Apr 20, 2010
Executives
Louise Mehrotra - Vice President, Investor Relations Dominic Caruso - Vice President, Finance and Chief Financial Officer
Analysts
Matthew Dodds - Citigroup Mike Weinstein - JP Morgan Catherine Arnold - Credit Suisse Bruce Nudell – UBS Danielle - Leerink Swann Larry Biegelsen – Wells Fargo David Lewis – Morgan Stanley Bob Hopkins - Banc of America Tao Levy - Deutsche Bank Glenn Novarro – RBC Matt Miksic - Piper Jaffray [Sebastian Packet] – Goldman Sachs Derrick Sung – Sanford Bernstein
Operator
(Operator Instructions) Welcome to the Johnson & Johnson First Quarter 2010 Earnings Conference Call. I would now like to turn the conference call over to Johnson & Johnson.
Louise Mehrotra
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 first quarter of 2010. Joining me on the call today are Dominic Caruso, Vice President, 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.
I’ll begin by briefly reviewing highlights of the first quarter for the Corporation and highlights for our three business segments. Following my remarks Dominic will provide some additional commentary on the first quarter financial results and guidance for the full year of 2010.
We will then open the call to your questions. We expect the call to last approximately one hour.
Included with the press release that was sent to the investment community earlier this morning is the schedule showing sales for major products and/or business franchises to facilitating updating your models. These are available on the Johnson & Johnson website as is the press release.
Before I get into the results let remind you that some of the statements made during this call may be considered forward looking statements. The 10-K for the fiscal year 2009 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 in the press release or on the Johnson & Johnson website.
Now I would like to review our results for the first quarter of 2010. If you would refer to your copy of the press release, let’s begin with the schedule titled supplementary sales data by geographic area.
Worldwide sales to customers were $15.6 billion for the first quarter 2010 up 4% as compared to the first quarter 2009. On an operational basis, sales were essentially flat and currency had a positive impact of 4.1%.
In the US sales declined 5%. In regions outside the US our operational growth was 5.5% while the affect of currency exchange rates positively impacted our reported results by 8.9 points.
Our strongest performing region was the Asia/Pacific/Africa region which grew 7.8% on an operational basis. Europe grew 4.6% operationally while the Western Hemisphere excluding the US grew by 3.5% operationally.
If you’ll now turn to the consolidated statement of earnings, net earnings on a reported basis were $4.5 billion compared to $3.5 billion in the same period in 2009 an increase of 29.1%. Earnings per share were $1.62 versus $1.26 a year ago.
Please direct your attention to the boxed section of the schedule where we have provided earnings information adjusted to exclude special items. As referenced in the footnote, first quarter results in 2010 have been adjusted to exclude the after tax impact of the gain from net litigation matters.
Net earnings on an adjusted basis were $3.6 billion and earnings per share were $1.29 up 3.1% and 2.4% respectively versus the first quarter 2009. I would now like to make some additional comments relative to the components leading to earnings before we move on to segment highlights.
Cost of goods sold at 29% of sales was 70 basis points higher than the same period in 2009 primarily due to product mix in the pharmaceutical business. Selling, marketing and administrative expenses at 30.5% of sales were down 20 basis points versus last year due to cost containment efforts.
Our investment in research and development as a percent to sales was 10% similar to the first quarter 2009. Interest expense net of interest income of $81 million is the same as the first quarter 2009.
Lower interest rates on our cash balanced offset the impact of higher cash balances. Other income net of other expense was nearly $1.6 billion in the first quarter 2010 compared to $75 million in the same period last year.
The 2010 results reflect the net litigation gain mentioned earlier. As a reminder this was excluded from adjusted earnings.
Excluding special items, taxes were 24.4% in the first quarter 2010 versus 24.5% in the first quarter 2009. Turning now to business segment highlights please refer to the supplementary sales schedule highlighting major products or business franchises.
I’ll begin with the consumer segment. Worldwide consumer segment sales for the first quarter 2010 of $3.8 billion increased 1.5% as compared to the same period last year.
On an operational basis sales declined 3.7% while the impact of currency was positive 5.2 point. US sales were down 9.6% while international sales grew 1.4% on an operational basis.
For the first quarter 2010 sales for the over the counter pharmaceuticals and nutritionals decreased 15% on an operational basis compared to the same period in 2009 with US sales down 25.3% and sales outside the US down 2.7% on an operational basis. Sales were impacted by the voluntary recall of certain OTC products announced in January compounded by a less severe cold and flu season.
Shipments throughout the quarter were lower than normal as the company took a very comprehensive approach to the investigation, remediation and resumption of production to insure these products met quality standards. The pace of restocking is accelerating and we are now approaching normal levels of production and shipment for the impacted products.
Zyrtec achieved strong sales growth in the quarter due to new product launches. Our skin care business achieved operational sales growth of 4.6% in the first quarter 2010 with sales in the US growing at 6.9% and sales outside the US up 2.4% on an operational basis.
Growth was driven by Aveeno, Neutrogena, Johnson’s Adult, and Le Petit Marseillais products. The launch of products featuring our patented Cytomimic technology contributed to the results this quarter.
Baby care products achieved operational growth of 1.2% when compared to the first quarter 2009 due primarily to growth in hair care products. Women’s health achieved operational growth of 4.4%.
Sales in the US were down 2% while sales outside the US were up on an operational basis by 7.8%. Strong sales of sanitary protection products outside the US contributed to the results this quarter due to both the acquisition of the Vania products last year and growth in other core products.
Sales in the oral care franchise were down 1.3%. In the US sales were down 7.4% due primarily to the divestiture in the fourth quarter of 2009 of the Efferdent and Effergrip grand compounded by slower category growth in mouth rinses.
Sales outside the US increased 5.1% operationally driven by strong growth for Listerine. That completes our review of the consumer segment and I’ll now review highlights for the pharmaceutical segment.
Worldwide net sales for the first quarter of $5.6 billion were down 2.5% versus the same period last year. On an operational basis sales were down 5.7% with a positive currency impact of 3.2 points.
Sales in the US decreased 12.7% while sales outside the US increased on an operational basis by 6.6%. The first quarter sales were negatively impacted by approximately $60 million related to the recently enacted healthcare reform legislation.
Dominic will discuss healthcare reform in greater detail in his commentary. Additionally, our results continued to be impacted by generic competition on some of our products namely Risperdal Oral and Topamax.
The marketing exclusivity for Risperdal expired in the US at the end of June 2008 and the US marketing exclusivity for Topamax expired at the end of March last year. The combined impact of these two products has reduced the first quarter worldwide pharmaceutical operational growth rate by approximately 11 points with the US impact estimated at approximately 14% and the impact outside the US estimated at 4%.
Now reviewing the major products. Contributing to the results were a number of the core products which I’ll discuss in a moment, and importantly the new products introduced recently; Stelara, Simponi, Invega Sustenna and Nucynta.
Sales of Remicade a biologic approved for the treatment of a number of immune mediated inflammatory diseases were up 15.4% when compared to the first quarter 2009. Sales growth in the US was 5.8% due to strong market growth partially offset by lower market share due to increased competition.
Strong market growth as well as build in inventory contributed to an increase in the export sales of nearly 40%. Procrit Eprex declined operationally by 8.2% during the quarter as compared to the same quarter last year with Procrit down 9.7% and Eprex down 6.2% operationally.
A softening of the market has contributed to the lower sales results for both Procrit and Eprex. Risperdal Consta a long acting injectable anti-psychotic achieved first quarter sales growth of 10.3% on an operational basis.
Sales in the US were down 7.1%, however, the total US sales of our long acting injectable including Invega Sustenna increased versus a year ago due to an increase in combined market share. Sales of Risperdal Consta outside the US were up 21.4% operationally with strong growth in all major regions.
Sales of Levaquin our anti-infective were down 12.8% on an operational basis when compared to the same period a year ago. The US and anti-infective market is estimated to be down approximately 8% in the quarter due to a lower incident of respiratory illness and flu.
Concerta, a product for attention deficit hyperactivity disorder declined 7.3% operationally in the first quarter as compared to the same period last year with the sales in the US down 14.1%. Concerta is the product most impacted by healthcare reform in the quarter due to changes to Medicaid managed care.
Sales outside the US were up 17.3% operationally with strong growth seen in most major regions. Velcade, a treatment for multiple myeloma is being co-developed with Millennium Pharmaceuticals.
We have commercialization rights in Europe and the rest of the world outside the US. Operational sales growth was strong at 26.3% driven by strong market growth.
AsipHex as known in the US market and Pariet outside the US is a proton pump inhibitor or PPI that we co market with Eisai. On an operational basis sales were down 5.7%.
US sales were down 13.8% with script share in the US down nearly 1% due to increased competition from generics in the category. Sales outside the US were up 3.1% operationally due to increased sales in Europe due to increased market share.
Prezista, a protease inhibitor for the treatment of HIV grew operationally 46.8% with the US growing 23.6% and sales outside the US growing 80% due to very strong momentum in share. Invega, an atypical anti-psychotic grew operationally 15.1% due to the very strong growth outside the US.
To complete the review of the pharmaceuticals, we know many of your closely follow the progress of our late stage pipeline. Today we will provide an update on two of those programs; Bapineuzumab and TMC278.
Starting with Bapineuzumab we are updating the information regarding the clinical development plan on ClinicalTrials.gov. Bapineuzumab is an investigational compound for the treatment of mild to moderate Alzheimer’s disease that we are developing in collaboration with Pfizer.
As you know, we acquired the rights tot he Alzheimer immuno therapy program or AIP from Elan in September 2009. To review, there are four phase three trials in the clinical development program.
Our subsidiary Johnson AI is leading both carrier and non-carrier studies focused primarily on clinical trial sights in North America while Pfizer is leading two similar studies focused primarily on study locations outside of North America. Each of these four trials includes important bio-marker sub-studies an integral part of the phase three program.
These sub-studies and the bio-marker data are relevant to the overall timelines for the clinical program and critical to the understanding of the affects and potential benefits of Bapineuzumab and I would therefore integrate it into our projections of trial completion. The duration of all our phase three studies is 18 months and the trials are considered fully completed when the related bio-marker sub-studies have also completed.
We expect the Johnson AI led North American studies to be completed with last patient out in mid 2012 and are in the process of updating ClinicalTrials.gov to reflect this. Pfizer is completing a review of the studies outside of North America.
As an update on TMC278, the two pivotal phase three studies recently completed four to eight weeks in the evaluation of TMC278 for the treatment of HIV and treatment naive patients. The result in both studies demonstrated that TMC278 met the primary efficacy objective of non-inferiority.
We look forward to presenting the full results at an HIV conference and are on track to submit TMC278 for regulatory review in the third quarter of this year. Additionally, to keep the investment community apprised of the status of some of the earlier stage pharmaceutical pipeline compounds, as well as selective filings for the medical devices and diagnostics pipeline products presented at our annual business reviews, beginning this quarter we will be posting these additional pipeline charts on the website under the pipeline tab in the investor relations section of JNJ.com.
I’ll now review the medical devices and diagnostic segment results. Worldwide medical devices and diagnostic segment sales of $6.2 billion grew 8.1% operationally as compared to the same period in 2009.
Currency had a positive impact of 4.4 points resulting in a total sales increase of 12.5%. Sales in the US were up 8.8% while sales outside the US increased on an operational basis by 7.5%.
Now turning to the franchises, starting with Cordis. Cordis sales were down 3.3% operationally with the US up 2% and sales outside the US down 6.3% operationally.
Cordis results were impacted by lower sales of Cypher, our sirolimus-eluting stent, partially offset by the strong growth in our Biosense Webster business. Cypher sales were approixmately $190 million down 27% on an operational basis versus the prior year.
Sales in the US were approximately $60 million were down 12%. In comparison tot he first quarter 2009 the US drug eluting stent market declined 13%.
Penetration rates were estimated at 78% up from 75% a year ago while PCI procedures were estimated to be down approximately 10% in the quarter versus the same period last year. The estimated price for Cypher is the US is down approximately 3% versus the first quarter 2009.
Estimated share in the US of 15% was the same as a year ago and up two points sequentially due to the strong contributions from the introduction of the Cypher 2.25 millimeter stent in the latter half of 2009. Sales outside the US of approximately $130 million declined 33% operationally.
The estimated market share in the quarter of 20% was down four points on a sequential basis and down nine points versus the first quarter 2009. Increased competition has impacted the share outside the US.
Cypher estimated worldwide share for the quarter was 18% down two points sequentially and down five points from the first quarter 2009. Biosense Webster, our electro physiology business achieved strong double digit operational growth in the quarter due to increased market share.
The successful launch of Carto three made a strong contribution to the results. Our DePuy franchise had operational growth of 8.2% when compared to the same period in 2009 with US growing 6.3% and the business outside the US growing by 11.2% operationally.
Pressure on pricing continued as a result of the economic trend, however, positive mix due to continuing product innovation has mitigated much of the impact. Operational hip growth on a worldwide basis was approximately 11% with the US growth at 7%.
Our estimated market share leadership position in the US widened sequentially throughout most of 2009 with the year end position estimated to be four points higher than the next competitor. The growth outside the US at 16% operational was driven by the success of the Acetabular and Cementless systems.
On an operational basis worldwide knee growth was approximately 9% due to the strength of the underlying business complemented by the new product launches. US growth for the quarter was 10% and outside the US growth was 8% operational.
Spine achieved operational growth of approximately 3% with the US flat and sales outside the US up 11% operationally. Pricing pressure in the category impacted the growth in the US.
Mitek, our sports medicine business grew approximately 11% operationally fueled by new product launches. The US growth was 8% and the growth outside the US was 13% operational.
The Diabetes franchise was up 6.4% operationally in the first quarter 2010 with the US business up 7.4% and the business outside the US up 5.4% operationally. Volume growth has been partially offset by continued pricing pressure.
Animas, our insulin pump business grew double digits due to new product launches and a continued development of the international market. Ethicon worldwide sales grew operationally by 15.5% with the US up over 25% and sales outside the US up 7.6% operationally.
The strong results were driven by double digit growth in sutures, bio-surgicals, and meshes. Additionally, the acquisitions of Acclarent this year and Mentor in early 2009 contributed about a third of the worldwide growth in the quarter.
As an update on the fibrin pad we believe we will be in a position to file the BLA during the latter half of 2010. Ethicon Endo-surgery achieved operational growth of 10% in the first quarter 2010 with the US sales growing 6.4% due to the strong growth of the advanced sterilization products or ASP.
Sales outside the US grew on an operational basis by 12.9% driven by the strong double digit growth for endo products, harmonic products and ASP. As an update on Sedasys, the first computer assisted personalized sedation system; the FDA recently issued a non-approvable letter for the PMA.
The Sedasys system integrates drug delivery and patient monitoring to enable Propofol sedation personalized to each patients needs. Ethicon Endo-surgery has appealed by filing a request for an administrative review by an independent advisory committee through the FDA commissioner’s office.
We are disappointed by the FDAs decisions especially following a successful clinical program and FDA advisory panel recommendation for approval. We remain committed to and excited about the future of the Sedasys system in the US and the clinical benefits it can bring to patients, physicians and nurses.
Ortho clinical diagnostics achieved operational growth of 8.9% in the first quarter. Sales growth in the US was 4% while sales outside the US were up 16.1% on an operational basis.
Vitros 5600 and 3600 made strong contributions to the results this quarter. Rounding out the review of the medical devices and diagnostic segment our vision care franchise achieved operational sales growth of 6.8% in the first quarter compared to the same period last year.
Sales in the US increased 6.4% while sales outside the US increased 6.9% on an operational basis. Double digit growth in both astigmatism and daily lenses were driven by the strength of the underlying platform and new product launches.
That completes highlights for the Medical Devices and Diagnostic segment and concludes the segment highlights for Johnson & Johnson’s first quarter 2010. I’ll now turn the call over to Dominic Caruso.
Dominic Caruso
I would like to provide some comments about our quarterly results and share some exciting developments in our business. I will also discuss the estimated impact of the recently enacted healthcare reform legislation and finally provide guidance for you to consider in refining your models for 2010.
We are very pleased with our financial results for the first quarter. We continue to deliver solid earnings despite several pressures in the quarter including tough year over year comparisons in our pharmaceutical business that we anticipated due to the impact of generic competition, most notably with Topamax in the first quarter.
And the impact to our consumer business from our recent OTC product recall and finally the initial impact of US healthcare reform legislation. Our ability to offset these pressures and still deliver solid earnings is another example of the strength in our broad base of healthcare businesses.
Excluding the estimated impact of generic competition and the affect of the consumer OTC product recall our underlying operational sales growth for the first quarter was approximately 5%. As for earnings you should be aware that our first quarter results of $1.29 per share includes an estimated $0.03 per share impact from items that you may not have factored into your estimates including the initial impact of healthcare reform, a currency impact that was less favorable than our previous expectations and a higher tax rate than our guidance since the R&D tax credit has not yet been enacted.
We remain committed to growing our business and we are well positioned for leadership and growth as we continue to manage our cost structure while investing in growth, launching several new products and advancing our pipeline. We see positive signs and growth opportunities across all of our businesses some of which I will talk about now.
I would to highlight for you a few exciting developments in the first quarter. We continue to see good progress in our recently launched pharmaceutical products.
For example, Simponi continued to gain market share in the quarter up nearly 0.5% and Stelara has been very well received by physicians for the treatment of moderate to severe psoriasis, with market share up over 4% achieving a nearly 14% market share in the US thermatology market since its launch. We commenced the global launch of three new skincare products based on the breakthrough anti-aging Cytomimic technology we discussed with you in January.
These three brands; Aveeno Ageless Vitality, Neutrogena Clinical, and Rock Brilliance all use variations of this proprietary patented technology to generate a flow of energy that travels through the surface layers of the skin to stimulate a natural renewal process. Zyrtec liquid gels got off to a strong start in the first quarter as the latest addition to the Zyrtec brands growing portfolio of allergy products.
One Day Acuvue True Eye is the world’s first daily disposable silicon hydrogel and the most exciting breakthrough in contact lens technology in years. True Eye has already been launched in numerous international markets.
In the first quarter it was approved in Japan, the world’s second largest contact lens market. Introduction in the US, the world’s largest contact lens market is expected later this year.
In other important pipeline news for the quarter, we filed the Nevo sirolimus-eluting coronary stent for CE mark approval in Europe, and the ExoSeal vascular closure devise was filed for approval in both Europe and the US. And our HIV drug Prezista met its primary objective in a new study comparing the safety and efficacy of a once daily versus twice daily regiment in treatment experienced patients.
Finally, we are pleased to have settled long standing litigation with Boston Scientific in the first quarter and our reported earnings results reflect this gain partially offset by other litigation matters which we have treated as a special item. Now for some comments on the newly enacted healthcare reform legislation.
With the recent passage of the reconciliation bill we now have a clear view of its implications on the industry and Johnson & Johnson. We support this legislation recently passed by the US Congress and we believe that appropriate healthcare reform can offer potential opportunities for growth and enhanced care for millions of patients in the United States.
We continue to feel very positive about many provisions in the legislation that will help increase patient access over time, improve the long term sustainability of the US healthcare system and at the same time provide incentives for medical progress. We see benefits coming from the programs emphasis on reducing hospital acquired infections, physician’s incentive for better outcomes and increased incentives for wellness and prevention initiatives.
We have also been strong supporters of the provisions around bio-similars and comparative effectiveness which it ultimately benefit patients and provide the right environment for innovation. At the same time we recognize that there are significant financial implications and costs for healthcare companies like Johnson & Johnson.
While most of the increased access for uninsured patients will not be seen until 2014 a number of the provisions are effective in 2010 and will have an immediate impact. As many financial analysts have already published, the pharmaceutical industry impact is estimated at over $100 billion and as much as approximately $115 billion over a 10 year period.
We estimate that the industry impact is $4 billion in 2010 this represents approximately 2% of the US branded pharmaceutical market. In 2011 the impact on the pharmaceutical industry is estimated at approximately $11 billion or about 6% of the US branded pharmaceutical market.
In terms of the medical device industry an excise tax of 2.3% of sales is included in the legislation but this will not be effective until 2013. For Johnson & Johnson, in 2010 we estimate that the impact to sales will be in the range of approximately $400 to $500 million.
This amount is less than 1% of the 2009 sales for our total enterprise and approximately 3% of our 2009 pharmaceutical sales in the US. This impact is slightly higher for our pharmaceutical business than the overall pharmaceutical industry because our mix of products are more impacted by the healthcare provisions that take affect in 2010.
In 2011 as other provisions take affect we anticipate that the impact to Johnson & Johnson will be more in line with the overall pharmaceutical industry impact. Ultimately the reduction in sales resulting primarily from higher rebates will negatively impact our earnings in 2010 by approximately $0.10 per share.
Although it is important to note that this represents our early estimate based on the available information at this time. We are on track with our previously announced restructuring efforts.
As we noted in our restructuring announcement last November and as we discussed in January we have designated the majority of the savings from the restructuring to investments and the many growth opportunities we have and it is our intention to continue with those investments despite the impact of US healthcare reform on our earnings. Given all that as context, let me now provide some guidance for you to consider as you refine your models for 2010.
This guidance will reflect the impact of healthcare reform as I just described it. Let me begin with a discussion of cash and interest income and expense.
At the end of the first quarter we had approximately $6 billion of net cash. This consists of approximately $18 billion of cash in investments and approximately $12 billion of debt.
This is an improvement of $1 billion in our overall net cash position from the fourth quarter 2009. For purposes of your models, assuming no additional major acquisitions during 2010 I suggest you consider modeling net interest expense of between $300 and $400 million slightly lower than our previous guidance.
Turning to other income and expense, as a reminder this is the account where we record royalty income as well as one time gains and losses arising from such items as litigation, investments by our development corporation and asset sales or write offs. This account is difficult to forecast but assuming no major one time gains or losses I would recommend that you consider modeling other income and expense for 2010 as a net gain ranging from approximately $200 to $300 million consistent with our previous guidance and excluding the impact of the recently settled litigation with Boston Scientific.
Now a word on taxes. For the first quarter 2010 the company’s effective tax rate excluding special items, was 24.4%.
This does not reflect the benefit of the R&D tax credit because that legislation has yet to be passed. We suggest that you model our effective tax rate for 2010 in the range of 23% to 24% consistent with our previous guidance.
This rate takes into consideration changes in the mix of our business for 2010 as well as a retroactive extension of the R&D tax credit for 2010. While it is not yet enacted it is our expectation that the R&D tax credit legislation will be passed and therefore we have included this impact in our estimate for the year.
As always, we will continue to pursue opportunities in this area to improve upon this rate throughout the year. Now turning to sales and earnings.
As we did throughout 2009 our guidance will be based first on the constant currency basis reflecting our results from operations, assuming that average currency rates for 2010 will be the same as they were for 2009. This is the way we manage our business and we believe this provides a good understanding of the underlying performance of our business.
We will also continue to provide an estimate of our sales and EPS results for 2010 with the impact of currency exchange rates could have and will use the Euro as an example. Turning to sales.
We would be comfortable with your models reflecting an operational sales increase on a constant currency basis of between 2% and 3% for the year. This is consistent with our previous guidance and now reflects the previously mentioned estimated impact of healthcare reform.
This would result in sales for 2010 on a constant currency basis of between $63 and $64 billion. While we are not predicting the impact of currency movements, to give you an idea of the potential impact, if currency exchange rates for all of 2010 were to remain where they were as of last week, then our sales growth rate would be positive impacted by approximately 1% or approximately $500 million.
This is a decrease from our previous guidance due principally to the weakening of the Euro from $1.42 in January to $1.35. Thus under this scenario we would then expect reported sales growth to be between 3% and 4% for a total expected level of reported sales of between $63.5 and 64.5 billion.
Now turning to earnings. I suggest that you consider full year 2010 EPS estimates excluding the impact of special items but now including the impact of healthcare reform of between $4.80 and $4.90 per share on an operational basis, that is assuming the same average exchange rates for 2010 as we saw in 2009.
This represents an operational EPS growth rate of 4% to 6% and is consistent with our previous guidance. Due to the strength of our business performance and our outlook for the remainder of the year, we are able to accommodate the impact of healthcare reform in our EPS guidance range of $4.80 to $4.90 per share.
As you update your models to incorporate the impacts of healthcare reform as well as changes in currency rates that I will discuss in just a minute, your models would likely reflect the lower end of the range of this guidance. Given it is early in the year and there are a number of estimates included in these numbers, we would be comfortable with that.
We look forward to updating you as we learn more. While we are not predicting the impact of currency movements, to give you an idea of the potential impact on EPS, if currency exchange rates for all of 2010 were to remain where they were as of last week, as an example with the Euro at $1.35.
Then currency impacts would be modest or essentially neutral to prior year and therefore our reported EPS excluding special items would also be between $4.80 and $4.90 per share. Importantly as you consider the guidance I’ve provided today we would be comfortable with your models continuing to reflect and improvement in pre-tax operating margins for 2010.
That concludes my comments on our operating performance this quarter and our guidance with respect to your models. Louise, back to you for some question and answers.
Operator
(Operator Instructions) Your first question comes from Matthew Dodds - Citigroup
Matthew Dodds - Citigroup
On the guidance it looks like when you compare how you talked about it last quarter with the FX with healthcare reform it’s about $0.12 to $0.15 total hit. Can you at least say broadly and also lumping this into the sales guidance with the $400 to $500 million hit is this mostly operational where you’re making up the difference or is there some area on the business in terms of revenue where you’re seeing an increase versus what you thought at the beginning of the year?
Dominic Caruso
You’re right; it’s about $0.05 lower due to currency so that $0.05 benefit sort of disappears due to current rates. Then of course healthcare reform I said was estimated at $0.10.
The underlying business is doing well. We said that if you exclude the impact of the generic competition in the first quarter and you also exclude the impact of the OTC recall which obviously took a toll on us in the first quarter, the underlying business growth is about 5% and we saw some very good growth in the medical device and diagnostic business at about 8% operational.
I would characterize this as confidence in our top line returning to growth and still delivering some pre-tax operating margin improvement as we indicated we would be throughout the year.
Matthew Dodds - Citigroup
It looked like diabetes and vision both did better and some of the consumer areas also maybe a little better versus the prior couple quarters. Is it your view, big picture, that you’re seeing some recovery in some of the areas that are economically impacted?
Dominic Caruso
Yes, I would characterize it as in some areas of the business we’re seeing stabilization and some recovery. The consumer businesses have always been as you know impacted by this kind of economic downturn but we still have innovations in the consumer business as we just discussed with Cytomimic technology, etc.
which consumers seem to favor and you do very well with those. Also, you’re right, life scan and vision care I have seen a rebound in the overall market for those products and our business seems to be recovering there.
In our medical device business I think a good sign of some recovery in healthcare spending is in our suture business where that’s a good barometer of what’s going on in the market and we see the growth there increasing over where it was the prior year as our procedures in hips and knees and other procedures including aesthetic medicine which we saw rebound nicely as well.
Operator
Your next question comes from Mike Weinstein - JP Morgan
Mike Weinstein - JP Morgan
Let me start with healthcare reform impact, in 2010 the impact was principally the increase in the Medicaid rebates. The donut hole fill in doesn’t come into effect until 2011.
Can you give us some preliminary thoughts on what that impact might be without obviously touching your 2011 guidance yet?
Dominic Caruso
It’s a good observation, you’re absolutely right, in 2010 it’s essentially all Medicaid and the mix of our business is essentially higher than the pharmaceutical industry norm in terms of Medicaid type products. In 2011 that is when the Medicare provisions kick in, particularly the donut hole.
It looks to us like our mix of the business would not be as impacted as the overall pharmaceutical industry with respect to that part of our business largely because we have Medicare Part B products, we have more acute products than chronic, those kinds of things. Therefore, the overall industry impact in 2011 is expected to be about 6% of the industry net trade sales and we expect that our overall impact will be very similar to that.
Mike Weinstein - JP Morgan
That flows through down to the bottom line?
Dominic Caruso
I think it’s too early to comment on that, although obviously it’ll have the significant impact on the bottom line. We’ll have to wait and see how the rest of the business performs and comment on that later.
Obviously it will have an impact on our bottom line for sure.
Mike Weinstein - JP Morgan
What’s the setback when you think about the different plusses and minuses if you can on 2010? You had the deals you did last year which I think you’d commented previously were in totality about $0.14 dilutive to this year, you had the restructuring plans and accelerated depreciation I think was $0.07 and now you’ve got healthcare reform Medicaid rebate going up about $0.10.
If we think about that combined impact of roughly $0.30 of those different items that would more than consumed the impact of the restructuring that the company did in November. Are you taking any additional actions at this point or is there a way to look at the restructuring that you announced back in November and say that it might have a bigger impact in 2010?
Dominic Caruso
No, we’re not taking any additional actions; the restructuring program is proceeding as planned. You may remember that the restructuring program will be fully implemented in 2011 so the impact that we discussed of about $1.4 to $1.7 billion in cost will hit in 2011, the estimate for 2010 is in the $800 to $900 million level, we’re still moving along that path.
Our estimates are consistent with our previous estimates there. And of course the after tax impact of something like $800 million is more in the sort of $0.20 plus a share impact so you see that in 2010 the impact is greater in 2011 the cost benefit is better in 2011 as the full program gets implemented.
Mike Weinstein - JP Morgan
We did see some improvement in performance in some businesses in the medical device segment we saw a pick up in Ethicon, some organic pick up in DePuy and Life Scan. Is the view that this business has just had a good quarter or that there is some fundamental turn in some of those markets, or particularly impacted by the economy.
Dominic Caruso
As I mentioned earlier, we did see some rebound in procedures in the first quarter. Our businesses are performing well in the medical device segment and the overall market growth seems to be stabilizing in some cases and turning in others.
Of course we continue to gain share in certain parts of the business so we’re very pleased with the strength of the underlying business overall and our medical device business in particular.
Operator
Your next question comes from Catherine Arnold - Credit Suisse
Catherine Arnold - Credit Suisse
Obviously we’re all trying to get more and more granularity on healthcare reform. I want to clarify your 6% hit to the industry is an all in hit in terms of donut hole, industry taxes, everything on the kitchen sink and I’m assuming that will recorded by J&J in terms of a revenue impact?
Dominic Caruso
Your assumption is correct. Our estimate is that it’s about $115 billion over 10 years and we think the 2011 impact of $11 billion is about 6% of the branded net trade sales in the industry.
As of now all the items except for one, which is the fee, are clearly reductions to net trade sales. It’s not clear whether the fee will be reflected that way or not but for purposes of the estimates I gave you earlier we’re including all of those impacts as a reduction to sales.
Catherine Arnold - Credit Suisse
Can you think longer term, in terms of the donut hold closure, I would assume that the 2011 commentary would assume a net negative effect of the industry participation that longer term obviously as real expansion occurs as far as uninsured. Would you have a different point of view on that?
Dominic Caruso
I think that the real expansion to the industry won’t take affect until the uninsured patients entered a marketplace, which as you know is not until 2014. We don’t expect a positive impact until then and it would be very difficult right now to estimate what that would be.
Catherine Arnold - Credit Suisse
Do you have a sense as you look at your own portfolio or from an industry perspective what type of compliance rates we now see as seniors hit the donut hole?
Dominic Caruso
It’s hard to estimate that. I think this’ll be the biggest challenge that pharmaceutical companies have in terms of estimating this because of utilization and when you hit the donut hole throughout the year, etc.
Suffice it to say that for our business because we have a large portion of our drugs are in Medicare Part B instead of D and also they’re more acute instead of chronic we don’t see a huge impact to our business and I think lower than the industry impact with respect to the donut hole fill for 2011 and going forward.
Operator
Your next question comes from Bruce Nudell – UBS
Bruce Nudell – UBS
What was the first quarter healthcare reform impact?
Louise Mehrotra
On the sales level $60 million.
Bruce Nudell – UBS
Speaking of that you mentioned that in Concerta, Concerta was the most effective because of the high representation in Medicaid patients. We had a panel meeting where among other things, Concerta was discussed.
The FDA seemed to have a preferred solution for bio equivalence for drugs like Concerta but the panel disagreed. Could you share your view of the net outcome of that panel meeting, do you think we’re closer or further away to resolution of the issues surrounding this citizen’s petition?
Dominic Caruso
Let me give you some thoughts then I’ll ask Louise to comment as well. I think it’s too early for us to predict the outcome of where the FDA will come out on this as you clearly described it there were mixed views, one way versus another.
We feel pretty strongly about the view here in terms of the partial area under the curve and as you know we fought a citizen’s petition back in 2004 to describe that. We feel pretty strongly that that is an important consideration in evaluating new entrants into the marketplace.
We really can’t speculate on what the FDA might conclude.
Bruce Nudell – UBS
A follow up on OTC, when do you think we’ll get back to trend line in that business?
Dominic Caruso
We’re currently, as Louise pointed out, we’ve resumed obviously production levels and shipment levels are now approaching at this point in this quarter approaching the normal levels of shipment. I think we will see some impact in the second quarter obviously because we’ve just recently gotten back to those levels but then of course throughout the quarter we’ll approach normal levels.
Importantly this OTC recall has not really impacted either physician recommendations or consumer preferences. Our ratings on these types of things we consistently monitor remain as high as they’ve always been so we’re very pleased with that.
Operator
Your next question comes from Danielle - Leerink Swann
Danielle - Leerink Swann
On outstanding litigation, do you have any update on the arbitration with Schering Merck on the Remicade Simponi front? Also any update on the Umera patent lawsuit?
Dominic Caruso
No update on the patent lawsuit with Umera and also as we said before the arbitration panel is scheduled to review the case in September and that’s still the case.
Danielle - Leerink Swann
On Ortho, it looks like US had seen growth deceleration year over year versus the fourth quarter. It is a slightly tougher comparable but just wondering if there’s anything going on in the market regarding pricing, volumes, that we to be aware of.
Also, more specifically, any impact to growth from the recent metal on metal hip issue?
Dominic Caruso
Let me have Louise give you some facts. We haven’t seen any impact on growth from the recent metal on metal impact.
We believe that the revision rates here are similar to other forms of prosthesis. We think physicians are very well aware of these various rates.
In terms of the overall market dynamics, I think it’s safe to say that although procedures are rebounding we still see the modest to negative one percentage point in price that we saw in 2009 so that’s continuing.
Louise Mehrotra
I want to remind that the fourth quarter had a 53rd week as well.
Operator
Your next question comes from Larry Biegelsen – Wells Fargo
Larry Biegelsen – Wells Fargo
On the pharma pipeline the 278 phase three data, any chance we could see that this summer at the World Aids Conference? Could you update us on when we’re likely to see the phase three data for Abiraterone?
Louise Mehrotra
For TMC278 potentially in July but it’s not fixed at this point. Abiraterone nothing significant this year.
Larry Biegelsen – Wells Fargo
The recall from Odin OTC could you quantify the impact in the first quarter and I assume that we should see a catch up in the second quarter, is that correct?
Dominic Caruso
The best way to quantify the impact in the first quarter the overall consumer business was down 3.7% operationally, without that the consumer business would have been about flat for the first quarter, that gives you sort of an overall impact. You could see that the OTC business in the first quarter in the US was down 25% from the prior year.
There are the two best indicators to assess the overall impact. As I mentioned earlier we are now resuming production levels and shipments are now resuming to more normal levels so I think there will be some improvement obviously in the second quarter but we still will see some impact from not being on the market in the early part of the second quarter.
We’ll have to wait and see how that plays out during the second quarter.
Larry Biegelsen – Wells Fargo
In healthcare reform, Medicare and Medicaid as a percent of US sales in the past I think you’ve said Medicaid was about 6.5% and Medicare about 10%. Are those still accurate numbers and do you expect those to change much going forward based on mix?
Louise Mehrotra
In 2009 our Medicaid sales were about $1.2 billion and our Medicare sales would have been about $2.4 billion, slightly more in the Part B versus the Part D. That’s on net sales.
Operator
Your next question comes from David Lewis – Morgan Stanley
David Lewis – Morgan Stanley
On healthcare reform, in terms of 2010 obviously these numbers do not include impact from the donut hole but will you begin accruing inventories or wholesale for the donut hole in the back half of 2010 for ’11?
Dominic Caruso
I think we’ll have to wait and see how that plays out because as you know the donut hole approaches or increases throughout 2011 so whether or not the inventories at the end of 2010 would be impacted is not really likely quite frankly.
David Lewis – Morgan Stanley
It’s not currently in guidance?
Dominic Caruso
That’s right.
David Lewis – Morgan Stanley
It’s very clear that there was core operating performance, positive performance is offsetting some of these headwinds and I wonder do you think in general this is operating sales performance looking better than you thought or are you seeing fundamental gross or operating margin strength that looks better than you thought early in the year. Is it more revenue or is it more underlying margin strength?
Dominic Caruso
I would say that it’s mostly revenue strength because look at our MD&D business, very, very strong operational growth and our pharma business of course you saw that it had negative nearly 6% ops growth in the quarter and Louise mentioned that it’s about 11% due to generic competition. The underlying strength of the pharmaceutical business is in the 5% range as well.
Of course we are able to have a really good quarter I thought in terms of top line irrespective of the fact that we had this significant impact of the consumer OTC recall. Of course that clouds the picture in the first quarter so the underlying strength of the business on the top line does in fact seem pretty strong to us and we’re confident about it for the remainder of the year.
As always, we’re going to continue to improve operating margins but not as much maybe as you saw in the past. I don’t think that this strength that you saw here has been dramatically impacted by operating expense improvements so much as it has with stronger performance across the top line.
David Lewis – Morgan Stanley
Multiple providers in the last three to four months have talked about increasing spine price competition. I’m trying to get a sense, is this true price competition, is this less mix driven innovation and if you are seeing competition is it coming from the larger market share players or are you seeing increasing competition from smaller players competing for share?
Dominic Caruso
Let me ask Louise for the detail. I do think this is real price competition in spine, that’s what our folks in our DePuy spine business tell us.
Whether it has to do with bigger or smaller players I don’t have that information available.
Louise Mehrotra
You are correct its general price competition.
Operator
Your next question comes from Bob Hopkins - Banc of America
Bob Hopkins - Banc of America
Are you guys willing to quantify the EPS impact of the recalls in consumer?
Dominic Caruso
No, not at that level of granularity. I think the point I made earlier about the consumer business would have been flat without it, gives you a pretty good sense.
Bob Hopkins - Banc of America
To clarify specifically the new EPS guidance, previously you’d talked about $4.85 to $4.95 then you got a $0.10 hit from reform, a $0.05 hit from currency and then $0.10 of operational strength in the business that gets you to that new range of $4.80 to $4.90 is that specifically correct?
Dominic Caruso
Yes, I think that’s a good way to look at it. Although as you take out the impact of healthcare reform and you do the math you could get to $4.70 to $4.80 of course.
We decided that the overall business was strong enough to support $4.80 to $4.90. As I mentioned earlier, I think at this early stage in the year and given the fact that these estimates on healthcare reform are also early we would be comfortable with your models at the lower end of that range for now.
Bob Hopkins - Banc of America
Finally, ask a little bit more about the strength in the medical device franchise, specifically in the Ethicon division you talked about 15% operational growth there but then obviously the current deal added a third so 10% excluding Acclarent. Then I was just wondering do you have a sense on the advanced sterilization products how much that might have, that rebound in the capital equipment side how much that might have also helped that franchise this quarter.
Louise Mehrotra
ASC had very strong sales in the quarter. ASP as in Ethicon Endo Surgery.
Dominic Caruso
It’s not in the Ethicon numbers that you saw.
Louise Mehrotra
We also saw very strong suture growth in Ethicon as well as bio-surgicals and meshes. ASP was very strong double digit growth in both the US and OUS.
Bob Hopkins - Banc of America
For the Ethicon division that’s organic constant currency growth that’s double digit, even excluding Acclarent?
Louise Mehrotra
Yes.
Dominic Caruso
Remember we acquired Mentor midway through the first quarter last year so we obviously have a full quarter for Mentor as well and we did see a nice rebound in the aesthetic medicine market and Mentor performed very nicely for us in the first quarter.
Operator
Your next question comes from Tao Levy - Deutsche Bank
Tao Levy - Deutsche Bank
Risperdal Consta you mentioned that you lost a little bit of share there but you offset that with Sustenna. How should we think about the positioning of these products going forward, can you still have a couple more years of patent life on Consta.
Is one of those products more profitable than the other?
Dominic Caruso
I don’t think it’s a question, we wouldn’t position the products differently based on their profitability. It’s absolutely the physician’s decision here.
I think if a patient is controlled on Risperdal Consta then we would not want to encourage a switch because that is very, very important that these patients are controlled with the medication. In the case where a patient may need to be better controlled or the physician believes that the monthly administration may be more suitable for that patient that of course we would encourage that and the physician tends to switch the patient in that regard.
We would not market the product or describe utilization based on its profitability.
Louise Mehrotra
They’re complementary product, differing dosing regimes on them. Also Risperdal Consta in the US has a broader label so we need to take that into account as well.
Tao Levy - Deutsche Bank
On the fibrin pad it looks like you moved that filing back a little bit again and also with the news on Sedasys. Again, two very separate products but anything reflective of a tougher med tech FDA environment that you’re noticing?
Dominic Caruso
I would think that both of these are separate issues, I don’t think there’s any common issue here. The fibrin pad is very complex filing; we want to take sure we get it right, of course.
We’re just making sure that the product filing goes in as best as we can get it and if we take a little bit more time to do that that’s fine, that’s prudent and our way of thinking on how to approach these kinds of complex filings. With Sedasys, as Louise mentioned earlier, we’re disappointed with the FDAs view on this.
We don’t think that the clinical trial data that we presented or the advisor committed recommendation is consistent with the FDAs ultimate conclusion here. As Louise pointed out, we filed an appeal and we look forward to discussing that with an independent panel that the commissioner’s office would establish.
Operator
Your next question comes from Glenn Novarro – RBC
Glenn Novarro – RBC
I’m trying to get a better sense of your Medicaid specific drugs on the call you mentioned Concerta. I would imagine Risperdal and Invega are Medicaid specific drugs.
Is there anything else I’m missing, I’m trying to model the pharmaceutical piece correct. Can you quantify the pricing pressure in spine, are we talking down 1% or 2% is there more mid single digit is there any mix benefit, any further clarity on spinal.
Dominic Caruso
With respect to the Medicaid, one thing to point out is that the provisions are two fold in Medicaid, there’s the fee for service rebate increase that goes from 15% to 23% but there’s also the fact that managed Medicaid or Medicaid lives that are contracted by states to a managed care organization now also get the Medicaid statutory rebate where previously they might not have based on the managed care contract. There’s a number of products that are included in that; you’re absolutely right we mentioned Concerta but yes Risperdal, Levaquin is included, Invega is included, Concerta or women’s health products, hopefully that gives you a good idea of the types of products that are included in this Medicaid impact.
Glenn Novarro – RBC
Women’s health being your oral contraceptive business?
Dominic Caruso
Yes, that’s right.
Louise Mehrotra
There’s an impact of Medicaid on pretty much all of the products but the most predominant are of course the Concerta that we called out for you.
Glenn Novarro – RBC
On spine, can you quantify what the pricing pressure was and if there’s any mix benefit that you could see to help in spine?
Louise Mehrotra
Its mid single digits, I don’t want to get too specific on it. There is a little bit of positive mix on it but it’s not offsetting the mid single digit decline.
Operator
Your next question comes from Matt Miksic - Piper Jaffray
Matt Miksic - Piper Jaffray
Following up on your comment on improving trends, it looks like you’ve seen some improvement in your business sequentially. I’m noticing just in OUS markets and in some cases stable or maybe sequentially slowing in the US and maybe that’s seasonal.
Thinking for example of Diabetes and DePuy. Just your comments on US versus OUS trends I guess we’ve all been thinking that OUS isn’t lagging US in terms of this slowdown in recovery.
Is that what you’re seeing, are there any sort of one timers that are driving those numbers and maybe any color you can provide on mix and price outside the US.
Dominic Caruso
We are seeing good growth outside the US. Just to give you an idea, the BRIC markets, Brazil, Russia, India, and China, in the first quarter those are businesses and those market grew about 12% and in the first quarter of 2009 those same businesses grew about 7%.
We obviously see some reacceleration of growth in the OUS markets in particular the BRIC markets. The big change over last year is that our business in Russia and the market overall in Russia has rebounded.
Last year Russia had a significant downturn in spending and healthcare spending and this year it looks like that’s coming back. A good way to describe OUS growth is to think about BRIC at 12% range this quarter versus 7% range in the prior year first quarter.
Hopefully that helps.
Matt Miksic - Piper Jaffray
Then pricing or mix, any differences outside the US?
Dominic Caruso
No, I don’t think there’s anything noteworthy to point out this quarter versus last year’s first quarter in terms of pricing or mix.
Matt Miksic - Piper Jaffray
It sounds like exposure to maybe emerging markets versus just concentrated exposure to say Europe might be an account for this strength OUS that we’re seeing.
Dominic Caruso
Certainly the BRIC markets are growing faster than the overall market, for example, Western Europe.
Matt Miksic - Piper Jaffray
You talked a little bit about pricing in spine; do you have the numbers handy for spine similar to what you gave us for hips and knees?
Louise Mehrotra
You mean the growth rates?
Matt Miksic - Piper Jaffray
Correct
Louise Mehrotra
The US on an operational basis was flat in the quarter, OUS was 11% and total was 3%.
Operator
Your next question comes from [Sebastian Packet] – Goldman Sachs
[Sebastian Packet] – Goldman Sachs
Could you provide some more detail on the $400 to $500 million hit for 2010? It seems a bit high just for the 8% increase in the fee for service rebates.
Could you please just slash out the managed Medicaid cost as well as 340B and any accruals you might have?
Dominic Caruso
It is much more than the 8% increase from 15% to 23% there’s the managed care Medicaid piece that we discussed earlier, that is the most significant component of the impact for 2010. Hopefully that gives you an idea, that piece by the way it only took effect in the latter part of March it was effective March 23rd this particular managed care piece of Medicaid.
Obviously for the year that has a much bigger component than the impact it had in the first quarter, you couldn’t just multiply the first quarter by four.
[Sebastian Packet] – Goldman Sachs
We talked about the BRIC but in terms of the developed Western European market, can you speak to any leading indicators on the overall health of the healthcare budgets in the developed European markets?
Dominic Caruso
Yes, we did see some issues or concerns raised about the healthcare budgets and its not new news but it did accelerate a little bit in connection with healthcare reform in the US. I think it’s too early to tell but for example we saw Germany in particular make some more noise about potential impacts to healthcare budgets as well as UK and others.
Too early to tell with the impact is and we have not yet reflected any of that in our estimates for 2010.
[Sebastian Packet] – Goldman Sachs
Any differentiation to make in terms of European healthcare budgets for pharma versus med tech?
Dominic Caruso
I don’t think so. I think it’s not that granular yet that we have a view on.
Operator
Your last question comes from Derrick Sung – Sanford Bernstein
Derrick Sung – Sanford Bernstein
We’ve spent quite a bit of time talking about the impact of healthcare reform on the pharma side but I was wondering if you could fast forward and think forward to 2013 when the medical device tax hits. How much of that 2.3% tax do you expect you’d be able to pass through given that it’s now in the form of an excise tax?
Also, how do you think about any offsets that expanded coverage might provide on the medical devices side?
Dominic Caruso
It’s a little too early to talk about how much of that we could or want to pass on so I’m not going to comment on that. Just to give you a sense the 2.3% excise tax our estimates are that that’s roughly about $4 billion for the medical device industry and our share of that is somewhere in the 6% to 7% range so that gives you an idea of the impact it could have on us once 2013 rolls around.
Derrick Sung – Sanford Bernstein
How do you think about the benefit of expanded coverage on medical devices?
Dominic Caruso
We’ll have to see how we can estimate that going forward. We don’t see any expanded coverage until 2014 of course.
It’s too early to tell, we haven’t yet factored in all the estimates there and obviously as we know more and we get closer to that time we’ll give you a better indication.
Derrick Sung – Sanford Bernstein
In terms of your guidance and the underlying strength of your business that you’ve alluded to for 2010, how much of that is predicated on a further improvement in the economy versus the economy staying as it is this past quarter?
Dominic Caruso
We’re not assuming a significant rebound in the economy. We see it stabilizing, we see a modest return to economic conditions back to normal but not at all any ‘V’ shaped or accelerated recovery so that’s not in our thinking.
Thanks very much for your questions this morning and thanks Louise. In closing, we’re very pleased with the solid results for the first quarter and we continue to see tremendous opportunities to grow our business and make important contributions to the health and well being of patients and customers around the world.
I’m confident in our outlook for growth and our ability to manage our business prudently thanks to the dedication, focus, and integrity of the people of Johnson & Johnson. I look forward to updating you on our progress throughout the year and seeing you at our meeting in June where we will provide an update on our medical device and diagnostic business.
Thanks for your time this morning and have a wonderful day.
Operator
This concludes today’s Johnson & Johnson first quarter 2010 earnings conference call. You may now disconnect.