Louise Mehrotra - Vice President, Investor Relations Dominic Caruso - Vice President, Finance and CFO.

Mike Weinstein - JPMorgan Larry Biegelsen - Wells Fargo Jami Rubin - Goldman Sachs Glenn Novarro - RBC Capital Markets Derrick Sung - Sanford Bernstein Vamil Divan - Credit Suisse Kristen Stewart - Deutsche Bank Bob Hopkins - Bank of America Matt Miksic - Piper Jaffray Josh Jennings - Cowen & Co. David Lewis - Morgan Stanley.

Good morning. And welcome to Johnson & Johnson’s Third Quarter 2014 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer session of the conference. This call is being recorded. If anyone has any objections, you may disconnect at this time.

(Operator Instructions) I would now like to turn the conference over to Johnson & Johnson. You may begin..

Good morning and welcome. I’m Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson and it is my pleasure this morning to review our business results for the third quarter of 2014. Joining me on the call today is Dominic Caruso, Vice President, Finance and Chief Financial Officer. A few logistics before we get into the details.

This review is being made available via webcast accessible through the Investor Relations section of the Johnson & Johnson website at investor.jnj.com. I’ll begin by briefly reviewing third quarter results for the corporation and for our three business segments.

Following my remarks, Dominic will provide some additional commentary on the business, review the income statement and provide guidance for 2014. We will then open the call to your questions. We expect the call to last approximately one hour.

Included with the press release that was issued earlier this morning is a schedule of sales for key products and/or businesses to facilitate updating your models. These schedules are available on the Johnson & Johnson website as is the press release. Please note we will be using a presentation to complement today’s commentary.

The presentation is also available on our website. Before we begin, let me remind you that some of the statements made during this review are or maybe considered forward-looking statements.

The 10-K for the fiscal year 2013 and the company’s subsequent filings identify certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made today.

The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. Our SEC filings including the 10-K are available through the company and on our website. During the review, non-GAAP financial measures are used to provide information pertinent to ongoing business performance.

These non-GAAP financial measures should not be considered replacements for GAAP results. Tables reconciling these measures to the most comparable GAAP measures are available in the press release and on the Investor Relations section of the Johnson & Johnson website. Now, I would like to review our results for the third quarter of 2014.

Worldwide sales to customers were $18.5 billion for the third quarter of 2014, up 5.1%. On an operational basis, sales were up 5.8% and currency had a negative impact of 0.7%. In the U.S., sales were up 11.6%.

In regions outside the U.S., our operational growth was 1%, while the effect of currency exchange rates negatively impacted our reported results by 1.3%. On an operational basis, the Western Hemisphere excluding the U.S. grew by 3.5%, Asia Pacific, Africa region grew 2% and Europe declined 0.8%.

The success of new product launches and continued growth of key products in all regions was partially offset by divestitures, the most significant one being Ortho-Clinical Diagnostics. Excluding the impact of divestitures, underlying operational growth was approximately 9%.

Turning now to earnings, net earnings were $4.7 billion and earnings per share were $1.66 versus $1.04 a year ago. As referenced in the table reconciling non-GAAP measures, 2014 third quarter net earnings were adjusted to exclude a net gain of $457 million for after tax special items.

Third quarter 2013 net earnings were adjusted to exclude a charge of $937 million for after tax special items. Dominic will discuss special items in his remarks.

Excluding special items for both periods, net earnings for the current quarter were $4.3 billion and diluted earnings per share were $1.50, representing increases of 9.5% and 10.3%, respectively, as compared to the same period in 2013.

Turning now to business segment highlights, please note percentages quoted represents operational sales change in comparison to the third quarter of 2013 unless otherwise stated and therefore, exclude the currency translational impact. I’ll begin with the Consumer segment. Worldwide Consumer segment sales of $3.6 billion increased 0.3% with U.S.

sales down 4.2%, while outside the U.S. sales grew 2.6%. Excluding the impact of divestitures, worldwide growth was approximately 2.5% with U.S. growth of approximately 1.5% and growth outside the U.S. were approximately 3%.

Major drivers of the results were over-the-counter and oral care products offset by the divestiture of the North American Sanitary Protection business. OTC sales growth was driven by upper respiratory products and analgesics.

Upper respiratory products grew 10% worldwide driven by sales growth outside the U.S., which included an early seasonal inventory build. Analgesic growth was 7% in U.S. driven by market share gains, partially offset by comparisons to the third quarter 2013 trade inventory build related to the re-launch of the products. In the U.S.

adult analgesic market share was approximately 11%, up from 8.5% a year ago, while U.S. pediatric share was over 40%, up from 26% a year ago. Oral care results were driven by strong results for LISTERINE due to new product launches and successful marketing campaigns.

Moving now to our Pharmaceutical segment, worldwide sales of $8.3 billion increased 18.7%, with U.S. sales up 33.1% and sales outside the U.S. up 4.1%, driven by both strong sales of new products, as well as core growth products. A major driver was our recently launched hepatitis C product called OLYSIO in the U.S. and EU and SOVRIAD in Japan.

Excluding sales of hepatitis C products, OLYSIO and INCIVO, underlying growth worldwide, U.S. and outside the U.S. was approximately 8%, 14% and 1.5%, respectively.

Other significant contributors to growth were immunology products, STELARA, REMICADE and SIMPONI, SIMPONI ARIA, as well as XARELTO, INVOKANA, ZYTIGA, INVEGA SUSTENNA/XEPLION and recently launched IMBRUVICA. Partially offsetting the growth were lower sales of ACIPHEX due to generic competition and lower sales of vaccines.

The results for immunology were driven by strong double-digit market growth complemented by increased market share for STELARA and SIMPONI, SIMPONI ARIA. We continue to be the U.S. market leader in immunology. XARELTO sales were up 68%, compared with the same quarter last year and grew 14.5% on a sequential basis.

Total prescription share or TRx for the quarter in the U.S. anticoagulant market grew to over 14.5%, with cardiology TRx estimated at 23.5%. INVOKANA sales contributed over three and a half points to the U.S.

pharmaceutical growth rate and for the quarter achieved 3.2% TRx within the defined market of type II diabetes excluding insulin and metformin, up from 2.4% in the second quarter of 2014. TRx with endocrinologists grew to 9.2% for the quarter, up approximately 1.5% sequentially. The strong results for ZYTIGA in the U.S.

were driven by increased market share in the combined metastatic castrate-resistant prostate cancer market and estimated market growth of 11%. ZYTIGA has captured approximately 33.5% of that market. Continued strong market uptick and additional country launches drove the strong results outside the U.S. ZYTIGA is approved in more than 90 countries.

I will now review the Medical Devices and Diagnostic segment results. Worldwide Medical Devices and Diagnostic segment sales of $6.6 billion decreased 4.6%. U.S. sales declined 6.5%, while sales outside the U.S. declined 2.8%. Excluding the impact of the OCD divestiture, worldwide growth was 1.6% while U.S. growth was 0.6% and growth outside the U.S.

was 2.4%. Growth was driven by orthopedics and cardiovascular care, partially offset by lower sales in vision care and surgical care. Competitive pricing dynamics impacted growth for vision care. In surgical care, the success of the ECHELONFLEX Powered ENDOPATH Stapler outside the U.S.

was offset by lower sales of women's health and urology products, coupled with U.S. pricing pressure. Orthopedic sales growth was driven by trauma, sports medicine, knees and hips.

Trauma was up 3% worldwide due to market growth and new product launches, while the successful launch of MONOVISC, coupled with the continued strong growth for ORTHOVISC drove results for sports medicine. Hip growth of 4% worldwide was driven by strong volume growth, partially offset by continued pricing pressure.

Primary stem platform sales were major contributors to the results. Knees worldwide increased 5% due to the successful launch of ATTUNE, partially offset by pricing pressure across the regions. Cardiovascular growth was driven by an 18% worldwide increase in our BioSense Webster business due to strong growth of the ThermoCool SmartTouch catheter.

That concludes the segment highlights for Johnson & Johnson’s third quarter of 2014. It is now my pleasure to turn the call over to Dominic Caruso.

Dominic?.

Good morning, everyone and thank you, Louise for sharing the highlights from our performance in the third quarter. We are very pleased with our strong performance this past quarter as well as the progress we've made on our long-term growth drivers. I believe we are well positioned in this evolving healthcare environment.

I'll take the next few minutes to highlight some of the progress we've made to advance our business, as well as to review some additional highlights of our financial performance for the third quarter. Then, I will provide our guidance for you to consider in refining your models for 2014.

But before I do that, I want to comment on what we're seeing in the market for healthcare. Although modest, we have now seen two consecutive quarters of positive momentum in hospital utilization rates, which is in line with recently published analysts’ reports noting the strength.

We continued to remain confident that as economies recover and as healthcare reform continues to gain momentum here in the U.S. and abroad, utilization rates are going to increase. At Johnson & Johnson, we’ve continued making very good progress on our near-term priorities of achieving our financial commitments, restoring and relaunching our U.S.

OTC products, continuing to capitalize on the potential of the DePuy Synthes acquisition and building on our strong momentum in Pharmaceuticals. At the same time, we’ve continued to focus on advancing our long-term growth drivers, which you're familiar with from our previous discussions.

During the quarter, we've made several significant advancements against these long-term growth drivers that are worth noting.

We continued to create value through innovation as evidenced by the strong performance of our newly launched products as well as by gaining regulatory approval for expanded uses of important products in our portfolio such as INVOKAMET, which is a combination of INVOKANA and metformin into a single pill to treat diabetes that the FDA approved in August.

Further, IMBRUVICA added a third indication in July, when the FDA approved it for use in treating patients with chronic lymphocytic leukemia, who have a specific genetic mutation that occurs when part of chromosome 17 is missing.

That's an important advancement for these patients who are considered to have the poorest prognosis and very limited treatment options. The CHMP also recommended IMBRUVICA for approval for similar uses in Europe.

And just yesterday, we announced that we entered into an agreement with Bristol-Myers Squibb and Pharmacyclics to evaluate IMBRUVICA in combination with an investigational PD-1 immune checkpoint inhibitor as a potential option for patients with non-Hodgkin's lymphoma.

And in our cardiovascular business, we launched INCRAFT Stent-Graft System for the treatment of abdominal aortic aneurysms in both Europe and Canada. Looking longer-term, we continued to make important investments to access early-stage innovation.

In the quarter, we acquired Covagen, the company that is focused on developing new therapeutics for the treatment of a broad range of inflammatory diseases.

On September 30th, we announced an agreement to acquire Alios Biopharma, which will give us a promising Phase 2 potential treatment for RSD, a major pediatric disease with no effective therapy available for prevention or treatment.

Their pipeline also includes two early-stage compounds for hepatitis C that could potentially augment our existing portfolio. We anticipate that the Alios acquisition will close later this quarter. And we are also leading with purpose, as demonstrated through our partnership with the NIH to fast-track the development of an Ebola vaccine.

Now let's review some highlights from the quarter. Turning to the next slide, you can see our condensed consolidated statement of earnings for the third quarter of 2014, which reflects both the success of our new products and the strength of our core businesses.

We’re pleased to show strong reported sales growth in the quarter of 5.1% or 5.8% operationally as we showed you earlier. This growth was driven in part by the continued uptake of our newly launched Pharmaceutical products including hepatitis C treatment OLYSIO, which is sold as SOVRIAD in Japan.

Please note that this is the first quarter reflecting the divestiture of our Ortho Clinical Diagnostics business. And in order to mitigate the EPS impact on future earnings from the OCD divestiture, you’ll recall that in July we announced a $5 billion share repurchase program.

Excluding the impact of the divestiture of Ortho Clinical Diagnostics, our sales increased nearly 8.5% on an operational basis in the quarter. Our hepatitis C products contributed approximately 1.5% of that growth. Please now direct your attention to the box section of the schedule where we’ve provided earnings adjusted to exclude special items.

Adjusted net earnings were $4.3 billion, reflecting an increase of 9.5% over the third quarter 2013, and adjusted earnings per share were $1.50 in the quarter versus $1.36 a year ago, which was up 10.3%, exceeding the mean of the analysts’ estimates as published by first call.

Profitability from sales of OLYSIO, net of investments we made, contributed approximately $0.06 of EPS this quarter and approximately $0.20 of EPS for the nine months of this year. As referenced in the table of non-GAAP measures, the 2014 third quarter net earnings were adjusted to exclude the following special items.

The net gains associated with the OCD divestiture, costs associated with the continued integration of Synthes, additional reserves for litigation expenses under the DePuy ASR Hip program and an approval for final IRS regulations related to the branded prescription drug fee.

Let me now provide some background about the branded prescription drug fee, which we have treated as a special item this quarter. As you know in 2011, we and all participants in the U.S.

pharmaceutical industry were required under the Affordable Care Act legislation to begin paying the fee based on our respective shares of branded prescription drugs sold to the U.S. government. The accounting for that fee has been consistently applied by the industry since that passage of the act as agreed with the Securities and Exchange Commission.

During the third quarter, the IRS issued final regulations, which had the effect of changing the recognition of the fee for accounting purposes from the period in which the fee is paid to the period from which market shares used to allocate the fee are determined.

Therefore, we and other industry participants are now required to record an additional year of the fee. Note that as the fee is still payable as originally provided for in the act, there is no resulting cash flow impact. Now let's take a few moments to talk about the other items on the statement of earnings.

I'm pleased to point out that we saw very good operating performance. Cost of goods sold was 120 basis points lower than the same period last year primarily due to our product mix offset by currency impact.

Selling, marketing and administrative expenses were 60 basis points lower as compared to the third quarter of 2013 due to the growth of new products in our pharmaceutical business and overall good management of cost primarily in our MD&D business.

These factors more than offset the inclusion of an additional year of the branded prescription drug fee, which I described earlier. Excluding the impact of this fee, which we have treated as a special item, these expenses were 180 basis points lower than in the prior year.

Our investment in research and development as a percent of sales was down compared to the prior year primarily due to timing of various R&D programs that we have and we will continue to make important R&D investments for the future. Overall, our pretax operating margin increased 240 basis points.

And excluding the incremental accrual for the additional year of the branded prescription drug fee, pretax operating margins increased 360 basis points. OLYSIO was a major contributor representing slightly more than one half of that increase.

Interest expense net of interest income are approximately $112 million was slightly higher than the prior year. Other income net of other expenses was $1.3 billion in the quarter as again, compared to $943 million of expense in the same period last year.

Now excluding the special items that were included in this line item, other income net of other expenses show the net expense of $25 million this quarter versus a net gain of $43 million in the prior year.

In the quarter, the effective tax rate excluding special items was 24.2% compared to 18.9% in the third quarter of 2013 and for nine months excluding special items, the tax rate was 21.9% compared to 19.3% in the same period last year. This was due primarily to the geographic mix of the results in each of the periods.

Now I will provide some guidance for you to consider as you refine your models for the balance of 2014. Before I discuss sales and earnings, I will give some guidance on items we know are difficult for you to forecast beginning with cash and interest income and expense.

At the end of the quarter, we had approximately $17.7 billion of net cash, which consist of approximately $33 billion of cash and marketable securities and approximately $15.3 billion of debt.

For purposes of your models, assuming no major additional acquisitions or other major uses of cash, I suggest you consider modeling net interest expense of between $400 million and $500 million, which is consistent with our previous guidance.

Regarding other income and expense, as a reminder, this is the account where we record royalty income as well as gains and losses arising from such items as litigation, investments by our development corporation as well as divestitures, asset sales and write-offs.

We will be comfortable with your models for 2014 reflecting other income and expense, excluding special items as a net gain, ranging from approximately $300 million to $400 million, which is lower than our previous guidance. And now a word on taxes. Our guidance for 2014 anticipates that the R&D tax credit will be renewed by Congress.

And although that has not yet occurred, we do anticipate that it will be retroactive for the full year when it is eventually passed consistent with our previous guidance. If the R&D tax credit is not approved, it will negatively impact our effective tax rate by approximately 0.5%.

We would therefore be comfortable with your models reflecting an effective tax rate for 2014 excluding special items of approximately 20% to 21%. This is an increase in our effective tax rate to reflect a higher portion of our earnings this year being subject to the U.S. tax rate.

As always, we will continue to pursue opportunities in this area to improve upon this rate. Turning to guidance on sales and earnings. As we've done for several years, our guidance will be based first on a constant currency basis reflecting our results from operations.

This is the way we manage our business and we believe this provides a good understanding of the underlying performance of our business. We will also provide an estimate of our sales and earnings per share results for 2014 with the impact that current exchange rates could have on the translation of those results.

Our sales and earnings guidance for 2014 takes into account several assumptions that I highlighted to you in previous quarters. For sales, our assumptions remain consistent from earlier guidance that PROCRIT will not have biosimilar competition in 2014.

And for INVEGA, SUSTENNA and RISPERDAL CONSTA, we do not anticipate generic entries for these products this year. Further, our guidance reflects net incremental sales from our hepatitis C products as well the divestiture of Ortho-Clinical Diagnostics.

Considering the factors I just noted, we would be comfortable with your models reflecting an operational sales increase on a constant currency basis of between 5.5% and 6.5% for the year. This would result in sales for 2014 on a constant currency basis of approximately $75 billion to $76 billion. This is an increase to our previous guidance.

Our underlying operational sales growth in this 2014 guidance excluding the impact of the hepatitis C products and the OCD divestiture for the full year 2014 is approximately 4.5%, a higher growth rate than the estimate we provided on last quarter's earnings call.

We are not predicting the impact of currency movements but to give you an idea of the potential impact on sales, if currency exchange rates were to remain where they were as of last week for the balance of the year than our sales growth rate would decrease by nearly 1.5%, reflecting the recent weakening of the euro and other currencies against the U.S.

dollar. Thus under this scenario, we would expect reported sales growth to range between 4% and 5% for total expected level of reported sales of between approximately $74 billion and $75 billion.

Our 2014 earnings guidance reflects the strength of our performance we've seen thus far including a strong contribution of OLYSIO which as I noted earlier contributed approximately $0.20 to 2014 EPS for the first nine months, net of investments we've made in the business.

Therefore we suggest you consider full year 2014 EPS estimates, excluding the impact of special items of between $5.94 and $5.99 per share on operational or constant currency basis, which is higher than our previous guidance.

Moving to reported EPS, again we’re not predicting the impact of currency movements but to give you an idea of the potential impact on EPS if currency exchange rates were to remain where they were as of last week for the balance of this year than our reported EPS, excluding special items, would be negatively impacted by approximately $0.02 per share due to exchange rate fluctuations.

This represents a $0.07 per share unfavorable swing from our previous guidance, with the weakening euro as a major factor. We therefore suggest that you model our reported EPS, excluding special items, in the range between $5.92 and $5.97 per share for growth rate of about 7% to 8%.

This is higher than our previous guidance, as our strong operational earnings performance is more than offsetting the negative impact of currency movements. And as a reminder, our full year earnings guidance includes intangible amortization of approximately $1.4 billion before tax, or an impact of approximately $0.38 on earnings per share.

Please note that our guidance does not include the impact of an official devaluation of the Venezuelan Bolivar or any other currency.

And while we’re not providing guidance for 2015, if currency exchange rates were to remain where they were as of last week for all of 2015, that impact would be a headwind to earnings per share of approximately $0.15 to $0.20 per share.

As you update your models for the guidance I just provided, you will see that we do expect that our pre-tax operating margins will show a significant improvement in 2014 over 2013 levels, and approximately half of that is attributed to OLYSIO net of the additional investments we’re making in the business.

In summary, we are very pleased with our strong results this quarter and with our ability to deliver an even stronger earnings performance for the full year than our previous guidance. Our new products continue to produce strong growth and we are advancing our near-term priorities while also continuing to make investments to fuel future growth.

Now I would like to turn things back to Louise for the Q&A portion of the meeting.

Louise?.

Thank you, Dominic. And Stephanie, could you please give the instructions for the Q&A session..

(Operator Instructions) Your first question is from the line of Mike Weinstein with JPMorgan..

Good morning, Mike.

Good morning. Thanks for taking the questions. So Dominic, first, one clarification, the $0.06, you called out this quarter and $0.20 for the year for OLYSIO, that would seem to imply probably about $0.20 and more of investments netted against that to get to that $0.20 number.

So, can you just maybe outline that the $0.20 versus what profitability could have been for that product?.

Sure, Mike. We are not going to give very specific profitability by product. But generally speaking, when we saw the uptick in OLYSIO sales this year, we knew we had the opportunity to invest more in the business, including both some marketing investment as well as new R&D program.

So we expected that we would do that while still having our investors see the benefits of the uptick in the OLYSIO product. So I can’t give you the specifics, but generally speaking about $0.20 for the year.

I mean, if you assume that OLYSIO is a high margin -- high gross margin product with very, very little costs associated with it, you can probably estimate what the total impact would be..

And do you view that $0.20 as one-time, essentially going away next year.

Is that you want these rates to be picking up in ‘15?.

Yeah. I think so, because it’s obvious that we saw such a significant uptick this quarter and you all know that Gilead’s compound in this space was just approved Friday. I think we all expected that. So we took the opportunity to invest.

I think we're being very transparent with investors of what the impact to this year's earnings are net of the investments, of course. And yes, we don't expect that that will continue into next year..

One last question.

Could you walk through the assumptions that you’ve laid for this year relative to biosimilar competition? Do you have any preliminary comments relative to 2015? And are you thinking about competition for REMICADE or can you give a product from the portfolio?.

Sure. Louise, we have spoken before about the fact that 2015 is biosimilar impact for REMICADE in Europe, in particular..

Correct. And as far as INVEGA SUSTENNA and RISPERDAL CONSTA, we are not aware of any ANDA filings on them at this point in time..

Perfect. I will let others jump in. Thank you..

Thanks, Mike..

Next question please..

Our next question comes from Larry Biegelsen, Wells Fargo..

Good morning, Larry..

Hi, Larry..

Good morning. Thanks for taking the questions. I wanted to ask a question about international growth, which has slowed the last couple quarters. The U.S. has obviously been very strong, but can you talk about what you're seeing outside the U.S. and why the U.S. -- O-U.S. I am sorry isn’t growing quite as robustly as the U.S.? And then I had a follow-up.

Thanks..

Right. Well, couple things. This quarter of course, we have the impact of the OCD divestiture, so the quarter-over-quarter comparisons are difficult for that. So Europe, I think you saw published operational growth of negative 0.8%. Without the OCD impact, it would've been positive 1% growth. That is slower growth than we’ve seen before.

I think you're all very familiar with the fact that Europe is in fact slowing down and we're seeing that across our businesses as well..

And then Dominic, on Vision Care, it was down 13% this quarter. Can you give us a little bit more color about what's going on there? Is that a market issue? Is that a J&J specific issue? And how long do you think it will take to recover? Thank you..

Right. Well, we mentioned in the comments by Louise earlier that there is some competitive pricing dynamics that we’re seeing in the market for our Vision Care products. So we took the opportunity to price we set, some of our products in that marketplace. We have a lot of new and important innovations coming to market soon.

And when we noticed what was going on in the market, we want to price our products competitively with those in anticipation of the new products we have coming in the near future. So I would say there is a little bit of a slowdown in overall market, but the impact you saw for our business was primarily a result of our price we set..

Thanks for taking the question..

Thank you..

Next question please..

Your next question comes from Jami Rubin, Goldman Sachs..

Good morning, Jami..

Hi, Jami..

Good morning. Just if you don’t mind, if I follow up a little bit on OLYSIO.

So just to be clear Dominic, you said $0.06 net of investments, are you talking net of general investments, or net of investments in hep C? I mean, what is your commitment level to hep C going forward? And given the new pricing around the Gilead combo, it would seem that OLYSIO, even if you cut the price dramatically would have a hard time competing.

Are you planning to cut the price and would you expect the $2 billion that you’ve generated year-to-date to just basically go away next year? And then just lastly, back to the margin contribution, I think you were a little bit more explicit on the previous call.

I think you had said two-thirds of a 230 basis point improvement was attributed to OLYSIO. If I assume the same thing this quarter, that would have led to about $0.15 contribution and that of course it does not include investments. So if you could just confirm that.

And then lastly, I am obliged to ask this, do you have any double Irish exposure? Thanks very much..

Okay. Well, let me say, I think I counted eight questions Jami, so I am going to do more..

I am going to get this opportunity four times a year..

Okay. So just to be clear, when I talk about the impact of OLYSIO net of investments, I am talking about net of all investments, not just investments in hep C. So investments across the full range of the Johnson & Johnson portfolio. We are committed to hep C. We continue to do studies in combination with other products.

We think there is important new advances still available in that marketplace. We think the market is substantial and it’s worth pursuing. So we are still committed to investment there and we’re doing those clinical trials.

As you know, we have already filed with the FDA for our combination of OLYSIO with sofosbuvir and then we have additional data coming out, I think, later this year in addition to that. And then, finally you would ask about pricing given the impact of Gilead’s new pricing for Harvoni, I believe the product is called.

And I would just offer the following comments. First of all, we believe that OLYSIO is in fact a very good -- has very good safety and efficacy results, in a strong position in patient experienced to date. We plan to remain competitive in the hepatitis C category and we will work with payers to maintain access for OLYSIO in the marketplace.

And given the size, complexity and diversity of this patient population, we think physicians will continue to need multiple treatment options and hence my comment earlier about our commitment to continue to study OLYSIO for hep C as well some other combinations.

We think having a potent protease inhibitor available to physicians is important and we’re committed to doing that. As far as Double Dutch or Irish Sandwiches or whatever they are called, I'm not going to comment very specifically about what we do or we don't have but we’ll have to wait to see what the Irish legislation actually says.

But we understand from all the comments that have been made by Irish regulators that there will certainly be some grandfathering period for any changes that they propose because they do expect to keep Ireland competitive in the world economy. So we certainly expect that there will be some grandfather period.

I don't know how long it will be but we've heard in the range of five years, could be three to five, could be five to seven. But we expect that the grandfathering provisions will give us all enough time to adjust any plans that we might have as a result of any impact..

Thank you..

You’re welcome..

Next question please..

Your next question comes from Glenn Novarro, RBC Capital Markets..

Good morning, Glenn..

Hey, Glenn..

Good morning. I want to focus on your orthopedics business. Your U.S. knees and your U.S. hips came in a little bit better than we were thinking.

So Dominic and Louise, can you provide some commentary about what you see on the U.S side in terms of volumes? Are things feeling a little bit better after kind of a softer first half and then as a follow-up Louise, you mentioned in your prepared remarks pricing pressure.

I wonder if you can characterize the pressure that you saw in 3Q compared to how you saw it in 2Q and 1Q? Thanks..

Okay. Well, let me start with just a few comments on volumes. We did see increased volume in the third quarter. Consistent with what we expected where we thought that the second half of the year would be stronger than the first half of the year.

Just by the way of reference, last year, our hip and knee growth we experienced 70% of that growth in the fourth quarter. So obviously, we've now seen a new seasonality that’s very clear in hip and knee market. And we’ve seen an uptick in the third quarter or in the back half of the year as we expected, we would see. And Louise on pricing..

Okay. And so just a little further on the market, so we are the first one though but our best estimate of the U.S market growth for the third quarter was hips about 3%. We grew slightly faster and knees about 4%, which we also grew slightly faster.

But that’s again, just a big estimate because we’re the first or second one out, depending on how you count it. Regarding price, so in hips this is U.S only, price was minus 5%, which is additional negative by 1% versus sequential basis and mix was virtually flat. So net net price mix in the U.S for hips was down about 5%.

For knees, price was negative 2.2% so that's a little better than the second quarter. Mix coming in about 1.5% positive so negative minus 0.6 on the quarter price and mix together and that’s better than the second quarter..

As a follow-up, Louise, that negative 5 on hips, that’s a big number. Do you have any commentary why negative 5? We’ve been kind of thinking the market overall for hips would be down more 2 to 3 and you’re coming in at negative 5. Was there any contract that rolled off any additional commentary you can provide? Thanks..

Yes. There were some additional contracts that were renewed in the third quarter and that is you’re seeing the impact in that minus 5%..

Okay. Thank you very much..

Okay. And did you want to do spine price in the U.S is down 5% and that’s more negative versus the second quarter. Mix is up a positive of 1% for a negative of 4% altogether price mix for spine in U.S..

Okay..

Next question please?.

Your next question comes from Derrick Sung, Sanford Bernstein..

Hi. Thanks for taking my question.

Actually, some of the follow-up on your biosimilar comments for next year? So few things, can you help us think about how we should think about the impact of competition in Europe sort of relative to, maybe what you’ve seen with your [Eagle] (ph) franchise and such? And then in the U.S in terms of the biosimilar threat there, last month the U.S.

Patent Office issued a final rejection on one of the key REMICADE patents under re-examination? Now we understand that the final rejection still has an appeals process to it? But I was wondering if you could kind of give us some insight into what that appeals process is and how you think about the -- your IP position in the U.S with potential FDA approval of Celltrion, REMICADE next year as well?.

So, Derrick, thanks for the question.

So biosimilars in the OUS first, we haven't seen much of an impact and we know that that even pricing is sort of in the 30% range down from the branded product, but we haven't seen much of an impact of biosimilars in Europe such as Procrit and we’re not seen much of an impact for any other biosimilars as well including REMICADE.

In the U.S, you raise a question about the potential biosimilar impact in the U.S because of Celltrion filing.

Just as a reminder, we have a patent in the U.S, which goes until 2018 and yes, it's true that the Patent Office recently issued a rejection to that patent, but we have recently filed a revised amendment to that, which is now in the public domain.

And until the patent in finally adjudicated, which could go up to the Supreme Court with the number of appellate arguments and appellate avenues that we have available to us. We don’t expect that there will be a final adjudication of the patent for several years now.

So whether or not, the biosimilar comes to market in the face of that particular patent situation is up to the competitor.

But we certainly continue to believe in the strength of our patents and the validity of those patents and we’re in active discussions with the Patent Office and we will pursue all available appeals and all the available jurisdictions and avenues of jurisdiction that we have to us, which again, I would say, would take several years before they would be finally adjudicated..

Okay. Great. That’s very helpful. Thank you for that.

Just a quick follow-up on your utilization comments, you’ve called out the fact that we’ve seen a couple of quarters of utilization pickup on the hospital side of things? Has that -- it didn't look like that really translated to pickup in your surgical sales and I was just wondering if that’s result of -- that being obscured by pricing or some other fact and when will we expect to see some of that utilization pickup be reflected in your MD&D sales?.

Right. Well, couple of things, I remember, the MD&D sales, surgical care in particular have been impacted by lower women’s health and urology sales. Remember, we withdrew the more selects product from the market. So there is some negative impact related to that. There was also some negative pricing pressure in the quarter.

And the overall utilization uptick that we saw was in the very low single digit. So, I mentioned it was modest growth, although encouraging that we saw in two quarters in a row but still very modest, Derrick..

Okay. Great. Thank you very much..

Welcome..

Next question, please..

The next question comes from Vamil Divan, Credit Suisse..

Morning, Vamil. .

Hi. Good morning, guys. Thanks a lot for taking my question. Just couple on the diabetes side here with your SGLT2.

Can you just comment what you are hearing from physicians around the differentiation for your product versus some of the competitors that are now in the market? And are you envisioning any tougher pricing dynamics going forward with that class given that there are competitors? And last on the combination with SGLT2 and DPP-4s, can you just remind us if you guys are working on that? I would think that would be good strategy to kind of maintain your position and your competitors certainly are working on those combinations..

Right. Well with respect to the differentiations of INVOKANA to the new competitors, INVOKANA, of course continues to do very well.

And the data as you know as filed was a result of something like eight different clinical trials, which should both the safety and the efficacy of INVOKANA, seems to continue to do well even in the face of new competition. So, we’re still growing share even with new competitors coming to the market.

We don't see much of a price issue in the marketplace. They are all relatively priced competitively. Remember, this is a very large market and the fact that more SGLT2 inhibitors come to market, we think is good for the market overall because it increases physician’s awareness of the use of that particular mechanism of action.

We think the market can withstand a number of competitors. And so we think overall there will be market growth as a result. As far as the combination, I’m not aware that we are actually studying the combination with DPP2 and SGLT2 inhibitor combination..

Yeah. So INVOKANA was just approved, right, which is combination with metformin. And if you look at the usage of INVOKANA, where about 50% of it is in triple therapies, so they are actually able to get the combination themselves..

Right..

Okay. Thanks. One quick follow-up, if I could on this because the schizophrenia market, just the LAIs, the growth there was a little bit less than we anticipated. Can you just provide any color there on the deceleration in the U.S. and outside the U.S.

this quarter?.

I think for our business, the combined, still grew very well, if you take a look at our INVEGA SUSTENNA and Risperdal Consta together. So the U.S. is up 10% due to an increase in combined market share for our growth and that’s INVEGA SUSTENNA and Risperdal Consta together. OUS is up about 3%, so worldwide it’s six in operational levels..

Okay. Thank you..

Next question, please?.

Your next question comes from Kristen Stewart, Deutsche Bank..

Hi. Thanks for taking the question.

I just want to go back to orthopaedics, I was wondering, Louise, if you could just provide the pricing on trauma and then I have other questions?.

I think someone was going to ask that one. Okay, so for trauma, U.S. only prices 0.5, 0.7 negative and mix was very strong at 2.5% positive, so for net net, a roughly 2% positive..

Okay. And then more strategically just thinking about the Medical Device business, I don't expect you to comment or rumors, but I guess there was some speculation that you guys maybe working where you saw some portions of the quarter’s business.

Can you maybe just tell us, Dominic, how you are thinking I guess more broadly about MD&D where you expressed an interest in cardiology more broadly, although have also said about comments on the growth rate there? But has anything changed just overall and the strategic value of having a more broad-based Medical Device business and maybe make some comments in that theme and just a consolidation that you are seeing in your competitors?.

Right. Kristen, thanks for the questions. So, couple of things, so nothing changed with respect to our overall strategic approach to the space.

We are looking at areas where we think there will be strong market growth either because of demographics or because of innovation or because of our own ability to compete in the market, bringing in new technologies with our current presence.

As you know, we made the determination some time ago that we’re going to focus on surgery, general surgery, and specialty surgery, and orthopedics and have less of a focus on cardiovascular and we got out of the drug-eluting stent business as we saw that become a commoditized business.

Within the overall approach to medical devices, we still believe surgery is the place to be. We’re obviously very happy with our market position there. We made a big bet as you know in orthopedics and we’re continuing to see the benefits of that combination with Synthes.

And with respect to cardiology, we believe that there are specific areas of focus within cardiology that are important. And for example, electrophysiology where we’re a leader there and we've seen very good growth, I think nearly 18% growth this quarter from our Biosense Webster business. So nothing has really changed.

We believe these are the two main areas within and indeed that we’re going to focus on surgery and orthopedics with selective investments in selective growth areas within cardiovascular medicine.

I think our competitors have basically followed suit in terms of these combinations in orthopedics as you know, and there is also combinations along with a current large player in cardiology now acquiring a major player in surgery, again confirming our approach that in fact surgery is the place that we’re going to see sustainable growth going forward.

So nothing has changed and I hope that overall picture that I gave you is consistent with the previous discussions we've had and we’re moving along that strategy..

And on the ortho side, we’ve seen the special charges for Synthes continue for longer than I would have anticipated.

When I guess will that business be fully integrated and then when will all the one-time charges that are more occurring I guess charges stop for that business? I’ve just been surprised by the magnitude and by how long we’ve been seeing that?.

Right. Well, we are very careful to integrate this business in a way that wouldn’t be disruptive to our customers. And we made sure that that was our first priority. There is a number of sites that we have to consolidate. These are two very large businesses as you can imagine.

So these integration activities are winding down and we should see less of the special charges going forward. And I would say that we’re very close to actually completing the full integration of Synthes..

Right. Thanks very much..

You’re welcome. .

Next question please..

Your next question comes from Bob Hopkins, Bank of America..

Good morning, Bob..

Hey, good morning. Thanks. Just a couple quick questions. First, Dominic for you, you mentioned a couple of headwinds for calendar year 2015. I think you said that if currency rates would stay the same, you would see about a $0.15 to $0.20 headwind, that's pretty clear.

But OLYSIO, I just want to make sure I understand what the message is in terms of looking forward.

Should we think about that as a significant EPS headwind in 2015? Or are you going to reduce the expenditures that you’ve got running through in 2014 or 2015, such that that won’t be a significant EPS headwind in 2015?.

Right.

Well, one way to think about it is that OLYSIO has been a major contributor this year, but we, of course, invested, as I mentioned earlier, some of that upside in the business, so that overall next year when you see a reduction of that contribution overall net-net, it wouldn't be a significant as you might think and that's why, I quoted, the net $0.20 impact for the first nine months.

We don't believe that that given the dynamics in the marketplace of this significance that we should overreact and adjust our business too drastically just from one year to the next, considering the fact that we have many investment opportunities, the businesses are still growing nicely and in fact, the overall pharmaceutical business as you know even without OLYSIO is still growing at high double-digit rate.

So we continue to bring our consumer products back to the marketplace. So we don't want to really overreact from a big change in a single item that we believe the investment community is very well versed on and so we’ll continue to invest in our businesses appropriately going forward..

Okay.

I asked the question just because and I realize it's only one year, but there was couple of headwinds for next year that people are trying to get ahead of from a modeling perspective, so I just want to make sure do you understand all the moving parts? The second question I want to ask was back on your utilization commentary, which did seem more constructive this quarter relative to last? And one thing you’ve comment on the past is your suture business perhaps is a good indication of what's going on from a surgical procedure volume perspective? So I was just wondering if you think your suture business this quarter provided any insight into what's going on, I was just wondering if could just give us a sense as to how much that grew to this particular quarter?.

Right. So, we said, I mentioned earlier, we did see positive utilization trends two quarters in a row. So we have you two dots we can connect.

I guess but these are very, very modest, very low single-digit utilization rate increases and our suture business also had modest low single-digit growth offset by a little bit of price, but overall modest growth. So I think that's consistent with utilization trends we have seen..

Yes. The best estimate from our surgical care group is that the market was flat in the U.S. and then as Dominic said, there’s some negative price on it, and then internationally, sutures grew about 2%, so on a worldwide basis we grew 1..

Okay. Thank you very much..

You’re welcome..

Okay.

Next question please?.

Your next question is from a line of Matt Miksic with Piper Jaffray..

Good morning, Matt..

Good morning. Thanks for taking the questions.

A couple, I think, most of the topics have been pretty well covered? But I did want to drill into a couple of comments on orthopedics? In particular you mentioned your estimates for market growth approximately 3% hips, 4% knees, and I realized that we are early about a third of the markets reported? But as you think about U.S.

versus Europe, I guess, one of the things in an OUS is a little bit surprising to us is the strength that we've seen overseas? If you can maybe comment on the seasonally slow quarter, how we are seeing things like 6% operating growth for example in knees OUS, if you could highlight a little bit of what you are seeing and then I have one follow-up?.

Well, Matt, one of things that we are benefiting from is the launch of ATTUNE, our knee platform and it’s been very well as it continued to launch throughout the world and we are seeing significant growth from the ATTUNE launch in Europe in particular, so that that's a major factor that’s specific to our business and not the overall market..

And then the other would be on sort of the share dynamic and I think about trauma and hips and knees coming together, we’ve all been talking for a long time about the potential benefits of bundling? I am wondering whether you are growing a little bit faster than the market as you commented on, but is any of that coming in the form of either share ahead of some of the strategic or hypothetical strategic actions in this space or just benefits of having a broader bigger trauma, hip, knee offering in orthopedics?.

Yes. I do think that that we are seeing the benefit of having a broader offering in orthopedics. So we had estimated some sales synergy from combining these businesses and we just got a report recently from the team and we are ahead of the sales synergies that we had expected. So I think the overall combination is working well for us.

This is a marketplace as you know where share changes are not very dramatic and they are gradual overtime, but we are seeing positive momentum in that regard..

Nothing on the share gains related to sort of dissynergies or reps jumping ship from some of these other competitors?.

Well, I think, a little too early to tell that, but we do think that is an opportunity going forward. There will be disruption as we experienced ourselves when we combined our two spine businesses. So we think that will be an opportunity for us go -- on a go forward basis..

Great. Thanks..

Welcome..

With respect to everyone’s time, we will take two more questions.

Next question please?.

The next question is from line of Josh Jennings with Cowen & Co..

Good morning, Josh..

Hi, Josh..

Good morning. Good morning. Thanks a lot. Just wanted to follow-up on with an orthopedic question on the Ortho unit, you’ve obviously established breadth and scale there.

But just wanted to see if you would comment on where some of the weakness in the portfolio is, that’s serving on as an anchor to the overall growth of the franchise? And then also, does J&J need a robotics platform for the recon and/or spine business to compete effectively in the future?.

Well, let me just say that with respect to the second question, I don’t think we need a robotics platform of our own to effectively compete in the future. We are in fact utilized in the robotic platform that exists today with our products, at the end of factor – end of the robotic arm.

So we do participate in the robotic -- view it as a critical enabler of growth for us in particular. And then, secondly, with respect to the overall orthopedics business, I would say, the only place we saw some softening is in trauma in the extremities portion of trauma.

So, lower foot and ankle kind of trauma products, that market seem to be growing more rapidly than the overall market and we have some new innovations coming to market, but not yet there. So we are not yet participated in that growth, but we will be going forward..

Okay..

Okay..

Next question please? Next and last question, and then we’ll turn it over to Dominic for some final remarks..

Your final question will be from the line of David Lewis, Morgan Stanley..

Thanks guys for squeezing me in here. Louise, just related to ZYTIGA, the U.S. growth rates were actually relatively strong but the international growth rates slowed a little bit, I know it was a very challenging comp outside the U.S. Could you just update us on any dynamics outside the U.S. for ZYTIGA? And then specifically in the U.S.

maybe any insight you can give us on competitive share and key patient indications and how you are trending? Thank you..

Certainly, for the U.S. about 90% of our shares are going through the oncologist and about 10% -- 10%, 11% going through the urologist. In the third quarters, 60 plus percent was in the naïve versus the refractory. And I think what you are seeing in outside the U.S. is just continued new introductions into the market..

Okay. Thank you very much..

Okay..

Very welcome..

Some final remarks from Dominic..

Okay. Well, thank you everybody for your thoughtful questions and I hope you will agree that our continued investments and innovations, and our strategic portfolio management are delivering very strong performance and positioning us well for growth moving forward.

Well, we couldn’t do that without the great people who work at Johnson & Johnson, I would like to thank them for all they do every day and the contributions they make on behalf of the consumers and patients whose lives we touch around the world every day. So thank you very much for joining us today and have a great day..

Thank you. This concludes today’s Johnson & Johnson’s third quarter 2014 earnings conference call. You may now disconnect..