peers in pharma that 20% range and a minimum for 2011, should we expect it to remain at pretty high levels?

William Weldon: Yes, I think you probably should. I think you'll see a comeback a little bit, Matt. But I think it's really a function of the products that are in the pipeline. I think if you look at it last year, I think -- or the year before, we had three or four products approved last year. We had four submissions we had throughout to go out early this year. So I think we had such a strong pipeline, and we're going to continue to invest at appropriate levels to make sure we capitalize on the opportunities.

Matthew Dodds - Citigroup Inc: And then, Dominic, one for you. As the other income is getting bigger here, can you give us at least a couple of areas of where that shows up, if not broken out, like what are some areas, is it royalty we should be thinking about?

Dominic Caruso: Well, maybe this perspective will help. The other income and expense line, the main component of that line is other income related to royalties, so royalty income. And that's generally about $500 million on an annual basis. Now over the years, other items hit that line, like write-offs, asset sales, gains and losses, et cetera. So this year, there were some gains and some lower level of write-offs. Then next year, we expect around the same level. But start with about $500 million of royalty income, which is usually offset by other items, which are very difficult to forecast. We're trying to give you our best guess on where those things might come out.

Louise Mehrotra: Maybe just right over to Bob here.

Robert Hopkins: Bob Hopkins, Bank of America Merrill Lynch. Dominic, I was wondering if you could be a little more specific in some of the commentary about pricing decelerating in the fourth quarter, maybe start with DePuy if you don't mind. You guys have a lot of moving parts in DePuy this quarter. So first, how much we need to add back for the tougher extra week comparison? And then if you can comment on how much did pricing decline in Q4 versus Q3.

Dominic Caruso: So generally speaking, across all of our businesses, we estimated that this 53rd week impact last year was worth about two points on the quarter's growth. Maybe about half a point or thereabouts for the year. So of course, each of the businesses vary a little bit from that, but that's an overall estimate for the impact. And then with DePuy in particular, the way I would characterize it is, in knees, price net of mix from fourth quarter 2010 compared to fourth quarter 2009 did not change very much. It was still negative by about a point. Things did not accelerate. In hips, in both worldwide and U.S. hips, price net of mix did negatively accelerate into fourth quarter, with mix being a far a less of an add, if you will, do that mix. And that change, that delta between the two quarters is about three points.

Robert Hopkins: And then as you look forward, just especially for the Medical Device business as a whole, and you talked about the company as a whole, but can you just talk about what you're assuming for pricing in 2011 within Medical Devices broadly?

Dominic Caruso: Well, across all the businesses, I could just comment across all the businesses. As I said, about half a point to a point of pretax operating margin as a decrease in price year-over-year. We've experienced price in 2010 as well, as I said, accelerated in the back half of 2010. But nearly a point of pretax margin rose into the price compression is a tough hill to climb when we want to make investments when you saw the significant pipeline that we're building and the launch of these exciting products. So we want to make sure we get through those launches and move those pipelines forward, and then hopefully, get price through better sales growth, of course, in the future as these products hit the marketplace.

Louise Mehrotra: Mike?

Michael Weinstein - JP Morgan Chase & Co: Mike Weinstein, JPMorgan. Dominic, let me ask you two sets of questions here, and the first is with regard to your, actually close to kind of like 2011 a bit. The first is on revenue growth. You're forecasting what appears to be business acceleration and organic growth where the model is. so I just wanted to explore that a bit. In 2010, I think your constant-currency growth was down 1.3%, but that included a bunch of moving parts, but there was I think 60 basis points from healthcare reform. And then you kind of added obviously the $900 million impact of Consumer business. So a lot of moving parts. If perhaps if we're forecasting some acceleration growth this year, just hoping you can just touch a little bit about on that. And then the second question is on a bit of capital allocation question. You bought back only $1 billion in stock last year, sitting on obviously just a ton of cash. And I'm curious. One, why did you buyback only $1 billion of stock? And two, what's in your assumption in your 2011 guidance for share repurchase?

Dominic Caruso: So with respect to the revenue, you're right, Mike. It's a good observation. We are forecasting an acceleration to the revenue growth in 2011 versus 2010. Just to give you a little bit of a perspective, you had mentioned the negative 1.3% operational decline in revenue in 2010. Just a few adjustments to that to give you a sense

Louise Mehrotra: Jami? [Jami Rubin, Goldman Sachs]

Jami Rubin - Goldman Sachs Group Inc.: Dominic, if you can again clarify. The $0.06 related to the excise tax for the Pharmaceutical business, which is an after-tax expense, is that new from what the company guided a year ago or your second quarter when you provided guidance for healthcare reform? Because that was on a revenue basis, and this is now a earnings basis. Just wondering if this is new. Secondly, if I could just go back and explore the pricing issue related to procedures and procedure volumes in the Med Tech business. Is what you're seeing with accelerated pricing a consequence of the weak economy? How come we don't have spending power? And you expect that as the economy picks up, that you will regain that pricing pressure? Or is there something going on, structurally, where the payers are pushing back because they're not going to pay for incremental innovation? And how should we think about that equation going forward? And then just thirdly on utilization trends, we saw a significant slowdown in the second half of 2011. What are your expectations, and how are you thinking about utilization trends in that business going forward?

Dominic Caruso: Well, let me take it starting from the top. Let's talk about healthcare reform. When we talk about it in April of 2010 after legislation was passed, of course, we provided guidance for 2010 and not guidance for 2011. But the overall macro picture we provided then was that healthcare reform impact for the industry was about $4 billion in 2010 growing to about $11 billion in 2011. We still think that's exactly the case. The difference is that $8 billion of the $11 billion is reflected in sales, and $2.5 billion or thereabouts of the $11 billion is reflected in the expense line. So no change in terms of overall impact to the industry or impact to Johnson & Johnson. With respect to pricing, I think two components. Yes, hospitals are under pressure, and therefore, pushing back on pricing. And I think that in various segments of the market, there is significant pressure on paying for innovation. So spine is probably the best example of that, where we saw a significant payer pushback. I wouldn't say that's the case across all of the markets that we compete in. And then utilization, we did see MD&D -- I think you were talking about medical device. So in the MD&D market, we expect that the market -- we think the market grew at about 4% overall for 2010, and we think that it's about 6% in the first half and 3% in the back half of the year. And even in that 3% in the back half, third quarter was a little stronger than fourth quarter. So we're expecting that for 2011 this back half of 2010 will continue, at least through the early part of 2011. And it may pick up a little bit towards the back half of 2011.

Louise Mehrotra: We'll go over there. Larry?

Larry Biegelsen - Wells Fargo Securities, LLC: Larry Biegelsen, Wells Fargo. On NEVO, could you give us a sense of when in 2010 you might refile in Europe? And how confident you are you can fix the problem, and how committed you are to the product given the slippage? And then I had a question on the Consumer business. The Puerto Rico facility, maybe this is a difficult -- this is, I'm sure, a difficult question to answer, but how confident are you we won't see similar issue with the Puerto Rico plant that we saw with Fort Washington?

William Weldon: Yes, I think maybe I'll talk about Puerto Rico first. I think we're working closely with the FDA to address the issues down there. But I don't think that we can really comment on what's the outcome going to be on that right now. As far as the NEVO question, we're assessing NEVO right now to look at where we're going. We're committed to the cardiovascular market. Right now, if you look at the results NEVO is showing, it's showing very good results. So we're assessing that right now to look to see what we do exactly with that product, but the strong commitment to both the product at this point in time as well as the market.

Louise Mehrotra: Rick?

Frederick Wise - Leerink Swann LLC: Rick Wise, Leerink Swann. Bill, maybe just on the Consumer topic. You described the CAP plans that are on track. Maybe there you can talk a little bit more about what's left to do to fully complete that? And on Consumer, generally, you said you completed the internal review. What's left to do, and do you think we've seen the last of the recalls at this point?

William Weldon: Yes, I think when you look at what's left to do, we have looked at every product that's internally manufactured, which is around 80% of the total volume of McNeil. So we're now looking at external manufacturers, which shows about 20%. Some of those we've already addressed as you saw with the recall in the past. So most of it is behind us, but we're going through the exact same process with external manufacturers as we did with the internal process. So 80% plus is behind us. We still have to look at those and see if there's anything. As I said, if there's any issues there, we'll address those appropriately. So I would say most of it is behind us, Rick, but there could be a little bit ahead of us.

Frederick Wise - Leerink Swann LLC: Does this make you rethink your strategy in some kind of way for managing the business? Maybe you want to bring everything in house? I mean, is this reflect too much cost cutting? How are you changing managing?

William Weldon: I don't think if we always talk about lots of different issues out there, and we can't go into a lot of them. But no, I think we've identified and understand what the issues are. We're addressing the issues, and we're going to put them behind us. I think what the CAP has allowed us to work closely with the FDA. I think we have a very good working relationship and resolving the issues as we go forward. But I think it was a myriad of issues that we really can't go into all of them at this point. But I think we've got them a, under control; b, understand them; and c, we're addressing them. And as I said before, the vast majority are behind us. So now we can look forward to getting the products back into the marketplace and being able move forward.

Frederick Wise - Leerink Swann LLC: And last, I hate to bring up the idea of thinking about your successor at this point. But clearly, there's a transition process underway. Maybe it would be interesting to hear, how you're thinking about the timing and maybe what you're looking for as you look out over the next couple of years in terms of the next kind of CEO for the company?

William Weldon: Well, I think we go through, as I said before, very thoughtful assessment of the succession planning. I think we've created the Office of the Chairman, which is something that we've done in the past and allows people to work closely for a protracted period of time. So I think that's the best I can say right now. I think the positive thing about J&J is that you have -- we're committed to continuing to give people exposure, experiences and to develop people so that we can have smooth transitions. And I think when the appropriate time comes, we'll have a smooth transition.

Louise Mehrotra: Derrick?

Derrick Sung - Bernstein Research: Derrick Sung, Sanford Bernstein. First, Bill, maybe a strategic question here. You talked a lot about emerging markets and opportunity there. But it seems like you're focused on emerging markets as most of have been in the consumer and med tech sectors. Many of your pharma peers have been making some big moves and land-grabs in emerging markets. And I was wondering how you thought about positioning your Pharmaceutical businesses for the opportunities in emerging markets? And then maybe kind of as a follow on to that also, if you can comment on some of your pharmaceutical peers are also getting to biosimilars as a growth area in pharma, how might you think about that?

William Weldon: Yes, as far as the emerging markets, I think we're looking at it in all of our businesses. I think in pharma, we've made -- we've looked at some opportunities that we've been able to expand our businesses. And you have to look at both kind of the not really the OTC, but let's call it the OTC market, as well as the RX market. But we have been doing a lot of research in those areas. We have set up a center over there to do clinical trials. We've got a relationship with Nanjing university in China, for example. So we have a lot of work going on. We're also working closely with the governments to get approvals in those areas and to launch new products in those areas. So I think in the pharma area, we're as active as we are in both MD&D and Consumer. Consumer, obviously, we bought a company called Dabao a couple of years ago, which has been very successful for us in China. We set up innovation centers, as well as a lot of training centers throughout both in the eye area as well as the surgical area and diabetes area. And we've set up a lot of manufacturing facilities. So I think where we've moved and make quite a few investments, and you'll see a lot more investment in that area.

Derrick Sung - Bernstein Research: In biosimilars?

William Weldon: Yes, the biosimilars area, it's not an area that we have felt was the right area to be going into it at this point in time. We think that we need to innovate, bring new products to market, and we have such a strong pipeline that we really haven't been worried about the biosimilars area. And we feel that we have to innovate and bring new products out. So that's not an area we've been looking at.

Derrick Sung - Bernstein Research: And just a follow-up on the pricing pressures that you're seeing in Europe, Dominic. On European austerity, I think last quarter you mentioned that you saw maybe $50 million in impact from European austerity, and we're expecting that to accelerate through the back half of this year and certainly into 2011. It seems like you reported that same number of about $50 million again this quarter. So I'm wondering is perhaps austerity not as bad as you thought it would be, or is it maybe unfolding a little slower? Can you kind of give some commentary that.

Dominic Caruso: You're exactly right. We had, early on, estimated it to maybe be in the $200 million range. It's probably a little over $100 million for 2010. But we do see it still accelerating through 2011 and more than doubling from what we saw in 2010.

Derrick Sung - Bernstein Research: Any specific moves by the countries that would make you think that it would accelerate?

Dominic Caruso: Well, we've been tracking all the countries and their specific legislative moves and their specific targets. And that's our estimation now based on what they have published.

Louise Mehrotra: Kristen?

Kristen Stewart - Deutsche Bank AG: Kristen Stewart from Deutsche Bank. You've mentioned earlier that there was obviously a negative pricing or pricing pressures emerging across several business units within MD&D. We talked a lot about DePuy, but what are you seeing in some of the other franchises?

Dominic Caruso: We did see pricing across many of the franchises throughout the MD&D business, pricing pressure again in the back half of the year. I think it's consistent with the comments that someone made earlier us procedure volumes have slowed down. That's come with it from additional pricing pressure by hospitals.

Kristen Stewart - Deutsche Bank AG: And how about U.S. versus Europe? I know historically you haven't been seeing a lot of pricing pressure in Europe in the devices, the device review data that was something that you had did kind of flagged as the potential to watch for 2011?

Dominic Caruso: Right. We still think that the pricing pressure, as a result of European austerity measures, will be more pronounced in the Pharmaceutical business that in the MD&D business. As you know, the MD&D market structure, which is essentially a DRG-based structure provides that there's less direct impact to price from the government. But as tenders come up in these markets throughout Europe, we are starting to see some additional pressure. But I would say, it's much more pronounced than pharma than it is in medical devices in Europe.

Louise Mehrotra: Bruce?

Bruce Nudell - UBS Investment Bank: Bruce Nudell, UBS. Bill, I had a question about Consumer. Skipping the OTC issue and just looking at the other divisions within Consumer, could you just characterize how they're performing relative to their respective peers? And if, in fact, they are underperforming, when you take out specials and stuff, what are the plans to address them? If you could give any color on the specific business units, where you have action items that you think really could exert a major effect?

William Weldon: Yes, in a simple word, they underperformed in 2010, especially as you got to the latter part of the year. Part of it I think was a distraction on the whole consumer area with the OTC recalls and looking at resources and resourcing and trying to address some of those areas. I think we're looking at people are refocused now back on their core businesses, making sure they're making the right investments in innovation. I talked about some of the areas of innovation that they're looking at. We also have some disruption in some of the other areas and some manufacturing in 2010 in some of the skin care areas. But I think we should be back on track and look at a positive movement in 2011.

Bruce Nudell - UBS Investment Bank: And just a follow-up broadly speaking on capital allocation, and I don't expect you to comment on specific things that have been speculated, but when you think about major investments and things such as major joints, where mature market hard-to-demonstrate clinical superiority and contrast that with things like Acclarent, which clearly unmet medical need or even Tibotec, which they prove to be a fantastic acquisition. Broadly speaking, any comments in that regard?

William Weldon: Well, I guess, what I would say is, when you look at -- you look at emerging markets. So we're looking at investments in those areas. Like you have to look at demographics and you mentioned joints. But demographics lead to a lot of areas, joints, cardiovascular diseases, those types of things. But I think as I mentioned up there, we try and work from the bottom up looking at where's the opportunity, where's the unmet medical need. As you look to the future, what are the future is going to be able to lead us, lend us towards, and it's demographics, it's emerging markets, cardiovascular disease, orthopedics, diabetes, these areas. And so I think we continue to look at areas where we can move into those in either expand areas that we have, such as you mentioned, Acclarent, with our surgical business or Tibotec with our Pharmaceutical business or possibly new areas to move into and Tibotec could be putting in that area also, really moving into the infectious disease. So we look at it more from where the opportunities that are going to be out there for the future and what is the opportunity that an acquisition or license would bring to us to afford us to capitalize on those opportunities.

Matthew Miksic - Piper Jaffray Companies: Matt Miksic, Piper Jaffray. Ethicon, if you want to get a sense the impact of acquisitions on that number from Acclarent to Micrus? And so, Bill, on the pharma side, the Medical Devices side, the business strategically become a tougher environment obviously over the last couple of years, regulatory pricing, the economy, patient behavior and so on, peer behavior, in some cases. And I'm wondering, number one, how do you compare that both regionally in the U.S. and o U.S. to trends that you're seeing in consumer? And how does that factor into your sort of strategic calculation where you look for growth? And then secondly is, do you see these changes as a permanent, or do you see these changes as something we can get through with an industry and come out of 12 to 18 to 24 months from now?

William Weldon: You'd love to say that the economic environment is going to change, but I think it's going to be a challenge for some time. I don't think we're going to come out of it in a year, 18 months. And the other piece of that is I think when you start to see some of the, let's call it compression on pricing or downward pressures, I think, once you get down there, it's very hard to bring it back. So I think we're going to see this come down to kind of a new level set. But I also think that innovation will allow us to be able to bring to get better prices in the marketplace. So if you look at some of the products I talked about earlier, they're real innovative products. Abiraterone, for example, will demand a much higher level. And I think to an earlier question that was asked, I think you're going to see much more need for differentiation of your products in the marketplace to be able to demand those higher prices, and whether that's devices or drugs. But I think as we see the pressure on pricing get to a new level, that's not going to be coming back. That's not going to come back. If it does, it's going to be a long time till it comes back. What will bring back is innovation in new products. So I think the compression is going to be there. And I think a lot of -- Dom talked about. I think if you look at pharmaceuticals in Europe, second half of last year, we really saw a lot of compression on pricing that will continue through into this year and I think into the future. But I think it's going to be the true advances and breakthroughs. If you come out with a non-differentiated product, that's gonna be very hard to get any real price.

Louise Mehrotra: So as far as Ethicon, on an operational basis, it grew 4.3%. And if you exclude the acquisitions, it would be about 1.6%. And as far as DePuy, it declined to 1.4%. And if you excluded Micrus, it will be about a decline of about 3%. Net-net, acquisition net of the divestitures for Johnson & Johnson in total had no impact on the quarter. And back to you, Bill.

William Weldon: Yes, I'd like to thank everybody, first of all, for coming today. But again to reinforce, I think that we have made a commitment to resolve in the OTC products and the manufacturing issues. We're going to put that behind us. I think that's going to be a big positive. And then I think when you look at the investment in the future and the product opportunities we have, I think we feel very, very good about the future. So again, I'd like to thank everybody and wish you a safe trip home. Thanks very much.

Louise Mehrotra: Thank you.