Q4 2007 Johnson & Johnson Earnings Conference Call on Jan. 22. 2008 / 8:30AM

FINAL TRANSCRIPT

JNJ - Q4 2007 Johnson & Johnson Earnings Conference Call

Event Date/Time: Jan. 22. 2008 / 8:30AM ET

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CORPORATE PARTICIPANTS Louise Mehrotra Johnson & Johnson - VP IR Bill Weldon Johnson & Johnson - Chairman, CEO Dominic Caruso Johnson & Johnson - VP Finance, CFO

CONFERENCE CALL PARTICIPANTS Rick Wise Bear Stearns - Analyst Mike Weinstein JPMorgan - Analyst Larry Biegelsen Wachovia - Analyst Bob Hopkins Lehman Brothers - Analyst Catherine Arnold Credit Suisse - Analyst Bruce Nudell UBS - Analyst Glenn Reicin Morgan Stanley - Analyst

PRESENTATION Louise Mehrotra - Johnson & Johnson - VP IR Good morning and welcome. I'm Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson, and it is my pleasure this morning to review our business results for the fourth quarter of 2007.

Joining me on the podium today are our host for today's meeting, Bill Weldon, Chairman of the Board of Directors and Chief Executive Officer of Johnson & Johnson; and Dominic Caruso, Vice President of Finance and Chief Financial Officer. A few logistics before we get into the details.

The audio and visuals from this presentation are being made available to a broader audience via a webcast accessible through the Investor Relations section of the Johnson & Johnson website. I will begin by briefly reviewing highlights for the fourth quarter and full year for the Corporation and our three business segments. Following my remarks, Bill Weldon will comment on the 2007 results and provide a strategic outlook for 2008 and beyond. At the completion of Bill's remarks, Dominic Caruso will provide some additional commentary on the 2007 financial results and guidance for 2008.

We will then open the floor to your questions. We will conclude our formal presentation at approximately 9.30, and following Q&A and some final remarks by Bill, we will conclude the meeting around 10 AM.

Distributed with the copy of the press release that you just received is a schedule with actual revenues for major products and our business franchises. For the listening audience, these are available on the Johnson & Johnson website, as is a copy of the press release.

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Before I get into the results, let me remind you that some of the statements made during this meeting may be considered forward-looking statements. The 10-K for the fiscal year 2006 identifies certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made this morning. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The 10-K is available through the Company or online.

Last item, during the call non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. These measures are reconciled to the GAAP measures and are available on the Johnson & Johnson website.

Now I would like to review our results for the fourth quarter of 2007. If you would refer to your copy of the press release, let's begin with the schedule titled Supplementary Sales Data by Segment of Business.

Worldwide sales to customers were a record $16 billion for the fourth quarter of 2007, up 16.6% as compared to the fourth quarter of 2006. Our operational growth was 11.9% and currency had a positive impact of 4.7 points. The sales results include the net impact of the acquisition of Pfizer Consumer Healthcare, or PCH, which was completed in December 2006. On a pro forma basis, including the net impact of the PCH acquisition in both periods, worldwide sales increased approximately 4.6% operationally.

If you turn to the schedule showing sales by geographic area, you'll see that we achieved growth of 9.1% in the U.S. In regions outside the U.S. our operational growth was 15.3%, while the effective currency exchange rates positively impacted our reported results by 10.5 points.

The Western Hemisphere, excluding the U.S., grew 26.1% on an operational basis, Europe grew 13.2%, while the Asia-Pacific African region grew by 13.6%. The results in all regions have been positively impacted by the acquisition of PCH.

If you will now turn to the Consolidated Statement of Earnings, net earnings on a reported basis were $2.4 billion, while earnings per share were $0.82. This compares to $2.2 billion and $0.74 in the same period in 2006.

Please direct your attention to the box section of the schedule where we have provided adjusted earnings information. As referenced in the footnotes, the fourth quarter 2007 results were adjusted to exclude a onetime after-tax non-cash charge of $441 million for the write-down of the intangible asset related to NATRECOR, and a onetime gain of $267 million associated with the restructuring of certain international subsidiaries.

The fourth quarter 2006 results were adjusted to exclude the after-tax impact of an in-process research and development charge of $217 million associated with the acquisition of Pfizer Consumer Healthcare. On an adjusted basis, fourth quarter 2007 net earnings of $2.5 billion and earnings per share of $0.88 were up 6.8% and 8.6%, respectively.

I would now like to make some additional comments relative to the components leading to the adjusted earnings before we move onto the segment highlights. For the fourth quarter of 2007 cost of goods sold at 29.7% was up 40 basis points as compared to the same period in 2006. The fourth quarter results included the addition of the PCH business to our mix of businesses, increasing cost of goods sold as a percent of sales by an estimated 80 basis points. This increase was partially offset by cost containment initiatives in our MD&D businesses.

Selling, marketing and administrative expenses at 35.8% of sales were up 150 basis points as compared to 2006. The addition of the PCH business to our mix of businesses increased these expenses by an estimated 100 basis points. Operating costs associated with the restructuring also contributed to the increase in these expenses.

Our investment in research and development as a percent of sales was 14.6%, 40 basis points less than the fourth quarter of 2006. The addition of PCH to our mix of businesses reduced R&D as a percent of sales by approximately 60 basis points, partially offset by increases in our Pharmaceutical R&D investment.

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Interest income, net of interest expense of $35 million, was down $160 million compared to the fourth quarter of 2006 due to a lower average cash balance and a higher average debt position. Other expense net of other income was $877 million in the fourth quarter of 2007, compared to $100 million of net other expense in the same period last year.

The before tax charge of $678 million associated with the previously announced write-down of the intangible assets related to NATRECOR and charges related to the renegotiation of certain contracts have been included in this category.

With regard to taxes, please direct your attention to the effective tax rate excluding special charges shown in the box section of the schedule. In the fourth quarter of 2007 taxes were 15.3% as compared to the prior year rate of 21.2%. Dominic well provide further comments on both taxes and other income expense during his remarks.

Looking at year-to-date data, consolidated sales to customers for the 12 months of 2007 were $61.1 billion, an increase of 14.6% as compared to the same period a year ago. On a year-to-date basis operational growth was 11.5% and currency had a positive impact of 3.1 points.

On the Consolidated Statement of year-to-date earnings I would first like to draw your attention to the box section. In 2007 the after-tax impact of charges for in-process research and development, the costs associated with the restructuring program, the non-cash charge related to the NATRECOR write-down, and the onetime gain associated with the restructuring of certain international subsidiaries have been excluded.

In 2006 after-tax amounts for both in-process research and development and the Guidant acquisition termination fee has been excluded. With these adjustments, net earnings for the 12 months of 2007 were $12.1 billion, or $4.15 per share, up 8.6% and 10.4%, respectively, as compared to the same period in 2006.

Now turning to business segment highlights, please refer to the schedule showing reported sales versus the prior period by product or franchise. I will begin with the Consumer segment. Worldwide Consumer segment sales of $3.8 billion increased 48.5% as compared to the fourth quarter of 2006. Operational growth was 42.5%, while currency contributed 6%. U.S. sales were up 37.6%, while international sales grew 46.8% on an operational basis.

On a pro forma basis, including the net impact of the acquisition of Pfizer Consumer Healthcare in both periods, sales were up an estimated 4% on an operational basis. For the fourth quarter of 2007 sales for the over-the-counter Pharmaceuticals and Nutritionals increased 83% on an operational basis compared to the same period in 2006. Sales in the U.S. were up 37%, while sales outside the U.S. were up 191% operationally.

On a pro forma basis, including the net impact of the PCH acquisition in both periods, estimated operational sales growth was approximately 6%. ROGAINE and VISINE both achieved strong double-digit growth, while analgesics and SPLENDA made solid contributions to the quarter.

Partially offsetting the growth in the quarter was the voluntary withdrawal of certain infant cough and cold products from the market.

Our skincare business achieved operational sales growth of 9% in the fourth quarter of 2007, driven by the strong U.S. sales growth of 15%. Sales outside the U.S. grew 5% on an operational basis. Results were driven by the addition of the PCH products, the double-digit growth of Johnson's adults' Clean and Clear, and [Vondone] productlines, complemented by the solid performance of Neutrogena. On a pro forma basis, including the net impact of the PCH acquisition in both periods, operational sales growth was approximately 4%.

Baby and kids care products achieved operational growth of 8% when compared to the fourth quarter of 2006, driven by the addition of the PCH products and the strong performance of Lights haircare and Baby-Center.com. Sales growth in the U.S. was

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14%, while sales outside the U.S. grew 7% on an operational basis. On a pro forma basis, including the net impact of the PCH acquisition in both periods, operational sales growth was approximately 7%.

Women's health had an operational increase of 2%, with the U.S. up 6% and sales outside the U.S. flat on an operational basis. On a pro forma basis, including the net impact of the PCH acquisition in both periods, sales declined on operational basis by approximately 2% due to increased competitive pressure.

On a pro forma basis, including the net impact of the PCH acquisition in both periods, operational sales growth for the oral care business was flat. Double-digit growth for LISTERINE mouthwash was offset by a sales decline of Rembrandt products and REACH toothbrushes.

That completes our review of the Consumer segment, and I will now review highlights for the Pharmaceuticals segment. Worldwide net sales for the fourth quarter of $6.4 billion were up 7.5% compared to the same period last year. Operational growth was 3.7%, while currency contributed 3.8%. Reported sales in the U.S. increased 2%, while sales outside the U.S. increased on an operational basis by 6.8%.

Our results continued to be impacted by generic competition on some of our products, namely DURAGESIC, DITROPAN, SPORANOX, and RISPERDAL ORAL in certain countries outside the U.S. The combined effects of this generic competition has reduced the fourth quarter worldwide Pharmaceutical operational growth rate by approximately 1.5 percentage points, with similar impact both in and outside the U.S. Additionally, we saw a retraction in the U.S. market for the ESAs following the ODAC discussions, the label changes, and changes to reimbursement.

The resulting decline in PROCRIT sales impacted the Worldwide Pharmaceutical operational sales growth by approximately 4 points. Excluding both the impact of generics and declining PROCRIT sales, the underlying operational growth for the Pharmaceutical products was approximately 9%.

PROCRIT/EPREX had a combined operational decline of 25%, with PROCRIT down 33% and EPREX down 12% on an operational basis. New competition and label reviews have contributed to the lower sales results for EPREX. PROCRIT results have been impacted by a decline in the market versus the fourth quarter of 2006 estimated at approximately 35%, partially offset by an increase in overall market share. PROCRIT aggregate share across all markets was approximately 45% in the fourth quarter of 2007, up 2 points versus the fourth quarter of 2006. Increased share in the hospital and retail markets was partially offset by lower share in oncology clinics due to our competitors' anticompetitive contacting strategy.

Sales of LEVAQUIN were down 2% operationally when compared to the same period a year ago, due to lower sales of LEVAQUIN IV due to increased competitive pressure.

Sales of hormonal contraceptives were down 15% operationally when compared to the same period a year ago due to lower sales of both ORTHO EVRA and the oral contraceptive.

Let me now move on to discuss some of our growth drivers. Our antipsychotic franchise, which includes RISPERDAL ORAL, RISPERDAL CONSTA and INVEGA, had operational growth of 11% when compared to the same period a year ago. U.S. sales increased 15%, while sales outside the U.S. were up 5%. Sales results outside the U.S. were impacted by generic competition for RISPERDAL ORAL in certain markets. The global success of RISPERDAL CONSTA continued to contribute strongly to the fourth quarter with sales of approximately $295 million, up over 20% on an operational basis.

REMICADE, a biologic approved for the treatment of a number of immune-mediated inflammatory diseases, grew by 16% when compared to the fourth quarter of 2006. Sales in the U.S. increased 12%.

Market growth in the anti-TNF category continues to be strong, and the competitive dynamics have intensified with the new entrance and the expansion of labels for existing competitors.

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International sales were up 31% due primarily to increased sales to our partners outside the U.S.

Sales of TOPAMAX, which is approved for the treatment of epilepsy and migraine prophylaxis, increased operationally by 21%. Sales growth in the U.S. was 25% due primarily to continued success in the migraine category. Sales outside the U.S. grew by 6% on an operational basis, with strong growth seen in many markets, partially offset by generic entries in certain other markets.

ACIPHEX as it is known in the US and PARIET outside the U.S. is a proton pump inhibitor that we co-market with Eisai. Overall operational growth was 3%. Sales in the US grew 6%, with market growth partially offset by lower market share. Operational sales growth outside the U.S. was flat due to increased competition from generic PPIs in certain regions, partially offset by strong growth in other regions.

CONCERTA for attention deficit hyperactivity disorder grew operationally by 10% in the fourth quarter as compared to the same period last year. Sales in the U.S. were up 6% due to market growth, partially offset by lower market share. Sales outside the U.S. grew 27% on an operational basis with very strong growth in all regions.

As a brief update on the pipeline, in the quarter we made significant progress in advancing our near-term pipeline, submitting three new molecular entities for approval, paliperidone palmitate for schizophrenia in the U.S., Ustekinumab for psoriasis in both the U.S. and Europe, and Dapoxetine for premature ejaculation in several countries in Europe.

During the quarter based on preliminary review of the Phase IIb data, we have removed MBX-102 from our list of potential filings between now and 2010. Final analyses are being undertaken, which when complete, will be used to decide on the next steps with the program.

And just last week we received FDA approval for INTELENCE, or TMC125, in HIV, and we expect to launch in the next few days. Let me now turn to the Medical Devices and Diagnostic segment.

Worldwide Medical Devices and Diagnostic segment sales of $5.8 billion grew 6.2% operationally as compared to the same period in 2006, while currency contributed 5.1 points to bring total reported growth to 11.3%. Sales in the U.S. grew 6.8%, while sales outside the U.S. increased on an operational basis by 5.6%.

Sales, excluding the impact of lower sales of drug eluting stents, grew nearly 11% operationally with healthy growth seen across the other franchises.

Now turning to the franchises, starting with Cordis. Cordis sales declined operationally by 14% in the fourth quarter due to lower sales of CYPHER, our sirolimus-eluting stent, partially offset by strong growth in both our Biosense Webster business and our neurovascular business. U.S. sales were down 15% and sales outside the U.S. declined 12% on an operational basis.

Worldwide CYPHER sales of approximately $415 million decreased 31% operationally. CYPHER sales in the U.S. declined 32% to approximately $119 million. A reduction in PCI procedures, a lower penetration rate of drug-eluting stents and lower prices resulted in an estimated market decline in the U.S. of over 30% versus the fourth quarter of 2006. Estimated share in the U.S. of 45% was up 2 points sequentially and down 1 point from the fourth quarter of 2006.

Sales outside the U.S. of approximately $225 million declined 30% operationally. The international market decline versus the fourth quarter of 2006 was estimated at 5%, while the estimated market share in the quarter of 39% was up 1 point on a sequential basis and down from 51% in the fourth quarter of 2006. Increased competition has impacted the share outside the U.S. CYPHER estimated worldwide share for the quarter was 42%, up 2 points sequentially and down 6 points from the fourth quarter of 2006.

Now turning to growth drivers. Within the Cordis franchise, both the Biosense Webster business, our electrophysiology business and our neurovascular business achieved strong operational growth in the quarter. Biosense Webster grew 25% operationally,

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Our DePuy franchises achieved operational growth of 9% when compared to the same period in 2006, with the U.S. growing 3% and the business outside the U.S. growing by 19% operationally.

Lower sales of trauma products to an international distributor have impacted the growth in the U.S. Both our worldwide hip and sports medicine businesses and our knee business outside the U.S. achieved double-digit operational growth. Based on projected market results, we obtained the number one position in the U.S. hip business in 2007.

ETHICON Endo-Surgery achieved operational growth of 13% in the fourth quarter of 2007, with U.S. up 14% and sales outside the U.S. growing 11% operationally. The Endo-Cutter, a key product in performing bariatric procedures, grew 16% operationally in the quarter and was a major contributor to growth.

Strong double-digit results were achieved in the energy business due to the continued success with the HARMONIC SCALPEL, up over 20% operationally in the quarter. The Advanced Sterilization Products achieved strong double-digit growth due to a combination of increased equipment installations and an increased demand for consumables due to the expanding installation base.

ETHICON worldwide sales grew operationally by 7%, with the U.S. up 14% and sales outside the U.S. up 4% on an operational basis. The results for the U.S. business were driven by the strong performance across all major product lines, sutures, hemostasis, women's health, biosurgericals and meshes.

Our vision care franchise achieved operational sales growth of 16%, with the sales in the U.S. up 21% and sales outside the U.S. up 13% operationally. Operational growth for the franchise was driven by the global success of ACUVUE OASYS, ACUVUE Moist, and ACUVUE Advanced for stigmatism. Additionally outside the U.S., 1-DAY ACUVUE DEFINE and ACUVUE Advanced made strong contributions to the growth in the quarter.

The LifeScan franchise achieved operational growth of 13% in the fourth quarter of 2007. U.S. sales increased 17%, reflecting the continued success the Ultra Mini and Ultra Strips, complemented by the growth of the Animas business. The Animas business achieved sales growth of nearly 40% in the quarter due to the launch of the 2020 pump earlier this year. Sales outside the U.S. increased 9% on an operational basis due to the strong results of the Ultra products.

Lastly, in the Medical Devices and Diagnostic segment, Ortho-Clinical Diagnostics sales grew on an operational 8% in the fourth quarter, with the U.S. sales up 16%. Sales outside the U.S. were flat on an operational basis impacted by the softness in clinical labs sales. The results in the U.S. were driven by the rapid uptake of the Chagas screening assay and strong results achieved with the immunodiagnostics and clinical chemistry products.

That completes the highlights for the Medical Devices and Diagnostic segment and concludes the segment highlights for Johnson & Johnson's fourth quarter of 2007. It is now my pleasure to introduce Bill Weldon, Chairman and Chief Executive Officer of Johnson & Johnson.

Bill Weldon - Johnson & Johnson - Chairman, CEO Thank you all for being here today. 2007 has been a very successful year. It was filled with opportunity, challenge and change for Johnson & Johnson. It has been a year that demonstrated quite clearly hour our broad base in health care businesses can absorb short-term pressures and help us build on our track record of growth. It has been a year in which we grew sales from our existing portfolio and demonstrated significant progress in our pipeline of new drugs, devices, diagnostics and consumer

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I would like to begin by reviewing our 2007 business and financial highlights and walk you through our segment results for the year. Then in the remainder of my presentation I will focus on our strategic outlook for 2008 and beyond, and describe for you how we're building on our foundation of growth and what priorities are critical to our continued success.

In 2007 we delivered strong results across our broad base of businesses and exceeded expectations. Our total reported sales increased 14.6% with operational sales up 11.5%, and pro forma sales up 4.2%. Adjusted earnings per share increased 10.4%. We made significant progress across our businesses, and I'm particularly proud that we achieved these results despite having to work through one of the more difficult years in Johnson & Johnson's recent history.

During the year we saw significant sales declines in two of our major products, CYPHER and PROCRIT, due to major market declines for drug-eluting stents and erythropoietin-stimulating agents. And in our Consumer segment we managed the complex integration of Pfizer Consumer Healthcare, the largest acquisition in our history.

2007 was the year when we took thoughtful, disciplined actions to deliver our commitments and to build an even stronger growth platform for the long term. We initiated major cost structure improvements in parts of the business, began a $10 billion share buyback, and announced organizational changes to sharpen our focus on growth.

As we begin 2008 we're moving forward with confidence in our plans, products, pipeline and people. We're focused on growth and execution. As you can see here our businesses, coupled with strong financial discipline, continued to deliver strong results and solid sales growth, strong earnings growth, and adjusted double-digit EPS growth that was faster than earnings due to our share repurchase program. We also generated a strong free cash flow in excess of $12 billion.

To add some context to these results, I would like to remind you of the expectations we set for this meeting last January. We said we expected operational sales in 2007 to increase 11.5 to 12.5%, and we delivered 11.5%. This is a remarkable achievement given the fact that we saw double-digit declines in sales for two of our major products. In January we projected an adjusted EPS range of $3.88 to $3.93. With our disciplined focus on execution and cost management, we raised our guidance twice during the year, and at the end of the year we produced a 10.4% increase in adjusted EPS to $4.15, significantly exceeding original expectations.

With the addition of PCH this year the three segments of our portfolio are more balanced. Pharmaceuticals generated approximately $25 billion in revenues, MD&D generated approximately $22 billion, and Consumer, $14.5 billion for total sales for just over $61 billion. With the addition of PCH our Consumer business grew from 18% of our total revenue in 2006 to 24% in 2007. I will get into more details on these segments in a few minutes.

Operating profit for 2007 was $15.9 billion and 26% to sales. That compares to 2006 on a pro forma basis of $14.6 billion and 25.7% to sales. This demonstrates our continuing ability to leverage operating profit.

We also took several actions to streamline and strengthen our business. We announced plans in July to generate $1.3 billion to $1.6 billion in cost savings for 2008 through a number of initiatives in our Pharmaceutical segment and Cordis business. We are executing against those plans and on track to achieve those savings this year.

These actions were designed to address near-term market conditions and upcoming patent expirations, while making permanent improvements to our overall cost structure. We continued investments in our R&D pipeline and in-line product expansions, which are critical to our continued growth.

Finally, we reorganized to better attain growth in the spaces where our businesses intersect, and also to explore new spaces in health care where we do not compete today. We established the Office of Strategy and Growth that is being led by Nick Valeriani,

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© 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. FINAL TRANSCRIPT Jan. 22. 2008 / 8:30AM, JNJ - Q4 2007 Johnson & Johnson Earnings Conference Call who spoke with you in October. We also established two new business operating groups within our MD&D segment, a surgical care group that will focus on technologies and solutions to enhance patient care in a surgical setting, and a comprehensive care group that will create portfolios to address the world's most chronic and pervasive conditions. Sheri McCoy and Don Casey are respectively leading these groups. I will speak in greater detail about the charterers of these organizations when I discuss our strategic outlook.

Let me now complete our look at 2007 with a review of our segment highlights. Our Consumer businesses delivered healthy growth in the midst of integrating the largest acquisition in our Company's history. The integration of PCH remains on track to deliver our synergy targets through 2009, and we expect the accretive impact of the acquisition on a GAAP basis will be realized in 2009, one full year ahead of our original plan.

The Consumer segment saw operational sales growth of 44.2% and pro forma operational sales growth of 4.6% when the impact of PCH is reflected for both periods. Pro forma growth was ahead of estimated market growth rates.

We launched approximately 600 new products and line extensions in the year, including such launches as Listerine Lightning Quick Dissolving Strips, AVEENO POSITIVELY AGELESS, and new products in the TYLENOL Rapid Release line.

We also saw strong momentum and double-digit growth in key emerging markets. This slide shows you the breakdown in sales and operational growth rates across our Consumer franchises. As you can see, we saw continuing growth across all of our major franchises on an operational basis. And from this slide -- and this slide shows you the breakdown on pro forma sales and operational growth rates across our Consumer franchises. We exceeded projected global category growth rates in four of five major franchises.

Our Consumer business continues to differentiate itself and build its brands on the foundation of science-based innovation. ZYRTEC, the number one prescribed allergy treatment in the United States, gained FDA approval for over-the-counter sales and will be on store shelves this week. Ongoing product introductions and geographic expansion of major brands, such as newly acquired Listerine and Nicorette, along with our key skincare brands, will continue to be growth drivers.

And we will continue to focus on growth in emerging markets. This effort will be bolstered by our opening last month of a new consumer R&D center in Shanghai, which is dedicated to developing products for emerging markets around the world.

In Pharmaceuticals nine products had 2007 sales of over $1 billion, including two that reached this milestone for the first time, RISPERDAL CONSTA and CONCERTA. Many of our $1 billion plus products delivered high single digit or double-digit growth, including REMICADE, TOPAMAX, RISPERDAL CONSTA and CONCERTA. And the cancer treatment VELCADE exceeded the $500 billion mark for the first time. And we built on strong competitive positions across seven therapeutic areas, with 70% of our [2000 end] sales coming from products holding the number one or number two market positions.

This breadth and depth enabled us to offset slower sales on PROCRIT and the impact of generic competition. To advance our future growth we also delivered on the pipeline targets we had established for the period of 2005 to 2007 and saw continued progress against new targets that we set for 2010.

This next slide provides you with greater detail on the sales and operational growth rates across our major pharmaceutical products. As you can see, the Pharm segment on a whole grew by 4.3%. Generic competition on several of our products in several markets around the world negatively impacted growth by approximately 2.5 percentage points, while concerns in the U.S. about the appropriate use of ESAs had a similar negative impact. Excluding these impacts, we saw operational sales growth of almost 10%.

We made excellent progress in advancing our late stage pipeline in 2007. We launched the antibacterial DORIBAX in the U.S. in 2007. In this month in Europe we launched IONSYS, the first needle-free patient control system for post-operative pain. We also received approval in the U.S. just last week for the HIV medicine TMC125, which we will market as INTELENCE. And we have

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© 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. FINAL TRANSCRIPT Jan. 22. 2008 / 8:30AM, JNJ - Q4 2007 Johnson & Johnson Earnings Conference Call four medicines currently filed, the antibacterial ceftobiprole in the U.S. and Europe; the long-acting injectable paliperidone palmitate for schizophrenia also in the U.S.; Ustekinumab, or CNTO 1275 for psoriasis in the U.S. and Europe; and Dapoxetine for premature ejaculation in several countries in Europe.

We also made important supplemental filings on a few of our newer products, including PREZISTA in the U.S. for treatment-naive HIV patients, CONCERTA in the U.S. for adult ADHD, and VELCADE in Europe for front-line multiple myeloma. Our partner, Millennium Pharmaceuticals filed VELCADE for this indication in the U.S. as well.

As we told you in June, we expect to make 7 to 10 filings between 2008 and the end of 2010, and that remains our target. In fact, we expect to make our first filing of 2008 later this week with a pain medication, Tapentadol, in the U.S. Many of these compounds have the potential to be first or best-in-class treatments.

Our Medical Devices and Diagnostics franchises comprise the world's largest technology business with capacity to treat some of the world's most pervasive conditions more comprehensively than any other company. In a challenging year for Cordis, the Medical Devices and Diagnostics business, excluding drug-eluting stents, grew nearly 10% operationally. We also enjoyed strong competitive positions across our diverse businesses, with more than 80% of 2007 sales coming from businesses in the number one or number two market positions.

This next slide shows you the breakdown in sales and operational growth rates across our MD&D franchises. Our vision care business passed the $2 billion milestone for the first time. In the Cordis franchise we saw double-digit growth in our Biosense Webster and neurovascular businesses. We had a number of major approvals and launches in 2007, including the REALIZE adjustable gastric band for the surgical treatment of morbid obesity; Animas 2020, the smallest full-featured insulin pump available on the market; and GENESEARCH Breast Lymph Node Assay, a molecular diagnostic to detect the spread of breast cancer to the lymph nodes while a patient is undergoing initial surgery. Last month, GENESEARCH was cited by Time Magazine as one of the top ten medical breakthroughs of 2007.

We are well-positioned going into 2008 with a robust pipeline and strategic development programs in orthopedics, biosurgicals, bariatric surgery, vision care, and the other major categories. The Medical Devices and Diagnostics development work we discussed with you in October continues to progress nicely. I'm really proud of what our people have accomplished in 2007 in face of significant challenges. We recognize that there are still short-term pressures, but there are even more extraordinary opportunities ahead.

Let me begin by quickly reviewing the foundations of our business before looking out to 2008 and beyond. As you know, at the foundation of Johnson & Johnson's business is our fundamental commitment to our credo, which provides a common set of values to our 119,000 employees around the globe. The four tenants of our credo provide a clear focus and mindset for how we approach every decision -- patients and customers first, then our employees, our communities, and our shareholders.

We also work under an operating model that has served us well for decades. Its four elements are being broadly based in human health care, managing our businesses for the long-term, taking a decentralized management approach, and focusing on our people and values. Our credo and operating model, along with our financial strength, discipline and talented people, have enabled us to build a track record of exceptionally consistent performance throughout the years -- 75 consecutive years of sales increases, 24 consecutive years of adjusted earnings increases, and 45 consecutive years of dividend increases, a track record that few, if any, companies can claim.

As we look to continue this performance for 2008 and beyond, our senior management team has set its sights on four basic priorities that we view as essential to this success. They are critical to serving all of our businesses and building on our position as the global leader in health care. They are also areas where we bring unique capabilities and strengths to bear, places where we have significant advantages over our competition. These priorities are winning in health care, capitalizing on convergence, accelerating growth in emerging markets, and developing leadership and talent. Let me begin by discussing winning in health care.

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Winning in health care really means two things, first, competing in the right business sectors, and second, executing well with the right people, products and pipelines in those sectors. Today we compete in three very important sectors, making up roughly 30% of the $4 trillion global health care market, as shown on this slide. As big as Johnson & Johnson is, however, we still represent only about 5% of total sales in those sectors, so there is plenty of room for us to grow our existing franchises.

As you know, our existing franchises make up the broadest base of health care businesses in the industry and are well-known leaders across our three segments. We're continuing to grow our in-line products, expand our iconic brands, and ensure that our pipelines enable us to develop sustainable leadership positions. We are also looking at areas where we may have a smaller presence to see how we can expand our positions and gain leadership positions in these areas.

We will continue to nurture new businesses within our existing family of companies and find ways to grow them into major contributors. One of many examples is the way that Ethicon Endo-Surgery and Cordis emerged out of the ETHICON business and have grown to become two of the most significant franchises in the Company. Each of those businesses grew into their own multibillion dollar franchises as their markets developed. They were given resources, dedicated management and the backing of Johnson & Johnson.

With the formation of our new Surgical Care Group we're also looking at how a more integrated view of an area like surgery could potentially drive innovation, growth and a greater focus on the patient and doctor. With surgical care we may further redefine surgery. For example, a potential new product like computer-assisted personalized sedation, or CAPS, could allow procedures in locations outside the traditional hospital setting, and it will make important screening procedures more accessible to patients. We believe this technology has the potential to transform the current standard of care and create entirely new business opportunities for us.

With the formation of our new comprehensive care group we're also looking at how we can better address chronic and pervasive diseases where we operate today, and where Johnson & Johnson's breadth and experience can make a difference for the patient. In 2005 yearly 50% of the disease burden and 60% of mortalities were due to chronic diseases. And in fact about 45% of global mortalities were attributed to four major chronic diseases, cardiovascular, cancer, diabetes and arthritis, places where Johnson & Johnson has a major presence.

In the past, however, the industry has tended to take a more sill product by product approach to these and other disease states rather than a broader view. The comprehensive care group will now take disease states and bring Johnson & Johnson's full portfolio to bear on treatment efforts. We will continue looking more holistically at our patients and the full cycle of their health, from wellness and prevention programs to disease management and treatments.

That gives you an idea of what we're doing in the 30% of health care where we compete today. But what about the opportunities in the other 70%? There is another enormous opportunity represented by this 70% or about $2.8 trillion of sales in health care sectors where we do not compete today. It is in these other areas -- health care sectors that we will be looking for entirely new platforms for growth. Throughout our history we have reached points where we look beyond where we were and discovered our next evolutionary platform. We're now at just this juncture.

Over the next five to ten years the health care industry will go through one of the most dynamic periods of change in its history, based on expected changes in demographics, technology, demand and affordability. No one is better positioned than Johnson & Johnson to deal with the changes in the health care landscape and to build successful businesses from these opportunities.

As I mentioned earlier, one way we're doing this is with our Office of Strategy and Growth, which will look specifically at the white spaces in health care, places where we envision new opportunities but have not yet ventured forth. This group will identify opportunities for growth that are distinct from those being pursued by our existing businesses. It will have responsibility for identifying where and how we build the next line of businesses that will take their place beside Consumer, Pharmaceuticals and Medical Devices and Diagnostics.

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To win in health care a highly productive pipeline is essential, whether it be in the existing 30% we compete in today or the untapped 70%. Given the robust pipelines we currently have in Pharmaceuticals, Medical Devices and Diagnostics and Consumer, we're continuing to invest resources and attention to achieve organic productivity and build our business for the long term.

In 2007 we spent $7.7 billion on R&D, an increase of almost 8%, and we continue to take measures to increase our return on that investment. For Johnson & Johnson our commitment to pipeline productivity is broader than traditional pharmaceutical R&D. It means capitalizing on the global capabilities across all our businesses in ways that competitors cannot.

We're taking advantage of our increasingly global reach to access innovation and talent around the world in markets like China and India, and to help us build faster and more efficient in R&D. For example, a growing number of patients in our clinical trials come from outside the U.S. and Western Europe. This feeds recruitment for the increasingly large-scale trials, and also provides us with data on a broader range of patient populations, something that helps us secure regulatory approvals in overseas markets, and also helps us to manage our costs.

We can also leverage the engineering prowess, materials and diagnostic capabilities, delivery and formulation expertise, and deep knowledge of patients and consumers across all our companies and geographies. By leveraging these strengths we improve our productivity, speed to market, cost structure and enhance the discoveries we can deliver to patients. This type of collaboration in our R&D operations leads right into our next business priority, and that is capitalizing on convergence.

Our approach to innovation extends beyond our pipeline and includes nurturing breakthroughs within and across our business segments. As you heard us discuss throughout 2007, our broad base offers us a unique advantage point to both identify new patient needs and advance a trend towards convergence in health care.

I would suggest that you think of convergence in two different ways. First there is a convergence of products and technologies, and second is a convergence of patient-centric solutions for health care treatments. Existing convergence models focus on bringing together products and technologies into a higher order product, much like the transformation that the CYPHER stent ushered in to become the standard of care in the treatment of coronary artery disease.

Beyond technology convergence lies solutions-based convergence, whereby we seek to view the world from the advantage point of a patient or a consumer, and address the needs of a condition from end-to-end, bundling together products and services. Let me offer some examples of convergence.

One example is in the area of heavy bleeding. Heavy uncontrolled bleeding is the leading cause of death due to injury around the world. In the U.S. alone, such trauma causes -- cases cause more than 160,000 deaths last year. Scientists from our ETHICON business have teamed up with OMRIX Biopharmaceuticals and our biologics manufacturing team at Centocor to create a remarkable patch, one that can rapidly manage the whole spectrum of bleeding. In this case, proprietary biologics are embedded on a biodegradable patch that is placed on the internal wound by a surgeon, and it forms an instant clot when it comes in contact with blood. This product, the Fibrin Patch, is in early phases of clinical testing.

The second perspective on convergence is the convergence of patient-centric solutions. When you look at health care first from a patient's point of view than the divisions that we sometimes see as health care suppliers begin to go away. The patient sees the many elements of his or her medical experience as part of one single treatment continuum. When Johnson & Johnson takes this patient-centric view of chronic and pervasive conditions, like diabetes or heart disease, it can deploy all its assets and medical knowledge to serve patients more effectively. Let's discuss diabetes as an example.

This is is seriously undertreated complex and overwhelming disease. The diabetic patient often takes as many as 16 prescription medications, deals with conditions like obesity, coronary artery disease and vision problems, and has a rolodex of care providers from physicians to educators to retailers. When you think about the need for convergence of care, consider that over 70% of patients who are hospitalized for heart attacks test positive for diabetes or prediabetes, conditions they may not have known they even have.

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Also consider the lifecycle of this disease. In an age of personalized medicine, we can use predictive technologies, such as our investigational diagnostic test for prediabetes, or new developments in biomarkers and genomics to understand the patient's likelihood to have this disease. A number of our products and medical devices might also help patients facilitate lifestyle changes or manage the disease. It might be products like SPLENDA, that contribute to a healthier low-calorie diet, or monitors from LifeScan that help monitor blood glucose, pumps from Animas that deliver insulin, or gastric bypass or joint replacement surgery that can return patients to more active lifestyles.

Within our one extraordinary Company, Johnson & Johnson, we have the know-how, proprietary technology and the capabilities of many diverse, innovative franchises to address diseases like diabetes, and to address them in a more comprehensive way than any other company in the world.

Our next business priority is accelerating growth in emerging markets. Johnson & Johnson has been a global Company since the 1920s when we established our first international affiliate in Canada and first overseas affiliate in Great Britain. We have continued since then to build businesses throughout the world, and today we have a presence in 57 countries. In the last year 47% of our revenues were from outside the United States, and we expect solid growth to continue in these markets.

Still an important part of our growth strategy is the United States, which remains the leading global health care market, and is projected to grow about 5% annually between now and 2015. However, as you can see in this slide, the most significant product growth rates are occurring in emerging markets outside the U.S., in less developed countries like Brazil, Russia, India and China, often referred to the BRIC countries. And because of their sizable growth and the substantial investments being made over the next seven years, they will soon be commensurate in size to some of the more developed, slower growing international markets today.

In emerging markets, Johnson & Johnson can continue to build on it strength. Our historical double-digit growth rates exceed the projected average growth rates for these markets, and bode well for continued success. Incredible opportunities exist in the emerging markets, not only in the BRIC countries, but in other developing markets where we can build off our existing presence, or where we can address significant unmet needs in places like Mexico, Southeast Asia and the Middle East.

We have strong and growing businesses in most of the countries. For example, in 2007 we actually celebrated our 50th year in India, and continue to grow in strong double-digit rates. Our decentralized operating model, our increasing global footprint, and our insights into the unique needs of local markets are all capabilities that will continue to serve us well.

We have several strategies for the emerging markets that are common to all of our business segments, addressing localized product and market strategies, building on our existing business strengths, and our brand equity, focusing on midtier demographics, exploiting new categories and new business models, and deploying an otherwise -- an enterprisewide approach to areas like site development and recruiting. Let me describe a couple of these in more detail.

We're developing localized product and market strategies in each region. This means developing products for special market needs with pricing appropriate to the local market. We market LifeScan OneTouch Horizon monitor in emerging markets where cost has been an impediment to people taking their blood glucose regularly. We're developing flavors, sense and consumer packaging that are more in line with local needs and tastes; for example, fruit flavors of Nicorette for smoking cessation in Asia.

As we explore medicines for some of the most prevalent illnesses in the emerging markets, illnesses like HIV, tuberculosis and hepatitis C, we also recognize the need to implement access programs that take into account the needs of patients with limited means.

The Johnson & Johnson brand and many of our subsidiary companies have recognizable brands in many emerging markets. We are leveraging this in new market segments as a global Olympic partner for the 2008 Beijing Olympic Games. This is Johnson & Johnson's first cycle as an Olympic partner, and we have seen the brand building impact in China already. With the nearly

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50% increase in top of mind awareness, this impact will serve us not only during the Beijing Olympics, but long after in building our reputation and our business.

Our final strategic area is developing leadership and talent. None of our strategies work without the right talent and expertise to drive them. At Johnson & Johnson we take great pride in the way we develop our leaders and in the commitment we make to them. As a result of these efforts, I believe we have one of the richest talent pools in the corporate world. And our strong leadership and people management programs have been recognized for years in industry surveys and media.

Our leaders are exposed to a variety of industries, company sizes and geographies throughout their careers. In many cases are executives are running companies within Johnson & Johnson that will be premier public companies on their own. Sheri and Don, the recent senior executive appointments I mentioned before, are perfect cases in point. Both ran significant businesses at Johnson & Johnson in multiple sectors before their latest assignments.

That concludes my review of the business highlights for 2007 and the strategies we're pursuing to better serve the evolving needs of our patients. To recap, 2007 was a year in which we overcame some unexpected challenges and delivered solid business results. This is all thanks to the perseverance and hard work of the many talented people across our Company.

We remain true to our credo and to the operating model that has helped drive our Company's track record of success over the long term. We remain committed to patients and our customers all around the world. We continue to feel very positive about opportunities in the health care market, about our ability to deliver useful, innovative medicines, technologies and products, and about our focus on accelerating markets and accelerating growth.

I hope you share my excitement for the future of Johnson & Johnson. And now I would like to turn it over to Dominic Caruso to take you through some financial details and others for 2008.

Dominic Caruso - Johnson & Johnson - VP Finance, CFO Good morning everyone. To wrap up our formal presentations, I would like to touch briefly on 2007, and then provide some comments for you to consider as you refine your models for 2008.

We're pleased with our solid financial results for 2007, and as Bill highlighted for you, during 2007 we positioned ourselves well for continued success in the future. Our sales results for 2007 were above the mean of the analyst expectations, as published by First Call, reflecting solid performances across many of our businesses. Our solid earnings performance demonstrates our ability to continue managing costs and improving margins. We were also able to continue investing in the future and to increase our earnings estimates as we overcame the dilutive effect of the PCH and Conor acquisitions, and offset the P&L pressures that came with the market challenges that we faced during the year.

I would like to point out some items that differ from the guidance I provided in October. First let's review our effective tax rate. As you can see from the box section of the Statement of Earnings Schedule attached to the press release, our effective tax rate was 22.1% for the full year 2007, lower than the guidance I provided in October of 23.5 to 24%. I'm happy to report that we were able to implement some tax planning strategies, as well as some adjustments resulting from the filing of our prior year tax return, and therefore improved on the rate we had anticipated for the year. This lower tax rate increased earnings per share by approximately $0.07.

Also, you'll see that other income and expense for 2007 was $534 million of expense, but this includes the write-down related to NATRECOR. Other income and expense was $144 million of income excluding this NATRECOR write-down were lower than the guidance I provided in October of income between $250 million and $300 million. This is a result of several charges we took in the fourth quarter related to contract terminations, legal matters and other nonoperating items. These additional costs had negative impact to earnings per share of approximately $0.03.

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Additionally during the fourth quarter we experienced higher costs related to our restructuring efforts. We have previously estimated that these type of costs that are not separately includable in restructuring charges would be $0.02 to $0.03 per share; however, due to the acceleration of some of these activities, these costs are now approximately $0.05 per share, or an additional negative impact to earnings of approximately $0.03. In summary, the $0.07 per share benefit achieved from the lower tax rate helped to offset the negative EPS impact of the additional costs items I mentioned, which aggregated to approximately $0.06 per share. The $0.01 remainder of the benefit from the lower tax rate and our strong operating results helped us exceed the higher end of my earnings guidance by $0.02.

Now an update on the $10 billion share repurchase program that we initiated in 2007. We began purchasing shares in August, and through the end of 2007 we have purchased $3.6 billion of our stock. This share repurchase program, along with our dividend, demonstrates our commitment to returning value to our shareholders, while allowing us the flexibility to invest in business building activities.

Now I would like to provide some comments for you to consider as you refine your models for 2008. Let's start with a discussion of cash and interest income and expense. During 2007 we continued to generate strong cash flows. In fact for 2007, as Bill pointed out earlier, we generated free cash flow, or cash flow after necessary capital expenditures, of approximately $12 billion.

At the end of 2007 we had approximately $200 million of net debt. This consists of approximately $9.3 billion of cash and investments, and $9.5 billion of debt. This is an improvement of $2.3 billion in our overall debt position -- net debt position from year-end 2006. We achieved this improvement while completing the $1.4 billion acquisition of Conor Med Systems and utilizing $3.6 billion to repurchase shares.

For purposes of your models, assuming no major acquisitions and considering the continuation but not full completion of the share repurchase program during 2008, I suggest you consider modeling net interest income and expense of between 0 and a modest level of interest income.

Turning now to other income and expense, as a reminder of the nature of this account, this is where we record royalty income, as well as one time gains and losses arising from such items as litigation, gains or losses from investments by our development corporation and asset sales. This account is difficult to forecast, but assuming no major one time gains or losses, I would recommend that you consider modeling other income and expense for 2008 as a net gain ranging from approximately $150 million to $200 million.

Now a word on taxes. For 2007 the Company's effective tax rate, excluding special items, was 22.1%. I mentioned earlier in the fourth quarter we made some adjustments relating to the filing of our prior year tax return. Additionally as you know, the R&D tax credit legislation has not been renewed for 2008. We suggest that you model our effective tax rate for 2008 in the range of 24 to 24.5%. As always, we will continue to pursue opportunities in this area to improve upon this rate throughout the year.

Turning to sales, the current mean of analyst estimates for 2008 as published by First Call, reflects a growth rate of 3.7%. We would be comfortable with your models reflecting total sales growth for the full year of 2008 of between 4% and 5%. This would include operational sales growth of between 1% and 2% and a positive impact from currency of approximately 3%, if rates were to remain where they are today.

Now turning to earnings. When I last checked the first mean -- the first -- the recent First Call mean estimate for our EPS for full year 2008 is $4.41 per share. I suggest that you consider full year 2008 EPS estimates, including the impact of IP R&D charges, the structuring charges or other special items of between $4.39 and $4.44.

As you can see from my guidance, we're growing our earnings per share at a rate that is faster than the rate of growth in sales. This is the financial discipline at Johnson & Johnson that I often speak of. While this may vary in degree and by business segment year to year, or may be impacted from time to time by short-term dilutive impact of acquisitions, this is a fundamental way we run our business; that is growing income faster than sales over time.

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In 2008 our share repurchase program will enhance our EPS. And as you work through the guidance I provided a few minutes ago, we would be comfortable with your models reflecting an improvement in pretax operating margins for 2008.

In closing, I would like to offer these final thoughts on 2007 and look at the year ahead. I'm very proud to be able to report on the strong financial performance delivered this year, because it is a testament to the hard work, dedication and focus of the talented people across the Johnson & Johnson family of companies.

As I have said to you throughout the year, Johnson & Johnson is committed to being a growth Company, and the results, priorities and outlook provided today reinforce that. Our commitment to growth means three things to us. First, we continue to focus on competing in the most attractive, fastest-growing segments of health care. As Bill pointed out, we're also looking outside our current businesses for new platforms of growth.

Second, with our robust pipelines and advantages in the convergence of health care, we're well-positioned to build on our broad base and our superior science and technology for continued market leadership. Third, with our strong businesses and our financial discipline, we expect to grow our earnings faster than our sales once again in 2008.

I look forward to updating you throughout the year and on our progress. Now, Louise, back to you.

Louise Mehrotra - Johnson & Johnson - VP IR We will now begin our Q&A session. We ask that you wait for a microphone as this meeting is being webcast. And as we have Bill Weldon with us today, we ask that you keep your questions at the strategic level.

QUESTIONS AND ANSWERS Rick Wise - Bear Stearns - Analyst Rick Wise, Bear Stearns. Bill, I understand that long-term emerging markets are huge an opportunity for J&J, and I appreciate your comments on strategy. But can you talk maybe about the near-term risks -- near-term, you think the next 12 to 18 months -- as the global markets weaken, and is that a big concern for you in '08 and '09 perhaps? Is that one of the major risks?

Bill Weldon - Johnson & Johnson - Chairman, CEO I think that you are always concerned about the weakening of markets. But I think as we move into health care and see some of health care needs and the investments that many of these companies are making in health care, I think from the slide you saw that most of the developing world is growing to two to three times faster than the developed world. We think there are huge opportunities to move in and to be able to help treat patients and to create opportunities of value for ourselves, our shareholders, for -- in treating patients. We think health care is a great place to be. And though there will be impacts in it, we think that the resources are being made available in most of these countries to take care of health care needs of their people.

Rick Wise - Bear Stearns - Analyst Two other big picture questions quickly. You seem to be shaking up the organization to its personnel in significant ways, creating the new office at the level. But I see more change I think at divisional levels than I have seen in a long time. I would be curious to hear your -- just maybe more personal thoughts about what are you trying to achieve where you're going? Is it all about growth, as you often say?

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Maybe just lastly, it is hard to resist asking an acquisition question. I might as well throw it out there. Does the current environment set you up for more opportunities, do you think?

Bill Weldon - Johnson & Johnson - Chairman, CEO I wouldn't describe it as shaking it up. I think it is a natural -- it is a natural progression to look at the growth and the opportunities going into the future. If you look first at our MD&D business, it was very diverse and very broad and it covered all kinds of things, as you all know.

What we decided to do is we felt we had two really great opportunities. One was to really look at the surgical patient, because people talk about going in and using endoscopic instruments or sutures or whatever it may be or replacing knees. But when you look at the patient, the patient really has a lot more needs than just than the knee coming in. There is a lot of things that you are involved in. And I think the example I gave here of this controlled sedation for the patients is going to revolutionize surgery and diagnostics. And it is really bringing more to bear on the surgical patient, the selection of the patient and the treatment of the patient, other than just going in and doing the procedure itself.

We think that there is a really great opportunity to bring the focus into that area and really focus on the operating suite and the surgical patient. That is number one. We have businesses that were natural for that area. If you look at ETHICON Endo and DePuy, you had businesses that were really focused in that area, and we can broaden those even beyond where they are today.

Than you look at comprehensive care, and we are seeing more and more as health care is evolving that the health care system is looking at the patient. In the example I gave in diabetes, they're looking holistically at the treatment of the patient, and the patient is looking for how do I deal with my disease, not just how do I monitor my glucose, or how do I pump in insulin or how do I do this or do that. But how do I really manage it?

We're looking at how do we help manage these diseases so that we can manage them in a better way. We can actually -- I think we're probably one of the few organizations that can actually get upfront and look at prevention and wellness as an opportunity for a business. It will affect diabetes. It will affect cancer. It will affect cardiovascular disease. You can look at all of them. There's a real opportunity to get in earlier. And it is the right thing to do, as well as a great opportunity to help move that forward.

But if you look at the diabetic patient, it is all the way across. And our target is, if we can really manage the disease better and help the patients manage their disease better, we will preclude some of the amputations and some of the ocular problems and other things at the back end. That is how we're really going to start looking at ourselves.

And it may be through things that we're doing, but it may mean that we have to reach out and form some relationships with partners, so there is more to it. But I think as you look at -- and we have worked in the UK, and we have worked in the U.S., we have worked in other areas. When you look at the total patient, there's a tremendous opportunity to reduce health care costs and to really take care of patients.

And then the third one is this area of strategy and growth. And the reason that we started looking at that is we feel we're very uniquely positioned to be able to drive our business through the three segments that we really deal with, and that is the Medical Devices and Diagnostics, Pharmaceuticals and the OTC Consumer business. But there is two-thirds of the health care market where approximately $3 trillion, $2.8 trillion, that is also going to be critically important as health care goes into the future.

You can look at services. You can look at health information technology. It is all built around information. And so we're looking at areas where we have never gone before. If there is an overlap, it may be -- there may be a convergence down the road, if you look at evidence-based medicine, electronic medical records, health information technology. But today it allows us to make investments in the futures. And when you look at the graph we put up there, you look at this -- it is not a natural rhythm, but

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And these continue to be huge opportunities. We are not taking attention off of those. But we're also looking into how do we help shape the future and how do we become an integral part of that, again through investments, through partners, through doing things that we have really not considered before. So we're really excited about the opportunities to advance our businesses today, and look into the future and make sure that we're being current with what the needs are as we advance our own business.

Acquisitions. One more, I'm sorry. The same thing goes here as always. We don't talk about acquisitions. We have our models. We use -- we want to make sure as we look at acquisitions we're bringing products in, we're bringing shareholder value. I think that's really what it comes down to. How do we enhance shareholder value for our shareholders through acquisitions, licenses or other ways of driving our business forward?

Mike Weinstein - JPMorgan - Analyst Mike Weinstein, JPMorgan. A couple of questions, and I will start with Bill, and then maybe follow-up with Dominic. Bill, when we think about the past six months in particular, there was a lot of positive developments in the Pharmaceutical pipeline, that was in my view a bit of a critical period for the Company as we get longer term, longer term into the next year or two. But if we think about the Company in the next five years and the Pharmaceutical pipeline, its development is pretty important, and the last six months were fairly encouraging.

As you think about the number of product launches the Company potentially has in 2008, 2009, 2010, can you talk just a little bit about the need to invest ahead of those launches, the need to restructured the pharmaceutical salesforces ahead of those launches, and how that balances off versus the big cost restructuring the Company just did? And then a financial follow-up for Dominic.

Bill Weldon - Johnson & Johnson - Chairman, CEO You know when we announced the realignment, if you want to call it a reorganization, earlier this year, or earlier last year, it was really with the intent of understanding what the products that were coming into the market would be. We didn't see that we would -- we tried to reposition ourselves, and we did reduce our salesforces, but we tried to position ourselves in a way that we would be able to capitalize on the products that would be coming into the market going forward.

So we don't see that there needs to be huge changes as we go forward. We think we have the resources necessary. Now there will be tweaks throughout as we always do. But we think we are really pretty well-positioned with our sales organizations to be able to launch the products in the markets we're going into, because most of them we compete in today. We don't see that there will be any real significant needs that will have to be addressed to the salesforce. Does that answer the question?

Mike Weinstein - JPMorgan - Analyst Yes. And there are some categories -- I mean, we're still really relative to some of the bigger pipeline products that are coming forward, but there are some categories you would be moving into it, and there are some drugs that are going -- potentially going generic which you might be moving out of. There was a potential shifting within your Pharmaceutical salesforces, right, naturally because of the evolution of the business.

Dominic, can I press you a little bit on your '08 commentary? I remember a year ago you gave earnings guidance, and I was struck by some of the commentary that I thought below the top line was conservative, and a year lady later I'm probably in the

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Dominic Caruso - Johnson & Johnson - VP Finance, CFO That's right. We have not assumed the extension of the R&D tax credit in the tax rate guidance.

Mike Weinstein - JPMorgan - Analyst Maybe you could just explain, if you would, you are a little bit more conservative than we are on both the other lines, the other income line and the other expense line. I just want to understand your guidance versus like what we're modeling.

Dominic Caruso - Johnson & Johnson - VP Finance, CFO Sure. In other -- let's take other -- let's take interest income and expense. It is probably the easiest ones. I gave guidance that it is probably going to be breakeven or a modest amount of income. What is happening throughout the year is obviously we're continuing to generate strong cash flows. We're going to use a significant amount of that to repurchase stock. And then our cash buildup will be primarily overseas. And our debt buildup will be in the U.S. We -- so there is a mix there that we need to think about when we forecast our interest rates.

Then of course this past year, which will affect us in '08, unlike it effected us in '07, we actually took advantage of the lower long-term rates -- the credit market crisis, and we termed out about $5 billion of our debt in much, much longer term rates, which we think are favorable rates for the long term. Those -- that balances were in very, very short-term commercial paper estimates earlier in the year. So we have higher interest expense, if you will, on that debt moving into 2008, coupled with a little bit lower interest income with investments abroad. The net of that is that although we're going to generate positive cash, of course, it is going to be nearly breakeven in terms of interest income and expense.

In other income and expense, it is primarily driven by, number one, a base of royalty income. And then each year, as I said, it is difficult to forecast what other items may run through that line. But we still have Pfizer integration costs running through that line. We still have a number of costs associated with multiple areas like product liability, closures of facilities, and all though sorts of costs that run through there, so we have tried to give you an estimate of what we think that net number for the year will be.

Mike Weinstein - JPMorgan - Analyst (Inaudible question - microphone inaccessible). All right, just to clarify that. So in the interest income line, what are you assuming, if you can share with us, if you wanted to -- what are you assuming relative to free cash flow generation? It looks like you are just assuming that goes elsewhere. Maybe it is the share buyback or acquisition. And then on the other line, the other expense line, the Pfizer -- the restructuring and the Pfizer piece, how much is that in 2008?

Dominic Caruso - Johnson & Johnson - VP Finance, CFO I don't want to give you a specific number for either of those, but we're going to increase our free cash flow next year over this year. Again, as I said, most of that will be generated ex U.S. versus U.S. And then the Pfizer integration costs, as I mentioned, will just continue in 2008, as well as the Pfizer synergy costs, which will are above the line in SG&A and reflect in our pretax operating margins above the other income line.

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Larry Biegelsen - Wachovia - Analyst Larry Biegelsen, Wachovia. First, a question for Bill, and then to pipeline questions. On the diabetes example, that was an impressive array of products, but could you talk about some of the tangible benefits you expect to see for change A., from bundling those products? And how do you incentivize people to work across divisions? The comprehensive care group is comprised of Device divisions, but you're looking for people to work across the Pharmaceutical division and Consumer divisions as well.

Bill Weldon - Johnson & Johnson - Chairman, CEO We may have some realignment as we go forward. They are really working on that right now. But I think it is easier to explain in that the people in the Pharmaceutical -- If you look at Pharmaceutical R&D, for example, they are working looking at products that will improve diabetes or health in that area. We're doing stem cell research in that area. And we are looking at this group be able to take the products from those areas and bring them into the treatment for the patient in a total way.

So we have areas where people are dedicated to diabetes, even though they may not specifically be working in this area. What we're doing is setting up, it is actually small groups, that are working together that are focused in this area. We have been working on this probably for about the last six or seven months, where we brought teams of people from Cordis. If you look at the cardiovascular problems, you look at ETHICON and amputations, you look at Vistakon and eye problems, the Pharm group and others, we have a team of people that have worked on this and are actually bringing it together.

As far as the compensation, the compensation model will still remain consistent. There will be -- if you look at another one is the REALIZE gastric band. There will endo people selling that for morbid obesity where people may not have diabetes, but we will also have people involved dealing with specific weight loss for diabetes. And they will be able to work together across the groups. But they have actually put up ways that they can do that.

Larry Biegelsen - Wachovia - Analyst First, on the pipeline, Telaprivir, could you give us an update on the initiation, the Phase III program in Europe, and your filing date. At the R&D day last year you said you would start by the end of '07 the Phase III trial, and file 2009/2010. But a recent Vertex press release, as you know, said that you're doing a few Phase II studies in Europe, which will complete at the end of -- or second half of 2008. I was wondering if there's an update on that and how that affects your timeline?

And then on DORIBAX, do you still plan to present the Phase III RA data at [Unlardi] this year and file in the second quarter of 2008 in the U.S.

Bill Weldon - Johnson & Johnson - Chairman, CEO Louise is looking some things up. I would like to make a couple of quick comments. On Telaprivir, we still are on the timeline that we had planned on -- be on for I think submission in -- is it -- the end of '10. We're still on that same timeline. And as far as 148, we're still on target.

Louise Mehrotra - Johnson & Johnson - VP IR (multiple speakers) presenting that data at Unlardi.

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Larry Biegelsen - Wachovia - Analyst You're planning to present the Unlardi Phase III data in Telaprivir, Bill, you said filing toward the end of 2010 is what you're targeting right now?

Louise Mehrotra - Johnson & Johnson - VP IR 2010.

Larry Biegelsen - Wachovia - Analyst 2010, sorry.

Bill Weldon - Johnson & Johnson - Chairman, CEO We're still on target, Telaprivir is still in target. What is going on in the U.S. is -- you have to talk to the other company about it.

Unidentified Audience Member Two questions for Bill. First, the Company gave '08 guidance, but someone argued that 2009 is a really, really tough year where you have got RISPERDAL still facing generics and TOPAMAX going generic. As you look out to '09, should we think about '09 as a year looking similar to 2008 in terms of topline and bottom line?

Can you talk about how you envision the Company beyond 2009, beyond the difficult years? Do we get back to J&J typical solid double-digit low teen type of EPS growth. Question one. Secondly, on the drug side, on the Pharma side, we did have some management changes, in 2007 announced Joe Scuderi stepping down, Chris Poon taking over. Should we assume though we get additional management announcements on the Pharmaceutical side in 2008?

Bill Weldon - Johnson & Johnson - Chairman, CEO Let me take the second one first. We don't anticipate any other changes. Joe had planned to retire. Chris was going to pick up the Pharmaceutical group. She has had a lot of experience there. And we think we have a great transition there that was planned and in place. We don't see any other changes.

As far as 2008 and 2009, if you go back to what we did earlier this year, you get really focused on growth and to really improve the cost structure of the Company. Those benefits of the $1.3 billion ,$1.6 billion are going to be carried on throughout '08, '09 and what not. So we feel we have really -- we have addressed the financial impact, so we can manage our business going forward without worrying about it.

We recognize -- and I met with our Pharm group the other day, July 1 of this year the market will be different than it is June 1. That is a fact. We're going to have to continue to do our jobs, get focused on the opportunities. We have great engines of growth throughout our business. We have wonderful pipeline. And I think that is the big thing.

And I guess Mike asked a question earlier. We are still going to -- it is going to mean some more investment. Even if it is not in people, it is going to be in other type of investments. But we think that we have -- through 2006, 2007 the approvals we will be seeing this year and beyond will position us very well as we move through 2008 and 2009. And I think in '10 that will all be behind us. We're very excited about where we are today, the changes we have made and the focus we have on the opportunities in developing and bringing the pipeline to life.

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Yes, it is going to be -- we're not blind to the challenges, but we feel we have really looked at and acknowledged the RISPERDAL and the TOPAMAX issues. And we feel that we've gotten ahead of them and we're going to power through it and do the good job that we've always done.

Larry Biegelsen - Wachovia - Analyst In 2010 we get back to typical J&J kind of (multiple speakers).

Bill Weldon - Johnson & Johnson - Chairman, CEO 2010 we will be moving along nicely.

Bob Hopkins - Lehman Brothers - Analyst Bob Hopkins, Lehman Brothers. Just a quick follow-up question on some of the earlier ones. You talked about it being something of an inflection point in your corporate history, as you try to take advantage and win in health care more broadly. Obviously historically you have been focused on consumer, and mostly on the health care product side. It sounds like from what you're communicating here as we move forward, whether it is internally or externally, you're going to become a lot more focused on health care services. Is that a fair interpretation of your comments?

Bill Weldon - Johnson & Johnson - Chairman, CEO There's a lot of things in that other $2.8 trillion that is out there. It is more than just services. But, yes, I think services are going to be very important. I think information is critically important. And you know we end up selling information. It is information that is going to drive the evidence-based decisions that physicians will be making in the future. It is going to also be information that is going to eliminate the problems and the issues that are going on in hospitals today, whether there may be concomitant use or misinterpretation of drugs.

So there is lots of opportunities out there. I think service is one of them. But it it is really reason why we put this group together, because it is all-encompassing when you get out there. And some of it is easy for us to see today, and I think everybody can see it, and everyone is talking about it. There is not a lot being done, but a lot of people are talking about it. But there's a lot of other things in there, and that is what the group is going to do, is they are going to explore the opportunities. And they really going to be looking at ways that we can make investments that will really set up the next $20 billion franchise for J&J.

But services, you have to say are going to be a very important part of that. I think over time you'll also see that some of these services and information are going to actually merge with some of our core businesses further down the road. So I can't predict the future. All I can say is that we will be very well-positioned, and we have a group is going to be able to help us really make some choices. Some of them are going to be wrong, and we know that. But hopefully some of them are going to be right, and we're going to be very well-positioned, better than anyone else.

Bob Hopkins - Lehman Brothers - Analyst Thank you for that. Then just one quick follow-up on the medical devices side, do you feel like you're comfortable with your current portfolio, or are there still product areas that you feel represent gaps that you would like to address as you look forward?

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Bill Weldon - Johnson & Johnson - Chairman, CEO I think when you look at medical devices there's always new innovations coming through, and there's always new things. We keep our eyes open. I don't think we have all the answers, and I think there's going to be -- I think there's good to be a lot of tremendous change that is going to go on in and new things hopefully. Some of them will be developed or discovered or invented internally. But there will be a lot of externally. I think you look at microelectronics, they are going to have a huge play as you go forward. There's a whole lot of things. And I don't think we have them all in-house and we will continue to look for opportunities external as well as develop them internal.

Catherine Arnold - Credit Suisse - Analyst Catherine Arnold, Credit Suisse. Bill, you were very candid about the headwinds that the PROCRIT franchise caused you in 2007. I'm wondering, as I interpret your 2008 guidance, if you're making some assumptions regarding solving the bleeding of that franchise, if you will, in regards to the penetration rates. I know you had mentioned market share, Louise, in your comments. But penetration rates are obviously a key component of when you reach trough levels. Is that going to happen in 2008?

Then my second question is about the Office of Strategy, could you tell me if those folks are going to be compensated based on what they bring to you in 2008? And do they have to bring to you current revenue and profit generating businesses?

Bill Weldon - Johnson & Johnson - Chairman, CEO The second one is very simple. No, they don't have to bring -- they're not going to be evaluated on are they going to bring profits in 2008. I think they're going to be looked at as are they making investments. Now I think as they kind of comb the landscaping they will see a lot of opportunities that will actually be able to be fed into the other businesses for the other ones to pursue. They may find things that are going to be able to creating revenue, if not profits, very shortly, in short-term. But I think it is more of an investment in the future. And that it will not be viewed as being evaluated on are you creating income for us this year. But it will be evaluated on the potential of income growth for the future.

As far as the ESAs, that was the other question, in PROCRIT. You know, I think it is going to be hard to comment on that. What we're pleased about -- we are obviously disappointed about the way the market has really contracted over time. But we're very pleased about the performance of PROCRIT in the market, because we have actually been able to gain share. We're right now we are seeing a leveling off. We have the ODAC meeting next month. We can't predict what is going to happen there. We feel when used appropriately we have a wonderful drug that over long term has been shown to be very safe and very effective. We are going to continue to try and drive the product and drive the results appropriately, because we do feel it is safe, it is efficacious when used appropriately, and brings extraordinary benefits to patients. So we think we will be able to continue to drive it and we have a strong commitment behind it.

Catherine Arnold - Credit Suisse - Analyst Just as a follow-up, if you don't reach trough penetration in '08 your guidance is still okay?

Bill Weldon - Johnson & Johnson - Chairman, CEO If we don't reach what?

Catherine Arnold - Credit Suisse - Analyst Trough penetration in some of the key segments, like chemotherapy and [disanemia], anemia of cancer?

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Bill Weldon - Johnson & Johnson - Chairman, CEO Yes, we feel good with where we are with PROCRIT in our forecast.

Bruce Nudell - UBS - Analyst Bruce Nudell, UBS. Bill, just kind of putting ballpark ranges around it, when you look at next year's guidance, what sort of operational revenue decline is built-in for Pharma and/or increase?

And a little follow-up with regards to Katherine's question with ESAs, we have modeled for chemotherapy-induced anemia, something like 75% decline in Medicare patients in the U.S. Do you see the ESA market down 50%, 60%? What is the ballpark you see in the U.S.? Thank you.

Bill Weldon - Johnson & Johnson - Chairman, CEO We don't give any numbers on the financials and the impacts on Pharmaceuticals. I think we see -- the ESAs, I think we are going to see, will continue to maybe show some declines this year. I don't think the magnitude of the ones you are describing, but we will see -- continue to see declines.

Glenn Reicin - Morgan Stanley - Analyst Glenn Reicin, Morgan Stanley. Can you just talk a little bit conceptually about the launch of the OTCs or what the economics of a lunch like that are? I assume it is not a moneymaker for several years. And I thought you sort of swung off the whole category with the old (inaudible) and the like. Maybe talk a little bit about the dissolvement of your decision to go ahead with that.

Bill Weldon - Johnson & Johnson - Chairman, CEO In the whole OTC area?

Glenn Reicin - Morgan Stanley - Analyst Just that product and particular to ZYRTEC.

Bill Weldon - Johnson & Johnson - Chairman, CEO Our feeling about ZYRTEC, we're very -- we feel very good about it. Obviously, it was the number one prescribed pharmaceutical. We have looked at Claritin. We have looked at other products and the models that they have used. We worked closely with our partners, the Wal-Marts and CVS' and Rite-Aids and Walgreens and everyone else to make sure that we have a good relationship there. We feel very good about where we are going. We feel very good about the investments. We started shipping -- actually ZYRTEC, the truck started I think Monday morning, and we will have it on the shelves by the end of this week.

Basically I think we have a very strong program, a comprehensive program, by looking at all the experiences we could gain from everyone else's launches and taking advantage of being able to move patients from the prescription area into this area, as well as to -- and to look at it that we feel ZYRTEC is probably the most effective of all the products, so when you start looking at the treatment in this area, we think that there is a big opportunity for the product.

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Glenn Reicin - Morgan Stanley - Analyst And the economics of a launch like that, how much does it actually cost to launch. and what is the breakeven? How many years conceptually does it take to breakeven on a launch like that? Is it two years, one year, five years?

Bill Weldon - Johnson & Johnson - Chairman, CEO You want to try and answer that one?

Dominic Caruso - Johnson & Johnson - VP Finance, CFO We're not going to talk about that level of specificity, but we wouldn't be excited about it if we didn't think it was going to make us money in a reasonable amount of time.

Louise Mehrotra - Johnson & Johnson - VP IR With respect to everybody's time, we will now close the meeting with some more final remarks from Bill.

Bill Weldon - Johnson & Johnson - Chairman, CEO I'll just make them from here. I really do want to thank everyone for coming. I also want to tell you how we feel that the organization really did respond to some extraordinary pressures and challenges in 2007 and delivered very solid results. We are very excited, as I said, about 2008 and beyond. And we are going to continue to drive our business. And we do have a MD&D review set up for June in New Brunswick, and we look forward to seeing you all there. Thanks very much.

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