10-Q 1 a3q10q9-27x15.htm 10-Q 3Q 2015 10-Q

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 27, 2015
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 23, 2015, 2,766,943,629 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 27, 2015
 
December 28, 2014
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
13,639

 
14,523

Marketable securities
 
23,667

 
18,566

Accounts receivable, trade, less allowances for doubtful accounts $260 (2014, $275)
 
11,366

 
10,985

Inventories (Note 2)
 
8,206

 
8,184

Deferred taxes on income
 
3,606

 
3,567

Prepaid expenses and other
 
3,010

 
3,486

Total current assets
 
63,494

 
59,311

Property, plant and equipment at cost
 
36,397

 
36,685

Less: accumulated depreciation
 
(20,846
)
 
(20,559
)
Property, plant and equipment, net
 
15,551

 
16,126

Intangible assets, net (Note 3)
 
25,988

 
27,222

Goodwill (Note 3)
 
21,279

 
21,832

Deferred taxes on income
 
3,150

 
3,396

Other assets
 
3,804

 
3,232

Total assets
 
$
133,266

 
131,119

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
Loans and notes payable
 
$
5,677

 
3,638

Accounts payable
 
5,928

 
7,633

Accrued liabilities
 
5,062

 
6,553

Accrued rebates, returns and promotions
 
5,338

 
4,010

Accrued compensation and employee related obligations
 
2,324

 
2,751

Accrued taxes on income
 
931

 
500

Total current liabilities
 
25,260

 
25,085

Long-term debt (Note 4)
 
14,073

 
15,122

Deferred taxes on income
 
3,561

 
3,154

Employee related obligations
 
9,515

 
9,972

Other liabilities
 
9,303

 
8,034

Total liabilities
 
61,712

 
61,367

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)
 
(12,861
)
 
(10,722
)
Retained earnings
 
102,748

 
97,245

Less: common stock held in treasury, at cost (352,562,000 and 336,620,000 shares)
 
21,453

 
19,891

Total shareholders’ equity
 
71,554

 
69,752

Total liabilities and shareholders' equity
 
$
133,266

 
131,119

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 27,
2015
 
Percent
to Sales
 
September 28,
2014
 
Percent
to Sales
Sales to customers (Note 9)
 
$
17,102

 
100.0
 %
 
$
18,467

 
100.0
 %
Cost of products sold
 
5,224

 
30.5

 
5,399

 
29.2

Gross profit
 
11,878

 
69.5

 
13,068

 
70.8

Selling, marketing and administrative expenses
 
5,081

 
29.7

 
5,468

 
29.6

Research and development expense
 
2,154

 
12.6

 
2,023

 
11.0

In-process research and development
 
10

 
0.1

 

 

Interest income
 
(32
)
 
(0.2
)
 
(18
)
 
(0.1
)
Interest expense, net of portion capitalized
 
123

 
0.7

 
130

 
0.7

Other (income) expense, net
 
420

 
2.5

 
(1,345
)
 
(7.3
)
Earnings before provision for taxes on income
 
4,122

 
24.1

 
6,810

 
36.9

Provision for taxes on income (Note 5)
 
764

 
4.5

 
2,061

 
11.2

NET EARNINGS
 
$
3,358

 
19.6
 %
 
$
4,749

 
25.7
 %
 
 
 
 
 
 
 
 
 
NET EARNINGS PER SHARE (Note 8)
 
 
 
 
 
 
 
 
Basic
 
$
1.21

 
 
 
$
1.69

 
 
Diluted
 
$
1.20

 
 
 
$
1.66

 
 
CASH DIVIDENDS PER SHARE
 
$
0.75

 
 
 
$
0.70

 
 
AVG. SHARES OUTSTANDING
 
 
 
 
 
 
 
 
Basic
 
2,768.4

 
 
 
2,814.4

 
 
Diluted
 
2,807.2

 
 
 
2,864.3

 
 
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 27,
2015
 
Percent
to Sales
 
September 28,
2014
 
Percent
to Sales
Sales to customers (Note 9)
 
$
52,263

 
100.0
 %
 
$
56,077

 
100.0
 %
Cost of products sold
 
15,863

 
30.4

 
16,893

 
30.1

Gross profit
 
36,400

 
69.6

 
39,184

 
69.9

Selling, marketing and administrative expenses
 
15,312

 
29.3

 
16,132

 
28.8

Research and development expense
 
6,182

 
11.8

 
5,859

 
10.5

In-process research and development
 
10

 
0.0

 
22

 
0.0

Interest income
 
(75
)
 
(0.1
)
 
(50
)
 
(0.1
)
Interest expense, net of portion capitalized
 
392

 
0.7

 
394

 
0.7

Other (income) expense, net
 
(859
)
 
(1.6
)
 
(1,033
)
 
(1.8
)
Earnings before provision for taxes on income
 
15,438

 
29.5

 
17,860

 
31.8

Provision for taxes on income (Note 5)
 
3,244

 
6.2

 
4,058

 
7.2

NET EARNINGS
 
$
12,194

 
23.3
 %
 
$
13,802

 
24.6
 %
 
 
 
 
 
 
 
 
 
NET EARNINGS PER SHARE (Note 8)
 
 
 
 
 
 
 
 
Basic
 
$
4.39

 
 
 
$
4.89

 
 
Diluted
 
$
4.33

 
 
 
$
4.81

 
 
CASH DIVIDENDS PER SHARE
 
$
2.20

 
 
 
$
2.06

 
 
AVG. SHARES OUTSTANDING
 
 
 
 
 
 
 
 
Basic
 
2,774.8

 
 
 
2,822.0

 
 
Diluted
 
2,817.1

 
 
 
2,871.2

 
 
 
 
 
 
 
 
 
 
 
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 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
 
 
 
 
 
 
 
Net earnings
$
3,358

 
4,749

 
12,194

 
13,802

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation
(1,069
)
 
(2,400
)
 
(2,729
)
 
(2,499
)
 
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
  Unrealized holding gain (loss) arising during period
(44
)
 
(35
)
 
267

 
6

  Reclassifications to earnings
(46
)
 
(1
)
 
(127
)
 
(1
)
  Net change
(90
)
 
(36
)
 
140

 
5

 
 
 
 
 
 
 
 
Employee benefit plans:
 
 
 
 
 
 
 
  Prior service cost amortization during period
(5
)
 
(5
)
 
(16
)
 
(14
)
  Gain (loss) amortization during period
159

 
101

 
477

 
301

  Net change
154

 
96

 
461

 
287

 
 
 
 
 
 
 
 
Derivatives & hedges:
 
 
 
 
 
 
 
  Unrealized gain (loss) arising during period
160

 
14

 
26

 
(139
)
  Reclassifications to earnings
38

 
(49
)
 
(37
)
 
(176
)
  Net change
198

 
(35
)
 
(11
)
 
(315
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
(807
)
 
(2,375
)
 
(2,139
)
 
(2,522
)
 
 
 
 
 
 
 
 
Comprehensive income
$
2,551

 
2,374

 
10,055

 
11,280

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements

The tax effects in other comprehensive income for the fiscal third quarters were as follows for 2015 and 2014, respectively: Securities: $48 million and $19 million; Employee Benefit Plans: $75 million and $46 million; Derivatives & Hedges: $107 million and $19 million.
 
The tax effects in other comprehensive income for the fiscal nine months were as follows for 2015 and 2014, respectively: Securities: $76 million and $3 million; Employee Benefit Plans: $226 million and $139 million; Derivatives & Hedges: $6 million and $170 million.
 
 

6


JOHNSON & JOHNSON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in Millions)
 
 
Fiscal Nine Months Ended
 
 
September 27,
2015
 
September 28,
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net earnings
 
$
12,194

 
13,802

Adjustments to reconcile net earnings to cash flows from operating activities:
 
 
 
 
Depreciation and amortization of property and intangibles
 
2,713

 
2,904

Stock based compensation
 
677

 
646

   Venezuela adjustments
 

 
89

Asset write-downs
 
367

 
259

Net gain on sale of assets/businesses
 
(1,274
)
 
(2,336
)
Deferred tax provision
 
233

 
297

Accounts receivable allowances
 
2

 
(54
)
Changes in assets and liabilities, net of effects from acquisitions:
 
 
 
 
Increase in accounts receivable
 
(910
)
 
(399
)
Increase in inventories
 
(719
)
 
(1,098
)
Decrease in accounts payable and accrued liabilities
 
(1,558
)
 
(827
)
Decrease in other current and non-current assets
 
986

 
72

Increase in other current and non-current liabilities
 
1,486

 
751

 
 
 
 
 
NET CASH FLOWS FROM OPERATING ACTIVITIES
 
14,197

 
14,106

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Additions to property, plant and equipment
 
(2,097
)
 
(2,218
)
Proceeds from the disposal of assets/businesses, net
 
1,620

 
4,481

Acquisitions, net of cash acquired
 
(233
)
 
(291
)
Purchases of investments
 
(28,766
)
 
(25,784
)
Sales of investments
 
23,167

 
14,576

Other
 
(35
)
 
(147
)
 
 
 
 
 
NET CASH USED BY INVESTING ACTIVITIES
 
(6,344
)
 
(9,383
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Dividends to shareholders
 
(6,101
)
 
(5,812
)
Repurchase of common stock
 
(3,394
)
 
(4,381
)
Proceeds from short-term debt
 
2,107

 
629

Retirement of short-term debt
 
(930
)
 
(1,713
)
Proceeds from long-term debt
 
3

 
17

Retirement of long-term debt
 
(27
)
 
(1,787
)
Proceeds from the exercise of stock options/excess tax benefits
 
837

 
1,406

Other
 
(50
)
 

 
 
 
 
 
NET CASH USED BY FINANCING ACTIVITIES
 
(7,555
)
 
(11,641
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(1,182
)
 
(191
)
Decrease in cash and cash equivalents
 
(884
)
 
(7,109
)
Cash and Cash equivalents, beginning of period
 
14,523

 
20,927

CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
13,639

 
13,818

 
 
 
 
 
Acquisitions
 
 
 
 
Fair value of assets acquired
 
$
477

 
305

Fair value of liabilities assumed and noncontrolling interests
 
(244
)
 
(14
)
Net fair value of acquisitions
 
233

 
291

See Notes to Consolidated Financial Statements

7


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 28, 2014. 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 third quarter of 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This update will be effective for the Company for all annual and interim periods beginning after December 15, 2015. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. This update is not expected to have a material impact on the Company’s consolidated financial statements.  

During the fiscal second quarter of 2015, the FASB issued Accounting Standard Update 2015-11: Simplifying the Measurement of Inventory. This update requires inventory to be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. This update will be effective for the Company for all annual and interim periods beginning after December 15, 2016. The amendments in this update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. This update will not have a material impact on the presentation of the Company’s financial position.

During the fiscal second quarter of 2015, the FASB issued Accounting Standard Update 2015-03: Simplifying the Presentation of Debt Issuance Costs. This update requires capitalized debt issuance costs to be presented as a reduction to the carrying value of debt instead of being classified as a deferred charge, as currently required. This update will be effective for the Company for all annual and interim periods beginning after December 15, 2015 and is required to be applied retroactively for all periods presented. This update will not have a material impact on the presentation of the Company’s financial position.

During the fiscal second quarter of 2015, the FASB issued Accounting Standard Update 2015-04: Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets. This update provides a practical expedient option to entities that have defined benefit plans and have a fiscal year-end that does not coincide with a calendar month-end. This option allows an entity to elect to measure defined benefit plan assets and obligations using the calendar month-end that is closest to its fiscal year-end. This update will be effective for the Company for all annual and interim periods beginning after December 15, 2015 and if the practical expedient is elected by an entity, it is required to be adopted on a prospective basis. Early adoption is permitted. The Company has elected to adopt the practical expedient to measure its defined benefit plans. This election is not expected to have a material impact on the Company’s consolidated financial statements.  

During the fiscal second quarter of 2014, the FASB issued Accounting Standards Update 2014-09: Revenue from Contracts with Customers. This standard replaces substantially all current revenue recognition accounting guidance. During the fiscal third quarter of 2015, the FASB approved a one year deferral to the effective date of Accounting Standards Update No. 2014-09 to be adopted by all public companies for all annual periods and interim reporting periods beginning after December 15, 2017. Early adoption of this standard is permitted but not before the original effective for the year beginning after December 15, 2016. The Company is currently assessing the impact of the future adoption of this standard on its financial statements.

During the fiscal second quarter of 2014, the FASB issued amended guidance Accounting Standards Update No. 2014-10: Development Stage Entities: Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entity Guidance in Topic 810, Consolidation.  The change in the current guidance will require the Company to determine if it should consolidate one of these entities based on the change in the consolidation analysis.  This update to the consolidation analysis will become effective for all annual periods and interim reporting periods beginning after December 15, 2015.  The adoption of this standard is not expected to have a material impact on the presentation of the Company's results of operations, cash flows or financial position.

During the fiscal third quarter of 2014, the FASB issued Accounting Standards Update No. 2014-15: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard requires management to evaluate, for each annual and interim reporting period, whether there are conditions and events, considered in the aggregate, that raise

8


substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued or are available to be issued. If substantial doubt is raised, additional disclosures around management’s plan to alleviate these doubts are required. This update will become effective for all annual periods and interim reporting periods beginning after December 15, 2016.  This standard is not expected to have any impact on current disclosures in the financial statements.
Annual Closing Date
The Company follows the concept of a fiscal year, which ends on the Sunday nearest to the end of the month of December. Normally each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks, as is the case in 2015.


NOTE 2 — INVENTORIES

(Dollars in Millions)
 
September 27, 2015
 
December 28, 2014
Raw materials and supplies
 
$
1,198

 
1,214

Goods in process
 
2,026

 
2,461

Finished goods
 
4,982

 
4,509

Total inventories
 
$
8,206

 
8,184



NOTE 3 — INTANGIBLE ASSETS AND GOODWILL

Intangible assets that have finite useful lives are amortized over their estimated useful lives. The latest annual impairment assessment of goodwill and indefinite lived intangible assets was completed in the fiscal fourth quarter of 2014. Future impairment tests for goodwill and indefinite lived intangible assets will be performed annually in the fiscal fourth quarter, or sooner, if warranted.
(Dollars in Millions)
 
September 27, 2015
 
December 28, 2014
Intangible assets with definite lives:
 
 
 
 
Patents and trademarks — gross
 
$
8,298

 
9,074

Less accumulated amortization
 
4,687

 
4,700

Patents and trademarks — net
 
3,611

 
4,374

Customer relationships and other intangibles — gross
 
17,739

 
17,970

Less accumulated amortization
 
5,637

 
5,227

Customer relationships and other intangibles — net
 
12,102

 
12,743

Intangible assets with indefinite lives:
 
 
 
 
Trademarks
 
7,084

 
7,263

Purchased in-process research and development
 
3,191

 
2,842

Total intangible assets with indefinite lives
 
10,275

 
10,105

Total intangible assets — net
 
$
25,988

 
27,222


Goodwill as of September 27, 2015 was allocated by segment of business as follows:
(Dollars in Millions)
 
Consumer
 
Pharm
 
Med Devices
 
Total
Goodwill, net at December 28, 2014
 
$
7,675

 
2,626

 
11,531

 
21,832

Goodwill, related to acquisitions
 

 
64

 
22

 
86

Goodwill, related to divestitures
 
(117
)
 
(17
)
 
(1
)
 
(135
)
Currency translation/Other
 
(350
)
 
(56
)
 
(98
)
(1)
(504
)
Goodwill, net as of September 27, 2015
 
$
7,208

 
2,617

 
11,454

 
21,279

See Note 10 to the Consolidated Financial Statements for more details related to business combinations and divestitures.

9



(1)Includes $98 million classified as held for sale, a component of other assets on the Consolidated Balance Sheet, related to the divestiture of Cordis which was pending as of September 27, 2015.

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 included in cost of products sold was $912 million and $1,033 million for the fiscal nine months ended September 27, 2015 and September 28, 2014, respectively. The estimated amortization expense for the five succeeding years approximates $1.2 billion, before tax, per year. Intangible asset write-downs are included in Other (income) expense, net.

NOTE 4 — FAIR VALUE MEASUREMENTS

The Company uses forward foreign exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany products and third-party purchases of materials denominated in a foreign currency. The Company uses cross currency interest rate swaps to manage currency risk primarily related to borrowings. Both types of derivatives are designated as cash flow hedges.

Additionally, the Company uses interest rate swaps as an instrument to manage interest rate risk related to fixed rate borrowings. These derivatives are treated as fair value hedges. The Company may use forward foreign exchange contracts designated as net investment hedges. Additionally, the Company uses forward foreign exchange contracts to offset its exposure to certain foreign currency assets and liabilities. These forward foreign 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 by either the Company or the counter-party. On an ongoing basis, the Company monitors counterparty credit ratings. The Company considers credit non-performance risk to be low, because the Company primarily enters into agreements with commercial institutions that have at least an "A" (or equivalent) credit rating. Refer to the table on significant financial assets and liabilities measured at fair value contained in this note for receivables and payables with these commercial institutions. As of September 27, 2015, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps of $27.8 billion, $2.4 billion and $2.2 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 and losses associated with interest rate swaps and changes in fair value of hedged debt attributable to changes in interest rates are recorded to interest expense in the period in which they occur. Gains and 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 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 for forward foreign exchange contracts and cross currency interest rate swaps. For interest rate swaps designated as fair value hedges, hedge ineffectiveness, if any, is included in current period earnings within interest expense. For the current reporting period, hedge ineffectiveness associated with interest rate swaps were not material.

As of September 27, 2015, the balance of deferred net gains on derivatives included in accumulated other comprehensive income was $130 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 forward 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 contracts. The amount ultimately realized in earnings may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative.

10


The following table is a summary of the activity related to derivatives designated as cash flow hedges for the fiscal third quarters in 2015 and 2014:
 
 
 
 
 
 
 
 
 
 
 
Gain/(Loss)
Recognized In
Accumulated
OCI(1)
 
Gain/(Loss) Reclassified From
Accumulated OCI
Into Income(1)
 
Gain/(Loss)
Recognized In
Other
Income/Expense(2)
(Dollars in Millions)
 
Fiscal Third Quarters Ended
Cash Flow Hedges By Income Statement Caption
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Sales to customers(3)
 
$
3

 
(43
)
 
(24
)
 
(2
)
 
(3
)
 

Cost of products sold(3)
 
222

 
(37
)
 
(34
)
 
37

 
1

 
(2
)
Research and development expense(3)
 
(10
)
 
25

 
7

 
8

 

 

Interest (income)/Interest expense, net(4)
 
(13
)
 
11

 
1

 
(6
)
 

 

Other (income) expense, net(3)
 
(42
)
 
58

 
12

 
12

 
(1
)
 

Total
 
$
160

 
14

 
(38
)
 
49

 
(3
)
 
(2
)

The following table is a summary of the activity related to derivatives designated as cash flow hedges for the first fiscal nine months in 2015 and 2014:
 
 
 
 
 
 
 
 
 
 
 
Gain/(Loss)
Recognized In
Accumulated
OCI(1)
 
Gain/(Loss) Reclassified From
Accumulated OCI
Into Income(1)
 
Gain/(Loss)
Recognized In
Other
Income/Expense(2)
(Dollars in Millions)
 
Fiscal Nine Months Ended
Cash Flow Hedges By Income Statement Caption
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Sales to customers(3)
 
$
(52
)
 
(73
)
 
(95
)
 
6

 
(5
)
 
1

Cost of products sold(3)
 
106

 
(187
)
 
82

 
196

 
15

 
(4
)
Research and development expense(3)
 
(13
)
 
28

 
(2
)
 
(5
)
 

 
(1
)
Interest (income)/Interest expense, net(4)
 
(42
)
 
21

 
(2
)
 
(12
)
 

 

Other (income) expense, net(3)
 
27

 
72

 
54

 
(9
)
 

 

Total
 
$
26

 
(139
)
 
37

 
176

 
10

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

For the fiscal third quarters ended September 27, 2015 and September 28, 2014, a loss of $8 million and a loss of $2 million, respectively, was recognized in Other (income) expense, net, relating to forward foreign exchange contracts not designated as hedging instruments.

For the fiscal nine months ended September 27, 2015 and September 28, 2014, a gain of $32 million and a loss of $48 million, respectively, was recognized in Other (income) expense, net, relating to forward 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 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., forward foreign exchange contracts, interest rate contracts) 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

11


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 and debt securities which are classified as Level 2. 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 27, 2015 and December 28, 2014 were as follows:
 
 
September 27, 2015
 
 
 
December 28, 2014
(Dollars in Millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Total(1)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(7)
 
$

 
791

 

 
791

 
996

Interest rate contracts (2)(4)(7)
 

 
51

 

 
51

 
31

Total
 

 
842

 

 
842

 
1,027

Liabilities:
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(8)
 

 
472

 

 
472

 
751

Interest rate contracts (3)(4)
 

 
185

 

 
185

 
8

Total
 

 
657

 

 
657

 
759

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(7)
 

 
56

 

 
56

 
29

Liabilities:
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(8)
 

 
39

 

 
39

 
51

Available For Sale Other Investments:
 
 
 
 
 
 
 
 
 
 
Equity investments(5)
 
1,130

 

 

 
1,130

 
679

Debt securities(6)
 
$

 
5,269

 

 
5,269

 


(1)
2014 assets and liabilities are all classified as Level 2 with the exception of equity investments of $679 million, which are classified as Level 1.
(2)
Includes $45 million and $29 million of non-current other assets for September 27, 2015 and December 28, 2014, respectively.
(3)
Includes $185 million and $8 million of non-current other liabilities for September 27, 2015 and December 28, 2014, respectively.
(4)
Includes cross currency interest rate swaps and interest rate swaps.
(5)
Classified as non-current other assets. The carrying amount of the equity investments were $531 million and $284 million as of September 27, 2015 and December 28, 2014, respectively. The unrealized gains were $648 million and $406 million as of September 27, 2015 and December 28, 2014, respectively. The unrealized losses were $49 million and $11 million as of September 27, 2015 and December 28, 2014, respectively.
(6)
Classified as current marketable securities.
(7)
Classified as other current assets.
(8)
Classified as accounts payable.







12




The Company's cash, cash equivalents and current marketable securities as of September 27, 2015 comprised:
 
September 27, 2015
(Dollars in Millions)
Carrying Amount
 
Unrealized Gain
 
Unrealized Loss
 
Estimated Fair Value
 
Cash & Cash Equivalents
 
Current Marketable Securities
Cash
$
1,976

 

 

 
1,976

 
1,976

 
 
U.S. Gov't Securities(1)
15,694

 
5

 

 
15,699

 
1,700

 
13,994

Other Sovereign Securities(1)
2,737

 

 

 
2,737

 
1,192

 
1,545

U.S. Reverse repurchase agreements(1)
3,015

 

 

 
3,015

 
3,015

 
 
Other Reverse repurchase agreements(1)
2,179

 

 

 
2,179

 
2,179

 
 
Corporate debt securities(1)
4,237

 

 

 
4,237

 
1,378

 
2,859

Money market funds
1,358

 

 

 
1,358

 
1,358

 
 
Time deposits(1)
841

 

 

 
841

 
841

 
 
     Subtotal
32,037

 
5

 

 
32,042

 
13,639

 
18,398

 
 
 
 
 
 
 
 
 
 
 
 
Gov't Securities
4,255

 
14

 
(1
)
 
4,268

 

 
4,268

Corporate debt securities
1,002

 
2

 
(3
)
 
1,001

 

 
1,001

     Subtotal Available for Sale(2)
$
5,257

 
16

 
(4
)
 
5,269

 

 
5,269

 
 
 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents and current marketable securities


 


 


 


 
13,639

 
23,667

(1) Held to maturity investments are reported at amortized cost and gains or losses are reported in earnings.
(2) Available for sale securities are reported at fair value with unrealized gains and losses reported net of taxes in other comprehensive income.

Fair value of government securities and obligations and corporate debt securities was estimated using quoted broker prices and significant other observable inputs.

The Company classifies all highly liquid investments with stated maturities of three months or less from date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months from the date of purchase as current marketable securities. Available for sale securities with stated maturities of greater than one year from the date of purchase are available for current operations and are classified as current marketable securities.

The estimated fair value was the same as the amortized cost as of December 28, 2014.
The contractual maturities of the debt securities available for sale at September 27, 2015 are due from one year through five years.



13



Financial Instruments not measured at Fair Value:
The following financial liabilities are held at carrying amount on the consolidated balance sheet as of September 27, 2015:
(Dollars in Millions)
 
Carrying Amount
 
Estimated Fair Value
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
Current Debt
 
$
5,677

 
5,677

 
 
 
 
 
Non-Current Debt
 
 
 
 
3 month LIBOR+0.07% FRN due 2016
 
800

 
800

0.70% Notes due 2016
 
399

 
400

5.55% Debentures due 2017
 
1,000

 
1,084

1.125% Notes due 2017
 
706

 
710

5.15% Debentures due 2018
 
899

 
995

1.65% Notes due 2018
 
609

 
616

4.75% Notes due 2019 (1B Euro 1.1267)
 
1,123

 
1,322

1.875% Notes due 2019
 
510

 
517

3% Zero Coupon Convertible Subordinated Debentures due in 2020
 
140

 
181

2.95% Debentures due 2020
 
545

 
585

3.55% Notes due 2021
 
448

 
487

2.45% Notes due 2021
 
350

 
357

6.73% Debentures due 2023
 
250

 
326

3.375% Notes due 2023
 
811

 
856

5.50% Notes due 2024 (500 MM GBP 1.5215)
 
756

 
940

6.95% Notes due 2029
 
297

 
426

4.95% Debentures due 2033
 
500

 
571

4.375% Notes due 2033
 
864

 
932

5.95% Notes due 2037
 
996

 
1,275

5.85% Debentures due 2038
 
700

 
898

4.50% Debentures due 2040
 
541

 
585

4.85% Notes due 2041
 
298

 
345

4.50% Notes due 2043
 
499

 
539

Other
 
32

 
32

Total Non-Current Debt
 
$
14,073

 
15,779


The weighted average effective interest rate on non-current debt is 4.18%.

The excess of the fair value over the carrying value of debt was $2.2 billion at December 28, 2014.

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

NOTE 5 — INCOME TAXES

The worldwide effective income tax rates for the fiscal nine months of 2015 and 2014 were 21.0% and 22.7%, respectively. The lower effective tax rate in 2015 as compared to 2014 was primarily due to the 2014 divestiture of the Ortho-Clinical Diagnostics business at an approximate 41.0% effective tax rate and the accrual of an additional year of the Branded Prescription Drug Fee, which is not tax deductible. This additional 2014 tax expense was partially offset by a benefit from the Conor Medsystems divestiture, a settlement of substantially all issues related to the Company's U.S. Internal Revenue Service audit of tax years 2006 - 2009 and the federal appeals court’s decision in OMJ Pharmaceuticals, Inc.’s litigation regarding

14


credits under former Section 936 of the Internal Revenue Code. Additionally, the effective tax rate is lower in 2015 as compared to 2014 as a result of the mix in foreign earnings to lower tax jurisdictions.

As of September 27, 2015, the Company had approximately $2.6 billion of liabilities from unrecognized tax benefits. 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 2015 and 2014 include the following components:
 
 
Fiscal Third Quarters Ended
 
 
Retirement Plans
 
Other Benefit Plans
(Dollars in Millions)
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Service cost
 
$
247

 
197

 
64

 
52

Interest cost
 
246

 
255

 
46

 
50

Expected return on plan assets
 
(451
)
 
(403
)
 
(2
)
 
(2
)
Amortization of prior service cost/(credit)
 

 
1

 
(8
)
 
(8
)
Recognized actuarial losses
 
186

 
115

 
50

 
33

Curtailments and settlements
 

 
(11
)
 

 

Net periodic benefit cost
 
$
228

 
154

 
150

 
125


Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the fiscal nine months of 2015 and 2014 include the following components:
 
 
 
 
 
 
 
 
 
 
 
Fiscal Nine Months Ended
 
 
Retirement Plans
 
Other Benefit Plans
(Dollars in Millions)
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Service cost
 
$
744

 
594

 
193

 
158

Interest cost
 
743

 
768

 
139

 
149

Expected return on plan assets
 
(1,361
)
 
(1,212
)
 
(5
)
 
(5
)
Amortization of prior service cost/(credit)
 
1

 
4

 
(25
)
 
(25
)
Recognized actuarial losses
 
560

 
346

 
150

 
101

Curtailments and settlements
 
4

 
(11
)
 

 

Net periodic benefit cost
 
$
691

 
489

 
452

 
378

 
 
 
 
 
 
 
 
 
Company Contributions

For the fiscal nine months ended September 27, 2015, the Company contributed $316 million and $23 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.

15



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
 
Plans
 
& Hedges
 
Income (Loss)
December 28, 2014
 
$
(4,803
)
 
257

 
(6,317
)
 
141

 
(10,722
)
Net change
 
(2,729
)
 
140

 
461

 
(11
)
 
(2,139
)
September 27, 2015
 
$
(7,532
)
 
397

 
(5,856
)
 
130

 
(12,861
)

Amounts in accumulated other comprehensive income are presented net of the related tax impact. Foreign currency translation is not adjusted for income taxes where 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:
Gain/(Loss) On Securities - reclassifications released to Other (income) expense, net.
Employee Benefit Plans - reclassifications are included in net periodic benefit cost. See Note 6 for additional details.
Gain/(Loss) On Derivatives & Hedges - reclassifications to earnings are recorded in the same account as the hedged transaction. See Note 4 for additional details.

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 27, 2015 and September 28, 2014:
 
 
Fiscal Third Quarters Ended
(Shares in Millions)
 
September 27, 2015
 
September 28, 2014
Basic net earnings per share
 
$
1.21

 
1.69

Average shares outstanding — basic
 
2,768.4

 
2,814.4

Potential shares exercisable under stock option plans
 
129.4

 
148.4

Less: shares which could be repurchased under treasury stock method
 
(92.8
)
 
(101.2
)
Convertible debt shares
 
2.2

 
2.7

Average shares outstanding — diluted
 
2,807.2

 
2,864.3

Diluted earnings per share
 
$
1.20

 
1.66


The diluted earnings per share calculation for both the fiscal third quarters ended September 27, 2015 and September 28, 2014 included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.

The diluted net earnings per share calculation for the fiscal third quarter ended September 27, 2015 excluded 20 million shares related to stock options, as the exercise price of these options was greater than their average market value, which would result in an anti-dilutive effect on diluted earnings per share. Diluted earnings per share calculation for the fiscal third quarter ended September 28, 2014 included all shares related to stock options, as there were no options or other instruments which were anti-dilutive.









16





The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the fiscal nine months ended September 27, 2015 and September 28, 2014:


 
 
 
 
 
 
Fiscal Nine Months Ended
(Shares in Millions)
 
September 27, 2015
 
September 28, 2014
Basic net earnings per share
 
$
4.39

 
4.89

Average shares outstanding — basic
 
2,774.8

 
2,822.0

Potential shares exercisable under stock option plans
 
129.1

 
148.8

Less: shares which could be repurchased under treasury stock method
 
(89.0
)
 
(102.3
)
Convertible debt shares
 
2.2

 
2.7

Average shares outstanding — diluted
 
2,817.1

 
2,871.2

Diluted earnings per share
 
$
4.33

 
4.81



 
 
 
 
 
 
 
 
 
The diluted earnings per share calculation for both the fiscal nine months ended September 27, 2015 and September 28, 2014 included the dilutive effect of convertible debt that was offset by the related reduction in interest expense.

The diluted net earnings per share calculation for the fiscal nine months ended September 27, 2015 excluded 20 million shares related to stock options, as the exercise price of these options was greater than their average market value, which would result in an anti-dilutive effect on diluted earnings per share. Diluted net earnings per share calculation for the fiscal nine months ended September 28, 2014 included all shares related to stock options, as there were no options or other instruments which were anti-dilutive.

NOTE 9 — SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS

SALES BY SEGMENT OF BUSINESS
 
 
Fiscal Third Quarters Ended
(Dollars in Millions)
 
September 27,
2015
 
September 28,
2014
 
Percent
Change
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
United States
 
$
1,277

 
1,173

 
8.9
 %
International
 
2,037

 
2,416

 
(15.7
)
Total
 
3,314

 
3,589

 
(7.7
)
Pharmaceutical
 
 
 
 
 
 
United States
 
4,509

 
4,723

 
(4.5
)
International
 
3,185

 
3,584

 
(11.1
)
Total
 
7,694

 
8,307

 
(7.4
)
Medical Devices
 
 
 
 
 
 
United States
 
3,005

 
2,946

 
2.0

International
 
3,089

 
3,625

 
(14.8
)
Total
 
6,094

 
6,571

 
(7.3
)
Worldwide
 
 
 
 
 
 
United States
 
8,791

 
8,842

 
(0.6
)
International
 
8,311

 
9,625

 
(13.7
)
Total
 
$
17,102

 
18,467

 
(7.4
)%

17


 
 
 
 
 
 
 
 
 
Fiscal Nine Months Ended
(Dollars in Millions)
 
September 27,
2015
 
September 28,
2014
 
Percent
Change
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
United States
 
$
3,991

 
3,802

 
5.0
 %
International
 
6,196

 
7,088

 
(12.6
)
Total
 
10,187

 
10,890

 
(6.5
)
Pharmaceutical
 
 
 
 
 
 
United States
 
13,423

 
13,076

 
2.7

International
 
9,943

 
11,238

 
(11.5
)
Total
 
23,366

 
24,314

 
(3.9
)
Medical Devices
 
 
 
 
 
 
United States
 
8,980

 
9,300

 
(3.4
)
International
 
9,730

 
11,573

 
(15.9
)
Total
 
18,710

 
20,873

 
(10.4
)
Worldwide
 
 
 
 
 
 
United States
 
26,394

 
26,178

 
0.8

International
 
25,869

 
29,899

 
(13.5
)
Total
 
$
52,263

 
56,077

 
(6.8
)%

SEGMENT PRE-TAX PROFIT
 
 
Fiscal Third Quarters Ended
(Dollars in Millions)
 
September 27,
2015
 
September 28,
2014
 
Percent
Change
Consumer (1)
 
$
811

 
407

 
99.3
 %
Pharmaceutical(2)
 
2,732

 
3,247

 
(15.9
)
Medical Devices(3)
 
835

 
3,399

 
(75.4
)
Segments operating profit
 
4,378

 
7,053

 
(37.9
)
Less: Expense not allocated to segments (4)
 
256

 
243

 
 
Worldwide income before taxes
 
$
4,122

 
6,810

 
(39.5
)%
 
 
 
 
 
 
 
 
 
Fiscal Nine Months Ended
(Dollars in Millions)
 
September 27, 2015
 
September 28, 2014
 
Percent
Change
Consumer (1)
 
$
1,772

 
1,588

 
11.6
 %
Pharmaceutical(2)
 
9,816

 
9,921

 
(1.1
)
Medical Devices(3)
 
4,640

 
7,069

 
(34.4
)
Segments operating profit
 
16,228

 
18,578

 
(12.6
)
Less: Expense not allocated to segments (4)
 
790

 
718

 
 
Worldwide income before taxes
 
$
15,438

 
17,860

 
(13.6
)%
(1) Includes a gain of $229 million from the divestiture of the SPLENDA® brand recorded in the fiscal third quarter and fiscal nine months of 2015. Includes a gain of $388 million from the divestiture of the K-Y® brand recorded in the fiscal nine months of 2014.

(2) Includes litigation expense of $136 million in the fiscal nine months of 2015. Includes a gain of $981 million recorded in the fiscal nine months of 2015 from the divestiture of the U.S. license rights to NUCYNTA® (tapentadol), NUCYNTA® ER (tapentadol extended-release tablets), and NUCYNTA® (tapentadol) oral solution. Includes an additional year of the Branded Prescription Drug Fee of $220 million recorded in the fiscal third quarter and fiscal nine months of 2014.

18


(3) Includes litigation expense of $409 million related to product liability and a $0.3 billion intangible asset write-down related to Acclarent recorded in the fiscal third quarter of 2015. Includes a net gain of $1,948 million from the divestiture of the Ortho-Clinical Diagnostics business, litigation expense of $225 million, Synthes integration costs of $167 million and $126 million for costs associated with the DePuy ASRTM Hip program recorded in the fiscal third quarter of 2014. Includes $148 million for costs associated with the DePuy ASRTM Hip program, Synthes integration costs of $113 million and a $0.3 billion intangible asset write-down related to Acclarent recorded in the fiscal nine months of 2015. Includes a net gain of $1,948 million from the divestiture of the Ortho-Clinical Diagnostics business, litigation expense of $501 million, Synthes integration costs of $429 million and $126 million for costs associated with the DePuy ASRTM Hip program recorded in the fiscal nine months of 2014.
(4) Amounts not allocated to segments include interest income/expense and general corporate income/expense.
SALES BY GEOGRAPHIC AREA
 
 
Fiscal Third Quarters Ended
(Dollars in Millions)
 
September 27, 2015
 
September 28, 2014
 
Percent
Change
United States
 
$
8,791

 
8,842

 
(0.6
)%
Europe
 
3,802

 
4,446

 
(14.5
)
Western Hemisphere, excluding U.S.
 
1,463

 
1,820

 
(19.6
)
Asia-Pacific, Africa
 
3,046

 
3,359

 
(9.3
)
Total
 
$
17,102

 
18,467

 
(7.4
)%
 
 
 
 
 
 
 
 
 
Fiscal Nine Months Ended
(Dollars in Millions)
 
September 27, 2015
 
September 28, 2014
 
Percent
Change
United States
 
$
26,394

 
26,178

 
0.8
 %
Europe
 
11,993

 
14,387

 
(16.6
)
Western Hemisphere, excluding U.S.
 
4,603

 
5,378

 
(14.4
)
Asia-Pacific, Africa
 
9,273

 
10,134

 
(8.5
)
Total
 
$
52,263

 
56,077

 
(6.8
)%

NOTE 10— BUSINESS COMBINATIONS AND DIVESTITURES
Subsequent to the quarter, on October 2, 2015, the Company completed the divestiture of the Cordis business to Cardinal Health for an approximate value of $2.0 billion subject to customary adjustments. The Company will record the gain in the fiscal fourth quarter of 2015. As of September 27, 2015, the assets classified as held for sale relating to the Cordis business were $173 million of inventory classified as prepaid expenses and other on the Consolidated Balance Sheet. The non-current assets classified as held for sale relating to the Cordis business were $104 million of property, plant and equipment, net, $59 million of intangible assets and $98 million of goodwill classified as other assets on the Consolidated Balance Sheet.

During the fiscal third quarter of 2015, the Company completed the divestiture of its SPLENDA® brand to Heartland Food Products Group. The pre-tax gain on the divestiture was $229 million and was recognized in Other (income) expense, net.

During the fiscal second quarter of 2015, the Company completed the divestiture of its U.S. license rights to NUCYNTA® (tapentadol), NUCYNTA ® ER (tapentadol extended-release tablets), and NUCYNTA® (tapentadol) oral solution for approximately $1.05 billion. The pre-tax gain on the divestiture was $981 million and was recognized in Other (income) expense, net.
During the fiscal first quarter of 2015, the Company acquired XO1 Limited, a privately-held biopharmaceutical company developing the anti-thrombin antibody, ichorcumab.

During the fiscal third quarter of 2014, the Company divested its Ortho-Clinical Diagnostics business to The Carlyle Group, for approximately $4.0 billion. The Company recorded a pre-tax net gain of approximately $1.9 billion in the fiscal third quarter of 2014. As of September 27, 2015, the assets classified as held for sale relating to the Ortho-Clinical Diagnostics companies in countries that have not completely closed due to local regulatory requirements were $42 million of inventory, classified as prepaid expenses and other on the Consolidated Balance Sheet and $107 million of property, plant and equipment, classified as other assets on the Consolidated Balance Sheet. Additional countries are expected to close by the end of the year.

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During the fiscal third quarter of 2014, the Company completed the acquisition of Covagen AG, a privately-held, biopharmaceutical company specializing in the development of multispecific protein therapeutics through the FynomAb® technology platform.

During the fiscal second quarter of 2014, McNEIL-PPC, Inc., a subsidiary of Johnson & Johnson, completed the divestiture of the K-Y® brand to Reckitt Benckiser Group PLC in the U.S. and certain other markets.  The pre-tax gain on the divestiture in the countries that closed as of the fiscal third quarter of 2014 was $388 million and was recognized in Other (income) expense, net.




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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 27, 2015, 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 as might be warranted based on new information and further developments in accordance with ASC 450-20-25. For these and other litigation and regulatory matters discussed below 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. Amounts accrued for legal contingencies often result from a complex series of judgments about future events and uncertainties that rely heavily on estimates and assumptions.

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 claims and lawsuits involving multiple products. Claimants in these cases seek substantial compensatory and, where available, punitive damages. While these subsidiaries believe they have substantial defenses, 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. In addition, product liability accruals can represent projected product liability for thousands of claims around the world, each in different litigation environments and with different fact patterns. Changes to the accruals may be required in the future as additional information becomes available.

The most significant of these cases include the DePuy ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System, the PINNACLE® Acetabular Cup System, pelvic meshes, RISPERDAL®, and XARELTO®. As of September 27, 2015, in the U.S. there were approximately 6,300 plaintiffs with direct claims in pending lawsuits regarding injuries allegedly due to the DePuy ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System, 8,300 with respect to the PINNACLE® Acetabular Cup System, 44,400 with respect to pelvic meshes, 5,400 with respect to RISPERDAL®, and 3,000 with respect to XARELTO®.

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. The number of pending lawsuits is expected to fluctuate as certain lawsuits are settled or dismissed and additional lawsuits are filed. 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. In November 2013, DePuy reached an agreement with a Court-appointed committee of lawyers representing ASR™ Hip System plaintiffs to establish a program to settle claims with eligible ASR Hip patients in the United States who had surgery to replace their ASR Hips, known as revision surgery, as of August 31, 2013. This settlement covered approximately 8,000 patients. In February 2015, DePuy reached an additional agreement which would effectively extend the existing settlement program to ASR Hip patients who had revision surgeries after August 31, 2013 and prior to February 1, 2015. This second agreement is now estimated to cover approximately 1,800 additional patients. The estimated cost of these agreements is covered by existing accruals. This settlement program is expected to bring to a close significant ASR Hip litigation activity in the U.S. However, many lawsuits in the U.S. will remain, and the settlement program does not address litigation outside of the U.S. The Company continues to receive information with respect to potential costs associated with this recall on a worldwide basis. The Company has established accruals for the costs associated with the DePuy ASR™ Hip program and related product liability litigation. Updates to these accruals may be required in the future as additional information becomes available.

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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. Litigation has also been filed in countries outside of the United States, primarily in the United Kingdom. The Company has established an accrual to cover defense costs in connection with 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 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, class actions and individual personal injury cases or claims have been commenced in Australia, Belgium, Canada, England, Israel, Italy, the Netherlands, Scotland and Venezuela, seeking damages for alleged injury resulting from Ethicon's pelvic mesh devices. The Company has established an accrual with respect to 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.

Claims for personal injury have been made against Janssen Pharmaceuticals, Inc. and Johnson & Johnson arising out of the use of RISPERDAL®, indicated for the treatment of schizophrenia, acute manic or mixed episodes associated with bipolar I disorder and irritability associated with autism, and related compounds. 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. The Company has established an accrual with respect to product liability litigation associated with RISPERDAL®. Changes to this accrual may be required in the future as additional information becomes available.

Claims for personal injury have been made against Janssen Pharmaceuticals, Inc. and Johnson & Johnson arising out of the use of XARELTO®, an oral anticoagulant. 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 Eastern District of Louisiana. In addition, cases have been filed in state courts across the United States and many cases have been consolidated into a state mass tort litigation in Philadelphia, Pennsylvania. Class action lawsuits also have been filed in Canada. The Company has established an accrual with respect to product liability litigation associated with XARELTO®. Changes to this accrual may be required in the future as additional information becomes available.


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 businesses. Many of these matters involve challenges to the coverage and/or validity of the patents on various 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. The most significant of these matters are described below.

Medical Devices

In January 2010, 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 EES's HARMONIC® shears infringed three Tyco patents. The case was tried in July 2012, and in March 2013, the Court ruled that some of EES's HARMONIC® shears infringed Tyco's patents and ordered EES to pay damages of approximately $176 million, but declined to order injunctive relief. EES appealed and in December 2014, the United States Court of Appeals for the Federal Circuit reversed the District Court's ruling and found all the asserted claims invalid. Tyco filed a motion for rehearing, which was denied in February 2015. In July 2015, Tyco filed a motion for review with the U.S. Supreme Court. In July 2014, Covidien filed another patent infringement lawsuit against EES in the United States District Court for the District of

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Connecticut seeking damages and a preliminary injunction, alleging that EES's newest version of its harmonic scalpels, the HARMONIC ACE®+ 7 Shears and the HARMONIC ACE®+ Shears, infringed the three Tyco patents asserted in the previous case. Covidien brought a motion for a preliminary injunction against the HARMONIC ACE®+7 Shears, and in October 2014, the District Court granted Covidien's motion for a preliminary injunction. EES appealed and the Court of Appeals for the Federal Circuit granted EES an interim stay of the injunction, and then in March 2015, reversed the grant of the preliminary injunction. The claims asserted by Covidien in this case are the same claims that were declared invalid in December 2014 by the Court of Appeals in the Tyco case discussed above.

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, alleging LifeScan's OneTouch® Line of Blood Glucose Monitoring Systems infringe two patents related to the use of microelectrode sensors. Roche is seeking monetary damages and injunctive relief. In September 2009, LifeScan obtained a favorable ruling on claim construction that precluded a finding of infringement. Roche appealed and 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. In December 2014, the District Court ruled in LifeScan's favor and reinstated the original claim construction. In February 2015, Roche appealed the ruling.

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 '327 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 infringes the '327 patent. Rembrandt appealed, and in August 2013, the United States Court of Appeals for the Federal Circuit affirmed the District Court's judgment. Rembrandt asked the District Court to grant it a new trial based on alleged new evidence, and in July 2014, the District Court denied Rembrandt’s motion. Rembrandt has appealed the District Court's denial of its motion for a new trial.

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. The case remains active, but no trial date has been set.

In September 2011, LifeScan, Inc. (LifeScan) filed a lawsuit against Shasta Technologies, LLC, Instacare Corp (now known as Pharmatech Solutions, Inc. (Pharmatech)) and Conductive Technologies, Inc. (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. Shasta has alleged that the three LifeScan patents-in-suit are invalid. Shasta also challenged the validity of the asserted patents in the United States Patent and Trademark Office (USPTO) and the patent infringement case has been stayed pending the outcome of the USPTO proceedings. The validity of two of the patents was confirmed by the USPTO and in August 2014, the USPTO determined that the third patent, U.S. Patent No. 7,250,105 (the '105 patent), is invalid. LifeScan is appealing that decision, and oral argument on the appeal is scheduled for December 2015. The patent case has resumed on the two other patents. In April 2013, Shasta brought counterclaims for alleged antitrust violations and false advertising and those claims have been stayed pending resolution of the patent infringement case. LifeScan entered into a settlement agreement with Shasta Technologies and Conductive Technologies and in March 2015, the Court entered a consent judgment against Shasta Technologies and Conductive Technologies. The litigation with Pharmatech continues. In May 2014, LifeScan filed a patent infringement lawsuit against UniStrip Technologies, LLC (UniStrip) in the United States District Court for the District of North Carolina alleging that the making and marketing of Unistrip’s strips infringe the same patents asserted against Shasta above. That case has been stayed pending the outcome of the appeal of the USPTO's decision on the validity of the '105 patent. In July 2014, UniStrip brought a lawsuit against LifeScan in the United States District Court for the Eastern District of Pennsylvania, alleging antitrust violations relating to marketing practices for LifeScan's strips.

In September 2012, Bonutti Skeletal Innovations LLC (Bonutti), a non-practicing entity, filed a patent infringement lawsuit against DePuy Mitek, LLC, The DePuy Institute, LLC (now DePuy Synthes Institute, LLC), DePuy, Inc. (now DePuy Synthes, Inc.) and DePuy Orthopaedics, Inc. (collectively, DePuy) in the United States District Court for the District of Massachusetts, alleging that DePuy’s manufacture, sale and/or method of using the SIGMA® Family of Partial and Total Knee Systems and the LCS® COMPLETE™ Knee System willfully infringe three of Bonutti’s patents. Bonutti also alleges that the method of using certain of DePuy’s suture anchors willfully infringe four of Bonutti’s other patents. In August 2014, the parties entered into a settlement of the portion of the lawsuit relating to suture anchors, and in March 2015, the parties entered into a settlement agreement relating to the remaining portion of the case.

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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 all of Cordis's sales of the CYPHER® and CYPHER SELECT™ Stents made in the United States since 2005 willfully infringed four of Medinol's patents directed to the geometry of articulated stents.  Medinol is seeking damages and attorney's fees. After trial in January 2014, the District Court dismissed the case, finding Medinol unreasonably delayed bringing its claims, and Medinol did not appeal the decision. In September 2014, the District Court denied a motion by Medinol to vacate the judgment and grant it a new trial. Medinol is appealing this decision. Following the divestiture of Cordis, the Company retains any liability that may result from this case.

In January 2014, Baxter International Inc., Baxter Healthcare Corporation, and Baxter Healthcare S.A. (collectively, Baxter) filed a lawsuit against Johnson & Johnson, Ethicon, Inc. (Ethicon), Ferrosan Medical Devices A/S and Packaging Coordinators Inc. in the United States District Court for the Northern District of Illinois, alleging that the manufacture, importation, sale and/or use of Ethicon’s SURGIFLO® Hemostatic Matrix Family of Products infringes six of Baxter’s patents. Baxter is seeking monetary damages and injunctive relief. In February 2014, Baxter also filed a complaint before the United States International Trade Commission (ITC) against the same defendants alleging that the importation into the United States of Ethicon’s SURGIFLO® Hemostatic Matrix Family of Products violates Section 337 of the Tariff Act of 1930 due to the alleged infringement of four of its products, and is seeking an exclusion order to enjoin the importation into the United States of such products. The ITC case was tried in January 2015 and in March 2015, the parties entered into an agreement settling the ITC and District Court cases.

In June 2014, My Health, Inc. (My Health) filed a patent infringement lawsuit against LifeScan, Inc. (LifeScan) in the United States District Court for the Eastern District of Texas, alleging LifeScan's OneTouch® Verio®IQ Blood Glucose Monitoring System infringes My Health's patent related to a method for monitoring and treating patients. My Health sought monetary damages and injunctive relief. In October 2014, Lifescan filed an Inter Partes review proceeding in the United States Patent and Trademark Office seeking to invalidate My Health’s patent. In December 2014, LifeScan moved to stay the lawsuit pending a decision in the Inter Partes review proceeding. In May 2015, LifeScan and My Health entered into a settlement agreement and LifeScan terminated its petition for Inter Partes Review.

In December 2014, Bonutti Skeletal Innovations LLC (Bonutti) sued DePuy Synthes Sales, Inc. and DePuy Synthes Products, Inc. in the United States District Court for the District of Massachusetts, alleging that DePuy Synthes's product line of spine implants infringes six patents owned by Bonutti, generally covering wedge implants and their methods of implantation. Bonutti is seeking monetary damages and injunctive relief.

Pharmaceutical

In 2012 and 2013, Noramco, Inc. (Noramco) moved to intervene in several patent infringement lawsuits filed in the United States District Court for the Southern District of New York by Purdue Pharma L.P. and others (Purdue) against Noramco oxycodone customers, Impax Laboratories, Inc. (Impax), Teva Pharmaceuticals USA, Inc. (Teva), Amneal Pharmaceuticals, LLC (Amneal), Watson Laboratories, Inc.- Florida (Watson) and Andrx Labs, LLC (Andrx). The lawsuits are in response to the defendants' respective Abbreviated New Drug Applications seeking approval to market generic extended release oxycodone products before the expiration of certain Purdue patents. Three of the asserted patents relate to oxycodone and processes for making oxycodone, and Noramco has agreed to defend the lawsuits on behalf of Impax, Teva, Amneal, Watson, and Andrx. In April 2013, Watson and Andrx entered into a settlement with Purdue. The trial against Impax and Teva (and others) took place in September 2013, and Noramco defended Teva and Impax. In November 2013, Impax entered into a settlement with Purdue. In January 2014, the Court issued a decision invalidating the relevant Purdue patents and, based on that decision, subsequently dismissed the lawsuit against Amneal (and other parties not defended by Noramco). Purdue has appealed the Court's decision. If Purdue prevails in its appeal of the invalidity decision, it can reinstitute its action against Amneal. In December 2014, Teva entered into a confidential settlement with Purdue, and Teva subsequently moved to have the appeal dismissed as moot in view of the settlement. The Federal Circuit deferred judgment on Teva’s motion to dismiss, and oral argument on Purdue’s appeal is set for November 2015.

Johnson & Johnson acquired the prostate cancer business of Aragon Pharmaceuticals, Inc. (Aragon), including ARN-509, a compound being tested for treatment of prostate cancer, in September 2013. Prior to the acquisition, in May 2011, Medivation, Inc. (Medivation) had sued Aragon and the University of California seeking rights to ARN-509. In December 2012, the State Court granted summary judgment to Aragon on Medivation's claims, awarding the rights of the ARN-509 compound to Aragon, and in January 2013, the Court dismissed the case against Aragon. Medivation has appealed.

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REMICADE® Related Cases

In March 2013, Hospira Healthcare Corporation (Hospira) filed an impeachment proceeding against The Kennedy Institute of Rheumatology (Kennedy) challenging the validity of a Canadian patent related to REMICADE® (a Feldman patent), which is exclusively licensed to Janssen Biotech, Inc. (JBI). In October 2013, Kennedy, along with JBI, Janssen Inc. and Cilag GmbH International (both affiliates of JBI), filed a counterclaim for infringement against Celltrion Healthcare Co., Ltd., Celltrion Inc. (together, Celltrion) and Hospira. The counterclaim alleges that the products described in Celltrion’s and Hospira’s marketing applications to Health Canada for their subsequent entry biologics (SEB) to REMICADE® would infringe the Feldman patents owned by Kennedy. Discovery in the patent action is ongoing. Trial has been scheduled for September 2016.

In January 2014, Health Canada approved Celltrion’s SEB to REMICADE®, allowing Celltrion to market its biosimilar version of REMICADE® in Canada, regardless of the pending patent action. In June 2014, Hospira received approval for its SEB to REMICADE®. In July 2014, Janssen Inc. (Janssen) filed a lawsuit to compel the Canadian Minister of Health to withdraw the Notice of Compliance for Hospira’s SEB because Hospira did not serve a Notice of Allegation on Janssen to address the patent listed by Janssen on the Patent Register. In March 2015, the parties entered into a settlement agreement whereby Health Canada agreed to a Consent Judgment setting aside Hospira’s Notice of Compliance, subject to Health Canada's right to appeal, which appeal was filed in June 2015. Nevertheless, Hospira began marketing a biosimilar version of REMICADE® as a distributor under Celltrion's Notice of Compliance.

In September 2013, JBI and NYU Langone Medical Center (NYU Medical Center) received an Office Action from the United States Patent and Trademark Office (USPTO) rejecting the claims in U.S. Patent No. 6,284,471 relating to REMICADE® (the '471 patent) in a reexamination proceeding instituted by a third party.  The '471 patent is co-owned by JBI and NYU Medical Center, and NYU Medical Center granted JBI an exclusive license to NYU Medical Center's rights under the patent. Currently, the '471 patent in the United States expires in September 2018. JBI responded to that rejection in December 2013 and in August 2014, JBI and NYU Medical Center received a further rejection. JBI responded to the rejection by filing a further amendment and in November 2014, JBI's petition to enter the amendment was granted. The application was returned to the examiner for issuance of a new Office Action, which occurred in February 2015, further rejecting the patent. JBI responded to that rejection and in April 2015, the USPTO issued a further action maintaining its rejection of the '471 patent. In May 2015, JBI filed a notice of appeal to the USPTO's Patent Trial and Appeal Board, and the appeal is currently pending. The '471 patent remains a valid and enforceable patent as it undergoes reexamination at the USPTO. JBI will continue to defend the patent and, if necessary, will pursue all available appeals.

In August 2014, Celltrion filed for FDA approval to make and sell its own biosimilar version of REMICADE®. In February 2015, JBI received a Notice of Commercial Marketing from Celltrion purportedly in accordance with the Biologics Price Competition and Innovation Act (the BPCIA), notifying JBI that Celltrion and/or Hospira intended to begin commercial marketing of a biosimilar product as early as 180 days from the date of the notice. In March 2015, JBI filed a lawsuit in the United States District Court for the District of Massachusetts against Celltrion and Hospira seeking a declaratory judgment that their biosimilar product for which they are seeking FDA approval under the new BPCIA statute infringes or potentially infringes six JBI patents. JBI is also seeking a declaratory judgment that defendants have failed to comply with certain procedural requirements of the BPCIA. In addition, JBI has moved for a preliminary and permanent injunction to prohibit Celltrion and Hospira from launching their biosimilar product until 180 days after they have given JBI a Notice of Commercial Marketing. Subsequently in March 2015, JBI moved to stay all proceedings in the District Court with respect to the ‘471 patent, pending the USPTO re-examination proceeding.

If any of the REMICADE® related patents discussed above is found to be invalid, any such patent could not be relied upon to prevent the introduction of biosimilar versions of REMICADE®. Biosimilar versions of REMICADE® have been introduced in certain markets outside the United States, resulting in a reduction in sales of REMICADE® in those markets. The timing of the possible introduction of a biosimilar version of REMICADE® in the United States would be subject to approval by the FDA. Loss of exclusivity will likely result in a further reduction in sales as additional biosimilar versions of REMICADE® are introduced to the market.



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Litigation Against Filers of Abbreviated New Drug Applications (ANDAs)

The following summarizes lawsuits pending against generic companies that have filed Abbreviated New Drug Applications (ANDAs) with the FDA, or undertaken similar regulatory processes outside of the United States, 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 the applicable patents. In the event the subsidiaries are not successful in these actions, or the statutory 30-month stays of the ANDAs 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 to the market, resulting in the potential for substantial market share and revenue losses for those products, and which may result in a non-cash impairment charge in any associated intangible asset.

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 additional patents relating to PREZISTA® that Tibotec exclusively licenses from G.D. Searle. In September 2011, the Court consolidated the above lawsuits (referred to here as the First Consolidated Action).

The approved New Drug Application for PREZISTA® was transferred from Tibotec, Inc. to Janssen Products, LP in December 2011. In 2012 and 2013, Janssen Products, LP and Janssen R&D Ireland (collectively, Janssen) added several patents that they own or exclusively license from G.D. Searle to the First Consolidated Action against Mylan and Lupin. In June 2013, Janssen and G.D. Searle dismissed their claims relating to the patents owned by G.D. Searle against Lupin and Mylan, based on those parties’ agreement not to seek FDA approval of their respective ANDAs until the November 2017 expiration of the G.D. Searle patents. After a trial regarding the remaining patents in the First Consolidated Action, the Court issued a decision in August 2014 in favor of Janssen, holding that the asserted patents are valid and would be infringed by Lupin's and Mylan's marketing of their proposed products. Mylan and Lupin filed an appeal.

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 March 2014, Janssen filed a patent infringement lawsuit against Lupin in the United States District Court for the District of New Jersey, alleging infringement of United States Patent No 8,518,987 (the ‘987 patent). In January 2015, the Court consolidated these lawsuits (referred to here as the Second Consolidated Action), and stayed them pending Lupin's appeal of the Court's decision in the First Consolidated Action. In April 2015, Lupin filed an Inter Partes Review in the USPTO seeking to invalidate the ‘987 patent and in October 2015, the USPTO denied Lupin's petition.

Janssen filed a patent infringement lawsuit against Hetero Drugs, Ltd. Unit III and Hetero USA Inc. in March 2013 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 October 2015, the parties stipulated to a Consent Judgment wherein the Hetero defendants admitted that the patents-in-suit are valid and would be infringed by the manufacture, importation, use or sale of Hetero’s ANDA product, and agreed to an injunction with respect to such product during the life of the patents-in-suit. Hetero reserved the right to develop non-infringing darunavir products and processes.

In July 2014, Janssen filed a patent infringement lawsuit against Mylan in the United States District Court for the District of New Jersey, alleging infringement of United States Patent No. 8,153,829. Discovery in the case in ongoing.


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In August 2014, Janssen filed patent infringement lawsuits against Cipla Ltd. and Cipla USA, Inc. (collectively, Cipla) in the United States District Courts for the Districts of New Jersey and Delaware in response to Cipla’s ANDA seeking approval to market a generic version of Janssen’s PREZISTA® product before the expiration of certain of Janssen’s patents relating to PREZISTA®. Cipla filed counterclaims seeking declarations of noninfringement and invalidity of the patents-in-suit. In May 2015, Janssen and Cipla entered into a settlement agreement.

In response to its Notice of Allegation seeking approval to market a generic version of PREZISTA® in Canada before the expiration of Canadian Patent No. 2,485,834, Janssen Inc. and Janssen R&D Ireland filed a Notice of Application against Mylan Pharmaceuticals ULC in July 2014. In December 2014, Janssen R&D Ireland transferred its PREZISTA® patents to Janssen Sciences Ireland UC, and Janssen Sciences Ireland UC was substituted for Janssen R&D Ireland as plaintiff in the above-referenced actions.

In January 2015, Janssen Inc. and Janssen Sciences Ireland UC filed a Notice of Application against Teva Canada Limited in response to its Notice of Alleg