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Announcement:

MOODY'S AFFIRMS Aaa/PRIME-1 RATINGS OF JOHNSON & JOHNSON; STABLE OUTLOOK

16 Nov 2005
MOODY'S AFFIRMS Aaa/PRIME-1 RATINGS OF JOHNSON & JOHNSON; STABLE OUTLOOK

Approximately $4 Billion of Rated Debt Securities Affected

New York, November 16, 2005 -- Moody's Investors Service affirmed the Aaa/Prime-1 ratings of Johnson & Johnson (J&J). This rating action follows the announcement that J&J and Guidant have entered a revised merger agreement in which J&J intends to acquire Guidant in a stock-and-cash financed transaction valued at approximately $19 billion, net of cash acquired. Based on the current share prices of the two, J&J would fund the acquisition with approximately $11 billion in cash and $8 billion in stock.

The affirmation of J&J's ratings reflects Moody's belief that the acquisition remains strategically sound and consistent with J&J's Aaa rating based upon: (1) Guidant's good position in the implantable cardio defibrillator (ICD) market, its bare metal stent technology and delivery systems, and the longer term opportunities from bio-absorbable stents; (2) the use of equity to fund approximately 50% of the transaction; and (3) J&J's extremely robust financial condition, based on excellent product diversity, extremely strong cash flow to gross debt coverage, and a highly liquid balance sheet.

Although the value of the acquisition has declined following recall problems affecting Guidant's ICDs, Moody's believes that J&J's excellent credit quality will not be substantially diminished as it addresses these issues and attempts to regain lost market share in ICDs. J&J's acquisition strategy has been successful to date. Moreover, Moody's views favorably the incremental diversification away from the higher-risk pharmaceutical business achieved by the proposed transaction. In addition, Moody's believes that J&J's key credit ratios such as cash flow from operations to adjusted debt, free cash flow to adjusted debt, and the ratio of balance sheet cash relative to debt -- will likely remain in the "Aaa" category, as discussed in Moody's Global Pharmaceutical Rating Methodology.

Moody's believes that the primary risks to the transaction include: (1) integration risk, including successfully resolving any remaining quality issues and rebuilding Guidant's reputation; (2) the large reduction in J&J's net cash position, which stood at approximately $11 billion on a reported basis as of September 30, 2005; (3) intellectual property litigation in the stent business; and (4) reimbursement pressure for costly devices such as ICDs as healthcare funding is likely to become further constrained. Additionally, J&J's organic growth rates have slowed and may continue to moderate due to competitive pressures facing core products as well as upcoming patent expirations on several pharmaceutical products. However, J&J's diversity and excellent financial strength currently offset these concerns.

Following this rating action, J&J's rating outlook remains stable based primarily on extremely strong, albeit reduced, financial flexibility. The company has not specified whether the cash portion of the acquisition will be funded with existing cash or with incremental debt. Under most financing scenarios, however, Moody's anticipates J&J's operating cash flow to adjusted debt will exceed 75%, that its free cash flow to adjusted debt will exceed 40%, and that its cash and investments relative to debt will exceed 75%.

Moody's notes, however, that the reduction in J&J's net cash position after the transaction could make J&J's rating or outlook more susceptible to future adverse events. These circumstances could include, but are not limited to: a product withdrawal, an unfavorable outcome in a patent lawsuit, other cash-financed acquisitions, or revenue declines if competition intensifies further.

Ratings affirmed:

Johnson & Johnson: Aaa issuer rating, debentures, senior unsecured bonds, medium term notes, revolving credit facility; (P)Aaa senior shelf registration; Aa1 subordinated notes; Prime-1 short term rating

ALZA Corporation -- Aa1 convertible subordinated notes

Headquartered in New Brunswick, New Jersey, Johnson & Johnson [NYSE: JNJ] is one of the world's largest healthcare companies, with $47 billion in 2004 revenues.

New York
Patrick Finnegan
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael Levesque
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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