Johnson & Johnson (NYSE: JNJ)
Q2 2008 Earnings Conference Call
July 15, 2008 8:30 AM ET
Management Summary

Operator

Welcome to the Johnson & Johnson second quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference call over to Johnson & Johnson.

Louise Mehrotra, Vice President of Investor Relations

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 second quarter of 2008. With me on the call today is Dominic Caruso, Vice President of Finance and Chief Financial Officer.

A few logistics before we get into the details. This review is being made available to a broader audience via a webcast accessible through the investor relations section of the Johnson & Johnson website. The press release that was sent to the investment community earlier this morning includes the schedule showing sales for major products and/or business franchises to facilitate updating your models. The press release is also available on the Johnson & Johnson website. I will review highlights of the second quarter 2008 results for the corporation and for our three business segments. Following additional remarks from Dominic, we will open the call to your questions. We expect the total call to last approximately one hour.

Before I get into the results, let me remind you that some of the statements made during this call may be considered forward-looking statements. The 10-K for the fiscal year 2007 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 second quarter of 2008. 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 $16.5 billion for the second quarter of 2008, up 8.7% as compared to the second quarter of 2007. Our operational growth was 3.1% and currency added 5.6 points.

If you turn to the schedule showing sales by geographic area, you will see that we achieved growth of 2.1% in the U.S. In regions outside the U.S., our operational growth was 4.3% while the effect of currency exchange rates positively impacted our reported results by 11.9 points.

Our strongest performing region was the Asia Pacific-Africa region growing 8.5% on an operational basis. The Western Hemisphere, excluding the U.S., grew by 3.3% operationally while Europe grew 2.4% operationally.

If you will now turn to the consolidated statement of earnings, net earnings on a reported basis were $3.3 billion and earnings per share were $1.17. This compares to $3.1 billion and $1.05 in the same period in 2007.

Please direct your attention to the box section of the schedule where we have provided adjusted earnings information. As referenced in the footnote, the 2008 results have been adjusted to exclude the after-tax impact of the in-process research and development charge of $40 million associated with the acquisition of Amic, a privately-held developer of in vitro diagnostics. There were no adjustments to the results for the second quarter of 2007.

Net earnings on an adjusted basis of $3.4 billion were up 9.3% and adjusted earnings per share of $1.18 were up 12.4%.

I would now like to make some additional comments relative to the components leading to the adjusted earnings before we move on to the segment highlights.

Cost of goods sold at 28.9% was up 10 basis points versus the same period in 2007, due to the change in mix of the businesses with higher growth in the consumer business and lower growth in the pharmaceutical business.

Selling, marketing, and administrative expenses of 33.5% of sales were up 20 basis points, due primarily to costs associated with new product launches in our MD&D business.

Our investment in research and development as a percent to sales was 11.5%, 80 basis points less than the second quarter of 2007. Approximately half of the leverage was due to the mix of businesses and the remaining half was due to timing of expenditures.

Interest expense net of interest income of $16 million compares to $36 million of net interest income in the second quarter of 2007. This increase in expense was due to a higher average debt position in the quarter versus the same period last year as we continue buying back shares as part of the repurchase program.

Other income, net of other expense was $135 million in the second quarter of 2008 compared to $117 million in the same period last year.

With regard to taxes please direct your attention to the effective tax rate excluding special charges shown in the box section of the schedule. Taxes were 23.7% in the second quarter of 2008 comparable to the 2007 rate.

Looking at year-to-date data, consolidated sales to customers for the first half of 2008 were $32.6 billion, an increase of 8.2% as compared to the same period a year ago. On a year-to-date basis, operational growth was 2.8% and currency had a positive impact of 5.4 points.

On the consolidated statement of year-to-date earnings, I'd first like to draw your attention to the box section. In both 2008 and 2007 charges for in-process research and development have been excluded. With these adjustments, net earnings for the first half of 2008 were $7 billion, or $2.44 per share, up 7.8% and 10.4% respectively as compared to the same period in 2007.

Turning now to business segment highlights, I'll begin with the consumer segment. Worldwide consumer segment sales of $4 billion increased 13.2% as compared to the second quarter of 2007. Operational growth was 6.8% while currency added 6.4 points. U.S. sales were up 8.5% while international sales grew 5.6% on an operational basis.

For the second quarter of 2008, sales for the over-the-counter pharmaceuticals and nutritionals increased 11% on an operational basis compared to the same period in 2007. Sales in the U.S. were up 16% while sales outside the U.S. were up 5% operationally. The successful launch of ZYRTEC in the U.S. in January of this year is the major contributor to this increase. Adult Tylenol achieved strong growth in the quarter driven by the sales outside the U.S. Additionally outside the U.S., nutritionals achieved strong double digit growth led by the growing demand for Splenda.

Our skin care business achieved operational sales growth of 5% in the second quarter of 2008 with sales in the U.S. growing 12% and sales outside the U.S. down 1% on an operational basis. The strong growth was driven by Nutrogena, Aveeno and Clean & Clear, due to a combination of new product launches and strength in the core businesses due to innovative technologies like Helioplex. These gains were partially offset by lower sales of RoC products, and in Europe, the discontinuation of Evian Facial Refresher.

Baby care products achieved operational growth of 9% when compared with the second quarter of 2007. Sales growth in the U.S. was 5% due to increased sales of cleansers and BabyCenter.com. Sales outside the U.S. grew 11% on an operational basis, driven by the double-digit growth of hair care, wipes, lotion, and oil.

Women's health achieved operational growth of 1%. In the increasingly competitive U.S. market, sales were down 3% while sales outside the U.S. were up on an operational basis by 3% with solid growth in the internal sanitary protection line.

Operational sales growth in the oral care franchise was 10% with U.S. sales down 1% and sales outside the U.S. up 21%. The Listerine product line achieved sales growth of over 20% operationally due to whitening strips launched in the third quarter of 2007, and the strong performance of Listerine mouthwash. Sales declines in Reach toothbrushes and Rembrandt products partially offset this growth.

That completes our review of the consumer segment and I'll now review highlights for the pharmaceutical segment.

Worldwide net sales for the second quarter of $6.3 billion were up 3.1% versus the same period last year. On an operational basis, sales were down 1.3% with positive currency adding 4.4 points. Sales in the U.S. decreased 1.7% while sales outside the U.S. decreased on an operational basis by 0.6%.

Our results continue to be impacted by generic competition on some of our products, namely DURAGESIC, and outside the U.S., RISPERDAL ORAL in many countries. The combined effect of this generic competition has reduced the second quarter worldwide pharmaceutical operational growth rate by approximately 2.5 percentage points with the U.S. impact estimated at approximately 0.5% and the impact outside the U.S. estimated at nearly 7%.

Additionally, we saw a retraction in the U.S. market for ESAs following the ODAC discussions, the label changes, and changes to reimbursement. The resulting decline in PROCRIT sales impacted the worldwide pharmaceutical operational growth by approximately 2 points. Excluding both the impact of generics and declining PROCRIT sales, the underlying operational growth for pharmaceutical products was approximately 3.5%.

PROCRIT/EPREX had a combined operational decline of 19% with PROCRIT down 23% and EPREX down 13% on an operational basis. New competition and a softening of the market due to ongoing label reviews have contributed to the lower sales results for EPREX. PROCRIT results have been impacted by a decline in the market versus the second quarter of 2007, estimated at approximately 25% and partially offset by an increase in overall market share. PROCRIT aggregate share across all markets was approximately 44% in the second quarter of 2008, up 1 point versus the same period last year. Increased share in the hospital and retail markets was partially offset by lower share in the oncology clinics.

RISPERDAL Oral had an operational decline of 19% when compared to the same period a year ago. Sales in the U.S. were down 9%, due primarily to the lowering of inventory levels as wholesalers and retailers prepare for the third quarter entry of the generic product. Sales outside the U.S. declined 37% on an operational basis due to generic competition for RISPERDAL Oral in most markets.

Sales of Levaquin our anti-infective, were down 4% on an operational basis when compared to the same period a year ago. Market share was negatively impacted by generics in the category.

Aciphex, as it's known in the U.S. market, and Pariet outside the U.S. is a proton pump inhibitor, or PPI, that we co-market with Eisai. On an operational basis, sales were down 9%. U.S. sales were down 5% and sales outside the U.S. were down 12% operationally.

In the U.S., market share has been negatively impacted by additional generic launches in the PPI category. Similar market dynamics impacted sales outside the U.S., compounded by the impact of market entry in Canada of generic rabeprazole, the active ingredient in Pariet.

Now moving on to our growth drivers, REMICADE, a biologic approved for the treatment of a number of immune mediated inflammatory diseases, grew by 2% when compared to the second quarter of 2007. Sales growth in the U.S. was 9%. Market growth in the Anti-TNF category continued to be strong and the competitive dynamics intensified with new competitors in the market and current competitors receiving new indications. Sales to our customers for markets outside the U.S. were down 18%.

As we reported in the first quarter there was a significant increase in sales outside the U.S. due to timing of shipments reflecting inventory planning on our customer's part. The second quarter sales were impacted as a significant portion of the inventory build was depleted. Excluding the estimated changes in inventory levels, demand outside the U.S. was up over 30%.

Sales of TOPOMAX, which is approved for the treatment of epilepsy and migraine prophylaxis, increased operationally by 15%. Sales in the U.S. were up 16% while sales outside the U.S. grew by 9% operationally. In the U.S., market share in the migraine category increased versus the same period last year. Outside the U.S., strong growth was achieved in many markets, partially offset by generic entries in certain other markets.

RISPERDAL CONSTA, our long-acting injectable formulation, achieved second quarter sales growth of 14% on an operational basis. U.S. sales growth was 18% due to higher market share and market growth. Sales outside the U.S. were up 12% operationally due to the positive shift form oral to injectable therapies.

CONCERTA, a product for attention deficit hyperactivity disorder, grew 6% operationally in the second quarter as compared to the same period last year. Sales in the U.S. were up 5% with continued strong market growth offset by a lower market share. The recent approval of the adult indication for CONCERTA will enable us to compete in the broader ADHD market. Sales outside the U.S. grew 13% on an operational basis with strong growth achieved in many regions.

VELCADE, a treatment for relapsed multiple myeloma, is being co-developed with Millennium Pharmaceuticals. We have commercialization rights in Europe and the rest of the world outside the U.S. Operational sales growth was 47%, with very strong results achieved at all regions.

Wrapping up the review of the pharmaceutical segment, as an update on the status of the complete response for Ceftobiprole, we have been working with the FDA on issues related to the approvable letter and are actively engaged in preparing our response. Once filed our complete response will likely be considered a class 2 resubmission. A class 2 resubmission has a six-month review clause.

Additionally, regarding DACOGEN, we will not submit the EU marketing authorization application in 2008. The phase 3 data did not demonstrate a statistically significant advantage of DACOGEN treatment on median overall survival. However, the preliminary analysis of the data indicated response rates similar to those observed in other clinical trials of DACOGEN in patients with NDS. We continue to analyze the data and later this year we will meet with the regulators to discuss the comprehensive findings from the study.

I'll now review the medical devices and diagnostic segment results.

Worldwide medical devices and diagnostic segment sales of $6.1 billion grew 5.7% operationally as compared to the same period in 2007. Currency added 6.4 points to the sales growth to bring total growth to 12.1%. Sales in the U.S. grew 4% while sales outside the U.S. increased on an operational basis by 7.3%. Results have been impacted by lower sales of drug-eluting stents. Sales, excluding the impact of lower sales of drug-eluting stents, grew nearly 8% operationally.

Now turning to the franchises, starting with Cordis. Cordis sales were down 6% operationally with the U.S. down 12% and sales outside the U.S. down 1%. Cordis results were impacted by lower sales of CYPHER, our sirolimus-eluting stent, partially offset by the results of Biosense Webster business. CYPHER sales were approximately $395 million down, 18% on an operational basis versus the prior year. Sales in the U.S. of approximately $165 million were down 20%.

In comparison to the second quarter of 2007, the U.S. market has stabilized with PCI procedures increasing slightly and penetration rates estimated at 66%, similar to the 2007 level, offset by a reduction in prices. Estimated share in the U.S. of 36% was down 7 points sequentially and down 10 points from the second quarter of 2007 due to the market entry of a new competitor in the first quarter of 2008.

Sales outside the U.S. of approximately $230 million declined 16% operationally. The estimated market share in the quarter of 34% was down 2 points on a sequential basis and down 4 points from the second quarter of 2007. Increased competition has impacted the share outside the U.S. CYPHER estimated worldwide share for the quarter was 35%, down 4 points sequentially and down 6 points from the second quarter of 2007.

Now, turning to growth drivers. Within the Cordis franchise, the Biosense Webster business, our electrophysiology business, achieved double-digit operational growth in the quarter driven by increased system placements as well as growth in irrigation, ultrasound and bidirectional catheters.

Our DePuy franchise had operational growth of 9% when compared to the same period in 2007 with the U.S. growing 6% and the business outside the U.S. growing by 12% operationally.

Hip growth on a worldwide basis was 14% operational, with similar strong results both in and outside the U.S. On an operational basis, worldwide knee growth was 6% while spine grew 4%.

Mitech, our sports medicine business, grew 15% operationally. Ethicon Endo-Surgery achieved operational growth of 10% in the second quarter of 2008, with the U.S. sales growing 7% and sales outside the U.S. growing on an operational basis by 13%.

The Harmonic business achieved operational growth of more than 20% due to the success of the recently launched products and the underlying strength of this platform. In addition, the endocutter, a key product in performing bariatric procedures; the realized gastric band and advanced sterilization products also contributed to the growth in the quarter.

Ethicon worldwide sales grew operationally by 6% with the U.S. up 7% and sales outside the U.S. growing operationally by 5%. Solid growth in sutures and double-digit growth in homeostasis and mesh products were the major contributors to growth in the quarter.

The diabetes franchise grew operationally by 7% in the second quarter of 2008. The U.S. business grew by 9% while sales outside the U.S. grew 4% on an operational basis.

The Animas business achieved operational growth of nearly 40% driven by continued market share gains. Additionally, the success of the One-Touch Ultra line has been a major contributor to the growth.

Our vision care franchise achieved operational sales growth of 8% in the second quarter compared to the same period last year. Sales in the U.S. increased 7%. The rate of growth has been impacted by the softness in the lens category overall, and the competitive launches. Additionally, the quarterly comparison was impacted by the very strong growth in the second quarter of 2007 due to significant new product launches earlier in that year.

Sales outside the U.S. grew 10% on an operational basis. ACUVUE OASYS, One-Day ACUVUE Moist, and ACUVUE Advanced for astigmatism were the major contributors to the growth in the quarter. Additionally, outside the U.S. One-Day ACUVUE Define made a strong contribution to growth in the quarter.

Rounding out the review of the medical devices and diagnostics segment, Ortho-Clinical Diagnostics achieved operational growth of 7% in the second quarter. Sales growth in the U.S. was 8% while sales outside the U.S. were up 6% on an operational basis. Immunohematology products achieving strong double-digit results.

That completes highlights for the medical devices and diagnostic segment and concludes the segment highlights for Johnson & Johnson's second quarter of 2008. Before we open the call to your questions, I'll turn the discussion over to Dominic Caruso for some additional comments.

Dominic?

Dominic Caruso, Chief Financial Officer

Thank you, Louise. We are very pleased today to report solid financial results for the second quarter of 2008. Our performance this past quarter demonstrates how we are successfully managing the business through some short-term pressures while continuing to advance some of our key growth initiatives.

Louise has already highlighted segment results for you, so I will mention some financial updates, highlight a few of the recent pipeline and product developments in the quarter and discuss our financial guidance for the year.

Our sales results for the quarter were above the mean of the analyst estimates as published by First Call. We also delivered another strong earnings performance for the quarter, also above the mean of the analyst estimates published by First Call, which reflects our ability to continue managing our costs and improving our margins. In fact, pre-tax operating profit margin increased 50 basis points to 26.1% this past quarter as compared to 25.6% in the same quarter last year.

We now have substantially implemented the cost restructuring program that we announced last year and we are on track to achieve the higher end of the annual cost savings of approximately $1.3 billion to $1.6 billion for 2008.

Now a brief update on the progress of our $10 billion share repurchase program. As you'll recall, we began purchasing shares in August 2007 and as of the end of June we have purchased approximately $6.5 billion of our stock. We also announced our 46th consecutive year of dividend increases this quarter, increasing our quarterly dividend by 10.8%.

Our share repurchase program, along with our dividends, continue to illustrate our commitment to returning value to our shareowners while maintaining a strong financial position that provides the flexibility to invest in business-building activities.

We continue to make the investments and take the actions to drive the future growth of our business. This quarter we demonstrated our progress with several new product introductions and pipeline developments.

In pharmaceuticals, the FDA Advisory Committee unanimously recommended the approval of Ustekinumab or CNTO 1275 for the treatment of moderate to severe plaque psoriasis.

We submitted an application to the FDA requesting approval of Golimumab or CNTO 148 as a subcutaneous injection for the treatment of rheumatoid arthritis, psoriatic arthritis and ankylosing spondylitis.

The FDA approved our CONCERTA extended release tablets for treatment of attention deficit hyperactivity disorder, or ADHD, in adults. This approval expands the CONCERTA indication from children and adolescents into adults with ADHD and offers these patients a patented once-daily formulation.

We also filed an application with the FDA requesting pediatric exclusivity for topomax which, if granted, would extend the market exclusivity for topomax by six months to March of 2009.

We've also recently announced positive clinical trial data for many of our compounds including RIVAROXABAN, TAPENTADOL and Golimumab.

In other pharmaceutical developments, our anti-psychotic drug RISPERDAL Oral lost marketing exclusivity on June 29 and our affiliate Janssen, launched an authorized generic version of RISPERDAL Oral on June 30. The branded version of RISPERDAL Oral will continue to be available for patients.

On June 5 we hosted many of you for a review of our medical devices and diagnostics and consumer businesses. As you know, these types of meetings are part of our continuous effort to inform the investment community about our plans to continue our track record of growth. I trust you saw in our business leaders how excited they are about the future growth opportunities they discussed with you that day.

Since June 5 our medical devices and diagnostic business has continued to advance the products and technologies that were mentioned that day. In the U.S. Vistakon introduced ACUVUE OASYS brand contact lens for astigmatism, which combine unique stabilization technology with a new generation of silicone hydrogel material.

And, the One-Touch ping glucose management system, which is the first full featured insulin pump that wirelessly communicates with a blood glucose meter remote, was cleared by the FDA. This system integrates technologies from both our Animus and Life Scan businesses and it gives patients more freedom and flexibility in using their insulin pump.

Consistent with our long-standing approach to growing our business profitably, we continue to take steps to strengthen our portfolio and ensure we are competing in the highest growth segments of health care.

This quarter we announced the acquisition of Amic, a privately-held Swedish developer of in vitro diagnostic technologies. This acquisition complements our ortho-clinical diagnostics business and provides OCD with new technologies and development for use in point-of-care and near-patient setting. These technologies will allow us to deliver information to health care professionals where and when they need it.

We also announced that Ethicon has received an offer from One Equity Partners to purchase our professional wound care business. This business includes both advanced wound care and general wound care products, which generated annual net sales of approximately $270 million in 2007. We had been exploring a potential sale of this business as part of a continuous review of our business priorities.

If the offer is accepted and the closing conditions are satisfied, the proposed transaction would be expected to close later in 2008. It would be premature to say anything more about this pending transaction at this time.

In the consumer segment this quarter we announced FDA approval of EVOLENCE, a new advanced collagen-based structural dermal filler that corrects moderate to deep facial wrinkles and folds. EVOLENCE is the first all-natural dermal filler using naturally-sourced collagen to replace the body's lost collagen in adding volume and structural support in depleted areas for a more naturally youthful appearance. We have begun training health care professionals in the administration of EVOLENCE and we will be introducing it throughout the second half of 2008.

Our consumer business continued to see strong results from our allergy treatment ZYRTEC which became first available without prescription in stores across the U.S. in January of this year. By the end of June ZYRTEC had captured 27% of the U.S. allergy market.

Meanwhile, the integration of the Pfizer consumer health care business and brands continues to be on track to meet our target of $500 million to $600 million in cost synergies by 2009 and we still expect this transaction to be breakeven or modestly accretive by 2009, one year ahead of the original schedule.

I would now 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 and common expense. During the second quarter of 2008 the company continued to generate strong cash flows. At the end of the second quarter, we had approximately $900 million of net debt. This consists of approximately $13 billion of cash and investments and $13.9 billion of debt. This is an increase of approximately $650 million in our overall net debt position from year end 2007, largely due to the continuation of our share repurchase program.

We also issued $1.6 billion of long-term debt in the U.S. this past quarter. This issuance was principally used to convert short-term borrowings to long term, not an increase in overall debt levels. As is our practice, we are always monitoring financial markets and the markets presented us with a good opportunity to issue long-term debt at reasonable rates and with significant participation from investors.

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 would suggest you consider modeling net interest expense of between $50 million and $100 million. This is a change from our previous guidance reflecting the additional costs from the conversion of some short-term debt to long term.

Turning to other income and expense, as a reminder, this account 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 or asset sales.

As announced this past Friday, we have reached a settlement with Amgen concerning litigation regarding their contracting practices that have had an impact on our sales of PROCRIT in certain market segments. The settlement includes the payment by Amgen to us of $200 million which we expect to record in this account in the third quarter.

This account is difficult to forecast, but considering the Amgen settlement payment, as well as some other partially offsetting items and assuming no other 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 $250 million to $300 million.

And now a word on taxes. Year-to-date through the second quarter of 2008, the company's effective tax rate was 24%. Consistent with our earlier guidance, we would suggest that you model our effective tax rate for 2008 in the range of 24% to 24.5%, which would not include any in-process research and development charges or other special items. Additionally, this guidance does not assume the reenactment of the R&D tax credit for 2008. As always, we will continue to pursue opportunities in this area to improve upon this rate throughout the year.

Turning to sales, we would be comfortable with your models reflecting operational sales growth for the full year 2008 of between 1% and 2%, consistent with our earlier guidance. As you know, currency rates are difficult to forecast so while we are not predicting the impact of currency movements on our sales to give you an idea of the potential impact if currency rates were to stay where they are today through the end of this year, then our sales growth would be favorably impacted by approximately 4.5 points, resulting in total reported sales growth for the year of between 5.5% and 6.5%.

Now for earnings. When I last checked, the First Call mean estimate for our EPS for full year 2008 was $4.45 per share. Considering the strength of our operating performance this past quarter, and taking into consideration the items I have outlined for you, but also taking into consideration opportunities to invest in future growth, we would be comfortable with your models reflecting full year 2008 earnings per share, excluding in-process research and development charges or other special items, of between $4.45 and $4.50 per share or an increase of $0.05 from our previous earnings per share guidance.

That concludes my comments on our operating performance this quarter and our guidance with respect to your models. I look forward to updating you throughout the remainder of the year on our quarterly earnings calls.

Thank you, and now back to you, Louise.

Louise Mehrotra, Vice President of Investor Relations

Thank you, Dominic. Ashley, could you provide some instructions on a Q&A session?

Q&A

Operator

(Operator Instructions) Your first question comes from Rick Wise, Leerink Swann.

Rick Wise, Leerink Swann

Let me start with the sales projections, Dominic you are guiding to 1% to 2% organic sales growth, and yet the first quarter. if I am looking at my numbers right, was nearly 3%; the second quarter was 3%+. Just remind us what, in your mind, is going to be so much slower? Is it the generics and the stent share loss likely in the second half?

Dominic Caruso, Chief Financial Officer

Sure Rick. As you know, RISPERDAL lost its market exclusivity at the end of June so we had expected that and we also had expected additional competition in the drug-eluting stent market.

Additionally, as you saw, we've seen a decline in the market for PROCRIT continuing from the prior year. So we had thought this would be the case at the beginning of the year when we commented on our sales guidance, and taking all of our sales performance into consideration year-to-date, some positives as well as some negatives and looking out to the future, we feel comfortable with the original guidance we gave of 1% to 2% operationally, of course impacted then by currency movements. We tried to give you an impact of what that might be.

Rick Wise, Leerink Swann

That was very helpful. Let me follow up with a couple of quick things. In the first quarter there seemed to be some economic impact on procedures. Perhaps you can talk specifically from the top line perspective. Ethicon, Ethicon Endo seemed to be rebounding nicely after a softer first quarter. Are you seeing any economic impact procedures generally?

Maybe on the cost side of that as well, Dominic, if you could touch on the impact of rising commodity costs and energy costs and how that affects the outlook for cost of goods or gross margins through the rest of the year? Thank you so much.

Dominic Caruso, Chief Financial Officer

Well, with respect to procedures, let's just talk about the first quarter. You're right, we did see some softening in both the Ethicon and Ethicon Endo business in the first quarter. Our comments then talked about the fact that there were some lower inventory patterns and ordering patterns by our distributors and that it might have been a sign of some lower procedures.

As it turned out, it really wasn't the case. There weren't lower procedure volumes, it was simply inventory adjustments by our distributors. In fact, as you saw, we had a nice rebound in the second quarter. We did not see any indication of any slowdown in procedures in the second quarter across the businesses. In fact, our DePuy business in the first quarter seemed to be impacted by the holiday time, as many of our competitors commented on as well. We are happy to see that was also limited to that particular situation in the quarter and not at all a trend, as we did not see any other procedural slowdown of any nature in the quarter.

With respect to energy and commodity prices and the like, it is a great question. Many companies are facing into this. We have a mix of businesses, as you know. The commodity prices and energy prices impact our consumer business more than they do our other businesses, as more direct material costs are a percentage of the total cost of products in that business compared to either medical devices or pharma.

Our team has managed through that reasonably well. We've put in cost improvement programs to try to offset those cost increases as much as possible, but we've also announced to our partners that we'll be taking some price increase throughout the remainder of the year; not in all product lines but across products that are most affected by commodity price increases.

Operator

Your next question comes from Tao Levy, Deutsche Bank.

Tao Levy, Deutsche Bank

One quick question on the settlement that you announced with Amgen, how do you think that affects the business over the back half of the year? Essentially are they no longer able to do the bundling that they were doing in the past?

Dominic Caruso, Chief Financial Officer

I think comments about their activity, I would ask that you ask them directly those comments. We're satisfied with the settlement. We are happy with the fact that we came to a reasonable settlement on our claims against them in their marketing practices. As we said in the press release, we are pleased with the settlement and we'll just move on.

Tao Levy, Deutsche Bank

Should the expectations be that the oncology business for J&J on the PROCRIT side improves?

Dominic Caruso, Chief Financial Officer

Tao, as you know, we don't provide any specific outlook for any specific products, but I can tell you that our guidance for the full year takes all these matters into consideration.

Tao Levy, Deutsche Bank

You mentioned the decline in prices on drug-eluting stents. Do you have some sort of magnitude in the second quarter, given the entry of the new competitor?

Dominic Caruso, Chief Financial Officer

Sure. Let me ask Louise to handle that.

Louise Mehrotra, Vice President of Investor Relations

In the U.S., the price in the quarter was about $19.40 and that's down about 2% versus the first quarter and down about 11% versus the second quarter of '07.

Tao Levy, Deutsche Bank

Anything internationally?

Louise Mehrotra, Vice President of Investor Relations

Internationally, the prices were flat in U.S. dollars but that also is impacted by the currency, so they were down about 10% in local currencies in Europe but that has been offset by the gains in the currency rate.

Operator

Your next question comes from Larry Biegelsen, Wachovia.

Larry Biegelsen, Wachovia

Can you remind us of the Rivaroxaban filings date in the U.S.? Also, I don't I think I heard you say when you were going to be responding to the FDA on Ceftobiprole. Then I have one question on PROCRIT/EPREX after that.

Dominic Caruso, Chief Financial Officer

Louise, why don't you give Larry those dates?

Louise Mehrotra, Vice President of Investor Relations

Rivaroxaban, in the United States we expect to file in the third quarter of '08. Regarding Ceftobiprole and the complete response, we are anticipating it will happen in the third quarter.

Larry Biegelsen, Wachovia

Could you help us understand the potential impact of the recent EMEA warnings for EPREX? Is it reasonable to assume that about 40% of EPREX sales are in oncology and about 40% of the oncology use is in symptomatic patients with curative intent?

Also, how do those numbers compare to the U.S.? Does oncology still represent about 70% of PROCRIT sales and do you expect the upcoming PROCRIT label revision to be similar to the EME warning? Just lastly, the timing of the U.S. label revisions?

Dominic Caruso, Chief Financial Officer

Let me just take the last part of that real quick. I think it's probably premature for us to comment on what we expect the actual label to be. This is a recommendation on potential labeling and of course the various countries have to work through the recommendations, so I really don't think we should comment now prematurely on what the ultimate labeling might be.

With respect to the actual facts on the percentage of sales, I've given Louise now a few minutes to look that up, so go ahead Louise.

Louise Mehrotra, Vice President of Investor Relations

So for PROCRIT in the United States it's about half oncology. If you define curative as non-metastatic stage 1 to 3 it would be about half of that is curative.

In terms of the EMEA, EPREX, it's about 55% oncology and at this point there is no clear definition OUS of what curative means, so we're not going to provide that information but you could probably use Pfizer as a benchmark.

Operator

Your next question comes from Mike Weinstein, JP Morgan.

Mike Weinstein, JP Morgan

Let me start with just a couple of clean-up items. Ustekinumab, you did get a positive panel vote and I would like to hear if you have had any dialogue with the agency on what you think might be needed to get that product approved post the panel, and what do you think the timing might be?

Dominic Caruso, Chief Financial Officer

Well as you know, there was a unanimous recommendation for approval of Ustekinumab and we are in discussions with the FDA. I probably can't give you too much detail on what those discussions are. I think the PDUFA data, if I'm not mistaken, is sometime in September of this year.

Louise Mehrotra, Vice President of Investor Relations

Yes. We actually filed November 29, so assuming it is a ten-month review, you are correct.

Mike Weinstein, JP Morgan

We should be looking still to that date as a legitimate action date?

With that in mind I am thinking about Paliperidone palmitate, which I am not sure if you commented on, but if you could give us your thoughts about the timing of that product?

Dominic Caruso, Chief Financial Officer

That PDUFA date for Pali is August, am I correct in that?

Louise Mehrotra, Vice President of Investor Relations

We filed October 29, 2007.

Dominic Caruso, Chief Financial Officer

Right, so it's August of '08. This is an area of the agency, Mike, as we have commented on before that has not typically given approvals in first response. We are in dialogue with the agency. It would probably be premature to comment on what they might do, but that date is upcoming now in August.

Mike Weinstein, JP Morgan

Dominic, let me ask you a broader financial question. It looks like you are on track for very low single-digit organic growth this year, but because of the company's discipline you are going to able to deliver what looks like is going to be at least high single-digit earnings growth; it may end up as high as 10%.

Can you talk a little bit about how we should be thinking about 2009 without actually giving guidance at this point? I don't think the company's taken share in a long time because of the generic competition issues. So you are showing really strong resilience in 2008 in managing the income statement. Should we be expecting the same as we move to '09? Thanks.

Dominic Caruso, Chief Financial Officer

Mike, it's a great observation. I think we are used to managing our P&L well. As you know, we have a strong track record of profitable growth and recently with the various challenges we faced and short-term pressures with market declines and other matters and new competition, I think our management teams have responded very well and they are accustomed to managing the business solidly anyway, but I think in these tougher times where there are some short-term pressures or some unexpected pressures, they have certainly risen to the occasion and are demonstrating the ability to manage the business well.

Our long-term view of our business, as you know, as we aim to grow our business in a way that's faster than the markets that we compete, and we ultimately also aim to grow our profits faster than our sales. You've seen us improve operating margins this year. We have taken actions to do that and we certainly expected that trend will continue into '09.

We've managed the business to grow our earnings at a rate that's faster than our sales. We just think that's good, sound discipline while still keeping an eye on investing for the future.

Operator

Your next question comes from Matthew Dodds, Citigroup.

Matthew Dodds, Citigroup

Dominic, if you look at the P&L and how that has year has gone so far, the one thing that I am surprised about is the SG&A is actually growing in line with the sales, and it is the R&D that has dropped a bit more.

I am wondering on the SG&A side, is that mix or foreign exchange that is keeping it at those rates, and can we expect that to start dropping at a growth rate below sales as we move through this year?

Dominic Caruso, Chief Financial Officer

It's a good observation. One thing to point out about SG&A, there are two factors. One is mix, as you mentioned. So as we launch products, for example, in our consumer business or the consumer business grows a bit faster in any one quarter that's a more SG&A intensive business.

Also, in some of our other businesses, for example our MD&D business as I pointed out earlier, we did launch some new products. So occasionally you will see an uptick in SG&A expense either related to the mix of the business or related to new launches.

In fact, in this particular quarter, if I back out just the launch expenses associated with some new meters from LifeScan, etc., we did see leveraging in the SG&A lines. So it's just a particular timing issue related to the launch of new products. Overall, we intend to leverage SG&A expense.

Matthew Dodds, Citigroup

One extra question on LEVAQUIN. Should we now think of that product as no longer a growth driver? This isn't just one soft quarter, that it is really not a growth driver going forward?

Dominic Caruso, Chief Financial Officer

There are two ways to look at it. One, of course, you know the warning that's been recommended for LEVAQUIN is actually not a new warning, it's the warning that was already on the label regarding tendon ruptures, but it now is more pronounced because it will be a black boxed, bolded warning. So obviously that should have some impact.

But I think it's already well-known, the reaction to those quinolones and that particular side effect. And then we've seen some competition, of course. So we are still happy with the product; obviously we have a good presence in the anti-infective arena with that product and we are happy with its performance. There is a bit of a change in character in the sense that the warning will be little bit stronger than it was before and there is some additional competition.

Operator

Your next question comes from Michael Jungling, Merrill Lynch.

Michael Jungling, Merrill Lynch

I have three quick questions. First on consumer, I realize you have had a very strong constant currency organic growth rate, but I'm curious whether you are seeing a negative mix shift towards cheaper alternatives within your division.

Secondly, on your cost rationalization program of $1.5 billion, $1.6 billion, could you please comment on what the run rate is in the second quarter?

The third question is on M&A. Most of the sub-sectors of medical devices are now trading at valuations 25% below the five-year average. I am just curious whether this is something which would perhaps accelerate J&J's intent of doing more M&A. Thank you.

Dominic Caruso, Chief Financial Officer

Okay. Great Michael, let me try to take those in order. We have not seen, in the consumer business, a trend to more cheaper alternatives. I think our consumer business appeals to a certain consumer class, if you will, if I could use that word. It is a class of consumers that value professionally endorsed and scientifically-based innovations in consumer products. We haven't seen any shift to cheaper alternatives in our business so I am glad to report that.

With respect to the cost savings of the restructuring program, I think it's probably best to just comment on the overall cost restructuring savings we had anticipated. We had anticipated $1.3 billion to $1.6 billion, so I just wanted to correct what you had said earlier. The range was $1.3 billion to $1.6 billion. As I said earlier in my discussion, now that we've substantially implemented the program we are very comfortable at the high end of that range.

Approaching $1.6 billion in total cost savings is the annual cost savings in '08 because there are projects that are implemented in various times through out the year, but we are comfortable at the high end of our range that we've substantially implemented all those projects.

Thirdly, with respect to M&A, as you know, we're always looking at M&A opportunities with our primary criteria being that they create value for shareholders. I don't think it necessarily accelerates our efforts; we've been involved in looking at M&A opportunities all the time, and obviously if there is an opportunity that we think would generate significant shareholder value we would obviously move forward on that.

You are right, that lower prices could make that easier to do, but I think it's just part of our normal discipline of looking at acquisitions and determining whether they can generate value and then moving at the appropriate time.

Operator

Your next question comes from Bob Hopkins, Banc of America.

Bob Hopkins, Banc of America

Dominic, on your comments about price increases, you mentioned some of your businesses have been more affected by cost pressures than others. I was wondering if you could go into a little bit more detail there and just give us a sense as to which businesses have been most affected?

Dominic Caruso, Chief Financial Officer

Sure. What I meant to say is the consumer businesses in general, Bob, have a higher percentage of their costs comprised of direct raw materials and in some of those product lines, those direct materials are derivatives of oil or other commodities that have accelerated in price or in cost to us.

It is basically the consumer business and those product lines within consumer that have resin-based or other commodity-based components.

Bob Hopkins, Banc of America

In the device division, has there been anything that really sticks out from a cost perspective?

Dominic Caruso, Chief Financial Officer

Not really across the overall device business, no.

Bob Hopkins, Banc of America

Not to put words in your mouth, but is it safe to say that basically what we are hearing here today about J&J relative to the economy is that you are seeing no meaningful impact on revenue growth for J&J as a result of the worldwide economy and the U.S. economy?

Dominic Caruso, Chief Financial Officer

I think that's a reasonable characterization. I think we've seen over multiple economic cycles that healthcare is generally not relatively correlated to economic cycles. Our business in particular has not been correlated with economic cycles in the past. It looks like so far this year our guidance for the year and our expectations for the year are holding up midway through the year and we feel confident about our outlook for the remainder of the year.

Bob Hopkins, Banc of America

Great, and just one final quick one on DePuy; obviously some strong results there. It looks like the hip number was especially strong. I was wondering if you had any comments back from DePuy relative to that hip growth. Because obviously there are a couple of your key competitors that are struggling a bit in hips and I was wondering if you have any commentary about whether maybe some of the outsized growth was due to competitive wins versus just a healthy market.

Dominic Caruso, Chief Financial Officer

Well, I think -- and Louise, you might have some more data here -- as you know, we are very pleased with our hip portfolio and our folks have done a fantastic job with hips. I think through the last shard data that we looked at for hips we had a slight increase in hip share.

Louise Mehrotra, Vice President of Investor Relations

And we are #1 in hips in the United States. If I looked at the market information for the first quarter -- we don't have second quarter at this point -- we think the U.S. market was up about 7% and we grew better than that, so we are very pleased with our hip performance.

Bob Hopkins, Banc of America

But in terms of units, did you get any feedback from the division that you feel like you are gaining unit share from the competitors or you just don't have that level of detail right now?

Louise Mehrotra, Vice President of Investor Relations

Well, I can tell you we have very, very modest price so that would indicate the rest is units.

Operator

Your next question comes from Bruce Nudell, UBS.

Bruce Nudell, UBS

I have a couple of pipeline questions. One of the areas that you are feeling competitive pressure in the anti-inflammatories is inflammatory bowel disease. I was just looking at your pipeline. I didn't see a lot of activity for either CNTO 148 or 1275 in Crohn's or ulcerative colitis. I was wondering what your plans might be there?

My second question pertains to Rivaroxaban which is a potentially very big drug for you folks. When might we really get a glimpse as to its effectiveness in the more chronic applications such as DVT or AF? Thank you so much.

Dominic Caruso, Chief Financial Officer

With respect to AF for Rivaroxaban, that study is ongoing I believe, Louise, so we probably won't see that data for a while, so nothing this year on Riva and AF.

Louise Mehrotra, Vice President of Investor Relations

Filing on that is anticipated to be 2010.

Dominic Caruso, Chief Financial Officer

Right, filing in 2010, so we should see hopefully some data next year on Riva and AF.

With respect to Crohn's disease and our future plans on ulcerative colitis, I think you referred to, and our plans with respect to either CNTO 148 or 1275, at the moment CNTO 1275 is being studied in psoriasis and that is, of course, our first indication. But Louise, for 148 we should talk about the future planned filings for those.

Louise Mehrotra, Vice President of Investor Relations

Also for CNTO 1275 or Ustekinumab, we are also in phase 2 for Crohn's disease so we are looking at it. For CNTO 148 or Golimumab we are in phase 2(b) for ulcerative colitis.

Operator

Your next question comes from Catherine Arnold, Credit Suisse.

Catherine Arnold, Credit Suisse

On Ustekinumab, there has been some speculation periodically that there are competitive patents that may get in the way of you marketing the drug or may require you to add incremental royalty arrangements to the drug. Could you comment on if there are any material patents that you think would fit that description or is that incorrect?

Secondly, I wondered if you could just reconcile your interest in Paliperidone palmitate to give you the opportunity to work with Alkermes to make a once-monthly RISPERDAL?

Dominic Caruso, Chief Financial Officer

Sure. Well with Ustekinumab, typically we will not comment on other's patents. We feel very comfortable about our own patent position.

With respect to working with Alkermes on RISPERDAL CONSTA, there is a potential formulation that I believe Alkermes believes is useful for a once-a-month dosing of RISPERDAL CONSTA. We are studying that particular application or that particular formulation for RISPERDAL CONSTA.

Catherine Arnold, Credit Suisse

If that formulation does prove successful, would you put more emphasis and energy behind that program and then comment? Is there [inaudible] mentioned a 2020 patent cycle for the CONSTA formulation. I'm not sure how that triangulates with your patent protection on Palmitate because I think paloperidone goes quite early; I think it's actually 2010 and 2011, if that's correct.

Dominic Caruso, Chief Financial Officer

Let me let Louise answer that question. She has been closer to that activity, actually. Go ahead, Louise.

Louise Mehrotra, Vice President of Investor Relations

For RISPERDAL CONSTA we have a patent expiration of 2014, but there also is formulation patents that do go out to 2020, so those should be considered. But we are right now communicating 2014.

As far as Paliperidone palmitate, it's in the 2013 range and OUS is, I think, 2017.

Dominic Caruso, Chief Financial Officer

We would just have to wait to see the results before we could comment on which direction we would move.

Catherine Arnold, Credit Suisse

Do you know what the timing is on that, Dominic?

Dominic Caruso, Chief Financial Officer

Next year we'll know something about the new formulation.

Operator

Your next question comes from Sara Michelmore, Cowen.

Sara Michelmore, Cowen

Just a few clean-up items here. Louise, can you just comment on the share dynamics of the CYPHER DS program in Japan? We talked about OUS?

Louise Mehrotra, Vice President of Investor Relations

We actually are not giving out Japan share any longer. We stopped doing that about a year-and-a-half ago, so sorry.

Dominic Caruso, Chief Financial Officer

But it has rebounded nicely in Japan, if I could add. We are pleased with its performance in Japan.

Sara Michelmore, Cowen

With the oral RISPERDAL generic competition in the U.S., could you just comment on INVEGA and if there's been any improvements in the momentum of that product heading into the generic launches of RISPERDAL?

Dominic Caruso, Chief Financial Officer

Well INVEGA is continuing to improve quarter after quarter, but I would say consistent with our prior comments it's not where we had expected it to be. So it's not the launch we had hoped for, as we have commented before, but we do see steady improvement with INVEGA. We believe it's a viable alternative for patients and when used, physicians comment very favorably about the effect with patients.

Sara Michelmore, Cowen

Are you willing to comment on a few of the drugs in the HIV franchise, PREZISTA and INTELENCE?

Dominic Caruso, Chief Financial Officer

Well we are not going to comment on sales sizes other than to point out that we did launch INTELENCE earlier this year. It seems to be well received by the community and PREZISTA is continuing to grow.

Of course what will be an important development would be the approval for front line or first line therapy for PREZISTA which is expected later, perhaps this year, because we filed last year for that.

Sara Michelmore, Cowen

Last question on EVOLENCE. Dominic, you mentioned the new product approval and I am just wondering if you can give us a sense – is that a new salesforce that you are investing in to launch that product? How big of an incremental investment are you making in that area? Thanks.

Dominic Caruso, Chief Financial Officer

Not a very big incremental investment. As you know, we have an ortho dermatological business and that is the group that is responsible for the launch of EVOLENCE. But we have made, obviously, some incremental investments to get ready for the launch, but I wouldn't call it significant.

Louise Mehrotra, Vice President of Investor Relations

With respect to everyone's time, we will ask for two more questions. The next question, please.

Operator

Your next question comes from Larry Keusch, Goldman Sachs.

Larry Keusch, Goldman Sachs

Starting out, some of the comments, Dominic, that you made around the vision care franchise, two things struck me there and I am wondering if you could add some thoughts around it.

Are you suggesting that perhaps you are losing some market share to some of these new product launches?

The other part is you also mentioned that you feel like you are seeing softness in the contact lens market. Are you again suggesting that is perhaps somewhat economically sensitive?

Dominic Caruso, Chief Financial Officer

Well let's just clarify a few things. I think one of the comments that Louise made in her discussion about the Vistakon business is that this quarter's comps were difficult because the second quarter of 2007 included two matters.

One was some product withdrawals by our competitors, plus some product launches for us. So we had a reasonably very strong second quarter of '07 which made this quarter's comp more challenging.

With respect to share, even though the market was soft – Louise, correct me if I am wrong -- I think the last share data is we are still gaining share with that business.

Louise Mehrotra, Vice President of Investor Relations

That is correct. We have first quarter data and we actually have picked up significant share points.

Larry Keusch, Goldman Sachs

So you are seeing some actual softness in contact lens?

Dominic Caruso, Chief Financial Officer

Right, that's apparently because we're gaining share but we're seeing just a slight softness in the market right now.

Louise Mehrotra, Vice President of Investor Relations

We don't have second quarter data, this is our first quarter, but that would be a logical thought process.

Larry Keusch, Goldman Sachs

I don't know if you guys have the details around this, but a couple weeks ago there was a release from PharmaMar indicating that J&J will no longer be involved in the development and marketing of YODNELIS in Japan. Again, I was just wondering if you had any comments around why perhaps you are not going to be involved with Japan with that product?

Dominic Caruso, Chief Financial Officer

What I can tell you about that is that the clinical development of that product in Japan will take some time. In making our priority choices for the future, we opted to essentially return the product back to PharmaMar. I understand they are proceeding with the development.

Larry Keusch, Goldman Sachs

Dominic, just coming to DePuy and primarily the large joint side of the business, now it's been some time since the settlement took place, that was back in the fall. Could you just comment on how business now is running? Is that distraction now behind the organization and it's really all about new product launches, or is the field of play still evolving?

Dominic Caruso, Chief Financial Officer

I think it is partly still evolving in general in the industry. I would say for our business, many of the changes that were agreed to in the settlement we had already implemented well in advance of that settlement. So wasn't as if at the time of the settlement we began new procedures; we had already implemented it.

In fact, I remember in the settlement discussions, that was commented on by the regulators that they were pleased to see that the items that they wanted to have in place we had already put in place.

So I think it's not something that I would characterize as a huge distraction for the business at all.

Operator

Your last question comes from David Roman, Morgan Stanley.

David Roman, Morgan Stanley

Thanks for squeezing in the question. Just a couple of detailed points. Can you just remind us with the $135 million of other income was for?

Dominic Caruso, Chief Financial Officer

David, that account, other income and expense, has a variety of items in it. The most prominent item in that account is our royalty income and we've commented before that is in the $100 million a quarter range. The rest of it is a variety of items, a list longer than I could actually read off.

David Roman, Morgan Stanley

So that is like asset sales or other settlements and things like that?

Dominic Caruso, Chief Financial Officer

Sure, absolutely. There are always miscellaneous items like that that go into that account.

David Roman, Morgan Stanley

On the DePuy side, can you break down U.S and international growth for us?

Dominic Caruso, Chief Financial Officer

Let me ask for Louise to do that.

Louise Mehrotra, Vice President of Investor Relations

This is all on an operational basis. The hips in the U.S. grew 14%; outside the U.S. grew 14%, for a total of 14%. Knees grew 4%; outside the U.S. they grew 8% for a total of 6% and spine was flat in the U.S., up 14% OUS and 4% in total.

David Roman, Morgan Stanley

Then on the knee number in the U.S., that appears to be a little bit below market. Is that more a share issue or are you seeing anything on the market side there?

Louise Mehrotra, Vice President of Investor Relations

What I have is first quarter ma