Good morning, and welcome to Johnson & Johnson's first quarter 2015 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. If you experience technical difficulties during the conference, you may press star zero to reach the operator. 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 first quarter of 2015. 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 a webcast accessible through the investor relations section of the Johnson & Johnson website at investor.jandj.com. I'll begin by briefly reviewing first quarter for the corporation and for our three business segments. Dominic will provide some additional commentary on the business, review the income statement, and provide guidance for 2015. 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 2014 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. Please note our 2015 sales schedules breakout sales for both IMBRUVICA and Invokana/INVOKAMET. To assist in updating your models, we have also provided the quarterly splits for 2014 for those products on the sales schedule by product. I would like to review our results for the first quarter of 2015.
Worldwide sales to customers were $17.4 billion for the first quarter of 2015, down 4.1% versus the first quarter of 2014. On an operational basis, sales were up 3.1%, and currency had a negative impact of 7.2%. In the U.S., sales were up 5.9%. In regions outside the U.S., our operational growth was 0.8%, while the effect of currency exchange rates negatively impacted our reported results by 13.2%. On an operational basis, the Western Hemisphere, excluding the U.S., grew by 9.9%, while Europe grew 0.3%, and Asia Pacific/Africa declined 3%. Growth in the U.S. and Japan was negatively impacted by hepatitis C competition, while growth in all regions was impacted by divestitures, the most significant one being Ortho Clinical Diagnostics. Excluding the net impact of acquisitions and divestitures, underlying operational growth was 5.7% worldwide, 9.1% in the U.S., and 3% outside the U.S. Turning now to earnings.
Net earnings were $4.3 billion, and earnings per share were $1.53 versus $1.64 a year ago. As referenced in the table reconciling non-GAAP measures, 2015 first-quarter net earnings were adjusted to exclude after-tax amortization expense of $226 million and a net gain of $128 million for after-tax special items. 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 $4.4 billion, and diluted earnings per share were $1.56, representing decreases of 5.9% and 4.3% respectively as compared to the same period in 2014. Currency translation significantly impacted net earnings. On an operational basis, adjusted net earnings grew 3.7%. Turning now to business segment highlights. Please note percentages quoted represent operational sales change in comparison to the first quarter of 2014, unless otherwise stated, and therefore exclude the currency translation impact.
I'll begin with the consumer segment. Worldwide consumer segment sales of $3.4 billion increased 3.4%, with U.S. sales up 3.8%, while outside the U.S., sales grew 3.1%. Excluding the net impact of acquisitions and divestitures, underlying operational growth was 4.7% worldwide, 5.1% in the U.S., and 4.5% outside the U.S. Growth was driven by OTC worldwide, skin care, as well as oral care and women's health outside the U.S. OTC sales growth was driven by analgesics, upper respiratory products outside the U.S., as well as new products and relaunches in digestive health, anti-smoking aids, and Rogaine. In the U.S., adult analgesic market share was approximately 12%, up from approximately 11% a year ago, while U.S. pediatric share was nearly 43%, up from nearly 38% a year ago. In skin care, seasonal inventory build and strong market growth drove results for Neutrogena and Aveeno.
New product launches and successful marketing campaigns drove the results for Listerine in oral care and women's health products outside the U.S. Moving now to pharmaceutical segment. Worldwide sales of $7.7 billion increased 10.2%, with U.S. sales up 16.9% and sales outside the U.S. up 3.7%, driven by both strong sales of new products as well as core growth products. New competitors in hepatitis C significantly impacted sales this quarter. Excluding sales of our hepatitis C products, Olysio and Incivo, underlying pharmaceutical growth worldwide, U.S., and outside the U.S. was approximately 13%, 24%, and 3% respectively. U.S. results included a positive adjustment for gross to net, including managed Medicaid rebates. Significant contributors to growth were immunology products, STELARA and SIMPONI ARIA, as well as Invokana, INVOKAMET, XARELTO, IMBRUVICA, ZYTIGA, CONCERTA, and INVEGA SUSTENNA or Xeplion.
The results for immunology were driven by strong double-digit market growth, complemented by increased market share for STELARA and combined SIMPONI ARIA. Regarding REMICADE export and international sales, as a reminder, the company made certain supply chain changes resulting in sales to distributors previously recorded as U.S. export sales being recorded as international sales. Combined international and export sales for REMICADE in the first quarter of 2015 were down approximately 2%. Strong growth in Canada was offset by lower sales to our distributors, reflecting the weakening of the EUR and the loss of exclusivity in Europe, partially offset by an inventory build. INVOKANA, INVOKAMET sales were up nearly 40% on a sequential basis. In the U.S., INVOKANA, INVOKAMET achieved 4.9% TRX within the defined market of type 2 diabetes, excluding insulin and metformin, up from 4.2% in the fourth quarter of 2014.
TRX with endocrinologists grew to 11.8% for the quarter and 4.3% in primary care, up 1.5% and 0.7% respectively on a sequential basis. INVOKANA, INVOKAMET remains the category leader in new-to-brand share with endocrinologists at nearly 18% at the end of the quarter. XARELTO sales were up 38%, and total prescription share or TRX for the quarter in the U.S. anticoagulant market grew to 15%, up over 3 points from a year ago. TRX in primary care reached 12%, and in cardiology, 23.8%, up on a sequential basis. XARELTO is broadly reimbursed with over 90% of commercial and Medicare Part D patients covered at the lowest copay for a branded product. Strong patient uptake with new indications, approvals, and demonstrated efficacy drove results for IMBRUVICA both in the U.S. and outside the U.S., primarily Europe, with launches in Germany, France, and the U.K.
Strong growth of the combined metastatic castrate-resistant prostate cancer, or MCRPC market, at 12.5% drove the results for ZYTIGA in the U.S. ZYTIGA's share was approximately 30.3% of that market, down approximately 1.2 points on a sequential basis due to increased competition. During the quarter, the FDA approved a label update for ZYTIGA plus prednisone, noting significantly prolonged median overall survival compared to placebo plus prednisone in chemo-naive men with MCRPC. Continued strong market uptake and additional country launches drove the strong results outside the U.S. ZYTIGA is approved in more than 95 countries. CONCERTA growth was primarily due to a therapeutic equivalence reclassification of generic competitors. INVEGA SUSTENNA or Xeplion achieved strong results in all regions due primarily to increased market share. I'll now review the medical devices segment results. Worldwide medical devices segment sales of $6.3 billion decreased 4.6%.
U.S. sales declined 6.1%, while sales outside the U.S. declined 3.3%. Ortho Clinical Diagnostics was divested mid-year 2014. Excluding the net impact of acquisitions and divestitures, underlying operational growth was 1.3% worldwide, with the U.S. up 1.1% and growth of 1.5% outside the U.S. Growth was driven by orthopedics, cardiovascular care, surgical care, and diabetes care, partially offset by lower sales in vision care. Competitive pricing dynamics and buying patterns negatively impacted growth for vision care. Orthopedic sales growth was driven by ORTHOVISC and MONOVISC in sports medicine, as well as trauma, hips, and knees, partially offset by competitive and pricing challenges in the U.S. in spine. Trauma growth of 3% worldwide was driven by 7% growth outside the U.S. due to strong volume growth, including a tender. Hips growth of 3% worldwide was driven by strong volume growth, partially offset by continued pricing pressure.
PRIMARY STEM platform sales were a major contributor to the results. Knees worldwide increased 1%, with the U.S. up 2% due to strong sales of ATTUNE, partially offset by pricing pressure. Outside the U.S., knees were down 1%, with growth in Asia Pacific and Latin America offset by lower sales in Europe. Slowing elective procedure volume, primarily in the U.K., contributed to the soft sales in Europe. Cardiovascular growth was driven by a 12% worldwide increase in our electrophysiology business due to strong sales of the THERMOCOOL SMARTTOUCH catheter. Surgical care growth was driven by strong suture growth and the success of new products in the ECHELON FLEX family, partially offset by lower sales in women's health. Results for diabetes care were driven by Animas strong double-digit growth, with the successful launch of Vibe in the U.S. and expanded pediatric indications outside the U.S.
That concludes the segment highlights for Johnson & Johnson's first quarter of 2015. It is now my pleasure to turn the call over to Dominic Caruso. Dominic?
Thanks, Louise, good morning, everyone. We're very pleased with our strong start to 2015, and I believe we're well-positioned for continued growth in this dynamic healthcare environment. At Johnson & Johnson, we continue to make very good progress on our near-term priorities as well as our long-term growth drivers, which we discussed during our January call. I'll take the next few minutes to highlight some key developments we've made to advance our business, as well as some key points regarding our results for the quarter. Then I'll provide some updates to our guidance for you to consider in refining your models for 2015. During the quarter, we had several key developments across our business.
We received new approvals for IMBRUVICA, PROCRIT, and VELCADE in our pharmaceutical business, also added a new antithrombin antibody to our early-stage development pipeline through the acquisition of XO1 Limited, which we announced last month. We also continued expanding our efforts to combat major global public health challenges through collaborations with government organizations and others in the industry to search for new solutions to stem the threats posed by dementia and Ebola. A much more in-depth review of the outstanding work our pharmaceutical business is doing will be provided at our upcoming pharmaceutical business review meeting on May 20th, which will take place in New Brunswick, New Jersey.
In medical devices, in line with our priority to accelerate growth through innovation, we announced in March a definitive agreement to collaborate with Google Life Sciences to advance development of a surgical robotics program, which we see as an important step in our commitment to advancing surgical care around the world. We continued making disciplined decisions regarding the management of our enterprise portfolio and completed our divestiture of the U.S. licensing rights for NUCYNTA in April. We announced the binding offer from Cardinal Health to acquire our Cordis business, which we expect to close in the latter part of the year. Please now turn to the consolidated statement of earnings. We are very pleased with the strong start to the year as reflected in our first quarter results.
While overall sales results were impacted by currency headwinds, our operational sales growth was 3.1%, and our operational sales growth, excluding the impact of acquisitions and divestitures, was a strong 5.7%. Competition in the hepatitis C market negatively impacted that growth by a full percentage point. You may recall that this same analysis for 2014 resulted in underlying operational growth of 5%. We're very pleased to see our underlying operational growth accelerating and very healthy. If you would please direct your attention to the box section of the schedule, you will see we have provided our earnings adjusted to exclude intangible amortization expense and special items. In the quarter, our adjusted earnings per share of $1.56 exceeded the mean of the analyst estimates as published by First Call.
The decline in adjusted EPS of 4.3% versus the prior year was entirely due to the negative impact of movements in currency rates in the translation of our results, particularly the weakening of the euro compared to prior year. This resulted in a negative impact to EPS in the quarter of approximately $0.13 per share. EPS on a constant currency basis was $1.69, or up 3.7% over the prior year. This is slightly higher than our operational sales growth rate of 3.1%. As referenced in the table of non-GAAP measures, the 2015 first quarter net earnings were adjusted to exclude intangible asset amortization expense and special items, which consisted primarily of the following. Intangible asset amortization expense was approximately $200 million. Net litigation gains were approximately $250 million. We had an increase in the accrual for the DePuy ASR hip program of approximately $100 million.
Let's take a few moments to talk about the other items on the statement of earnings. Cost of goods sold increased 30 basis points. This is mostly due to currency impacts. Selling, marketing, and administrative expenses were 27.9% of sales, or 70 basis points lower as compared to the first quarter of 2014 due to good cost management. Our investment in research and development as a % of sales was 10.9%, and it was higher than the prior year as we continue to make important investments for the future. Overall, our pre-tax operating margin when excluding special items and intangible amortization expense was 32.6%, or 50 basis points lower than the prior year, primarily due to such R&D investments. Interest expense, net of interest income, was similar to last year.
Other income and expense was a net gain of $348 million in the quarter, compared to a net charge of $86 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 $91 million, compared to a net gain of $50 million in the prior year period. Excluding special items, the effective tax rate was 21.5%, compared to 20.8% in the same period last year. This effective tax rate is higher than our previous guidance, as it does not yet reflect the benefit of the R&D tax credit, as that legislation has not yet been passed. I will provide some guidance for you to consider as you refine your models for 2015.
At the end of the quarter, we had approximately $12 billion of net cash, which consists of approximately $31 billion of cash and marketable securities and approximately $19 billion of debt. I'm also pleased to report that we have made significant progress and nearly completed our share repurchase program, which will offset the ongoing impact of the Ortho Clinical Diagnostics divestiture we did last year. For purposes of your models and assuming no major acquisitions or other major uses of cash, I'd suggest you consider modeling net interest expense 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 2015 reflecting net other income and expense, excluding special items, as a gain ranging from approximately $2 billion-$2.1 billion, which includes the gain from the divestiture of our U.S. rights to the NUCYNTA pain medicine, which we announced closed in early second quarter. We've updated our guidance now to reflect the anticipated gain on the pending divestiture of the Cordis business. As we noted in January, we expect to use the increase in other income to compensate for the anticipated decrease in income from Olysio in 2015 as compared to 2014, while continuing to invest in our core business and opportunities for future growth. We firmly believe that continued portfolio decisions are an important process and enable us to focus our resources on the highest growth opportunities.
With the anticipated Cordis gain, we will be able to mitigate some of the impact of strong foreign currency headwinds this year. The increase in guidance for other income and expense will flow directly through to increase operational earnings versus our prior guidance. A word on taxes. Our guidance for 2015 anticipates that the R&D tax credit will be renewed by Congress, although that has not happened. We therefore would be comfortable with your models reflecting an effective tax rate for 2015, excluding special items, of approximately 21%-22%. This is higher than our previous guidance, reflecting changes in the mix of our earnings. If the R&D tax credit is not approved, it would negatively impact the tax rate by approximately half a percent for 2015. Turning to sales and earnings.
Our sales and earnings guidance for 2015 takes into account several assumptions and key factors that I would like to highlight, which may not be fully reflected in your models. Consistent with our previous guidance for sales, our assumption for PROCRIT is that there will not be biosimilar competition in 2015. We also do not anticipate generic competition this year for RISPERDAL CONSTA or INVEGA SUSTENNA, but we are expecting a generic entrant for INVEGA in 2015. As expected, we have seen additional biosimilar competition for REMICADE in Europe following the patent expiration in many countries in February. 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 EPS results for 2015 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 1%-2% for the year. This would result in sales for 2015 on a constant currency basis of approximately $75 billion-$76 billion. Additionally, by way of comparison to how we described our sales results in 2014, our operational sales growth for 2015, excluding the impact of all acquisitions and divestitures, as well as the impact of hepatitis C, would be approximately 6%, a higher level of growth than the comparable 5% for 2014, which we noted earlier.
As of last week, the EUR was lower by approximately 17% as compared to 2014 average levels, the dollar has strengthened recently versus virtually all major currencies. Though we are not predicting the impact of currency movements, 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, our sales growth rate would decrease by nearly 7%, reflecting the weakening of the EUR and other major currencies against the U.S. dollar. Turning to earnings. A significant factor impacting our earnings guidance for 2015 is the impact of currency movements on transactions, which although hedged, is still somewhat negative incrementally versus the prior year.
We expect transaction currency impacts to be negative to our gross profit by approximately 60-70 basis points in 2015 as compared to 2014. Consistent with the reporting practices by the majority of our competitors, as we explained last quarter, we now exclude intangible amortization expense in addition to special items when providing our adjusted earnings guidance and actual results. Accordingly, we would be comfortable with adjusted EPS guidance in a range between $6.64-$6.79 per share on a constant currency basis, reflecting an operational or constant currency growth rate of 4%-6%. This is higher than our previous guidance by $0.10 per share, reflecting some operational improvements and the higher other income and expense I noted earlier, partially offset by a higher tax rate. We are not predicting the impact of currency movements.
To give you an idea of the potential impact on EPS, if currency exchange rates for all of 2015 were to remain where they were as of last week, our reported earnings per share would be negatively impacted by approximately $0.60 per share. This is a higher negative impact of approximately $0.18 per share than we provided in our January guidance. Therefore, our reported adjusted EPS range will range from $6.04-$6.19 per share, primarily due to the increased headwind of currency on EPS of $0.18 per share, which is partially offset by our improved operating performance of approximately $0.10 per share. At this stage in the year, we would be comfortable with your models reflecting the midpoint of this range.
In summary, as you update your models for the guidance that I just provided, I would like to make a few key points. Although operational sales growth is expected to range between 1%-2%, we are pleased to note that when excluding the impact of acquisitions and divestitures and the impact of hepatitis C products, our operational sales growth at the midpoint of our guidance is approximately 6% for the full year 2015 as compared to 5% for all of 2014. We expect that the higher level of other income in our guidance for 2015 will mitigate the lower level of income from Olysio in 2015 as compared to 2014 and allow for continued investment in the business, particularly in research and development as we continue to build our pipeline.
Now with the inclusion of the gain from the Cordis divestiture, we are able to offset some currency headwinds to earnings as well. With regard to earnings on a constant currency basis, our guidance on an operational EPS growth is strong and in the range between 4%-6%. In closing, we're very pleased with our strong results for the first quarter of the year, and we're pleased with what we see for the full year, namely strong underlying sales growth, solid operational earnings per share, and the benefits of decisive portfolio actions enabling us to fund investments in future growth opportunities and also help us mitigate some of the currency headwinds. Now I'd like to turn things back to Louise for the Q&A portion of the meeting. Louise?
Thank you, Dominic. Andrea, could you please provide the instructions for the Q&A session?
Ladies and gentlemen, if you'd like to ask a question at this time, please press star then the number one on your keypad. If you would like to withdraw your question, press the pound key. Your first question comes from Mike Weinstein with JP Morgan.
Morning, Mike.
Hi, Mike.
Good morning. Thanks, guys, for taking the question. Dominic, the first question I think people are probably going to have is the FX headwind obviously has gotten worse over the course of the last few months, and you reflected that in the guidance. You're helping manage through 2015 with the gains from NUCYNTA and Cordis, but that won't help you for 2016. We're a long ways away from there, but obviously the question is, can you grow earnings in 2016 after the gains you'll be taking in 2015? Assuming the dollar holds, at least.
Dollar holds and there isn't further currency headwinds. We did purposely offset some of the Olysio income we saw in 2014 with now this benefit from the divestitures that we talked about and are very transparent about in 2015. With a business of our size, $70 billion-$75 billion in sales, we actively manage our portfolio and we would expect that we would continue to do so and as we talked about before, look at the businesses that we expect to not be in and make the right portfolio choices and take decisive actions and that will further enable us to refocus our resources in the right areas. Although I can't predict the level of other income we would have in 2016, I wouldn't expect it to drop off so dramatically. Secondly, as I mentioned, our sales growth is accelerating.
Our business is being managed well by all of our business leaders around the world. I would expect continued sales growth and increased profitability from those sales as we move forward. More to come and we'll obviously keep you posted throughout the year.
Okay. Let me ask you two kind of balance sheet capital allocation questions. One, you and I discussed this a few weeks ago on our call, but I know a lot of people had questions on the back of the press reports on Pharmacyclics and AbbVie's acquisition there and J&J's potential involvement. I won't ask you to comment on J&J's involvement, but can you talk about the company's thinking about larger M&A, particularly in the pharmaceutical space, but really across the portfolio, the appetite for larger M&A at this point? Second, it shouldn't just in your comment on the back of the GE activity on Friday.
As you're aware, GE as part of its move to slim down to being more of a pure industrial company to offset some of that dilution, announced that they were going to repatriate $36 billion in cash that was sitting outside the U.S. to fund a stock buyback. In the tax laws to allow you guys to access that cash. With GE being this very high profile, U.S. multinational repatriating all this cash, does it change your thinking at all about how you're managing your cash balance, all of which sits outside the U.S.? Thanks.
Okay, Mike. There's a lot there. Let me start with the first half, which was about, I think, the appetite for large acquisitions, and I won't comment on rumors or speculation about our involvement in Pharmacyclics. I think just to take a step back, our capital allocation policy remains the same, and we have, for a long time, emphasized dividends as the first use of our capital, and we believe that's the most enduring return to shareholders, and we've demonstrated that over now 52 consecutive years of increase in the dividend. If it was up to me and others in our business, we'd invest all the remaining free cash flow in value-creating acquisitions, whether they were large or small. I think the key point here is the transaction value-creating regardless of its size?
Our appetite doesn't really change in terms of whether or not an acquisition is large or small. Our view of acquisitions as being value-creating has to do with the disciplined approach we take to evaluating an acquisition. Whether it's large or small, we're not going to overpay for an asset. Typically, large acquisitions are difficult to generate value from because they're either overvalued by the market or significant premium's required, or the asset is already substantially mature enough where you can't add much to it. I would not necessarily read into any of our discussions or actions as being necessarily adverse or favorable towards any particular size of transaction. It is true that over long periods of time, the majority of our transactions have been below $1 billion actually.
We've done, as you know, with the Synthes transaction, important strategic moves that are significant in the $20 billion range. Hopefully that provides you some insight there. On the repatriation question, we're still firm believer that the ultimate conclusion here is a much more competitive corporate tax system in the U.S. I can't speak for what GE did, but it does not alter our view that it's currently uneconomical to repatriate those earnings at such a high corporate tax burden. We'd much rather see our government move in the direction of lowering that tax burden for corporations, getting that cash back to the U.S. and invested more appropriately without the burden of this extra tax bite. I can't comment on why or whether we would do something similar as to what GE did.
Thanks, Dominic. That's very helpful.
Thank you. Next question, please.
Your next question comes from Vamil Divan with Credit Suisse.
Yeah, thanks so much for taking the questions. Just a couple on the pharma side here. One, you mentioned specifically around guidance and how you're thinking about 2015 with PROCRIT and other products. Just any thoughts on biosimilar REMICADE in the U.S., is that in any way factored into your thinking for the rest of this year? Then on the oncology side, one area we hear a lot of focus on from a lot of companies is immuno-oncology, and I'm just wondering if you could share any thoughts. I know you have your pharma business review day coming up in a little bit here, but any thoughts you could share ahead of that as we kind of get ready for some of these big oncology meetings with your focus on getting more involved on the immuno-oncology side? Thanks.
Sure, Vamil. Well, our guidance for 2015 does not assume any biosimilar competition in the U.S. We remain confident in the strength of our patents and obviously are pursuing all available avenues to protect our intellectual property, but we're not expecting biosimilar competition in 2015 in the guidance that I provided. In terms of oncology and immuno-oncology in particular, our teams have done very good work here in the next generation of immuno-oncology, and I think it's best to save any further comments to the experts, and you'll hear from them and see them in action on May 20th. I encourage you all to hear what they have to say. I think you'll find it very exciting.
Okay. Thank you. Next question, please.
Your next question comes from Larry Biegelsen with Wells Fargo.
Larry?
Good morning. Thanks for taking the question. I hope you can hear me okay. I'm on a cell phone.
Yeah, we can, Larry.
Great. Let me start off with, first, it was good to see the acceleration in the consumer segment. I think it was about 4.7% organic growth. Dominic, can you talk about how sustainable that is?
Sure, Larry. Well, thanks for pointing it out. We're very pleased with the consumer business's progress over the last several years, actually. Now we're seeing that progress result in higher sales levels for a couple reasons. I think overall, the market is healthier in consumer spending is what we see. We also have made important innovation in skincare. We see skincare doing really well, and we continue to invest behind it. Finally, we've made great progress in the OTC business in terms of resolving and remediating the issues around the consent decree. We're complete with all of those particular actions, although we still need to wait for final FDA certification. Now that allows us to more freely ship product from those plants, and we can do so on a consistent basis.
We're happy to see that once those products hit the shelves, they go quickly. We're happy to see that we're able to replenish the shelves on a more consistent basis. We believe Consumer is off to a great start in 2015, and we're expecting more continued positive results from the business going forward.
Thanks, Dominic. On the Q4 call, you said you expected Consumer and Devices to both accelerate in 2015. As you noted, we saw Consumer accelerated in the first quarter. We didn't see Devices accelerate. Do you still expect Devices to accelerate in 2015, and if so, what drives that? Thanks for taking the questions.
Thanks, Larry. Thanks for the question. Let's take a minute to just put the medical device results for the quarter in perspective. Of course, negatively impacted by divestitures and as we said, about 1.3% growth without that. Underlying that, there's a few issues there that I think is important to point out. One is we exited the women's health business recently. We also have seen the negative impact of the price reset in the vision care business. That's a drag, quite frankly, year-over-year. Also the continued headwinds that we faced in our diabetes business as to pricing. When you exclude those factors and you sort of normalize for what's really happening, the underlying business is growing at approximately 3% or about equal to the market.
Going forward, the medical device business, as we described last year in the medical device day, has a number of new product launches, 30 new products that we're expecting to launch by 2016. Some of them have already begun to launch. We're very optimistic about the fact that the medical device business will return to growth, especially once we lap some of these comparisons, and also we see the benefits of the new products that we're launching. We're very excited about that.
Jami Rubin with Goldman Sachs.
Morning, Jami.
Good morning. Couple questions for you, Dominic. Just back on the Remicade biosimilar potential. Can you just update us on what's happening with the patent? Because the last we saw, the USPTO issued a rejection on your September 2018 composition of matter patent. Just if you can remind us what the appeals process looks like, could Celltrion launch at risk since you lost the patent, the composition of matter? Just how does that work? More importantly, do you have other long-dated patents around Remicade that you can assert using the 351 pathway? My second question relates to utilization. I think in the last quarter or two, you talked about two straight quarters of improved U.S. utilization. Are you seeing that continue into the first quarter? Last question, apologies for the nitpickiness of this, but I'm just trying to understand my math.
You had talked about an additional $500 million in one-time gains from sales. That to me looks like $0.14, but you talked about $0.10 combined with, which was a combination of the one-time gain plus operational benefits. Just curious what I'm missing. Thanks very much.
Okay, Jami. Thanks for the question. Let me start with the-
I'm sorry. They're too many, I had to get them all in.
That's okay. You got them all in. I'll try my best to answer them all, we'll take them in the same order. The REMICADE biosimilar patent situation is what you asked about. Let me just give you a perspective on that. Yes, it's true that the U.S. Patent Office has issued what is referred to as a final rejection. Under the process in the U.S. Patent Office, the word final is not exactly what a layman or I would consider as final. There are a number of steps that can still occur after that final rejection. In fact, one of those steps includes our response to that final rejection, which we filed just yesterday. That filing then is reviewed by the patent office, we would expect to hear back from them in the next 30 to 60 days.
Depending on that response, we then have another avenue of appeal, which if the current position of the patent office remains the same, we have another appeal process, which could take another 12 months or so to prosecute with the patent office. After that, even if there's an adverse ruling after that, there's another decision to the Court of Appeals for the Federal Circuit that we could appeal for, which would take another 12 to 18 months. First of all, as I said earlier, we're very confident in the strength of our patents, we intend to pursue all the available avenues for appeal, we're doing so, including our response just yesterday to what was previously described by you as the final, but it's not final, as I've just described. On whether Celltrion will launch at risk, it's a question for them.
I really can't comment on what they might do. In terms of utilization, we have seen an uptick in utilization in this first quarter, a continued trend of although slight increases, but nonetheless positive increases in overall hospital admissions, surgical procedures, doctor visits, et cetera. That's encouraging. We continue to see now trends of now three consecutive quarters of positive trends in healthcare utilization. Finally, on your math as you were trying to do, let me try to help everyone on that because I think it would be a common question. We talked about the increase in other income and expense. Because of the tax rates applied to those particular items in that line item, let's call that roughly about $0.12 of earnings. Let's call that about $0.12 of earnings on a pre-tax basis.
The tax rate going up is primarily due to the fact that those items have a higher U.S. tax burden. Our tax rate went up as a result. Let's call that $0.07 negative. Now you're up $0.05, we said we increased our operational earnings by $0.10. That's $0.05 I just described another $0.05 just due to continued good management and overall progress we're making in the business overall for the $0.10 that I just described earlier. Hopefully that's helpful.
Yes. Thank you very much.
Thank you. You're welcome.
Next question, please.
Glenn Novarro with RBC Capital Markets.
Morning, Glenn.
Good morning, guys. Wanted to start with a question on spine. Louise, in your prepared remarks, you talked about, I believe it was in the U.S., competition and pricing challenge for the negative U.S. spine number in the quarter. Can you talk to us about what the challenges you're facing? Is it from the smaller players taking share? Can you describe to us the pricing pressure and how that compared to the fourth quarter? I had a follow-up on robotics.
Okay. Going forward, because we have some movement between price and mix when a new product goes up, annualizes itself, I'm going to start giving people only price and mix on the U.S. price changes. Okay? In the first quarter, we had a 5% decline, price and mix in the U.S. in spine, that compared to about 4% in the fourth quarter of 2014. Regarding the competitive, there's new products coming out with our competition, as Dominic mentioned, we have a number of new products coming through the year.
Just as a follow-up, the pricing got a little worse for you guys here in the first quarter. Do you have any commentary why that may have happened? Is it just more about your mix and your new product cadence?
It's a lot to do with the mix, Glenn. Yes.
I think generally, Glenn, price has been negative in this marketplace in orthopedics now for several quarters. We're just seeing that trend continue. We just saw it recently as well.
Yep.
Yeah.
Okay. Just on the competition side, like I said, if you can look at two-thirds of the market, it's you and Medtronic. Is the pressure really coming from that other third, some of the younger upstart companies?
I'm just going to take a look at the share data.
As a follow-up on your robotics commentary. You recently announced a collaboration with Google. Can you talk about the timing of when you may have a robot that could enter the market? Is this two or three years out, longer or shorter? Any commentary on the timeframe would be helpful.
Yeah. Sure, Glenn. One thing I would say is this is a continuation of what we discussed at the MD&D Business Review Day a year ago. We had mentioned that we were working on our own robotics program internally. We've now obviously partnered with Google to gain their expertise in technology and visualization and in robotics, and I think that's going to provide us some acceleration to the plans we were already anticipating. We're already in the market for robotics in terms of our I would say several years for us to come to market with the new type of robotic surgery that we think will dramatically revolutionize. It's there, and I'd say it's a couple of years away.
Okay, Glenn, I just checked. It is the smaller players that appear to be taking share. Okay.
Okay.
Next question, please.
Thanks, Dominic.
You're welcome.
Your next question comes from David Lewis with Morgan Stanley.
Morning, David.
Good morning. Just, Dominic, one quick nit for you and then a couple pharmaceutical questions as well. Traditionally, we see a step-up in gross margins, Dominic, into the first quarter from the fourth quarter. We didn't see that in this particular quarter. Was there anything driving that in particular?
Yeah. David, I mentioned in my prepared remarks that the main issue with gross margin this quarter versus last year, and also versus the fourth quarter, I should have said, has to do with currency impact. It's just even though we hedge most of our manufacturing foreign currency commitments, they do roll over from year to year and quarter to quarter. This particular quarter, I could sort of reflect on it and say it's essentially all currency impacts.
Okay. Very helpful. Then two quick questions on pharma. The first is on REMICADE outside the U.S. There was a little bit of softness. It wasn't clear from prepared remarks whether that reflected inventory issues or some stocking element or increasing competition. Then secondarily, on Invokana, a very strong number. The two elements I wanted to get your views on. The first is it does appear in some of the data Invokana's beginning to accelerate its share relative Increasing concerns on DPP-4 drug class. Could we see a positive class effect, and are you expecting one for the SGLT2s? Thank you.
Yeah. Well, with REMICADE OUS, as Louise mentioned, we saw that these are shipments that we make to our partner, Merck, for their territories outside the U.S. As you know, many of those territories, we have seen the loss of exclusivity, so biosimilars have entered those markets. The primary reason is basically lower shipments to our partner as they plan for the balance of the year. Anything else you could add to that, Louise?
If you recall, about a year ago, we made some changes to our supply chain, which caused some of the export sales that are recorded in the U.S. to be actually recorded in the international. You really have to add those two together to get a clear picture of what's going on there. If you take a look at them together, it's down about 2%. We had very strong sales in Canada, that was offset by some of the distributor sales being down due to the weakening of the euro and also market pressures because of the biosimilars, and they did have an inventory build with our distributors. There's a number of confounding factors that are going on there, but you really need to take a look at it in total.
With Invokana, we're very pleased, obviously, with the performance of Invokana and with Invokamet in particular, because as you know, many patients take these SGLT2s in combination with metformin, that product is doing well. Whether or not this is a class effect for SGLT2s, I think we have a particular benefit in strong SGLT2. The benefit that we have here is, of course, the lower HbA1c levels, lower weight gain, et cetera. The product is getting very, very good acceptance, and it's now exceeding all the other SGLT2s that have recently come to the market by significant margins and gaining market share despite increased competition.
Our commercial payers, we have about 75% coverage at tier 2, the Part D, we have about 85% coverage at a tier 2, which is the lowest tier for our branded. We're doing very, very well in the reimbursement front, and we're gaining share in all the categories. The endo share sequentially, it's 11.8 in the first quarter, that's up from 10.3, nice growth there. Even more impressive is the primary care going from 3.6 to 4.3, primary care is about 60% of that market. It's really impressive results.
Great. Thank you very much.
You're welcome.
Next question, please.
Thank you. Your next question comes from Rick Wise.
Let me start off, Dominic, with surgical care and specialty surgery, specifically. Both businesses have been pretty flat for a few quarters here. It's not so surprising maybe in surgical care, but specialty surgery. You're saying volumes are picking up, and yet we're not seeing it here. Is this lagging or it's going to accelerate? Is it competitive issues? Just give us some more color if you could. Thank you.
Within the specialty surgery area, we have a number of businesses put in there. If you take a look at the core businesses of biologics and energy, biologics is up 7% worldwide, energy is up 4% worldwide, and if you look at the OUS for biologics, it's up 11%, and OUS is up 5%. Acclarent in there, which is causing some depression of the numbers. Mentor is in there as well, but Mentor is doing well. If you really take a look at the two cores, they're doing very well.
Yeah, I think that's well said, Louise. Biosurgicals in particular is doing very, very well, and energy is, with the launch of new products, is gaining momentum. I think we'll see it in future quarters, quite frankly, as these products have just recently launched. There is some noise in the other segments, but the overall core business is doing very well, Rick.
Okay. Turning to diabetes, you highlighted that Animas had strong double-digit growth. Is this all Vibe and moving past the negative price cuts? Just maybe talk, if you could, a little more color again on Vibe, the rollout, where you are, and you'd highlighted the three-day wearable patch as a possibility. Where does that stand? Thanks.
Sure. Well, Rick, it is primarily due to the Vibe business. Vibe was launched OUS last year and continued to pick up a lot of volume, did extremely well OUS, and was just launched in the U.S. recently, and we're seeing some very, very good uptick on Vibe. We're very, very pleased by that new insulin pump. It's doing very, very well, taking share and growing. With what we saw happening OUS, certainly bodes well for the uptick of that product in the U.S. In terms of the wearable patch pump, that's probably a couple of years out still. Obviously, we need to scale up manufacturing, complete some additional work on that. A few of us were just there recently visiting our diabetes business, and all plans are in shape there. They're moving forward with all the manufacturing that needs to be done.
We're very excited that'll come to market, but it's probably not before 2016, I would say.
Existing customers or is this taking competitive share?
From what we saw, the data we saw shows us that we are taking competitive share from the major player in the marketplace.
With the very strong growth rates we had, we would have to be taking share. Next question, please.
Thank you. Your next question comes from Josh Jennings with Cowen and Company.
Morning, Josh.
Hi, good morning.
Question. Just wanted to start, Dominic, if you would, just on the strategy behind the Cordis divestiture. It seemed like it was an underperforming unit, but just throughout last year, some of your commentary and Alex's commentary seemed that you were looking to get bigger in cardiology, not smaller. Can you give us just a little more color on that acquisition and also just your outlook for the cardiology spaces and your comfort level of having a relatively standalone Biosense Webster division?
Well, it's a great question, Josh. We've been very consistent with our approach to divestitures. Alex has said many times if we're not either number 1 or number 2 in the market or we don't see a pathway to being number 1 or number 2 in the market through technology and the appropriate amount of investment, or for example, if it's not otherwise complementary to our business, then it should be a candidate for divestiture. As you pointed out, we obviously did not divest the Biosense Webster piece of the Cordis business. That's very promising business. It's doing extremely well. New innovations coming to market, et cetera. We're pleased with being in the cardiovascular business.
It generally has become, from our vantage point, a commodity business. It would be, in our view, better managed in the hands of others. I think Cardinal's going to do just a great job with that business.
Thanks for that. Then just to follow up on operating margin in the quarter, only 50 basis point hit year-over-year despite the Olysio headwind and FX. Can you help us think about sort of apples to apples ex HCV in terms of the operating margin performance and then how we should think about operating margins year-over-year, 2015 over 2014? Thanks a lot.
Well, the first quarter, there was some impact for Olysio. Obviously Olysio grew throughout 2014. We'll see that operating margin decline more pronounced in future quarters, obviously, and that's all in our guidance. The guidance we provided shows that if we didn't give you a specific operating margin, but you work through the P&L as you update your models, you'll see that the pre-tax operating profit margin is probably going to go down about 150 basis points. That's primarily 120 basis points due to the Olysio, net Olysio, because remember, we invested some of those gains last year. That, of course, is what I referred to earlier that we're offsetting with the decisions that we've made about the portfolio. We think these are the right decisions to make at the right time.
They also come at a time when we can offset this decline in operating profit margin. Hopefully, that's clear now, Josh.
Thanks so much.
Yeah.
Thank you. We'll take one more question.
Thank you. Your next question comes from the line of Jayson Bedford with Raymond James.
Morning, Jayson.
Good morning. Thanks for taking the questions. Just a couple quick ones. On consumer, in terms of the consent decree, a third party has blessed the facilities. You're now waiting for the FDA. When it's officially lifted, can you give us an idea as to the potential impact on the business, if any, and specifically as it relates to margins, which still look like they're down in the low double digits?
Sure, Jayson. Well, it is true that we've completed our work. We have an outside party that sort of verifies what we completed and prepares their report. The FDA has to come in and certify. Even after the FDA certifies, remember that we still will operate under the consent decree for a five-year period. That's what the law requires. Now, during that five-year period, we'll continue to make improvements, et cetera. I would say, generally speaking, the consumer business has done a very nice job mapping out the fact that gross margins and overall margins in that business should improve over time, while at the same time we're investing behind the products that we're launching. I would say we'll see continued improvements in margins.
I wouldn't view them as dramatic in the short term, continued steady progress and improvements in that business, which we're very pleased with.
Thank you.
Thanks very much. Some final comments from Dominic?
Okay. Thanks, everyone, and thanks, Louise. As I noted earlier, we're very pleased with our strong start to 2015, and I would just like to take a moment and recognize and thank all of our associates around the world for their extraordinary achievements and dedication to the success of Johnson & Johnson. Thank you all for your time this morning. I look forward to updating you on our progress throughout the year. Finally, just a reminder that we will be conducting a review for the investment community of our pharmaceutical business on May 20th in New Brunswick, and I obviously look forward to seeing you all there. Have a great day. Thank you.
Thank you. This concludes today's Johnson & Johnson's first quarter 2015 earnings conference call. You may now disconnect.