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
January 3, 2016
. 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.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
During the fiscal first quarter of 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-09 Compensation - Stock Compensation: Improvements to Employee Share Based Payment Accounting. The amendments in the update are effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. During the fiscal second quarter of 2016, the Company elected to early adopt this standard. The update requires the following changes to presentation of the financial statements:
|
|
•
|
All excess tax benefits and deficiencies to be recognized as a reduction or an increase to the provision for taxes on income. Previously, the Company recorded these benefits directly to Retained Earnings. The tax benefit for the Company was
$47 million
and
$335 million
for the fiscal third quarter and fiscal nine months ended for 2016, respectively. The standard does not permit retroactive presentation of this benefit to prior fiscal years on the Consolidated Statement of Earnings.
|
|
|
•
|
The tax benefit or deficiency is required to be classified and presented as a cash flow to/from operating activities. It was previously required to be presented as a cash flow to/from financing activities on the Consolidated Statement of Cash Flows. As permitted in the standard, the Company has elected to adopt this reclassification on a prospective basis and therefore prior fiscal years for the Consolidated Statement of Cash Flows have not been recast for this provision.
|
|
|
•
|
Clarifies that all cash payments made to taxing authorities on employees’ share-based compensation should be classified as a cash outflow from financing activities. This reclassification is required to be recast retrospectively. As a result, for the fiscal nine months of 2016,
$264 million
was classified as a cash outflow from financing activities and for the fiscal nine months of 2015,
$287 million
of cash outflow was reclassified from an operating activity to a financing activity (Proceeds from the exercise of stock options/employee withholding tax on stock awards, net).
|
|
|
•
|
In the diluted net earnings per share calculation, when applying the treasury stock method for shares that could be repurchased, the assumed proceeds no longer include the amount of excess tax benefit. This did not have a material impact on the Company's diluted net earnings per share calculation.
|
During the fiscal third quarter of 2015, the FASB issued Accounting Standards Update 2015-16 Business Combinations: 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 is 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 did not have a material impact on the Company’s consolidated financial statements.
During the fiscal second quarter of 2015, the FASB issued Accounting Standards 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 is 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 did not have a material impact on the presentation of the Company’s financial position.
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 became effective for all annual periods and interim reporting periods beginning after December 15, 2015. The adoption of this standard did not have a material impact on the presentation of the Company's consolidated financial statements.
Recently Issued Accounting Standards
Not Adopted as of October 2, 2016
In October 2016, the FASB issued Accounting Standards Update 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This update removes the current exception in US GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted and should be in the first interim period if an entity issues interim financial statements. The Company is currently assessing the impact of the future adoption of this standard on its consolidated financial statements.
During the fiscal third quarter of 2016, the FASB issued Accounting Standards Update 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update addresses whether to present certain specific cash flow items as operating, investing or financing activities. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing the impact of the future adoption of this standard on its consolidated Statements of Cash Flows.
During the fiscal first quarter of 2016, the FASB issued Accounting Standards Update 2016-07 Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments in the update eliminate the requirement that when an investment qualifies for the use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step by step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the application of the equity method. Earlier adoption is permitted for any entity in any interim or annual period. The adoption of this standard is not expected to have a material impact on the presentation of the Company's consolidated financial statements.
During the fiscal first quarter of 2016, the FASB issued Accounting Standards Update 2016-02 Leases (Topic 842). This update requires the recognition of lease assets and lease liabilities on the balance sheet for all lease obligations and disclosing key information about leasing arrangements. This update requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous generally accepted accounting principles. This update will be effective for the Company for all annual and interim periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company is currently assessing the impact of the future adoption of this standard on its financial statements.
During the fiscal first quarter of 2016, the FASB issued Accounting Standards Update 2016-01 Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities to be measured at fair value with changes in the fair value recognized through net income. The standard amends financial reporting by providing relevant information about an entity’s equity investments and reducing the number of items that are recognized in other comprehensive income. This update will be effective for the Company for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is unable to estimate the impact of the future adoption of this standard on its financial statements as it will depend on the equity investments as of the adoption date.
During the fiscal second quarter of 2015, the FASB issued Accounting Standards 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. 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 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 to be adopted by all public companies for all annual periods and interim reporting periods beginning after December 15, 2017. During the fiscal first quarter of 2016, the FASB issued additional guidance and clarification relating to Identifying Performance Obligations, Licensing, and Principal versus Agent Considerations. During the second quarter of 2016, the FASB issued additional guidance and clarification relating to assessing collectability, presentation of sales taxes, noncash consideration, and contract modifications & completed contracts at transition. Early adoption of this standard is permitted but not before the original effective date for all annual periods and interim reporting periods 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 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 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 ending after December 15, 2016. This standard is not expected to have any impact on current disclosures in the financial statements.
NOTE 2 — INVENTORIES
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
October 2, 2016
|
|
January 3, 2016
|
Raw materials and supplies
|
|
$
|
974
|
|
|
936
|
|
Goods in process
|
|
1,859
|
|
|
2,241
|
|
Finished goods
|
|
5,655
|
|
|
4,876
|
|
Total inventories
|
|
$
|
8,488
|
|
|
8,053
|
|
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
2015
. 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)
|
|
October 2, 2016
|
|
January 3, 2016
|
Intangible assets with definite lives:
|
|
|
|
|
Patents and trademarks — gross
|
|
$
|
10,815
|
|
|
8,299
|
|
Less accumulated amortization
|
|
5,017
|
|
|
4,745
|
|
Patents and trademarks — net
|
|
5,798
|
|
|
3,554
|
|
Customer relationships and other intangibles — gross
|
|
17,830
|
|
|
17,583
|
|
Less accumulated amortization
|
|
6,411
|
|
|
5,816
|
|
Customer relationships and other intangibles — net
|
|
11,419
|
|
|
11,767
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
Trademarks
|
|
7,042
|
|
|
7,023
|
|
Purchased in-process research and development
|
|
3,383
|
|
|
3,420
|
|
Total intangible assets with indefinite lives
|
|
10,425
|
|
|
10,443
|
|
Total intangible assets — net
|
|
$
|
27,642
|
|
|
25,764
|
|
Goodwill as of
October 2, 2016
was allocated by segment of business as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
Consumer
|
|
Pharm
|
|
Med Devices
|
|
Total
|
Goodwill, net at January 3, 2016
|
|
$
|
7,240
|
|
|
2,889
|
|
|
11,500
|
|
|
21,629
|
|
Goodwill, related to acquisitions
|
|
1,332
|
|
|
—
|
|
|
180
|
|
|
1,512
|
|
Goodwill, related to divestitures
|
|
(24
|
)
|
|
(10
|
)
|
|
—
|
|
|
(34
|
)
|
Currency translation/Other
|
|
27
|
|
|
15
|
|
|
22
|
|
|
64
|
|
Goodwill, net at October 2, 2016
|
|
$
|
8,575
|
|
|
2,894
|
|
|
11,702
|
|
|
23,171
|
|
The weighted average amortization periods for patents and trademarks and customer relationships and other intangible assets are
19
years and
24
years, respectively. The amortization expense of amortizable intangible assets included in cost of products sold was
$895 million
and
$912 million
for the fiscal nine months ended
October 2, 2016
and
September 27, 2015
, respectively. The estimated amortization expense for the five succeeding years approximates
$1.3 billion
, before tax, per year. Intangible asset write-downs are included in Other (income) expense, net.
The primary driver of the increase to intangible assets and goodwill is the Vogue International LLC acquisition in the fiscal third quarter of 2016, which resulted in the recording of
$2.3 billion
to intangible assets and
$1.1 billion
to goodwill. The intangible assets and goodwill amounts related to the Vogue acquisition are based on the preliminary purchase price allocation. See Note 10 to the Consolidated Financial Statements for additional details on the Vogue acquisition.
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.
The Company also uses equity collar contracts to manage exposure to market risk associated with certain equity investments.
All three 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 designated as fair value hedges. The Company uses 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 (excluding equity collar contracts) by either the Company or the counter-party. For equity collar contracts, the Company pledged the underlying hedged marketable equity securities to the counter-party as collateral. On an ongoing basis, the Company monitors counter-party 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 investment grade credit rating. Refer to the table on significant financial assets and liabilities measured at fair value contained in this footnote for receivables and payables with these commercial institutions. As of
October 2, 2016
, the Company had notional amounts outstanding for forward foreign exchange contracts, cross currency interest rate swaps, interest rate swaps and equity collar contracts of
$35.0 billion
,
$2.3 billion
,
$2.2 billion
, and
$0.4 billion
respectively.
All derivative instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.
The designation as a cash flow hedge is made at the entrance date of the derivative contract. At inception, all derivatives are expected to be highly effective. Changes in the fair value of a derivative that is designated as a cash flow hedge and is highly effective are recorded in accumulated other comprehensive income until the underlying transaction affects earnings, and are then reclassified to earnings in the same account as the hedged transaction. Gains 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. 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, cross currency interest rate swaps, net investment hedges and equity collar contracts. 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 was not material.
During the fiscal second quarter of 2016, the Company designated its Euro denominated notes issued in May 2016 with due dates ranging from 2022 to 2035 as a net investment hedge of the Company's investments in certain of its international subsidiaries that use the Euro as their functional currency in order to reduce the volatility caused by changes in exchange rates.
During the fiscal third quarter of 2016, the change in the carrying value due to remeasurement of these Euro notes resulted in a
$76 million
pretax gain reflected in foreign currency translation adjustment, within the Consolidated Statements of Comprehensive Income.
As of
October 2, 2016
, the balance of deferred net losses on derivatives included in accumulated other comprehensive income was
$364 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, net investment hedges and equity collar 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.
The following table is a summary of the activity related to derivatives designated as cash flow hedges for the fiscal
third
quarters in
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
Sales to customers
(3)
|
|
$
|
(12
|
)
|
|
3
|
|
|
(8
|
)
|
|
(24
|
)
|
|
(1
|
)
|
|
(3
|
)
|
Cost of products sold
(3)
|
|
(4
|
)
|
|
222
|
|
|
13
|
|
|
(34
|
)
|
|
(4
|
)
|
|
1
|
|
Research and development expense
(3)
|
|
(5
|
)
|
|
(10
|
)
|
|
(2
|
)
|
|
7
|
|
|
1
|
|
|
—
|
|
Interest (income)/Interest expense, net
(4)
|
|
29
|
|
|
(13
|
)
|
|
12
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Other (income) expense, net
(3) (5)
|
|
(4
|
)
|
|
(42
|
)
|
|
(12
|
)
|
|
12
|
|
|
—
|
|
|
(1
|
)
|
Total
|
|
$
|
4
|
|
|
160
|
|
|
3
|
|
|
(38
|
)
|
|
(4
|
)
|
|
(3
|
)
|
The following table is a summary of the activity related to derivatives designated as cash flow hedges for the fiscal nine months in
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
Sales to customers
(3)
|
|
$
|
(39
|
)
|
|
(52
|
)
|
|
(29
|
)
|
|
(95
|
)
|
|
(1
|
)
|
|
(5
|
)
|
Cost of products sold
(3)
|
|
(226
|
)
|
|
106
|
|
|
5
|
|
|
82
|
|
|
(10
|
)
|
|
15
|
|
Research and development expense
(3)
|
|
(100
|
)
|
|
(13
|
)
|
|
(98
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Interest (income)/Interest expense, net
(4)
|
|
38
|
|
|
(42
|
)
|
|
27
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Other (income) expense, net
(3) (5)
|
|
(110
|
)
|
|
27
|
|
|
(14
|
)
|
|
54
|
|
|
(3
|
)
|
|
—
|
|
Total
|
|
$
|
(437
|
)
|
|
26
|
|
|
(109
|
)
|
|
37
|
|
|
(14
|
)
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
(5) Includes equity collar contracts
For the fiscal
third
quarters ended
October 2, 2016
and
September 27, 2015
, a gain of
$35 million
and a loss of
$8 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
October 2, 2016
and
September 27, 2015
, a loss of
$6 million
and a gain of
$32 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 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
October 2, 2016
and
January 3, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2016
|
|
|
|
January 3, 2016
|
(Dollars in Millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Total
(1)
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
(7)
|
|
$
|
—
|
|
|
222
|
|
|
—
|
|
|
222
|
|
|
452
|
|
Interest rate contracts
(2)(4)(7)
|
|
—
|
|
|
50
|
|
|
—
|
|
|
50
|
|
|
28
|
|
Total
|
|
—
|
|
|
272
|
|
|
—
|
|
|
272
|
|
|
480
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
(8)
|
|
—
|
|
|
542
|
|
|
—
|
|
|
542
|
|
|
358
|
|
Interest rate contracts
(3)(4)(8)
|
|
—
|
|
|
309
|
|
|
—
|
|
|
309
|
|
|
241
|
|
Equity collar contracts
(8)(9)
|
|
—
|
|
|
95
|
|
|
—
|
|
|
95
|
|
|
—
|
|
Total
|
|
—
|
|
|
946
|
|
|
—
|
|
|
946
|
|
|
599
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
(7)
|
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
|
33
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Forward foreign exchange contracts
(8)
|
|
—
|
|
|
33
|
|
|
—
|
|
|
33
|
|
|
41
|
|
Available For Sale Other Investments:
|
|
|
|
|
|
|
|
|
|
|
Equity investments
(5)
|
|
1,332
|
|
|
—
|
|
|
—
|
|
|
1,332
|
|
|
1,494
|
|
Debt securities
(6)
|
|
$
|
—
|
|
|
12,237
|
|
|
—
|
|
|
12,237
|
|
|
8,316
|
|
|
|
(1)
|
2015 assets and liabilities are all classified as Level 2 with the exception of equity investments of
$1,494 million
, which are classified as Level 1.
|
|
|
(2)
|
Includes
$35 million
and
$20 million
of non-current other assets for
October 2, 2016
and January 3, 2016, respectively.
|
|
|
(3)
|
Includes
$309 million
and
$239 million
of non-current other liabilities for
October 2, 2016
and January 3, 2016, respectively.
|
|
|
(4)
|
Includes cross currency interest rate swaps and interest rate swaps.
|
|
|
(5)
|
Classified as non-current other assets with the exception of
$345 million
of current other assets for
October 2, 2016
. The carrying amount of the equity investments were
$544 million
and
$528 million
as of
October 2, 2016
and January 3, 2016, respectively. The unrealized gains were
$802 million
and
$979 million
as of
October 2, 2016
and January 3, 2016, respectively. The unrealized losses were
$14 million
and
$13 million
as of
October 2, 2016
and January 3, 2016, respectively.
|
|
|
(6)
|
Classified as current marketable securities.
|
|
|
(7)
|
Classified as other current assets.
|
|
|
(8)
|
Classified as accounts payable.
|
|
|
(9)
|
Includes
$16 million
of non-current other liabilities for
October 2, 2016
.
|
The Company's cash, cash equivalents and current marketable securities as of
October 2, 2016
comprised:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2016
|
(Dollars in Millions)
|
Carrying Amount
|
|
Unrecognized Gain
|
|
Unrecognized Loss
|
|
Estimated Fair Value
|
|
Cash & Cash Equivalents
|
|
Current Marketable Securities
|
Cash
|
$
|
1,971
|
|
|
—
|
|
|
—
|
|
|
1,971
|
|
|
1,971
|
|
|
|
U.S. Gov't Securities
(1)
|
10,498
|
|
|
1
|
|
|
—
|
|
|
10,499
|
|
|
6,997
|
|
|
3,501
|
|
Other Sovereign Securities
(1)
|
3,385
|
|
|
—
|
|
|
—
|
|
|
3,385
|
|
|
952
|
|
|
2,433
|
|
U.S. Reverse repurchase agreements
(1)
|
5,883
|
|
|
—
|
|
|
—
|
|
|
5,883
|
|
|
4,882
|
|
|
1,001
|
|
Other Reverse repurchase agreements
(1)
|
96
|
|
|
—
|
|
|
—
|
|
|
96
|
|
|
96
|
|
|
|
Corporate debt securities
(1)
|
3,501
|
|
|
1
|
|
|
—
|
|
|
3,502
|
|
|
790
|
|
|
2,711
|
|
Money market funds
|
1,448
|
|
|
—
|
|
|
—
|
|
|
1,448
|
|
|
1,448
|
|
|
|
Time deposits
(1)
|
1,069
|
|
|
—
|
|
|
—
|
|
|
1,069
|
|
|
1,069
|
|
|
|
Subtotal
|
27,851
|
|
|
2
|
|
|
—
|
|
|
27,853
|
|
|
18,205
|
|
|
9,646
|
|
|
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
|
|
|
|
|
Gov't securities
|
10,235
|
|
|
120
|
|
|
(1
|
)
|
|
10,354
|
|
|
—
|
|
|
10,354
|
|
Other Sovereign Securities
|
91
|
|
|
—
|
|
|
—
|
|
|
91
|
|
|
—
|
|
|
91
|
|
Corporate debt securities
|
1,782
|
|
|
11
|
|
|
(1
|
)
|
|
1,792
|
|
|
—
|
|
|
1,792
|
|
Equity investments
|
50
|
|
|
314
|
|
|
(19
|
)
|
|
345
|
|
|
—
|
|
|
345
|
|
Subtotal Available for Sale
(2)
|
$
|
12,158
|
|
|
445
|
|
|
(21
|
)
|
|
12,582
|
|
|
—
|
|
|
12,582
|
|
Total cash, cash equivalents and current marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
18,205
|
|
|
22,228
|
|
(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 January 3, 2016.
The contractual maturities of the available for sale securities at October 2, 2016 are as follows:
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
Cost Basis
|
|
Fair Value
|
Due within one year
|
|
$
|
475
|
|
|
475
|
|
Due after one year through five years
|
|
11,445
|
|
|
11,575
|
|
Due after five years through ten years
|
|
188
|
|
|
187
|
|
Total debt securities
|
|
$
|
12,108
|
|
|
12,237
|
|
Financial Instruments not measured at Fair Value:
The following financial liabilities are held at carrying amount on the consolidated balance sheet as of
October 2, 2016
:
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
Current Debt
|
|
$
|
3,443
|
|
|
3,443
|
|
|
|
|
|
|
Non-Current Debt
|
|
|
|
|
1.125% Notes due 2017
|
|
703
|
|
|
705
|
|
5.15% Debentures due 2018
|
|
899
|
|
|
958
|
|
1.65% Notes due 2018
|
|
608
|
|
|
616
|
|
4.75% Notes due 2019 (1B Euro 1.1198)
|
|
1,115
|
|
|
1,287
|
|
1.875% Notes due 2019
|
|
511
|
|
|
524
|
|
0.89% Notes due 2019
|
|
299
|
|
|
300
|
|
1.125% Notes due 2019
|
|
699
|
|
|
700
|
|
3% Zero Coupon Convertible Subordinated Debentures due in 2020
|
|
94
|
|
|
152
|
|
2.95% Debentures due 2020
|
|
545
|
|
|
578
|
|
3.55% Notes due 2021
|
|
447
|
|
|
491
|
|
2.45% Notes due 2021
|
|
349
|
|
|
367
|
|
1.65% Notes due 2021
|
|
997
|
|
|
1,013
|
|
0.250% Notes due 2022 (1B Euro 1.1198)
|
|
1,116
|
|
|
1,132
|
|
6.73% Debentures due 2023
|
|
249
|
|
|
335
|
|
3.375% Notes due 2023
|
|
807
|
|
|
875
|
|
2.05% Notes due 2023
|
|
497
|
|
|
507
|
|
0.650% Notes due 2024 (750MM Euro 1.1198)
|
|
834
|
|
|
863
|
|
5.50% Notes due 2024 (500 MM GBP 1.3000)
|
|
643
|
|
|
868
|
|
2.45% Notes due 2026
|
|
1,989
|
|
|
2,059
|
|
1.150% Notes due 2028 (750MM Euro 1.1198)
|
|
830
|
|
|
886
|
|
6.95% Notes due 2029
|
|
296
|
|
|
440
|
|
4.95% Debentures due 2033
|
|
497
|
|
|
635
|
|
4.375% Notes due 2033
|
|
857
|
|
|
1,026
|
|
1.650% Notes due 2035 (1.5B Euro 1.1198)
|
|
1,660
|
|
|
1,884
|
|
3.55% Notes due 2036
|
|
987
|
|
|
1,098
|
|
5.95% Notes due 2037
|
|
991
|
|
|
1,457
|
|
5.85% Debentures due 2038
|
|
695
|
|
|
1,016
|
|
4.50% Debentures due 2040
|
|
537
|
|
|
674
|
|
4.85% Notes due 2041
|
|
296
|
|
|
390
|
|
4.50% Notes due 2043
|
|
495
|
|
|
624
|
|
3.70% Notes due 2046
|
|
1,970
|
|
|
2,213
|
|
Other
|
|
34
|
|
|
34
|
|
Total Non-Current Debt
|
|
$
|
23,546
|
|
|
26,707
|
|
The weighted average effective interest rate on non-current debt is
3.14%
.
The excess of the estimated fair value over the carrying value of debt was
$1.7 billion
at January 3, 2016.
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
2016
and
2015
were
17.8%
and
21.0%
, respectively. In the fiscal nine months of 2016, the Company had higher income in lower tax jurisdictions relative to higher tax jurisdictions as compared to 2015, which decreased the effective tax rate by approximately
0.8%
. As described in Note 1, the Company has adopted a new accounting standard for the reporting of tax benefits on share-based compensation. The adoption of this new standard reduced the tax rate for the first nine months of fiscal 2016 by approximately
2.0%
versus 2015. The remainder of the change in the effective tax rate from prior year was primarily related to the U.S. Research & Development tax credit and the Controlled Foreign Corporation look-through provisions, which were not enacted into law until the fiscal fourth quarter of 2015, and the settlement of several uncertain tax positions in international jurisdictions.
As of
October 2, 2016
, the Company had approximately
$3.1 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 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
2016
and
2015
include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Third Quarters Ended
|
|
|
Retirement Plans
|
|
Other Benefit Plans
|
(Dollars in Millions)
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
Service cost
|
|
$
|
224
|
|
|
247
|
|
|
56
|
|
|
64
|
|
Interest cost
|
|
232
|
|
|
246
|
|
|
39
|
|
|
46
|
|
Expected return on plan assets
|
|
(490
|
)
|
|
(451
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Amortization of prior service cost/(credit)
|
|
2
|
|
|
—
|
|
|
(9
|
)
|
|
(8
|
)
|
Recognized actuarial losses
|
|
123
|
|
|
186
|
|
|
33
|
|
|
50
|
|
Curtailments and settlements
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
97
|
|
|
228
|
|
|
118
|
|
|
150
|
|
Net periodic benefit cost for the Company’s defined benefit retirement plans and other benefit plans for the
fiscal nine months
of 2016 and 2015 include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Nine Months Ended
|
|
|
Retirement Plans
|
|
Other Benefit Plans
|
(Dollars in Millions)
|
|
October 2, 2016
|
|
September 27, 2015
|
|
October 2, 2016
|
|
September 27, 2015
|
Service cost
|
|
$
|
676
|
|
|
744
|
|
|
166
|
|
|
193
|
|
Interest cost
|
|
698
|
|
|
743
|
|
|
118
|
|
|
139
|
|
Expected return on plan assets
|
|
(1,475
|
)
|
|
(1,361
|
)
|
|
(4
|
)
|
|
(5
|
)
|
Amortization of prior service cost/(credit)
|
|
2
|
|
|
1
|
|
|
(25
|
)
|
|
(25
|
)
|
Recognized actuarial losses
|
|
371
|
|
|
560
|
|
|
101
|
|
|
150
|
|
Curtailments and settlements
|
|
11
|
|
|
4
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
283
|
|
|
691
|
|
|
356
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
Company Contributions
For the fiscal nine months ended
October 2, 2016
, the Company contributed
$372 million
and
$21 million
to its U.S. and international retirement plans, respectively. The Company plans to continue to fund its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. International plans are funded in accordance with local regulations.
NOTE 7 — ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of other comprehensive income (loss) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
Gain/(Loss)
|
|
Employee
|
|
Gain/(Loss)
|
|
Total Accumulated
|
|
|
Currency
|
|
On
|
|
Benefit
|
|
On Derivatives
|
|
Other Comprehensive
|
(Dollars in Millions)
|
|
Translation
|
|
Securities
|
|
Plans
|
|
& Hedges
|
|
Income (Loss)
|
January 3, 2016
|
|
$
|
(8,435
|
)
|
|
604
|
|
|
(5,298
|
)
|
|
(36
|
)
|
|
(13,165
|
)
|
Net change
|
|
490
|
|
|
(7
|
)
|
|
295
|
|
|
(328
|
)
|
|
450
|
|
October 2, 2016
|
|
$
|
(7,945
|
)
|
|
597
|
|
|
(5,003
|
)
|
|
(364
|
)
|
|
(12,715
|
)
|
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 underlying 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
October 2, 2016
and
September 27, 2015
:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Third Quarters Ended
|
(Shares in Millions)
|
|
October 2, 2016
|
|
September 27, 2015
|
Basic net earnings per share
|
|
$
|
1.56
|
|
|
1.21
|
|
Average shares outstanding — basic
|
|
2,731.6
|
|
|
2,768.4
|
|
Potential shares exercisable under stock option plans
|
|
140.8
|
|
|
129.4
|
|
Less: shares which could be repurchased under treasury stock method
|
|
(88.4
|
)
|
|
(92.8
|
)
|
Convertible debt shares
|
|
1.4
|
|
|
2.2
|
|
Average shares outstanding — diluted
|
|
2,785.4
|
|
|
2,807.2
|
|
Diluted net earnings per share
|
|
$
|
1.53
|
|
|
1.20
|
|
The diluted net earnings per share calculation for both the fiscal
third
quarters ended
October 2, 2016
and
September 27, 2015
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
October 2, 2016
included all shares related to stock options, as there were
no
options or other instruments which were anti-dilutive. 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.
The following is a reconciliation of basic net earnings per share to diluted net earnings per share for the
fiscal nine months
ended
October 2, 2016
and
September 27, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Nine Months Ended
|
(Shares in Millions)
|
|
October 2, 2016
|
|
September 27, 2015
|
Basic net earnings per share
|
|
$
|
4.64
|
|
|
4.39
|
|
Average shares outstanding — basic
|
|
2,744.9
|
|
|
2,774.8
|
|
Potential shares exercisable under stock option plans
|
|
144.0
|
|
|
129.1
|
|
Less: shares which could be repurchased under treasury stock method
|
|
(93.7
|
)
|
|
(89.0
|
)
|
Convertible debt shares
|
|
1.4
|
|
|
2.2
|
|
Average shares outstanding — diluted
|
|
2,796.6
|
|
|
2,817.1
|
|
Diluted net earnings per share
|
|
$
|
4.55
|
|
|
4.33
|
|
|
|
|
|
|
The diluted net earnings per share calculation for both the
fiscal nine months
ended
October 2, 2016
and
September 27, 2015
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
October 2, 2016
included all shares related to stock options, as there were
no
options or other instruments which were anti-dilutive. 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.
NOTE 9 — SEGMENTS OF BUSINESS AND GEOGRAPHIC AREAS
SALES BY SEGMENT OF BUSINESS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Third Quarters Ended
|
(Dollars in Millions)
|
|
October 2,
2016
|
|
September 27,
2015
|
|
Percent
Change
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
United States
|
|
$
|
1,291
|
|
|
1,277
|
|
|
1.1
|
%
|
International
|
|
1,970
|
|
|
2,037
|
|
|
(3.3
|
)
|
Total
|
|
3,261
|
|
|
3,314
|
|
|
(1.6
|
)
|
Pharmaceutical
|
|
|
|
|
|
|
United States
|
|
5,042
|
|
|
4,509
|
|
|
11.8
|
|
International
|
|
3,358
|
|
|
3,185
|
|
|
5.4
|
|
Total
|
|
8,400
|
|
|
7,694
|
|
|
9.2
|
|
Medical Devices
|
|
|
|
|
|
|
United States
|
|
3,048
|
|
|
3,005
|
|
|
1.4
|
|
International
|
|
3,111
|
|
|
3,089
|
|
|
0.7
|
|
Total
|
|
6,159
|
|
|
6,094
|
|
|
1.1
|
|
Worldwide
|
|
|
|
|
|
|
United States
|
|
9,381
|
|
|
8,791
|
|
|
6.7
|
|
International
|
|
8,439
|
|
|
8,311
|
|
|
1.5
|
|
Total
|
|
$
|
17,820
|
|
|
17,102
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Nine Months Ended
|
(Dollars in Millions)
|
|
October 2,
2016
|
|
September 27,
2015
|
|
Percent
Change
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
United States
|
|
$
|
4,033
|
|
|
3,991
|
|
|
1.1
|
%
|
International
|
|
5,842
|
|
|
6,196
|
|
|
(5.7
|
)
|
Total
|
|
9,875
|
|
|
10,187
|
|
|
(3.1
|
)
|
Pharmaceutical
|
|
|
|
|
|
|
United States
|
|
15,123
|
|
|
13,423
|
|
|
12.7
|
|
International
|
|
10,109
|
|
|
9,943
|
|
|
1.7
|
|
Total
|
|
25,232
|
|
|
23,366
|
|
|
8.0
|
|
Medical Devices
|
|
|
|
|
|
|
United States
|
|
9,118
|
|
|
8,980
|
|
|
1.5
|
|
International
|
|
9,559
|
|
|
9,730
|
|
|
(1.8
|
)
|
Total
|
|
18,677
|
|
|
18,710
|
|
|
(0.2
|
)
|
Worldwide
|
|
|
|
|
|
|
United States
|
|
28,274
|
|
|
26,394
|
|
|
7.1
|
|
International
|
|
25,510
|
|
|
25,869
|
|
|
(1.4
|
)
|
Total
|
|
$
|
53,784
|
|
|
52,263
|
|
|
2.9
|
%
|
INCOME BEFORE TAX BY SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Third Quarters Ended
|
(Dollars in Millions)
|
|
October 2,
2016
|
|
September 27,
2015
|
|
Percent
Change
|
Consumer
(1)
|
|
$
|
679
|
|
|
811
|
|
|
(16.3
|
)%
|
Pharmaceutical
(2)
|
|
3,309
|
|
|
2,732
|
|
|
21.1
|
|
Medical Devices
(3)
|
|
1,526
|
|
|
835
|
|
|
82.8
|
|
Segments operating profit
|
|
5,514
|
|
|
4,378
|
|
|
25.9
|
|
Less: Expense not allocated to segments
(4)
|
|
233
|
|
|
256
|
|
|
|
Worldwide income before tax
|
|
$
|
5,281
|
|
|
4,122
|
|
|
28.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Nine Months Ended
|
(Dollars in Millions)
|
|
October 2, 2016
|
|
September 27, 2015
|
|
Percent
Change
|
Consumer
(1)
|
|
$
|
1,816
|
|
|
1,772
|
|
|
2.5
|
%
|
Pharmaceutical
(2)
|
|
10,340
|
|
|
9,816
|
|
|
5.3
|
|
Medical Devices
(3)
|
|
4,041
|
|
|
4,640
|
|
|
(12.9
|
)
|
Segments operating profit
|
|
16,197
|
|
|
16,228
|
|
|
(0.2
|
)
|
Less: Expense not allocated to segments
(4)
|
|
718
|
|
|
790
|
|
|
|
Worldwide income before taxes
|
|
$
|
15,479
|
|
|
15,438
|
|
|
0.3
|
%
|
(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.
(2) Includes litigation expense of
$136 million
recorded 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 a positive adjustment of
$513 million
and
$462 million
to previous reserve estimates in the fiscal nine months of 2016 and 2015, respectively.
(3) Includes a restructuring related charge of
$109 million
and
$387 million
in the fiscal third quarter and fiscal nine months of 2016, respectively. Includes litigation expense of
$55 million
and
$731 million
recorded in the fiscal third quarter and fiscal
nine months of 2016, respectively. Includes litigation expense of
$409 million
in the fiscal third quarter of 2015. Includes a
$346 million
intangible asset write-down related to Acclarent recorded in the fiscal third quarter and fiscal nine months of 2015. The fiscal nine months of 2015 included
$148 million
for costs associated with the DePuy ASR
TM
Hip program.
(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)
|
|
October 2, 2016
|
|
September 27, 2015
|
|
Percent
Change
|
United States
|
|
$
|
9,381
|
|
|
8,791
|
|
|
6.7
|
%
|
Europe
|
|
3,832
|
|
|
3,802
|
|
|
0.8
|
|
Western Hemisphere, excluding U.S.
|
|
1,396
|
|
|
1,463
|
|
|
(4.6
|
)
|
Asia-Pacific, Africa
|
|
3,211
|
|
|
3,046
|
|
|
5.4
|
|
Total
|
|
$
|
17,820
|
|
|
17,102
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Nine Months Ended
|
(Dollars in Millions)
|
|
October 2, 2016
|
|
September 27, 2015
|
|
Percent
Change
|
United States
|
|
$
|
28,274
|
|
|
26,394
|
|
|
7.1
|
%
|
Europe
|
|
11,769
|
|
|
11,993
|
|
|
(1.9
|
)
|
Western Hemisphere, excluding U.S.
|
|
4,269
|
|
|
4,603
|
|
|
(7.3
|
)
|
Asia-Pacific, Africa
|
|
9,472
|
|
|
9,273
|
|
|
2.1
|
|
Total
|
|
$
|
53,784
|
|
|
52,263
|
|
|
2.9
|
%
|
NOTE 10— BUSINESS COMBINATIONS AND DIVESTITURES
During the fiscal third quarter of 2016, the Company completed the acquisition of Vogue International LLC, a privately-held company focused on the marketing, development and distribution of salon-influenced and nature inspired hair care and other personal products for
$3.3 billion
in cash. The net purchase price of
$3.3 billion
was primarily recorded as amortizable intangible assets for
$2.3 billion
and goodwill for
$1.1 billion
. The weighted average life for the
$2.3 billion
of total amortizable intangibles is approximately
22 years
. The trademark asset values were determined to have definite lives ranging from
10
to
22
years, with the majority being
22
years. The customer relationship asset values were determined to have definite lives of
15
years. The goodwill is primarily attributable to synergies expected to arise from the business acquisition and is expected to be deductible for tax purposes. The intangible assets and goodwill amounts are based on the preliminary purchase price allocation. The assets acquired were recorded in the Consumer segment.
During the fiscal third quarter of 2016, the company announced a definitive agreement to acquire Abbott Medical Optics (AMO), a wholly-owned subsidiary of Abbott Laboratories, for
$4.325 billion
in cash. The acquisition will include ophthalmic products related to: cataract surgery, laser refractive surgery and consumer eye health. The transaction is expected to close in the first quarter of 2017. The closing is subject to antitrust clearance and other customary closing conditions.
During the fiscal second quarter of 2016, the Company completed the acquisitions of NeuWave Medical, Inc., a privately-held medical device company that manufactures and markets minimally invasive soft tissue microwave ablation systems and NeoStrata Company, Inc., a global leader in dermocosmetics. Additionally, during the fiscal second quarter of 2016, the Company completed the divestiture of its controlled substance raw material and active pharmaceutical ingredient (API) business. The proceeds from the divestiture were
$650 million
.
During the fiscal third quarter of 2015, the Company completed the divestiture of its SPLENDA
®
brand. 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 an anti-thrombin antibody.
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 loss contingencies associated with these legal matters when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. As of
October 2, 2016
, 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 estimate the possible loss or range of loss beyond the amounts already accrued. 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. The ability to make such estimates and judgments can be affected by various factors, including whether damages sought in the proceedings are unsubstantiated or indeterminate; scientific and legal discovery has not commenced or is not complete; proceedings are in early stages; matters present legal uncertainties; there are significant facts in dispute; or there are numerous parties involved.
In the Company's opinion, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities accrued in the Company's balance sheet, is not expected to have a material adverse effect on the Company's financial position. However, the resolution of, or increase in accruals for, one or more of these matters in any reporting period may have a material adverse effect on the Company's results of operations and cash flows for that period.
PRODUCT LIABILITY
Johnson & Johnson and certain of its subsidiaries 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 the Company believes it has substantial defenses, it is not feasible to predict the ultimate outcome of litigation. The Company has established accruals for product liability claims and lawsuits in compliance with ASC 450-20 based on currently available information, which in some cases may be limited. The Company accrues an estimate of the legal defense costs needed to defend each matter when those costs are probable and can be reasonably estimated. For certain of these matters, the Company has accrued additional amounts such as estimated costs associated with settlements, damages and other losses. 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
®
, XARELTO
®
and JOHNSON'S
®
Baby Powder. As of
October 2, 2016
, in the U.S. there were approximately
2,900
plaintiffs with direct claims in pending lawsuits regarding injuries allegedly due to the DePuy ASR™ XL Acetabular System and DePuy ASR™ Hip Resurfacing System,
9,300
with respect to the PINNACLE
®
Acetabular Cup System,
53,400
with respect to pelvic meshes,
15,400
with respect to RISPERDAL
®
,
15,600
with respect to XARELTO
®
and
2,400
with respect to JOHNSON'S
®
Baby Powder.
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, Australia, Ireland, Germany and Italy. 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 effectively extends 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 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 United States. However, many lawsuits in the United States will remain, and the settlement program does not address litigation outside of the United States. In Australia,
a settlement has been reached with representatives of a class action lawsuit pending in the Federal Court of New South Wales that resolves the claims of the majority of ASR Hip patients in that country. 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. Changes to these accruals may be required in the future as additional information becomes available.
Claims for personal injury have also been made against DePuy and Johnson & Johnson relating to DePuy's PINNACLE
®
Acetabular Cup System used in hip replacement surgery. The number of pending product liability lawsuits continues to increase, and the Company continues to receive information with respect to potential costs and the anticipated number of cases. Cases filed in federal courts in the United States have been organized as a multi-district litigation in the United States District Court for the Northern District of Texas. Litigation has also been filed in countries outside of the United States, primarily in the United Kingdom. The Company has established an accrual for 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 various countries outside of the United States, including claims and cases in the United Kingdom, the Netherlands, Belgium, Italy and Venezuela, and class actions in Israel, Australia and Canada, 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. Many of these cases have been consolidated into a state mass tort litigation in Philadelphia, Pennsylvania; and there are coordinated proceedings in Delaware, California and Missouri. Class action lawsuits also have been filed in Canada. The Company has established an accrual for defense costs in connection with product liability litigation associated with XARELTO
®
. Changes to this accrual may be required in the future as additional information becomes available.
Claims for personal injury have been made against Johnson & Johnson Consumer Inc. and Johnson & Johnson arising out of the use of JOHNSON'S
®
Baby Powder. 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. Lawsuits have been primarily filed in state courts in Missouri, New Jersey and California. In addition, a federal multi-district litigation proceeding has been created for this litigation in the District Court of New Jersey. The Company has established an accrual for defense costs in connection with product liability litigation associated with JOHNSON'S
®
Baby Powder. 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 and allegations that certain of the Company’s products infringe the patents of third parties. Although these subsidiaries believe that they have substantial defenses to these challenges and allegations with respect to all significant patents, there can be no assurance as to the outcome of these matters. A loss in any of these cases could adversely affect the ability of these subsidiaries to sell their products, result in loss of sales due to loss of market exclusivity, require the payment of past damages and future royalties, and may result in a non-cash impairment charge for any associated intangible asset. The most significant of these matters are described below.
Medical Devices
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, reinstated the original claim construction and dismissed the case. Roche appealed, and in September 2016, the Court of Appeals affirmed the District Court's 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 appealed and the Court of Appeals overturned that ruling in April 2016 and remanded the case to the District Court for a new trial. JJVC's motion to reconsider was denied; and JJVC has filed a petition for review with the United States Supreme Court.
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 (Shasta), Instacare Corp (now Pharmatech Solutions, Inc. (Pharmatech)) and Conductive Technologies, Inc. (Conductive) in the United States District Court for the Northern District of California for patent infringement and false advertising for the making and marketing of a strip for use in LifeScan's OneTouch
®
Blood Glucose Meters. The defendants alleged that the
three
LifeScan patents-in-suit are invalid and challenged the validity of the asserted patents in the United States Patent and Trademark Office (USPTO). In April 2013, the defendants brought counterclaims for alleged antitrust violations and false advertising and those claims were stayed pending resolution of the patent infringement case. The validity of
two
of the patents was confirmed by the USPTO, but the USPTO determined that the third patent, U.S. Patent No. 7,250,105, is invalid. LifeScan lost an appeal of that decision, but is seeking a rehearing. LifeScan entered into a settlement agreement with Shasta and Conductive. A motion brought by Pharmatech for summary judgment of patent invalidity was denied. In April 2016, LifeScan and Pharmatech entered into a settlement agreement and the case was dismissed.
LifeScan filed a patent infringement lawsuit against UniStrip Technologies, LLC (UniStrip) in the United States District Court for the District of North Carolina in May 2014, alleging that the making and marketing of UniStrip’s strips for use in LifeScan’s blood glucose monitors infringe U.S. Patent Nos. 6,241,862 (the ‘862 patent) and 7,250,105 (the ‘105 patent). In August 2014, the USPTO determined that the ‘105 patent is invalid. In January 2016, the invalidity decision was upheld on appeal. LifeScan filed a motion for rehearing, which was denied. 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 strips.
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's appeal of this decision has been dismissed. Medinol has filed a petition for review with the United States Supreme Court. Following the divestiture of Cordis, the Company retains any liability that may result from this case.
Pharmaceutical
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 appealed, and in September 2016, the Court of Appeals affirmed the lower court's ruling in all respects.
In April 2016, Morphosys AG, a German biotech company, filed a patent infringement lawsuit against Janssen Biotech, Inc. (JBI), Genmab U.S. Inc. and Genmab A/S (collectively, Genmab) in the United States District Court for the District of Delaware, alleging that JBI’s manufacture and sale of DARZALEX
®
(daratumumab) willfully infringes its U.S. Patent No. 8,263,746. Morphosys is seeking money damages. JBI licenses patents and the commercial rights to DARZALEX
®
from Genmab. In June 2016, JBI filed a motion to dismiss the lawsuit.
REMICADE
®
Related Cases
U.S. Proceedings
In September 2013, Janssen Biotech, Inc. (JBI) and NYU Langone Medical Center (NYU) 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
®
(infliximab) (the '471 patent) in a reexamination proceeding instituted by a third party. The '471 patent is co-owned by JBI and NYU, and NYU granted JBI an exclusive license to NYU’s rights under the patent. The '471 patent in the United States expires in September 2018. Following several office actions by the patent examiner, including two further rejections, and responses by JBI, 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.
In August 2014, Celltrion Healthcare Co. Ltd. and Celltrion Inc. (together, Celltrion) filed an application with the U.S. Food and Drug Administration (FDA) for approval to make and sell its own infliximab biosimilar. In March 2015, JBI filed a lawsuit in the United States District Court for the District of Massachusetts against Celltrion and Hospira Healthcare Corporation (Hospira), which has exclusive U.S. marketing rights for Celltrion's infliximab biosimilar, seeking, among other things, a declaratory judgment that their biosimilar product infringes or potentially infringes several JBI patents, including the '471 patent and U.S. Patent No. 7,598,083 (the '083 patent). In August 2016, the District Court granted both Celltrion's and Hospira's motions for summary judgment of invalidity of the '471 patent. JBI has appealed those decisions.
In June 2016, JBI filed two additional patent infringement lawsuits asserting the '083 patent, one against Celltrion in the United States District Court for the District of Massachusetts and the other against HyClone Laboratories, Inc., the manufacturer of the cell culture media that Celltrion uses to make its biosimilar product, in the United States District Court for the District of Utah. Although the '083 patent is already asserted in the existing lawsuit against Celltrion, the additional lawsuit against Celltrion expands the claims to include any use of the cell culture media made in the United States to manufacture Celltrion's biosimilar. This additional lawsuit against Celltrion has been consolidated with the existing lawsuit discussed above. Trial of the Celltrion lawsuit relating to the '083 patent is scheduled to begin in February 2017. Celltrion has moved to dismiss all counts of the lawsuit related to the '083 patent.
The FDA approved Celltrion’s infliximab biosimilar for sale in the United States in April 2016, and the 180-day period for notice of launch of a biosimilar product under the Biologics Price Competition and Innovation Act has passed.
Hospira's parent company, Pfizer Inc., has announced its plan to begin shipment of Celltrion's infliximab biosimilar to wholesalers in the United States in late November 2016. Introduction to the U.S. market of the biosimilar will result in a reduction in U.S. sales of REMICADE
®
.
Canadian Proceedings
In March 2013, 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 JBI. In October 2013, Kennedy, along with JBI, Janssen Inc. (Janssen) and Cilag GmbH International (both affiliates of JBI), filed a counterclaim for infringement against 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. A trial in the patent action concluded in October 2016, and closing arguments are scheduled for January 2017.
In January 2014, Health Canada approved Celltrion’s SEB to REMICADE
®
, allowing Celltrion to market its infliximab biosimilar in Canada, regardless of the pending patent action. In June 2014, Health Canada approved Hospira’s SEB to REMICADE
®
. In July 2014, 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 appeal, which was filed in June 2015. Nevertheless, Hospira began marketing an infliximab biosimilar as a distributor under Celltrion's Notice of Compliance. In October 2016, the appeals court reversed the Consent Judgment. Hospira continues to market and sell its infliximab biosimilar in Canada.
In Canada, if any of the REMICADE
®
related patents discussed above is found to be invalid following all appeals, such patent could not be relied upon to prevent the further introduction of infliximab biosimilars.
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. In addition, from time to time, subsidiaries may settle these actions and such settlements can involve the introduction of generic versions of the products at issue to the market prior to the expiration of the relevant patents.
CONCERTA
®
In December 2014, Janssen Inc. and ALZA Corporation filed a Notice of Application against Actavis Pharma Company (Actavis) in response to Actavis’ Notice of Allegation seeking approval to market a generic version of CONCERTA
®
before the expiration of Canadian Patent No. 2,264,852 (the ‘852 patent). The hearing was held in September 2016 and the parties are awaiting a decision. Janssen and ALZA are seeking an order enjoining Actavis from marketing its generic version of CONCERTA
®
before the expiration of the ‘852 patent.
In October 2016, ALZA Corporation and Janssen Pharmaceuticals, Inc. filed a patent infringement lawsuit in the United States District Court for the District of Delaware against Amneal Pharmaceuticals of New York, LLC and Amneal Pharmaceuticals LLC in response to Amneal’s ANDA seeking approval to market a generic version of CONCERTA
®
before the expiration of United States Patent Nos. 8,163,798 and 9,144,549.
ZYTIGA
®
In June and July 2015, Janssen Biotech, Inc. (JBI) received notices of paragraph IV certification from several companies advising of their respective ANDAs seeking approval for a generic version of ZYTIGA
®
before the expiration of one or more patents relating to ZYTIGA
®
. In July 2015, JBI, Janssen Oncology, Inc. (Janssen Oncology) and Janssen Research & Development, LLC (collectively, Janssen) and BTG International Ltd. (BTG) filed a patent infringement lawsuit in the United States District Court for the District of New Jersey against several generic ANDA applicants (and certain of their affiliates and/or suppliers) in response to their respective ANDAs seeking approval to market a generic version of ZYTIGA
®
before the expiration of United States Patent Nos. 5,604,213 (the '213 patent) and/or 8,822,438 (the '438 patent). The generic companies
include Actavis Laboratories, FL, Inc. (Actavis); Amneal Pharmaceuticals, LLC and Amneal Pharmaceuticals of New York, LLC (collectively, Amneal); Apotex Inc. and Apotex Corp. (collectively, Apotex); Citron Pharma LLC (Citron); Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. (collectively, Dr. Reddy's); Mylan Pharmaceuticals Inc. and Mylan Inc. (collectively, Mylan); Par Pharmaceuticals, Inc. and Par Pharmaceutical Companies, Inc. (collectively, Par); Sun Pharmaceutical Industries Ltd. and Sun Pharmaceuticals Industries, Inc. (collectively, Sun); Teva Pharmaceuticals USA, Inc. (Teva); Wockhardt Bio A.G.; Wockhardt USA LLC and Wockhardt Ltd. (collectively, Wockhardt); West-Ward Pharmaceutical Corp. (West-Ward); and Hikma Pharmaceuticals, LLC (Hikma). The Court entered a stay of the lawsuit against Par and Citron, as each agreed to be bound by the decision against the other defendants in the action. In February 2016, the Court set a trial date of October 2017. In August 2016, Janssen and BTG dismissed the ‘213 patent claim against Actavis, the only challenger to the ‘213 patent, based on Actavis’ agreement not to challenge the patent, which expires in December 2016.
In August 2015, Janssen and BTG filed an additional jurisdictional protective lawsuit against the Mylan defendants in the United States District Court for the Northern District of West Virginia, which has been stayed.
In August 2015, Janssen received a notice of paragraph IV certification from Hetero USA Inc., the U.S. Regulatory Agent for Hetero Labs Limited Unit-V, a division of Hetero Labs Limited (collectively, Hetero) advising of Hetero’s ANDA seeking approval for a generic version of ZYTIGA
®
before expiration of the '438 patent. In September 2015, Janssen and BTG filed an amended complaint in the New Jersey lawsuit to allege infringement of the '438 patent by Hetero.
In March 2016, Janssen filed a motion to correct inventorship of the ‘438 patent to add an inventor and requested that, should the Court order the requested correction, it grant Janssen leave to amend the complaint to recognize BTG as a co-owner of the ‘438 patent and a co-plaintiff with Janssen with regard to the ‘438 patent infringement claims.
In March 2016, Janssen received a notice from Amerigen Pharmaceuticals Limited (Amerigen) advising of Amerigen’s ANDA seeking approval for a generic version of ZYTIGA
®
before expiration of the ‘438 patent. In response, Janssen and BTG filed a patent infringement lawsuit in the United States District Court for the District of New Jersey against Amerigen in May 2016.
In May 2016, Janssen received a notice of paragraph IV certification from Glenmark Pharmaceuticals Inc., on behalf of Glenmark Pharmaceuticals SA, a wholly owned subsidiary of Glenmark Pharmaceuticals Ltd. (collectively, Glenmark) advising of Glenmark’s ANDA seeking approval for a generic version of ZYTIGA
®
before expiration of the ‘438 patent. In response, in June 2016, Janssen and BTG filed a patent infringement lawsuit in the United States District Court for the District of New Jersey against Glenmark. The parties have stipulated to a dismissal of Glenmark Pharmaceuticals Ltd.
The filing of the above-referenced lawsuits triggered a stay until October 2018 during which the FDA will not grant final approval of the generics' ANDAs unless there is an earlier District Court decision finding the patents-in-suit invalid or not infringed.
In each of the above lawsuits, Janssen is seeking an order enjoining the defendants from marketing their generic versions of ZYTIGA
®
before the expiration of the relevant patents.
In December 2015, Amerigen filed a petition for an Inter Partes Review in the USPTO seeking to invalidate the '438 patent. In May 2016, the USPTO granted the Inter Partes Review, and a decision as to the validity of the ‘438 patent is expected by May 2017. In June 2016, Argentum Pharmaceuticals LLC and Mylan Pharmaceuticals Inc. filed petitions for Inter Partes Review in the USPTO seeking to invalidate the '438 patent and moved to join the Inter Partes Review filed by Amerigen. The USPTO granted Argentum’s motion for joinder, but deferred a decision on Mylan’s motion. In August 2016, Wockhardt Bio AG filed a petition for Inter Partes Review in the USPTO seeking to invalidate the ‘438 patent.
COMPLERA
®
In August and September 2015, Janssen Pharmaceutica NV and Janssen Sciences Ireland UC (collectively, Janssen) and Gilead Sciences, Inc. and Gilead Sciences Ireland UC (collectively, Gilead) filed patent infringement lawsuits in the United States District Courts for the District of Delaware and the District of West Virginia, respectively, against Mylan, Inc. and Mylan Pharmaceuticals, Inc. (collectively, Mylan) in response to Mylan’s ANDA seeking approval to market a generic version of COMPLERA
®
before the expiration of United States Patent Nos. 8,841,310 (the '310 patent), 7,125,879 (the '879 patent) and 8,101,629 (the '629 patent).
In the West Virginia action, in September 2015, Mylan filed an answer and counterclaims asserting invalidity and non-infringement of the '310 patent, '879 patent, and '629 patent, as well as United States Patent No. 8,080,551 (the ‘551 patent). In
March 2016, the District of West Virginia Court stayed the lawsuit and scheduled a conditional trial date in February 2018, in accordance with the schedule in the first-filed Delaware lawsuit described below.
In the Delaware action, in January and March 2016, Janssen and Gilead amended their complaint to add claims for patent infringement with respect to the ‘551 patent and United States Patent Nos. 7,399,856 (the '856 patent), 7,563,922 (the '922 patent), 8,101,752 (the '752 patent) and 8,618,291 (the '291 patent). Mylan filed a motion to dismiss the suit for lack of personal jurisdiction and a motion to dismiss, strike or sever the infringement claims regarding the ‘752 and ‘291 patents. In September 2016, the Delaware District Court denied both of Mylan’s motions. A trial in the Delaware action has been scheduled for February 2018.
In each of these lawsuits, Janssen is seeking an order enjoining the defendants from marketing their generic versions of COMPLERA
®
before the expiration of the relevant patents.
XARELTO
®
A number of generic companies have filed ANDAs seeking approval to market generic versions of XARELTO
®
. In October 2015, Janssen Pharmaceuticals, Inc. (JPI) and Bayer Pharma AG and Bayer Intellectual Property GmbH (collectively, Bayer) filed patent infringement lawsuits in the United States District Court for the District of Delaware against Aurobindo Pharma Limited, Aurobindo Pharma USA, Inc., Breckenridge Pharmaceutical, Inc., Micro Labs USA Inc. and Micro Labs Ltd. (collectively, Micro), Mylan Pharmaceuticals Inc., Mylan Inc. (Mylan), Prinston Pharmaceutical, Inc., Sigmapharm Laboratories, LLC, Torrent Pharmaceuticals, Limited and Torrent Pharma Inc., in response to those parties’ respective ANDAs seeking approval to market generic versions of XARELTO
®
before the expiration of Bayer’s United States Patent Nos. 7,157,456 (the ‘456 patent), 7,585,860 (the ‘860 patent) and 7,592,339 (the ‘339 patent) relating to XARELTO
®
. JPI is the exclusive licensee of the asserted patents.
In November 2015, Mylan moved to dismiss the action. In December 2015, JPI, Bayer, and Mylan stipulated and agreed to dismiss the claims against Mylan, and suspend further briefing and argument on Mylan's motion to dismiss, pending appeals relating to personal jurisdiction over Mylan Pharmaceuticals Inc. in the District of Delaware. In February 2016, a similar patent infringement action by JPI and Bayer against Invagen Pharmaceuticals Inc. (Invagen), in response to Invagen’s notice of paragraph IV certification advising of its ANDA seeking FDA approval for a generic XARELTO
®
product before expiration of the relevant patents, was consolidated with the original case. The District Court has set a trial date of March 2018.
In April 2016, JPI and Bayer filed a separate patent infringement action in the District of Delaware against Micro, in response to their notice of paragraph IV certification advising of their ANDA seeking FDA approval for a generic XARELTO
®
product before expiration of the ‘860 and ‘339 patents. In May 2016, this action was consolidated with the original action.
In July 2016, JPI and Bayer filed a separate patent infringement action in the District of Delaware against Breckenridge Pharmaceutical, Inc., in response to its notice of paragraph IV certification advising of its ANDA seeking FDA approval for a generic XARELTO
®
product before expiration of the ‘456 and ‘339 patents. This action has been consolidated with the original action.
In each of these lawsuits, JPI is seeking an order enjoining the defendants from marketing their generic versions of XARELTO
®
before the expiration of the relevant patents.
In October 2016, Mylan filed petitions for Inter Partes Review in the USPTO seeking to invalidate the ‘339, ‘456 and ‘860 patents.
GOVERNMENT PROCEEDINGS
Like other companies in the pharmaceutical and medical devices industries, Johnson & Johnson and certain of its subsidiaries are subject to extensive regulation by national, state and local government agencies in the United States and other countries in which they operate. As a result, interaction with government agencies is ongoing. The most significant litigation brought by, and investigations conducted by, government agencies are listed below. It is possible that criminal charges and substantial fines and/or civil penalties or damages could result from government investigations or litigation.
Average Wholesale Price (AWP) Litigation
Johnson & Johnson and several of its pharmaceutical subsidiaries (the J&J AWP Defendants), along with numerous other pharmaceutical companies, are defendants in a series of lawsuits in state and federal courts involving allegations that the
pricing and marketing of certain pharmaceutical products amounted to fraudulent and otherwise actionable conduct because, among other things, the companies allegedly reported an inflated Average Wholesale Price (AWP) for the drugs at issue. Payors alleged that they used those AWPs in calculating provider reimbursement levels. Many of these cases, both federal actions and state actions removed to federal court, were consolidated for pre-trial purposes in a Multi-District Litigation (MDL) in the United States District Court for the District of Massachusetts. The plaintiffs in these cases included three classes of private persons or entities that paid for any portion of the purchase of the drugs at issue based on AWP, and state government entities that made Medicaid payments for the drugs at issue based on AWP. In June 2007, after a trial on the merits, the MDL Court dismissed the claims of two of the plaintiff classes against the J&J AWP Defendants. In March 2011, the Court dismissed the claims of the third class against the J&J AWP Defendants without prejudice.
AWP cases brought by various Attorneys General have proceeded to trial against other manufacturers. Several state cases against certain Johnson & Johnson subsidiaries have been settled, including the case in Wisconsin, which settled in February 2016. Cases are still pending in Illinois, New Jersey, and Utah. The cases in Illinois and New Jersey have not yet proceeded to trial. In Utah, the claims brought by the Attorney General were dismissed by the Court in 2013, but the State may appeal the dismissal after the conclusion of similar pending matters against other defendants. In the AWP case against the J&J AWP Defendants brought by the Commonwealth of Pennsylvania, following a trial in 2010, the Pennsylvania Commonwealth Court found in favor of the Commonwealth with regard to certain of its claims under the Pennsylvania Unfair Trade Practices and Consumer Protection Law, and in favor of the J&J AWP Defendants on the Commonwealth’s remaining claims. Following an appeal to the Pennsylvania Supreme Court that vacated that judgment, the Commonwealth Court entered a subsequent judgment in favor of the J&J AWP Defendants on all claims. That subsequent judgment has been upheld by the Pennsylvania Supreme Court in a successive appeal.
McNeil Consumer Healthcare
Starting in June 2010, McNeil Consumer Healthcare Division of McNEIL-PPC, Inc. (now Johnson & Johnson Consumer Inc., McNeil Consumer Healthcare Division) (McNeil Consumer Healthcare) and certain affiliates, including Johnson & Johnson (the Companies), received grand jury subpoenas from the United States Attorney's Office for the Eastern District of Pennsylvania requesting documents broadly relating to recalls of various products of McNeil Consumer Healthcare, and the FDA inspections of the Fort Washington, Pennsylvania and Lancaster, Pennsylvania manufacturing facilities, as well as certain documents relating to recalls of a small number of products of other subsidiaries. In addition, in February 2011, the government served McNEIL-PPC, Inc. (now Johnson & Johnson Consumer Inc.) (JJCI) with a Civil Investigative Demand seeking records relevant to its investigation to determine if there was a violation of the Federal False Claims Act. In March 2015, McNEIL-PPC, Inc. (now JJCI) entered a guilty plea in the United States District Court for the Eastern District of Pennsylvania to a misdemeanor violation of the U.S. Food, Drug and Cosmetic Act. McNEIL-PPC, Inc. (now JJCI) agreed to pay a
$20 million
fine and a
$5 million
forfeiture to resolve the matter.
The Companies have also received Civil Investigative Demands from multiple State Attorneys General Offices broadly relating to the McNeil recall issues. The Companies continue to cooperate with these inquiries, which are being coordinated through a multi-state coalition. If a resolution cannot be reached with this multi-state coalition, it is possible that individual State Attorneys General Offices may file civil monetary claims against the Companies.
In January 2011, the Oregon Attorney General filed a civil complaint against Johnson & Johnson, McNEIL-PPC, Inc. (now JJCI) and McNeil Healthcare LLC in state court alleging civil violations of the Oregon Unlawful Trade Practices Act relating to an earlier recall of a McNeil OTC product. In November 2012, the state court granted a motion by the Companies to dismiss Oregon's complaint in its entirety, with prejudice. In November 2015, the State Court of Appeals reversed the trial court and reinstated Oregon's consumer protection claims. In February 2016, the Oregon Supreme Court denied the Companies' petition for review, and the case was sent back to the trial court.
Opioids Litigation
As described below, Johnson & Johnson (J&J) and Janssen Pharmaceuticals, Inc. (JPI), along with other pharmaceutical companies, have been named in four lawsuits alleging claims related to marketing of opioids, including DURAGESIC
®
, NUCYNTA
®
and NUCYNTA
®
ER, and have been subpoenaed by two other states for information related to opioid marketing practices.
In May 2014, Santa Clara and Orange Counties in California filed a complaint in state court in Orange County, California against numerous pharmaceutical manufacturers, including J&J and JPI, alleging claims related to opioid marketing practices, including false advertising, unfair competition, and public nuisance. The counties seek injunctive and monetary relief. In February 2015, the defendants filed motions challenging the sufficiency of the complaint. In August 2015, the Court stayed the
case until the FDA concludes its ongoing inquiry into the safety and effectiveness of long-term opioid treatment. Following a motion by the counties to lift the stay, in October 2016, the Court kept the stay in place in part, requested the parties to confer, and adjourned the matter until February 2017.
In June 2014, the City of Chicago filed a complaint in Cook County Circuit Court against the same group of pharmaceutical manufacturers, including J&J and JPI, alleging a number of claims related to opioid marketing practices, including consumer fraud violations and false claims, and seeking injunctive and monetary relief. The case was later removed to the United States District Court for the Northern District of Illinois. In December 2014, J&J and JPI filed a motion to dismiss the City of Chicago's First Amended Complaint, which was granted with leave to file an amended complaint. The City filed an amended complaint, and in November 2015, J&J and JPI filed a motion to dismiss the Second Amended Complaint. In September 2016, the Court dismissed eight of the City’s ten causes of action and granted the City one final opportunity to replead the dismissed claims by mid-December 2016.
In September 2014, the Tennessee Attorney General Division of Consumer Affairs issued a Request for Information to JPI and other pharmaceutical companies related to opioids marketing practices.
In August 2015, the New Hampshire Attorney General, Consumer Protection and Antitrust Bureau issued a subpoena to JPI and other pharmaceutical companies related to opioids marketing practices. In October 2015, the State filed a motion in the State of New Hampshire Superior Court to enforce the subpoena. JPI and the other pharmaceutical companies subsequently filed a joint motion for injunctive relief and a protective order to preclude the State from engaging private contingent fee counsel to participate in the State’s investigation or any subsequent enforcement action. In March 2016, the Court granted the protective order on the grounds that the State had not obtained requisite executive and legislative approvals to retain private counsel, but rejected the contention that the contingency fee agreement was otherwise unlawful. All parties have appealed the March 2016 ruling to the New Hampshire Supreme Court. In August 2016, the Court denied the pharmaceutical companies’ joint motion to enforce the protective order on the ground that the underlying deficiency (legislative approval) had been cured. In September 2016, the State stipulated to stay enforcement of any subpoenas pending the New Hampshire Supreme Court’s consideration of the companies’ appeal of the March 2016 ruling.
In December 2015, the State of Mississippi filed a complaint in the Chancery Court of the First Judicial District of Hinds County against substantially the same group of pharmaceutical manufacturers as in the suits brought by the California counties and City of Chicago, including J&J and JPI, alleging a number of claims related to opioid marketing practices and seeking penalties and injunctive and monetary relief. In March 2016, defendants filed motions to dismiss the complaint.
In August 2016, the County of Suffolk in New York filed a complaint against several pharmaceutical manufacturers in New York Supreme Court, including J&J and JPI, alleging claims related to opioid marketing, including claims based on deceptive acts and practices, false advertising, fraud and unjust enrichment.
Other
In September 2011, Synthes, Inc. (Synthes) received a Civil Investigative Demand issued pursuant to the False Claims Act from the United States Attorney's Office for the Eastern District of Pennsylvania. The demand sought information regarding allegations that fellowships had been offered to hospitals in exchange for agreements to purchase products. Synthes has produced documents and information in response to the demand and is cooperating with the inquiry.
In May 2012, Acclarent, Inc. (Acclarent) received a subpoena from the United States Attorney's Office for the District of Massachusetts requesting documents broadly relating to the sales, marketing and alleged off-label promotion by Acclarent of the RELIEVA STRATUS
®
MicroFlow Spacer product (the RELIEVA STRATUS
®
Spacer). In March 2016, Acclarent executed a civil settlement with the United States Justice Department and other agencies to resolve this investigation. Johnson & Johnson was not a party to this settlement and there was no admission of liability. In a separate matter, in July 2016, the former President/CEO and Vice President of Sales of Acclarent (the former Acclarent officers), were convicted of misdemeanor violations in connection with the sale and marketing of the RELIEVA STRATUS
®
Spacer. There are no charges against Acclarent, Ethicon, Inc. or Johnson & Johnson in this matter.
In August 2012, DePuy Orthopaedics, Inc., DePuy, Inc. (now DePuy Synthes, Inc.), and Johnson & Johnson Services, Inc. received an informal request from the United States Attorney's Office for the District of Massachusetts and the Civil Division of the United States Department of Justice (the United States) for the production of materials relating to the ASR™ XL Hip device. In July 2014, the United States notified the United States District Court for the District of Massachusetts that it had declined to intervene in a qui tam case filed pursuant to the False Claims Act against the companies. In February 2016, the District Court granted the companies’ motion to dismiss with prejudice, unsealed the qui tam complaint, and denied the qui tam
relators’ request for leave to file a further amended complaint. The qui tam relators' appealed the case to the United States Court of Appeals for the First Circuit. In addition, in October 2013, a group of State Attorneys General issued Civil Investigative Demands relating to the development, sales and marketing of several of DePuy Orthopaedics, Inc.'s hip products. The states are seeking monetary and injunctive relief. In July 2014, the Oregon Department of Justice, which was investigating these matters independently of the other states, announced a settlement of its ASR
™
XL Hip device investigation for a total payment of
$4 million
to the State of Oregon.
In October 2012, Johnson & Johnson was contacted by the California Attorney General's office regarding a multi-state Attorney General investigation of the marketing of surgical mesh products for hernia and urogynecological purposes by Johnson & Johnson's subsidiary, Ethicon, Inc. (Ethicon). Johnson & Johnson and Ethicon have since entered into a series of tolling agreements with the 47 states and the District of Columbia participating in the multi-state investigation and have responded to Civil Investigative Demands served by certain of the participating states. The states are seeking monetary and injunctive relief. In May 2016, California and Washington filed civil complaints against Johnson & Johnson and Ethicon alleging violations of their consumer protection statutes. In August 2016, Kentucky filed similar complaints against the companies. Johnson & Johnson and Ethicon have entered into a new tolling agreement with the remaining 44 states and the District of Columbia.
In December 2012, Therakos, Inc. (Therakos), formerly a subsidiary of Johnson & Johnson and part of the Ortho-Clinical Diagnostics, Inc. (OCD) franchise, received a letter from the civil division of the United States Attorney's Office for the Eastern District of Pennsylvania informing Therakos that the United States Attorney's Office was investigating the sales and marketing of Uvadex
®
(methoxsalen) and the Uvar Xts
®
System during the period 2000 to the present. The United States Attorney's Office requested that OCD and Johnson & Johnson preserve documents that could relate to the investigation. Therakos was subsequently acquired by an affiliate of Gores Capital Partners III, L.P. in January 2013. OCD and Johnson & Johnson retain certain liabilities that may result from the investigation for activity that occurred prior to the sale of Therakos. In March 2014 and March 2016, the United States Attorney’s Office requested that Johnson & Johnson produce certain documents, and Johnson & Johnson is cooperating with the requests. Following the divestiture of OCD, Johnson & Johnson retains OCD’s portion of any liability that may result from the investigation for activity that occurred prior to the sale of Therakos.
In June 2014, the Mississippi Attorney General filed a complaint in Chancery Court of The First Judicial District of Hinds County, Mississippi against Johnson & Johnson and Johnson & Johnson Consumer Companies, Inc. The complaint alleges that defendants failed to disclose alleged health risks associated with female consumers' use of talc contained in JOHNSON'S
®
Baby Powder and JOHNSON'S
®
Shower to Shower (a product no longer sold by Johnson & Johnson) and seeks injunctive and monetary relief. This matter is currently scheduled for trial in September 2017.
In March 2016, Janssen Pharmaceuticals, Inc. (JPI) received a Civil Investigative Demand from the United States Attorney’s Office for the Southern District of New York related to JPI’s contractual relationships with pharmacy benefit managers over the period from January 1, 2006 to the present with regard to certain of JPI's pharmaceutical products. The demand was issued in connection with an investigation under the False Claims Act.
In recent years, Johnson & Johnson has received numerous requests from a variety of United States Congressional Committees to produce information relevant to ongoing congressional inquiries. It is the policy of Johnson & Johnson to cooperate with these inquiries by producing the requested information.
GENERAL LITIGATION
In June 2009, following the public announcement that Ortho-Clinical Diagnostics, Inc. (OCD) had received a grand jury subpoena from the United States Department of Justice, Antitrust Division, in connection with an investigation that has since been closed, multiple class action complaints were filed against OCD by direct purchasers seeking damages for alleged price fixing. These cases were consolidated for pre-trial purposes in the United States District Court for the Eastern District of Pennsylvania as In re Blood Reagent Antitrust Litigation. Following the divestiture of OCD, Johnson & Johnson retains any liability that may result from these cases. In August 2012, the District Court granted a motion filed by the plaintiffs for class certification. In April 2015, the United States Court of Appeals for the Third Circuit reversed the class certification ruling and remanded the case to the District Court for further proceedings. In October 2015, the District Court again granted the motion by the plaintiffs for class certification. In July 2016, OCD filed a motion for summary judgment.
In September 2011, Johnson & Johnson, Johnson & Johnson Inc. and McNeil Consumer Healthcare Division of Johnson & Johnson Inc. received a Notice of Civil Claim filed by Nick Field in the Supreme Court of British Columbia, Canada (the BC Civil Claim). The BC Civil Claim is a putative class action brought on behalf of persons who reside in British Columbia and who purchased during the period between September 20, 2001 and in or about December 2010 one or more various McNeil infants' or children's over-the-counter medicines that were manufactured at the Fort Washington facility. The BC Civil Claim
alleges that the defendants violated the BC Business Practices and Consumer Protection Act, and other Canadian statutes and common laws, by selling medicines that were allegedly not safe and/or effective or did not comply with Canadian Good Manufacturing Practices. The class certification hearing scheduled for October 2015 was adjourned, and there is currently no date set for that hearing.
In May 2014,
two
purported class actions were filed in federal court, one in the United States District Court for the Central District of California and one in the United States District Court for the Southern District of Illinois, against Johnson & Johnson and Johnson & Johnson Consumer Companies, Inc. (now Johnson & Johnson Consumer Inc.), alleging violations of state consumer fraud statutes based on nondisclosure of alleged health risks associated with talc contained in JOHNSON'S
®
Baby Powder and JOHNSON'S
®
Shower to Shower (a product no longer sold by the Company). Both cases seek injunctive relief and monetary damages; neither includes a claim for personal injuries. In October 2016, both cases were transferred to the United States District Court for the District Court of New Jersey as part of a newly created federal multi-district litigation.
In August 2014, United States Customs and Border Protection (US CBP) issued a Penalty Notice against Janssen Ortho LLC (Janssen Ortho), assessing penalties for the alleged improper classification of darunavir ethanolate (the active pharmaceutical ingredient in PREZISTA
®
) in connection with its importation into the United States. In October 2014, Janssen Ortho submitted a Petition for Relief in response to the Penalty Notice. In May 2015, US CBP issued an Amended Penalty Notice assessing substantial penalties and Janssen Ortho filed its Petition for Relief in July 2015.
In March 2015, Costco Wholesale Corporation (Costco) filed a complaint against Johnson & Johnson Vision Care, Inc. (JJVCI) in the United States District Court of the Northern District of California, alleging antitrust claims of an unlawful vertical price fixing agreement between JJVCI, Costco and unnamed other distributors and retailers. Costco alleges that the alleged agreements harmed competition by causing increases in the price Costco customers pay for JJVCI contact lenses. Costco is seeking an injunction and monetary damages. In June 2015, the case was transferred to the United States District Court for the Middle District of Florida along with related class action cases described below. In May 2016, Costco dismissed its claims without prejudice.
In March and April 2015, over 30 putative class action complaints were filed by contact lens patients in a number of courts around the United States against Johnson & Johnson Vision Care, Inc. (JJVCI), other contact lens manufacturers, distributors, and retailers, alleging vertical and horizontal conspiracies to fix the retail prices of contact lenses. The complaints allege that the manufacturers reached agreements with each other and certain distributors and retailers concerning the prices at which some contact lenses could be sold to consumers. The plaintiffs are seeking damages and injunctive relief. All of the class action cases were transferred to the United States District Court for the Middle District of Florida in June 2015. The plaintiffs filed a Consolidated Class Action complaint in November 2015, and in December 2015, JJVCI and other defendants filed motions to dismiss. In June 2016, the Court denied the motions to dismiss.
In April 2015, Johnson & Johnson Vision Care, Inc. (JJVCI) filed a complaint in the United States District Court for the District of Utah against the State of Utah seeking a declaratory judgment that a law passed by the State to ban unilateral pricing policies solely in the contact lens market violates the Commerce Clause of the United States Constitution. The Court denied JJVCI's motion for a preliminary injunction. JJVCI appealed. Argument on the appeal was held in August 2015.
In April 2015, Adimmune Corporation Ltd (Adimmune) commenced an arbitration in the International Court of Arbitration - International Chamber of Commerce against Crucell Switzerland AG (now Janssen Vaccines AG) and Crucell Holland B.V. (now Janssen Vaccines & Prevention B.V.) (collectively, Crucell). Adimmune claims that Crucell breached certain agreements relating to the supply of flu antigen when Crucell ceased purchasing flu antigen from Adimmune. In December 2015, Adimmune filed its Statement of Claim seeking monetary damages. The arbitration hearing is scheduled to commence in November 2016.
In August 2015, two third-party payors filed a purported class action in the United States District Court for the Eastern District of Louisiana against Janssen Research & Development, LLC, Janssen Ortho LLC, Janssen Pharmaceuticals, Inc., Ortho-McNeil-Janssen Pharmaceuticals, Inc. and Johnson & Johnson (as well as certain Bayer entities), alleging that the defendants improperly marketed and promoted XARELTO
®
as safer and more effective than less expensive alternative medications while failing to fully disclose its risks. The complaint seeks damages in an unspecified amount.
Johnson & Johnson or its subsidiaries are also parties to a number of proceedings brought under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Superfund, and comparable state, local or foreign laws in which the primary relief sought is the cost of past and/or future remediation.
NOTE 12— RESTRUCTURING
The Company announced restructuring actions in its Medical Devices segment to better serve the needs of patients and customers in today’s evolving healthcare marketplace. The Company is undertaking actions to strengthen its go-to-market model, accelerate the pace of innovation, further prioritize key platforms and geographies, and streamline operations while maintaining high quality standards.
The Company estimates that, in connection with its plans, it will record pre-tax restructuring and other charges of approximately
$2.0 billion
to
$2.4 billion
. In the fiscal third quarter of 2016, the Company recorded a pre-tax charge of
$109 million
, of which
$3 million
was included in cost of products sold and
$44 million
was included in other (income) expense. In the fiscal nine months of 2016, the Company recorded a pre-tax charge of
$387 million
, of which
$27 million
was included in cost of products sold and
$64 million
was included in other (income) expense. See table below for additional details. Total project costs of
$977 million
have been recorded since the restructuring has been announced.
Additionally, as part of the plan, the Company expects that the restructuring actions will result in position eliminations of approximately
4
to
6
percent of the Medical Devices segment’s global workforce over the next
two
years, subject to any consultation procedures in countries, where required. Approximately
1,170
positions have been eliminated since the restructuring has been announced.
The Company estimates that approximately one half of the cumulative pre-tax costs will result in cash outlays, including
approximately
$500 million
of employee severance. Approximately one half of the cumulative pre-tax costs are non-cash,
relating primarily to facility rationalization, inventory write-offs and intangible asset write-offs.
The following table summarizes the severance related reserves and the associated spending under this initiative through the fiscal nine months of 2016:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
Severance
|
Asset Write-offs
|
Other**
|
Total
|
Reserve balance, January 3, 2016
|
$
|
484
|
|
—
|
|
17
|
|
501
|
|
|
|
|
|
|
Current year activity:
|
|
|
|
|
Charges
|
—
|
|
158
|
|
229
|
|
387
|
|
Cash payments
|
(81
|
)
|
—
|
|
(245
|
)
|
(326
|
)
|
Settled non cash
|
—
|
|
(158
|
)
|
—
|
|
(158
|
)
|
|
|
|
|
|
Reserve balance, October 2, 2016*
|
$
|
403
|
|
—
|
|
1
|
|
404
|
|
|
|
|
|
|
*Cash outlays for severance are expected to be substantially paid out over the next 24 months in accordance with the Company's plans and local laws.
**Other includes project expense such as salaries for employees supporting the initiative and consulting expenses.