2005 Annual Report Our Credo JOHNSON & 2005 We believe our first responsibility is to the doctors, nurses and patients, to mothers and Reaching more 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. ANNU people AL REPORT 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 Serving more 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. health needs 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 FINANCIAL HIGHLIGHTS % Change (Dollars in Millions Except Per Share Figures) 2005 2004 2003 2005 2004 Sales to customers $50,514 47,348 41,862 6.7% 13.1 Net earnings 10,411 8,509 7,197 22.4 18.2 Percent return on average shareholders’ equity 29.9 29.0 29.0 — — Diluted net earnings per share $ 3.46 2.84 2.40 21.8% 18.3 Cash dividends paid per share 1.275 1.095 0.925 16.4 18.4 Market price (year-end close) 60.10 63.42 50.62 (5.2) 25.3 Net Sales Diluted Earnings Per Share Dividends Paid Per Share (in billions of dollars) (in dollars) (in dollars) 50 4.0 1.25 40 1.00 3.0 30 0.75 2.0 20 0.50 1.0 10 0.25 0 01 02 03 04 05 0 01 02 03 04 05 0 01 02 03 04 05 ABOUT THE COMPANY TABLE OF CONTENTS Johnson & Johnson achieved $50.5 billion in sales and, Letter to Shareholders ..................................1 through its operating companies, is the world’s most Features ........................................... 5 comprehensive and broadly based manufacturer of health Resources ......................................... 23 care products, as well as a provider of related services, for the consumer, pharmaceutical, and medical devices Board of Directors ....................................24 and diagnostics markets. The more than 230 Johnson Committees of the Board ...............................25 & Johnson operating companies employ approximately Corporate Officers and Company Group Chairmen ...........26 115,600 men and women in 57 countries and sell products Corporate Governance and Management’s Responsibility ......27 throughout the world. Management’s Discussion and Analysis ...................28 Consolidated Financial Statements .......................39 ON THE COVER Notes to Consolidated Financial Statements ................43 For patients with conditions from coronary artery disease Management’s Report on Internal Control over to bipolar disorder, and consumers looking for advanced Financial Reporting ...................................64 science in skin care, Johnson & Johnson companies’ Report of Independent Registered Public Accounting Firm .....65 products are reaching more people and serving more health Summary of Operations and Statistical Data 1995-2005 .......66 needs around the world. Inside, read the stories of people Reconciliation of Non-GAAP Measures ....................67 whose lives are changed for the better by our products. Principal Global Businesses .............................68 Worldwide Family of Companies .........................73 Corporate and Shareholder Information ...................77 JOHNSON & JOHNSON 2005 ANNUAL REPORT TO OUR SHAREHOLDERS Johnson & Johnson achieved record financial results stories in this year’s annual report relate. Each of our in 2005 and made further progress in preparing businesses plays an important role in this regard. Let me for future growth. Worldwide sales grew to a record provide a few examples. $50.5 billion, a growth rate of nearly 7 percent, The Medical Devices and Diagnostics segment per- with operational growth of 6 percent and a positive formed exceptionally well this past year, with strong currency impact of 1 percent. growth in both revenue and profitability. The segment’s Adjusted net earnings for the year were also at strength was broadly based, with five of the seven record levels, with net income growing at 13.3 percent Medical Devices and Diagnostics franchises growing to $10.5 billion and diluted net earnings per share sales at double-digit rates. The businesses in the segment increasing 12.9 percent to $3.50(1). aspire to a compelling vision: Restoring the joys of life An improvement in mix toward higher margin prod- for patients by establishing standards of care. ucts, productivity increases driven by cost containment As we have pursued this vision over the last decade, efforts, and positive interest and other income all helped our Medical Devices and Diagnostics businesses have drive impressive earnings growth. harnessed the power of science and technology to enhance Our cash flow from operations in 2005 continued to the diagnosis and treatment of disease across a broad be strong at $11.9 billion. In light of this, we increased range of medical and surgical specialties. our quarterly dividend to shareholders for the 43rd consecutive year, this year by nearly 16 percent to $.33. Even with this significant increase, we ended the year with a very strong net cash position of $13.5 billion, providing us the resources to continue important business building investments. A year ago I reported to you our excitement about the prospect of broadening our presence in cardiovascular devices through the acquisition of Guidant Corporation. We extended considerable effort throughout the year to conclude this transaction. Unfortunately, a combination of adverse developments in Guidant’s business and competition for the asset forced the price to a point where we concluded it was no longer in the best interest of our shareholders to pursue this business opportunity. Nonetheless, we remain committed to strengthening our business in this important therapeutic category. Elsewhere, aggressive investment in the future con- tinued unabated. We were successful in advancing our future growth through a series of smaller but nonetheless important acquisitions described later in this letter. And, across the business we invested $6.3 billion in research and development, a $1.1 billion increase, or more than 21 percent, above our 2004 investment. The men and women of Johnson & Johnson are to be recognized for their strong performance this past year. They remain the engine that drives our business forward. They make it possible for Johnson & Johnson to continue to touch people’s lives in a more meaningful way, as the William C. Weldon Chairman, Board of Directors, and Chief Executive Officer TO OUR SHAREHOLDERS PAGE 1 For example, DePuy, the world’s leader in joint Key business building acquisitions in the Medical reconstruction and other important orthopaedic areas, is Devices and Diagnostics segment will continue to be focusing on less invasive and more durable, motion-saving an important source of future growth. Last June, we solutions. iOrthopaedics, DePuy’s computer-assisted acquired Closure Medical Corporation, a global leader navigation platform, affords greater surgical precision and in biomaterial-based medical devices, and in January, improved outcomes in minimally invasive procedures. we added Hand Innovations LLC, bringing leading In interventional cardiology, Cordis’ innovative product technology in the fastest-growing segment of the global solutions are addressing cardiovascular disease, the world’s extremities market. Just last month, we concluded the leading cause of death. CYPHER® Sirolimus-Eluting Stent acquisition of Animas Corporation, an insulin delivery is now the world’s market leader, building on the most company that will operate as part of our successful credible library of clinical evidence on outcomes and LifeScan business and will strengthen our ability to safety to win preference among interventional cardiologists. further advance the treatment of diabetes. Other examples like VICRYL® Plus, the world’s first For our Pharmaceutical segment, 2005 was a challeng- and only antibacterial suture, and Veridex, our diagnostic ing year, with growth well below historical levels. Growth business focused on cancer cell detection at earlier was affected by the impact of generic competition for stages of disease, demonstrate