Louise Mehrotra - Vice President-Investor Relations Dominic J. Caruso - Vice President, Finance and Chief Financial Officer.

David R. Lewis - Morgan Stanley & Co. LLC Joshua Jennings - Cowen & Co. LLC Michael Weinstein - JPMorgan Securities LLC Kristen Stewart - Deutsche Bank Securities, Inc. Jami Rubin - Goldman Sachs & Co. Glenn John Novarro - RBC Capital Markets LLC Vamil K. Divan - Credit Suisse Securities (USA) LLC (Broker) Geoffrey Meacham - Barclays Capital, Inc.

Damien Conover - Morningstar, Inc. (Research) Vik Chopra - UBS Securities LLC Lawrence Biegelsen - Wells Fargo Securities LLC.

Good morning and welcome to Johnson & Johnson's first quarter 2016 earnings conference call. All participants will be in listen-only mode 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. I will now turn the conference call 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 first quarter of 2016. Joining me on the call today is Dominic Caruso, our Chief Financial Officer.

A few logistics before we get into the details; this review is being made available via a webcast accessible through the Investor Relations section of the Johnson & Johnson website at investor.jnj.com. I will begin by briefly reviewing the first quarter for the corporation and for our three business segments.

Then Dominic will provide some additional commentary on the business, review the income statement and guidance for 2016. 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 may be considered forward-looking statements.

The 10-K for the fiscal year 2015 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 and should be read together with GAAP results. Tables reconciling these measures to the most comparable GAAP measures are available in the schedules accompanying the press release and on the Investor Relations section of the Johnson & Johnson website.

A number of the products and compounds discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide acknowledges those relationships. Now I would like to review our results for the first quarter of 2016.

Worldwide sales to customers were $17.5 billion for the first quarter of 2016, up 0.6% versus first quarter 2015. On an operational basis, sales were up 3.9%, and currency had a negative impact of 3.3%. In the U.S., sales were up 7.2%.

In regions outside the U.S., our operational growth was 0.6%, while the effect of currency exchange rates negatively impacted our reported results by 6.6%. On an operational basis, Asia-Pacific and Africa grew 3%. Europe declined 0.8%, and the Western Hemisphere excluding the U.S. declined by 0.6%.

Results in all regions were negatively impacted by hepatitis C competition and divestitures, the most significant one being Cordis. In addition, the devaluation in Venezuela impacted operational growth in the Western Hemisphere excluding the U.S.

Excluding the net impact of acquisitions, divestitures, and hepatitis C, underlying operational growth was 6.9% worldwide, 9.8% in the U.S., and 3.8% outside the U.S. In addition, the devaluation in Venezuela impacted worldwide and outside-the-U.S. operational growth by 60 basis points and 120 basis points, respectively.

Turning now to earnings, net earnings were $4.3 billion, and earnings per share were $1.54 versus $1.53 a year ago. As a reference, in the table reconciling non-GAAP measures, 2016 first quarter net earnings were adjusted to exclude after-tax amortization expense of $205 million and a charge of $192 million for after-tax special items.

2015 first quarter net earnings were adjusted to exclude a net charge of $98 million. Dominic will discuss special items in his remarks.

Excluding amortization expense and special items for both periods, adjusted net earnings for the current quarter were $4.7 billion, and diluted earnings per share were $1.68, representing increases of 6.1% and 7.7%, respectively, as compared to the same period in 2015. Currency translation significantly impacted net earnings.

On an operational basis, adjusted net earnings per share grew 10.3%. Turning now to business segment highlights, please note percentages quoted represent operational sales change in comparison to the first quarter of 2015 unless otherwise stated, and therefore exclude the currency translation impact. I'll begin with the Consumer segment.

Worldwide Consumer segment sales of $3.2 billion decreased 0.2%, with U.S. sales down 0.1%, while outside-the-U.S. sales were down 0.3%. Excluding the net impact of acquisitions and divestitures, underlying operational sales growth was 1.9% worldwide, 4.1% in the U.S., and 0.5% outside the U.S.

In addition, the devaluation in Venezuela impacted growth worldwide and outside the U.S. by 200 basis points and 320 basis points, respectively, with the most significant impact to women's health, oral care, and baby care. Growth for the segment was driven primarily by OTC worldwide and oral care. OTC sales growth was strong despite a weak flu season.

U.S. OTC sales growth was driven by analgesic share growth and an inventory build as well as seasonal and new product launch inventory for upper respiratory products. In the U.S., adult analgesic market share was approximately 14%, up from approximately 12% a year ago, while U.S. pediatric share was nearly 46%, up from nearly 43% a year ago.

Major contributors to the growth outside the U.S. were the strong performance of analgesics and anti-smoking aids, partially offset by lower sales of upper respiratory products due to the fourth quarter distributor inventory build, as noted last quarter.

New product launches and successful marketing campaigns drove the results for LISTERINE in oral care. Moving now to our Pharmaceutical segment, worldwide sales of $8.2 billion increased 8.5%, with U.S. sales up 12.9% and sales outside the U.S. up 2.6%, driven by both strong sales of new products as well as core growth products.

Competitors in hepatitis C significantly impacted sales this quarter. Excluding sales of our hepatitis C products, OLYSIO and INCIVO, as well as the impact of acquisitions and divestitures, underlying sales growth worldwide in the U.S. and outside the U.S. was 12.3%, 16.2%, and 7.1%, respectively. As we discussed last year, U.S.

results in the first quarter of 2015 included a positive adjustment for gross-to-net, including managed Medicaid rebates. In the first quarter this year, U.S. results included an adjustment for a similar amount, and therefore overall growth was not impacted.

However, on a product basis, STELARA growth in 2016 was positively impacted by approximately 16 points, XARELTO by four points, and REMICADE by three points.

Significant contributors to growth were immunology products REMICADE, STELARA, and SIMPONI/SIMPONI ARIA, oncology products IMBRUVICA and recently launched DARZALEX, as well as cardiovascular metabolic products XARELTO and INVOKANA.

The results for immunology were driven by strong double-digit market growth as well as the gross-to-net adjustment to sales that I mentioned. Combined REMICADE export sales and international sales grew approximately 11%. Sales to distribution partners were up approximately 5%.

Sales to our international direct markets were up approximately 17% due primarily to strong double-digit growth in the Western Hemisphere excluding the U.S., primarily driven by timing of shipments and market growth. Strong patient uptake with new indications, approvals, and demonstrated efficacy drove the results for IMBRUVICA both in the U.S.

and outside the U.S. In the U.S., IMBRUVICA remains the new patient share and total share leader in second-line CLL and MCL. IMBRUVICA is now launched in more than 65 countries. DARZALEX was approved in the U.S. in November 2015 and has achieved rapid uptake. DARZALEX contributed over 2% to the U.S. Pharmaceutical growth rate.

XARELTO sales were up 29%, and total prescription share, or TRx, for the quarter in the U.S. anticoagulant market grew to over 16.5%, up over 1.5 points from a year ago. TRx in primary care was nearly 14% and in cardiology nearly 23.5%, up on a sequential basis by 0.5 point and 0.3 points, respectively.

XARELTO is broadly reimbursed, with 95% of commercial and Medicare Part D patients covered at the lowest co-pay for a branded product. INVOKANA/INVOKAMET sales were up nearly 18% on a worldwide basis and nearly 12% in the U.S.

In the U.S., INVOKANA/INVOKAMET TRx within the defined market of Type 2 diabetes excluding insulin and metformin was 6.1%, up from 5.1% in the first quarter of 2015. TRx with endocrinologists was 11.5% and 5.5% in the primary care.

On a sequential basis, sales declined due to the extra shipping days in the fourth quarter, incremental rebates and savings program redemptions, as well as increased competition and formulary positions. INVOKANA access remains strong at 80% preferred for combined commercial and Part D. I'll now review the Medical Devices segment results.

Worldwide Medical Devices segment sales of $6.1 billion increased 0.5%. U.S. sales increased 2.2% while sales outside the U.S. declined 1%. Cordis was divested in the fourth quarter of 2015. Excluding the net impact of acquisitions and divestitures, underlying operational sales growth was 3% worldwide, with the U.S.

up 3.3% and the growth of 2.8% outside the U.S. Growth was driven by orthopedics, advanced surgery, and electrophysiology. Orthopedic sales growth was driven by worldwide knees and hips and U.S. trauma and spine. Market growth and the success of product launches drove results for the U.S. orthopedics business.

Pricing pressure continued across the major categories, partially offset by positive mix for trauma and spine products. The success of the TFNA nailing system in trauma, the ATTUNE platform in knees, our primary stem platform in hips, and ORTHOVISC/MONOVISC and new spine product introductions made important contributions to results.

Orthopedic sales outside the U.S. were negatively impacted by results in China due to a softer demand and a reduction in inventory. Trauma and spine other were the categories most impacted. In addition, timing of tender business negatively impacted trauma growth for the quarter.

Strong results were achieved for advanced surgery products, with endocutters growth of 10%, biosurgicals growth of 8%, and energy growth of 8%. Base electrophysiology grew 19% worldwide due to strong market growth, complemented by new product launches and increased penetration for both ultrasound and diagnostic catheters.

That concludes the segment highlights for Johnson & Johnson's first quarter of 2016. It is now my pleasure to turn the call over to Dominic Caruso.

Dominic?.

Thanks, Louise, and good morning, everyone. We carried last year's momentum into 2016, and we're off to a strong start this year.

We are very pleased with the results generated in the first quarter, and we continue to make very good progress on our nearer-term priorities as well as our long-term growth drivers, which we discussed during our January call. We remain confident in the strength of our business.

As we've previously discussed in 2015, our underlying operational sales growth, which excludes the impact of acquisitions, divestitures, as well as hepatitis C sales, and a few extra shipping days in 2015, was 5.5%.

On this same basis, we gained momentum in the first quarter, with strong underlying operational sales growth of approximately 7% and in line with analyst estimates. In our Pharmaceutical business, our strong performance from 2015 continued into the first quarter, with underlying operational growth at over 12%.

First quarter underlying operational sales growth for Consumer increased approximately 4% when also adjusting for the impact of the devaluation in Venezuela that Louise mentioned earlier. In Medical Devices, we're off to a good start in the first quarter, with underlying operational growth of approximately 3%.

Growth in our consumer-facing Medical Device businesses was negatively impacted by challenges in the diabetes market.

For the hospital-focused Medical Device businesses, we're seeing signs of continued improvement, with underlying operational growth in those businesses of approximately 4%, driven by strength in our orthopedics, advanced surgery, and electrophysiology businesses. We also saw an improvement in our overall adjusted pre-tax operating margin.

For 2016, our guidance from January included a 200 basis point increase on an adjusted basis, and we remain comfortable with that forecast, as we will accelerate throughout the year with the restructuring activities in our Medical Device business and lower levels of spending in the back half as compared to the prior year.

As a reminder, pre-tax operating margin is defined as gross profit less selling, marketing, administrative, and R&D expenses.

Now I'll take a few minutes to highlight some key developments from the first quarter as well as some key points regarding our results, and then I'll provide some updates to our guidance for you to consider in refining your models for 2016. During the quarter, we had several key developments across the business.

In our Pharmaceutical business, we received an additional approval for IMBRUVICA for first-line treatment of chronic lymphocytic leukemia and also entered into a worldwide collaboration and license agreement with TESARO for exclusive rights to the investigational compound niraparib in prostate cancer.

Niraparib is an orally administered poly polymerase, or PARP, inhibitor.

We also continued our efforts to combat major global health challenges through collaborations with government organizations and others in the industry, with a call for innovative ideas to reduce HIV infections in sub-Saharan Africa as well as providing funding for nonprofit organizations supporting underserved communities in the United States.

In March 2016, we entered into an agreement to sell our controlled substance raw material and API business. In 2015, these businesses totaled approximately $250 million in net trade sales. This divestiture remains subject to customary closing conditions and regulatory approvals, but is expected to be completed towards the middle of 2016.

In Medical Devices, Ethicon completed the acquisition of NeuWave Medical, a privately held medical device company that manufactures and markets minimally invasive soft tissue microwave ablation systems.

We look forward to providing an in-depth review of the ongoing efforts of our Consumer and Medical Device businesses at our upcoming business review meeting on May 18, which will take place in New Brunswick, New Jersey. I will now turn to our consolidated statement of earnings for the first quarter of 2016.

As we've mentioned, our operational sales growth this quarter was 3.9%. And excluding the impact of acquisitions and divestitures and hep-C sales, it was a strong 6.9%. If you will direct your attention to the boxed section of the schedule, you will see we have provided our earnings adjusted to exclude intangible amortization and special items.

As referenced in the table of non-GAAP measures, the 2016 first quarter net earnings were adjusted to exclude intangible asset amortization expense and special items of approximately $400 million on an after-tax basis, which consisted primarily of the following, intangible asset amortization of $200 million and litigation charges and our Medical Devices restructuring charge.

Our adjusted earnings per share is therefore $1.68 per share, exceeding the mean of the analyst estimates as published by First Call. This is an increase in adjusted EPS of 7.7% versus the prior year. Adjusted EPS on a constant currency basis was $1.72, up 10% over the prior year.

Now let's take a few moments to talk about the other items on the statement of earnings. Cost of goods sold increased by 10 basis points, mostly due to transactional currency, partially offset by a favorable mix in the business.

Selling, marketing, and administrative expenses were 26.8% of sales, or 110 basis points lower as compared to the first quarter of 2015, due to continued good cost management.

Our investment in research and development as a percent of sales was 11.5%, higher than the prior year, due to increased project spending as we advance our promising product pipelines.

Our pre-tax operating margin when excluding special items and intangible amortization expense was 32.9%, 30 basis points higher than the first quarter of the prior year. Interest expense net of interest income was lower than last year due to slightly better rates on our investments.

Other income and expense was a net gain of $39 million in the quarter compared to a net gain of $348 million in the same period last year. Excluding special items that are reflected in this line item, other income and expense was a net gain of $127 million compared to a net gain of $91 million in the prior-year period.

Excluding special items, the effective tax rate was 19.2% compared to 21.5% in the same period last year. This year's effective rate reflects the R&D tax credit, which was passed by Congress late last year, and the current mix of our business. Turning to the next slide, I will now review adjusted income before tax by segment.

On our 2015 year-end call, we commented on our segment results for adjusted income before tax versus the prior year. Now that all of our competitors have reported their results for 2015, I would like to take the opportunity to point out that our 2015 adjusted income before tax was 31.4% compared to 26.2% weighted average for our competitive set.

This was driven by higher margins in both Pharmaceutical and Medical Devices and somewhat lower margins in our Consumer business as compared to our competitive set.

In the first quarter of 2016, our adjusted income before tax for the enterprise improved 80 basis points versus the first quarter of 2015, driven by improvement in both our Pharmaceutical and Medical Device businesses. Our Consumer business had a lower margin this year as compared to last year, due principally to devaluation in Venezuela.

We are confident that our Consumer business will show an improved adjusted income before tax margin for full-year 2016 as compared to 2015. Now I will provide some guidance for you to consider as you refine your models for 2016.

At the end of the quarter, we had approximately $17 billion of net cash, which consists of approximately $40 billion of cash and marketable securities and approximately $23 billion of debt.

As you know, in February we took the opportunity to finance our share repurchase program and upcoming debt maturities at very attractive interest rates with a debt issuance of $7.5 billion.

Through the end of the first quarter, we completed approximately 25% of our $10 billion share repurchase program, and we expect to complete 75% of the program by the end of this year.

For purposes of your models and assuming no major acquisitions or other major uses of cash, I suggest you consider modeling net interest expense of between $450 million and $550 million. This is unchanged from our prior 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, divestitures, asset sales, and write-offs.

We would be comfortable with your models for 2016 reflecting net other income and expense excluding special items as a net gain, ranging from approximately $1.1 billion to $1.2 billion, and this is also unchanged versus our January guidance.

And now a word on taxes, our guidance for 2016 includes the R&D tax credit that Congress made permanent in 2015.

We are therefore comfortable with your models reflecting an effective tax rate for 2016 excluding special items of approximately 19% to 20%, lower by 50 basis points than our previous guidance due to updating our outlook for a higher mix of our earnings from lower tax jurisdictions in 2016 than we anticipated in our previous guidance.

And now turning to sales and earnings. Our sales and earnings guidance for 2016 takes into account several assumptions and key factors that I would like to highlight. As a reminder, our sales guidance for 2016 assumes no biosimilar entrant for PROCRIT or REMICADE in the U.S.

And our assumption with regard to REMICADE biosimilar remains unchanged, even with the recent FDA approval of INFLECTRA, due to our intellectual property, which we intend to defend. We also do not anticipate generic competition this year from ZYTIGA, RISPERDAL CONSTA, and INVEGA SUSTENNA.

But as expected, there are generic entrants for INVEGA and ORTHO TRI-CYCLEN LO. 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 very good understanding of the underlying performance of our business. We also provide an estimate of our sales and EPS results for 2016 with the impact that current exchange rates could have on the translation of those results.

Consistent with our previous guidance, we would be comfortable with your models reflecting an operational sales increase on a constant currency basis of between 2.5% and 3.5% for the year. This would result in sales for 2016 on a constant currency basis of approximately $71.9 billion to $72.6 billion.

Additionally, by way of comparison to how we described our sales results in 2015, our operational sales growth for 2016 excluding the impact of all acquisitions and divestitures and hepatitis C sales would be approximately 5.5%, a level of growth comparable to last year after adjusting for the extra shipping days in 2015, which we mentioned earlier.

The devaluation in Venezuela that we previously discussed is anticipated to be a headwind of approximately 30 basis points for the full year, which we anticipate will be offset by the strength of the business.

Although we're not predicting the impact of currency movements, using the euro as of last week at $1.13, the negative impact of foreign currency translation would be approximately 1%. This is an improvement of 50 basis points since we last provided guidance.

We are watching the euro and other currencies closely, as it is uncertain how they will eventually settle out for the year.

Thus, under this scenario, we would expect reported sales to reflect a change in the range of 1.5% to 2.5%, for a total expected level of reported sales of approximately $71.2 billion to $71.9 billion, higher than our previous guidance.

Now turning to earnings, as a reminder, we expect transaction currency impacts to be negative to our gross margin by approximately 60 to 80 basis points in 2016 as compared to 2015.

We would be comfortable with adjusted EPS guidance in a range between $6.56 to $6.71 per share on a constant currency basis, reflecting an operational or constant currency growth rate of 6% to 8%. This is higher than our previous guidance.

If currency exchange rates for all of 2016 were to remain where they were as of last week, then our reported adjusted EPS would be negatively impacted by approximately $0.03 per share due to currency movements, a better outlook than the approximate $0.10 negative impact we discussed in our January guidance.

Therefore, we would be comfortable with our reported adjusted EPS ranging from $6.53 to $6.68 per share, which is an increase from our previous guidance due to an update to our tax rate and current currency estimates. As it's still early in the year, we would be comfortable with your models reflecting the midpoint of this range.

In closing, we are very pleased with our strong start for the year, and we are optimistic with what we see ahead for the full year. Namely, we're expecting operational sales growth of 2.5% to 3.5% and underlying operational sales growth of 5.5%, consistent with 2015 growth on a comparable basis.

Our operating margin improvements are on track to meet the expectations we laid out in our guidance of more than 200 basis point improvement over the prior year. Our operational adjusted EPS growth in our guidance remains strong, in the range of 6% to 8%, and our businesses are continuing to invest while also delivering on our growth expectations.

In particular, we're pleased to see our Medical Device businesses showing continued signs of improvement, and our restructuring activities in that business are on track. And we look forward to discussing with you in more detail these activities on our May 18 Investor Day. Now I'd like to turn things back to Louise for the Q&A portion of the call.

Louise?.

Thank you, Dominic.

And, Manny, could you please give the instructions for the Q&A session?.

Thank you. With that, our first question is from David Lewis of Morgan Stanley. Please go ahead..

Good morning, David..

Good morning. I'm going to start with a strategic question for Dominic, and then one follow-up. Dominic, the longstanding view of J&J has been to assert the defensiveness of having these three major franchises under the J&J family of companies. Does that still remain the prevailing view of management and the board? And then I had a quick follow-up..

Yes, David, it's our view, both management and the board, that our broadly-based business is the right approach to have in healthcare. It certainly has served us well and we expect it will continue to serve us well as the healthcare industry evolves in the future.

We think of ourselves as a healthcare company, and of course that allows us to access opportunities in healthcare no matter where they be, either in Pharma, Medical Devices, or in Consumer Health..

Okay, that's very helpful. And then the second question, either for Louise or Dominic, just REMICADE gross-to-net dynamics in the quarter, any more detail you can provide us on that or any sense of what you're expecting net pricing gains to be for REMICADE in the U.S. for 2016? Thanks so much..

Okay. So as we've discussed, we had the prior year gross-to-net that you saw that contributed I think it was 3% to the REMICADE growth, and pricing dynamics continued to be okay in that market..

I don't think it's expected that REMICADE sales will be significantly impacted year over year by gross-to-net adjustments..

Okay, next question, please..

Thank you very much..

Thank you. The next question is from Josh Jennings of Cowen & Company. Please go ahead..

Good morning, Josh..

Hi, good morning..

Hi, Josh..

Good morning, thanks for taking the questions. I know you've had some public comments, Dominic, recently around the REMICADE franchise.

But now that we have the I-compound (30:23) panel and the FDA approval in the rearview window, clearly you don't expect any biosimilar competition in 2016 due to your defense of IP, but any updated thoughts on the potential impact of biosimilar competition to the REMICADE franchise in 2017 and beyond?.

You're right, Josh, we don't expect biosimilar competition in 2016. As you know, we have several patents that we intend to defend. For example, the U.S. patent, the '471 patent [U.S. Patent number 6,284,471], extends to 2018, and another patent that we have extends to 2027.

Having said that, I think overall the immunology franchise of Johnson & Johnson is very strong because it's not just about REMICADE. Of course, we have STELARA, SIMPONI, et cetera.

And the overall pipeline in the Pharmaceutical business, as you know from our review last May, is very, very robust, with 10 new products being filed, each of which having more than $1 billion potential.

So overall we remain very, very comfortable with the growth outlook for the Pharmaceutical business regardless of the outcome of any REMICADE biosimilar..

Thanks for that. I just wanted to follow up with a question on your operating margin guidance maintaining at 200 basis points. I was just curious about the Venezuelan crisis impact. It looks like it primarily hit the Consumer units operating margins.

But can you talk about the expectations of Venezuela's impact on your operating margins at the beginning of the year, how your internal expectations have evolved? Clearly with maintaining that guidance, the performance of the rest of the business units are going to offset any direct impact from Venezuela.

But I just wanted to hear about any offsets there and the impact to the operating margin performance of the Consumer unit. And can Consumer still experience operating margin expansion in 2016? Thanks for taking the questions..

Sure, Josh. Just to put things in perspective, Venezuela is less than 1% of our sales, less than 0.5% of our sales, so it's not a very significant impact. It is more significant in Consumer than in the other businesses.

But we're very confident in our outlook for a 200 basis point improvement in operating margin expansion – pre-tax operating margin expansion for 2016. And that will be across all the businesses, including Consumer, who will make a significant contribution to that, even despite the impacts of Venezuela.

So we're very confident with that outlook for the year..

Thank you, next question please..

Thank you. The next question is from Mike Weinstein of JPMorgan. Please go ahead..

Good morning, Mike..

Hi, Mike..

Good morning, guys..

Good morning..

Good morning. The immunology franchise, REMICADE, SIMPONI, STELARA, all had much better growth than at least the scripts would have suggested.

Outside of the gross-to-net, was there an inventory catch-up this quarter that might have impacted those products?.

So in the U.S., nothing significant in the inventory. That market grows strong, strong double digits, and that is a good contributor to the immunology. STELARA continues to grow market share. SIMPONI ARIA is contributing to the results; but in the U.S., no significant inventory build..

Okay. Can we talk about DARZALEX? DARZALEX obviously had a very, very strong first full quarter out of the box here.

Can you just talk about the uptake in multiple myeloma and how you see it playing out on the back of the relapsed refractory data?.

Mike, we're obviously very pleased with the early uptake of DARZALEX. And as we said, it contributed two points of growth to our U.S. Pharma business, so off to a great start. The CD38 mechanism of action seems to be something that the KOLs [Key Opinion Leaders] really respect as having a significant impact on the disease.

And we think the product is going to do extremely well and will see continued uptake throughout the year..

And also we had the CASTOR trial, which actually the IDMC [Independent Data Monitoring Committee] has recommended to stop early. So that's a very positive sign as well in that instance..

Great. Dominic, one quick finance question for you. The tax rate coming down runs a little bit counter to the performance of the business because your growth in the U.S. has been so strong, particularly in the Pharmaceutical business. So what we see optically is very strong U.S. revenue growth and we assume U.S. profit growth.

But obviously, the manufacturing IP of some of those products is outside the U.S. Can you just shed a little bit of light there on how you're managing that because the U.S.

business relative to the OUS business looks very different?.

Yes, Mike, it's an interesting observation. Actually, the strength of the sales in any one particular region does not necessarily correlate with the strength of the earnings in that region, and it's for the very reason that you mentioned, which is where the IP is located, where the manufacturing takes place, et cetera.

So what we did is we just updated our outlook with how the profits will fall amongst the different regions and different jurisdictions. And we thought about 0.5 point improvement in the overall tax rate would be achievable this year for the full year, and therefore we adjusted that in our outlook..

Understood. Thank you, Dominic..

You're welcome..

Next question, please..

Thank you. The next question is from Kristen Stewart of Deutsche Bank. Please go ahead..

Good morning, Kristen..

Hey, good morning, guys..

Hi, Kristen..

I was just wondering if you could comment a little bit more about the diabetes business. I think, Dominic, you had mentioned there are challenges in the market. I was just wondering if you could comment about INVOKANA and the additional competition that's in the market or just provide a little bit more commentary there..

Sure. Just to clarify what I said, I was talking about challenges in the market with respect to our consumer Medical Device diabetes business, the LifeScan business. And what I meant by that was we see continued pricing pressure in that market, and we also see some competition with respect to new pumps being launched.

We've just launched a new pump obviously, so we're also seeing good uptake with our current pump. So the dynamics I'm talking about are in the Medical Device piece of the business as being challenging. Overall, INVOKANA continues to do well. Its uptake is strong quarter over quarter and remains a growth driver for us going forward..

Okay. And then I guess just more broadly, what are you seeing – can you just go back and address China? I know that was something that you had brought up just in terms of still seeing a little bit of softness, I think you had mentioned more within the Medical Device segment.

Any changes there, is it getting worse or getting any better?.

Sure. China again, just to put it in perspective, it's about 5% of our overall business. And a slowdown in the economy actually last year is what caused some distributor inventory to be at relatively high levels. That distributor inventory is beginning to bleed off.

We saw that in the first quarter, and we think that that bleed-off will be completed shortly. So we don't expect to see a continued impact of that for the rest of the year..

Okay, perfect. Thanks, everyone..

You're welcome..

Next question, please..

Thank you. The next question is from Jami Rubin of Goldman Sachs. Please go ahead..

Good morning, Jami..

Thank you, good morning. I have a few questions. Just back to Kristen's question on diabetes, INVOKANA is an important growth driver for the company, but sales did come in a bit lighter than we had anticipated, despite I think the growing excitement about this class of drugs.

Dominic, can you comment just generally on what drug categories you are seeing widening gross-to-net discounts? And are you seeing more gross-to-net discounts or widening discounts specifically in diabetes? And can you comment on where you might be seeing that elsewhere in the Pharma business? My second question is on the OTC business.

You've clearly highlighted the strong growth that you're seeing in the U.S. and particularly the analgesics market.

How much of that growth is just regaining back lost market share from private label when you were out of the market, and how much of that is market growth? And maybe you can comment just generally on the dynamics of the OTC marketplace and where you see store brand market share now. Thanks, and I have one more follow-up, one more follow-up..

Wow..

Okay, let's take them in order. And, Louise, you could add, obviously, if I've left anything out. I wouldn't say, Jami, that there's any one particular area in the business where we see a widening of gross-to-net or rebating that's any different than what we've seen before in the business.

So rather than comment on any one particular area, I would say generally speaking there's nothing that sticks out to us as a widening trend. With respect to U.S. OTC, a couple things to mention; we are gaining back share, and the products are doing very, very well.

And this particular quarter was a relatively low growth market quarter because of a very, very soft flu season, a very, very soft flu season. So most of the growth that we saw is not on the back of market expansion but on the back of share expansion as we continue to regain share..

Are you where you want to be in terms of regaining back that lost share, and what is a realistic goal? You were out of the market completely.

Where are you now?.

So we're not where we want to be. We're continuing – we're pleased. As Alex [Gorsky] often says, we're pleased but not satisfied. So we're going to continue to gain share there.

And, Louise, do you have the year-over-year comparison of share?.

Yes, so in 2009, before the McNeil issues that we had, the adult share was about 25%, and we're back to 14%. And pediatric was about 70%, and we're now back to 46%, so you're seeing some nice growth on that.

And if you take a look at year over year, the adult (sic) [pediatric] (40:56) share a year ago was 43%, so you see it going up about three points. And then the pediatric share is also going up to the 46%..

So we're making progress..

I'm sorry, that was pediatric share, sorry, from 43% to 46%..

We're making progress, Jami, but we're not finished. I think these products have a long heritage and legacy. They're very, very important in overall healthcare. And quite frankly, they're admired by consumers. So we expect to see continued share growth..

And in the adult, it was 14% U.S. share now, and it was 12%. And you asked about the private label. We think in the U.S. market, the adult is about a third, and in the pediatric it's about 40%..

Okay, and then just can I follow up, Dominic? I'm actually shocked that I'm what, the fifth, sixth question and this hasn't come up yet. Your net cash position is now $17 billion. That keeps growing. I don't think any company that I cover or anybody else covers has the kind of balance sheet prowess that you have, the lack of debt on your balance sheet.

And I think what was it, back in September at an investor conference you had mentioned that you were uncomfortable with the amount of cash that you had growing on the balance sheet.

And now here we are six to seven months later and don't really see any activity with respect to putting that cash to work with the exception of a buyback that you announced earlier this year.

Can you just give us an update on your thoughts on capital allocation? Clearly, we've had a lot of disruption in the marketplace, with valuations on many names coming back. And I'm just surprised that we haven't really seen much action on the part of capital allocation from J&J. Thanks, and then I'm done..

Okay, sure, Jami. Okay, great. Okay, good, all right. Just to clarify, back in September, I didn't really say I was uncomfortable with the level of cash. I just said that it was a higher level of cash than we normally hold. And then of course, after that we announced a $10 billion share buyback.

So we're very conscious of the fact that while we're evaluating M&A opportunities, we can continue to return capital to shareholders, which in addition to our very, very strong dividend, we can do share buybacks.

We're in the middle of doing one right now, and we'll obviously evaluate whether we continue increase that particular share buyback as time goes on. With respect to not allocating capital to any particular deals, I could tell you that we're very active, but as you know, we're also very disciplined.

We do see opportunities, but we want to do the right deal at the right time with the right party at the right valuation. And we're comfortable waiting for that to take place because we think that's what ultimately generates the most value for shareholders..

Is that what you plan to do with your cash, M&A, Dominic? Is that what the message is today?.

The message is very consistent, what it's always been. Our first priority is allocating capital to dividends. So we'll announce what we're going to do with dividends at our April 28 shareholder meeting. After that, we'd like to grow the business and create value for shareholders through M&A.

And in addition to that, we'll continue to return capital to shareholders through share purchases, repurchase. So it's not really a change. So our attitude, our capital allocation policy does not change depending on how much capital we have. It's all about creating the most value for shareholders with whatever capital we deploy..

Thank you very much..

You're welcome..

Thank you. Next question, please..

Thank you. The next question is from Glenn Novarro of RBC Capital Markets. Please go ahead..

Good morning, Glenn..

Hi. Good morning, good morning, just two questions. Let me first just piggyback on what Jami just asked because I think we're all surprised that J&J hasn't done more with the balance sheet so far.

And I'm just wondering, Dominic, as you're having these discussions, it appears that some of the targets you may be having discussions with have unrealistic valuation expectations. So maybe talk about where valuation expectations have come.

Are they getting at least in the ballpark of what J&J thinks is appropriate valuation? And then with Allergan and Pfizer no longer getting together, you have two more companies that are going to be actively looking at deals. And does that make the competitive landscape more challenging for J&J? And then I had a follow-up on devices. Thank you..

Sure, Glenn. In certain areas of the market, valuations are still high. They're coming down, as you know, in biotech in particular. But in certain other areas, in med device, for example, certain valuations are still inflated, in our opinion. Things will get better as time goes on, we believe. We're patient, disciplined.

And as I said earlier, we'll look for the right opportunity, but at the right time at the right valuation. With respect to Allergan and Pfizer maybe being in the market now and creating more competition, that's probably true.

I can't speak for what they're going to do, but we're accustomed to looking at various acquisition candidates where more than one party may be interested in a particular asset. That does not dissuade us from being disciplined and having a clear focus on ultimately what matters, which is the deployment of that capital to create shareholder value.

So yes, there will be more competition. We'll still remain very disciplined..

Okay, and then let me just follow up on the Device business. When you ex out divestitures and currency, the Device business grew 3% in the first quarter, and that's pretty much in line with most of the device categories that we cover. But I don't think J&J had any major new product launches here recently.

So is the improvement in the Device business for J&J, is that just better execution and better blocking and tackling, or did some of the major end markets in cardio and ortho and spine in the first quarter come in slightly better than you expected? Thank you..

Just to clarify, 3% overall is the Medical Device business ex-acquisition and divestitures, but the hospital-based Medical Device business excluding the consumer-facing Medical Device businesses, that grew 4% on a comparable basis. We did have a number of products that we filed last year, and we have about 30 new products that we're launching.

Half of those have already been launched, so we are seeing the impact of those. And I think it's also a matter of focus, focus on the primary growth drivers. For example, you saw very good results in energy, in endocutters, in electrophysiology as major drivers of growth. And also we're very pleased with the results in orthopedics.

And the ATTUNE Knee, for example, in the U.S. in particular, the U.S. growth was over 8% for knees, which is pretty fantastic growth, and the ATTUNE knee is still a new product that's being launched in that marketplace..

But as you talk to division heads, is everything – are the end markets status quo, no change, still stable, or is there any pickup in some of these end markets?.

I think from what we've seen back in the fourth quarter trends, because we don't have all the first quarter trends, continued improvement in procedural growth, but not dramatic, Glenn, just a continued steady improvement in procedural growth.

Anything else, Louise?.

So our estimate of the first quarter hip market is about 3.5% in the U.S., again qualified, but we haven't seen all the competitors report. We think the U.S. knee market grew about 4.5%, and we believe we grew faster than those markets. Now we did have about 1.5 extra selling days.

But even if you take that out of there, we do believe we grew faster than the market in hips and knees in the U.S..

Okay. Thanks, Louise. Thank you, Dominic..

You're welcome..

You're welcome, Glenn..

Next question, please..

Your next question is from Vamil Divan of Credit Suisse. Please go ahead..

Good morning Vamil..

Hi, good morning, guys. Thanks so much for taking the questions, so just a couple following up on some of the topics that have been raised already. The one we've specifically been getting a lot of questions are around your desire on the Consumer side to maybe do business development. I know you talked generally about M&A.

Maybe if you could, just provide a little more color on the Consumer side specifically and if it is an area where you're looking to boost. Is there a preference you can share? I think in the past you've talked about emerging markets, but I was just wondering if there is anything more timely you can share today on that side of things.

And then the second question relates back to the INVOKANA discussion that we were having before. There was this announcement last week that the EMA [European Medicines Agency] is looking into an increase in amputations that is being seen in the CANVAS study. I'm curious if you have any comments on that at this point.

And also, is that something that the FDA is also looking into at this point? Thanks..

Sure, Vamil. So on M&A, just in general we're looking at M&A as an important additional growth driver in all of our businesses, including Consumer. As we've said before, Consumer can generally benefit from taking very, very specific brands that are in certain regional categories.

We're certainly in our sweet spot of skin care, baby, oral care, et cetera, where we think we could do better with a combination of the technology that we have and the overall market and distribution presence that we have. So we'll continue to look there.

And again, like every other M&A evaluation, we'll make sure that it's at the right valuation at the right time. With respect to INVOKANA, a couple things to mention there.

There has been – previous to this CANVAS study, there have been 12 previous studies with INVOKANA where we saw no such indication of increase in lower limb amputations, particularly the toe, so this seems to be focused only on the patients in the CANVAS study.

It's important to note that, yes, that European regulatory body is taking a look at it, but already the independent monitoring committee that reviews the clinical trial after reviewing all the data concluded that the trial should continue. So that's what I can tell you about that.

And obviously, we'll look to advise physicians appropriately of the results once we have more understanding of them..

Thank you. Next question, please..

Okay, thank you..

Next question, please..

Thank you. The next question is from Geoff Meacham of Barclays. Please go ahead..

Good morning, guys. Thanks for taking the question, just a couple on the Pharma segment. You guys have a new product cycle obviously coming up with guselkumab and sirukumab.

I guess when you think about this in the context of the pricing environment, especially with INFLECTRA down the road, how do you guys think about durability of pricing in the immunology segment? And I have one more follow-up on Pharma..

Yes, sure, Geoff. Both guselkumab and sirukumab are different mechanisms of action than the current products that we have in immunology.

And typically, innovative products that have a significant impact on unmet medical need – in this case it would be those patients that are not otherwise responding to, for example, TNF therapy, our view is that pricing will still continue to be – the products will still continue to be valued and therefore not have a lot of pressure on pricing because there is some still significant unmet medical need, and it's a new mechanism of action that should have an impact on patients.

I think that that's irrespective of whether or not there's a biosimilar in the market with respect to REMICADE because overall pricing for immunology products, particularly in the TNF category, already have pretty significant gross-to-net discounts in the marketplace.

I think we've talked before about that ours are already in the 25% range, so I don't think there's that much room for there to be significantly lower pricing in that market..

Got you. And just as a follow-up to the other questions on M&A, the TESARO agreement with the PARP, clearly there's a lot of excitement with this class.

I guess the question is, was the focus on prostate strategic or is it data-driven? I just want to get your sense, Dominic, for maybe other indications that you could have some enthusiasm for, for PARP, such as ovarian or breast cancer, et cetera..

Our agreement with respect to this PARP inhibitor was a result of our oncology therapeutic area, taking a look at where PARPs can have an added benefit. Our first approach to this is going to be with prostate cancer in conjunction with our development of ARN-509 in prostate cancer, so the particular focus at the moment is in prostate cancer, Geoff..

Got you, thanks..

Next question, please..

You're welcome..

Thank you. The next question is from Damien Conover of Morningstar. Please go ahead..

Good morning, Damien..

Hey, good morning. Thanks for taking the question, just a question on the nerve growth factor discontinuation. It looked like there was a prioritization within the pipeline to discontinue that. I just had a question what projects you might be accelerating also, given that those Phase 3 studies are coming up shortly.

I just wanted to understand that a little bit more. Also, with the hepatitis C products there, you have some very potent products. I wanted to see what the next steps were for bringing those to the market, the timeline. And then lastly, just on REMICADE, has J&J received a 180-day notice of a biosimilar launch from Pfizer? Thank you..

All right, let me take them in the order you gave them, and Louise can help here as well.

So with respect to – why don't you take the hepatitis C question?.

Okay, so we're expecting to see some Phase 2 data of our AL-335 and the three direct-acting inhibitors in 2016..

Right, and also with respect to your question on the 180-day notice period, yes, we have received that from Celltrion. And with respect to the growth nerve factor discontinuance, what you said was exactly right. This was a portfolio question. As we mentioned, we have 10 new products that we're planning to file between now and 2019.

Obviously, we're going to focus on those. They all have more than $1 billion potential. So we make portfolio decisions all the time, and this is just another one of those types of decisions..

Great, thank you..

You're welcome. Next question, please..

Thank you. The next question is from Matt Miksic of UBS. Please go ahead..

Good morning, Matt..

Hey, good morning. This is Vik in for Matt. I have two questions.

Now that the CJR [Comprehensive Care for Joint Replacement] bundle payment system is in effect for hips and knees, can you talk a little bit about your approach to customers and what you can expect to help there? And the second question I have is an update on the payer environment in spine, any meaningful changes that you guys have seen in support amongst payers? Thank you..

Generally speaking, on the bundling approach, which is now present in certain markets but not across all markets in the U.S., we do think that we're positioned very well there because obviously we have a very broad portfolio of products.

So the bundling approach with the hospital or integrated care network would include multiple Johnson & Johnson products, which we think we're in a great position to partner with in that regard. The payer economics in spine, we haven't seen much of a dramatic change there.

One thing I'd like to point out is we did see growth in our spine business this quarter of about 2%. So we're very pleased with that business coming back and showing some improvement..

So we'll take one more question..

Thank you. The next question is from Larry Biegelsen of Wells Fargo. Please go ahead..

Good morning, Larry..

Good morning and thanks for fitting me in. I hope you can hear me okay. So, Dominic, on the call today, you guided organic sales growth in 2016 about the same as in 2015, which was 5.5% excluding the benefit from extra selling days.

However, if we compare 2016 to 2015, organic growth on the same 52-week basis, we estimate that your 2016 organic growth should be closer to 6% to 6.5%. In other words, the 5.5% in 2016 doesn't adjust for the extra selling days in 2015. Is our math directionally right, Dominic? And I had one follow-up..

I think you're directionally right. I think you're right that without the – if you just neutralized I guess is what you did, for the extra selling days, we would see growth of better than 5.5%, right..

Okay, I just wanted to confirm that. And then lastly, Dominic, last week you announced that you discontinued UPP, or Unilateral Pricing Policy, in your VISTAKON business.

Can you talk about the rationale there and what this signals regarding any change in your strategy and how you're running your contact lens business? If I recall, two years ago when you implemented UPP, it was disruptive to your U.S. VISTAKON business.

So why should we not assume or be concerned that you might have similar types of disruptions from discontinuing UPP and moving to a different pricing model now? Thanks for taking the questions..

Sure, Larry. Thanks for the question, just a couple things on the Vision Care business and our ACUVUE brand. As you know, the ACUVUE business has a long heritage of strong category growth as well as good innovation, which creates fantastic products for contact lens wearers.

And as you know, we are the world leader in contact lenses with the ACUVUE brand. And we just launched four new products in 2015, which are being received very well by the eye care professional and the contact lens wearer. Back in 2014, we did not have that kind of innovation coming to market, first of all.

And secondly, we saw some unevenness in the pricing in the market with very, very different pricing in different channels. So, we decided to implement the Unilateral Pricing Policy in order to even out the pricing.

And at the end of the day, what happened there was we did see a lower overall price for our products, which made the products more affordable. So today the majority of the patients who get ACUVUE contact lenses are paying less than they did for that brand two years ago.

Now with innovation and with the market stabilizing, we've adopted a new program that encourages patients to see their eye care professional and provides rebates and incentives for the purchase of contact lenses in conjunction with their eye exam as prescribed by the eye care professional.

And we think that's just the next evolution as a market leader to focus on eye health and not just price of the contact lens.

So just a continued evolution of how we approach the market, and there may be – when there is some slight disruption in the market, we think that overall the long-term benefit to the overall category into our business is worth it..

Thank you, and that concludes the Q&A. And we'll have some closing remarks from Dominic..

Okay, thanks, Louise. As I noted earlier, we're very pleased with our continued momentum as we entered into 2016. I would just like to take this time to recognize and thank all of our associates around the world for their extraordinary achievements and dedication to the success of Johnson & Johnson. Thank you for your time this morning.

I look forward to updating you on our progress throughout the year, and have a great day..

Thank you. This concludes today's Johnson & Johnson first quarter 2016 earnings conference call. You may now disconnect your lines and thank you for your participation..