1998 Annual Report

Platforms for Growth

Anti-infectives Biotechnology Cardiology & Circulatory Diseases Central Nervous System Diagnostics Gastrointestinals Minimally Invasive Therapies Nutraceuticals Orthopaedics Pain Management Skin Care Urology Vision Care Women’s Health Wound Care Letter to Shareowners

1998 was one of the more difficult years that Johnson & Johnson has encountered in a long time. The good news is that our people responded to the challenges in a remarkable manner … allowing us to once again achieve solid financial performance. Sales of $23.7 bil- lion represented an increase of 4.5% over 1997. Prior to a special charge described below, our net income of $3.7 billion was up 11.1% and earnings per share, at $2.67, increased 10.8% over the previous year. These financial results were achieved despite our weathering a series of problems during the year. The continued strengthening of the U.S. dollar for the third year in a row resulted in negative currency adjust- ments that decreased our sales by about 2.5%. We faced economic turmoil in more parts of the world at Ralph S. Larsen the same time than we can ever remember… most Chairman and Chief Executive Officer notably in the important emerging markets of Asia as well as Russia. We also wrestled with several research disappointments in our pharmaceutical business where a number of promising new compounds for the treatment of serious diseases failed to meet clinical endpoints and we made the decision to discontinue further work on them. This once again dramatized for us all the high-risk nature of pharmaceutical research, and we are taking steps to implement a more rigorous program review and selection process with the objective of improving our batting average in this critical area. And finally, we experienced a flood of new competi- tors in our coronary stent business and suffered a loss of significant market share – not a happy situation. So all in all it was a difficult year. Having said that … we managed our way through the storms, turned in solid financial results and emerged from the year older, wiser and stronger than ever. Importantly, we undertook two major strategic initiatives during 1998 that are expected to be of great significance to our future growth. The first was the acquisition of DePuy, Inc., a leading manufacturer of orthopaedic products headquartered in Warsaw, Indiana. This $3.7 billion cash acquisition was the largest in our history. The second was to fundamentally implant market segment. This was an important busi- reconfigure our worldwide manufacturing operations, ness-building initiative that will serve us well in the moving from local to regional production facilities. years to come. We took a special charge of $610 million against Our strong cash flow enabled us to consummate the fourth quarter earnings for the costs of the reconfigura- DePuy transaction while maintaining our Triple A tion of our global manufacturing network, including credit rating and we remain among only six U.S. write-downs and write-offs of assets no longer provid- industrial companies with this top tier rating. ing economic benefit to the Company, as well as for The second major strategic decision made in 1998 purchased in-process research and development costs was the fundamental reconfiguration of our worldwide primarily associated with the acquisition of DePuy. manufacturing network to meet the global require- The charges reduced earnings per share for the year to ments of the 21st century. Over the next 18 months, this $2.23 and consolidated net earnings for the full year will involve reducing the number of our manufactur- were reduced to $3.1 billion. ing facilities around the world by approximately 36, Before acquiring DePuy, we had a good but mod- from 159 to 123 plants, with a decrease of about 4% in estly sized orthopaedics business. By combining our our global work force. This is the most significant existing business with the newly acquired DePuy orga- reconfiguration of facilities in the Company’s history. nization, we transformed Johnson & Johnson into a As painful as actions like this are, they are absolutely leading player in the $9 billion growing orthopaedics essential to the continued health and competitiveness market. DePuy is a premier company and provides us of our business and will be implemented with the not only with the critical mass and leadership we utmost sensitivity to the people who will be affected. sought in joint reconstruction, but also vaults us into As Johnson & Johnson built its business around the the number two position in the fast-growing spinal world over the past one hundred years, we typically

Three Years in Brief–Worldwide % Change

(Dollars in Millions Except Per Share Figures) 1998 1997 1996 1998 1997 Sales to customers $23,657 22,629 21,620 4.5 4.7 Net earnings* 3,059 3,303 2,887 (7.4) 14.4 Cash dividends paid 1,305 1,137 974 14.8 16.7 Shareowners’ equity 13,590 12,359 10,836 10.0 14.1

Percent return on average shareowners’ equity* 23.6 28.5 29.0 – –

Per share Net earnings – basic* $ 2.27 2.47 2.17 (8.1) 13.8 – diluted* 2.23 2.41 2.12 (7.5) 13.7 Cash dividends paid 0.97 0.85 0.735 14.1 15.6 Shareowners’ equity 10.11 9.19 8.13 10.0 13.0 7 7 1 Market price (year-end close) 83 ⁄8 64 ⁄8 50 ⁄2 29.3 28.5 Average shares outstanding (millions) – basic 1,344.8 1,336.0 1,332.6 0.7 0.3 – diluted 1,371.6 1,369.9 1,359.4 0.1 0.8 Shareowners of record (thousands) 165.9 156.8 138.5 5.8 13.2 Number of employees (thousands) 93.1 90.5 89.3 2.9 1.3

* Net earnings and earnings per share include Restructuring and In-Process Research and Development charges of $610 million or $.44 diluted earnings per share in 1998. Excluding the impact of these charges, 1998 net earnings increased 11.1% over 1997. The percent return on average shareowners’ equity in 1998 before these charges is 27.6%. For detailed discussion of these charges, refer to Note 15 and Note 17 of the Notes to Consolidated Financial Statements.

1 established small manufacturing plants in each country. First of all, health care is a wonderful business to be That made sense at the time because of the difficulty of in, both from a personal and business standpoint. transportation as well as the existence of trade barriers Medical science and technology are exploding. People in most countries. In today’s global marketplace these are living longer and not only require, but demand, reasons have largely disappeared and it is no longer more and better health care. Johnson & Johnson is economically feasible to manufacture on a country-by- uniquely positioned to meet this growing need. country basis, often in small and less efficient plants. Secondly, we have carefully and deliberately made Moving from a local to a regional manufacturing the strategic choice to be broadly based in human configuration will greatly improve our productivity in health care. Note we do not use the term “diversified,” the years ahead. The reconfiguration, combined with which suggests to us a certain “disconnectedness” of other strategic cost reductions, will reduce annual after- the parts. We have chosen to be broadly based in relat- tax costs by some $250 million, while allowing us to ed fields of health care because our view of the future decrease inventory levels and ultimately to improve the is that there will be an increasing convergence in treat- way we serve our customers. This reconfiguration of our ment modalities where pharmaceuticals, diagnostics manufacturing system is an excellent example of how and medical devices will be brought together at earlier we continuously strive to make the business stronger. stages to be used in combination for the prevention, diagnosis and treatment of disease. Productivity Improvements Continue Against this backdrop, our objective is to have Over the last several years we have been working Johnson & Johnson build ever stronger leadership especially hard at improving all aspects of our produc- positions in key high technology, knowledge-based, tivity, including the sharing of common services across growth segments of health care – pharmaceuticals, the corporation such as purchasing, information man- diagnostics, medical devices and consumer health care. agement, administration and human resources. And finally, our long-standing commitment to a Through these efforts, our SIGNATURE OF QUALITY decentralized approach to managing the business, initiative, and the elimination of unnecessary and less coupled with strong underpinning by the ethical prin- valuable activities, we have dramatically improved ciples of the Johnson & Johnson Credo, gives us an productivity and taken out about $2 billion in annual unusual ability for our more than 180 operating units operating costs. to pursue multiple opportunities for growth – and to Productivity enhancements such as this have do so simultaneously throughout the world. This is a enabled us to provide good value to our customers and great advantage in today’s competitive environment. 1998 was the fifth straight year in which we took less Because of the breadth of our business, it is some- than 1% net price increases on a worldwide basis. We times difficult to fully grasp the range of Johnson & have also reinvested a portion of the savings generated Johnson’s positions in health care today – all providing through our productivity efforts back into business- multiple sources of future growth. We have a solid expanding activities. Last year, for example, we invest- pharmaceutical business that spans a wide range of ed more than $2.3 billion in research & development, therapeutic categories. It had excellent growth in 1998 which places us among the top companies in the and has done very well over the years. The Company United States in terms of research spending. markets more than 90 prescription pharmaceutical As we look to the future, we are convinced that the products in 150 countries. Of these drugs, 28 have sales opportunities to expand our business around the world greater than $50 million annually and 17 have annual at a superior rate of growth are brighter than ever. sales greater than $100 million. Continued robust pharmaceutical segment growth reflects the strong performance of products that

2 include RISPERDAL, an antipsychotic medication; PROCRIT, for the treatment of anemia; DURAGESIC, a transdermal patch for chronic pain; LEVAQUIN, an anti-infective, and the oral contraceptive line of products. It is our intention to focus more heavily in pharma- ceuticals and further strengthen this important seg- ment of our business. We are actively pursuing the necessary added resources including people, research programs and aggressive in-licensing activities to accomplish our leadership objectives. In the professional business segment, 1998 saw strong sales growth from Ethicon Endo-Surgery’s laparoscopy and mechanical wound closure products, Ethicon’s Mitek suture anchors and Gynecare women’s health products, and DePuy’s newly added orthopaedic products. Although Cordis created the market for coronary stents with its PALMAZ-SCHATZ device for keeping Robert N. Wilson Vice Chairman of the Board clogged arteries open following balloon angioplasty, the Company’s second generation products did not meet the performance of competitive stents used in placement and flexibility in reaching lesions, even tortuous arteries and we paid the penalty in terms of through very tortuous vessels. Cordis’ Biosense lost market share. At the same time, as we have Webster unit also has developed a leading position in reminded our people, we have a stubborn habit of the rapidly expanding field of electrophysiology. being extremely persistent in the building of businesses Strength in catheter design, coupled with the unique and are determined to be very competitive as we move Biosense visualization technology, is taking us into forward. Cordis has been developing new, more flexi- new areas of treatment such as complex arrhythmias ble stent products, including so called “active” or coat- and direct myocardial revascularization. ed stents that will deliver radiation, heparin or other Our consumer segment growth was led by contin- pharmaceutical agents to prevent or reduce restenosis. ued strength in the skin care franchise, which includes We find it encouraging that from their original base the NEUTROGENA, RoC and CLEAN & CLEAR prod- in cardiology, our Cordis management has formed sev- uct lines, as well as strong performances from the adult eral new companies to pursue promising opportuni- and children’s MOTRIN line of analgesic products. ties in the broader field of circulatory diseases. Cordis Late in the year the Company signed a definitive Endovascular, for example, is investing significant agreement to acquire the dermatological skin care resources in building its technology base in vascular business of S.C. Johnson & Son, Inc., consisting primar- medicine and we believe it will be an important ily of the AVEENO brand specialty soaps, bath, anti- growth engine for the future. We were pleased that itch and moisturizing cream and lotion products. We Cordis received year-end marketing approval for its also formed an alliance with Shiseido Co., Ltd. of Japan S.M.A.R.T. Stent for treating biliary obstructions. This that encompasses skin and hair care marketing and is a self-expanding, crush-recoverable device with a research and development initiatives. proprietary nitinol alloy design that allows for precise

3 On a corporate-wide basis, to augment the growth balance sheet is strong with excellent free cash flow of that is generated through our commitment to research more than $1 billion a year; and in 1998 the total share- & development, each year we enter into something in owner value of Johnson & Johnson stock passed the the range of 125-150 third party transactions that $100 billion mark for the first time to almost $113 bil- include licensing arrangements and research collabo- lion, an increase of more than 29% over the prior year. rations. In 1998 our Development Corporation also To put this in perspective, ten years ago, in 1988, made investments totaling more than $100 million in the total market value of your Company was just over 33 outside entities with technologies and strategic $14 billion. objectives that parallel our health care interests. Looking ahead, we are continuing to invest signifi- We continue to make strategic, business-building cant resources in preparing for the year 2000 computer acquisitions that range from large ones such as DePuy issues and have been working on this since 1996. It is in orthopaedics to smaller ones such as FemRx, a a complex undertaking and while there will almost leader in the development of proprietary surgical sys- certainly be some minor “glitches,” we are confident of tems that enable surgeons to perform less invasive our level of preparedness and are sharing related infor- alternatives to hysterectomy. Over the past ten years mation with our customers and business partners. we have made 45 such acquisitions of companies and Johnson & Johnson is a great company today product lines. During the same period we divested 18 because it has great people. We wish to give deserving businesses that no longer fit our long-term growth credit for our many successes in 1998 to the 93,000 men strategies and which we felt would be better off in and women who make up our more than 180 compa- someone else’s hands. It’s a constant process of plant- nies throughout the world. We are tremendously ing and pruning to strengthen the business. The most grateful for their hard work, dedication and contribu- recent example this past year is the divestiture of our tions to the business. It is because of their creativity and Critikon patient monitoring business. talent that we look to the future with such confidence. We also thank you, our shareowners, for your “Platforms for Growth” continued support. All of us remain committed to When you step back and look at it … our approach is serving you as well as we know how and building very straightforward: Protect and strengthen the lead- long-term shareowner value – a responsibility we take ership positions we have established in our base busi- very seriously. nesses, and use them as foundations for building new “platforms for growth”– the theme of this Annual Report. In the pages that follow, we feature 15 selected growth platforms that present significant opportuni- ties for the future, across our wide-ranging business Ralph S. Larsen segments. Chairman of the Board and In a world that tends to focus on short-term results, Chief Executive Officer we remain committed to managing Johnson & Johnson for the long term. Our best estimate is that approxi- mately 75% of 1998 sales came from businesses or cate- gories in which we have the number one or two mar- Robert N. Wilson ket position on a global basis. It was also a year in Vice Chairman of the Board which we posted our 36th consecutive year of divi- dend increases; our sales have increased every year March 10, 1999 since 1933, in the midst of the great depression; our

4 Minimally Invasive Therapies

A platform for growth in mini- ASSISTANT device, shown in tional product development surgeons train other surgeons mally invasive therapies was use by Boyd Crafton, M.D., teams work closely with sur- in the proper use of new prod- established in 1992, with the FACS, above, a surgeon at geons from that medical spe- ucts and procedures. formation of Ethicon Endo- Christ Hospital in Cincinnati, OH. cialty in designing new proce- Minimally invasive surgical Surgery as a developer and SUTURE ASSISTANT allows dures and related products. and diagnostic products from manufacturer of endosurgical surgeons to tie surgical knots Numerous successes have Ethicon Endo-Surgery can instrumentation, and the new inside the body with a simple resulted from this close interac- reduce overall health care costs, company swiftly (by 1995) push of a button, utilizing our tion – as with our comprehen- postoperative pain, recovery achieved market leadership. An patented, pre-tied knot delivery sive line of CARDIOVATIONS times and hospital stays, while example of the company’s inno- system. Cardiovascular Instruments. also providing patients a faster vative devices for videoscopic When Ethicon Endo-Surgery Subsequently, at our Endo- return to everyday activities. surgery is the new SUTURE targets an area such as cardio- Surgery Institutes in Cincinnati, vascular surgery, its cross-func- Germany and Japan, leading Vision Care

The ACUVUE Bifocal Contact distance and near vision under be worn for a single day, then being test marketed is ACUVUE Lens, launched in the United varying light conditions. The thrown away and replaced with Toric, an extension of our dis- States, Canada and the United lens design allows for precise a brand new, sterile pair; posable contact lens technology Kingdom to fulfill the need for zone-to-zone transitions to min- ACUVUE Lenses, which revolu- that enables the fitting of patients bifocal vision correction, is imize the halos and blur com- tionized contact lens wear with significant levels of astig- among the latest innovations in monly associated with soft bifo- when they were launched in matism. An innovative front our vision care platform for cal contact lenses. The new 1988, and offer outstanding surface design allows the lens growth. lens is shown above with Diane comfort and visual acuity with to orient properly to correct for The ACUVUE Bifocal is a Garrett, process technician, and daily or extended wear capabili- astigmatism, while the back concentric ring, distance-center, Dwane Fowler, quality control ties; and SUREVUE, a two-week surface of the lens contains the simultaneous vision lens with technician. replacement lens, with excep- toric optic zone, which actually PUPIL INTELLIGENT design that Other lenses from the tional handling qualities for corrects the defective vision. has five alternating zones Vistakon Division of Johnson & daily wear. sized and spaced to optimize Johnson Vision Products in- Presently emerging from our clude 1-DAY ACUVUE Contact vision care pipeline and now Lenses, the world’s first contact lenses designed specifically to

6 Women’s Health

With innovative, technology- excessive menstrual bleeding include surgical adhesion pre- diagnosis. The company also based medical devices being (menorrhagia); it replaces the vention, urinary incontinence, provides instruments for laparo- added to long-standing cate- traditional hysterectomy proce- infertility and fibroid removal. scopically assisted vaginal gories such as feminine hygiene dure in many cases. Above, The company is developing a hysterectomy. and family planning, Johnson & Radha Syed, M.D., who prac- cryosurgical system for Oral contraceptives, dia- Johnson has the largest and tices obstetrics/gynecology in endometrial ablation through phragms, vaginal antifungals most diverse women’s health Staten Island, N.Y., explains to the recent acquisition of and hormone replacement ther- care products portfolio of any a patient that the THERMA- FemRx, Inc., and a cervical can- apy are among prescription company in the world. CHOICE System is based on cer screening system. products provided by Ortho- Among newer devices in thermal ablation technology Ethicon Endo-Surgery’s mini- McNeil Pharmaceutical, and gynecology, for example, is the that treats menorrhagia in an mally invasive MAMMOTOME product lines for women from THERMACHOICE Uterine eight-minute outpatient proce- Breast Biopsy System requires Personal Products Company Balloon Therapy System from dure that can be done under only a local anesthetic and, include sanitary protection, the Gynecare Products Division local anesthesia. through a single insertion incontinence, and nonprescrip- of Ethicon, Inc., for the mini- Also in the women’s health probe, provides multiple tissue tion vaginal yeast cures. mally invasive treatment of category, Ethicon focuses on samples for breast cancer products and therapies that In the $9 billion orthopaedics implant market segment, and Antonio, Tex. The company has market, we vaulted into a lead- we added substantially to our received marketing clearance ership position through the positions in trauma fixation from the Food and Drug acquisition of DePuy, Inc. Our devices for managing fractures Administration for the device, existing worldwide orthopaedics and in orthopaedic sports medi- which is intended to facilitate business, Johnson & Johnson cine. Below, at the DePuy spinal fusion. Professional, Inc., became AcroMed spinal implant facility, The MITEK Products Division part of DePuy, in our largest Product Manager Brad Moore of Ethicon, Inc. also participates acquisition ever. and Supply Chain Manager for in orthopaedics through its Besides providing products Implants Julia Eller discuss suture anchors for reattaching for reconstructing damaged or the Lumbar I/F CAGE, a device soft tissue to bone, and prod- diseased joints, through the designed in cooperation with ucts produced by CODMAN DePuy acquisition we became Orthopaedic Surgeon John W. include spinal fixation implants. #2 in the rapidly growing spinal Brantigan, M.D., of San

Orthopaedics Biotechnology

The world’s most successful support of a new virtual reality alfa), including a collaboration therapeutic biotechnology prod- simulator called “In My Steps.” with Alkermes, Inc. for injec- uct, Epoetin alfa, is marketed by The simulator, which reproduces table sustained release formula- Ortho Biotech as PROCRIT in the exhaustion and fatigue tions. PROCRIT already is the United States and in other endured by these patients, is approved for once-a-week dos- countries by Janssen-Cilag as touring major health centers ing for the surgery indication. EPREX, for treating anemia throughout the U.S. Pictured Other products in our experienced by people with above, participating in the 15- biotechnology growth platform cancer, HIV and chronic renal minute virtual reality tour, is include REGRANEX (becapler- failure, as well as for anemic Howard Wallach, M.D., of Miami min) Gel 0.01%, a platelet- patients who qualify prior to Baptist Hospital. The simulator derived growth factor for heal- elective surgery. was developed by “The Fatigue ing diabetic foot ulcers, and Our efforts to heighten Coalition,” a group of medical ORTHOCLONE OKT3 awareness among medical pro- experts developing initiatives (muromonab-CD3) for reducing fessionals and caregivers about that concern fatigue in cancer acute organ transplant rejec- the debilitating effects of ane- patients, and it is underwritten tion, introduced in 1986 as the mia experienced by cancer by Ortho Biotech. first therapeutic monoclonal chemotherapy patients include The Company has a develop- antibody product. ment program for longer-acting forms of PROCRIT (Epoetin

9 Gastrointestinals

Our expanding platform for patients like Piers Guilar Other Janssen prescription brands PEPCID AC Acid growth in gastrointestinal (above), an advertising execu- gastrointestinal products are Controller (famotidine 10 mg.) products – ranging from widely tive in London who is being PROPULSID (cisapride), for for preventing and relieving prescribed motility agents to treated for GERD. treating nocturnal heartburn heartburn and indigestion, and nonprescription acid control In the United States, where due to GERD (marketed in MYLANTA Antacid (calcium car- products – was bolstered when an approvable letter has been about 90 countries outside the bonate and magnesium hydrox- PARIET (rabeprazole sodium), a received from the Food and U.S. as PREPULSID) and ide). Through McNeil Consumer proton pump inhibitor for treat- Drug Administration, the prod- MOTILIUM (domperidone), a Healthcare we provide the lead- ing erosive gastroesophageal uct will be sold as ACIPHEX gastrointestinal mobilizer sold ing over-the-counter anti-diar- reflux disease (GERD) and duo- (rabeprazole sodium). outside the U.S. rheal product, IMODIUM A-D denal ulcers, was launched by Synthesized by Eisai Co., Ltd. Our broad line of nonprescrip- (loperamide HCl), and IMODIUM Janssen-Cilag as a prescription of Japan, rabeprazole sodium – tion gastrointestinals includes Advanced (loperamide HCl and product in the United Kingdom now cleared throughout the acid control products offered simethicone), the only nonpre- and Germany. PARIET already is European Union – will be mar- by Johnson & Johnson• Merck scription product available for improving the quality of life for keted in most countries of the Consumer Pharmaceuticals Co., treating diarrhea plus bloating, world by Janssen and Eisai with its category-leading pressure and cramps. under a strategic alliance.

10 Skin Care

In Korea, driven by the accep- further aging. Through our con- microsphere, 0.1%, and RENOVA markets PREVACARE Skin tance of our CLEAN & CLEAR sumer, pharmaceutical and pro- (tretinoin emollient cream) Protectants and Moisturizers. Brand among teenagers who fessional business segments, 0.05%, for reducing fine facial Among recent developments are concerned with acne break- we market products for preven- wrinkles, brown spots and in the skin care category, the outs and other facial blemishes, tion, maintenance, improve- surface roughness. In addition Company signed an agreement our skin care franchise has ment and repair of the skin. to its birth control indication, in principle to acquire the der- attained a solid leadership posi- Global consumer brands Ortho-McNeil Pharmaceutical’s matological skin care business tion. It typifies our success in include NEUTROGENA, ORTHO TRI-CYCLEN Tablets of S.C. Johnson & Son, Inc., numerous countries throughout JOHNSON’S, CLEAN & CLEAR (norgestimate/ethinyl estradiol) which is led by the AVEENO the world by providing a broad and RoC. Regional brands are used for treating acne and line of colloidal oatmeal prod- array of products for changing include PURPOSE, PENATEN, another prescription product, ucts, and we formed a strategic skin care needs at every stage PIZ BUIN, SUNDOWN and Janssen’s SPORANOX (itracona- alliance with Shiseido Co., Ltd. of life. SHOWER TO SHOWER. zole) Antifungal cures toenail of Japan that encompasses Skin thickens as infants Breakthrough prescription fungal disease. For health care skin and hair care marketing grow and become adults, but products from Ortho Dermatolo- professionals and their patients, and research and development then gets thinner and drier with gical include the acne treatment Johnson & Johnson Medical initiatives. RETIN-A MICRO (tretinoin gel)

11 Cardiology & Circulatory Diseases

Utilizing its proprietary medical now in clinical trials in the U.S., more flexible stents, including restenosis. The unit also sensor imaging and mapping the procedure is tracked and one for small vessels, in Europe. merged with an IsoStent, Inc., technologies, Cordis’ Biosense directed on a computerized, vir- The NINJA PTCA Dilatation entity, acquiring its catheter- Webster unit is pioneering new tual image of the heart or on Catheter, with flexibility and based intravascular radiation intracardiac procedures such as preacquired images, by cardiol- ease of use, is among other therapy and other technology, Direct Myocardial Revascular- ogists like Prof. Dr. Karl Heinz successful interventional cardi- along with the BX Stent, a ization (DMR), a treatment that Kuck, M.D., pictured at St. ology launches. flexible, laser-cut slotted tube is believed to stimulate the Georg Hospital in Hamburg, The Cardiology unit has design that is in development. growth of new blood vessels in Germany. new, more flexible stents under New entries from Cordis hibernating heart tissue where In the area of coronary development, including Endovascular included S.M.A.R.T circulation is impaired or inac- stents for keeping clogged “active” or coated stents that Stent, a self-expanding crush- tive. Launched in Europe and arteries open following balloon will deliver radiation, heparin or recoverable nitinol stent for angioplasty, Cordis Cardiology other pharmaceutical agents to treating biliary obstructions. launched a series of improved, prevent or further reduce Central Nervous System

RISPERDAL (risperidone) Our start in the CNS cate- antiepileptic drug discovered Antipsychotic, the breakthrough gory goes back to Janssen’s by the R.W. Johnson Pharma- drug discovered by the Janssen development and 1959 intro- ceutical Research Institute for Research Foundation for treat- duction of haloperidol, which reducing the frequency of par- ing schizophrenia and other remains the most widely used tial onset seizures. Launched in psychotic disorders, achieved antipsychotic in the world. 1997, TOPAMAX is now sold another year of solid growth in Current Janssen activities in the United States and more our expanding treatment area include the co-development, than 25 other countries. for central nervous system with U.K.-based Shire Pharma- The professional business (CNS) disorders. Pictured above ceuticals Group, of REMINYL segment also is involved in the at Janssen Pharmaceutica, (galantamine) for the treatment treatment of CNS disorders reviewing marketing plans for of Alzheimer’s disease. We through Codman, which pro- RISPERDAL, are Barry Fitzsimons, recently completed Phase III duces products for managing group director for medical busi- clinical trials on REMINYL. cranial trauma and others such ness development, and Janet Ortho-McNeil Pharmaceu- as hydrocephalic shunt valve Vergis, group director, CNS. tical’s involvement in the cen- systems, and DePuy, Inc., which tral nervous system category has a strong position in spinal includes the marketing of fixation products. TOPAMAX (topiramate), an

13 Diagnostics

In the field of diagnostics, our System, which is an automated ucts to hospital and commercial prompts, a touchable test strip technology-based products random access immunoassay clinical laboratories, blood and easy-to-access memory. range from the VITROS ECi analyzer that runs up to 90 donor centers are another major SURESTEP System makes self Immunodiagnostic System tests per hour and presently customer of Ortho-Clinical monitoring about as easy as it (above, right) for use by hospi- has the capability of performing Diagnostics and the company gets for people with diabetes. tal laboratories and commercial 35 different assays in categories is among the world leaders in Other LifeScan meters are avail- clinical laboratories, to self such as endocrinology, oncol- blood screening tests. able for use in the home and blood glucose monitoring sys- ogy, cardiology, virology, skele- LifeScan, Inc. also is a world for bedside monitoring, and tems such as the SURESTEP tal health and anemia. The sys- leader – in hand-held electronic depending upon the patient’s System (also pictured above) tem incorporates enhanced meters and reagent test strips preference they feature conve- for people with diabetes. chemiluminescence technology, for keeping track of blood glu- nience, simplicity, or compre- Ortho-Clinical Diagnostics on-board reagent management cose levels. With the SURESTEP hensive data tracking. produces the VITROS ECi and a touch-screen, icon-driven System, for example, user- menu. friendly features include a large, Besides providing a variety easy-to-read screen with of professional diagnostic prod-

14 Pain Management

From mild headaches to chronic analgesia through a three-day franchise of any company in COX-2 inhibitors for pain and cancer pain that afflicts patients patch that enables him to the world, with TYLENOL inflammation, licensed from like Walter Ehrbar (above) in maintain an active lifestyle. Acetaminophen as well as Japan Tobacco, which are less Zurich, Switzerland, our broad DURAGESIC System was intro- MOTRIN Ibuprofen products for likely to produce serious gas- pain management growth plat- duced in another three coun- adults and children in a variety trointestinal side effects than form consists of prescription tries in 1998 – France, Spain of dosage forms. nonsteroidal anti-inflammatory and over-the-counter analgesics and Switzerland. Frequently prescribed prod- drugs (NSAIDs); rapid acting that are taken worldwide, more Our first product in the pain ucts for moderately severe pain TRANSFENTA (E-TRANS fen- than a million times a day, to management category was are our TYLENOL with Codeine tanyl system) for acute pain, relieve suffering. For Mr. Ehrbar, TYLENOL Acetaminophen, which and the non-narcotic, centrally being developed in cooperation DURAGESIC (fentanyl transder- McNeil Laboratories introduced acting synthetic analgesic with Alza Corp; and a new mal system) from our Janssen in 1955 as a prescription elixir ULTRAM (tramadol hydrochlo- generation of NSAIDs with an affiliate – marketed as DURO- for children. Today, McNeil ride) Tablets from Ortho-McNeil improved safety profile that are GESIC outside the United Consumer Healthcare has the Pharmaceutical. being developed through an States – provides continuous most comprehensive nonpre- Our pipeline of new pre- alliance with NitroMed, Inc. scription pain management scription products includes Ethicon, Inc., long the world Emergency Medicine, Hospital anesthetic injections, suture Alginate Dressing and TIELLE leader in surgical sutures and of the University of Pennsylvania, kits, wound dressings and Hydropolymer Wound Dressing other products for precise attests that children requiring other devices. The product is for managing exudate from wound closure, introduced the repair of lacerations find the licensed from Closure Medical wounds such as chronic skin DERMABOND Topical Skin experience less traumatic when Corporation. ulcers and donor sites. Adhesive (2 octyl cyanoacrylate) the adhesive is applied, instead In addition to hundreds of And since 1921, millions of for closing trauma-induced lac- of stitching the wound together needle-suture combinations consumers throughout the erations and surgical incisions with sutures. from Ethicon, Inc., our wound world have come to rely on that otherwise would require DERMABOND Adhesive care growth platform includes BAND-AID Brand Adhesive sutures, staples or skin strips. reaches full strength within two- staples for wound closure from Bandages for protecting cuts The new liquid adhesive is and-a-half minutes and sloughs Ethicon Endo-Surgery, the and scrapes. Johnson & applied by the physician with a from the skin as the wound market leader. Johnson Consumer Products light brushing stroke to a heals. There is no need for a When it comes to advanced produces BAND-AID Brand cleaned wound while its edges follow-up physician visit to wound dressings, Johnson & Bandages as well as our are held together. Below, Judd remove sutures, unlike tradi- Johnson Medical is among the familiar First Aid Kits, which Hollander, M.D., Department of tional wound repair, and the leaders with products that originated in 1890. adhesive reduces the need for include FIBRACOL Collagen-

Wound Care An important new platform for margarine, pictured below. is used, including cooking and growth is nutraceuticals, a cate- McNeil Consumer Healthcare baking. McNeil Specialty gory that encompasses food holds the exclusive worldwide Products Company is construct- derivatives or specialized ingre- rights to the stanol ester ingre- ing a new facility to expand the dients that serve the essential, dient, except for Finland and production of sucralose. nutritional needs of the body. neighboring Baltic countries. Our first entry in the Our nutraceuticals pipeline Another of our nutraceutical nutraceuticals category came in includes stanol ester, a plant- or products is sucralose, a low- 1990, when McNeil Consumer wood pulp-derived substance calorie sweetener made from Healthcare began marketing clinically proven to reduce total sugar that has been approved LACTAID products for people cholesterol levels by 10% and for marketing in the United with lactose intolerance – the LDL cholesterol by 14%. We States by the Food and Drug inability to digest lactose, the have licensed rights to stanol Administration, in 15 food and milk sugar found in dairy prod- ester from Raisio Group of beverage categories. Sucralose ucts. LACTAID is sold as lac- Finland, which markets the already is sold under the tose-reduced milk and in caplet ingredient there as BENECOL SPLENDA Brand in nearly 30 form, and new lactose-free margarine and BENECOL low-fat countries. It is 600 times foods are in the pipeline. sweeter than sugar and can be used virtually anywhere sugar

Nutraceuticals

17 Urology is among our newest THERASEED procedure with under an agreement with excess prostate tissue. Prostate growth platforms and we Indigo Brachytherapy Specialist Theragenics Corp. reduction occurs subsequently entered this field through the Izzy Ruiz. Indigo Medical also produces through the natural resorption 1996 acquisition of Indigo Medical THERASEED implants are the portable 830e LASEROPTIC of the treated tissue, thereby and a subsequent alliance with placed in the prostate gland in Treatment System, which relieving the symptoms of BPH. Theragenics Corporation. a one-time, minimally invasive combines fiber optics and diode Interstitial laser coagulation, as Products marketed by Indigo procedure that typically has a laser technology for the mini- the procedure is known, can be include THERASEED, a lower incidence of side effects mally invasive treatment of performed with a variety of Palladium-103 radioactive than traditional surgery. The enlarged prostates, known as anesthesia methods and requires isotope, for treating localized objective is to deliver enough benign prostatic hyperplasia no external incisions. The preci- cancer of the prostate – the radiation to kill the targeted (BPH). sion of laser treatment minimizes second most common form of cancer, while avoiding exces- With the INDIGO System’s the risk of damage to surround- cancer in men. Below, Radiation sive damage to surrounding unique DIFFUSER-TIP Fiberoptic ing tissues, thereby reducing Oncologist Stewart Berkowitz, normal tissue. The company providing direct visualization the risk of complications. M.D., right, discusses the has worldwide marketing rights and uniform energy distribu- to THERASEED Palladium-103 tion, the surgeon quickly and safely destroys a precise area of

Urology

18 Anti-infectives

In the continuing worldwide LEVAQUIN Anti-infective uncomplicated urinary tract Research Institute. FLOXIN is rollout of LEVAQUIN (lev- was launched in the U.S. in infection (acute cystitis), and used for treating sexually trans- ofloxacin) Tablets/Injection, the 1997 as the first once-a-day we are seeking approval for mitted diseases, infections newest entry in our anti-infec- anti-infective proven effective further indications. of the lower respiratory tract, tives growth platform was against three of the most diffi- LEVAQUIN and our first prostate gland, urinary tract, introduced in Brazil and other cult to treat bacterial respira- anti-infective, FLOXIN (ofloxacin) skin and soft tissue, and for Latin American countries, tory infections – community- Tablets/Injection, are broad- pelvic inflammatory disease in where it is being used to treat acquired pneumonia, acute spectrum agents from the women. patients such as Vera Peixoto, maxillary sinusitis and exacer- quinolone class of drugs that The Company also has seen above in Rio de Janeiro, bation of chronic bronchitis. At were licensed from Daiichi research agreements with who was diagnosed with com- year-end 1998, it also received Pharmaceutical Co., Ltd., by Microcide Pharmaceuticals, Inc. munity-acquired pneumonia. marketing clearance in the U.S. Ortho-McNeil Pharmaceutical and Kosan Biosciences, Inc. to for a short-course, three-day and developed by the R.W. discover and develop products treatment of mild to moderate Johnson Pharmaceutical for treating bacterial infections. 1

REACH Powerbrush, a battery- powered toothbrush designed to remove plaque while also making tooth- brushing more fun for kids, and REACH ULTRACLEAN Toothbrush with unique bristle patterns for superior cleaning, were introduced by Personal Products Year in Review Company. In Turkey, Janssen-Cilag was 1 Neutrogena Corporation established as a distinct marketing and sales entity. 2 product launches included Extra Gentle Cleanser and Extra Gentle Cleansing Bar, PROLENE Hernia System, for use on even the most sensitive skin introduced by Ethicon, Inc., is a knitted while adding back necessary moisture, polypropylene product for the repair of and BODY CLEAR, a unique acne wash direct and indirect inguinal hernias. It is for the entire body. a tension-free repair method that mini- 2 ORTHO TRI-CYCLEN Tablets mizes the incidence of product migration (norgestimate/ethinyl estradiol) from and reduces the likelihood of recurrent Ortho-McNeil Pharmaceutical became the hernias. most widely prescribed oral contraceptive R.W. Johnson Pharmaceutical in the United States. It is the first birth Research Institute and Ortho-McNeil control pill also used for treating moder- Pharmaceutical entered into exclusive 3 ate acne vulgaris in women age 15 or development and marketing agreements older, who have no known contraindica- with Mitsubishi Chemical Corp., for tions to oral contraceptive therapy, who MCC-555, a second generation oral desire contraception, have begun men- insulin sensitizing agent, and backup struation and are unresponsive to topical compounds for treating Type 2 diabetes anti-acne medications. and related diseases, and with BioCryst 3 Johnson & Johnson Consumer Pharmaceuticals Inc. to develop and Products Company launched market products to treat and prevent BAND-AID Brand Cushions for Feet, a line viral influenza. of five foot care products using a hydro- DERMATOP (prednicarbate) colloid technology. The cushions soften Emollient Cream 0.1%, introduced by corns, callouses and heel cracks, and the Ortho Dermatological, is a mid-potency 4 line includes two sizes of blister relief topical steroid effective for treating patients cushions. age 1 and older with skin conditions such 4 The new MITEK Meniscal as atopic dermatitis, intertriginous psori- Repair System provides sports medi- asis and primary irritative dermatitis. cine arthroscopists a one-step, safe and A new biological and chemistry effective technique for repairing torn discovery research laboratory is under knee cartilage. The system includes a construction in La Jolla, Calif., for the disposable applier, reusable depth probe R.W. Johnson Pharmaceutical Research and absorbable and nonabsorbable Institute. The energy-efficient, 123,000 meniscal fasteners. square-foot facility is expected to open mid-1999.

20 The CODMAN HAKIM Programmable Valve System, implanted 5 in the brain to drain excess fluid in treat- ing hydrocephalus, decreases the need for revision surgeries. The system pro- vides the capability to make non-invasive changes to the shunt’s pressure setting 5 MYLANTA Supreme (calcium after it is implanted. carbonate and magnesium hydroxide), a new liquid antacid with a less chalky Ethicon, Inc. entered into comprehen- taste and available in cherry, lemon and sive licensing and supply agreements mint flavors, was added to the MYLANTA with Genetronics Biomedical Ltd. involv- Antacid line of Johnson & Johnson• Merck ing Genetronics’ proprietary drug delivery Consumer Pharmaceuticals Co. MYLANTA system for Electroporation Therapy, a Supreme is sold in 12 oz. and 24 oz. sizes. new technology under development for 6 treating cancer patients with solid 6 MONISTAT 1 (tioconazole) 6.5% tumors. Electroporation involves the use vaginal ointment antifungal, which pro- of brief, intense electric pulses to induce vides a safe and effective one-dose treat- transient permeability of cells, thereby ment for yeast infections, and MONISTAT facilitating the delivery of chemothera- 3 (miconazole nitrate) Cream, a three- peutic agents to cancer tumors. dose cream treatment for vaginal yeast infections, were introduced by Personal An alliance that calls for the develop- Products Company. MONISTAT 1 became ment and marketing of a new product the market leader in its product category to regenerate joint (articular) cartilage, within one month. commonly found in the knee and other joints, was formed by Johnson & 7 McNeil Consumer Healthcare Johnson Professional, Inc. (now DePuy) 7 launched NICOTROL Inhaler (nicotine and Integra LifeSciences Corp. Integra inhalation system), a novel prescription is developing the absorbable, collagen- device that helps smokers quit by provid- based implant and DePuy is to market ing nicotine replacement therapy and a the product worldwide, while also devel- key behavioral component of smoking – oping arthroscopic instrumentation to the hand-to-mouth ritual. The Inhaler be used in the surgeries. consists of a mouthpiece and cartridge containing about 30% of the nicotine a ENDOPATH Non-Bladed smoker gets from cigarettes without any Obturator, an innovative trocar from of the harmful substances in tobacco Ethicon Endo-Surgery, minimizes poten- smoke such as tar and carbon monoxide. tial trauma to the abdominal wall with plastic blades that separate tissue fibers 8 PEPCID AC (famotidine 10 mg) and vessels rather than cutting them, in 8 Chewables, a new dosage form of the contrast to the metal blades found on nonprescription, number one selling acid traditional trocars. controller, was introduced by Johnson & Johnson• Merck Consumer Pharmaceu- ticals Co., for consumers who prefer chewable products. PEPCID AC prevents and relieves heartburn and indigestion. 9

A research building with pharmacol- ogy laboratories for the Janssen Research Foundation was completed in Beerse, Belgium, through the conversion of a former warehouse, and two new medicinal chemistry laboratories were completed in Val-de-Reuil, France. In 9 SPORANOX (itraconazole) addition, Janssen Pharmaceutica built 10 Oral Solution was approved for mar- new chemical process development keting and launched by Janssen-Cilag in laboratories in Beerse. the European Union for prophylaxis of fungal infections in neutropenic patients. STAYFREE Four Wall Protection Maxi with a cotton dry cover and STAYFREE 10 Ortho-McNeil Pharmaceutical Four Wall Protection Maxi with Wings, received marketing approval from introduced by Personal Products the Food and Drug Administration for Company, deliver superior protection TOPAMAX (topiramate) Sprinkles, a new against leaks. dosage form of our antiepileptic drug. TOPAMAX Sprinkles provides ease of PANALOK RC Suture Anchor, dosing. in conjunction with PANACRYL Suture, the first fully absorbable anchor/suture 11 DePuy opened a new manufactur- system for shoulder repair and sports 11 ing facility in County Cork, Ireland, which medicine, was introduced by Ethicon, Inc. produces orthopaedic joint replacement products. Managing Director Gerry Fagan Ethicon Endo-Surgery launched the is pictured outside the award-winning, LCS-5 (LaparoSonic Coagulating Shears energy-efficient plant. System), an addition to its line of ULTRACISION Harmonic Scalpel products 12 TYLENOL Arthritis Extended that use sound waves to turn electrical Relief Caplets was launched by McNeil energy into mechanical motion and oper- Consumer Healthcare after changing the ate at lower temperatures, resulting in name from TYLENOL Extended Relief, less tissue damage. The LCS-5 enables reflecting the product’s broad use by peo- surgeons to cut and coagulate tissue ple with arthritis. Patented bi-layer tech- with ultrasonic energy through much nology allows the first layer of the caplet 12 smaller incisions. to dissolve quickly for fast action and the second layer is time-released for long- lasting pain relief.

ADVASEAL Synthetic Sealant System for sealing air leaks in thoracic surgical procedures was launched in Europe by Ethicon, Inc. The synthetic, bioabsorbable sealant polymerizes into a gel in about 40 seconds, eliminating air and fluid leaks. The system is licensed from Focal, Inc. for sale outside the U.S. and other NAFTA countries.

22 Contents

24 Management’s Discussion and Analysis of Results 31 Consolidated Financial Statements 35 Notes to Consolidated Financial Statements 44 Report of Management 44 Independent Auditor’s Report 45 Segments of Business and Geographic Areas 46 Summary of Operations and Statistical Data 1988-1998 47 Principal Global Affiliates 50 Worldwide Family of Companies 54 Board of Directors and Committees of the Board 55 Corporate Officers, Company Group Chairmen, Corporate and Shareowner Information

Financials

23 Management’s Discussion and Analysis of Results of Operations and Financial Condition

Overview Sales and Earnings Record 1998 sales of $23.66 billion, an increase over 1997 of 4.5%, In 1998, worldwide sales increased 4.5% to $23.66 billion com- marked the sixty-sixth consecutive year of positive sales growth. pared to increases of 4.7% in 1997 and 14.7% in 1996. Excluding The Company achieved this increase despite the impact of the the impact of foreign currencies, worldwide sales increased 7.0% stronger dollar that depressed sales by 2.5%. During the fourth in 1998, 8.7% in 1997 and 16.5% in 1996. quarter of 1998, the Company completed the acquisition of DePuy, Inc. and approved a reconfiguration plan for its manufac- Sales to Customers turing facilities worldwide. As a result, net earnings included Millions of Dollars special charges of $610 million for the cost of purchased In-Process 89 Research and Development (IPR&D) primarily related to the DePuy acquisition as well as restructuring costs related to the reconfiguration plan. The objective of the reconfiguration plan was to enhance worldwide operating efficiencies. For detailed 98 discussion of this plan, see Note 15 and 17. Reported net earnings decreased by 7.4% to $3.06 billion. Prior to the effect of the special 0 5,000 10,000 15,000 20,000 25,000 charges, net earnings increased 11.1% over 1997 and the net ■ Domestic ■ International income margin for 1998 was a record high of 15.5%. The Company’s investment in research and development con- Worldwide net earnings for 1998 including the impact of the tinues to drive sales of innovative products. In 1998, $2.3 billion Restructuring and IPR&D charges were $3.06 billion, reflecting a or 9.6% of sales was invested in research and development. This 7.4% decrease from 1997. Worldwide net earnings per share for level of investment, the highest in the Company’s history, reflects 1998 equaled $2.23 per share, a decrease of 7.5% from the $2.41 the Company’s continued commitment to achieving significant net earnings per share in 1997. advances in health care through the discovery and development Worldwide net earnings for 1998 excluding the impact of the of innovative, knowledge-based, cost effective products that pro- Restructuring and IPR&D charges were $3.67 billion, reflecting long and enhance the quality of life. an 11.1% increase over 1997. Excluding the impact of these In 1998, the Company continued to improve operating mar- charges, worldwide net earnings per share for 1998 equaled $2.67 gins. The gross profit margin, excluding special charges, per share, an increase of 10.8% over the $2.41 net earnings per improved from 68.4% to 68.6% while selling, marketing and share in 1997. The income margin for 1998, excluding the impact administrative expenses as a percent to sales dropped from of these charges was a record 15.5%, up from 14.6% in 1997. 38.5% to 37.7%. Worldwide net earnings for 1997 were $3.30 billion, or net Cash from operations in 1998 was $4.89 billion and served as earnings per share of $2.41, representing an increase over 1996 of the primary source of funding to finance capital investments of 13.7%. In 1996, worldwide net earnings were $2.89 billion, or net $1.5 billion, dividend distribution of $1.3 billion and the pur- earnings per share of $2.12 on a split-adjusted basis, representing chase of treasury stock of $.9 billion, with the remaining cash an increase over 1995 of 16.5%. used to partially fund the DePuy acquisition. Cash dividends Average diluted shares of common stock outstanding in 1998 paid to shareowners in 1998 increased by 14.1% over 1997 and and 1997 were 1.37 billion compared with 1.36 billion in 1996. represented the thirty-sixth consecutive year of dividend increases. Net Earnings Total equity market capitalization was $112.7 billion, an Millions of Dollars increase of 29.1% over 1997, while the percentage return on aver- 89 age shareowners’ equity, excluding the impact of special charges, was 27.6% in 1998. The worldwide health care market continues to be trans- formed as customers have become more knowledgeable and 98 demand even greater value. Simultaneously, the marketplace has 98(1) become increasingly more competitive. The Company believes 0 800 1,600 2,400 3,200 4,000 that it is well positioned to meet these challenges by providing innovative products as demonstrated by the Company’s commit- (1)1998 results excluding Restructuring and In-Process Research and ment to research and development. In addition, dedicated Development Charges employees along with strong Credo values and decentralized management structure enable the Company to provide its cus- Sales by domestic companies were $12.56 billion in 1998, $11.76 tomers with value creating, innovative products and services. billion in 1997 and $10.9 billion in 1996. This represents an increase of 6.8% in 1998, 7.9% in 1997 and 18.6% in 1996. The strong performance of products introduced in the past few years and the continued expansion of base businesses resulted in the sales increase in 1998.

24 Sales by international companies were $11.1 billion in 1998, Costs and Expenses $10.87 billion in 1997 and $10.72 billion in 1996. This represents Research activities represent a significant part of the Company’s an increase of 2.1% in 1998, 1.4% in 1997 and 11.1% in 1996. business. These expenditures relate to the development of new Excluding the impact of the foreign currency fluctuations over products, improvement of existing products, technical support of the past three years, international company sales increased 7.3% products and compliance with governmental regulations for the in 1998, 9.5% in 1997 and 14.6% in 1996. protection of the consumer. Worldwide costs of research activi- All geographic areas throughout the world posted solid oper- ties, excluding the write-off of IPR&D primarily in connection ational gains during 1998. Excluding the effect of exchange rate with the acquisition of DePuy, were as follows: fluctuations of the U.S. dollar on foreign currencies, sales increased 10.3% in Europe, 5.7% in the Western Hemisphere (Millions of Dollars) 1998 1997 1996 (excluding the U.S.) and 8.8% in the Asia-Pacific, Africa regions. Research expense $2,269 2,140 1,905 The Company achieved an annual compound growth rate of Percent increase over 10.2% for worldwide sales for the ten-year period since 1988 with prior year 6.0% 12.3% 16.6% domestic sales growing at a rate of 10.6% and international sales Percent of sales 9.6 9.5 8.8 growing at a rate of 9.6%. For the same ten-year period, exclud- Research expense as a percent of sales for the Pharmaceutical ing the impact of special charges in 1998, worldwide net earnings segment was 15.8% for 1998, 16.7% for 1997 and 15.2% in 1996, achieved an annual growth rate of 14.2%, while earnings per while averaging 6.1%, 5.7% and 5.6% in the other two segments. share grew at a rate of 14.3%. For the last five years, the annual compound growth rate for sales was 10.8%. Excluding the special Research Expense charges, the annual compound growth rate for net earnings was 15.5% and the annual compound growth rate for earnings per Millions of Dollars share was 14.4%. 89

Common Stock Market Prices The Company’s common stock is listed on the New York Stock Exchange under the symbol JNJ. The approximate number of shareowners of record at year-end 1998 was 165,900. The com- 98 posite market price ranges for Johnson & Johnson common stock 0 500 1,000 1,500 2,000 2,500 during 1998 and 1997were:

1998 1997 Advertising expenses, which are comprised of television, High Low High Low radio and print media, were $1.19 billion in 1998 and $1.26 billion

1 3 3 5 in both 1997 and 1996. Additionally, significant expenditures First quarter $76 ⁄2 63 ⁄8 62 ⁄4 48 ⁄8 7 7 1 Second quarter 77 ⁄8 67% 66 ⁄8 51 ⁄8 were incurred for promotional activities such as couponing and 3 1 7 1 Third quarter 80 ⁄4 68 ⁄4 65 ⁄8 55 ⁄8 performance allowances. 3 5 5 5 Fourth quarter 89 ⁄4 72 ⁄8 67 ⁄16 52 ⁄8 The Company believes that its operations comply in all mater- 7 7 Year-end close 83 ⁄8 64 ⁄8 ial respects with applicable environmental laws and regulations. The Company or its subsidiaries are parties to a number of pro- Cash Dividends Paid ceedings brought under the Comprehensive Environmental The Company increased its dividends in 1998 for the thirty-sixth Response, Compensation and Liability Act, commonly known as consecutive year. Cash dividends paid were $.97 per share in Superfund, and comparable state laws, in which primary relief 1998 compared with dividends of $.85 per share in 1997 and $.735 sought is the cost of past and future remediation. While it is not per share in 1996. The dividends were distributed as follows: feasible to predict or determine the outcome of these proceed- ings, in the opinion of the Company, such proceedings would not 1998 1997 1996 have a material adverse effect on the results of operations, cash First quarter $.220 .190 .165 flows or financial position of the Company. Second quarter .250 .220 .190 Worldwide sales do not reflect any significant degree of Third quarter .250 .220 .190 seasonality; however, spending has been heavier in the fourth Fourth quarter .250 .220 .190 quarter of each year than in other quarters. This reflects increased Total $.970 .850 .735 spending decisions, principally for advertising and research grants. The worldwide effective income tax rate was 28.3% in 1998, On December 3, 1998, the Board of Directors declared a regular 27.8% in 1997 and 28.4% in 1996. The increase in the 1998 world- cash dividend of $.25 per share, paid on March 9,1999 to share- wide effective tax rate was primarily due to the Company’s owners of record on February 11, 1999. charge for IPR&D in the fourth quarter of 1998, which is not tax The Company expects to continue the practice of paying deductible. Refer to Note 6 of the Notes to Consolidated Finan- regular cash dividends. cial Statements for additional information. A summary of operations and related statistical data for the years 1988-1998 can be found on page 46.

25 Distribution of Sales Revenues by the gains or losses on the underlying transactions. A 10% The distribution of sales revenues for 1998, 1997 and 1996 were: appreciation of the U.S. Dollar from January 3, 1999 market rates would increase the unrealized value of the Company’s forward 1998 1997 1996 contracts by $225 million. Conversely, a 10% depreciation of the Employment costs 23.9% 23.8% 24.4% U.S. Dollar from January 3, 1999 market rates would decrease the Cost of materials unrealized value of the Company’s forward contracts by $259 and services 48.9 50.8 51.8 million. In either scenario, the gain or loss on the forward con- Depreciation and tract is offset by the gain or loss on the underlying transaction amortization and therefore has no impact on future earnings and cash flows. of property The Company enters into interest rate and currency swap con- and intangibles 5.3 4.7 4.6 tracts to manage the Company’s exposure to interest rate Taxes other than payroll 6.4 6.1 5.8 changes and hedge foreign currency denominated debt. The Earnings reinvested impact of a 1% change in interest rates on the Company’s interest in business 7.4 9.6 8.9 rate sensitive financial instruments is immaterial. Cash dividends paid 5.5 5.0 4.5 Restructuring/IPR&D 2.6 – – The Company does not enter into financial instruments for trading or speculative purposes. Further, the Company has a pol- icy of only entering into contracts with parties that have at least Liquidity and Capital Resources an “A” (or equivalent) credit rating. The counterparties to these Cash generated from operations and selected borrowings pro- contracts are major financial institutions and the Company does vide the major sources of funds for the growth of the business, not have significant exposure to any one counterparty. Manage- including working capital, additions to property, plant and ment believes the risk of loss is remote and in any event would equipment and acquisitions. Cash and current marketable secu- be immaterial. rities totaled $2.58 billion at the end of 1998 as compared with $2.90 billion at the end of 1997. Changing Prices and Inflation Total unused credit available to the Company approximates Johnson & Johnson is aware that its products are used in a $3.2 billion, including $1.2 billion of credit commitments with setting where, for more than a decade, policymakers, consumers, various worldwide banks, $800 million of which expires on Octo- and businesses have expressed concern about the rising cost of ber 1, 1999 and $400 million on October 6, 2003. health care. In response to these concerns, Johnson & Johnson In 1998 the Company issued $60 million of 5.12% notes due has a long-standing policy of pricing products responsibly. For 2003, the proceeds of which were used for general corporate pur- the period 1980-1998, in the United States, the weighted average poses. The Company issued no medium term notes during 1998. compound annual growth rate of Johnson & Johnson price At January 3, 1999, the Company had $2.29 billion remaining on increases for health care products (prescription and over-the- its shelf registration of $2.59 billion. A summary of borrowings counter drugs, hospital and professional products) was below can be found on page 36. the U.S. Consumer Price Index (CPI) for the period. Total borrowings at the end of 1998 and 1997 were $4.02 bil- Inflation rates, even though moderate in many parts of the lion and $1.84 billion, respectively. The increase in borrowings world during 1998, continue to have an effect on worldwide was attributable to financing the acquisition of DePuy. In 1998 economies and, consequently, on the way companies operate. In net debt (debt net of cash and current marketable securities) was the face of increasing costs, the Company strives to maintain its 9.6% of net capital (shareowners’ equity and net debt). In 1997 profit margins through cost reduction programs, productivity net cash (cash and current marketable securities net of debt) was improvements and periodic price increases. $1.06 billion. Total debt represented 22.8% of total capital (share- owners’ equity and total debt) in 1998 and 13.0% of total capital YEAR 2000 in 1997. Shareowners’ equity per share at the end of 1998 was The YEAR 2000 problem may occur when computer systems use $10.11 compared with $9.19 at year-end 1997, an increase of 10.0%. the two digits “00”to represent the year 2000. As a result, these systems may not process dates after 1999, causing system errors Financial Instruments or failures. The Company has had a program in place since the The Company uses financial instruments to manage the impact fourth quarter of 1996 to address YEAR 2000 issues in our critical of interest rate and foreign exchange rate changes on earnings business areas relating to information management systems and cash flows. Accordingly, the Company enters into forward (IM), non-IM systems with embedded technology, products, sup- foreign exchange contracts to protect the value of existing foreign pliers and customers. A report on this program’s process has currency assets and liabilities and to hedge future foreign cur- been provided to the Board of Directors. rency product costs. Gains or losses on these contracts are offset The Company has completed its review of critical IM systems and is in the process of correcting issues as necessary. These cor- rective actions will be substantially complete by the second quar- ter of 1999. Additionally, the Company is reviewing all other automated systems including non-IM systems with embedded technology and adjusting these systems as needed. This phase is also expected to be completed by the end of the second quarter of 1999.

26 The Company has made substantial progress in its assessment New Accounting Pronouncement and testing plan for all its products. The Company has substan- In June 1998, the Financial Accounting Standards Board issued tially completed this plan at year-end 1998 with full completion Statement of Financial Accounting Standards No. 133 “Account- expected by the third quarter of 1999. ing for Derivative Instruments and Hedging Activities” (FAS The Company’s ability to implement its YEAR 2000 program 133). This standard is effective for all fiscal quarters of fiscal years and the related non-implementation costs cannot be accurately beginning after June 15, 1999. determined at this time. Although a failure to completely correct FAS 133 requires that all derivative instruments be recorded one system may adversely affect other systems, the Company on the balance sheet at their respective fair values. Changes in the does not believe that these effects are likely. A material adverse fair value of derivatives are recorded each period in current earn- effect on the financial condition and results of operations of the ings or other comprehensive income, depending on the designa- business may occur if a significant number of such failures should tion of the hedge transaction. For fair-value hedge transactions in take place, requiring manual backup methods and related costs. which the Company is hedging changes in an asset’s, liability’s The Company has been reviewing and has requested assur- or firm commitment’s fair value, changes in the fair value of the ances on the status of YEAR 2000 readiness of its critical suppli- derivative instrument will generally be offset by changes in the ers. Many of these suppliers however, have either declined to hedged item’s fair value. For cash flow hedge transactions in provide or have limited their assurances on the status of their which the Company is hedging the variability of cash flows YEAR 2000 readiness. The Company has established a plan for related to a variable rate asset, liability or forecasted transaction, continued monitoring of critical suppliers during 1999. changes in the fair value of the derivative instrument will be Although the Company has contacted major customers to reported in other comprehensive income. The gains and losses assess the status of their YEAR 2000 issues, their YEAR 2000 on the derivative instrument that are reported in other compre- readiness is unclear. If a significant number of suppliers and cus- hensive income will be recognized in earnings in the periods in tomers experience disruptions as a result of YEAR 2000 issues, which earnings are impacted by the variability of the cash flows this could have a material adverse effect on the financial position of the hedged item. and results of operations of the Company. The Company will adopt FAS 133 in the first quarter of 2000 The Company is formulating contingency plans to deal with and does not expect it to have a material effect on the Company’s the impact of YEAR 2000 problems on critical suppliers and results of operations, cash flows or financial position. major customers. For critical suppliers, these plans may include identifying the availability of alternate utilities and raw material Segments of Business supply sources as well as increasing levels of inventory. To miti- Financial information for the Company’s three worldwide gate the effects of lack of YEAR 2000 readiness of major cus- business segments is summarized below. Refer to page 45 for tomers, the Company has few alternatives other than manual additional information on segments of business. methods. Regardless of the contingency plans developed, there can be no assurance that these plans will address all YEAR 2000 Sales by Segment of Business problems or that implementation of these plans will be successful. Millions of Dollars The total cost of addressing the Company’s YEAR 2000 readiness issues is not expected to be material to the Company’s 96 % 29.4 33.3 37.3 $21,620 financial condition or results of operations. Since the initiation 97 % 28.7 34.0 37.3 $22,629 of the YEAR 2000 readiness program in 1996, the Company esti- 98 % 27.6 36.2 36.2 $23,657 mates that it has expensed approximately $125 million in internal ■ ■ ■ and external costs on a pre-tax basis. The Company currently Consumer Pharmaceutical Professional estimates that the total costs for addressing YEAR 2000 readiness will approximate $200 million on a pre-tax basis. These costs are Sales Increase being expensed as incurred and are funded through operating cash flows. No projects material to the financial condition or (Millions of Dollars) 1998 1997 Amount Percent results of operations of the Company have been deferred or Consumer $ 6,526 6,498 28 0.4% delayed as a result of the Company’s YEAR 2000 program. Pharmaceutical 8,562 7,696 866 11.3 Professional 8,569 8,435 134 1.6 Worldwide total $23,657 22,629 1,028 4.5%

27 Operating Profit by Segment of Business(2) Consumer segment sales in 1998 were $6.53 billion, an

Millions of Dollars increase of .4% over 1997. Domestic sales increased by 2.6% while international sales declined by 1.7%. International sales gains in 96 % 8.3 58.2 33.5 $4,193 local currency of 5.2% were offset by a negative currency impact 97 % 11.8 55.1 33.1 $4,661 of 6.9%. Consumer sales were led by continued strength in the 98 % 9.5 69.0 21.5 $4,371 skin care franchise that includes the NEUTROGENA, RoC and CLEAN & CLEAR product lines, as well as strong performances 98(1) %12.8 59.8 27.4 $5,148 from the adult and children’s MOTRIN line of analgesic prod- ■ Consumer ■ Pharmaceutical ■ Professional ucts. During the fourth quarter, the Company announced the signing of a definitive agreement to acquire the dermatological (1)1998 results excluding Restructuring and In-Process Research and Development charges skin care business of S.C. Johnson & Son, Inc., including the AVEENO brand specialty soaps, bath, anti-itch and moisturizing cream and lotion products. Operating Profit Percent of Sales The 1998 special pre-tax charge for the Consumer segment (Millions of Dollars) 1998 1998(1) 1997 1998 1997 was $244 million. See Note 15 for detailed discussion on the Consumer $ 414 658 551 6.3% 8.5% Restructuring charges. Pharmaceutical 3,016 3,081 2,567 35.2 33.4 Consumer segment sales in 1997 were $6.50 billion, an Professional 941 1,409 1,543 11.0 18.3 increase of 2.1% over 1996. Sales by domestic companies accounted for 49.9% of the total segment, while international Worldwide total 4,371 5,148 4,661 18.5 20.6 Expenses not companies accounted for 50.1%. During 1997, the Company allocated to announced a licensing agreement with Raisio Group of Finland segments (102) (102) (85) (.4) (.4) for the North American marketing rights (as well as a letter of intent for the worldwide marketing rights) to a dietary ingredi- Earnings before ent, stanol ester, which is patented for use in reducing choles- taxes on income $4,269 5,046 4,576 18.0% 20.2% terol. The Company also established an alliance with Takeda (1) 1998 results excluding Restructuring and In-Process Research and Development charges. Chemical Industries in Japan for the sale and distribution of Excluding these charges, operating profit as a percent of sales by segment was: Consumer OTC products beginning with several forms of TYLENOL brand 10.1%, Pharmaceutical 36.0%, and Professional 16.4%. acetaminophen products. (2) Prior year restated to conform to 1998 presentation according to SFAS No. 131. Consumer segment sales in 1996 were $6.36 billion, an increase of 9.1% over 1995. Sales by domestic companies accounted for Consumer 49.7% of the total segment, while international companies The Consumer segment’s principal products are personal care accounted for 50.3%. The sales growth was led by the strong and hygienic products, including oral and baby care products, performance of TYLENOL brand products, despite heavy first aid products, nonprescription drugs, sanitary protection competition. products and adult skin and hair care products. Major brands include ACT Fluoride Rinse; BAND-AID Brand Adhesive Ban- Pharmaceutical dages; CAREFREE Panty Shields; CLEAN & CLEAR skin care The Pharmaceutical segment represents over 50% of operating products; IMODIUM A-D, an antidiarrheal; JOHNSON’S Baby profit for all segments. line of products; JOHNSON’S pH5.5 skin and hair care products; The Pharmaceutical segment’s principal worldwide fran- MONISTAT, a remedy for vaginal yeast infections; adult and chil- chises are in the allergy, anti-infective, antifungal, antianemia, dren’s MOTRIN analgesic products; MYLANTA gastrointestinal central nervous system, contraceptive, dermatology, gastroin- products and PEPCID AC Acid Controller from the Johnson & testinal, and pain management fields. These products are distrib- Johnson•Merck Consumer Pharmaceuticals Co.; NEUTRO- uted both directly and through wholesalers for use by health care GENA skin and hair care products; NICOTROL smoking cessa- professionals and the general public. tion products; o.b. Tampons; PENATEN and NATUSAN baby Prescription drugs include DURAGESIC (fentanyl transder- care products; PIZ BUIN and SUNDOWN sun care products; mal system sold abroad as DUROGESIC), a transdermal patch for REACH toothbrushes; RoC skin care products; SHOWER TO chronic pain; EPREX (Epoetin alfa sold in the U.S. as PROCRIT), a SHOWER personal care products; STAYFREE and SURE & NAT- biotechnology derived version of the human hormone erythro- URAL sanitary protection products; and the broad family of poietin that stimulates red blood cell production; ERGAMISOL TYLENOL acetaminophen products. These products are mar- (levamisole hydrochloride), a colon cancer drug; FLOXIN keted principally to the general public and distributed both to (ofloxacin) and LEVAQUIN (levofloxacin), both anti-infectives; wholesalers and directly to independent and chain retail outlets. IMODIUM (loperamide HCl), an antidiarrheal; LEUSTATIN (cladribine), for hairy cell leukemia; MOTILIUM (domperidone), a gastrointestinal mobilizer; NIZORAL (ketoconazole), SPORANOX (itraconazole) and TERAZOL (terconazole), antifun- gals; ORTHOCLONE OKT-3 (muromonab-CD3), for reversing the rejection of kidney, heart and liver transplants; ORTHO- NOVUM (norethindrone/mestranol) group of oral contracep- tives; PREPULSID (cisapride sold in the U.S. as PROPULSID), a gastrointestinal prokinetic; RETIN-A (tretinoin), a dermatological

28 cream for acne; RISPERDAL (risperidone), an antipsychotic drug; Strong sales growth from Ethicon Endo-Surgery’s laparoscopy and ULTRAM (tramadol hydrochloride), a centrally acting pre- and mechanical closure products, Ethicon’s MITEK suture scription analgesic for moderate to moderately severe pain. anchors and GYNECARE’S women’s health products and the Johnson & Johnson markets more than 90 prescription drugs acquisition of the DePuy orthopaedic products business were around the world, with 45% of the sales generated outside the offset by a decline in sales of Cordis’ coronary stents. United States. Twenty-eight drugs sold by the Company had During the fourth quarter, the Company completed the acqui- 1998 sales in excess of $50 million, with 17 of them in excess of sition of DePuy, one of the world’s leading orthopaedic products $100 million. companies with products in reconstructive, spinal, trauma and Pharmaceutical segment sales in 1998 were $8.56 billion, an sports medicine for $3.7 billion. The Company also completed increase of 11.3% over 1997 including 21.4% growth in domestic the acquisition of FemRx, a leader in the development of propri- sales. International sales increased .9% as sales gains in local cur- etary surgical systems that enable surgeons to perform less inva- rency of 5.7% were offset by a negative currency impact of 4.8%. sive alternatives to hysterectomy. Worldwide growth reflects the strong performance of At year-end 1998, two new Cordis products were approved RISPERDAL, PROCRIT, DURAGESIC, LEVAQUIN, and the oral for marketing by the FDA. The S.M.A.R.T. stent, a self-expand- contraceptive line of products. At year-end 1998, the Company ing, crush-recoverable nitinol stent was approved for use in treat- received approval from the FDA for LEVAQUIN for the indica- ing biliary obstructions. Its nitinol alloy design allows for precise tion of uncomplicated urinary tract infection. placement and flexibility in reaching lesions, even through very The 1998 special pre-tax charge for the Pharmaceutical seg- tortuous vessels. In addition, the NINJA balloon was approved ment was $65 million. See Note 15 for detailed discussion on the in the U.S. for use in angioplasty procedures. Restructuring charges. The 1998 special pre-tax charge for the Professional segment Pharmaceutical segment sales in 1997 were $7.70 billion, an for restructuring was $304 million. Additionally, the write-off of increase of 7.1% over 1996. This growth reflected the strong IPR&D related to acquisitions was $164 million. See Note 15 and 17 performance of RISPERDAL, PROCRIT, PROPULSID, ULTRAM, for detailed discussion on Restructuring charges and Acquisitions. DURAGESIC, and LEVAQUIN, a new anti-infective launched in Worldwide sales of $8.44 billion in 1997 in the Professional 1997. At year-end 1997, the Company received approval from the segment represented an increase of 4.5 % over 1996. Sales growth FDA for REGRANEX (becaplermin), the first biologic treatment continued to be fueled by the excellent performance of Ethicon proven to increase the incidence of healing in diabetic foot ulcers. Endo-Surgery’s minimally invasive surgical instruments, Pharmaceutical segment sales in 1996 were $7.19 billion, an Johnson & Johnson’s orthopaedics business, VISTAKON’S increase of 14.6% over 1995. Domestic sales advanced 24.4% disposable contact lenses and LIFESCAN’S blood glucose moni- while international sales advanced 7.2%. The worldwide growth toring systems. The Asia-Pacific and Central Europe regions was a result of the outstanding performances of PROCRIT, contributed significantly to the overall increase in the Profes- RISPERDAL, SPORANOX, PROPULSID, ULTRAM, and DURAGESIC. sional segment. There were also several business combinations in Significant research activities continued in the Pharmaceutical the Professional segment during 1997. These included Biopsys segment, increasing to $1.4 billion in 1998, or $68 million over Medical, Inc., a maker of products for the diagnosis and manage- 1997. This represents 15.8% of 1998 Pharmaceutical sales and a ment of breast cancer; Biosense, Inc., a leader in medical sensor compound annual growth rate of approximately 14.6% for the technology for use in diagnostic and therapeutic interventional five-year period since 1993. procedures; Gynecare, Inc., a maker of minimally invasive med- Pharmaceutical research is led by two worldwide organiza- ical devices for the treatment of uterine disorders; and Innotech, tions, Janssen Research Foundation, headquartered in Belgium Inc., a manufacturer of equipment for high quality prescription and the R.W. Johnson Pharmaceutical Research Institute, head- eyeglass lenses. quartered in the United States. Additional research is conducted In 1996, Professional segment sales increased 19.8% over 1995, through collaboration with the James Black Foundation in to $8.07 billion. The sales growth included the full year impact London, England. of the merger with Cordis Corporation in early 1996. Strong growth in the Asia-Pacific region also contributed to the increase Professional in the Professional segment, as did excellent performances by The Professional segment includes suture and mechanical LIFESCAN’S blood glucose monitors, VISTAKON’S disposable wound closure products, minimally invasive surgical instru- contact lenses, Ethicon Endo-Surgery’s minimally invasive surgical ments, diagnostic products, cardiology products, disposable con- instruments and Johnson & Johnson Professional’s orthopaedic tact lenses, surgical instruments, orthopaedic joint replacements, business. Acquisitions and divestitures during 1998 and 1997 are products for wound management and infection prevention and described in more detail on page 42. other medical equipment and devices. These products are used principally in the professional fields by physicians, nurses, thera- pists, hospitals, diagnostic laboratories and clinics. Distribution to these markets is done both directly and through surgical sup- ply and other dealers. Worldwide sales of $8.57 billion in the Professional segment represented an increase of 1.6% over 1997. Domestic sales decreased 2.4% while international sales gains in local currency of 10.7% were partially offset by the strength of the U.S. dollar.

29 Geographic Areas outside the United States and selling in over 175 countries The Company further categorizes its sales by major geographic throughout the world. area as presented for the years 1998 and 1997. In all its product lines, the Company competes with compa- nies both large and small, located in the U.S. and abroad. Compe- Sales Increase tition is strong in all lines without regard to the number and size (Millions of Dollars) 1998 1997 Amount Percent of the competing companies involved. Competition in research, United States $12,562 11,757 805 6.8% involving the development and improvement of new and exist- Europe 6,317 5,942 375 6.3 ing products and processes, is particularly significant and results Western Hemisphere from time to time in product and process obsolescence. The excluding U.S. 2,090 2,034 56 2.8 development of new and improved products is important to the Asia-Pacific, Africa 2,688 2,896 (208) (7.2) Company’s success in all areas of its business. This competitive Worldwide total $23,657 22,629 1,028 4.5% environment requires substantial investments in continuing research and in multiple sales forces. In addition, the winning International sales were once again negatively impacted by the and retention of customer acceptance of the Company’s con- translation of local currency operating results into U.S. dollars. Aver- sumer products involves heavy expenditures for advertising, age exchange rates to the dollar have declined each year since 1995. promotion, and selling. See page 45 for additional information on geographic areas. Cautionary Factors that May Affect Future Results This Annual Report may contain forward-looking statements Sales by Geographic Area of Business that anticipate results based on management’s plans that are Millions of Dollars subject to uncertainty. The use of the words “expects,” “plans, “

96 % 50.4 28.4 8.9 12.3 $21,620 “anticipates” and other similar words in conjunction with dis- cussions of future operations or financial performance identifies 97 %51.9 26.3 9.0 12.8 $22,629 these statements. 98 %53.1 26.7 8.8 11.4 $23,657 Forward-looking statements are based on current expecta- ■ United States ■ Western Hemisphere excluding U.S. tions of future events. The Company cannot ensure that any for- ■ Europe ■ Asia-Pacific, Africa ward-looking statement will be accurate, although the Company believes that it has been reasonable in its expectations and assumptions. Investors should realize that if underlying assump- Description of Business tions prove inaccurate or that unknown risks or uncertainties The Company, which employees 93,100 employees worldwide, is materialize, actual results could vary materially from our engaged in the manufacture and sale of a broad range of prod- projections. The Company assumes no obligation to update any ucts in the health care field. It conducts business in virtually all forward-looking statements as a result of future events or countries of the world. The Company’s primary interest, both developments. historically and currently, has been in products related to health In Item 1 of the Company’s Annual Report on Form 10-K for and well-being. the year ended January 3, 1999 that will be filed in April 1999, the The Company is organized on the principle of decentralized Company discusses in more detail various factors that could management. The Executive Committee of Johnson & Johnson is cause actual results to differ from expectations. Prior to the filing the principal management group responsible for the operations of Form 10-K, investors should reference the Company’s quar- and allocations of resources of the Company. In addition, several terly report on Form 10-Q for the quarter ended September 27, Executive Committee members serve as Chairmen of Group 1998. The Company notes these factors as permitted by the Pri- Operating Committees, which are comprised of managers who vate Securities Litigation Reform Act of 1995. Investors are cau- represent key operations within the group, as well as manage- tioned not to place undue reliance on such statements that speak ment expertise in other specialized functions. The composition of only as of the date made. Investors also should understand that it these Committees can change over time in response to business is not possible to predict or identify all such factors and should needs. These Committees oversee and coordinate the activities of not consider this list to be a complete statement of all potential domestic and international companies related to each of the Con- risks and uncertainties. sumer, Pharmaceutical and Professional businesses. Operating management is headed by a Chairman, President, General Man- ager or Managing Director who reports directly, or through a line executive to a Group Operating Committee. In line with this policy of decentralization, each international subsidiary is, with some exceptions, managed by citizens of the country where it is located. The Company’s international busi- ness is conducted by subsidiaries manufacturing in 36 countries

30 Consolidated Balance Sheet Johnson & Johnson and Subsidiaries

At January 3, 1999 and December 28, 1997 (Dollars in Millions) (Note 1) 1998 1997 Assets

Current assets Cash and cash equivalents (Notes 1 and 16) $ 1,927 2,753 Marketable securities at cost (Note 16) 651 146 Accounts receivable trade, less allowances $385 (1997, $358) 3,661 3,329 Inventories (Notes 1 and 2) 2,853 2,516 Deferred taxes on income (Note 6) 1,180 831 Prepaid expenses and other receivables 860 988

Total current assets $11,132 10,563

Marketable securities, non-current (Note 16) 416 385 Property, plant and equipment, net (Notes 1, 3 and 15) 6,240 5,810 Intangible assets, net (Notes 1 and 5) 7,209 3,261 Deferred taxes on income (Note 6) 102 332 Other assets 1,112 1,102

Total assets $26,211 21,453

Liabilities and Shareowners’ Equity

Current liabilities Loans and notes payable (Note 4) $ 2,747 714 Accounts payable 1,861 1,753 Accrued liabilities 2,920 2,258 Accrued salaries, wages and commissions 428 332 Taxes on income 206 226

Total current liabilities 8,162 5,283

Long-term debt (Note 4) 1,269 1,126 Deferred tax liability (Note 6) 578 175 Employee related obligations (Note 11) 1,738 1,562 Other liabilities 874 948

Shareowners’equity Preferred stock-without par value (authorized and unissued 2,000,000 shares) –– Common stock-par value $1.00 per share (Note 20) (authorized 2,160,000,000 shares; issued 1,534,824,000 shares) 1,535 1,535 Note receivable from employee stock ownership plan (Note 14) (44) (51) Accumulated other comprehensive income (Note 8) (328) (378) Retained earnings 13,928 12,661 15,091 13,767 Less common stock held in treasury, at cost (Note 20) (190,773,000 and 189,687,000 shares) 1,501 1,408

Total shareowners’equity 13,590 12,359

Total liabilities and shareowners’equity $ 26,211 21,453

See Notes to Consolidated Financial Statements

31 Consolidated Statement of Earnings Johnson & Johnson and Subsidiaries

(Dollars in Millions Except Per Share Figures) (Note 1) 1998 1997 1996

Sales to customers $23,657 22,629 21,620

Cost of products sold (1998 includes $60 of inventory write-offs for restructuring) 7,496 7,152 7,018

Gross profit 16,161 15,477 14,602

Selling, marketing and administrative expenses 8,907 8,715 8,394 Research expense 2,269 2,140 1,905 Purchased in-process research and development (Notes 15 and 17) 164 – – Interest income (262) (203) (139) Interest expense, net of portion capitalized (Note 3) 110 120 125 Other expense, net 151 129 284 Restructuring charge (Note 15) 553 – –

11,892 10,901 10,569

Earnings before provision for taxes on income 4,269 4,576 4,033 Provision for taxes on income (Note 6) 1,210 1,273 1,146

Net earnings $ 3,059 3,303 2,887

Basic net earnings per share (Notes 1 and 19) $ 2.27 2.47 2.17

Diluted net earnings per share (Notes 1 and 19) $ 2.23 2.41 2.12

See Notes to Consolidated Financial Statements

32 Consolidated Statement of Equity Johnson & Johnson and Subsidiaries

Note Receivable Accumulated From Employee Other Common Comprehensive Retained Stock Ownership Comprehensive Stock Issued Treasury Stock (Dollars in Millions) Total Income Earnings Plan (ESOP) Income Amount Amount Balance, December 31, 1995 $ 9,045 9,702 (64) 189 1,535 2,317

Net earnings 2,887 2,887 2,887 Cash dividends paid (974) (974) Employee compensation and stock option plans 204 (185) (389) Repurchase of common stock (412) 412 Business combinations 318 (490) (808) Other comprehensive income, net of tax: Currency translation adjustments (270) (270) Unrealized gains on securities 31 31

Other comprehensive income (239) (239)

Total comprehensive income 2,648

Note receivable from ESOP 7 7

Balance, December 29, 1996 $10,836 10,940 (57) (50) 1,535 1,532

Net earnings 3,303 3,303 3,303 Cash dividends paid (1,137) (1,137) Employee compensation and stock option plans 290 (333) (623) Repurchase of common stock (628) 628 Business combinations 17 (112) (129) Other comprehensive income, net of tax: Currency translation adjustments (289) (289) Unrealized gains (losses) on securities (39) (39)

Other comprehensive income (328) (328)

Total comprehensive income 2,975

Note receivable from ESOP 6 6

Balance, December 28, 1997 $12,359 12,661 (51) (378) 1,535 1,408

Net earnings 3,059 3,059 3,059 Cash dividends paid (1,305) (1,305) Employee compensation and stock option plans 340 (494) (834) Repurchase of common stock (930) 930 Business combinations 10 7 (3) Other comprehensive income, net of tax: Currency translation adjustments 82 82 Unrealized gains (losses) on securities (32) (32)

Other comprehensive income 50 50

Total comprehensive income 3,109

Note receivable from ESOP 7 7

Balance, January 3, 1999 $13,590 13,928 (44) (328) 1,535 1,501

See Notes to Consolidated Financial Statements

33 Consolidated Statement of Cash Flows Johnson & Johnson and Subsidiaries

(Dollars in Millions) (Note 1) 1998 1997 1996

Cash flows from operating activities Net earnings $ 3,059 3,303 2,887 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles 1,246 1,067 1,009 Increase in deferred taxes (239) (121) (3) Purchased in-process research and development 164 – – Changes in assets and liabilities, net of effects from acquisition of businesses: Increase in accounts receivable, less allowances (74) (318) (306) Increase in inventories (80) (175) (242) Increase in accounts payable and accrued liabilities 622 460 245 Decrease (increase) in other current and non-current assets 139 10 (40) Increase in other current and non-current liabilities 49 117 341

Net cash flows from operating activities 4,886 4,343 3,891

Cash flows from investing activities Additions to property, plant and equipment (1,460) (1,391) (1,373) Proceeds from the disposal of assets 71 69 37 Acquisition of businesses, net of cash acquired (Note 17) (3,481) (180) (233) Other, principally marketable securities (769) (112) (123)

Net cash used by investing activities (5,639) (1,614) (1,692)

Cash flows from financing activities Dividends to shareowners (1,305) (1,137) (974) Repurchase of common stock (930) (628) (412) Proceeds from short-term debt 2,424 300 282 Retirement of short-term debt (226) (182) (128) Proceeds from long-term debt 86 7 126 Retirement of long-term debt (416) (504) (411) Proceeds from the exercise of stock options 269 225 149

Net cash used by financing activities (98) (1,919) (1,368)

Effect of exchange rate changes on cash and cash equivalents 25 (68) (21) (Decrease) increase in cash and cash equivalents (826) 742 810 Cash and cash equivalents, beginning of year (Note 1) 2,753 2,011 1,201

Cash and cash equivalents, end of year (Note 1) $ 1,927 2,753 2,011

Supplemental cash flow data Cash paid during the year for: Interest, net of portion capitalized $ 89 91 113 Income taxes 1,310 1,431 1,210

Supplemental schedule of noncash investing and financing activities Treasury stock issued for employee compensation and stock option plans, net of cash proceeds $ 598 425 252

Acquisitions of businesses Fair value of assets acquired $ 4,322 184 237 Fair value of liabilities assumed (including $296 of assumed debt) (545) (4) (4) Net purchase price $ 3,777 180 233

See Notes to Consolidated Financial Statements

34 Notes to Consolidated Financial Statements Johnson & Johnson and Subsidiaries

Advertising 1 Summary of Significant Accounting Policies Costs associated with advertising are expensed in the year in- curred. Advertising expenses worldwide, which are comprised Principles of Consolidation of television, radio and print media, were $1.19 billion in 1998 The consolidated financial statements include the accounts of and $1.26 billion in 1997and 1996 respectively. Johnson & Johnson and subsidiaries. Intercompany accounts and transactions are eliminated. Income Taxes The Company intends to continue to reinvest its undistributed Cash Equivalents international earnings to expand its international operations; The Company considers securities with maturities of three therefore, no tax has been provided to cover the repatriation of months or less, when purchased, to be cash equivalents. such undistributed earnings. At January 3, 1999 and December 28, 1997 the cumulative amount of undistributed international Revenue Recognition earnings was approximately $7.0 billion and $5.9 billion, The Company recognizes revenue from product sales when the respectively. goods are shipped and title passes to the customer. Net Earnings Per Share Inventories Basic earnings per share is computed by dividing net income Inventories are stated at the lower of cost or market determined available to common shareowners by the weighted average by the first-in, first-out method. number of common shares outstanding for the period. Diluted Depreciation of Property earnings per share reflects the potential dilution that could occur The Company utilizes the straight-line method of depreciation if securities or other contracts to issue common stock were exer- for financial statement purposes for all additions to property, cised or converted into common stock. plant and equipment. Risks and Uncertainties Intangible Assets The preparation of consolidated financial statements in confor- The excess of the cost over the fair value of net assets of pur- mity with generally accepted accounting principles requires chased businesses is recorded as goodwill and is amortized on a management to make estimates and assumptions that affect the straight-line basis over periods of 40 years or less. The cost of amounts reported. Actual results are not expected to differ mate- other acquired intangibles is amortized on a straight-line basis rially from those estimates. over their estimated useful lives. The Company continually eval- uates the carrying value of goodwill and other intangible assets. Annual Closing Date Any impairments would be recognized when the expected The Company follows the concept of a fiscal year which ends on future operating cash flows derived from such intangible assets the Sunday nearest to the end of the month of December. Nor- is less than their carrying value. mally each fiscal year consists of 52 weeks, but every five or six years, as in 1998, the fiscal year consists of 53 weeks. Financial Instruments Gains and losses on foreign currency hedges of existing assets or Reclassification liabilities, or hedges of firm commitments, are deferred and rec- Certain prior year amounts have been reclassified to conform ognized in income as part of the related transaction. with current year presentation. Unrealized gains and losses on currency swaps which hedge third party debt are classified in the balance sheet as other assets or liabilities. Interest expense under these agreements, and the 2 Inventories respective debt instruments that they hedge, are recorded at the At the end of 1998 and 1997, inventories were comprised of: net effective interest rate of the hedged transaction. (Dollars in Millions) 1998 1997 In the event of early termination of a currency swap contract that hedges third party debt, the gain or loss on the swap contract Raw materials and supplies $ 770 655 is amortized over the remaining life of the related transaction. If Goods in process 489 417 the underlying transaction associated with a swap, or other Finished goods 1,594 1,444 derivative contract, is accounted for as a hedge and is terminated $2,853 2,516 early, the related derivative contract is terminated simultane- ously and any gains or losses would be included in income immediately.

35 The Company has access to substantial sources of funds at 3 Property, Plant and Equipment numerous banks worldwide. Total unused credit available to the At the end of 1998 and 1997, property, plant and equipment at Company approximates $3.2 billion, including $1.2 billion of cost and accumulated depreciation consisted of: credit commitments with various worldwide banks, $800 million of which expire on October 1, 1999 and $400 million on October 6, (Dollars in Millions) 1998 1997 2003. Interest charged on borrowings under the credit line agree- Land and land improvements $ 459 407 ments is based on either bids provided by the banks, the prime Buildings and building equipment 2,922 2,895 rate or London Interbank Offered Rates (LIBOR), plus applicable Machinery and equipment 5,575 5,224 margins. Commitment fees under the agreements are not material. Construction in progress 1,068 918 The Company’s shelf registration filed with the Securities and 10,024 9,444 Exchange Commission enables the Company to issue up to $2.59 Less accumulated depreciation 3,784 3,634 billion of unsecured debt securities, and warrants to purchase $ 6,240 5,810 debt securities, under its medium term note (MTN) program. No MTN’s were issued during 1998. At January 3, 1999, the Com- The Company capitalizes interest expense as part of the cost pany had $2.29 billion remaining on its shelf registration. In 1998 of construction of facilities and equipment. Interest expense capi- the Company issued $60 million of 5.12% notes due 2003, the talized in 1998, 1997 and 1996 was $71, $40 and $55 million, proceeds of which were used for general corporate purposes. respectively. Short-term borrowings and current portion of long-term debt Upon retirement or other disposal of fixed assets, the cost and amounted to $2.7 billion at the end of 1998. These borrowings are related amount of accumulated depreciation or amortization are composed of $2.2 billion U.S. commercial paper, at an average eliminated from the asset and reserve accounts, respectively. The rate of 5.0% and $0.5 billion of local borrowings, principally by difference, if any, between the net asset value and the proceeds is international subsidiaries. adjusted to income. For additional discussion on property, plant Aggregate maturities of long-term obligations for each of the and equipment, see Note 15. next five years commencing in 1999 are: After (Dollars in Millions) 1999 2000 2001 2002 2003 2003 4 Borrowings $35 31 137 214 80 807 The components of long-term debt are as follows: Eff. Eff. (Dollars in Millions) 1998 Rate 1997 Rate 5 Intangible Assets At the end of 1998 and 1997, the gross and net amounts of 8.72% Debentures due 2024 $ 300 8.72% 300 8.72% intangible assets were: 6.73% Debentures due 2023 250 6.73 250 6.73 3 7 ⁄8% Notes due 2002 199 7.49 199 7.49 (Dollars in Millions) 1998 1997 8.25% Euro Notes Goodwill – gross $4,112 2,198 due 2004 199 8.37 199 8.37 1 Less accumulated amortization 329 241 11 ⁄ 4% Italian Lire Notes due 1998(1) – – 115 4.88 Goodwill – net $3,783 1,957 5% Deutsche Mark Notes Patents & trademarks – gross $1,634 1,074 due 2001(3) 107 1.98 101 1.98 Less accumulated amortization 343 262 5.12% Notes due 2003(4) 60 0.82 – – 1 4 ⁄2% Currency Indexed Patents and trademarks – net $1,291 812 Notes due 1998(1) – – 72 5.26 Other intangibles - gross $2,296 613 8.18% to 8.25% Medium Term Less accumulated amortization 161 121 Notes due 1998 – – 65 8.23 Industrial Revenue Bonds 50 5.28 57 5.77 Other intangibles – net $2,135 492 Other, principally international 139 – 36 – Total intangible assets – gross $8,042 3,885 1,304 6.85(2) 1,394 6.96(2) Less accumulated amortization 833 624 Less current portion 35 268 Total intangible assets – net $7,209 3,261 $1,269 1,126 The weighted average amortization periods for goodwill, (1) The principal amounts of these debt issues include the effect of foreign currency move- patents and trademarks and other intangibles are 32 years, 21 ments. Such debt was converted to fixed or floating rate U.S. dollar liabilities via interest years and 18 years, respectively. rate and currency swaps. Unrealized currency gains (losses) on currency swaps are not included in the basis of the related debt transactions and are classified in the balance sheet as other assets (liabilities). (2) Weighted average effective rate. (3) Represents 5% Deutsche Mark notes due 2001 issued by a Japanese subsidiary and converted to a 1.98% fixed rate yen note via an interest rate and currency swap. (4) Represents 5.12% U.S. Dollar notes due 2003 issued by a Japanese subsidiary and converted to a 0.82% fixed rate yen note via an interest rate and currency swap.

36 6 Income Taxes 7 International Currency Translation The provision for taxes on income consists of: For translation of its international currencies, the Company has determined that the local currencies of its international sub- (Dollars in Millions) 1998 1997 1996 sidiaries are the functional currencies except those in highly Currently payable: inflationary economies, which are defined as those which have U.S. taxes $ 964 939 662 had compound cumulative rates of inflation of 100% or more International taxes 485 455 487 during the past three years. 1,449 1,394 1,149 In consolidating international subsidiaries, balance sheet cur- Deferred: rency effects are recorded as a separate component of shareown- U.S. taxes (122) (115) 28 ers’ equity. This equity account includes the results of translating International taxes (117) (6) (31) all balance sheet assets and liabilities at current exchange rates, (239) (121) (3) except for those located in highly inflationary economies, princi- pally Latin America, which are reflected in operating results. $1,210 1,273 1,146 An analysis of the changes during 1998 and 1997 for cumula- tive currency translation adjustments is included in Note 8. Deferred income taxes are recognized for tax consequences Net currency transaction and translation gains and losses of “temporary differences” by applying enacted statutory tax included in other expense were after-tax losses of $15 million in rates, applicable to future years, to differences between the finan- 1998, after-tax losses of $27 million in 1997, and after-tax gains of cial reporting and the tax basis of existing assets and liabilities. $2 million in 1996. Temporary differences and carryforwards for 1998 are as follows: Deferred Tax 8 Accumulated Other Comprehensive Income (Dollars in Millions) Asset Liability In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 “Reporting Employee benefit obligations $ 546 – Comprehensive Income” that the Company adopted in the first Depreciation – (329) Non-deductible intangibles – (851) quarter of 1998. SFAS 130 requires presentation of comprehen- International R&D capitalized for tax 150 – sive income and its components in the financial statements. Reserves & liabilities 609 – Components of other comprehensive income/(loss) consist of Income reported for tax purposes 231 – the following: Miscellaneous international 168 (276) Accumulated Miscellaneous U.S. 377 – Foreign Unrealized Other Currency Gains/(Losses) Comprehensive Total deferred income taxes $2,081 (1,456) (Dollars in Millions) Translation on Securities Income/(Loss) December 31, 1995 $ 148 41 189 A comparison of income tax expense at the federal statutory 1996 change (270) 31 (239) rate of 35% in 1998, 1997 and 1996, to the Company’s effective tax rate is as follows: December 29, 1996 (122) 72 (50) 1997 change (289) (39) (328) (Dollars in Millions) 1998 1997 1996 December 28, 1997 (411) 33 (378) Earnings before taxes 1998 change 82 (32) 50 on income $4,269 4,576 4,033 January 3, 1999 $(329) 1 (328) Statutory taxes $1,494 1,602 1,412 Tax rates: The change in unrealized gains/(losses) on marketable securities Statutory 35.0% 35.0% 35.0% during 1998 includes reclassification adjustments of $38 million Puerto Rico & Ireland of losses realized from the write-down of marketable securities operations (5.5) (5.7) (6.3) and the associated tax benefit was $13 million. The tax effect on Research tax credits (0.3) (0.3) (0.3) the components of other comprehensive income are benefits of Domestic state and local 1.0 1.0 1.6 $17 million and $21 million in 1998 and 1997, respectively and International subsidiaries excluding Ireland (3.3) (2.7) (2.0) expense of $16 million in 1996 related to unrealized gains (losses) IPR&D 1.3 – – on securities. All other 0.1 0.5 0.4 The currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. Effective tax rate 28.3% 27.8% 28.4% subsidiaries. The increase in the 1998 worldwide effective tax rate was primar- ily due to the Company’s fourth quarter purchased IPR&D charge. During 1998, the Company had subsidiaries operating in Puerto Rico under a tax incentive grant expiring December 31, 2007. In addition, the Company has subsidiaries manufacturing in Ireland under an incentive tax rate effective through the year 2010.

37 The Company applies the provisions of Financial Accounting 9 Rental Expense and Lease Commitments Standards No. 123, “Accounting for Stock-Based Compensation,” Rentals of space, vehicles, manufacturing equipment and office that calls for companies to measure employee stock compensa- and data processing equipment under operating leases amounted tion expense based on the fair value method of accounting. How- to approximately $239 million in 1998, $235 million in 1997 ever, as allowed by the Statement, the Company elected contin- and $237 million in 1996. ued use of Accounting Principle Board (APB) Opinion No. 25, The approximate minimum rental payments required under “Accounting for Stock Issued to Employees, “ with pro forma operating leases that have initial or remaining noncancellable disclosure of net income and earnings per share determined as if lease terms in excess of one year at January 3, 1999 are: the fair value method had been applied in measuring compensa- After tion cost. Had the fair value method been applied, net income (Dollars in Millions) 1999 2000 2001 2002 2003 2003 Total would have been reduced by $66 million or $.05 per share in 1998 $80 64 45 37 31 78 335 and $30 million or $.02 per share in 1997. In 1996, net income would have been reduced by $16 million or $.01 earnings per Commitments under capital leases are not significant. share. These calculations only take into account the options issued since January 1, 1995. The average fair value of options granted was $19.62 in 1998, $17.50 in 1997 and $13.37 in 1996. 10 Common Stock, Stock Option Plans and Stock The fair value was estimated using the Black-Scholes option Compensation Agreements pricing model based on the weighted average assumptions of: At January 3, 1999 the Company had eight stock-based compen- sation plans. Under the 1995 Employee Stock Option Plan, the 1998 1997 1996 Company may grant options to its employees for up to 56 million Risk-free rate 4.52% 5.89% 6.11% shares of common stock. The shares outstanding are for contracts Volatility 22.0% 21.5% 18.2% under the Company’s 1986, 1991 and 1995 Employee Stock Expected life 5 yrs 5.3 yrs 7 yrs Option Plans, the 1997 Non-Employee Directors’ Plan and the Dividend yield 1.30% 1.43% 1.48% Mitek, Cordis, Biosense and Gynecare Stock Option plans. Stock options expire ten years from the date they are granted The following table summarizes stock options outstanding and vest over service periods that range from one to six years. and exercisable at January 3, 1999: Shares available for future grants amounted to 15.0 million, 22.7 million and 32.9 million in 1998, 1997 and 1996, respectively. (Shares in Thousands) Outstanding Exercisable A summary of the status of the Company’s stock option plans Average Average as of January 3, 1999, December 28, 1997 and December 29, 1996 Exercise Average Exercise Exercise and changes during the years ending on those dates, is presented Price Range Options Life(a) Price Options Price below: $8.00-$22.28 11,973 3.2 $18.78 10,629 $18.39 Options Weighted Average $22.32-$42.86 22,733 4.7 24.93 18,016 24.61 (Shares in Thousands) Outstanding* Exercise Price $43.13-$59.88 20,477 7.2 46.44 7,238 44.97 Balance at December 31, 1995 78,624 24.89 Options granted 10,120 43.81 $60.13-$83.63 20,254 9.4 72.19 1 71.06 Options exercised (7,442) 16.13 $8.00-$83.63 75,437 6.4 $42.49 35,884 $26.88 Options cancelled/forfeited (2,231) 29.27 (a) Balance at December 29, 1996 79,071 28.01 Average contractual life remaining in years Options granted 12,564 60.62 Options exercised (10,597) 16.80 11 Employee Related Obligations Options cancelled/forfeited (2,193) 36.36 At the end of 1998 and 1997, employee related obligations Balance at December 28, 1997 78,845 34.48 were: Options granted 9,872 80.05 Options exercised (11,076) 18.59 (Dollars in Millions) 1998 1997 Options cancelled/forfeited (2,204) 44.46 Post retirement benefits $ 767 753 Balance at January 3, 1999 75,437 42.49 Post employment benefits 144 166 Unfunded pension liabilities 677 517 * Adjusted to reflect the 1996 two-for-one stock split. Certificates of extra compensation 150 126 Employee related obligations $1,738 1,562

12 Segments of Business and Geographic Areas In 1998 the Company adopted Financial Accounting Standards No. 131, “Segments of Business;” see page 45.

38 In certain countries other than the United States, the funding 13 Retirement and Pension Plans of pension plans is not a common practice as funding provides The Company sponsors various retirement and pension plans, no economic benefit. Consequently, the Company has several including defined benefit, defined contribution and termination pension plans which are not funded. indemnity plans, which cover most employees worldwide. The The Company does not fund retiree health care benefits in Company also provides postretirement benefits, primarily health advance and has the right to modify these plans in the future. care to all domestic retired employees and their dependents. Effective December 29, 1997, the Company adopted Statement Most international employees are covered by government-spon- of Financial Accounting Standards (SFAS) No. 132,”Employers’ sored programs and the cost to the Company is not significant. Disclosures about Pensions and Postretirement Benefits,” which Retirement plan benefits are primarily based on the standardizes the disclosure requirements for pensions and other employee’s compensation during the last three to five years postretirement benefits. The Statement addresses disclosure only. before retirement and the number of years of service. The Com- It does not address liability measurement or expense recognition. pany’s objective in funding its domestic plans is to accumulate There was no effect on financial position or net income as a result of funds sufficient to provide for all accrued benefits. International adopting SFAS No. 132. subsidiaries have plans under which funds are deposited with Net periodic benefit costs for the Company’s defined benefit trustees, annuities are purchased under group contracts, or retirement plans and other benefit plans for 1998, 1997 and 1996 reserves are provided. include the following components:

Retirement Plans Other Benefit Plans

(Dollars in Millions) 1998 1997 1996 1998 1997 1996 Service cost $185 166 159 20 17 16 Interest cost 254 239 230 50 46 46 Expected return on plan assets (291) (256) (231) (14) (3) (3) Amortization of prior service cost 17 16 14 2 1 1 Amortization of net transition assets (14) (13) (13) – – – Recognized actuarial (gain)/loss (24) (19) 2 8 (6) (1) Curtailments and settlements 2 1 – – – – Net periodic benefit cost $129 134 161 66 55 59

The net periodic cost attributable to domestic retirement plans included above was $40 million in 1998, $50 million in 1997 and $84 million in 1996. The following tables provide the weighted-average assump- tions used to develop net periodic benefit cost and the actuarial present value of projected benefit obligations:

Retirement Plans Other Benefit Plans Domestic Benefit Plans 1998 1997 1996 1998 1997 1996 Weighted average discount rate 6.75% 7.25% 7.75% 6.75% 7.25% 7.75% Expected long-term rate of return on plan assets 9.0 9.0 9.0 9.0 9.0 9.0 Rate of increase in compensation levels 5.0 5.0 5.5 5.0 5.0 5.5

International Benefit Plans Weighted average discount rate 5.50% 6.25% 6.50% 6.00% 7.00% 7.25% Expected long-term rate of return on plan assets 7.75 7.75 7.75 – – – Rate of increase in compensation levels 3.50 4.25 4.75 4.25 5.00 5.00

Health care cost trends are projected at annual rates grading from 10% for employees under age 65 and 7% for employees over age 65 down to 5% for both groups by the year 2008 and beyond. The effect of a 1% change in these assumed cost trends on the accumulated postretirement benefit obligation at the end of 1998 would be a $99 million increase or an $88 million decrease and the effect on the ser- vice and interest cost components of the net periodic postretirement benefit cost for 1998 would be a $12 million increase or a $10 million decrease.

39 The following tables set forth the change in benefit obligations and change in plan assets at year-end 1998 and 1997 for the Com- pany’s defined benefit retirement plans and other postretirement plans:

(Dollars in Millions) Retirement Plans Other Benefit Plans Change in Benefit Obligation 1998 1997 1998 1997 Benefit obligation – beginning of year $3,704 3,412 691 591 Service cost 185 166 20 17 Interest cost 254 239 50 46 Plan participant contributions 11 10 – – Amendments 13 27 – – Actuarial loss 325 123 – 66 Curtailments & settlements (7) 1 – – Total benefits paid (203) (175) (33) (28) Effect of exchange rates 33 (99) (2) (1) Benefit obligation – end of year $4,315 3,704 726 691

Change in Plan Assets Plan assets at fair value – beginning of year $3,694 3,330 46 41 Actual return on plan assets 606 547 14 8 Company contributions 45 35 29 24 Plan participant contributions 11 10 – – Settlements (4) - – – Benefits paid from plan assets (193) (158) (32) (27) Effect of exchange rates 14 (70) – – Plan assets at fair value – end of year $4,173 3,694 57 46

Amounts recognized in the Company’s balance sheet consist of the following: Retirement Plans Other Benefit Plans

(Dollars in Millions) 1998 1997 1998 1997 Plan assets less than projected benefit obligation $ (142) (10) (668) (645) Unrecognized actuarial gains (511) (543) (117) (107) Unrecognized prior service cost 98 102 (11) (8) Unrecognized net transition asset (37) (51) – – Total recognized in the consolidated balance sheet $ (592) (502) (796) (760)

Book reserves $ (726) (592) (796) (760) Prepaid benefits 109 75 – – Intangible assets 25 15 – – Total recognized in the consolidated balance sheet $ (592) (502) (796) (760)

Plans with accumulated benefit obligations in excess of plan assets consist of the following: Retirement Plans Other Benefit Plans

(Dollars in Millions) 1998 1997 1998 1997 Accumulated benefit obligation $ (558) (435) (696) (691) Projected benefit obligation $ (723) (566) – – Plan assets at fair value $ 162 126 57 46

40 discounted for the risk inherent in such projects. The majority of 14 Savings Plan the value of the IPR&D is associated with DePuy projects that The Company has voluntary 401(k) savings plans designed to focus on spinal and hip implants. For additional discussion on enhance the existing retirement programs covering eligible acquisitions, see Note 17. employees. The Company matches a percentage of each The special charges impacted the business segments as fol- employee’s contributions consistent with the provisions of the lows: the special pre-tax charge for the Consumer segment was plan for which he/she is eligible. $244 million. This charge reflects $85 million for severance costs In the U.S. salaried plan, one-third of the Company match is associated with the termination of approximately 2,550 employ- paid in Company stock under an employee stock ownership plan ees; $133 million for the write-down of impaired assets and $26 (ESOP). In 1990, to establish the ESOP, the Company loaned $100 million for other exit costs. The Pharmaceutical business segment million to the ESOP Trust to purchase shares of the Company recorded $65 million of the special charge representing $18 mil- stock on the open market. In exchange, the Company received a lion for severance costs associated with the termination of note, the balance of which is recorded as a reduction of share- approximately 250 employees and $47 million for the write-down owners’ equity. of impaired assets. Acquisitions within the Professional business Total Company contributions to the plans were $63 million in segment resulted in a $164 million write-off of purchased IPR&D. 1998, $58 million in 1997, and $50 million in 1996. Additionally, the Professional business segment recorded other special charges of $304 million. This charge included $58 million 15 Restructuring and In-Process Research and Development Charges for severance costs associated with the termination of approxi- In the fourth quarter of 1998, the Company approved a plan to mately 2,300 employees; $194 million for the write-down of reconfigure its global network of manufacturing and operating impaired assets and $52 million for other exit costs. facilities with the objective of enhancing operating efficiencies. It is expected that the plan will be completed over the next eighteen 16 Financial Instruments months. Among the initiatives supporting this plan were the clo- sure of inefficient manufacturing facilities, exiting certain busi- Derivative Financial Instrument Risk nesses which were not providing an acceptable return and related The Company uses derivative financial instruments to manage employee separations. The closure of these facilities represented the impact of interest rate and foreign exchange rate changes on approximately 10% of the Company’s manufacturing capacity. earnings and cash flows. The Company does not enter into finan- The estimated cost of this plan is $613 million which has been cial instruments for trading or speculative purposes. reflected in cost of sales ($60 million) and restructuring charge The Company has a policy of only entering into contracts with ($553 million). The charge consisted of employee separation costs parties that have at least an “A” (or equivalent) credit rating. The of $161 million, asset impairments of $322 million, impairments counterparties to these contracts are major financial institutions of intangibles of $52 million, and other exit costs of $78 million. and the Company does not have significant exposure to any one Employee separations will occur primarily in manufacturing and counterparty. Management believes the risk of loss is remote and operations facilities affected by the plan. The decision to exit cer- in any event would be immaterial. tain facilities and businesses decreased cash flows triggering the Interest Rate and Foreign Exchange Risk Management asset impairment. The amount of impairment of such assets was The Company uses interest rate and currency swaps to manage calculated using discounted cash flows or appraisals. interest rate and currency risk primarily related to borrowings. Special charges recorded during 1998 were as follows: Interest rate and currency swap agreements that hedge third party debt mature with these borrowings and are described in Beginning 1998 Remaining Note 4. (Dollars in Millions) Accrual Cash Outlays Accrual The Company enters into forward foreign exchange contracts Restructuring charges: maturing within five years to protect the value of existing foreign Employee separations $161 3 158 currency assets and liabilities and to hedge future foreign cur- Other exit costs 78 – 78 rency product costs. The Company has forward exchange con- 239 3 236 tracts outstanding at year-end in various currencies, principally in U.S. Dollars, Belgian Francs and Swiss Francs. In addition, the Asset impairments 322 Intangible assets 52 Company has currency swaps outstanding, principally in U.S. Dollars, Belgian Francs and French Francs. Unrealized gains and Total restructuring plan 613 losses, based on dealer quoted market prices, are presented in the In-process R&D 164 following table: Total special charges $777 1998

The headcount reduction for the year ended January 3, 1999 Notional was approximately 225 employees. (Dollars in Millions) Amounts Gains Losses In connection with the businesses acquired in 1998, the Com- Forwards $6,848 94 227 pany recognized charges for in-process research and develop- Currency swaps 3,422 25 89 ment (IPR&D) in the amount of $164 million related primarily to DePuy. The value of the IPR&D projects was calculated with the assistance of third party appraisers and was based on the esti- mated percentage completion of the various research and devel- opment projects being pursued using cash flow projections

41 Fair Value of Financial Instruments ers would not materially effect previously issued financial state- The carrying amount of cash and cash equivalents and current ments. The 1997 mergers included Biopsys Medical, Inc., and non-current marketable securities approximates fair value of Biosense, Inc. and Gynecare, Inc. Biopsys Medical, Inc. is an inno- these instruments. In addition the carrying amount of long-term vator and marketer of the MAMMOTOME Breast Biopsy System. investments, long-term debt, interest rate and currency swaps Biosense, Inc. is a leader in developing medical sensor technol- (used to hedge third party debt) approximates fair value of these ogy and is developing several applications that will facilitate a instruments for 1998 and 1997. variety of diagnostic and therapeutic interventional and cardio- The fair value of current and non-current marketable securi- vascular procedures. Gynecare, Inc. is the developer and mar- ties, long-term debt and interest rate and currency swap agree- keter of innovative, minimally invasive medical devices utilized ments was estimated based on quotes obtained from brokers for in the treatment of uterine disorders. those or similar instruments. The fair value of long-term invest- Certain businesses were acquired for $180 million during 1997 ments was estimated based on quoted market prices at year-end. and the purchase method of accounting was employed. The most significant 1997 acquisition was Innotech, Inc., a developer and Concentration of Credit Risk marketer of eyeglass lens products. The Company invests its excess cash in both deposits with major The excess of purchase price over the estimated fair value of banks throughout the world and other high quality short-term 1997 acquisitions amounted to $157 million. This amount has liquid money market instruments (commercial paper, govern- been allocated to identifiable intangibles and goodwill. Pro ment and government agency notes and bills, etc.). The Com- forma information is not provided for in 1997 as the impact of the pany has a policy of making investments only with commercial acquisition does not have a material effect on the Company’s institutions that have at least an “A” (or equivalent) credit rating. results of operations, cash flows or financial position. These investments generally mature within six months and the Divestitures in 1998 and 1997 did not have a material effect on Company has not incurred any related losses. the Company’s results of operations, cash flows or financial position. The Company sells a broad range of products in the health care field in most countries of the world. Concentrations of credit risk with respect to trade receivables are limited due to the large 18 Pending Legal Proceedings number of customers comprising the Company’s customer base. The Company is involved in numerous product liability cases in Ongoing credit evaluations of customers’ financial condition are the United States, many of which concern adverse reactions to performed and, generally, no collateral is required. The Company drugs and medical devices. The damages claimed are substan- maintains reserves for potential credit losses and such losses, in tial, and while the Company is confident of the adequacy of the the aggregate, have not exceeded management’s expectations. warnings which accompany such products, it is not feasible to predict the ultimate outcome of litigation. However, the Com- pany believes that if any liability results from such cases, it will 17 Mergers, Acquisitions and Divestitures be substantially covered by reserves established under its Certain businesses were acquired for $3.8 billion during 1998 and self-insurance program and by commercially available excess lia- the purchase method of accounting was employed. The most sig- bility insurance. nificant 1998 acquisition was DePuy, Inc., a leading orthopaedics The Company, along with numerous other pharmaceutical company. DePuy’s product lines include reconstructive products manufacturers and distributors, is a defendant in a large number (implants for hips, knees and extremities), spinal implants, of individual and class actions brought by retail pharmacies in trauma repair and sports-related injury products. state and federal courts under the antitrust laws. These cases The excess of purchase price over the estimated fair value assert price discrimination and price-fixing violations resulting amounted to $3.3 billion. This amount has been allocated to iden- from an alleged industry-wide agreement to deny retail pharma- tifiable intangibles and goodwill. Approximately $164 million cists price discounts on sales of brand name prescription drugs. has been identified as the value of IPR&D associated with the The Company believes the claims against the Company in these acquisitions. The majority of the value is associated with DePuy actions are without merit and is defending them vigorously. projects that focus on spinal and hip implants, which were near The Company, together with another contact lens manufac- regulatory approval as of the acquisition date. The remaining turer, a trade association and various individual defendants, is a effort and cost to complete these projects is not expected to be defendant in several consumer class actions and an action material. The Company is in the process of finalizing a plan to brought by multiple State Attorneys General on behalf of con- reconfigure and integrate DePuy’s operations, which will be sumers alleging violations of federal and state antitrust laws. completed within one year of acquisition. This effort is expected These cases assert that enforcement of the Company’s long- to result in employee terminations, facility closures and other standing policy of selling contact lenses only to licensed eye care related costs, which will be recorded as adjustments to the open- professionals is a result of an unlawful conspiracy to eliminate ing balance sheet and are not expected to be material. Pro forma alternative distribution channels from the disposable contact lens information is not provided since the impact of the acquisitions market. The Company believes that these actions are without does not have a material effect on the Company’s results of oper- merit and is defending them vigorously. ations, cash flows or financial position. The Company is involved in a number of patent, trademark During 1997, certain businesses were merged with Johnson & and other lawsuits incidental to its business. Among those is a Johnson at a value, net of cash, of $737 million. The mergers have patent infringement action in which U.S. Surgical Corporation been accounted for as poolings of interests; prior period financial seeks substantial damages and an injunction based on what it statements have not been restated since the effect of these merg- alleges are infringing trocar surgical instrument sales by the Company’s Ethicon Endo-Surgery unit. The Company disputes infringement as well as the validity and enforceability of the asserted patents and is vigorously contesting the claims.

42 However, it is not possible to predict with certainty the outcome of In December 1998, Ortho Biotech was found in a separate litigation, and while the Company does not believe an adverse arbitration not to have rights in what Amgen describes as its result would have a material effect on the Company’s consolidated second-generation EPO product, known as Novel Erythropoiesis financial position, it could be material to the results of operations Stimulating Protein, or NESP. The effect of the ruling is to allow for a fiscal year. Amgen’s NESP product, if approved, to compete with Ortho’s The Company’s Ortho Biotech subsidiary is party to an arbi- EPO product in the U.S. non-dialysis market and in all markets tration proceeding filed against it by Amgen, Ortho’s licensor of overseas, except China and Japan, which are reserved to Kirin- U.S. non-dialysis rights to EPO, in which Amgen seeks to termi- Amgen. Currently, Ortho is Amgen’s exclusive licensee for EPO nate Ortho’s U.S. license rights based on alleged deliberate EPO in U.S. non-dialysis markets and in all ex-U.S. markets except sales by Ortho during the early 1990’s into Amgen’s reserved dial- China and Japan. Because NESP is still in clinical trials, it is not ysis market. The Company believes no basis exists for terminat- possible to predict the impact on Ortho’s marketing of EPO. ing Ortho’s U.S. license rights and is vigorously contesting The Company believes that the above proceedings, except as Amgen’s claims. However, Ortho’s U.S. license rights to EPO are noted above, would not have a material adverse effect on its material to the Company; thus, an unfavorable outcome could results of operations, cash flows or financial position. have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

19 Earnings Per Share 20 Capital and Treasury Stock The following is a reconciliation of basic net earnings per share to Changes in treasury stock were: diluted net earnings per share for the years ended January 3, 1999, December 28, 1997 and December 29, 1996: Treasury Stock Amounts in millions except number of shares in thousands Shares Amount (Shares in Millions) 1998(1) 1997 1996 Balance at December 31, 1995 239,464 $2,317 Basic net earnings per share $ 2.27 2.47 2.17 Employee compensation and stock Average shares outstanding option plans (8,510) (389) –basic 1,344.8 1,336.0 1,332.6 Repurchase of common stock 8,745 412 Potential shares exercisable Business combinations (37,359) (808) under stock option plans 65.8 68.1 71.6 Balance at December 29, 1996 202,340 1,532 Less: shares repurchased under Employee compensation and stock treasury stock method (39.0) (34.2) (44.8) option plans (11,175) (623) Adjusted average shares Repurchase of common stock 10,520 628 outstanding–diluted 1,371.6 1,369.9 1,359.4 Business combinations (11,998) (129) Diluted earnings per share $ 2.23 2.41 2.12 Balance at December 28, 1997 189,687 1,408 Employee compensation and stock (1) 1998 results excluding Restructuring and In-Process Research & Development option plans (11,516) (834) charges are: Basic EPS at $2.73 and diluted EPS at $2.67 (unaudited). Repurchase of common stock 12,602 930 Business combinations (3) Balance at January 3, 1999 190,773 $1,501

Shares of common stock authorized and issued were 1,534,824,000 shares at the end of 1998, 1997, 1996 and 1995.

21 Selected Quarterly Financial Data (Unaudited) Selected unaudited quarterly financial data for the years 1998 and 1997 is summarized below:

1998 1997 (Dollars in Millions First Second Third Fourth First Second Third Fourth Except Per Share Figures) Quarter Quarter Quarter Quarter(1) Quarter Quarter Quarter Quarter Segment sales to customers Consumer $1,639 1,571 1,587 1,731 1,683 1,612 1,585 1,618 Pharmaceutical 2,092 2,162 2,098 2,210 1,944 1,934 1,918 1,900 Professional 2,052 2,050 2,039 2,426 2,088 2,152 2,083 2,112 Total sales 5,783 5,783 5,724 6,367 5,715 5,698 5,586 5,630 Gross profit 4,006 3,980 3,966 4,209 3,943 3,949 3,836 3,749 Earnings before provision for taxes on income 1,434 1,371 1,317 147 1,302 1,294 1,197 783

Net earnings 1,010 1,005 961 83 909 909 855 630

Basic net earnings per share $ 0.75 .75 .71 .06 .68 .68 .64 .47

Diluted net earnings per share $ 0.73 .74 .70 .06 .66 .67 .63 .45

(1)1998 results excluding Restructuring and In-Process Research & Development charges: Earnings before taxes $924; Net earnings $693; Basic EPS $.52 and Diluted EPS $.50.

43 Report of Management Independent Auditor’s Report

The management of Johnson & Johnson is responsible for To the Shareowners and Board of Directors of Johnson & Johnson: the integrity and objectivity of the accompanying financial state- In our opinion, the accompanying consolidated balance sheets ments and related information. The statements have been and the related consolidated statements of earnings, consoli- prepared in conformity with generally accepted accounting dated statements of equity, and consolidated statements of cash principles, and include amounts that are based on our best judg- flows present fairly, in all material respects, the financial position ments with due consideration given to materiality. of Johnson & Johnson and its subsidiaries at January 3, 1999 and Management maintains a system of internal accounting con- December 28, 1997, and the results of their operations and their trols monitored by a corporate staff of professionally trained cash flows for each of the three years in the period ended January internal auditors who travel worldwide. This system is designed 3, 1999, in conformity with generally accepted accounting princi- to provide reasonable assurance, at reasonable cost, that assets ples. These financial statements are the responsibility of the are safeguarded and that transactions and events are recorded Company’s management; our responsibility is to express an properly. While the Company is organized on the principle of opinion on these financial statements based on our audits. We decentralized management, appropriate control measures are conducted our audits of these statements in accordance with also evidenced by well-defined organizational responsibilities, generally accepted auditing standards which require that we management selection, development and evaluation processes, plan and perform the audit to obtain reasonable assurance about communicative techniques, financial planning and reporting whether the financial statements are free of material misstate- systems and formalized procedures. ment. An audit includes examining, on a test basis, evidence It has always been the policy and practice of the Company supporting the amounts and disclosures in the financial state- to conduct its affairs ethically and in a socially responsible man- ments, assessing the accounting principles used and significant ner. This responsibility is characterized and reflected in the estimates made by management, and evaluating the overall Company’s Credo and Policy on Business Conduct that are financial statement presentation. We believe that our audits distributed throughout the Company. Management maintains a provide a reasonable basis for the opinion expressed above. systematic program to ensure compliance with these policies. PricewaterhouseCoopers LLP, independent auditors, is engaged to audit our financial statements. Pricewaterhouse- Coopers LLP maintains an understanding of our internal con- trols and conducts such tests and other auditing procedures con- New York, New York sidered necessary in the circumstances to express their opinion in January 25, 1999 the report that follows. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the indepen- dent auditors, management and internal auditors to review their work and confirm that they are properly discharging their responsibilities. In addition, the independent auditors, the Gen- eral Counsel and the Vice President, Internal Audit are free to meet with the Audit Committee without the presence of manage- ment to discuss the results of their work and observations on the adequacy of internal financial controls, the quality of financial reporting and other relevant matters.

Ralph S. Larsen Robert J. Darretta Chairman, Board of Directors Vice President, Finance and Chief Executive Officer and Chief Financial Officer

44 (1) Segments of Business Johnson & Johnson and Subsidiaries

Sales to Customers(2)

(Dollars in Millions) 1998 1997 1996 Consumer-Domestic $ 3,325 3,240 3,166 International 3,201 3,258 3,198 Total 6,526 6,498 6,364 Pharmaceutical-Domestic 4,707 3,877 3,355 International 3,855 3,819 3,833 Total 8,562 7,696 7,188 Professional-Domestic 4,530 4,640 4,378 International 4,039 3,795 3,690 Total 8,569 8,435 8,068 Worldwide total $23,657 22,629 21,620

Operating Profit(3) Identifiable Assets

(Dollars in Millions) 1998(5) 1997 1996 1998 1997 1996 Consumer $ 414 551 346 4,645 4,745 4,874 Pharmaceutical 3,016 2,567 2,441 6,441 5,919 5,581 Professional 941 1,543 1,406 12,856 7,773 7,505 Segments total 4,371 4,661 4,193 23,942 18,437 17,960 Expenses not allocated to segments(4) (102) (85) (160) General corporate 2,269 3,016 2,050 Worldwide total $4,269 4,576 4,033 26,211 21,453 20,010

Additions to Property, Depreciation and Plant & Equipment Amortization

(Dollars in Millions) 1998 1997 1996 1998 1997 1996 Consumer $ 268 267 294 273 265 257 Pharmaceutical 515 460 445 313 267 265 Professional 627 573 594 629 495 446 Segments total 1,410 1,300 1,333 1,215 1,027 968 General corporate 50 91 40 31 40 41 Worldwide total $ 1,460 1,391 1,373 1,246 1,067 1,009

Geographic Areas(2)

Sales to Customers(2) Long-Lived Assets(3)

(Dollars in Millions) 1998 1997 1996 1998 1997 1996 United States $12,562 11,757 10,899 8,284 5,623 5,200 Europe 6,317 5,942 6,151 4,072 2,357 2,452 Western Hemisphere excluding U.S. 2,090 2,034 1,914 429 457 441 Asia-Pacific, Africa 2,688 2,896 2,656 402 384 435 Segments total 23,657 22,629 21,620 13,187 8,821 8,528 General corporate 262 250 230 Other non long-lived assets 12,762 12,382 11,252 Worldwide total $23,657 22,629 21,620 26,211 21,453 20,010

(1) See Management’s Discussion and Analysis, pages 27 to 30, for a description of the segments in which the Company does business. (2) Export sales and intersegment sales are not significant. No single customer or country represents 10% or more of total sales. (3) Prior years restated to conform to 1998 presentation according to SFAS No. 131. (4) Amounts not allocated to segments include interest income/expense, minority interests and general corporate income and expense. (5) 1998 results excluding Restructuring and In-Process Research and Development charges: Consumer $658, Pharmaceutical $3,081 and Professional $1,409. See Note 15 for details of Restructuring and IPR&D charges by segment.

45 Summary of Operations and Statistical Data 1988-1998 Johnson & Johnson and Subsidiaries

(Dollars in Millions Except Per Share Figures) 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 Sales to customers-Domestic $12,562 11,757 10,899 9,190 7,812 7,203 6,903 6,248 5,427 4,881 4,576 Sales to customers-International 11,095 10,872 10,721 9,652 7,922 6,935 6,850 6,199 5,805 4,876 4,424 Total sales 23,657 22,629 21,620 18,842 15,734 14,138 13,753 12,447 11,232 9,757 9,000 Cost of products sold 7,496 7,152 7,018 6,235 5,299 4,791 4,678 4,204 3,937 3,480 3,292 Selling, marketing and administrative expenses 8,907 8,715 8,394 7,462 6,350 5,771 5,671 5,099 4,469 3,897 3,630 Research expense 2,269 2,140 1,905 1,634 1,278 1,182 1,127 980 834 719 674 Purchased in-process research and development 164–––––––––– Interest income (262) (203) (139) (115) (60) (80) (93) (88) (98) (87) (72) Interest expense, net of portion capitalized 110 120 125 143 142 126 124 129 201(4) 141 104 Other expense (income), net 151 129 284 166 44 16 39 85 266(4) 93 (24) Restructuring charge 553–––––––––– 19,388 18,053 17,587 15,525 13,053 11,806 11,546 10,409 9,609 8,243 7,604 Earnings before provision for taxes on income 4,269 4,576 4,033 3,317 2,681 2,332 2,207 2,038 1,623 1,514 1,396 Provision for taxes on income 1,210 1,273 1,146 914 675 545 582 577 480 432 422 Earnings before cumulative effect of accounting changes 3,059 3,303 2,887 2,403 2,006 1,787 1,625 1,461 1,143 1,082 974 Cumulative effect of accounting changes (net of tax) ––––––(595) –––– Net earnings $ 3,059 3,303 2,887 2,403 2,006 1,787 1,030 1,461 1,143 1,082 974 Percent of sales to customers 12.9(3) 14.6 13.4 12.8 12.7 12.6 7.5(1) 11.7 10.2(2) 11.1 10.8 Basic net earnings per share of common stock* $ 2.27(3) 2.47 2.17 1.86 1.56 1.37 .78 1.10 .86 .81 .71 Diluted net earnings per share of common stock* $ 2.23(3) 2.41 2.12 1.82 1.55 1.36 .77 1.08 .85 .80 .70 Percent return on average shareowners’ equity 23.6(3) 28.5 29.0 29.7 31.6 33.3 19.1(1) 27.8 25.3(2) 28.3 27.9

Percent increase (decrease) over previous year: Sales to customers 4.5 4.7 14.7 19.8 11.3 2.8 10.5 10.8 15.1 8.4 12.3 Basic net earnings per share (8.1)(3) 13.8 16.7 19.2 13.9 75.6(1) (29.1)(1) 27.9(2) 6.2(2) 14.1 18.2 Diluted net earnings per share (7.5)(3) 13.7 16.5 17.4 14.0 76.6(1) (28.7)(1) 27.1(2) 6.3(2) 14.3 18.6 Supplementary expense data: Cost of materials and services(5) $11,580 11,484 11,204 9,852 7,952 7,033 6,857 6,329 5,728 4,908 4,528 Total employment costs 5,659 5,387 5,275 4,707 4,282 4,066 4,044 3,507 3,195 2,871 2,639 Depreciation and amortization 1,246 1,067 1,009 857 724 617 560 493 474 414 391 Maintenance and repairs(6) 294 265 281 252 217 202 210 203 185 193 191 Total tax expense(7) 1,845 1,843 1,699 1,433 1,142 968 1,000 966 825 708 678 Total tax expense per share(7)* 1.37 1.38 1.27 1.11 .89 .74 .76 .73 .62 .53 .50 Supplementary balance sheet data: Property, plant and equipment, net $ 6,240 5,810 5,651 5,196 4,910 4,406 4,115 3,667 3,247 2,846 2,493 Additions to property, plant and equipment 1,460 1,391 1,373 1,256 937 975 1,103 987 830 750 664 Total assets 26,211 21,453 20,010 17,873 15,668 12,242 11,884 10,513 9,506 7,919 7,119 Long-term debt 1,269 1,126 1,410 2,107 2,199 1,493 1,365 1,301 1,316 1,170 1,166 Common stock information:* Dividends paid per share $ .97 .85 .735 .64 .565 .505 .445 .385 .33 .28 .24 Shareowners’ equity per share $ 10.11 9.19 8.13 6.98 5.54 4.33 3.94 4.22 3.68 3.11 2.63 7 7 1 3 3 3 1 5 7 7 5 Market price per share (year-end close) $ 83 ⁄8 64 ⁄8 50 ⁄2 42 ⁄4 27 ⁄8 22 ⁄8 25 ⁄4 28 ⁄8 17 ⁄8 14 ⁄8 10 ⁄8 Average shares outstanding (millions)–basic 1,344.8 1,336.0 1,332.6 1,291.9 1,286.1 1,303.5 1,318.9 1,332.3 1,332.2 1,332.5 1,362.4 –diluted 1,371.6 1,369.9 1,359.4 1,317.4 1,297.2 1,315.1 1,336.9 1,353.2 1,349.7 1,350.8 1,379.6 Shareowners of record (thousands) 165.9 156.8 138.5 113.5 104.7 96.1 84.1 69.9 64.6 60.5 54.5 Employees (thousands) 93.1 90.5 89.3 82.3 81.5 81.6 84.9 82.7 82.2 83.1 81.3 *Adjusted to reflect the 1996 two-for-one stock split. (1) Excluding the cumulative effect of accounting changes of $595 million.–1992 earnings percent of sales to customers before accounting changes is 11.8%. –1992 earnings percent return on average shareowners’ equity before accounting changes is 28.5%. –1993 basic net earnings per share percent increase over prior year before accounting change is 11.4%; 1992is 12.3%. (2) Excluding Latin America non-recurring charges of $125 million. –1990 net earnings percent of sales to customers before non-recurring charges is 11.3%.–1990 percent return on average shareowners’ equity before non-recurring charges is 27.6%. –1991 basic net earnings per share percent increase over prior year before non-recurring charges is 15.3%; 1990 is 17.3%. (3) Excluding Restructuring and In-Process Research and Development charges of $610 million. –1998 earnings percent of sales to customers before special charges is 15.5%. –1998 basic net earnings per share before special charges of $2.73. –1998 diluted net earnings per share before special charges is $2.67. –1998 percent return on average shareowners’ equity before special charges is 27.6%. –1998 basic net earnings per share increase over prior year before special charges is 10.5%. –1998 diluted net earnings per share increase over prior year before special charges is 10.8%. – 1998 cost of products sold includes $60 million of inventory write-offs for restructuring. (4) Includes Latin America non-recurring charge of $36 million for the liquidation of Argentine debt and $104 million writedown in other expenses for permanent impairment of certain assets and operations in Latin America. (5) Net of interest and other income. (6) Also included in cost of materials and services category. (7) Includes taxes on income, payroll, property and other business taxes.

46 Principal Global Affiliates

Advanced Sterilization Cordis is a global leader DePuy develops and mar- Ethicon, Inc. develops Ethicon Endo-Surgery Products develops, man- in developing and mar- kets products under both and markets innovative develops and markets ufactures and markets a keting devices for circula- the DePuy and Codman products for surgery in a broad portfolio of range of sterilization sys- tory disease manage- brands. As DePuy, it pro- the areas of wound man- advanced surgical instru- tems based on a patented ment, including stents, vides products for recon- agement, soft tissue ments for less invasive low temperature hydro- balloons and catheters structing damaged or dis- repair and women’s and traditional surgery. gen peroxide gas plasma used in treating cardio- eased joints, facilitating health. Ethicon Products Its mission is to help process, as well as steril- vascular disease and fusion of elements of the Division produces sutures, physicians around the izing/disinfecting solu- related conditions. Prod- spine and correcting adhesives, sealants and world improve the qual- tions. The STERRAD ucts are marketed by clin- spinal deformities, repair- other devices designed to ity of patient care Sterilization System is ical application through ing bone fractures and facilitate precise wound through innovation. The safe, fast, environmen- four main divisions: rehabilitating sports closure and tissue repair. company’s focus is on tally friendly and effec- Cordis Cardiology for injuries. As Codman, it Mitek Products Division designing innovative, tive, and can be used on a coronary applications; provides for the surgical makes suture anchor sys- procedure-enabling broad range of medical Cordis Endovascular for treatment of central ner- tems to reattach soft tis- devices for interventional products in both health all non-coronary uses; vous system disorders sue to bone and electro- diagnosis and treatment care and industrial/sci- interventional neuroradi- through a wide range of surgical systems for soft of various diseases and entific facilities. ology; and Biosense Web- products such as hydro- tissue management. conditions in the areas ster for electrophysiology cephalic shunt valve sys- Gynecare Products Divi- of general surgery, breast and medical sensor tech- tems, intracranial pressure sion focuses on devices care management, nology in cardiovascular sensors and spinal fixation and therapies for surgical cardiovascular, thoracic procedures. implants. adhesion prevention, uri- and gynecology. nary incontinence, abnor- mal uterine bleeding and infertility diagnosis.

Greiter AG develops and Indigo Medical develops Janssen-Cilag produces Janssen Pharmaceutica The Janssen Research produces a line of elegant and markets innovative and markets a broad produces and markets Foundation conducts sunscreen and after-sun minimally invasive prod- range of pharmaceutical prescription pharmaceu- pharmaceutical research products that combine ucts to treat urologic dis- products, mainly discov- tical products that and development in sun protection with orders, including a diode ered and/or developed include analgesics, anti- areas such as allergy, special moisturizers. Its laser for treatment of by the Janssen Research fungals, antipsychotics, analgesia, dermatology, products are sold benign prostatic hyper- Foundation or by the antiparasitics, gastropro- gastroenterology, mycol- throughout Europe and plasia, and THERASEED, R. W. Johnson Pharma- kinetics and anti-diar- ogy, neurology, oncology, other markets. a Palladium-103 radio- ceutical Research Institute. rheals, for use in areas psychiatry, parasitology, active isotope for the Leading products include such as dermatology, gas- virology and cardiovas- treatment of localized PROCRIT/EPREX troenterology, oncology, cular disease. prostate cancer. (hematology), pain management and PROPULSID/PREPULSID psychiatry. Leading (gastroenterology), products include RISPERDAL (psychiatry), RISPERDAL (risperidone), SPORANOX (dermatology/ an antipsychotic; fungal infections) and PROPULSID/PREPULSID DURAGESIC/DUROGESIC (cisapride) for gastro- (pain management). esophageal reflux; SPORANOX (itraconazole) for fungal nail infections and other mycoses, and DURAGESIC/DUROGESIC (fentanyl) for pain management.

47 Principal Global Affiliates

The primary businesses The Johnson & Johnson Johnson & Johnson Johnson & Johnson Med- Johnson & Johnson • of Johnson & Johnson Development Corpora- Health Care Systems Inc. ical provides products for Merck Consumer Consumer Products tion makes equity invest- provides managed care, wound management, Pharmaceuticals Co. is a Company are baby care, ments in early-stage provider network and infection prevention and 50/50 joint venture wound care and skin venture companies and government customers vascular access. Products formed to develop and care. The company’s young publicly-traded with one interface to include surgical sponges, market a broad range of wide range of products companies in the health Johnson & Johnson prod- advanced wound care nonprescription products includes the familiar line care field, where promis- ucts and health manage- dressings, professional derived primarily from of baby and child care ing new technologies ment services. It coordi- skin care cleansers and Merck & Co., Inc. products plus a baby are under development. nates the consumer, moisturizers, disposable prescription medicines, bottle feeding system, a diagnostic, medical/sur- surgical packs and as well as products complete line of family gical and pharmaceutical apparel, surgical gloves licensed and acquired first aid and home health expertise of Johnson & and safety intravenous from outside sources. care products, a line of Johnson for large cus- catheters. Current products include 100% cotton products, tomers with an emphasis PEPCID AC Acid Con- and skin care products on decreasing costs and troller, for both the such as cleansers, astrin- improving quality of care. prevention and relief of gents, moisturizers, acne heartburn and acid indi- treatments, sunscreens gestion, and MYLANTA and body powders. Antacid, a leading line of antacid/antigas products in liquid and solid forms.

Noramco, Inc. produces Ortho Biotech Inc. mar- Ortho-Clinical Diagnos- Ortho Dermatological Ortho-McNeil Pharma- pharmaceuticals, inter- kets products derived tics, Inc. provides profes- develops and markets ceutical, Inc. provides the mediates, synthetic fine from biotechnology sional diagnostic products prescription skin care medical profession with organic chemicals and research. Included in the to hospital laboratories, products that are leaders prescription drugs in the polymers. company’s current prod- commercial clinical labo- in the acne, antifungal following categories: uct line is an rDNA ery- ratories and blood donor and aging skin categories. Analgesics, anti-infectives, thropoietin–PROCRIT centers. Its products Major brands are antiepileptics, cystic (Epoetin alfa)–to treat include diagnostic reagent RETIN-AMICRO (tretinoin fibrosis and wound heal- the anemias associated and instrument systems gel) microsphere, 0.1%, ing. The company’s line with cancer chemother- for clinical chemistry, RENOVA (tretinoin emol- of women’s pharmaceuti- apy, HIV-infected, AZT- immunodiagnostic blood lient cream) 0.05% and cals includes oral contra- treated individuals, screening and hemosta- SPECTAZOLE (econazole ceptives, diaphragms, chronic renal failure pre- sis. VITROS and VITROS nitrate 1%) Cream. vaginal antifungals and dialysis, and as an alter- ECi Chemistry Systems hormone replacement native to blood transfu- are among its products therapy. Leading products sion in certain elective, for hospital and reference include ULTRAM (tra- non-cardiac, non-vascu- laboratories. madol HCl) pain medica- lar surgical procedures. tion; FLOXIN (ofloxacin) Ortho Biotech also mar- and LEVAQUIN (lev- kets the first therapeutic ofloxacin) Antibacterials; monoclonal antibody TOPAMAX (topiramate) approved to reverse solid Antiepileptic; REGRANEX organ transplant rejection (becaplermin) Gel 0.01% and a product to treat for diabetic foot ulcers, hairy cell leukemia, a rare and oral contraceptives form of cancer. such as ORTHO TRI- CYCLEN (norgestimate/ ethinyl estradiol).

48 On behalf of the domestic LifeScan, Inc. develops, McNeil Consumer McNeil Specialty Prod- Neutrogena Corporation consumer operating manufactures and mar- Healthcare’s nonpre- ucts Company is devel- develops, manufactures companies, Johnson & kets self blood glucose scription pharmaceuti- oping food and beverage and markets premium, Johnson Sales and monitoring products for cals include complete ingredients and products high quality skin and hair Logistics Company pro- people with diabetes. lines of TYLENOL Aceta- that have a positive care products that are vides sales, marketing Each product consists of a minophen and MOTRIN impact on nutrition and sold worldwide and rec- and logistical services to portable electronic meter Ibuprofen products for offer dietary alternatives. ommended by medical our U.S. retail customers. and reagent test strips adults and children. Sucralose, a non-caloric professionals. The prod- It represents a single used in the home and for Other products include sweetener with broad- uct line includes bar and point of contact for cross- bedside monitoring. IMODIUM A-D Anti-diar- based applications, is its liquid soap, shampoo, functional selling rheal, sinus pain reliev- first product offering. hand cream, body lotion, teams, customer service, ers, cough/cold/allergy facial moisturizers and distribution, retail preparations, children’s bath preparations, as well merchandising and pro- vitamins, LACTAID lac- as other hair and skin fessional detailing. tose-intolerance products care products. and NICOTROL smoking cessation products.

Penaten develops, manu- Personal Products Com- RoC S.A. produces a line The R.W. Johnson Phar- Therakos, Inc. specializes factures and markets pany develops, produces of products for the care maceutical Research in extracorporeal disease a wide range of baby toi- and markets innovative of sensitive skin. The Institute conducts phar- management through letries. The PENATEN oral health, women’s products, sold to con- maceutical research and photomedical therapy. brand is the market health and sanitary pro- sumers internationally, development in thera- leader in Germany and tection products. It is a include lotions, cosmetics peutic areas including enjoys a strong position in leader in the oral health and creams for the face anti-infectives, central other European countries. market with a full line of and body, and a sun pro- nervous system, hematol- floss, rinse and tooth- tection line. ogy/oncology, immunol- brush products. Personal ogy/inflammation, Vistakon produces and Products is also a leader women’s health, diabetes markets the #1, #2 and #3 in women’s health prod- and wound healing. brands of disposable con- ucts with nonprescription tact lenses through con- vaginal yeast cures, per- tact lens-dispensing pro- sonal lubricants, urinary fessionals to consumers. pain relief tablets and vaginal contraceptives. The company’s compre- hensive product line of sanitary protection prod- ucts includes feminine incontinence products, pantiliners, tampons and maxi pads.

49 Worldwide Family of Companies

United States Ethicon Johnson & Johnson Ortho Dermatological Endo-Surgery, Inc. Sales and Logistics Skillman, New Jersey Advanced Sterilization Cincinnati, Ohio Company W. D. Cordivari, Products N. J. Valeriani, New Brunswick, President Irvine, California President New Jersey L.P. Harbing, President J. F. Hogan, President Ortho-McNeil Indigo Medical, Inc. Pharmaceutical, Inc. Cordis Corporation Cincinnati, Ohio LifeScan, Inc. Raritan, New Jersey Cardiology J. D. Litts, President Milpitas, California R. G. Savage, President Miami, Florida D. Van Avermaete, J. R. Penn, President Janssen President Personal Products Endovascular Pharmaceutica Inc. Company Warren, New Jersey Titusville, New Jersey McNeil Consumer Skillman, New Jersey R. C. Coradini, D. Y. Norton, President Healthcare P. D. Mutchler, President Fort Washington, President Pennsylvania Biosense Webster Inc. Johnson & Johnson Consumer Products W. A. Vernon, President Diamond Bar, R.W. Johnson Company Pharmaceutical California Skillman, New Jersey McNeil Specialty Research Institute R. T. Tanaka, President C. A. Goggins, Products Company Raritan, New Jersey Chairman New Brunswick, P. Peterson, M.D., Ph.D., DePuy New Jersey President DePuy, Inc. Johnson & Johnson N. R. Polo, President Warsaw, Indiana Development Corporation Therakos, Inc. M. J. Dormer, New Brunswick, Neutrogena Corporation Exton, Pennsylvania Chairman New Jersey Los Angeles, California J. S. MacLean, President Codman L. G. Pickering, J. M. Nugent, President Raynham, President Vistakon Massachusetts Noramco, Inc. Johnson & Johnson D. M. Hable, President Johnson & Johnson Athens, Georgia Vision Products, Inc. Health Care Systems Inc. E. S. Graham, President Jacksonville, Florida Ethicon, Inc. Piscataway, New Jersey P. R. Keefer, President, Somerville, New Jersey E. P. Milledge, Ortho Biotech Inc. Americas C. E. Holland, Chairman Raritan, New Jersey President C. A. Webb, President Johnson & Johnson Medical Ortho-Clinical Arlington, Texas Diagnostics, Inc. S. J. Fanning, President Raritan, New Jersey Rochester, New York Johnson & Johnson• C. M. Burzik, President Merck Consumer Pharmaceuticals Co. Fort Washington, Pennsylvania S. P. MacMillan, President

50 Canada Brazil Puerto Rico Janssen Research Janssen-Cilag Johnson & Johnson Foundation DePuy Canada Ltd. Farmaceutica Ltda. (Caribbean) Beerse Mississauga, Ontario São Paulo Caguas LifeScan Benelux Janssen-Ortho Inc. Johnson & Johnson Johnson & Johnson Beerse North York, Ontario Indústria e Comércio Medical Johnson & Johnson Inc. Ltda. (Caribbean) Czech Republic Montreal, Quebec São Paulo Caguas Johnson & Johnson spol. s.r.o. Johnson & Johnson Johnson & Johnson Uruguay Prague Professional Products Medical Products Inc. Johnson & Johnson de Peterborough, Ontario Ltda. Uruguay S.A. England São Paulo LifeScan Canada, Ltd. Montevideo DePuy International Limited Burnaby, Chile Venezuela Leeds British Columbia Johnson & Johnson de Janssen-Cilag Chile S.A. Ethicon Endo-Surgery McNeil Consumer Farmaceutica C.A. Santiago U.K. Products, Canada Caracas Guelph, Ontario Bracknell Colombia Johnson & Johnson de Janssen-Cilag Limited Ortho-Clinical Janssen-Cilag Venezuela, S.A. High Wycombe Diagnostics Farmaceutica S.A. Caracas Mississauga, Ontario Bogota Johnson & Johnson Johnson & Johnson Limited Johnson & Johnson de Medical de Venezuela Latin America Maidenhead Colombia S.A. Caracas Argentina Cali Johnson & Johnson Janssen-Cilag Europe Medical Limited Farmaceutica Johnson & Johnson Ascot Buenos Aires Medical Colombia Austria Bogota Janssen-Cilag G.m.b.H. Johnson & Johnson Johnson & Johnson de Vienna Professional Argentina S.A. C.e.l. Mexico Europe Buenos Aires Johnson & Johnson Janssen-Cilag Bracknell G.m.b.H. Johnson & Johnson Farmaceutica, Hallein LifeScan U.K. Medical S.A. S.A. de C.V. High Wycombe Buenos Aires Mexico City Johnson & Johnson Johnson & Johnson de Medical G.m.b.H. Ortho-Clinical Mexico, S.A. de C.V. Vienna Diagnostics Mexico City Amersham Belgium Johnson & Johnson Cordis N.V. Vistakon Europe Medical Mexico, Zaventem Bracknell S.A. de C.V. Mexico City Janssen-Cilag N.V. Antwerp Panama Janssen Pharmaceutica Johnson & Johnson N.V. Central America Beerse Panama City

Peru Johnson & Johnson del Peru S.A. Lima

51 Worldwide Family of Companies

France Janssen-Cilag G.m.b.H. Ethicon Endo-Surgery Scotland Janssen-Cilag Cordis S.A. Rosellen S.p.A. Ethicon Limited Zug Issy-Les-Moulineaux Rome Edinburgh Johnson & Johnson Johnson & Johnson AG DePuy France G.m.b.H. Janssen-Cilag S.p.A. Slovenia Spreitenbach Villeurbanne Düsseldorf Milan Johnson & Johnson S.E. Johnson & Johnson Ethicon S.A. Johnson & Johnson Johnson & Johnson Ljubljana Medical AG Issy-Les-Moulineaux Medical G.m.b.H. S.p.A. Spreitenbach Norderstedt Rome Spain Ethicon Endo-Surgery Janssen-Cilag S.A. Turkey S.A. LifeScan G.m.b.H. LifeScan S.p.A. Madrid Johnson & Johnson Issy-Les-Moulineaux Neckargemund Milan Johnson & Johnson S.A. Limited Janssen-Cilag S.A. Ortho-Clinical Ortho-Clinical Madrid Istanbul Issy-Les-Moulineaux Diagnostics G.m.b.H. Diagnostics S.p.A. Neckargemund Milan Johnson & Johnson Asia-Pacific, Africa Johnson & Johnson S.A. Professional Issy-Les-Moulineaux Australia Greece The Netherlands Products S.A. DePuy Australia Pty. Johnson & Johnson Janssen-Cilag Janssen-Cilag B.V. Madrid Ltd. Medical S.A. Pharmaceutical S.A.C.I. Tilburg LifeScan Nottinghill, Issy-Les-Moulineaux Athens Johnson & Madrid Victoria LifeScan Johnson & Johnson Johnson/Gaba B.V. Ortho-Clinical Janssen-Cilag Pty. Ltd. Issy-Les-Moulineaux Hellas S.A. Almere Diagnostics Lane Cove Athens Neutrogena France Johnson & Johnson Madrid Johnson & Johnson Issy-Les-Moulineaux Johnson & Johnson Medical B.V. Vistakon Medical Pty. Ltd. Medical Products S.A. Amersfoort Ortho-Clinical Madrid North Ryde Athens Diagnostics S.A. Poland Johnson & Johnson Issy-Les-Moulineaux Sweden Hungary Johnson & Johnson Janssen-Cilag AB Pacific Pty. Limited RoC S.A. Johnson & Johnson Kft. Poland, Sp. z.o.o. Sollentuna Sydney Issy-Les-Moulineaux Budapest Warsaw Johnson & Johnson AB Ortho-Clinical Diagnostics Germany Ireland Portugal Sollentuna Melbourne Janssen-Cilag Janssen-Cilag Cordis G.m.b.H. Johnson & Johnson Pharmaceutical Limited Farmaceutica, Ltda. Haan Consumer Products Tasmanian Alkaloids Cork Queluz Pty. Limited DePuy Orthopädie Sollentuna Westbury, Tasmania G.m.b.H. Johnson & Johnson Johnson & Johnson Sulzbach (Ireland) Limited Limitada Switzerland Tallaght Queluz Cilag AG Ethicon G.m.b.H. Schaffhausen Norderstedt Johnson & Johnson Johnson & Johnson Medical Professional Greiter AG Ethicon Endo-Surgery Tallaght Products, Limitada Baar (Europe) G.m.b.H. Queluz Janssen-Cilag AG Norderstedt Italy Baar Cordis S.p.A. Russia Milan Johnson & Johnson Ltd. Moscow DePuy Italy SRL Milan Johnson & Johnson Health Care Ltd. Ethicon S.p.A. Moscow Rome

52 China Indonesia Malaysia South Africa Johnson & Johnson Janssen-Cilag Pharma- Johnson & Johnson Janssen-Cilag (Pty.) Ltd. China Ltd. ceutica Medical Mfg., Sdn. Sandton Shanghai Jakarta Bhd. Johnson & Johnson Selangor Darul Ehsan Johnson & Johnson P.T. Johnson & Johnson Professional Products Medical Ltd. Indonesia Johnson & Johnson (Pty.) Ltd. Shanghai Jakarta Sdn. Bhd. Halfway House Selangor Darul Ehsan Shanghai Johnson & Johnson & Johnson Israel Johnson Ltd. (Pty.) Limited Biosense Europe Morocco Shanghai East London Haifa Johnson & Johnson Shanghai Johnson & Morocco S.A. J-C Healthcare, Ltd. Taiwan Johnson Casablanca Kibbutz Shefayim Janssen-Cilag Taiwan Pharmaceuticals Ltd. Taipei Shanghai Pakistan Japan Johnson & Johnson Johnson & Johnson Xian-Janssen DePuy Japan, Inc. Pakistan (Private) Medical Taiwan Pharmaceutical Ltd. Tokyo Limited Taipei Xian, Janssen-Kyowa Co., Karachi Shaanxi Province Johnson & Johnson Ltd. Taiwan, Ltd. Tokyo Philippines Egypt Janssen-Cilag Taipei Johnson & Johnson Johnson & Johnson K.K. Philippines (Egypt) S.A.E. Tokyo Metro Manila Thailand Cairo Janssen-Cilag Johnson & Johnson Johnson & Johnson Pharmaceutica Limited Medical K.K. Hong Kong Medical Philippines Bangkok Tokyo Janssen-Cilag Metro Manila Johnson & Johnson Hong Kong Ortho-Clinical Johnson & Johnson Medical Thailand Diagnostics K.K. Johnson & Johnson (Philippines), Inc. Bangkok Tokyo (Hong Kong) Limited Metro Manila Johnson & Johnson Hong Kong Vistakon Japan (Thailand) Limited Tokyo Singapore Johnson & Johnson Janssen-Cilag Bangkok Medical Hong Kong Kenya Singapore/Malaysia Hong Kong United Arab Emirates Johnson & Johnson Singapore Johnson & Johnson (Kenya) Limited India Johnson & Johnson (Middle East) Inc. Nairobi Janssen-Cilag Medical S.I.M. Dubai Mumbai Singapore Korea Zimbabwe Johnson & Johnson Janssen-Cilag Korea, Johnson & Johnson Johnson & Johnson Limited Ltd. Pte. Ltd. (Private) Limited Mumbai Seoul Singapore Harare Johnson & Johnson Johnson & Johnson Ortho-Clinical Professional Korea, Ltd. Diagnostics Mumbai Seoul Singapore Johnson & Johnson Medical Korea Ltd. Seoul

53 Board of Directors Committees of the Board

Gerard N. Burrow, M.D. Audit Nominating and Corporate Governance Special Advisor to the President of The Audit Committee, composed The Nominating and Corporate Gover- Yale University for Health Affairs entirely of non-employee Directors, nance Committee, composed entirely of helps the Board oversee the Company’s non-employee directors, is responsible Joan G. Cooney accounting and reporting practices. It for overseeing corporate governance Chairman, Executive Committee, recommends independent public matters, reviewing possible candidates Children’s Television Workshop accountants for appointment by the for Board membership and recommend- James G. Cullen Board and reviews their performance; ing nominees for election. The Commit- President and Chief Operating Officer, monitors the adequacy of internal tee is also responsible for evaluating Bell Atlantic Corporation accounting practices, procedures and the function and performance of the controls; and reviews all significant Board and the Chief Executive Officer. M. Judah Folkman, M.D. changes in accounting policies. Additionally, the Committee reviews Senior Associate in Surgery at the Company’s management succession P. J. Rizzo, Chairman Children’s Hospital and Professor, plans and executive resources. Harvard Medical School J. G. Cullen A. G. Langbo H. B. Schacht, Chairman Ann D. Jordan H. B. Schacht G. N. Burrow, M.D. Former Director of the Social Services A. D. Jordan Department, Chicago Lying-In Hospital Benefits P. J. Rizzo Arnold G. Langbo The Benefits Committee, composed Chairman of the Board and Chief entirely of non-employee Directors, Public Policy Executive Officer, Kellogg Company reviews the management of the various The Public Policy Advisory Committee is retirement, pension, health and welfare composed of Board members and the Ralph S. Larsen plans that cover substantially all employ- Company’s Vice President, Administra- Chairman, Board of Directors and ees of the Company’s domestic opera- tion. It reviews the Company’s policies, Chief Executive Officer tions and employees of certain interna- programs and practices on public health John S. Mayo, Ph.D. tional subsidiaries. The Committee also issues regarding the environment and President Emeritus, AT&T Bell monitors the performance of the trusts in the health and safety of employees, and Laboratories which pension funds are invested. advises and makes recommendations to the Board on such issues. Paul J. Rizzo J. G. Cooney, Chairperson Retired Vice Chairman, M. F. Singer, Ph.D. J. S. Mayo, Ph.D., Chairman IBM Corporation J. W. Snow R. C. Deyo M. J. Folkman, M.D. Henry B. Schacht Compensation A. D. Jordan Former Chairman and Chief Executive The Compensation Committee, composed Officer, Lucent Technologies entirely of non-employee Directors, Science and Technology reviews the compensation philosophy The Science and Technology Advisory Maxine F. Singer, Ph.D. and policy of the non-Board Manage- Committee is composed of Board mem- President, Carnegie Institution of ment Compensation Committee with bers and the Company’s Vice President, Washington respect to executive compensation, Science and Technology. It advises the John W. Snow fringe benefits and other compensation Board on scientific matters that include Chairman, President and Chief matters. The Committee also administers major internal projects, interaction with Executive Officer, CSX Corporation the Company’s stock option plans and academic and other outside research determines the compensation of the organizations, and the acquisition of Robert N. Wilson members of the Management Compen- technologies and products. Vice Chairman, Board of Directors sation Committee. G. N. Burrow, M.D., Chairman A. G. Langbo, Chairman M. J. Folkman, M.D. J. G. Cooney R. Z. Gussin, Ph.D. J. G. Cullen J. S. Mayo, Ph.D. J. W. Snow M. F. Singer, Ph.D.

Finance The Finance Committee exercises the management authority of the Board during the intervals between Board meetings. This Annual Report is R. S. Larsen, Chairman printed in its entirety on R. N. Wilson recycled paper.

54 Corporate Officers & Company Group Chairmen Corporate & Shareowner/ Investor Information

Corporate Officers Dennis N. Longstreet Principal Office Ralph S. Larsen Eric P. Milledge One Johnson & Johnson Plaza Chairman, Board of Directors and Gerald M. Ostrov New Brunswick, New Jersey 08933 Chief Executive Officer Brian D. Perkins (732) 524-0400 Frank J. Ryan Robert N. Wilson Annual Meeting Curt M. Selquist Vice Chairman, Board of Directors The Annual Meeting of Shareowners will take Pericles P. Stamatiades place April 22, 1999, at the Hyatt Regency Robert J. Darretta Valentino Tanca New Brunswick, 2 Albany Street, New Vice President, Finance Peter T. Tattle Brunswick, New Jersey. The meeting will Executive Committee Gerard Vaillant convene at 10:00 A.M. All shareowners are Bernard W. Walsh cordially invited to attend. A formal Notice of Russell C. Deyo Michael A. Yates Meeting, Proxy Statement and Proxy have Vice President, Administration been sent to shareowners. Executive Committee The Executive Committee of Johnson & Reports Available Roger S. Fine Johnson is the principal management Copies of the Company’s 1998 Annual Report Vice President, General Counsel group responsible for the operations and on Form 10-K and Quarterly Reports on Form Executive Committee allocation of the Company’s resources. 10-Q to the Securities and Exchange Commis- In addition, several Executive Committee sion, and this Annual Report are available to Ronald G. Gelbman members serve as Chairmen of Group shareowners without charge, upon written Worldwide Chairman, Operating Committees, which are com- request to the Secretary at the Company’s Health Systems & Diagnostics Group prised of managers who represent key principal office or by calling (800) 328-9033. Executive Committee operations within the groups, as well as Common Stock Robert Z. Gussin, Ph.D. management expertise in other specialized Listed on New York Stock Exchange Vice President, Science and functions. These Committees oversee and Stock Symbol JNJ Technology coordinate the activities of domestic and Shareowner Relations Contact international companies related to each of Michael H. Ullmann JoAnn Heffernan Heisen the Consumer, Pharmaceutical and Profes- Corporate Secretary Vice President, sional businesses. Operating management (732) 524-2455 Chief Information Officer of each company is headed by a Chairman, Executive Committee President, General Manager or Managing Investor Relations Contact Helen E. Short Director who reports directly or through Christian Koffmann Vice President, Investor Relations a line executive to a Group Operating Worldwide Chairman, Consumer & (800) 950-5089 Personal Care Group Committee. Transfer Agent and Registrar Executive Committee The following trademarks, service marks Questions regarding stock holdings, certifi- James T. Lenehan and trade names of Johnson & Johnson and cate replacement/transfer, dividends and Worldwide Chairman, Consumer its affiliated companies appear in this report: address changes should be directed to: Pharmaceuticals & Professional Group ACROMED, ACT, ACUVUE, ADVANCED STERILIZATION First Chicago Trust Company, Executive Committee PRODUCTS, BAND-AID, BIOPSYS, BIOSENSE WEBSTER, a Division of EquiServe BODY CLEAR, BX, CARDIOVATIONS, CAREFREE, CLEAN P. O. Box 2500 Clarence E. Lockett & CLEAR, CODMAN, CODMAN HAKIM, CORDIS, Jersey City, NJ 07303-2500 CROSSFLEX, CROWN, 1-DAYACUVUE, DEPUY, DERMABOND, Corporate Controller DERMATOP, DIFFUSER-TIP, DURAGESIC, DUROGESIC, (800) 328-9033 Willard D. Nielsen ETHICON, ETHICON ENDO-SURGERY, ENDOPATH, EPREX, Internet: (FCTC Home Page) ERGAMISOL, FEMRX, FIBRACOL, FLOXIN, GREITER, http://www.FCTC.com Vice President, Public Affairs GYNECARE, INNOTECH, JANSSEN, JANSSEN-CILAG, JOHNSON & JOHNSON, JOHNSON’S, JOHNSON’S pH5.5, E-mail address: [email protected] John A. Papa IMODIUM, IMODIUM A-D, INDIGO, LACTAID, LASEROPTIC, Dividend Reinvestment Plan Treasurer LCS, LEUSTATIN, LIFESCAN, MAMMOTOME, MCNEIL, The Plan allows for full or partial dividend MINI CROWN, MITEK, MONISTAT, MOTILIUM, MOTRIN, Michael H. Ullmann MYLANTA, NATUSAN, NEUTROGENA, NICOTROL, NINJA, reinvestment, and additional monthly cash Secretary, NITINOL, NORAMCO, o.b., OKT, ORTHO, ORTHO BIOTECH, investments up to $50,000 per year, in Assistant General Counsel ORTHO-CLINICAL DIAGNOSTICS, ORTHOCLONE, Johnson & Johnson stock without brokerage ORTHO DERMATOLOGICAL, ORTHO-MCNEIL, ORTHO commissions or service charges on stock James R. Utaski NOVUM, ORTHO TRI-CYCLEN, PANACRYL, PANALOK, purchases. If you are interested in joining the PENATEN, PEPCID AC, PERSONAL PRODUCTS Vice President, Business Development COMPANY, PIZ BUIN, POWERBRUSH, PREPULSID, Plan and need an authorization form and/or more background information, please call William C. Weldon PREVACARE, PROCRIT, PROLENE, PROPULSID, PUPIL INTELLIGENT, PURPOSE, REACH, REGRANEX, REMINYL, First Chicago Trust Company, a Division of Worldwide Chairman, RENOVA, RETIN-AMICRO, RISPERDAL, RoC, SHOWER EquiServe, at (800) 328-9033. Pharmaceuticals Group TO SHOWER, SIGNATURE OF QUALITY, S.M.A.R.T., Executive Committee SPECTAZOLE, SPLENDA, SPORANOX, STAYFREE, STERRAD, Hearing Impaired SUNDOWN, SURE & NATURAL, SURESTEP, SUREVUE, Shareowners who have inquiries regarding SUTURE ASSISTANT, TERAZOL, THERAKOS, stock-related matters can communicate Company Group Chairmen THERMACHOICE, TIELLE, TOPAMAX, TRANSFENTA, directly with First Chicago Trust Company, a Robert W. Croce TYLENOL, ULTRACISION, ULTRACLEAN, ULTRAM, VISTAKON, VITROS, VITROS ECi. Division of EquiServe, via a telecommunica- William D. Dearstyne, Jr. tions device (TDD). The telephone number The following trademarks of other companies Colleen A. Goggins for this service is (201) 222-4955. Carlos A. Gottschalk also appear in this report: Walter Hak ACIPHEX and PARIET (Eisai Co., Ltd.), ADVASEAL World Wide Web Site (Focal, Inc.), AVEENO (S.C. Johnson & Son, Inc.), BENECOL http://www.jnj.com James A. Lent (Raisio Group), LEVAQUIN (Daiichi Pharmaceutical Co.), THERASEED (Theragenics Corporation). © Johnson & Johnson 1999 Our Credo

We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit.

We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical.

We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens – support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.

Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return.

One Johnson & Johnson Plaza, New Brunswick, New Jersey 08933

Description of the Company

Johnson & Johnson has $23.7 billion in sales and is the world's most comprehensive and broadly-based manufacturer of health care products, as well as a provider of related services, for the consumer, pharmaceutical and professional markets. Johnson & Johnson has 93,100 employees and 188 operating companies in 52 countries around the world, selling products in more than 175 countries.