Johnson & JohnsonJohnson & Johnson

Alice FrenkelThomas SteinerThomas Steiner Wanda Wang 

Business OverviewBusiness Overview

Healthcare IndustryHealthcare Industry• One of the world’s largest and fastest growing industries• Consumes over 10 percent of the gross domestic product in most 

developed nations

• In 2003 health care costs paid to medical professionals consumed 15 3In 2003, health care costs paid to medical professionals consumed 15.3 percent of the GDP of the United States

• Experts estimate that by 2016, the industry will reach 19.6% of our entire GDP. 

• Last year, US healthcare expenditures totaled $2.2 trillion 

• An average of $7,498 being spent on every person quest to produce better medicine and patient service, health care positions that are expected to rise 27% by 2014.

Old PeopleOld People

• Long term prospects boosted by baby g p p y yboomer generation needs, quickly entering into retirement and will certainly need more medical attentionmedical attention

• Demographic growth in the elderly (which account for about 33% of industry sales) y )

• Largest block of our society (28% of our population), born between 1946 and 1964

• In 2030, nearly one in five U.S. residents is expected to be 65 and older

Three SegmentsThree Segments• Consumer:  personal care products including Baby Care, Skin & Hair Care , Wound Care & Topicals, 

Oral Health Care, Women's Health, Over‐the Counter Medicines, Nutritionals , Vision CareOral Health Care, Women s Health, Over the Counter Medicines, Nutritionals , Vision Care• Pharmaceuticals: prescription medicines to treat  Alzheimer’s disease, anemia, autoimmune 

disorders (such as rheumatoid arthritis and psoriasis), cancer, cardiovascular disease, schizophrenia, epilepsy, infectious disease, migraine, and pain

• Medical Devices & Diagnostics: a wide variety of equipment and supplies used mostly in the professional fields by physicians nurses therapists hospitals diagnostic laboratories and clinicsprofessional fields, by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics

• >250 operating companies in over 57 countries, international business was 47% of sales.

Q2 Sales

$4,036 , 24%$6,074 , 37%

Consumer

Pharmaceutical

Medical Devices & Diagnostics

$6,340 , 39%

ConsumerConsumer

• Brand leadership in multiple industriesa d eade s p u t p e dust es

• Competition from generics stemmed by strengthCompetition from generics stemmed by strength of brand and distribution advantages

Key Brands:y

ConsumerConsumer

ConsumerConsumer

• Problem:Problem:– Sales had been slow in the US to pick up in this segmentsegment

S l ti• Solution:– In 2007 Q4, sales of over‐the‐counter products i d b 48% t $3 8 billi l l d i bincreased by 48% to $3.8 billion, largely driven by the Pfizer Consumer Health Care acquisition

Pharmaceutical Top ProductsPharmaceutical Top Products 

• In 2007, eight pharmaceutical drugs each generated at least $1 billi f lbillion of sales: – Risperdal/Risperdal Consta ($4.6 billion, down 9% from 2006)– Procrit/Eprex ($2.9 billion, down 9%)

Remicade ($3 3 billion up 10%)– Remicade ($3.3 billion, up 10%)– Topamax ($2.5 billion, up 21%)– Floxin/Levaquin ($1.6 billion, up 8%)– Duragesic ($1 2 billion down 10%)Duragesic ($1.2 billion, down 10%)– Aciphex/Pariet ($1.4 billion, up 10%)– Concerta ($1.0 billion, up 11%)

• Generic competition against Risperdal commenced in mid‐2008

• Largest and most diversified JNJ segmentg g

RISPERDALRISPERDAL

• Used to treat schizophrenia, autism in young children, and manic depression

• Approved for marketing in more than 100 countriesApproved for marketing in more than 100 countries– Oral solution and quick dissolving tablet forms – Risperdal is the most widely prescribed atypical antipsychotic in 

the world

• More than 2 million people suffering from manic depression in USdepression in US

• More than 2 million suffering from schizophrenia

REMICADEREMICADE

• Treatment of Crohn's disease ankylosingTreatment of Crohn s disease, ankylosingspondylitis, psoriasis, psoriatic arthritis, ulcerative colitis and use in the treatment ofulcerative colitis and use in the treatment of rheumatoid arthritis

• 1.4 million Americans suffer from IBD, with i l 30 000 di dapproximately 30,000 new cases diagnosed 

each year

Remicade’s #1 UserRemicade s #1 User

fBefore

Arvindh Rao!!Arvindh Rao!!

After

Other Top Selling MedicinesOther Top Selling Medicines

• PROCRIT: Used to increase red blood cellPROCRIT: Used to increase red blood cell production in cancer patients 

• CONCERTA: To ADHD for young adults

• TOPAMAX: Migraine preventiong p

Medical & Diagnostics Devices

• Major Franchises:

Medical & Diagnostics Devices

Major Franchises:

• DePuy – Products for reconstructing joints: spinal deformities bone fracturesspinal deformities, bone fractures

• 2007: Brought in $4.6 billion

• Cordis – Stents, Catheters, Guidewires, other surgical products

• Lifescan – Blood glucose monitoring devices for diabetes patientsp

Medical & Diagnostics DevicesMedical & Diagnostics Devices

• New products introduced in last 5 years accounted for over 30% of sales

• JNJ holds almost 54,000 patents domestically and internationally

• Primary contributors to the operational growth included:– Ethicon Endo‐Surgery's minimally invasive products– DePuy's orthopaedic joint reconstruction, sports medicine andDePuy s orthopaedic joint reconstruction, sports medicine and 

trauma businesses– Ethicon's surgical care products– Vistakon's disposable contact lensesp– Diabetes Care's blood glucose monitoring and insulin delivery 

products. 

Demand: PharmaceuticalsDemand: Pharmaceuticals

• Growth from new therapeutic products stemming from discoveries i i d bi t h lin genomics and biotechnology

• The global pharmaceutical market is projected to increase between 5 and 6% in 2008 to reach $735–745 billion, according to IMS HealthHealth

• In the US and the five largest European markets, sales growth in 2008 is projected at 4–5%

• The United States accounts for almost half of the globalThe United States accounts for almost half of the global pharmaceutical market, with $289 billion in annual sales followed by the EU and Japan

• Emerging markets such as China, Russia, South Korea and Mexico d h k i h 81 i 2006outpaced that market, growing a huge 81 percent in 2006

• Fortune Global 500, JNJ ranked number 1 in Rank for revenues and profits earned under the pharmaceuticals industry in 2007; Profits where 11 053 millionwhere 11,053 million. 

Demand: Medical DevicesDemand: Medical Devices

• Baby Boomersaby oo e s• Worldwide Medical Devices and Diagnostics a 12.1% increase operational growth of 5.7% and a p gpositive impact from currency of 6.4%

• Domestic sales increased 4.0%, while international sales increased 19.7%

• On July 1, 2008, the Company introduced its O T h® Pi ™ th fi t f ll f t i liOneTouch® Ping™, the first full‐feature insulin pump that wirelessly communicates with a blood glucose meter‐remoteglucose meter remote.

Suppliers are not a concernSuppliers are not a concern

• Raw materials available from multiple sourcesp

• Thousands of suppliers provide the input materials, goods and services to Johnson & Johnson

N i i f li• No pricing power from suppliers

• Committed to the ongoing identification of small and• Committed to the ongoing identification of small and diverse suppliers that can add value to our businesses and help us achieve our long‐term growth objectives

ThesisThesis

• Recession Proof

• Good growth prospects– Strong business model for environment

S B l Sh• Strong Balance Sheet

• Solid “other considerations”• Solid  other considerations– Management– Ownership Basep

Recession ProofRecession Proof

Competitive AdvantagesCompetitive Advantages

• Brand equity and strength

• Large financial resources

• Economies of  Scale 

• Global Sales Capabilities

• Product Diversification• Product Diversification

• Cost Synergies from Acquisitions 

We Don’t Do Cyclicality

Sales

We Don t Do Cyclicality

30000

40000

50000

60000

70000

Sales

0

10000

20000

2003 2004 2005 2006 2007 2008E

25.0%

30.0%

35.0%

Overall Gross Margin

0.0%

5.0%

10.0%

15.0%

20.0%

Overall Gross Margin

2003 2004 2005 2006 2007 2008

Down Market? JNJ Isn’t WorriedDown Market? JNJ Isn t Worried

• 75 consecutive years of sales increasesy

• 24 consecutive years of earnings increases 

• 46 consecutive years of dividend increases

• Even in these difficult time doing share buybacks. In July 2008 JNJ said that it had repurchased $6 5In July 2008, JNJ said that it had repurchased $6.5 billion of stock under a $10 billion buyback that started in August 2007. 

Recession DefenseRecession Defense

Johnson & Johnson stock performance inJohnson & Johnson stock performance in difficult market conditions

85

90

95

100

105

110

JNJ110

120

130

140

150

160

60

65

70

75

80

85 JNJ

S&P

60

70

80

90

100S&P

JNJ

Aug‐87 Sep‐87 Oct‐87 Nov‐87 Dec‐87

‘87 Market Crash ’01 – ’02 Tough Times

Growth ProspectsGrowth Prospects

Growth from AcquisitionsGrowth from Acquisitions

• Johnson & Johnson is constantly acquiringJohnson & Johnson is constantly acquiring new companies, including 8 in the last year alonealone. 

I 2007 ld id l l d $61 1 billi• In 2007, worldwide sales totaled $61.1 billion, making Johnson & Johnson the second largest 

f f h l h d b hi dmanufacturer of health care products, behind Pfizer.

Health Care AcquisitionsHealth Care Acquisitions

• The acquisition of Pfizer's Consumer Healthcare qdivision in 2006 and addition of brands such as Listerine, Lubriderm, Visine, and Neosporin further solidified Johnson & Johnson dominancefurther solidified Johnson & Johnson dominance in consumer health care.

• Acquisition of Amic, a developer of in vitro diagnostic technologies for use in Point‐of‐Care and near‐patient settings

• In February 2007 JNJ consummated its• In February 2007, JNJ consummated its acquisition of Conor Medsystems, Inc. for $1.4 billion in cash.

Notice!!!Notice!!!

• M&A activity faced screeching slowdown inM&A activity faced screeching slowdown in 2007

• Johnson and Johnson made 16.6 BN i i i i 2007acquisition in 2007

• Also made a cash acquisition– Strong balance sheet more on this laterg

Emerging MarketsEmerging Markets

• JNJ has pharmaceutical sales in countries on every continent, including China, Egypt, India, Russia, Turkey; expected sales growth of 12–13% in these markets

• Annual pharmaceutical sales in emerging markets isAnnual pharmaceutical sales in emerging markets is expected to reach $400 billion by 2020

• By 2020, emerging markets will contribute more than 50% of worldwide pharmaceutical market growth up50% of worldwide pharmaceutical market growth, up from just 13% of growth in 2001 and an expected 33% in 2011Ali d i i h h l h d d i• Aligned interests with healthcare advancement and is capable of adapting their business model to reflect local and regional needs

Strong Balance SheetStrong Balance Sheet

Strong Balance SheetStrong Balance Sheet

• The company also said it was on track toThe company also said it was on track to achieve the higher end of its $1.3 billion to $1 6 billion cost restructuring savings goal for$1.6 billion cost restructuring savings goal for 2008. 

• At the end of June 2008, JNJ had cash and i f $13 9 billi d d b finvestments of $13.9 billion, and debt of about $13 billion.

Continue to Increase R&D BudgetContinue to Increase R&D Budget

Johnson & Johnson continues to make

R&D Budget

Johnson & Johnson continues to make research investments in the face of a recession

3,550

3,600

3,650

g

3,400

3,450

3,500

R&D Budget

3,250

3,300

3,350

3,200

First 2Q 2006 First 2Q 2007 First 2Q 2008

Important in R&D reliant IndustryImportant in R&D reliant Industry

R&D as % of Sales:R&D as % of Sales:

• Pfizer Inc. – 16.4%

i G %• Novartis AG – 17.1%

• Merck Co. – 21.0 %

• Johnson & Johnson – 21.2%Johnson & Johnson  21.2%

Strengthens Pharmaceutical SegmentStrengthens Pharmaceutical Segment

• Remember – 39% of sales

• Expected to make seven to 10 additional filings between 2008 and the end of 2010.

M Ph III d t• Many Phase III products

• Entire R &D department enrolled in “LINK”• Entire R &D department enrolled in  LINK  program to help integrate large international collaboration

Product PipelineProduct Pipeline

“Other Considerations”Other Considerations

Strong ManagementStrong Management• William C. Weldon – CEO

Joined the compan in 1971– Joined the company in 1971– Sits on the board at JP Morgan

• Sherlyn S. McCoy – Divisional Chair of the BoardE i i M di l D i & Di i– Expertise in Medical Devices & Diagnostics

• Colleen A. Goggins – Divisional Chair of the Board– Joined the company in 1981– Expertise in the Consumer Segment

• Donald M. Casey – Divisional Chair of the Board– Joined the company in 1985– Expertise in Pharmaceuticals

• Voluntarily employ an Audit Committee for the board of directors (independent entity)

Good OwnersGood Owners

Diversified holders and little concentration ofDiversified holders and little concentration of shares

Top 10 Holders Shares Out PercentSTATE STREET CORPORATION 130,232,641 4.66%

Barclays Global Investors UK Holdings Ltd 109,598,737 3.92%

VANGUARD GROUP INC (THE) 88 648 400 3 17%VANGUARD GROUP, INC. (THE) 88,648,400 3.17%

BERKSHIRE HATHAWAY, INC 61,754,448 2.21%

FMR LLC 47,544,569 1.70%

Bank of New York Mellon Corporation 42,483,553 1.52%

NORTHERN TRUST CORPORATION 38 718 716 1 39%NORTHERN TRUST CORPORATION 38,718,716 1.39%

STATE FARM MUTUAL AUTOMOBILE INSURANCE CO 37,878,592 1.36%

BANK OF AMERICA CORPORATION 35,419,700 1.27%

Capital World Investors 31,579,000 1.13%* f J 30th 2008* as of June 30th 2008

RisksRisks

• Expiring Patents in PharmaceuticalsExpiring Patents in Pharmaceuticals– Remember JNJ is an R&D leader– Brand loyalty helps fight generic competitiony y p g g p

• Legal proceedingsLegal proceedings– Insured

• Drug and Device Testing– Improvements have high capital requirementsImprovements have high capital requirements 

Summary / TakeawaysSummary / Takeaways

• Key point 1:– Tough times require strong safe companies– History of strength in these times / well diversified (75 years of + sales)y )

• Key Point 2:– Fundamentals always come back over time (see Buffet)JNJ h t ifi b l h t d d th– JNJ has a terrific balance sheet and very good growth prospects

• Key Point 3:– Always want to look at the whole picture of an investment– Experienced and long term management, Good ownership, Limited downside risk

CompetitorsCompetitors

Rev Growth EPS Growth P/ERev Growth EPS Growth P/EJohnson & Johnson 14.57% -2.39% 14.24

Pharmaceutical Competitors:Novartis AG 10.70% -3.10% 16.35Pfizer INC 0.10% -21.71% 7.65Glaxosmithkline -2.19% -1.16% 12.47Merck & Co 6 90% 25 98% 8 63Merck & Co 6.90% -25.98% 8.63

Consumer Competitors:Procter & Gamble 9.19% 19.88% 18.16Unilever 1.37% 11.04% 13.54

P A 8 61% 13 58% 14 18Peer Average 8.61% 13.58% 14.18

Losing Patents Always a ConcernLosing Patents Always  a Concern

• Losing patents lose = lost salesLosing patents lose = lost sales

• HOWEVER! Downside is not as big as you might thinkmight think.Risperdal Sales (The Lost Patent Effect)

2008 2007US 1099 1074International 447 616International 447 616Total 1546 1690

Percent Change ‐8 52%Percent Change 8.52%

Q2 Medical Devices Sales (in millions)Q2 Medical Devices Sales (in millions)

2,723

3,351 U.S. International

Q2 Pharmaceutical Sales (in millions)Q2 Pharmaceutical Sales (in millions)

2,547

U.S. International

3,793

Q2 Consumer Sales (in millions)Q2 Consumer Sales (in millions)

1,694

U.S. International

2,342

General NotesGeneral Notes

• Third quarter earnings call:Third quarter earnings call:– 10/14/08 Tuesday

• Insider selling in the last six months only 8%

Some Things to Keep in Mind for the lValuation

• R&D requirements actually overstated – seeR&D requirements actually overstated  see note in the DCF

• Non‐operating expenses were the i / i j hi h irestructuring/cost savings project which is 

scheduled to end in 2008 – Possible d hoverstated here