10-Q 1 a3q10q9-29x13.htm 10-Q 3Q 10Q 9-29-13

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
 
 
þ
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended September 29, 2013
or
 
 
 
o
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from            to
Commission file number 1-3215
(Exact name of registrant as specified in its charter)
NEW JERSEY
(State or other jurisdiction of
incorporation or organization)
 
22-1024240
(I.R.S. Employer
Identification No.)

One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
(Address of principal executive offices)
Registrant’s telephone number, including area code (732) 524-0400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
On October 25, 2013 2,821,438,423 shares of Common Stock, $1.00 par value, were outstanding.



JOHNSON & JOHNSON AND SUBSIDIARIES
TABLE OF CONTENTS
 
Page
 
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.1
 EX-32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT



2


Part I — FINANCIAL INFORMATION

Item 1 — FINANCIAL STATEMENTS

JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in Millions Except Share and Per Share Data)

 
 
September 29, 2013
 
December 30, 2012
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
17,204

 
$
14,911

Marketable securities
 
8,024

 
6,178

Accounts receivable, trade, less allowances for doubtful accounts $429 (2012, $466)
 
12,027

 
11,309

Inventories (Note 2)
 
8,124

 
7,495

Deferred taxes on income
 
3,485

 
3,139

Prepaid expenses and other receivables
 
3,312

 
3,084

Total current assets
 
52,176

 
46,116

Property, plant and equipment at cost
 
36,432

 
34,654

Less: accumulated depreciation
 
(20,305
)
 
(18,557
)
Property, plant and equipment, net
 
16,127

 
16,097

Intangible assets, net (Note 3)
 
28,467

 
28,752

Goodwill (Note 3)
 
22,852

 
22,424

Deferred taxes on income
 
4,596

 
4,541

Other assets
 
2,715

 
3,417

Total assets
 
$
126,933

 
$
121,347

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
Loans and notes payable
 
$
5,359

 
$
4,676

Accounts payable
 
6,055

 
5,831

Accrued liabilities
 
6,921

 
7,299

Accrued rebates, returns and promotions
 
3,465

 
2,969

Accrued compensation and employee related obligations
 
2,324

 
2,423

Accrued taxes on income
 
1,711

 
1,064

Total current liabilities
 
25,835

 
24,262

Long-term debt (Note 4)
 
9,748

 
11,489

Deferred taxes on income
 
3,613

 
3,136

Employee related obligations
 
9,038

 
9,082

Other liabilities
 
8,895

 
8,552

Total liabilities
 
57,129

 
56,521

Shareholders’ equity:
 
 
 
 
Common stock — par value $1.00 per share (authorized 4,320,000,000 shares; issued 3,119,843,000 shares)
 
$
3,120

 
$
3,120

Accumulated other comprehensive income (loss) (Note 7)
 
(5,346
)
 
(5,810
)
Retained earnings
 
87,703

 
85,992

Less: common stock held in treasury, at cost (299,184,000 and 341,354,000 shares)
 
15,673

 
18,476

Total shareholders’ equity
 
69,804

 
64,826

Total liabilities and shareholders' equity
 
$
126,933

 
$
121,347

See Notes to Consolidated Financial Statements

3


JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
 
 
Fiscal Third Quarters Ended
 
 
September 29,
2013
 
Percent
to Sales
 
September 30,
2012
 
Percent
to Sales
Sales to customers (Note 9)
 
$
17,575

 
100.0
 %
 
$
17,052

 
100.0
 %
Cost of products sold
 
5,344

 
30.4

 
5,597

 
32.8

Gross profit
 
12,231

 
69.6

 
11,455

 
67.2

Selling, marketing and administrative expenses
 
5,314

 
30.2

 
5,228

 
30.6

Research and development expense
 
2,042

 
11.6

 
1,923

 
11.3

In-process research and development
 
178

 
1.0

 
679

 
4.0

Interest income
 
(18
)
 
(0.1
)
 
(15
)
 
(0.1
)
Interest expense, net of portion capitalized
 
105

 
0.6

 
135

 
0.8

Other (income) expense, net
 
943

 
5.4

 
(90
)
 
(0.5
)
Earnings before provision for taxes on income
 
3,667

 
20.9

 
3,595

 
21.1

Provision for taxes on income (Note 5)
 
685

 
3.9

 
966

 
5.7

NET EARNINGS
 
2,982

 
17.0

 
2,629

 
15.4

Add: Net loss attributable to noncontrolling interest, net of tax
 

 

 
339

 
2.0

NET EARNINGS ATTRIBUTABLE TO JOHNSON & JOHNSON
 
$
2,982

 
17.0
 %
 
$
2,968

 
17.4
 %
NET EARNINGS PER SHARE ATTRIBUTABLE TO JOHNSON & JOHNSON (Note 8)
 
 
 
 
 
 
 
 
Basic
 
$
1.06

 
 
 
$
1.08

 
 
Diluted
 
$
1.04

 
 
 
$
1.05

 
 
CASH DIVIDENDS PER SHARE
 
$
0.66

 
 
 
$
0.61

 
 
AVG. SHARES OUTSTANDING
 
 
 
 
 
 
 
 
Basic
 
2,818.4

 
 
 
2,757.4

 
 
Diluted
 
2,881.2

 
 
 
2,818.1

 
 
See Notes to Consolidated Financial Statements



4


JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars & Shares in Millions Except Per Share Amounts)
 
 
Fiscal Nine Months Ended
 
 
September 29,
2013
 
Percent
to Sales
 
September 30,
2012
 
Percent
to Sales
Sales to customers (Note 9)
 
$
52,957

 
100.0
 %
 
$
49,666

 
100.0
 %
Cost of products sold
 
16,387

 
30.9

 
15,655

 
31.5

Gross profit
 
36,570

 
69.1

 
34,011

 
68.5

Selling, marketing and administrative expenses
 
15,913

 
30.0

 
15,208

 
30.6

Research and development expense
 
5,772

 
10.9

 
5,334

 
10.7

In-process research and development
 
242

 
0.5

 
1,108

 
2.2

Interest income
 
(56
)
 
(0.1
)
 
(46
)
 
(0.1
)
Interest expense, net of portion capitalized
 
348

 
0.7

 
425

 
0.9

Other (income) expense, net
 
1,630

 
3.1

 
1,307

 
2.7

Earnings before provision for taxes on income
 
12,721

 
24.0

 
10,675

 
21.5

Provision for taxes on income (Note 5)
 
2,409

 
4.5

 
2,728

 
5.5

NET EARNINGS
 
10,312

 
19.5

 
7,947

 
16.0

Add: Net loss attributable to noncontrolling interest, net of tax
 

 

 
339

 
0.7

NET EARNINGS ATTRIBUTABLE TO JOHNSON & JOHNSON
 
$
10,312

 
19.5
 %
 
$
8,286

 
16.7
 %
NET EARNINGS PER SHARE ATTRIBUTABLE TO JOHNSON & JOHNSON (Note 8)
 
 
 
 
 
 
 
 
Basic
 
$
3.68

 
 
 
$
3.02

 
 
Diluted
 
$
3.58

 
 
 
$
2.96

 
 
CASH DIVIDENDS PER SHARE
 
$
1.93

 
 
 
$
1.79

 
 
AVG. SHARES OUTSTANDING
 
 
 
 
 
 
 
 
Basic
 
2,805.6

 
 
 
2,747.1

 
 
Diluted
 
2,879.0

 
 
 
2,805.0

 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements


5


JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; Dollars in Millions)

 
Fiscal Third Quarters Ended
 
Fiscal Nine Months Ended
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
 
 
 
 
 
 
 
 
Net Earnings
$
2,982

 
2,629

 
10,312

 
7,947

 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation
1,278

 
1,485

 
(48
)
 
689

 
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
  Unrealized holding gain (loss) arising during period
59

 
(263
)
 
238

 
(194
)
  Reclassifications to earnings

 
(3
)
 
(289
)
 
(4
)
  Net change
59

 
(266
)
 
(51
)
 
(198
)
 
 
 
 
 
 
 
 
Employee benefit plans:
 
 
 
 
 
 
 
  Prior service cost amortization during period

 

 
2

 
1

  Gain (loss) amortization during period
130

 
94

 
390

 
282

  Net change
130

 
94

 
392

 
283

 
 
 
 
 
 
 
 
Derivatives & hedges:
 
 
 
 
 
 
 
  Unrealized gain (loss) arising during period
41

 
(5
)
 
224

 
(90
)
  Reclassifications to earnings
(44
)
 
(29
)
 
(53
)
 
23

  Net change
(3
)
 
(34
)
 
171

 
(67
)
 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss)
1,464

 
1,279

 
464

 
707

 
 
 
 
 
 
 
 
Comprehensive Income
$
4,446

 
3,908

 
10,776

 
8,654

 
 
 
 
 
 
 
 
Comprehensive Loss Attributable To Noncontrolling Interest, net of tax

 
339

 

 
339

 
 
 
 
 
 
 
 
Comprehensive Income Attributable To Johnson & Johnson
$
4,446

 
4,247

 
10,776

 
8,993

 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements

The tax effects in other comprehensive income for the fiscal third quarters were as follows for 2013 and 2012, respectively: Securities: $32 million and $144 million; Employee Benefit Plans: $68 million and $49 million; Derivatives & Hedges: $1 million and $18 million.
The tax effects in other comprehensive income for the fiscal nine months were as follows for 2013 and 2012, respectively: Securities: $28 million and $107 million; Employee Benefit Plans: $204 million and $147 million; Derivatives & Hedges: $92 million and $36 million.
Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries.


6


JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
 
 
Fiscal Nine Months Ended
 
 
September 29,
2013
 
September 30,
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net earnings
 
$
10,312

 
$
7,947

Adjustments to reconcile net earnings to cash flows from operating activities:
 
 
 
 
Depreciation and amortization of property and intangibles
 
3,002

 
2,630

Stock based compensation
 
584

 
515

Noncontrolling interest
 

 
339

  Venezuela currency devaluation
 
108

 

Asset write-downs
 
247

 
2,047

Net gain on equity investment transactions
 
(380
)
 

Deferred tax provision
 
(224
)
 
(324
)
Accounts receivable allowances
 
(32
)
 
86

Changes in assets and liabilities, net of effects from acquisitions:
 
 
 
 
(Increase)/decrease in accounts receivable
 
(971
)
 
94

Increase in inventories
 
(799
)
 
(593
)
Increase in accounts payable and accrued liabilities
 
589

 
1,220

Increase in other current and non-current assets
 
(403
)
 
(790
)
Increase/(Decrease) in other current and non-current liabilities
 
1,242

 
(1,151
)
 
 
 
 
 
NET CASH FLOWS FROM OPERATING ACTIVITIES
 
13,275

 
12,020

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Additions to property, plant and equipment
 
(2,166
)
 
(1,782
)
Proceeds from the disposal of assets
 
192

 
905

Acquisitions, net of cash acquired
 
(819
)
 
(4,423
)
Purchases of investments
 
(13,583
)
 
(8,837
)
Sales of investments
 
12,891

 
12,134

Other
 
(40
)
 
(4
)
 
 
 
 
 
NET CASH USED BY INVESTING ACTIVITIES
 
(3,525
)
 
(2,007
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Dividends to shareholders
 
(5,424
)
 
(4,924
)
Repurchase of common stock
 
(3,050
)
 
(12,919
)
Proceeds from short-term debt
 
1,770

 
3,606

Retirement of short-term debt
 
(1,416
)
 
(5,780
)
Proceeds from long-term debt
 
51

 
16

Retirement of long-term debt
 
(1,531
)
 
(796
)
Proceeds from the exercise of stock options/excess tax benefits
 
2,271

 
1,817

Other
 
56

 
(111
)
 
 
 
 
 
NET CASH USED BY FINANCING ACTIVITIES
 
(7,273
)
 
(19,091
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(184
)
 
22

Increase/(decrease) in cash and cash equivalents
 
2,293

 
(9,056
)
Cash and Cash equivalents, beginning of period
 
14,911

 
24,542

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
17,204

 
$
15,486

 
 
 
 
 
 
 
 
 
 

7


JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
 
 
Fiscal Nine Months Ended
 
 
September 29,
2013
 
September 30,
2012
Supplemental schedule of non-cash investing and financing activities
 
 
 
 
Issuance of common stock associated with the acquisition of Synthes, Inc.
 
$

 
13,335

 
 
 
 
 
Acquisitions
 
 
 
 
Fair value of assets acquired
 
$
1,012

 
$
18,984

Fair value of liabilities assumed and noncontrolling interests
 
(193
)
 
(1,226
)
Net fair value of acquisitions
 
819

 
17,758

Less: Issuance of common stock associated with the acquisition of Synthes, Inc.
 

 
13,335

Net cash paid for acquisitions
 
$
819

 
$
4,423

See Notes to Consolidated Financial Statements

8


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of Johnson & Johnson and its subsidiaries (the Company) and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2012. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented.

During the fiscal first quarter of 2013, the Company adopted the Financial Accounting Standards Board (FASB) guidance and amendments related to testing indefinite-lived intangible assets for impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to determine the fair value. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. This update became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard is not expected to have a material impact on the Company’s results of operations, cash flows or financial position.

During the fiscal first quarter of 2013, the Company adopted the FASB guidance related to additional reporting and disclosure of amounts reclassified out of accumulated other comprehensive income (AOCI). Under this new guidance, companies are required to disclose the effect of significant reclassifications out of AOCI on the respective line items on the income statement if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional details about those amounts. This update became effective for annual and interim reporting periods for fiscal years beginning after December 15, 2012. The Company has disclosed the reclassification details in Note 7 to the Consolidated Financial Statements.

During the fiscal first quarter of 2013, the FASB issued amended guidance clarifying the release of accumulated Foreign Currency Translation from OCI into current year Net Earnings. The amendment requires that when the parent company ceases to have a controlling interest in a subsidiary or a business within a foreign entity the parent is to release accumulated Foreign Currency Translation from OCI. This update is required to be adopted for all annual periods and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company's results of operations, cash flows or financial position.

During the fiscal third quarter of 2013, the FASB adopted clarifying guidance on the presentation of unrecognized tax benefits when various qualifying tax credits exist. The amendment requires that unrecognized tax benefits be presented on the Consolidated Balance Sheet as a reduction to deferred tax assets created by net operating losses or other tax credits from prior periods that occur in the same taxing jurisdiction. To the extent that the unrecognized tax benefit exceeds these credits, it shall be presented as a liability. This update is required to be adopted for all annual periods and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the presentation of the Company's financial position.

NOTE 2 — INVENTORIES

(Dollars in Millions)
 
September 29, 2013
 
December 30, 2012
Raw materials and supplies
 
$
1,345

 
1,416

Goods in process
 
2,714

 
2,262

Finished goods
 
4,065

 
3,817

Total inventories
 
$
8,124

 
7,495


9




NOTE 3 — INTANGIBLE ASSETS AND GOODWILL

Intangible assets that have finite useful lives are amortized over their estimated useful lives. The latest impairment assessment of goodwill and indefinite lived intangible assets was completed in the fiscal fourth quarter of 2012. Future impairment tests for goodwill and indefinite lived intangible assets will be performed annually in the fiscal fourth quarter, or sooner if warranted, as was the case for certain indefinite lived intangible assets in 2013.

(Dollars in Millions)
 
September 29, 2013
 
December 30, 2012
Intangible assets with definite lives:
 
 
 
 
Patents and trademarks — gross
 
$
8,953

 
8,890

Less accumulated amortization
 
3,789

 
3,416

Patents and trademarks — net
 
5,164

 
5,474

Customer relationships and other intangibles — gross
 
18,810

 
18,755

Less accumulated amortization
 
4,645

 
4,030

Customer relationships and other intangibles — net
 
14,165

 
14,725

Intangible assets with indefinite lives:
 
 
 
 
Trademarks
 
7,634

 
7,648

Purchased in-process research and development
 
1,504

 
905

Total intangible assets with indefinite lives
 
9,138

 
8,553

Total intangible assets — net
 
$
28,467

 
28,752


Goodwill as of September 29, 2013 was allocated by segment of business as follows:
(Dollars in Millions)
 
Consumer
 
Pharm
 
Med Dev & Diag
 
Total
Goodwill, net at December 30, 2012
 
$
8,519

 
1,792

 
12,113

 
22,424

Acquisitions
 
80

 
247

 
11

 
338

Currency translation/Other
 
18

 
15

 
57

 
90

Goodwill, net as of September 29, 2013
 
$
8,617

 
2,054

 
12,181

 
22,852


The weighted average amortization periods for patents and trademarks and customer relationships and other intangible assets are 17 years and 24 years, respectively. The amortization expense of amortizable intangible assets was $980 million and $866 million for the fiscal nine months ended September 29, 2013 and September 30, 2012, respectively. The estimated amortization expense for the five succeeding years approximates $1,300 million, before tax, per year. Amortization expense is included in cost of products sold.

NOTE 4 — FAIR VALUE MEASUREMENTS

The Company uses forward exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany product and third-party purchases of materials denominated in foreign currency. The Company also uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both types of derivatives are designated as cash flow hedges. The Company also uses forward exchange contracts to manage its exposure to the variability of cash flows for repatriation of foreign dividends. These contracts are designated as net investment hedges. Additionally, the Company uses forward exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward exchange contracts are not designated as hedges, and therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the related foreign currency assets and liabilities. The Company does not enter into derivative financial instruments for trading or speculative purposes, or that contain credit risk related contingent features or requirements to post collateral. On an ongoing basis, the Company monitors counterparty credit ratings. The Company considers credit non-performance risk to be low, because the Company enters into agreements with commercial institutions that have at least an A (or equivalent) credit rating. As of September 29, 2013, the

10


Company had notional amounts outstanding for forward foreign exchange contracts and cross currency interest rate swaps of $27.5 billion and $2.4 billion, respectively.

All derivative instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.

The designation as a cash flow hedge is made at the entrance date of the derivative contract. At inception, all derivatives are expected to be highly effective. Changes in the fair value of a derivative that is designated as a cash flow hedge and is highly effective are recorded in accumulated other comprehensive income until the underlying transaction affects earnings, and are then reclassified to earnings in the same account as the hedged transaction. Gains/losses on net investment hedges are accounted for through the currency translation account and are insignificant. On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes in the cash flows of hedged items. If and when a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is included in current period earnings in Other (income) expense, net.

As of September 29, 2013, the balance of deferred net gains on derivatives included in accumulated other comprehensive income was $179 million after-tax. For additional information, see the Consolidated Statements of Comprehensive Income and Note 7. The Company expects that substantially all of the amounts related to foreign exchange contracts will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period. The maximum length of time over which the Company is hedging transaction exposure is 18 months excluding interest rate swaps. The amount ultimately realized in earnings will differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative.

The following table is a summary of the activity related to derivatives designated as hedges for the fiscal third quarters in 2013 and 2012:
 
 
 
 
 
 
 
 
 
 
 
Gain/(Loss)
Recognized in
Accumulated
OCI(1)
 
Gain/(Loss) Reclassified from
Accumulated OCI
into Income(1)
 
Gain/(Loss)
Recognized in
Other
Income/Expense(2)
 
 
Fiscal Third Quarters Ended
Cash Flow Hedges by Income Statement Caption
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
(Dollars in Millions)
 
 
 
 
 
 
 
 
 
 
 
 
Sales to customers(3)
 
$
25

 
30

 
17

 
(12
)
 

 
(1
)
Cost of products sold(3)
 
42

 
(61
)
 
51

 
(19
)
 

 
(1
)
Research and development expense(3)
 
(20
)
 
22

 
(14
)
 
43

 

 

Interest (income)/Interest expense, net(4)
 
7

 
28

 
(2
)
 
(2
)
 

 

Other (income)expense, net(3)
 
(13
)
 
(24
)
 
(8
)
 
19

 

 
1

Total
 
$
41

 
(5
)
 
44

 
29

 

 
(1
)

The following table is a summary of the activity related to derivatives designated as hedges for the fiscal nine months in 2013 and 2012:

11


 
 
 
 
 
 
 
 
 
 
 
Gain/(Loss)
Recognized in
Accumulated
OCI(1)
 
Gain/(Loss) Reclassified from
Accumulated OCI
into Income(1)
 
Gain/(Loss)
Recognized in
Other
Income/Expense(2)
 
 
Fiscal Nine Months Ended
Cash Flow Hedges by Income Statement Caption
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
(Dollars in Millions)
 
 
 
 
 
 
 
 
 
 
 
 
Sales to customers(3)
 
$
22

 
16

 
24

 
(42
)
 

 
(1
)
Cost of products sold(3)
 
220

 
(100
)
 
72

 
(53
)
 
4

 
(1
)
Research and development expense(3)
 
(27
)
 
33

 
(31
)
 
56

 
(3
)
 

Interest (income)/Interest expense, net(4)
 
15

 
(14
)
 
(6
)
 
(11
)
 

 

Other (income)expense, net(3)
 
(6
)
 
(25
)
 
(6
)
 
27

 
(1
)
 

Total
 
$
224

 
(90
)
 
53

 
(23
)
 

 
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
All amounts shown in the tables above are net of tax.
(1) Effective portion
(2) Ineffective portion
(3) Foreign exchange contracts
(4) Cross currency interest rate swaps

For the fiscal third quarter ended September 29, 2013, no gain or loss was recognized and for the fiscal third quarter ended September 30, 2012, a gain of $35 million was recognized in Other (income)expense, net, relating to foreign exchange contracts not designated as hedging instruments.

For the fiscal nine months ended September 29, 2013 and September 30, 2012, a gain of $50 million and a gain of $9 million, respectively, were recognized in Other (income)expense, net, relating to foreign exchange contracts not designated as hedging instruments.

Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that is determined using assumptions that market participants would use in pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy are described below with Level 1 having the highest priority and Level 3 having the lowest.

The fair value of a derivative financial instrument (i.e., foreign exchange contract or cross currency interest rate swap) is the aggregation by currency of all future cash flows discounted to its present value at the prevailing market interest rates and subsequently converted to the U.S. dollar at the current spot foreign exchange rate. The Company does not believe that fair values of these derivative instruments materially differ from the amounts that could be realized upon settlement or maturity, or that the changes in fair value will have a material effect on the Company’s results of operations, cash flows or financial position. The Company also holds equity investments which are classified as Level 1 because they are traded in an active exchange market. The Company did not have any other significant financial assets or liabilities which would require revised valuations under this standard that are recognized at fair value.

The following three levels of inputs are used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets and liabilities.
Level 2 — Significant other observable inputs.
Level 3 — Significant unobservable inputs.

The Company’s significant financial assets and liabilities measured at fair value as of September 29, 2013 and December 30, 2012 were as follows:

12


 
 
September 29, 2013
 
 
 
December 30, 2012
(Dollars in Millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Total(2)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$

 
482

 

 
482

 
423

Cross currency interest rate swaps(3)
 

 
127

 

 
127

 
98

Total
 

 
609

 

 
609

 
521

Liabilities:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 

 
181

 

 
181

 
252

Cross currency interest rate swaps(4)
 

 
10

 

 
10

 
10

Total
 

 
191

 

 
191

 
262

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 

 
37

 

 
37

 
75

Liabilities:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 

 
15

 

 
15

 
23

Other Investments(1)
 
$
405

 

 

 
405

 
1,247


(1)
Classified as non-current other assets. The change in the fair value from December 30, 2012 was primarily due to the sale of Elan American Depositary Shares.
(2)
As of December 30, 2012, these assets and liabilities are classified as Level 2 with the exception of Other Investments of $1,247 million which are classified as Level 1.
(3)
Includes $127 million and $96 million of non-current assets for September 29, 2013 and December 30, 2012, respectively.
(4)
Includes $5 million and $4 million of non-current liabilities for September 29, 2013 and December 30, 2012, respectively.

13



Financial Instruments not measured at Fair Value:

The following financial assets and liabilities are held at carrying amount on the consolidated balance sheet as of September 29, 2013:
(Dollars in Millions)
 
Carrying Amount

 
Estimated Fair Value

Financial Assets
 
 
 
 
Current Investments
 
 
 
 
Cash
 
$
2,701

 
2,701

Government securities and obligations
 
19,884

 
19,884

Corporate debt securities
 
611

 
611

Money market funds
 
1,399

 
1,399

Time deposits
 
633

 
633

Total cash, cash equivalents and current marketable securities
 
$
25,228

 
25,228

 
 
 
 
 
Fair value of government securities and obligations and corporate debt securities was estimated using quoted broker prices and significant other observable inputs.
Financial Liabilities
 
 
 
 
 
 
 
 
 
Current Debt
 
$
5,359

 
5,359

Non-Current Debt
 
 
 
 
2.15% Notes due 2016
 
898

 
932

5.55% Debentures due 2017
 
1,000

 
1,159

5.15% Debentures due 2018
 
898

 
1,041

4.75% Notes due 2019 (1B Euro 1.3503)
 
1,345

 
1,605

3% Zero Coupon Convertible Subordinated Debentures due in 2020
 
178

 
260

2.95% Debentures due 2020
 
542

 
564

3.55% Notes due 2021
 
446

 
470

6.73% Debentures due 2023
 
250

 
323

5.50% Notes due 2024 (500 GBP 1.6042)
 
797

 
965

6.95% Notes due 2029
 
296

 
404

4.95% Debentures due 2033
 
500

 
561

5.95% Notes due 2037
 
995

 
1,226

5.85% Debentures due 2038
 
700

 
832

4.50% Debentures due 2040
 
539

 
556

4.85% Notes due 2041
 
298

 
322

Other
 
66

 
66

Total Non-Current Debt
 
$
9,748

 
11,286


The weighted average effective interest rate on non-current debt is 5.12%.

Fair value of the non-current debt was estimated using market prices, which were corroborated by quoted broker prices and significant other observable inputs.

14


NOTE 5 — INCOME TAXES

The worldwide effective income tax rates for the fiscal nine months of 2013 and 2012 were 18.9% and 25.6%, respectively. The R&D tax credit and the CFC look-through provisions were enacted into law in January 2013 and were retroactive to January 1, 2012. The entire 2012 R&D tax credit and the CFC look-through provisions and the quarterly impact of the 2013 R&D tax credit and the CFC look-through provisions are reflected in the 2013 fiscal nine months financial results which decreased the 2013 tax rate by 1.5 points. Additionally, taxable income increased in lower tax jurisdictions relative to higher tax jurisdictions. The higher effective tax rate in 2012 was also due to lower tax rates associated with the deductions for Synthes integration and transaction costs, litigation accruals and the add back of the net loss attributable to noncontrolling interest, which added approximately 4.0 points to the tax rate.

During the fiscal third quarter of 2013, the Company reached a settlement agreement related to certain issues regarding the Internal Revenue Service audit related to tax years 2006-2009. As a result of this settlement, the Company adjusted the reserves relating to these matters which lowered tax expense for the fiscal third quarter and fiscal nine months. Also included in the fiscal third quarter and fiscal nine month results were incremental tax expense associated with the establishment of a valuation allowance on the Company's foreign deferred tax assets and additional U.S. tax expense related to increased dividends of foreign earnings. The above items had no net impact on the effective income tax rate for the fiscal nine months of 2013.

As of September 29, 2013, the Company had approximately $2.4 billion of liabilities from unrecognized tax benefits which reflects the settlement agreement described above. The Company believes it is possible that audits may be completed by tax authorities in some jurisdictions over the next twelve months. The Company is not able to provide a reasonably reliable estimate of the timing of any other future tax payments relating to uncertain tax positions.

NOTE 6 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS

Components of Net Periodic Benefit Cost

Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the fiscal third quarters of 2013 and 2012 include the following components:

 
 
Retirement Plans
 
Other Benefit Plans
 
 
Fiscal Third Quarters Ended
(Dollars in Millions)
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Service cost
 
$
204

 
163

 
49

 
42

Interest cost
 
226

 
218

 
37

 
41

Expected return on plan assets
 
(360
)
 
(307
)
 
(1
)
 
(1
)
Amortization of prior service cost/(credit)
 
1

 
2

 
(1
)
 
(1
)
Amortization of net transition obligation
 

 
1

 

 

Recognized actuarial losses
 
169

 
123

 
29

 
21

Net periodic benefit cost
 
$
240

 
200

 
113

 
102


Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the fiscal nine months of 2013 and 2012 include the following components:

15


 
 
 
 
 
 
 
 
 
 
 
Retirement Plans
 
Other Benefit Plans
 
 
Fiscal Nine Months Ended
(Dollars in Millions)
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Service cost
 
$
615

 
492

 
147

 
131

Interest cost
 
681

 
659

 
112

 
123

Expected return on plan assets
 
(1,084
)
 
(927
)
 
(4
)
 
(3
)
Amortization of prior service cost/(credit)
 
4

 
4

 
(2
)
 
(3
)
Amortization of net transition obligation
 

 
1

 

 

Recognized actuarial losses
 
509

 
371

 
84

 
59

Curtailments and settlements
 

 
(1
)
 

 

Net periodic benefit cost
 
$
725

 
599

 
337

 
307

 
 
 
 
 
 
 
 
 

Company Contributions

For the fiscal nine months ended September 29, 2013, the Company contributed $45 million and $27 million to its U.S. and international retirement plans, respectively. The Company plans to continue to fund its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. International plans are funded in accordance with local regulations.

NOTE 7 — ACCUMULATED OTHER COMPREHENSIVE INCOME

Components of other comprehensive income (loss) consist of the following:
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign
 
Gain/(Loss)
 
Employee
 
Gain/(Loss)
 
Total Accumulated
 
 
Currency
 
on
 
Benefit
 
on Derivatives
 
Other Comprehensive
(Dollars in Millions)
 
Translation
 
Securities (1)
 
Plans (2)
 
& Hedges (3)
 
Income (Loss)
December 30, 2012
 
$
(296
)
 
195

 
(5,717
)
 
8

 
(5,810
)
Net change
 
(48
)
 
(51
)
 
392

 
171

 
464

September 29, 2013
 
$
(344
)
 
144

 
(5,325
)
 
179

 
(5,346
)

Amounts in accumulated other comprehensive income are presented net of the related tax impact. Foreign currency translation is not adjusted for income taxes as it relates to permanent investments in international subsidiaries. For additional details on comprehensive income see the Consolidated Statements of Comprehensive Income.

Details on reclassifications out of Accumulated Other Comprehensive Income:
(1)
Gain/(Loss) on Securities - reclassifications released to other (income) expense, net.
(2)
Employee Benefit Plans - reclassifications are included in net periodic benefit cost. See Note 6 for additional details.
(3)
Gain/(Loss) on Derivatives & Hedges - reclassifications to earnings are recorded in the same account as the hedged transaction. See Note 4 for additional details.


16


NOTE 8 — EARNINGS PER SHARE

The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the fiscal third quarters ended September 29, 2013 and September 30, 2012:
 
 
Fiscal Third Quarters Ended
(Shares in Millions)
 
September 29, 2013
 
September 30, 2012
Basic net earnings per share attributable to Johnson & Johnson
 
$
1.06

 
$
1.08

Average shares outstanding — basic
 
2,818.4

 
2,757.4

Potential shares exercisable under stock option plans
 
154.1

 
181.6

Less: shares which could be repurchased under treasury stock method
 
(107.9
)
 
(141.5
)
Convertible debt shares
 
3.0

 
3.6

Accelerated share repurchase program
 
13.6

 
17.0

Average shares outstanding — diluted
 
2,881.2

 
2,818.1

Diluted earnings per share attributable to Johnson & Johnson
 
$
1.04

 
$
1.05


The diluted earnings per share calculation for both fiscal third quarters ended September 29, 2013 and September 30, 2012 included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.

The diluted earnings per share calculation for the fiscal third quarters ended September 29, 2013 and September 30, 2012 included the dilutive effect of 13.6 million shares and 17.0 million shares, respectively, related to the accelerated share repurchase program, associated with the acquisition of Synthes, Inc. See Note 10 to the Consolidated Financial Statements for additional details.

The diluted earnings per share calculation for both the fiscal third quarters ended September 29, 2013 and September 30, 2012 included all shares related to stock options, as the exercise price of all options was less than the average market value of the Company's stock during the quarter.

The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the fiscal nine months ended September 29, 2013 and September 30, 2012:
 
 
Fiscal Nine Months Ended
(Shares in Millions)
 
September 29, 2013
 
September 30, 2012
Basic net earnings per share attributable to Johnson & Johnson
 
$
3.68

 
$
3.02

Average shares outstanding — basic
 
2,805.6

 
2,747.1

Potential shares exercisable under stock option plans
 
154.7

 
181.5

Less: shares which could be repurchased under treasury stock method
 
(110.4
)
 
(144.2
)
Convertible debt shares
 
3.0

 
3.6

Accelerated share repurchase program
 
26.1

 
17.0

Average shares outstanding — diluted
 
2,879.0

 
2,805.0

Diluted earnings per share attributable to Johnson & Johnson
 
$
3.58

 
$
2.96

 
 
 
 
 
The diluted earnings per share calculation for both fiscal nine months ended September 29, 2013 and September 30, 2012 included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.

The diluted earnings per share calculation for the fiscal nine months ended September 29, 2013 and September 30, 2012 included the dilutive effect of 26.1 million shares and 17.0 million shares, respectively, related to the accelerated share repurchase program, associated with the acquisition of Synthes, Inc. See Note 10 to the Consolidated Financial Statements for additional details.

The diluted earnings per share calculation for the fiscal nine months ended September 29, 2013 included all shares related to stock options, as the exercise price of all options was less than the average market value of the Company's stock during the quarter. The diluted earnings per share calculation for the fiscal nine months ended September 30, 2012 excluded 1.0 million

17


shares related to stock options, as the exercise price of these options was greater than the average market value, which would result in an anti-dilutive effect on diluted earnings per share.

18



NOTE 9 — SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS

SALES BY SEGMENT OF BUSINESS
 
 
Fiscal Third Quarters Ended
(Dollars in Millions)
 
September 29,
2013
 
September 30,
2012
 
Percent
Change
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
United States
 
$
1,225

 
$
1,214

 
0.9
 %
International
 
2,386

 
2,367

 
0.8

Total
 
3,611

 
3,581

 
0.8

Pharmaceutical
 
 
 
 
 
 
United States
 
3,549

 
3,288

 
7.9

International
 
3,487

 
3,114

 
12.0

Total
 
7,036

 
6,402

 
9.9

Medical Devices & Diagnostics
 
 
 
 
 
 
United States
 
3,151

 
3,289

 
(4.2
)
International
 
3,777

 
3,780

 
(0.1
)
Total
 
6,928

 
7,069

 
(2.0
)
Worldwide
 
 
 
 
 
 
United States
 
7,925

 
7,791

 
1.7

International
 
9,650

 
9,261

 
4.2

Total
 
$
17,575

 
$
17,052

 
3.1
 %
 
 
 
 
 
 
 
 
 
Fiscal Nine Months Ended
(Dollars in Millions)
 
September 29,
2013
 
September 30,
2012
 
Percent
Change
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
United States
 
$
3,899

 
$
3,843

 
1.5
%
International
 
7,045

 
6,952

 
1.3

Total
 
10,944

 
10,795

 
1.4

Pharmaceutical
 
 
 
 
 
 
United States
 
10,397

 
9,408

 
10.5

International
 
10,432

 
9,418

 
10.8

Total
 
20,829

 
18,826

 
10.6

Medical Devices & Diagnostics
 
 
 
 
 
 
United States
 
9,600

 
9,119

 
5.3

International
 
11,584

 
10,926

 
6.0

Total
 
21,184

 
20,045

 
5.7

Worldwide
 
 
 
 
 
 
United States
 
23,896

 
22,370

 
6.8

International
 
29,061

 
27,296

 
6.5

Total
 
$
52,957

 
$
49,666

 
6.6
%

19


SEGMENT PRE-TAX PROFIT
 
 
Fiscal Third Quarters Ended
(Dollars in Millions)
 
September 29,
2013
 
September 30,
2012
 
Percent
Change
Consumer
 
$
467

 
$
510

 
(8.4
)%
Pharmaceutical (2)
 
2,449

 
1,388

 
76.4

Medical Devices & Diagnostics(3)
 
956

 
1,927

 
(50.4
)
Segments operating profit
 
3,872

 
3,825

 
1.2

Less: Expense not allocated to segments(4)
 
205

 
230

 
 
Worldwide income before taxes
 
$
3,667

 
$
3,595

 
2.0
 %
 
 
 
 
 
 
 
 
 
Fiscal Nine Months Ended
(Dollars in Millions)
 
September 29, 2013
 
September 30, 2012
 
Percent
Change
Consumer (1)
 
$
1,525

 
$
1,239

 
23.1
 %
Pharmaceutical (2)
 
7,858

 
4,494

 
74.9

Medical Devices & Diagnostics (3)
 
3,991

 
5,880

 
(32.1
)
Segments operating profit
 
13,374

 
11,613

 
15.2

Less: Expense not allocated to segments (4)
 
653

 
938

 
 
Worldwide income before taxes
 
$
12,721

 
$
10,675

 
19.2
 %

(1) Includes a gain on the sale of intangible and other assets of $55 million recorded in the fiscal nine months of 2013. Includes intangible asset write-downs of $294 million recorded in the fiscal nine months of 2012.
(2) Includes in-process research and development charges of $178 million and litigation expense of $28 million recorded in the fiscal third quarter of 2013. Includes litigation expense of $206 million, in-process research and development charges of $178 million and a net gain of $400 million on equity investment transactions, primarily the sale of Elan American Depositary Shares recorded in the fiscal nine months of 2013. Includes in-process research and development charges of $679 million recorded in the fiscal third quarter of 2012. Includes in-process research and development charges of $1,108 million, litigation expense of $658 million and intangible asset write-downs of $499 million recorded in the fiscal nine months of 2012.
(3) Includes litigation expense of $844 million, Synthes integration/transaction costs of $122 million and $35 million for the ASR™ Hip program recorded in the fiscal third quarter of 2013. Includes litigation expense of $1,564 million, Synthes integration/transaction costs of $502 million, in-process research and development charges of $64 million and $117 million for the ASR™ Hip program in the fiscal nine months of 2013. Includes Synthes integration/transaction costs of $165 million, litigation expense of $89 million and $27 million for the ASR Hip program recorded in the fiscal third quarter of 2012. Includes Synthes integration/transaction costs of $388 million, intangible asset write-downs of $146 million, litigation expense of $89 million and $27 million for the ASR Hip program recorded in the fiscal nine months of 2012.
(4) Amounts not allocated to segments include interest income/(expense), noncontrolling interests and general corporate income/expense. The fiscal nine months of 2013 includes litigation expense of $6 million. The fiscal nine months of 2012 includes currency losses related to the Synthes acquisition of $234 million and litigation expense of $11 million.

20


SALES BY GEOGRAPHIC AREA
 
 
Fiscal Third Quarters Ended
(Dollars in Millions)
 
September 29, 2013
 
September 30, 2012
 
Percent
Change
United States
 
$
7,925

 
$
7,791

 
1.7
 %
Europe
 
4,478

 
3,983

 
12.4

Western Hemisphere, excluding U.S.
 
1,842

 
1,824

 
1.0

Asia-Pacific, Africa
 
3,330

 
3,454

 
(3.6
)
Total
 
$
17,575

 
$
17,052

 
3.1
 %

 
 
 
 
 
 
 
 
 
Fiscal Nine Months Ended
(Dollars in Millions)
 
September 29, 2013
 
September 30, 2012
 
Percent
Change
United States
 
$
23,896

 
$
22,370

 
6.8
%
Europe
 
13,631

 
12,342

 
10.4

Western Hemisphere, excluding U.S.
 
5,530

 
5,266

 
5.0

Asia-Pacific, Africa
 
9,900

 
9,688

 
2.2

Total
 
$
52,957

 
$
49,666

 
6.6
%

NOTE 10— BUSINESS COMBINATIONS AND DIVESTITURES
During the fiscal third quarter of 2013, the Company completed the acquisitions of Aragon Pharmaceuticals, Inc., a privately-held, pharmaceutical discovery and development company focused on drugs to treat hormonally-driven cancers. Under the terms of the agreement, the Company made an upfront cash payment of $650 million. Additional contingent payments of up to $350 million may be paid in the future based on reaching predetermined milestones.  The purchase price for the acquisition including the fair value of the contingent consideration of $0.2 billion was allocated primarily to purchased IPR&D for $0.8 billion and goodwill for $0.2 billion.

During the fiscal first quarter of 2013, the Company completed the acquisitions of Flexible Stenting Solutions, Inc., a leading developer of innovative flexible peripheral arterial, venous and biliary stents and Shanghai Elsker Mother & Baby Co., Ltd, a baby care company in China.

During the fiscal third quarter of 2012, the Company acquired Calibra Medical, developer of a unique, wearable three-day insulin patch for convenient and discreet mealtime dosing for people with diabetes who take multiple daily injections of insulin and Spectrum Vision LLC, a full service distributor of contact lenses serving Russia and with facilities in the Ukraine and Kazakhstan.

During the fiscal third quarter of 2012, the Company completed the initial closing related to the divestiture of the RhoGAM® business. The Company also completed the sale of certain consumer brands in the United States and Canada to Valeant Pharmaceuticals.

During the fiscal second quarter of 2012, the Company completed the acquisition of Synthes, Inc., a global developer and manufacturer of orthopaedics devices, for a purchase price of $20.2 billion in cash and stock. The net acquisition cost of the transaction was $17.5 billion based on cash on hand at closing of $2.7 billion.

Under the terms of the agreement, each share of Synthes, Inc. common stock was exchanged for CHF 55.65 in cash and 1.717 shares of Johnson & Johnson common stock, based on the calculated exchange ratio. The exchange ratio was calculated on June 12, 2012 and based on the relevant exchange rate and closing price of Johnson & Johnson common stock on that date, the total fair value of consideration transferred was $19.7 billion. When the acquisition was completed on June 14, 2012, based on the relevant exchange rate and closing price of Johnson & Johnson common stock on that date, the total fair value of the consideration transferred was $20.2 billion. Janssen Pharmaceutical, a company organized under the laws of Ireland and
a wholly-owned subsidiary of Johnson & Johnson, used cash on hand to satisfy the cash portion of the merger consideration.


21


The stock portion of the merger consideration consisted of shares of Johnson & Johnson common stock purchased by Janssen Pharmaceutical, from two banks, pursuant to two accelerated share repurchase (ASR) agreements dated June 12, 2012. On June 13, 2012, Janssen Pharmaceutical purchased an aggregate of approximately 203.7 million shares of Johnson & Johnson common stock at an initial purchase price of $12.9 billion under the ASR agreements, with all of the shares delivered to Janssen Pharmaceutical on June 13, 2012.  During the fiscal third quarter of 2013, the Company settled the remaining liabilities under the ASR agreements for $2.9 billion in cash which was recorded as a reduction to equity.

In addition, while the Company believes that the transactions under each ASR agreement and a series of related internal transactions were consummated in a tax efficient manner in accordance with applicable law, it is possible that the Internal Revenue Service could assert one or more contrary positions to challenge the transactions from a tax perspective. If challenged, an amount up to the total purchase price for the Synthes shares could be treated as subject to applicable U.S. tax at approximately the statutory rate to the Company, plus interest.

The following table summarizes the consideration transferred to acquire Synthes, Inc. valued on the acquisition date of June 14, 2012:

(Dollars in Millions)
 
 
Cash (multiply 55.65CHF by shares of Synthes common stock outstanding by the exchange rate)(A)
 
$
6,902

Common stock (multiply 1.717 by shares of Synthes common stock outstanding by J&J stock price)(B)
 
$
13,335

Total fair value of consideration transferred
 
$
20,237


(A) Synthes common stock outstanding of 118.7 million shares as of the acquisition date and CHF/USD exchange rate of .95674

(B) Johnson & Johnson closing stock price on the New York Stock Exchange as of the acquisition date of $65.45 per share.

During the fiscal second quarter the Company finalized the purchase price allocation to the individual assets acquired and liabilities assumed using the acquisition method. The following table presents the amounts recognized for assets acquired and liabilities assumed as of the acquisition date with adjustments made through June 30, 2013:

(Dollars in Millions)
 
Cash & Cash equivalents
$
2,749

Inventory
1,194

Accounts Receivable, net
738

Other current assets
238

Property, plant and equipment
1,253

Goodwill
6,074

Intangible assets
12,861

Other non-current assets
46

Total Assets Acquired
25,153

 
 
Current liabilities
1,081

Deferred Taxes
3,506

Other non-current liabilities
329

Total Liabilities Assumed
4,916

 
 
Net Assets Acquired
$
20,237



The adjustments made since the date of acquisition were to account for changes to inventory, based on the results of the physical inventory counts and deferred taxes, to reflect the statutory tax rate that is being applied to the intangible assets. The revisions to the purchase price allocation were not material to the Statements of Consolidated Earnings or the Consolidated Balance Sheet for the fiscal second quarter of 2013 and prior fiscal quarters.

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The assets acquired are recorded in the Medical Devices and Diagnostics segment. The acquisition of Synthes, Inc. resulted in $6.1 billion of goodwill. The goodwill is primarily attributable to synergies expected to arise from the acquisition of Synthes, Inc. The goodwill is not deductible for tax purposes.


The purchase price allocation to the identifiable intangible assets is as follows:

(Dollars in Millions)
 
 
Intangible assets with definite lives:
 
 
Customer Relationships
 
$
9,870

Patents and Technology
 
1,508

Total amortizable intangibles
 
11,378

Trademark and Trade name
 
1,420

In-process research and development
 
63

Total intangible assets
 
$
12,861



The Customer Relationship intangible lives were determined using the projected customer retention period based
on historical experience. Synthes has a broad product portfolio, including trauma, spine, cranio-maxillofacial, biomaterials and
power tools. An analysis was performed to determine the lives for each of the Customer Relationship assets in the distinct product areas. The calculations to determine useful lives included attrition rates and discounted future cash flows by product area. This analysis resulted in a weighted average life of 22 years for the Customer Relationship assets.

The Patents and Technology intangible lives were derived based on technology obsolescence rates that are commensurate with the nature of the Synthes businesses. New product introductions are predominantly incremental enhancements to existing platforms and are infrequently transformational. An analysis was performed to determine the lives for each of the Patents and Technology assets in each distinct product area. The calculations to determine useful lives included assumptions on technology obsolescence and discounted future cash flows by product area. This analysis resulted in a weighted average life of 18 years for the Patents and Technology assets.

A weighted average of the values and lives ascribed to the Customer Relationship and Patents and Technology intangible assets results in a 21 year weighted average life.

The Trademark and Trade name asset values were determined to have an indefinite life based on a number of factors, including trade name history, the competitive environment, market share and future operating plans. Additionally, in-process research and development intangible assets were valued for technology programs for unapproved products.

The value of the IPR&D was calculated using cash flow projections discounted for the risk inherent in such projects. The discount rate applied was 14%.

The Company is in the process of executing the integration plans to combine businesses, sales organizations, systems and locations as a result of which the Company has and will continue to incur integration costs.

The operating results of Synthes were reported in the Company's financial statements beginning on June 14, 2012.
The following table provides pro forma results of operations for the fiscal nine months ended September 30, 2012, as if Synthes, Inc. had been acquired as of January 3, 2011. The pro forma results include the effect of divestitures and certain purchase accounting adjustments such as the estimated changes in depreciation and amortization expense on the acquired tangible and intangible assets. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of Synthes, Inc. Accordingly, such amounts are not necessarily indicative of the results if the acquisition had occurred on the dates indicated or which may occur in the future.

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Unaudited Pro forma Consolidated Results
 
 
(Dollars in Millions Except Per Share Data)
Fiscal Nine Months Ended September 30, 2012
Net Sales
$
51,336

Net Earnings Attributable to Johnson & Johnson
$
8,734

Diluted Net Earnings per Common Share Attributable to Johnson & Johnson
$
3.11


In the fiscal nine months of 2013, the Company recorded acquisition-related costs of $502 million before tax, which were recorded in Cost of products sold and Other (income)expense.

In connection with the Synthes acquisition, DePuy Orthopaedics, Inc. agreed to divest certain rights and assets related to its trauma business to Biomet, Inc. and completed the initial closing for this transaction in the fiscal second quarter of 2012, including those countries that represented the majority of sales. As of December 30, 2012, the transaction had closed worldwide.

Additionally, during the fiscal second quarter of 2012, the Company acquired Guangzhou Bioseal Biotech Co., Ltd., a privately held biopharmaceutical company specializing in the design, development and commercialization of a porcine plasma-derived biologic product for controlling bleeding during surgery; CorImmun GmbH, a privately held drug development company in Germany; and certain assets of the Angiotech Pharmaceuticals, Inc. barbed suture business. During the fiscal third quarter of 2013, the Company recorded a charge of $0.2 billion for the impairment of the in-process research and development associated with CorImmun.

During the fiscal first quarter of 2012, the Company completed the divestiture of its U.S. patents and other U.S. and Canadian intellectual property for BYSTOLIC® (nebivolol), which is currently approved in the U.S. for the treatment of hypertension, to Forest Laboratories, Inc. Proceeds received from the divestiture were $357 million.


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NOTE 11 — LEGAL PROCEEDINGS

Johnson & Johnson and certain of its subsidiaries are involved in various lawsuits and claims regarding product liability, intellectual property, commercial and other matters; governmental investigations; and other legal proceedings that arise from time to time in the ordinary course of their business.

The Company records accruals for such contingencies when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. As of September 29, 2013, the Company has determined that the liabilities associated with certain litigation matters are probable and can be reasonably estimated. The Company has accrued for these matters and will continue to monitor each related legal issue and adjust accruals for new information and further developments in accordance with ASC 450-20-25. For these and other litigation and regulatory matters currently disclosed for which a loss is probable or reasonably possible, the Company is unable to determine an estimate of the possible loss or range of loss beyond the amounts already accrued. These matters can be affected by various factors, including whether damages sought in the proceedings are unsubstantiated or indeterminate; scientific and legal discovery has not commenced or is not complete; proceedings are in early stages; matters present legal uncertainties; there are significant facts in dispute; or there are numerous parties involved.

In the Company's opinion, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities accrued in the Company's balance sheet, is not expected to have a material adverse effect on the Company's financial position. However, the resolution in any reporting period of one or more of these matters, either alone or in the aggregate, may have a material adverse effect on the Company's results of operations and cash flows for that period.
PRODUCT LIABILITY

Certain subsidiaries of Johnson & Johnson are involved in numerous product liability cases. The damages claimed are substantial, and while these subsidiaries are confident of the adequacy of the warnings and instructions for use that accompany the products at issue, it is not feasible to predict the ultimate outcome of litigation. The Company has established product liability accruals in compliance with ASC 450-20 based on currently available information, which in some cases may be limited. Changes to the accruals may be required in the future as additional information becomes available.

Multiple products of Johnson & Johnson subsidiaries are subject to product liability claims and lawsuits in which claimants seek substantial compensatory and, where available, punitive damages, including LEVAQUIN®, the ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System, the PINNACLE® Acetabular Cup System, RISPERDAL®, pelvic meshes, DURAGESIC®/fentanyl patches and TOPAMAX®. As of September 29, 2013, in the U.S. there were approximately 1,490 plaintiffs with direct claims in pending lawsuits regarding injuries allegedly due to LEVAQUIN®, 12,140 with respect to the ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System, 5,160 with respect to the PINNACLE® Acetabular Cup System, 490 with respect to RISPERDAL®, 23,040 with respect to pelvic meshes, 30 with respect to DURAGESIC®/fentanyl patches and 130 with respect to TOPAMAX®.

In August 2010, DePuy Orthopaedics, Inc. (DePuy) announced a worldwide voluntary recall of its ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System used in hip replacement surgery. Claims for personal injury have been made against DePuy and Johnson & Johnson, and the number of pending lawsuits continues to increase. Cases filed in Federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the Northern District of Ohio. Litigation has also been filed in countries outside of the United States, primarily in the United Kingdom, Canada and Australia. The Company continues to receive information with respect to potential costs associated with this recall. During the fiscal third quarter of 2013, the Company increased its accruals for the DePuy ASR™ Hip recall program and related product liability based on additional information. Changes to these accruals may be required in the future as additional information becomes available.

Claims for personal injury have also been made against DePuy and Johnson & Johnson relating to DePuy's PINNACLE® Acetabular Cup System used in hip replacement surgery. The number of pending product liability lawsuits continues to increase, and the Company continues to receive information with respect to potential costs and the anticipated number of cases. Cases filed in Federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the Northern District of Texas. The Company has established a product liability accrual in anticipation of product liability litigation associated with DePuy's PINNACLE® Acetabular Cup System. Changes to this accrual may be required in the future as additional information becomes available.

Claims for personal injury have been made against Ethicon, Inc. (Ethicon) and Johnson & Johnson arising out of Ethicon's pelvic mesh devices used to treat stress urinary incontinence and pelvic organ prolapse. The number of pending product

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liability lawsuits continues to increase, and the Company continues to receive information with respect to potential costs and the anticipated number of cases. Cases filed in Federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the Southern District of West Virginia. In addition, a class action and several individual personal injury cases or claims have been commenced in Canada, Australia, England, Italy, Scotland, Venezuela, Israel and the Netherlands seeking damages for alleged injury resulting from Ethicon's pelvic mesh devices. The Company has established a product liability accrual in anticipation of product liability litigation associated with Ethicon's pelvic mesh products. Changes to this accrual may be required in the future as additional information becomes available.

The Company believes that the ultimate resolution of these matters based on historical and reasonably likely future trends is not expected to have a material adverse effect on the Company's financial position, annual results of operations and cash flows. The resolution in any interim reporting period could have a material impact on the Company's results of operations and cash flows for that period.

INTELLECTUAL PROPERTY

Certain subsidiaries of Johnson & Johnson are subject, from time to time, to legal proceedings and claims related to patent, trademark and other intellectual property matters arising out of their business. The most significant of these matters are described below.

PATENT INFRINGEMENT

Certain subsidiaries of Johnson & Johnson are involved in lawsuits challenging the coverage and/or validity of the patents on their products. Although these subsidiaries believe that they have substantial defenses to these challenges with respect to all material patents, there can be no assurance as to the outcome of these matters, and a loss in any of these cases could potentially adversely affect the ability of these subsidiaries to sell their products, or require the payment of past damages and future royalties.

Medical Devices and Diagnostics

In October 2004, Tyco Healthcare Group, LP (Tyco) and U.S. Surgical Corporation (now Covidien plc) filed a lawsuit against Ethicon Endo-Surgery, Inc. (EES) in the United States District Court for the District of Connecticut alleging that several features of EES's HARMONIC® Scalpel infringed four Tyco patents. In October 2007, on motions for summary judgment prior to the initial trial, a number of claims were found invalid and a number were found infringed. However, no claim was found both valid and infringed. Trial commenced in December 2007, and the Court dismissed the case without prejudice on grounds that Tyco did not own the patents in suit. The dismissal without prejudice was affirmed on appeal. In January 2010, Tyco filed another complaint in the United States District Court for the District of Connecticut asserting infringement of three of the four patents from the previous lawsuit and adding new products. Tyco is seeking monetary damages and injunctive relief. The case was tried in July 2012, and in March 2013, the Court ruled that EES's HARMONIC Scalpel infringed on Tyco's patents and ordered EES to pay damages of approximately $176 million. EES has appealed the decision to the United States Court of Appeals for the Federal Circuit. The Company believes EES has strong arguments supporting its appeal. Because the Company believes that the potential for an unfavorable outcome is not probable, it has not established an accrual with respect to the case.

In October 2007, Bruce Saffran (Saffran) filed a patent infringement lawsuit against Johnson & Johnson and Cordis Corporation (Cordis) in the United States District Court for the Eastern District of Texas alleging infringement on U.S. Patent No. 5,653,760. In January 2011, a jury returned a verdict finding that Cordis's sales of its CYPHER® Stent willfully infringed the '760 patent. The jury awarded Saffran $482 million. In March 2011, the Court entered judgment against Cordis in the amount of $593 million, representing the jury verdict, plus $111 million in pre-judgment interest. Cordis appealed the judgment, and in April 2013, the United States Court of Appeals for the Federal Circuit reversed the judgment and held that Cordis did not infringe Plaintiff's patent as a matter of law. Plaintiff's petition with the Court of Appeals to reconsider the decision was denied, and Plaintiff has filed a Petition for Certiorari with the United States Supreme Court.
 
In November 2007, Roche Diagnostics Operations, Inc., et al. (Roche) filed a patent infringement lawsuit against LifeScan, Inc. (LifeScan) in the United States District Court for the District of Delaware, accusing LifeScan's entire OneTouch® line of blood glucose monitoring systems of infringement of two patents related to the use of microelectrode sensors. In September 2009, LifeScan obtained a favorable ruling on claim construction that precluded a finding of infringement. The Court entered judgment against Roche in July 2010 and Roche appealed.  The Court of Appeals reversed the District Court's ruling on claim construction and remanded the case to the District Court for new findings on the issue. The parties are awaiting a ruling on claim construction. Roche is seeking monetary damages and injunctive relief.


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In June 2009, Rembrandt Vision Technologies, L.P. (Rembrandt) filed a patent infringement lawsuit against Johnson & Johnson Vision Care, Inc. (JJVC) in the United States District Court for the Eastern District of Texas alleging that JJVC's manufacture and sale of its ACUVUE®ADVANCE® and ACUVUE® OASYS® Hydrogel Contact Lenses infringe their U.S. Patent No. 5,712,327 (the Chang patent). Rembrandt is seeking monetary relief. The case was transferred to the United States District Court for the Middle District of Florida. In May 2012, the jury returned a verdict holding that neither of the accused lenses infringe the '327 patent. Rembrandt appealed and the United States Court of Appeals for the Federal Circuit affirmed the District Court's judgment. Rembrandt has also asked the District Court to grant it a new trial based on alleged new evidence, and the Court's decision on that motion is pending.

In September 2011, LifeScan filed a lawsuit against Shasta Technologies, Instacare Corp and Conductive Technologies (collectively, Shasta) in the United States District Court for the Northern District of California for patent infringement for the making and marketing of a strip for use in LifeScan's OneTouch® Blood Glucose Meters.  In November 2012, Shasta got a limited approval from the United States Food and Drug Administration (FDA) for its strips.  In December 2012, LifeScan filed an additional lawsuit alleging violation of the Lanham Act based on Shasta's packaging.  LifeScan moved for, and the District Court granted, a preliminary injunction prohibiting Shasta from marketing their strips.  Shasta appealed, and the Court of Appeals granted Shasta's motion for stay of the preliminary injunction. Oral argument on the appeal was heard in June 2013 and the parties are awaiting a decision. Litigation regarding the preliminary injunction and the underlying merits of the claims is continuing.

In November 2011, Howmedica Osteonics Corp. (Howmedica) and Stryker Ireland Ltd. (Stryker) filed a patent infringement lawsuit against DePuy Orthopaedics, Inc. (DePuy) in the United States District Court for the District of New Jersey alleging infringement by DePuy's PINNACLE® Acetabular Cup System and DURALOC® Acetabular Cup System of a patent relating to a dual-locking mechanism feature in an acetabular cup system. Howmedica and Stryker are seeking monetary damages and injunctive relief. DePuy filed its answer in February 2012 and filed a counterclaim asserting that Stryker's Trident Acetabular Hip System infringes DePuy's U.S. Patent No. 6,610,097. DePuy is seeking damages and injunctive relief from Howmedica and Stryker.

In May 2012, Medtronic MiniMed, Inc., Medtronic Puerto Rico Operations Co. and MiniMed Distribution Corp. (collectively, Medtronic MiniMed) filed a patent infringement lawsuit against Animas Corporation in the United States District Court for the Central District of California alleging that Animas' OneTouch® Ping® Glucose Management System infringes nine of their patents.  Medtronic MiniMed is seeking monetary damages and injunctive relief.

In March 2013, Medinol Ltd. (Medinol) filed a patent infringement lawsuit against Cordis Corporation (Cordis) and Johnson & Johnson in the United States District Court for the Southern District of New York alleging that Cordis's past sales of the CYPHER® and CYPHER SELECT® Stents willfully infringed four of Medinol's patents directed to the geometry of articulated stents.  Medinol is seeking damages and attorney's fees.

Pharmaceutical

In May 2009, Abbott Biotechnology Ltd. (Abbott) filed a patent infringement lawsuit against Centocor, Inc. (Centocor) (now Janssen Biotech, Inc. (JBI)) in the United States District Court for the District of Massachusetts alleging that SIMPONI® infringes Abbott's U.S. Patent Nos. 7,223,394 and 7,541,031 (the Salfeld patents). Abbott is seeking monetary damages and injunctive relief. In April 2012, the parties participated in an arbitration on the issue of JBI's defense that Abbott is equitably estopped from asserting the patents. In May 2012, the arbitrator rejected JBI's defense. The case has been reinstated in the District Court. Oral argument on summary judgment motions is scheduled for December 2013.

In August 2009, Abbott GmbH & Co. (Abbott GmbH) and Abbott Bioresearch Center filed a patent infringement lawsuit against Centocor (now JBI) in the United States District Court for the District of Massachusetts alleging that STELARA® infringes two United States patents assigned to Abbott GmbH. JBI filed a complaint in the United States District Court for the District of Columbia for a declaratory judgment of non-infringement and invalidity of the Abbott GmbH patents, as well as a Complaint for Review of a Patent Interference Decision that granted priority of invention on one of the two asserted patents to Abbott GmbH. The cases have been transferred from the District of Columbia to the District of Massachusetts. Trial was held in September 2012 with a jury verdict in favor of JBI, invalidating Abbott's patent claims. In March 2013, the Court denied Abbott's post-trial motions challenging the outcome and granted JBI's motion on the appeal of the interference decision. Abbott filed its notice of appeal in April 2013. Also in August 2009, Abbott GmbH and Abbott Laboratories Limited brought a patent infringement lawsuit in The Federal Court of Canada alleging that STELARA® infringes Abbott GmbH's Canadian patent. A trial is scheduled for December 2013 in the Canadian Case. In addition to the U.S. and Canadian litigations, in August 2012, Abbott filed patent infringement lawsuits in the Netherlands, Switzerland and Germany. In each of the above cases, Abbott is seeking monetary damages and injunctive relief.

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LITIGATION AGAINST FILERS OF ABBREVIATED NEW DRUG APPLICATIONS (ANDAs)

The following summarizes lawsuits pending against generic companies that filed Abbreviated New Drug Applications (ANDAs) seeking to market generic forms of products sold by various subsidiaries of Johnson & Johnson prior to expiration of the applicable patents covering those products. These ANDAs typically include allegations of non-infringement, invalidity and unenforceability of these patents. In the event the subsidiaries are not successful in these actions, or the statutory 30-month stays expire before the United States District Court rulings are obtained, the third-party companies involved will have the ability, upon approval of the FDA, to introduce generic versions of the products at issue, resulting in very substantial market share and revenue losses for those products.
ORTHO TRI-CYCLEN® LO

A number of generic companies have filed ANDAs seeking approval to market generic versions of ORTHO TRI-CYCLEN® LO. Janssen Pharmaceuticals, Inc. (JPI) filed patent infringement lawsuits against these generic companies seeking an Order enjoining them from marketing their generic versions of ORTHO TRI-CYCLEN® LO prior to the expiration of JPI's patent relating to ORTHO TRI-CYCLEN® LO (the OTCLO patent). In 2012, JPI entered into settlement agreements with certain of these generic companies. The two remaining cases were concluded in the fiscal first quarter of 2013, as described below.

In January 2010, Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI) (now JPI) filed a patent infringement lawsuit against Lupin Ltd. and Lupin Pharmaceuticals, Inc. (collectively, Lupin) in the United States District Court for the District of New Jersey in response to Lupin's ANDA seeking approval to market a generic version of ORTHO TRI-CYCLEN® LO prior to the expiration of the OTCLO patent. Lupin filed a counterclaim alleging invalidity of the patent. Trial concluded in June 2012, and in September 2012, the Court issued a decision in favor of JPI upholding the validity of the patent. In particular, the Court ordered that the effective date of the approval of Lupin's ANDA (which had previously been approved) be not earlier than the expiration of the OTCLO patent. Lupin appealed the decision to the Court of Appeals for the Federal Circuit. Oral argument was heard in February 2013. In March 2013, JPI and Lupin entered into a settlement agreement pursuant to which Lupin was granted a license under the OTCLO patent to market its generic version of ORTHO TRI-CYCLEN® LO starting December 31, 2015 (or earlier under certain circumstances).

In October 2011, JPI filed a patent infringement lawsuit against Sun Pharma Global FZE and Sun Pharmaceutical Industries (collectively, Sun) in the United States District Court for the District of New Jersey in response to Sun's ANDA seeking approval to market a generic version of ORTHO TRI-CYCLEN® LO prior to the expiration of the OTCLO patent. In February 2013, JPI and Sun entered into a settlement agreement pursuant to which Sun was granted a license under the OTCLO patent to market its generic version of ORTHO TRI-CYCLEN® LO starting December 31, 2015 (or earlier under certain circumstances), if and when they obtain FDA approval.

PREZISTA® 

A number of generic companies have filed ANDAs seeking approval to market generic versions of PREZISTA®. In November 2010, Tibotec, Inc. (now Tibotec, LLC) and Tibotec Pharmaceuticals (now Janssen R&D Ireland) (collectively, Tibotec) filed a patent infringement lawsuit against Lupin, Ltd., Lupin Pharmaceuticals, Inc. (collectively, Lupin), Mylan, Inc. and Mylan Pharmaceuticals, Inc. (collectively, Mylan) in the United States District Court for the District of New Jersey in response to Lupin's and Mylan's respective ANDAs seeking approval to market generic versions of Tibotec's PREZISTA® product before the expiration of Tibotec's patent relating to PREZISTA®. Lupin and Mylan each filed counterclaims alleging non-infringement and invalidity. In July 2011, Tibotec filed another patent infringement lawsuit against Lupin in the United States District Court for the District of New Jersey in response to Lupin's supplement to its ANDA to add new dosage strengths for its proposed product. In August 2011, Tibotec and G.D. Searle & Company (G.D. Searle) filed a patent infringement lawsuit against Lupin and Mylan in response to their notice letters advising that their ANDAs are seeking approval to market generic versions of Tibotec's PREZISTA® product before the expiration of two patents relating to PREZISTA® that Tibotec exclusively licenses from G.D. Searle.

In March 2011, Tibotec and G.D. Searle filed a patent infringement lawsuit against Teva Pharmaceuticals USA, Inc. and Teva Pharmaceuticals, Ltd. (collectively, Teva) in the United States District Court for the District of New Jersey in response to Teva's ANDA seeking approval to market a generic version of PREZISTA® before the expiration of certain patents relating to PREZISTA® that Tibotec either owns or exclusively licenses from G.D. Searle.


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In March 2011, Tibotec filed a patent infringement lawsuit against Hetero Drugs, Ltd. Unit III and Hetero USA Inc. (collectively, Hetero) in the United States District Court for the District of New Jersey in response to Hetero's ANDA seeking approval to market a generic version of PREZISTA® before the expiration of certain patents relating to PREZISTA® that Tibotec exclusively licenses from G.D. Searle. In July 2011, upon agreement by the parties, the Court entered a stay of the lawsuit pending a final decision in the lawsuit against Teva with respect to the validity and/or enforceability of the patents that Tibotec licenses from G.D. Searle, with Hetero agreeing to be bound by such final decision. In September 2013, the lawsuit against Hetero was dismissed because Hetero is no longer seeking FDA approval to market its generic version of PREZISTA® before the expiration of the relevant patents.

In September 2011, the Court consolidated the above lawsuits, as well as lawsuits brought by the United States Government against each of the defendants for infringement of a United States Government-owned patent relating to PREZISTA®, for purposes of pre-trial discovery and trial, with the proviso that after discovery is completed, any party can move to have the cases de-consolidated for trial.

In May and June 2012, Janssen Products, LP and Janssen R&D Ireland (collectively, Janssen) and G.D. Searle filed a patent infringement lawsuit against Lupin, Teva and Mylan in the United States District Court for the District of New Jersey, alleging infringement of newly issued United States Reissue Patent No. Re42,889, which Janssen exclusively licenses from G.D. Searle. In August 2012, Janssen and G.D. Searle filed a patent infringement lawsuit against Lupin, Teva and Mylan in the United States District Court for the District of New Jersey, alleging infringement of newly issued United States Reissue Patent No. Re43,596, which Janssen exclusively licenses from G.D. Searle. These cases have been consolidated with the above lawsuits. In October 2012, Janssen filed a motion to file a Supplemental Complaint against Lupin, Teva and Mylan in the United States District Court for the District of New Jersey, alleging infringement of United States Patent Nos. 7,772,411 (Mylan only), 7,126,015 (Lupin and Teva only) and 7,595,408 (Lupin and Teva only). In January 2013, the Court permitted these three additional patents to be added to the consolidated action. In March 2013, Janssen filed a patent infringement lawsuit against Hetero in the United States District Court for the District of New Jersey, alleging infringement of United States Patent Nos. 7,126,015 and 7,595,408.

In May 2013, Lupin notified Janssen that it filed an ANDA seeking approval to market a new dosage strength of its generic version of PREZISTA®.  In response, Janssen filed a patent infringement lawsuit in the United States District Court for the District of New Jersey, alleging that Lupin's new dosage strength would infringe the same patents that Janssen is asserting against Lupin in the original action.

In June 2013, Janssen and G.D. Searle dismissed their claims relating to the patents owned by G.D. Searle against Lupin and Mylan, and in July 2013, Janssen and G.D. Searle dismissed their claims relating to those patents against Teva.  A trial on the remaining patents has been scheduled for March 2014.

In each of the above lawsuits, Tibotec and Janssen are seeking an Order enjoining the defendants from marketing their generic versions of PREZISTA® before the expiration of the relevant patents.

CONCERTA® 

In June 2013, ALZA Corporation and Janssen Pharmaceuticals, Inc. (collectively, Janssen) filed patent infringement lawsuits in the District Court for the District of Delaware against (1) Par Pharmaceuticals, Inc., Actavis Elizabeth LLC and Actavis, Inc. (collectively, Par) and (2) Osmotica Kereskedelmies Szolgaltato Kft (Osmotica) and Norwich Pharmaceuticals, Inc. (Norwich) in response to those parties' ANDAs seeking approval to market a generic version of CONCERTA® before the expiration of United States Patent No. 8,163,798 (the '798 patent). In each of the above lawsuits, Janssen is seeking an Order enjoining the defendants from marketing their generic versions of CONCERTA® before the expiration of the '798 patent. In September 2013, Janssen dismissed Actavis Elizabeth LLC and Actavis, Inc. from the case. The claims against Par Pharmaceuticals, Inc., Osmotica and Norwich remain. In addition, in September 2013, Par and Osmotica filed counterclaims against Janssen seeking declarations of invalidity and noninfringement of the patent-in-suit, and Norwich filed a motion to dismiss.

NUCYNTA® AND NUCYNTA® ER

In July 2013, Janssen Pharmaceuticals, Inc. (JPI) filed patent infringement lawsuits in the United States District Court for the District of New Jersey against Actavis Elizabeth LLC, Actavis Inc. and Actavis LLC (collectively, Actavis), as well as Alkem Laboratories Limited and Ascend Laboratories, LLC (collectively, Alkem).  The patent infringement claims against Actavis and Alkem relate to their respective ANDAs seeking approval to market a generic version of NUCYNTA® ER before the expiration of United States Reissue Patent No. 39,593 (the '593 patent), United States Patent No. 7,994,364 (the '364 patent) and, as to

29


Actavis only, United States Patent No. 8,309,060 (the '060 patent).  The lawsuit also includes a patent infringement claim against Alkem in response to its ANDA seeking approval to market a generic version of NUCYNTA® before the expiration of the '593 and '364 patents.  JPI is seeking an Order enjoining the defendants from marketing their generic versions of NUCYNTA® ER and NUCYNTA® before the expiration of the asserted patents. In October 2013, JPI received a Paragraph IV Notice from Sandoz, Inc. with respect to NUCYNTA® related to the ‘364 patent, and a Paragraph IV Notice from Roxane Laboratories, Inc. (Roxane) with respect to NUCYNTA® related to the ‘593 and ‘364 patents and United States Patent No. 6,071,970.   JPI is currently investigating Roxane’s and Sandoz’s ANDA submissions.


OTHER INTELLECTUAL PROPERTY MATTERS

In December 2009, the State of Israel filed a lawsuit in the District Court in Tel Aviv Jaffa against Omrix Biopharmaceuticals, Inc. and various affiliates (Omrix). In the lawsuit, the State claims that an employee of a government-owned hospital was the inventor on several patents related to fibrin glue technology that the employee developed while he was a government employee. The State claims that he had no right to transfer any intellectual property to Omrix because it belongs to the State. The State is seeking damages plus royalties on QUIXIL™ and EVICEL™ products, or alternatively, transfer of the patents to the State.

In March 2012, Noramco, Inc. (Noramco) moved to intervene in three patent infringement lawsuits filed in the United States District Court for the Southern District of New York (SDNY) by Purdue Pharma L.P. and others (Purdue) against Noramco oxycodone customers, Impax Laboratories, Inc. (Impax), Teva Pharmaceuticals USA, Inc. (Teva) and Amneal Pharmaceuticals, LLC (Amneal). In February 2013, Noramco appeared on behalf of Noramco customers Watson Laboratories, Inc. - Florida and Andrx Labs, LLC (collectively, Watson/Andrx) in a similar lawsuit filed by Purdue in the SDNY. The lawsuits are in response to the defendants' respective ANDAs seeking approval to market generic extended release oxyc