A Review of Pharmaceutical Performance Johnson and Johnson 2008

A Review of Pharmaceutical Performance Johnson & Johnson 2008

By: Emery James Baker MS, MBA November 8, 2009

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Table of Contents

Contents Scope ............................................................................................................................................................. 3 Introduction .................................................................................................................................................. 3 Pharmaceutical Division Overview ............................................................................................................... 4 Organizational Structure ........................................................................................................................... 4 Prescription Products ................................................................................................................................ 5 Neuroscience (Including Pain) .............................................................................................................. 5 Cardiovascular Disease and Metabolism .............................................................................................. 5 Immunology .......................................................................................................................................... 5 Infectious Disease ................................................................................................................................. 5 Oncology ............................................................................................................................................... 5 Research & Development (R&D)............................................................................................................... 6 Late Stage Pipeline ................................................................................................................................ 6 Marketing & Sales ......................................................................................................................................... 7 Summary Statement ................................................................................................................................. 7 Recent Advancements .......................................................................................................................... 8 Downturns and Challenges ................................................................................................................... 9 Financials..................................................................................................................................................... 10 Growth .................................................................................................................................................... 10 Pharmaceutical Sector Specifics ............................................................................................................. 10 Functional Analysis ..................................................................................................................................... 11 Additional Strategic Issues: ..................................................................................................................... 11 Symptoms of business issues - Functional Analysis ................................................................................ 11 Functional Analysis ................................................................................................................................. 11 SWOT analysis ......................................................................................................................................... 12 Recommendations .................................................................................................................................. 13 Implementation ...................................................................................................................................... 14 Appendices.................................................................................................................................................. 15 Newly Approved and Released products (2008): ................................................................................... 15 Values:..................................................................................................................................................... 16 References .................................................................................................................................................. 17

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Scope This writing will examine the Pharmaceutical divisions of Johnson & Johnson Inc. Although some reference to the parent company is unavoidable, the objective is to examine the contributions and challenges faced by the traditional drug manufacturing sector and how they relate to a company profile. This writing will not address some of the associated over the counter (OTC) products made within the operating companies that share Consumer and Pharmaceutical sectors. This separation is made possible by the segregation of financial information within the operating companies that span the two business sectors (i.e. McNeil inc. under the Ortho-McNeil-Janssen Pharmaceutical group). A major component of some business unit’s financial information as well as all other supporting information will be divided by the sector being Pharmaceutical. The period of this analysis will cover fourth quarter 2007 through and including first quarter 2009 with financial reporting focused on the 2008 fiscal year.

Introduction Johnson & Johnson (J&J) is a large global conglomeration consisting of over two hundred and fifty operating companies. The parent company develops, manufactures and provides products and services that enter into nearly all aspects of the health care industry. J&J practices the principle of decentralized management. J&J currently employees over one hundred and eighteen thousand employees worldwide with more than double that number of partner interfaces involved in close business to business operations. The operating companies of J&J primarily serve the: 1. Consumer Healthcare sector 2. Medical Devices and Diagnostics sector 3. Pharmaceuticals As reported in year end 2008 the firm grossed over 63.7 billion dollars representing an increase of 4.3 percent over the previous year this coupled with a corporate wide decrease in operational costs of 1.9 percent yielded an adjusted earnings growth of 6.2 percent.

J&J also took advantage of the low cost of borrowing during late 2007 and 2008. During this timeframe the A++ rated firm was able to secure low cost debt In order to continue and expand its ten billion dollar stock repurchase program. By the period end they reclaimed 8.1 billion dollars of common stock, repatronizing the assets and redirecting profits internally while maintaining cash assets through low interest loans. 3

It is important to keep the diluted figures (due to roll-up accounting across operating companies) in mind when examining the pharmaceutical sector within Johnson & Johnson. On the whole the firm did well with conservative growth during severe global economic downturns. As we examine the microeconomic climates of the pharmaceutical division it will become apparent that the survivability of the business as a whole is made possible by the diversification of products and by the decentralization of the organization.

Pharmaceutical Division Overview Within the Pharmaceutical sector of Johnson & Johnson the key division is Ortho-McNeil-Janssen Pharmaceutical Inc. (OMJPI). The Company was formed from the merger of Ortho Pharmaceutical and McNeil Pharmaceutical in 1993. Both of these pharmaceutical companies are pioneers and leaders in areas such as pain management, acid reflux disease, and infectious diseases. Ortho-McNeil and Janssen have been placed in the Ortho-McNeil-Janssen group within Johnson & Johnson. Also part of the pharmaceutical development group is Pharmaceutical Research & Development or J&J PRD. Although smaller operating companies exist outside of the group (i.e. Centocor reports into JJPRD Inc) Reporting, Financial Data, Marketing, Sales, Development are driven by OMJPI.

Organizational Structure These Centers of Excellence support the business of (some Centers of Excellence also support other operating companies): Ortho-McNeil-Janssen Structure:      

Janssen®, Division of Ortho-McNeil-Janssen Pharmaceuticals, Inc. McNeil Pediatrics™, Division of Ortho-McNeil-Janssen Pharmaceuticals, Inc. Ortho-McNeil™, Division of Ortho-McNeil-Janssen Pharmaceuticals, Inc. Ortho-McNeil Neurologics®, Division of Ortho-McNeil-Janssen Pharmaceuticals, Inc. Ortho Women's Health & Urology™, Division of Ortho-McNeil-Janssen Pharmaceuticals, Inc. PriCara®, Division of Ortho-McNeil-Janssen Pharmaceuticals, Inc.

Early stage pipeline and research falls under the prevue of J&J PRD as well as OMJPI. J&J PRD manages research and development from a number of downstream companies. J&J PRD is primarily made up of: J&J PRD Structure:     

Johnson & Johnson Pharmaceutical Research & Development, L.L.C., which focuses primarily on small molecules Centocor, center for development in biologics; ALZA, develops drug delivery technologies; Tibotec, focused on anti-virals; 3-Dimensional Pharmaceuticals, offering drug discovery capabilities for R&D productivity; 4



Scios, research in oral protein-based compounds

Prescription Products The division has experienced strong organic growth. Also J&J is well adapt at mergers and acquisitions as the divisions own history proves true (see appendices Mergers and acquisitions timeline). OMJPI is focused on scale and J&J PRD is centered on biopharmaceuticals and small molecules to drive discovery and development. Biotech and subsequent product development is fueled by the mergers and acquisitions teams. This is a very strong advantage for OMJPI and J&J PRD. Johnson & Johnson as a whole as well as the Pharmaceutical operating companies are too large and conservative to excel in new formula discovery without the aid of smaller firms. Introduction of new fast paced science happens via one of 2 avenues, either Mergers & Acquisitions or strategic partnerships. Both of which OMJPI and J&J proper have down to the preverbal science. Unfortunately the M&A team does not take advantage of the Biotechnology sector as often as it invests in large acquisitions. J&J cooperate did invest over five billion dollars into R&D; however the lion’s share of new product realization has come from M&A over the past five years. The majority of that investment was in five therapeutic areas. The current product portfolio is as follows: Neuroscience (Including Pain)  AXERT  INVEGA  RISPERDAL  AXERT  INVEGA  RISPERDAL

     

CONCERTA INVEGA® SUSTENNA RISPERDAL® CONSTA CONCERTA INVEGA® SUSTENNA RISPERDAL® CONSTA

Cardiovascular Disease and Metabolism  ACIPHEX®/PARIET  ACIPHEX®/PARIET  REOPRO  NATRECOR Immunology  SIMPONI Infectious Disease  DORIBAX  PREZISTA Oncology  DOXIL

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 STELARA

     

DURAGESIC REMINYL® /RAZADYNE TOPAMAX DURAGESIC REMINYL® /RAZADYNE TOPAMAX

 REGRANEX®

 REMICADE

 INTELENCE  LEVAQUIN  PROCRIT

 VELCADE

Research & Development (R&D) In the Pharmaceutical division several new products are either on file or will be filed with the FDA/ EU before year end 2010. The list below is managed by Ortho-McNeil-Janssen directly or via cooperative agreements with J&J PRD and other smaller operating companies within J&J. Late Stage Pipeline Central Nervous System 1. INVEGA (paliperidone ER OROS) Bipolar mania/ recurrence prevention FDA- Phase III EU -File withdrawn 12/08, Schizoaffective disorder FDA- Approved 7/09 EU- Filed 8/09 2. INVEGA SUSTENNA (paliperidone palmitate IM long acting injectable ) Schizophrenia FDAApproved 7/09 Phase III 3. RISPERDAL CONSTA (risperidone) Bipolar maintenance - long acting injectable FDA- Approved 5/09 EU- Filed 12/08 Deltoid injection FDA- Approved 10/08 EU- Approved 7/09 4. BAPINEUZUMAB Alzheimer's disease FDA- Phase III 5. COMFYDE (carisbamate) Epilepsy FDA Complete Response letter 8/09 EU- Filed 8/09 6. CONCERTA (OROS methylphenidate) Adult attention deficit hyperactivity disorder FDAApproved 6/08 EU- Phase III Gastrointestinal 1. REMICADE (infliximab) Pediatric Ulcerative Colitis FDA- Phase III Hematology 1. PROCRIT (epoetin alfa) Chronic Renal Function - extended dosing FDA- Phase III, Myelodysplastic Syndrome FDA- Phase III Infectious Disease 1. ZEFTERA/ZEVTERA (ceftobiprole) Complicated Skin and Skin Structure Infections FDA Complete Response letter 11/08 CHMP Decision on hold 2/09 2. Nosocomial Pneumonia FDA- Phase III EU- Phase III, Hospitalized community acquired pneumonia (CAP) FDA- Phase III EU- Phase III 3. DORIBAX (doripenem) Nosocomial Pneumonia FDA Complete Response letter 8/08 EUApproved 7/08 Oncology 1. DOXIL (doxorubicin HCl liposome injection) Breast Cancer (metastatic) FDA Complete Response letter 9/09 2. VELCADE (bortezomib) Non-Hodgkin's Lymphoma FDA- Phase III, Mantle Cell Lymphoma 1st line EU- Phase III, Subcutaneous formulation EU- Phase III 3. YONDELIS (trabectedin) Relapsed Ovarian Cancer FDA Complete Response letter 9/09 4. ABIRATERONE Prostate cancer (chemo-refractory and chemo naïve) FDA -Phase III EU- Phase III 5. DACOGEN (decitabine) for Injection Myelodysplastic Syndromes (MDS) EU- Phase III Acute Myeloid Leukemia EU- Phase III 6

Anti-Viral 1. TELAPREVIR Chronic hepatitis C virus (HCV) infection EU- Phase III 2. TMC278 NNRTI HIV/AIDS treatment-naive patients FDA- Phase III EU- Phase III Pain Management 1. NUCYNTA ER (tapentadol ) Moderate to severe chronic pain (Extended Release formulation) FDA- Phase III Cardiovascular/Metabolism 1. RIVAROXABAN VTE Prophylaxis (Prevention of venous thromboembolism in hip and knee replacement surgery) FDA Complete Response letter 5/09 a. Stroke prevention in atrial fibrillation FDA- Phase III b. VTE treatment FDA- Phase III c. Acute Coronary Syndrome FDA- Phase III d. Medically Ill FDA- Phase II 2. CANAGLIFLOZIN Type 2 diabetes FDA- Phase III EU- Phase III Sexual Health 1. PRILIGY (dapoxetine) Premature ejaculation FDA non-approvable letter 10/05 EU- Approved 2/09

Marketing & Sales Summary Statement As a unified organization across the member divisions that make up Ortho-McNeil-Janssen the sales and marketing organization is chartered with Business Operations, Sales Measurement and Compensation and Sales Analytics. The organizational structure within the group is unique. The Sales and Marketing division is funded as one entity but the reporting structures are unified at the vice president level. Across both Sales and Marketing there are common goals: 1. To provide counsel to business partners based on clear and objective analysis of marketplace data, guided by the best interests of the business. 2. To improve organizational effectiveness and productivity by adopting innovative solutions, leveraging best practices, reducing inefficiency, and implementing continuous process/program improvements. 3. To train and develop both our team and our business partners to maximize performance, and attain aspirations. Clearly some objectives are more focused on sales vs. marketing however it is unique that common goals and objectives span the departments. The unified Sales and Marketing teams demonstrate a economy of scale for all of the Pharmaceutical products. This division is regional however spanning the

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globe with multiple instances to best cater to the diverse needs of international products and campaigns. As stated earlier overall sales for Johnson & Johnson numbered in the $63.7 billion dollar range. Pharmaceutical sales figures are in the $24.6 billion dollar range with a total adjusted decrease of 1.2 percent over the previous year. Recent Advancements The gross sales figure of 24.6 billion dollars was supported by a few major players. Overall International sales experienced an increase of 5.1% (adjusted for currency exchange, see “Financials“ below) for a gross sales achievement 9.7 billion dollars in 2008. Remicade experienced a double digit increase in sales (domestic and International) to reach 12.7% improvement over the previous year. Topamax had exceptional gains as well, in 2008 the epilepsy drug improved over the preceding year by 11.3% to gross 2.7 billion dollars in sales. Surprisingly the off patent Adult Attention Deficit Disorder (ADHD) Concerta achieved a sales record of 1.2 billion dollars in 2008. The increase was 21.3% over the previous year’s sales figures. 155 million dollars in accrued sales figures were attributed to the drug in 2008. Smaller success stories exist as well for Johnson & Johnson Pharmaceuticals. Under the category of “Other Pharmaceutical” fall Velicade, Prezista and Invega all of which contributed to the categories growth of 7.2 billion dollars representing a 10.9% increase over 2007. A breakdown by product/ sector can be seen below.

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Downturns and Challenges Although the Phase III pipeline looks promising, getting a product approved from the FDA is never a sure thing. The problem is that there are several blockbuster drugs either off patent or close to losing their patent and this fact is a sure thing. Phase I & II data is sketchy from public sources which is an indication that the pharmaceutical sector for J&J may be in for some tough times in the next couple of years. The following is a list of obstacles J&J OMJPI and J&J PRD must overcome: Issues:  Procit – Market declining domestically  Ionsys - never launched, R&D money invested 3 generations of product  Ceftibiprole - never launched, research level discontinuance  Levaquin – Generic Threat  Doripenum - lost bid for national contract  Aciphex – Market saturated.  Ultram ER – Generic Threat  Nucynta – Threat from Vicodin less expensive to customer  Risperdal - Generic Threat  Duragesic - Generic Threat  Topamax - Generic Threat  Ortho Tricyclen - Generic Threat in near future  Rivoroxiban - No FDA approval to date, sales channel prepped and waiting

Not all sales figures had great gains for Johnson and Johnson in 2008. Procrit, one of the firms mainstays for profitability had an overall decrease in sales revenue by 14.7% over 2007 sales. This erosion was due to a declining market in the US. Risperdal lost its market exclusivity on June 29, 2008 and fell victim to aggressive generic threats, decrease its overall sales returns by 37.8% to yield only 2.1 billion in 2008. The rapid decline was a landmark event for J&J, losses due to Generic Threat are common but more than 35% decrease in sales over 6 months was a first for the firm. A good number of J&J blockbuster drugs are currently facing generic competition or will in the near future and J&J has mainstay drugs in the pipeline to replace the lost revenue but not a clear blockbuster. Of note is Topamax. Sales for Topamax were high and increased in 2008, now that the drug will be exposed to Generic Threat the decline is expected to be harsh and quick as was the case for Risperdal (see above). It is going to be interesting how the company handles this situation. The bad news does not end with Topamax, although Concerta experienced record sales in 2008 it has been off patent for 4 years without generic competition. Recently 2 ANDA filings have been made to compete with Concerta. Sales figure for 2009 are expected to plummet due to the almost certain Generic Threat. In addition Levaquin/Floxin decreased in sales of 3.3%, Aciphex/Pariet dropped 14.7% and finally Duragesic had lost 11% sales to Generic Threats. 9

Financials Growth Johnson and Johnson as an entity showed sales growth of 4.3% yielding 63.7 billion dollars as stated previously. The earnings growth for the company was 6.8% and adjusted earnings per share were 9.6%. On the surface this would seem strong and even uncommon but it is important to keep in mind the 10 billion dollar Stock Repurchase Program which led to the adjusted EPS value exceeding growth by slightly less than 3%. Also of significant interest was the firm’s ability to drive down overall operations costs to have an additional positive effect on operational profit. In 2008 operational profit on the whole was 17.3 billion dollars or 27.1 percent to sales. This represents an increase over 2007 which reported 15.9 billion dollars or 26 percent to sales.

Pharmaceutical Sector Specifics The Pharmaceutical segment had a good year in operational profit internal to J&J. The operating companies were able to achieve an increase of segment operating profit by 16.3%. The more relevant value was an increase of 31% in “percent to sales” for the firm. The 31% percent to sales value rivals J&J Medical Device sector which is always strong but not the firm’s leader. However in years past the Pharmaceutical segment lead the “percent to segment sales” race by a wide margin within Johnson & Johnson. 2008 represents the first year that Medical Devices and Pharmaceuticals reported near equal results with Medical devices squeaking out a lead. The results are attributed to massive restructuring within the OMJPI as seen below.

On the whole however, the sector experienced a decrease over 2007 in the general marketplace. Earlier it was discussed that the decrease was adjusted to 1.2% lose in 2008. The key point is “adjusted”. Actual sales of 24.6 billion dollars in this sector represent 3.6% reduction over 2007. The “adjustment” is the result of “Currency Exchange”. Due to the weak dollar in 2008 and the strong international sales of J&J products in this sector an unforeseen gain was realized. The gains made in currency exchange for domestically manufactured products as well as those manufacturing facilities that report in US dollars represented and additional

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increase in value of 2.4% lessoning the impact of sales lost in 2008. This situation unfortunately is not sustainable and cannot be forecasted for 2009.

Functional Analysis Additional Strategic Issues: How to maintain sustainable success and secure its future as the leader in the Pharmaceutical industry while:  Restructuring the organization to increase cost and revenue transparency and to reduce fragmentation in decision processes.  Focusing on continuing strategic cost savings in terms of creating global alliances.  Combating exhaustion, change-tiredness, or even organizational burnout in an industry that requires maintaining constant change momentum.

Symptoms of business issues - Functional Analysis 1. 2. 3. 4. 5. 6. 7. 8. 9.

Not agile in relation to smaller firms Organizational structure very restrictive due to the parent companies size Loss of bottom-up development Customer service declining Too many partners and internal competitors Employee turnover Not promoting from within, reduced incentive buy vs. build issues May have expanded too far, more than divisional culture could handle Authority Vs. responsibility, Operating Companies do not feel empowered, often Opco management need to get authorization from corporate headquarters 10. Narrow Marketing Channels, need to embrace DTC Internet opportunities 11. Failures of acceptance other Opco technologies from one division to another 12. Weak Pipeline, Poor sales due to Generic Threats

Functional Analysis

Management Functions/

Planning

Organization

Control

1, 8

2, 3, 9

2, 3, 4, 9

Business Functions Top Management

Marketing

11

1

10

Finances

1

Production/ Sourcing

12

R&D/ Technology

11

Human Resources

3, 7

5

11

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SWOT analysis Johnson & Johnson Strengths Strong presence in oncology market, low competition to date Financial strength, A++ rating Strong brand value Johnson & Johnson Weaknesses Few novel products Underperformance of pharmaceutical division Huge company moves to slow Johnson & Johnson Opportunities Smooth Acquisitions & Integrations Growing global market Approval of Perzista, Doxil, Velicade and other Phase II emerging drugs Johnson & Johnson Threats Government Regulation, i.e. Health Care Bill Mergers and acquisitions costs, time Increased competition due to patent expiry Generic competition to Topamax and other mainstay drugs

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5

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SWOT Analysis Template State what you are assessing here Johnson & Johnson Pharmaceuticals (Many criteria can apply to more than one quadrant. Identify criteria appropriate to a SWOT situation.)

Strengths

1. Strong presence in oncology market, low competition to date 2. Financial strength, A++ rating 3. Strong brand value

Opportunities

1. New markets developing in wake of consolidations 2. Overseas expansion 3. Form partnerships with overseas suppliers 4. Use of newer technologies - such as the Internet 5. Smooth Acquisitions & Integrations 6. Growing global market 7. Approval of Perzista, Doxil, Velicade

Weaknesses

1. Organizational structure very restrictive 2. Few novel products 3. Underperformance of pharmaceutical division 4. Huge company moves to slow

Threats

1. Government Regulation, i.e. Health Care Bill 2. Mergers and acquisitions costs, time 3. Increased competition due to patent expiry 4. Generic competition to Topamax and other mainstay drugs

Recommendations At this juncture it is recommend that the firm diversify its product base with new mergers and acquisitions Focus on a complimentary product set and use the existing distribution and sales channels to market and deliver these products. The current pipeline is in serious trouble, high levels of Generic Threat and with very few phase I and II drugs on the radar. The firm is financially strong and can acquire low cost debt easily. Leveraging this asset would seem the best choice. Due to the amount of time and dollars that associate research and development it is recommend that top level management begin to search out other firms that are receptive to a full or partial buyout. Care is to be exercised in regards to corporate culture. J&J has a complex organizational structure that exudes a lot of product pride. It would be difficult to succeed in the integration of other businesses and products that do not come from the same type of corporate culture.

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In addition it is recommended that the firm engage in a new marketing relationship. The existing relationship does not appear to be conditioned to new emerging channels, (partially due to the long standing corporate culture). With the addition of new products the firm will have to market these more heavily than they are accustomed in non-traditional channels. In addition LATA and the Middle East should be more heavily targeted. On the financial front It is recommend that a more aggressive corporate investment policy and perhaps a new engagement with new advisory firms. The current financial operations management is very good however financial investment is currently lacking growth funds. The business treats market investments as a means to hold short term cash and not as growth vehicles.

Implementation Johnson & Johnson Pharmaceuticals (both OMJPI and J&J PRD) will need to leverage multiple tiers in order to implement a change throughout its vast organization. The objectives of this shift in marketing and financial expansion are: Corporate Management Diversify products & begin new expansion/ acquisition policy –Due to the time involved in discovery and the firms unyielding size It would be difficult to nurture new products other than niche offerings. To attempt to do so would most likely result in the demise of the acquired product. It is recommended that OMJPI & J&J PRD build upon its Phase III product suite instead of its aging products. In order to rebuild its pipeline the firm should acquire and partner with smaller more agile firms. Several companion products are uniquely aligned with OMJPI and J&J PRD especially in the Biotech field. Small development shops have the ability to move quickly without the overhead that Johnson & Johnson operations bring to the table. OMJPI and PRD should change focus to establish scale and managing emerging products and away from pure discovery. It’s better to “Buy than Build” at this juncture. Marketing Management: Become swift in marketing – The unified marketing division within Ortho-McNeil-Janssen is very familiar with the marketing needs and abilities within OMJPI and J&J PRD. The firm spends a good part of operating cash on international marketing and the results were notable. A review of the capabilities and new marketing needs are in order domestically and should be aided by an outside marketing firm. The new products that mergers and acquisitions will bring into the catalogue will require a fresh approach to marketing to stimulate sales. Expected margin from sales of existing products as well as mature additions should remain within the corporate sales objectives. Financial Management Rework financial investments increase expansions – J&J would benefit greatly from a new engagement with an advisory firm more aligned with growth investment. It is strongly recommended that an RFP be developed in order to begin interviewing candidate firms. Techcaliber incorporated is a market leader in RFP development, solicitation and negotiation of vendor business agreements. First steps toward Financial RFP development should include Contacting this firm for aid in this task.

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Appendices Newly Approved and Released products (2008): DOXIL® (doxorubicin HCl liposome injection) in combination with VELCADE

Once monthly INVEGA® SUSTENNA™ (paliperidone palmitate) Extended-Release

INTELENCE™ (etravirine)

SIMPONI™ (golimumab)

STELARA™ (ustekinumab)

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Values:

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References The Johnson & Johnson Corporation Annual Report 2008 http://www.investor.jnj.com/investor-relations.cfmAnnual Report Johnson & Johnson Ward & Railroad Ave, New Brunswick, NJ 08901 Ortho-McNeil-Janssen http://www.ortho-mcneilpharmaceutical.com/ortho-mcneilpharmaceutical/about/home.html Ortho-McNeil Janssen Scientific Affairs, LLC Customer Communications Center 1125 Trenton-Harbourton Road P.O. Box 200 Titusville, NJ 08560-200

Yahoo Finance! HTTP://www.finance.yahoo.com/ J&J CO - Johnson & Johnson (NYSE: JNJ) (http://www.investor.jnj.com/investor-relations.cfm)

Techcaliber Consulting llc. http://www.techcaliber.com/contact.cfm TechCaliber Consulting, LLC 2001 L Street NW, Suite 900 Washington, D.C. 20036 Telephone: (202) 969-7870 Fax: (202) 223-0833

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