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`Johnson & Johnson's Management Discusses Q3 2013 Results - Earnings Call Transcript | Seeking Alpha
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`Johnson & Johnson's Management Discusses Q3 2013 Results -
`Earnings Call Transcript
`
`Oct.15.13 | About: Johnson & (JNJ)
`
`Johnson & Johnson (NYSE:JNJ)
`
`Q3 2013 Earnings Call
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`October 15, 2013, 8:30 am ET
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`Executives
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`Louise Mehrotra - Vice President of Investor Relations
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`Dominic Caruso - Chief Financial Officer, Vice President - Finance
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`Michel Orsinger - Worldwide Chairman of DePuy Synthes Companies
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`Analysts
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`Matthew Dodds - Citicorp
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`Mike Weinstein - JPMorgan
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`Kristen Stewart - Deutsche Bank
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`Larry Biegelsen - Wells Fargo
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`Tony Butler - Barclays Capital
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`Bruce Nudell - Credit Suisse
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`Jami Rubin - Goldman Sachs
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`Rick Wise - Stifel
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`Derrick Sung - Sanford Bernstein
`
`Danielle Antalffy - Leerink Swann
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`Wockhardt v. Janssen IPR2016-01582
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`Johnson & Johnson's Management Discusses Q3 2013 Results - Earnings Call Transcript | Seeking Alpha
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`Glenn Novarro - RBC Capital Markets
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`Bob Hopkins - Bank of America
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`Operator
`
`Good morning, and welcome to the Johnson & Johnson third quarter 2013 earnings
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`conference call. All participants will be able to listen-only until the question-and-answer
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`session of the conference. This call is being recorded. If anyone has any objections you
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`may disconnect at this time. (Operator Instructions).
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`I would now like to turn the call over to Johnson & Johnson, you may begin.
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`Louise Mehrotra
`
`Good morning, and welcome. I am Louise Mehrotra, Vice President of Investor Relations
`
`for Johnson & Johnson and it is my pleasure this morning to review our business results
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`for the third quarter of 2013. Joining me on the call today are Dominic Caruso, Vice
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`President, Finance and Chief Financial Officer and Michel Orsinger, Worldwide Chairman
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`of DePuy Synthes Companies.
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`A few logistics before we get into the details. This review is being made available to a
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`broader audience via webcast accessible through the Investor Relations section of the
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`Johnson & Johnson website. I will begin by briefly reviewing highlights of the third quarter
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`for the corporation and highlights for our three business segments.
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`Following my remarks, Michel will provide an update on our DePuy Synthes business and
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`the progress made on our near-term priorities in successfully integrating Synthes. Please
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`note the presentations that accompanies Michel's remarks is available on our website.
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`Next Dominic will provide some additional commentary on the financial results and
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`guidance for 2013. We will then open the call to your questions. We expect the call to last
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`approximately 90 minutes. Included with the press release that was issued earlier this
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`morning is a schedule of sales for key products and/or businesses to facilitate updating
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`your models. These schedules are available on the Johnson & Johnson website as is the
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`press release.
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`Before I get into the results, let me remind you that some of the statements made during
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`this review may be considered forward-looking statements. The 10-K for the fiscal year
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`2012 identifies certain factors that could cause the company's actual results to differ
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`materially from those projected in any forward-looking statements made today. The
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`company does not undertake to update any forward-looking statements as a result of new
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`information or future events or developments. The 10-K is available through the company
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`and online.
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`During the review, non-GAAP financial measures are used to provide information pertinent
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`to ongoing business performance. These non-GAAP financial measures should not be
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`considered replacements for GAAP results. Tables reconciling these measures to the
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`most comparable GAAP measures are available in the press release and on the Investor
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`Relations section of the Johnson & Johnson website at investor.jnj.com.
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`Now, I would like to review our results for the third quarter of 2013. If you would refer to
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`your copy of the press release, let's begin with the schedule titled, supplementary sales
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`data by geographic area.
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`Worldwide sales to customers were $17.6 billion for the third quarter of 2013, up 3.1% as
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`compared to the third quarter of 2012. On an operational basis, sales were up 4.7% and
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`currency had a negative impact of 1.6%. In the U.S., sales were up 1.7%. In regions
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`outside the U.S., our operational growth was 7.1%, while the effect of currency exchange
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`rates negatively impacted our reported results by 2.9 points. Europe grew 8.4% on an
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`operational basis while the western hemisphere, excluding the U.S., grew by 8%
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`operationally. Asia-Pacific/Africa region grew 5.1% operationally. The success of new
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`product launches made strong contributions to the results in all regions.
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`If you now turn to the consolidated statements of earnings, net earnings were $3 billion
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`consistent with the 2012 results. Earnings per share were $1.04 versus $1.05 a year ago.
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`Please direct your attention to the box section of the schedule where we have provided
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`earnings adjusted to exclude special items. As referenced in the accompanying table
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`reconciling non-GAAP measures, 2013 third quarter net earnings were adjusted to
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`exclude the after-tax special items of $937 million, primarily related to an increase in the
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`accrual for litigation expenses, in-process research and development and integration costs
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`associated with the acquisition of Synthes.
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`Third quarter 2012, net earnings included after-tax special items of approximately $553
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`million as shown in the reconciliation of non-GAAP financial measures, excluding these
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`special items for both periods, net earnings for the current quarter were $3.9 billion and
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`diluted earnings per share were $1.36, representing increases of 11.3% and 8.8%,
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`respectively as compared to the same period in 2012.
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`I would now like to make some additional comments relative to the components leading to
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`earnings before we move onto the segment highlights. For the third quarter of 2013, cost
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`of goods sold at 30.4%, was down 240 basis points from the same period last year. In the
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`third quarter of 2012, we recorded an inventory step up charge related to the Synthes
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`acquisition. Excluding the inventory step up charge, which was treated as a special item,
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`cost of goods sold decreased 150 basis points versus the same period last year. Positive
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`mix, strong volume growth in our Pharmaceutical business and cost improvement
`
`initiatives across many of the businesses was partially offset by the impact of the medical
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`device excise tax.
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`Third quarter selling, marketing and administrative expenses, were 30.2% of sales, or 40
`
`basis points lower than our 2012 results due to cost containment initiatives across many of
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`the businesses. Our investment in research and development as a percent of sales was
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`11.6%, up 30 basis points due to increased spending in the Pharmaceuticals business.
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`Interest expense, net of interest income of $87 million was down $33 million versus the
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`third quarter of 2012, due to a lower average debt level.
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`Other expense net of other income of $943 million in the third quarter of 2013, compared
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`to other income net of other expense of $19 million in the same period last year. Excluding
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`special items, other income net of other expense of $43 million was $132 million less than
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`2012, due primarily to the impact of 2012 gains on divestitures. Excluding special items,
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`the effective tax rate was 18.9% in the third quarter of 2013 compared to 22.2% in the
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`same period last year. Dominic will provide commentary on taxes in his remarks.
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`Turning now to business segment highlights, please refer to the supplementary sales
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`schedule highlighting key products or businesses for the third quarter of 2013. I will begin
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`with the consumer segment.
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`Worldwide consumer segment sales for the third quarter of 2013 of $3.6 billion, increased
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`0.8% as compared to the same period last year. On an operational basis, sales increased
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`2%, while the impact of currency was negative 1.2%. U.S. sales were up 0.9%, while
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`international sales grew 2.6% on an operational basis.
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`Excluding the impact of divestitures net of acquisitions, operational growth was
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`approximately 2.5%. Baby care products increased on an operational basis by 2.6% when
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`compared to the third quarter of 2012, due primarily to the impact of the health care
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`products acquired earlier this year.
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`Sales in the Oral Care business decreased 3% operationally. Excluding the impact of the
`
`divestiture of manual toothbrushes in North America, operational sales were essentially
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`flat.
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`For the third quarter of 2013, sales for OTC Pharmaceuticals increased 6.5% on an
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`operational basis compared to the same period in 2012. U.S. sales were up 17.9%, driven
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`by strong growth in analgesics and other key brands as we continue to make progress in
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`returning a reliable supply of products to the marketplace.
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`International sales were up 2% operationally. Our skin care business grew 2.7% on an
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`operational basis in the third quarter of 2013. Strong results for AVEENO were partially
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`offset by the impact of divestitures. Excluding divestitures, operational growth was
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`approximately 4%. Women's health grew 2.5% on an operational basis due to growth in
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`international women's sanitary protection products. Wound care other sales decreased
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`6.9% on an operational basis impacted by competitive pressures as well as divestitures.
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`That completes our review of the consumer segment and I will now review highlights for
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`the pharmaceutical segment. Worldwide net sales for the third quarter of $7 billion
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`increased 9.9% versus the same period last year. On an operational basis, sales
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`increased 10.9% with a negative currency impact of one point. Sales in the U.S. increased
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`7.9%, while sales outside the U.S. increased on an operational basis by 14%.
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`Now reviewing sales for major therapeutic areas. Immunology products grew 13.4%
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`operationally, with sales in the U.S. up 3% and sales outside the U.S. up 47.7%
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`operationally. Earlier this year, the company made certain supply chain changes for
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`REMICADE resulting in sales to distributors previously recorded as U.S. export sales now
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`being recorded as international sales. Adjusting for this impact the U.S. immunology
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`growth was approximately 8% and operational growth outside the U.S. was approximately
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`28%.
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`In the U.S., REMICADE excluding export sales was up 7.8%, SIMPONI was up 19.4%
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`and STELARA are was up 23.9%. Results were driven by market growth across the major
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`products complemented by increased market share for both STELARA and SIMPONI.
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`With the strength of our portfolio, we continue to be the U.S. market leader in immunology.
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`REMICADE outside the U.S., adjusted for the supply chain change just mentioned, was
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`up approximately 15% operationally due to strong growth in Canada and the emerging
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`markets. STELARA made significant contributions to growth outside the U.S. due to
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`market share gains and market growth across the major regions while SIMPONI's strong
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`growth was due to increased shipments to our distribution partner, complemented by
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`additional country launches and strong growth in other markets.
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`Sales of infectious disease products increased 2.4% on an operational basis. INCIVO, a
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`treatment for Hepatitis C, grew 5.3% on an operational basis, reflecting launches in
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`additional countries partially offset by lower sales in Europe impacted by a combination of
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`patient warehousing, patients enrollment in clinical trials and seasonality in treatment
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`patterns impacting new patient starts in the summer months. Continued momentum in
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`market share growth in the major markets for PREZISTA made notable contributions to
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`the results. Results outside the U.S. were impacted by the timing of tender business.
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`Strong growth for the combined sales of COMPLERA and EDURANT also contributed to
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`the results.
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`Neuroscience product sales declined 1.9% operationally with U.S. sales down 11.4%
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`impacted by generic competition primarily for CONCERTA. The long-acting injectable
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`antipsychotics, RISPERDAL CONSTA and INVEGA SUSTENA or XEPLION achieved
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`operational growth of over 15% due to an increase in combined market share. Sales of
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`oncology products increased 57% on an operational basis due to the strong results for
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`ZYTIGA and VELCADE. ZYTIGA is approved to treat both chemo refractory and chemo
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`naïve metastatic castration resistant prostate cancer.
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`In the quarter, ZYTIGA achieved operational sales growth of over 70%, with U.S. sales
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`growing 50% due to very strong market growth of nearly 25% and increased market share
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`in the combined metastatic castrate resistant prostate cancer market. ZYTIGA has
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`captured 33% of that market and is up approximately 2.5 points sequentially. ZYTIGA
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`sales outside the U.S. nearly doubled on an operational basis versus third quarter of 2012
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`and on a sequential basis, sales were up over 15%. Additional country rollouts and the
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`expansion of the label to chemo naïve patients drove the strong results. ZYTIGA is
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`approved in more than 80 countries.
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`VELCADE is a treatment for multiple myeloma. Sales increased 26.3% on an operational
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`basis. Strong performance in patient share in the frontline setting and the launch of the
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`subcutaneous version continue to drive sales growth. Other oncology increased primarily
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`due to DOXIL/CAELYX. Regarding DOXIL/CAELYX, ensuring a efficient supply for
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`physicians and their patients remained our urgent priority. We have begun to encounter
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`supply outages of DOXIL in the U.S. due to issues at our third-party manufacturer. We
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`continue to take the steps needed for the long-term transition to suppliers, which we are
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`accelerating wherever possible. The FDA has approved the generic doxorubicin
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`hydrochloride liposome injection, which is currently available for patients.
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`In Europe, the Committee for Medicinal Products for Human Use, or CHMP has approved
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`manufacturing at CAELYX from an alternate supplier. We anticipate receiving CAELYX
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`from this manufacturer by the end of the year.
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`Other pharmaceutical products increased 5.9% on an operational basis with strong results
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`for XARELTO and INVOKANA partially offset by lower sales for EPREX and PARIET,
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`primarily related to generic competition.
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`XARELTO more than tripled compared with the same quarter last year and grew nearly
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`30% on a sequential basis, reaching nearly 40% of the new two brand scripts in cardiology
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`in September, surpassing warfarin by over eight points and widening the lead by three
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`points versus the last quarter.
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`Total prescription exit share in the broader anticoagulant market grew approximately 1.5
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`points on a sequential basis to nearly 10%.
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`In the U.S., INVOKANA achieved 17% new to brand share with endocrinologists within the
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`defined market of type-2 diabetes excluding insulin and metformin. At 17%, INVOKANA is
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`the number one branded non-insulin product NBRx in that market. In addition to the
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`number of approvals and filings that Dominic will highlight in his remarks, during the
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`quarter, ibrutinib was granted priority review by the FDA for the use in the treatment of
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`previously treated patients with chronic lymphocytic leukemia or CLL, and small
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`lymphocytic lymphoma or SLL and for its use in the treatment of previously treated
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`patients with mantle cell lymphoma, or MCL. In late February, PDUFA date has been
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`assigned.
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`We announced the simultaneous submissions of a biologic license application to FDA and
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`a marketing authorization application to the European Medicines Agency or EMA for
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`siltuximab, an experimental product for the treatment of patients with multicentric
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`Castleman disease. The resubmission to the FDA complete response for the use of
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`XARELTO to reduce the risk of secondary cardiovascular events and [Centrum] in patients
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`with acute coronary syndrome was filed with a PDUFA date of mid-February, next year.
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`In October, a marketing authorization application was submitted to the EMA, seeking
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`approval for a once-daily single tablet fixed dose antiretroviral combination product
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`containing darunavir, a protease inhibitor developed by Johnson with cobicistat, a
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`pharmacokinetic enhancer developed by Gilead Sciences for use in combination with
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`other HIV-1 medicines.
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`That completes the review of the Pharmaceutical segment. I will now review the Medical
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`Devices and Diagnostics segment results. Worldwide medical devices and diagnostic
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`segment sales of $6.9 billion, declined 2% versus for the same period last year. On an
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`operational basis, sales increased 0.3% with a negative currency impact of 2.3 points.
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`Sales in the U.S. declined 4.2%, while sales outside the U.S. increased on an operational
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`basis by 4.2%. Adjusted for divestitures and exits from certain businesses, underlying
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`growth was approximately 1% reflecting continued market and pricing pressure.
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`I will provide more commentary on these factors in the franchise reviews. Starting with
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`cardiovascular care, sales were up 4.2% operationally with U.S. up 0.5%, and sales
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`outside the U.S. up 6.6% operationally, driven by Biosense Webster, our Electrophysiology
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`business, with worldwide operational growth of over 11% in the quarter. The success of a
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`number of capital launches made strong contributions to the results.
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`Diabetes care sales declined 11.3% on an operational basis in the third quarter of 2013
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`with the U.S. business down 27.7% due to the impact of lower price primarily related to
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`competitive bidding. The business outside the U.S. was up 6.5% operationally with strong
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`sales in the emerging markets partially offset by lower sales in some of the developed
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`markets. The success of the launch of Animas Vibe in certain international countries has
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`contributed to growth in the quarter.
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`The diagnostics business declined 8% on an operational basis. Excluding the impact of
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`the divestiture of the Virco's business, operational sales were down approximately 2.5%
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`due to the exit from certain donor screening contracts and lower capital placements.
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`Infection prevention decreased 0.5% on an operational basis with sales in the U.S. down
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`7.1% due to the soft capital equipment sales reflecting a lower level of trade-ins. Outside
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`the U.S., operational growth of 4.3% was driven by both consumables and capital item
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`sales.
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`Orthopedic sales were up 1.1% on an operational basis when compared to the same
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`period in 2012 with the U.S. down 0.8% and sales outside the U.S. up 3.4%.
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`Operationally, hips were up 6% worldwide driven by 7% growth in U.S. due to strong
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`results on primary stent platforms sales partially offset by continued pricing pressure. Hips
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`outside the U.S. were up 4% on the operational basis driven mainly by heads and
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`acetabular products. Knees worldwide increased 3% on an operational basis with similar
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`results both in and outside the U.S. Growth in the U.S. was due to the successful launch
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`of ATTUNE Fixed Bearing Knee as well as strong sales of Revision platforms partially
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`offset by lower sales of rotating platforms and pricing pressure. The launch of ATTUNE
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`drove the results outside the U.S.
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`Trauma was up 1% on an operational basis with the U.S. flat and outside the U.S., up 2%
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`operationally. Low cost competition impacted to the results in the U.S. while the timing of
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`tender business negatively impacted the results outside the U.S. Worldwide spine was
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`down 2% on an operational basis with the U.S. down approximately 10% impacted by
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`pricing pressures, the continued softness in the market as well as the disruption in the
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`commercial sales organization as we integrate the businesses. Outside the U.S., sales
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`were up approximately 9% operationally, with strong growth in Latin America and Asia-
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`Pacific.
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`Specialty surgery operational growth was 6.7% in the third quarter of 2013. U.S. sales
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`were up 4.2% and sales outside the U.S. up 9.2% on an operational basis. Strong sales of
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`biosurgical products and international sales of energy products were the major
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`contributors to growth, complemented by sales growth from new products for both
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`MENTOR and ACCLARENT. These gains were partially offset by lower sales of
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`HARMONIC products in the U.S. due to competitive pressures.
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`Surgical care worldwide sales were up 1.4% on an operational basis, with U.S. down 2.5%
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`and sales outside the U.S. up 3.9% operationally. U.S. sales were impacted by lower
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`sales of women's health and urology products. Outside the U.S., future sales and strong
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`demand for endocutter products with the ECHELON FLEX powered ENDOPATH Stapler
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`were the important drivers of growth.
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`Rounding up the review of the medical devices and diagnostic segment. Our vision care
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`business achieved operational sales growth of 3.9% in the third quarter with U.S. up 1.9%
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`and sales outside the U.S. up 4.9% operationally. Growth was driven by daily lenses and
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`ASTIGMATISM lenses. That completes highlights for the medical devices and diagnostics
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`segment and concludes the segment highlights for Johnson & Johnson's third quarter of
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`2013.
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`It is now my pleasure to turn the call over to Michel Orsinger. Michel?
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`Michel Orsinger
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`Thank you, Louise, and good morning, everyone. I look forward to providing you with an
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`update on the integration of the DePuy and Synthes, the value we are seeing in the
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`combination of these two companies and our strategy for leading and shaping the
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`industry. Having now worked with Johnson & Johnson prior to the Synthes acquisition,
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`and now as a J&J leader, I have had ample opportunity to get to know the enterprise and
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`discover its richness, breadth, resources and capabilities.
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`I am very impressed by the values expressed in our credo and the ability of a large global
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`organization to nourish and live by such values in an increasingly complex world. I now
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`have a lot of respect for the people in Johnson & Johnson.
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`Before I start my presentation, I would like to give my perspective on the DePuy Synthes
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`third quarter results that Louise presented. While I am not entirely satisfied with our
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`results, we have had some important wins. Joint reconstruction, especially in the U.S., is
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`performing very well and we believe we grew market share in hips. Furthermore we
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`generated double-digit growth in emerging markets with the best results coming from
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`China, Russia and Brazil.
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`Our performance in trauma and U.S. spine was lower than expected. Trauma results were
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`due mostly to a biannual tender that did not repeat this year and pressure from lower price
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`competition which we are managing by leveraging sales force coverage, segmenting the
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`market and introducing new product configurations. U.S. spine results were due to
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`integration disruptions which we are addressing.
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`Overall, we are pleased to maintain our strong market leadership positions. I am very
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`confident about the future. DePuy and Synthes, two of the most successful and respected
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`companies in orthopedics and neuro, joined together at the right time to actively
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`participate in and shape the changing healthcare environment. I am convinced that we are
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`all well positioned to expand our leadership in the industry and I am excited by the
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`opportunities in front of us.
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`As a combined organization, we are better suited to optimize our offerings. For patients
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`and surgeons, there is the potential for exciting medical innovations that leverage the
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`product development capabilities from both organizations as well as from the larger J&J
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`enterprise. For providers, our scaled and unparalleled product portfolio which spans many
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`platforms opens new possibilities to consolidate suppliers. In emerging markets, the same
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`benefit will enable us to continue accelerating growth. In addition, our larger experienced
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`sales force, leadership and professional education, and collaboration with the AO, and the
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`values driven, combined talent from both organizations offer competitive differentiation in
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`the industry.
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`DePuy Synthes participates in a market that has very strong fundamentals. At $44 billion
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`the market is large and diverse. There is plenty of opportunity to address unmet
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`orthopedic and neuro needs. We believe that as the global population ages, demand for
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`the types of products we offer will increase and many emerging markets are investing in
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`the healthcare systems to provide more and better care for their citizens.
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`As you look over our planning horizon, emerging market growth is projected to increase
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`roughly four times the rate of developed markets. As healthcare systems around the world
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`face the reality of cost containment and provide us participate more in decision making
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`with clinicians, DePuy Synthes as part of J&J is primed to offer new value-added solutions
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`and help transform healthcare delivery.
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`Against the backdrop of these market dynamics, we are expecting the worldwide ortho
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`and neuro market to grow between 2% and 4% compounded annually by 2017. Our first
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`year at DePuy Synthes has been exciting and rewarding. As you can imagine combining
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`two organizations of this size and complexity is a significant undertaking. Our employees
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`are doing a great job and I am pleased to say the integration is on track.
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`Our primary goal during the integration was to minimize customer disruption. Based on
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`feedback from customers, we believe we have achieved this in all, but one platform. As
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`we combine two different sales forces with two different sales models in U.S. spine, we
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`have experienced some disruptions in that business and we continue to take corrective
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`measures.
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`In other parts of the business, I am particularly encouraged to see synergies being
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`realized by cross-selling initiatives we envisioned from the onset, as well as revenue and
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`cost synergies. Initially having very much focused on commercial integration, we are now
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`spending more time on internal systems and processes, including IT, HR, supply chain
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`and quality. This work remains a priority as the successful integration is one of the
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`foundational elements of our future.
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`We have combined terrific talent from both organizations and supplemented our team with
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`new capabilities to help address the changes in our markets. We achieved a high
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`retention rate of our global DePuy Synthes staff during integration and we are engaging in
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`a new innovation agenda.
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`Our strategy is focused on four growth drivers. We have continued to transform our
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`business and drive growth through continuous innovation, focus on emerging markets,
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`excellent execution and cultivation of talent and an engaged organization. For the rest of
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`today's discussion, I will focus on our approach to innovation and our emerging market
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`strategy.
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`In today's dynamic healthcare environment, our customers are looking for new solutions
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`that improve clinical outcomes, increased patient satisfaction and do this at reduced cost,
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`specifically to address patient satisfaction and to unmet patient needs, improving the
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`instability some patients experience with existing knew replacements.
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`ATTUNE also was developed to address provider interest in outcomes and efficiency of
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`healthcare delivery. To-date, 27 publications document the science behind the design
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`thereby addressing our stakeholders' need for evidence. The ATTUNE knee system
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`launch is off to a very successful start with positive feedback from patients, surgeons and
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`physical therapists. Following commercialization in North America, launches are underway
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`in 13 European and Asia-Pacific countries.
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`In addition to developing new products, we have started to complement our product
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`offering with value-added programs and services. Let me describe one such program we
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`are piloting, DePuy partnered with CAELYX [ph] and Janssen to create a program to help
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`hospital reduce the length of stay for joint replacement patients while enhancing quality of
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`care and patient satisfaction. The result is a patient care pathway program called
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`Care4Today Orthopedic Solutions that integrates patient education, a change
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`management program for hospitals and home recovery support. The first impressive
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`results from the pilot show reduced patient length of stay and excellent patient and staff
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`feedback.
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`The third pillar of innovation is new business models. We are piloting many different cross-
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`selling arrangements across DePuy Synthes and J&J that leverage our considerable
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`product portfolio. For example, in the U.S., joint recon distributors are selling power tools
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`and they are in community and they are rural community and rural hospitals selling
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`trauma. Trauma is selling joint week on as sports medicine products in academic centers.
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`Sports medicine is selling trauma products in community and rural hospitals and
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`ambulatory research centers. Across Johnson & Johnson, Ethicon is selling and marketing
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`CMS tissue metrics product as part of its hernia portfolio.
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`We formed a strategic account management group that is leveraging our broader offerings
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`to become one point of contact for all of our customers' orthopedic and neuro needs. As
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`providers seek to reduce vendors, the team is steadily gaining traction in identifying and
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`winning accounts that would benefit most from our comprehensive portfolio.
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`Taking collaboration one step further we are in active discussions with large institutions to
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`jointly define value, based on their specific needs, set new standards and pilot entirely
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`new approaches to delivering healthcare. The combination of the DePuy and Synthes and
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`even the broader efforts across MD&D and J&J, place us in a very unique position to
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`accomplish these goals.
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`Now, I would like to move to another significant source of future growth, emer