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Business Combinations and Divestitures
 6 Months Ended
Jul. 01, 2012
Business Combinations [Abstract]  
BUSINESS COMBINATIONS AND DIVESTITURES
BUSINESS COMBINATIONS AND DIVESTITURES

On June 14, 2012, the Company completed the acquisition of Synthes, Inc., a global developer and manufacturer of orthopaedics devices, for a purchase price of $20.2 billion in cash and stock. The net acquisition cost of the transaction is $17.5 billion based on cash on hand at closing of $2.7 billion.

Under the terms of the agreement, each share of Synthes common stock was exchanged for CHF 55.65 in cash and 1.717 shares of Johnson & Johnson common stock, based on the calculated exchange ratio. The exchange ratio was calculated on June 12, 2012 and based on the relevant exchange rate and closing price of Johnson & Johnson common stock on that date, the total fair value of consideration transferred was $19.7 billion. When the acquisition was completed on June 14, 2012, based on the relevant exchange rate and closing price of Johnson & Johnson common stock on that date, the total fair value of the consideration transferred was $20.2 billion. Janssen Pharmaceutical, a company organized under the laws of Ireland and
a wholly owned subsidiary of Johnson & Johnson, used cash on hand to satisfy the cash portion of the merger consideration.

The stock portion of the merger consideration consisted of shares of Johnson & Johnson common stock purchased by Janssen Pharmaceutical, from two banks, pursuant to two accelerated share repurchase (ASR) agreements dated June 12, 2012. On June 13, 2012, Janssen Pharmaceutical purchased an aggregate of approximately 203.7 million shares of Johnson & Johnson common stock at an initial purchase price of $12.9 billion under the ASR agreements, with all of the shares delivered to Janssen Pharmaceutical on June 13, 2012.  Final settlement of the transactions under each ASR agreement is expected to occur in the second quarter of 2013, and may occur earlier at the option of the two banks, as applicable, or later under certain circumstances. Based on the theoretical settlement of the ASR agreements an additional 13.2 million shares would be issued to settle the ASR agreements as of July 1, 2012.

In addition, while the Company believes that the transactions under each ASR agreement and a series of related internal transactions were consummated in a tax efficient manner in accordance with applicable law, it is possible that the Internal Revenue Service could assert one or more contrary positions to challenge the transactions from a tax perspective. If challenged, an amount up to the total purchase price for the Synthes shares could be treated as subject to applicable U.S. tax at approximately the statutory rate to the Company, plus interest.

The following table summarizes the consideration transferred to acquire Synthes, valued on the acquisition date of June 14th, 2012:

(Dollars in Millions)
 
 
Cash (multiply 55.65CHF by shares of Synthes common stock outstanding by the exchange rate)(A)
 
$
6,902

Common Stock (multiply 1.717 by shares of Synthes common stock outstanding by J&J stock price)(B)
 
$
13,335

Total fair value of consideration transferred
 
$
20,237


(A) Synthes common stock outstanding of 118.7 million shares as of the acquisition date and CHF/USD exchange rate of .95674

(B) Johnson & Johnson closing stock price on the New York Stock Exchange as of acquisition date of $65.45 per share.

The Company is in the process of finalizing the allocation of the purchase price to the individual assets acquired and liabilities assumed. The preliminary allocation of the purchase price included in the current period balance sheet is based on the best estimates of management and is preliminary and subject to change. To assist management in the allocation, the Company engaged valuation specialists to prepare independent appraisals. The completion of the purchase price allocation may result in adjustments to the carrying value of Synthes, Inc.'s recorded assets and liabilities, revisions of the useful lives of intangible assets, the determination of any residual amount that will be allocated to goodwill and related tax effects. The related depreciation and amortization from the acquired assets are also subject to revision based on the final allocation.

The following table presents the preliminary allocation of the purchase price related to Synthes, Inc. as of the date of acquisition:

(Dollars in Millions)
 
Cash & Cash equivalents
$
2,749

Inventory(1)
889

Accounts Receivable, net
738

Other current assets
249

Property, plant and equipment
1,253

Goodwill
5,371

Intangible assets
12,929

Other non-current assets
46

Total Assets Acquired
24,224

 
 
Current liabilities
825

Deferred Taxes
2,731

Other non-current liabilities
431

Total Liabilities Assumed
3,987

 
 
Net Assets Acquired
$
20,237



(1) Includes $0.4 billion related to inventory step-up.

The acquisition of Synthes, Inc. resulted in $5.4 billion of goodwill, which is allocated to the Medical Devices and Diagnostics segment. The goodwill is primarily attributable to synergies expected to arise from the business acquisition of Synthes, Inc. The goodwill is not expected to be deductible for tax purposes.

The preliminary purchase price allocation to the identifiable intangible assets included in the current period balance sheet is as follows:

(Dollars in Millions)
 
 
Intangible assets with definite lives:
 
 
Customer relationships
 
$
9,950

Patents and technology
 
1,495

Total amortizable intangibles
 
11,445

Trademark and Trade name
 
1,420

In-process research and development
 
64

Total intangible assets
 
$
12,929




The weighted average life for the $11,445 million of total amortizable intangibles is approximately 21 years.

The trade name asset values were determined to have an indefinite life based on a number of factors, including trade name history, the competitive environment, market share and future operating plans. The intangible assets with definite lives were assigned asset lives ranging from 7 to 22 years.

The majority of the intangible asset valuation relates to customer relationships, patents and technology and tradename intangible assets in the Company's trauma, cranio maxillofacial, spine and power tools business lines. Additionally, in-process research and development intangible assets were valued for technology programs for unapproved products.

The value of the IPR&D was calculated using cash flow projections discounted for the risk inherent in such projects. The discount rate applied was 14%.

The Company is in the process of executing the integration plans to combine businesses, sales organizations, systems and locations as a result of which the Company is and will continue to incur integration costs.

The operating results of Synthes, Inc. were reported in the Company's financial statements beginning on June 14, 2012. Total sales and net earnings for Synthes, Inc. for the second quarter ended July 1, 2012 were $193 million and $28 million, respectively.

The following table provides pro forma results of operations for the fiscal second quarters and the fiscal six months ended July 1, 2012 and July 3, 2011, as if Synthes, Inc. had been acquired as of January 3, 2011. The pro forma results include the effect of divestitures and certain purchase accounting adjustments such as the estimated changes in depreciation and amortization expense on the acquired tangible and intangible assets. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of Synthes, Inc. Accordingly, such amounts are not necessarily indicative of the results if the acquisition had occurred on the dates indicated or which may occur in the future.
 
Unaudited Pro forma consolidated results
 
Fiscal Six Months Ended
 
Fiscal Second Quarters Ended
(Dollars in Millions Except Per Share Data)
July 1, 2012
July 3, 2011
 
July 1, 2012
July 3, 2011
 
 
 
 
 
 
Net Sales
$
34,481

34,609

 
17,410

17,524

Net Earnings
$
5,641

6,108

 
1,631

2,772

Diluted Net Earnings per Common Share
$
2.02

2.20

 
0.58

1.00



In 2012, the Company recorded acquisition related costs of $457 million, before tax, which were recorded in Other income and expense.

In connection with the Synthes acquisition, DePuy Orthopaedics, Inc. agreed to divest certain rights and assets related to its trauma business, to Biomet, Inc. and completed the initial closing for this transaction in the fiscal second quarter of 2012, including those countries that represented the majority of sales.

Additionally, during the fiscal second quarter of 2012, the Company acquired Guangzhou Bioseal Biotech Co., Ltd., a privately held biopharmaceutical company specializing in the design, development and commercialization of a porcine plasma-derived biologic product for controlling bleeding during surgery; CorImmun GmbH, a privately held drug development company in Germany, whose lead compound, COR-1, is a small cyclic peptide currently in early clinical development for the treatment of heart failure; and certain assets of the Angiotech Pharmaceuticals, Inc. barbed suture business.

During the fiscal first quarter of 2012, the Company completed the divestiture of its U.S. patents and other U.S. and Canadian intellectual property for BYSTOLIC® (nebivolol), which is currently approved in the U.S. for the treatment of hypertension, to Forest Laboratories Holdings Limited. Proceeds received from the divestiture were $357 million.

During the fiscal first quarter of 2011, the Company acquired substantially all of the outstanding equity of Crucell N.V. that it did not already own. Crucell is a global biopharmaceutical company focused on the research and development, production and marketing of vaccines and antibodies against infectious disease worldwide. The net purchase price of $2.0 billion was primarily recorded as non-amortizable intangible assets for $1.0 billion, amortizable intangible assets for $0.7 billion and goodwill for $0.5 billion. During the fiscal second quarter of 2012, the Company recorded a charge of $0.5 billion for the intangible asset write-down and $0.4 billion for the impairment of the in-process research and development related to the Crucell business.