Johnson & Johnson Justin Quaglia

Analyst, Non-Cyclical SectorMadison Investment Fund

Objective

A stable and strong company that meets all the needs of a stock an investor should have going into a recession

DIVERSIFICATION-not only produces medication, but also medical equipment, and human staple goods

Unlike many other pharmaceutical companies, they

are not in big trouble with patents Proven successful during the recent recessions

Pharmaceutical Plague

2007-2010: Disappointing, dissipating, and decaying time for many pharmaceutical companies around the world

Key drugs that provide profit and revenue will be losing their patent protection Allows these medications to go generic which will

provide the consumer with the same medication at a cheaper and more reasonable price

 

Pharmaceutical Plague

Many companies are not showing any positive signs in R&D

Blockbuster drugs are lacking

Even if they do break through, they are being shut down by the FDA for undesired and dangerous side effects

Company Overview

The world's largest healthcare group

R&D, manufacture, and sale of a range of products in the healthcare field

Operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics

Not only produce pharmaceuticals but human staple goods as well

They have more than 250 operating companies

Sell products in 57 countries throughout the world

Key Stats

Market Cap: 177.86B52 Week High: 68.8552 Week Low: 59.72

Average Volume: 13.63MP/E: 17.12

F P/F: 14.94Beta: 0.12EPS: 3.63

Dividend: 0.41Yield: 2.67%Shares: 2.86B

Price: 62.15

Product Categories

AllergiesBaby Care

Dental Care

Diabetes Care

Feminine

Hygiene Gastrointestinal

Nutritional OrthopedicsPrescription Drugs

Vision Care

Wound Care

Colds and FluCardiology

Denture CareFamily Planning

First Aid Medial

Devices/Diagnostics Oncology

Pain RelieverSkin and Hair Care Women’s Health

New Release

Intelence- HIV drug for patients with resistance to other therapies (NNRTIs)

Patients need new options because HIV can mutate to resist existing treatments

Tens of thousands of patients worldwide have resistance to NNRTIs and could be candidates for Intelence

FDA approved Intelence for use with other AIDS drugs

Close to 40 million people are infected with HIV

Medications(Top Sellers)

RISPERDAL CONSTA (June) and INVEGA, both antipsychotic medications

TOPAMAX, an antiepileptic and a treatment for the prevention of migraine headaches (March 2009)

REMICADE, for the treatment of a number of immune mediated inflammatory diseases

VELCADE, a treatment for multiple myeloma

CONCERTA, a treatment for attention deficit hyperactivity disorder

LEVAQUIN, an anti-infective

Newly Acquired

Introduced 600 products and line extensions under its consumer business just this year Rolaids, Rogaine, Sudafed, Visine, Neosporin, Listermint,

Listerine, Bengay, and Benadril just to name a few

Always evaluating licensing and acquisitions Highly respected for making business

deals/buying/selling operating companies

In the Pipeline

8 drugs in early FDA approval stages

20 drugs in Phase III of FDA approval Could be as soon as 12 months before

release

4 drugs have received FDA approval for releases in 2008

CompetitorsStatistics JNJ MRK NVS

Market Cap 179.65b 101.62b 113.68b

Employees 119,000 60,000 98,200

Quarterly Rev Growth

16.60% 12.30% N/A

Revenues 61.10b 24b 38.95b

Gross Margin 70.94% 76.10% 72.50%

EBITDA 17.75b 8.08b 10.16b

Operating Margins

24.90% 25.22% 20.37%

Net Income 10.58b 5.38b 6.62b

EPS 3.63 2.46 5.13

P/E 17.12 18.98 9.79

PEG 1.58 1.49 .94

P/S 2.98 4.35 2.93Source: Yahoo Finance

1 Year Chart

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Price Performance Chart

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JNJ Adjusted CloseDJIA

Management

Weldon Williams- (1971) CEO Joined the Company in 1971 Served in several sales, marketing and international management positions

Dominic Caruso - (1999) CFO & Vice President of Finance Previously VP of the Finance for the Medical Devices and Diagnostics KPMG Joined in October of 1999 through the acquisition of Centocor (has been with that

company since 1985)

Christine Poon - (2000) Vice Chairman of the Board Served in various management positions at Bristol-Myers Squibb Company for 15

years, most recently as President of International Medicines before coming to JNJ

Strong sense of seniority

Track Record of Performance

Exceptionally consistent performance 75 consecutive years of sales increases 24 consecutive years of earnings increases 45 consecutive years of dividend increases

Few, if any companies, can claim this

Q4 and Fiscal 2007 Earnings

Announced record sales of $16.0 billion for Q4 2007, an increase of 16.6% YoY

Operational growth was up 11.9%

Domestic sales were up 9.1%, while international sales increased 25.8% in 2007

Worldwide sales for the year 2007 were $61.1 billion, an increase of 14.6% over 2006

Pharmaceutical sales- $25 billion, and increase of 7% MD&D sales- $21.7 billion, increase of 7.2% Consumer segment- $14.5 billion, increase of 48%

Q4 and Fiscal 2007 Earnings

Net earnings and diluted earnings for Q4 2007 were $2.4 billion and $.82 respectively, representing increases of 9.5% and 10.8%

Sales results reflect the strong performance of LISTERINE and the launch of whitening products; Baby and Kids Care products; the skin care lines of AVEENO, CLEAN & CLEAR, and NEUTROGENA; SPLENDA sweetener; ROGAINE hair regrowth treatment; and IMODIUM A-D

Significant progress in their pipeline

Successful integration of Pfizer Consumer Healthcare Increased profits 48%

Financial Highlights

Balance Sheet (in millions)            2007 2006 2005 2004 2003Dates 12/31 12/31 12/31 12/31 12/31           Cash and Short Term Investments $4,083 $16,055 $9,203 $5,377 $2,894

Trade Accounts Receivable, Gross $8,872 $7,174 $7,034 $6,766 $5,590Total Receivables- Net $8,712 $7,010 $6,831 $6,574 $5,399Total Inventory $4,889 $3,959 $3,744 $3,588 $3,303Other Curr. Assets, Total $2,094 $1,931 $1,737 $1,526 $1,419Total Current Assets $22,975 $31,480 $27,320 $22,995 $19,266           Buildings $7,347 $5,875 $5,907 $5,242 $4,364Machinery/Equipment $13,108 $10,835 $10,455 $9,638 $7,869Property/Plant/ Equipment-Net $13,044 $10,830 $10,436 $9,846 $8,710Total Assets $70,556 $58,864 $53,317 $48,263 $40,556           Accounts Payable $5,691 $4,315 $5,227 $4,966 $3,621Total Current Liabilities $19,161 $12,635 $13,927 $13,448 $11,449Total Long Term Debt $2,014 $2,017 $2,565 $2,955 $2,022Total Debt $6,593 $2,685 $2,845 $4,094 $4,139           Total Liabilities $31,238 $20,154 $21,504 $21,384 $17,859           Total Equity $39,318 $38,710 $31,813 $26,869 $22,697Total Liabilities & Shareholders' Equity $70,556 $58,864 $53,317 $48,263 $40,556

Income Statement (in millions)          

  2007 2006 2005 2004 2003

Dates 12/31 12/31 12/31 12/31 12/31

           

Total Revenue $61,095 $53,324 $50,514 $47,348 $41,862

           

Research & Development $7,680 $7,125 $6,462 $5,344 $4,684

Purchased R&D Written-Off $807 $559 $362 $18 $918

Restructuring Charge $745 $0 - - -

Unusual Expense (Income) $1,552 $559 $362 $18 $918

Total Operating Expense $47,812 $38,737 $37,398 $35,017 $31,554

           

Operating Income $13,283 $14,587 $13,116 $12,331 $10,308

           

Net Income $12,088 $11,053 $10,060 $8,180 $7,197

Cash Flow (in millions)          

  2007 2006 2005 2004 2003Dates 12/31 12/31 12/31 12/31 12/31           Net Income 12, 088 11,053 10,060 8,180 7,197

Purchased R&D 559 362 18 918 189 Inventories 210 396 11 39 109

Total Cash from Operations 14,880 11,799 11,089 10,595 8,176            Capital Expenditures 2,666 2,632 2,175 2,262 2,099Acquisition of Business 18,023 987 580 2,812 478Sale of Fixed Assets 511 154 237 335 156 Sale/Maturity of Investments 426 9,187 12,061 8,062 7,353 Total Cash from Investing 20,291 279 2,347 4,526 2,197           Total Cash Dividends Paid 4,267 3,793 3,251 2,746 2,381Short Term Debt, Net 3,752 483 777 1,072 1,799 Long Term Debt, Net 7 190 378 827 223Total Cash from Financing 6,109 4,443 5,106 3,863 6,953           Foreign Exchange Effects 180 225 190 277 110 Net Change in Cash 11,972 6,852 3,826 2,486 864

Accelerating Growth in 2008

“Back Up Products” Patients getting used to certain drugs,

especially antipsychotic RISPERDAL CONSTA and TOPAMAX Prevents generics from taking over

Make their own generics Will continue to pull in a strong profit from

loss of patent protection

2008 Forecast

Expects earnings per share for 2008 to total $4.39 to $4.44 Analysts have been looking for earnings of $4.42 a share for

2008

Benefit from the relatively weak US dollar

Expects at least 60% of its predicted 4-5% sales growth this year to come from foreign exchange gains

Investment Rationale

Diversity Stability (low Beta) Profiting acquisition Determination for consistent

improvement Strong pipeline

“Safe Haven”

“A safe haven away from volatility” Goldman Sachs

``JNJ certainly could be a haven in a bear market because of its diversity'' Raymond James & Associates

Recommendation: BUY