net selling prices in the Pharmaceutical business due to U.S. health care reform and price reductions in certain Medical Devices and Diagnostics businesses. The 2009 decrease of 6.9% as compared to $16.9 billion in 2008 was primarily related to lower sales, the negative impact of product mix, lower interest income due to lower rates of interest earned and restructuring charges of $1.2 billion. This was partially offset by lower selling, marketing and administra- tive expenses due to cost containment efforts across all the busi- nesses. The 2008 earnings included purchased in-process research and development (IPR&D) charges of $0.2 billion and increased investment spending in selling, marketing and administrative expenses utilized from the proceeds associated with the divestiture of the Professional Wound Care business of Ethicon, Inc. As a per- cent to sales, consolidated earnings before provision for taxes on income in 2010 was 27.5% versus 25.4% in 2009. The sections that follow highlight the significant components of the changes in consolidated earnings before provision for taxes on income. Cost of Products Sold and Selling, Marketing and Administrative Expenses: Cost of products sold and selling, marketing and adminis- trative expenses as a percent to sales were as follows: In 2009, cost of products sold as a percent to sales increased compared to the prior year primarily due to the continued negative impact of product mix and inventory write-offs associated with the restructuring activity. Additionally, 2008 included some non- recurring positive items. There was a decrease in the percent to sales of selling, marketing and administrative expenses in 2009 compared to the prior year primarily due to cost containment efforts across all the businesses and the annualized savings recognized from the 2007 restructuring program. In addition, in 2008 the Company utilized the proceeds associated with the divestiture of the Professional Wound Care business of Ethicon, Inc. to fund increased investment spending. unfavorable product mix attributable to the loss of market exclusiv- ity for TOPAMAX® contributed to the increase. There was a decrease in the percent to sales of selling, marketing and adminis- trative expenses in 2010 compared to the prior year primarily due to cost containment initiatives principally resulting from the restruc- turing plan implemented in 2009. The decrease was partially offset by lower net selling prices in the Pharmaceutical business due to U.S. health care reform and price reductions in certain Medical Devices and Diagnostics businesses. In 2008, cost of products sold as a percent to sales remained flat to the prior year. The change in the mix of businesses, with higher sales growth in the Consumer business and a slight sales decline in the Pharmaceutical business, had a negative impact on the cost of products sold as a percent to sales. In 2008, this was off- set by manufacturing efficiencies and non-recurring positive items in 2008 and negative items in 2007. There was an increase in the percent to sales of selling, marketing and administrative expenses in 2008 primarily due to the change in the mix of businesses, whereby a greater proportion of sales were attributable to the Consumer seg- ment, which has higher selling, marketing and administrative spend- ing. Additionally, in 2008 the Company utilized the gain associated with the divestiture of the Professional Wound Care business of Ethicon, Inc. to fund increased investment spending. This was par- tially offset by ongoing cost containment efforts. In 2010, cost of products sold as a percent to sales increased com- pared to the prior year primarily due to costs associated with the impact of the OTC recall and remediation efforts in the Consumer business, lower net selling prices in the Pharmaceutical business due to U.S. health care reform and price reductions in certain Medical Devices and Diagnostics businesses. Additionally, Research and Development expense (excluding purchased in-process research and development charges) by segment of business was as follows: Research and Development Expense: Research and development activities represent a significant part of the Company’s business. These expenditures relate to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of consumers and patients. The Company remains committed to investing in research and development with the aim of delivering high quality and innovative products. evolving global environment. In the fiscal fourth quarter of 2009, the Company recorded a pre-tax charge of $1.2 billion, of which $113 million was included in cost of products sold. See Note 22 to the Consolidated Financial Statements for additional details related to the restructuring. Purchased In-Process Research and Development: Beginning in 2009, in accordance with U.S. GAAP for business combinations, pur- chased in-process research and development (IPR&D) is no longer expensed but capitalized and tested for impairment. The Company capitalized approximately $0.2 billion of IPR&D in 2010, primarily associated with the acquisitions of Acclarent, Inc., RespiVert Ltd. and Micrus Endovascular Corporation. The Company capitalized $1.7 bil- lion of IPR&D in 2009, primarily associated with the acquisitions of Cougar Biotechnology, Inc. and substantially all of the assets and rights of Elan related to its Alzheimer’s Immunotherapy Program. JOHNSON & JOHNSON 2010 ANNUAL REPORT 34 Restructuring: In 2009, the Company announced global restructur- ing initiatives that are expected to generate pre-tax, annual cost savings of approximately $1.5 billion when fully implemented in 2011. The associated savings has provided additional resources to invest in new growth platforms; ensure the successful launch of the Company’s many new products and continued growth of the core businesses; and provide flexibility to adjust to the changed and 2010 2009 2008 _____________________ _____________________ _____________________ (Dollars in Millions) Amount % of Sales* Amount % of Sales* Amount % of Sales* Consumer $ 609 4.2% 632 4.0 624 3.9 Pharmaceutical 4,432 19.8 4,591 20.4 5,095 20.7 Medical Devices and Diagnostics 1,803 7.3 1,763 7.5 1,858 8.0 Total research and development expense $6,844 11.1% 6,986 11.3 7,577 11.9 Percent (decrease)/increase over the prior year (2.0)% (7.8) (1.3) * As a percent to segment sales % of Sales 2010 2009 2008 Cost of products sold 30.5% 29.8 29.1 Percent point increase over the prior year 0.7 0.7 — Selling, marketing and administrative expenses 31.5 32.0 33.7 Percent point (decrease)/increase over the prior year (0.5) (1.7) 0.2