Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Good afternoon, everybody. My name is Andrew Callaway. I'm responsible for health care investment banking here at Deutsche Bank. I'm joined by my partner, John Duskin, who's responsible for our med tech effort. And we are so pleased to have our good friend, Joe Wolk, here today. For those who don't know Joe, he's the Executive Vice President and CFO at Johnson & Johnson. So really excited to have this fireside with him. Today, we're going to start with some high-level questions. then we're going to jump into med tech. Then we'll do a bit of a deep dive on pharma, and then we'll close with some capital allocation questions.

So let's jump in, Joe. You guys had a great Q2, you've been able to indicate that you're going to generate sales north of $100 billion this year, which is exciting. Innovative Medicines represents about 2/3 of that and medtech, the remaining 1/3. How do you see the balance potentially changing over time? Do you feel like you got the right balance between the 2 businesses? Or do you think as you look forward, that could change.

Yes. First off, thank you Cal and John for as well as all of you for your interest in Johnson & Johnson. Certainly, it's a pleasure to be here today. And I think a really good story that we have to talk about at these conferences now that I got to say the Board, the executive committee, we don't really wake up to a formula says it's got to be 2/3 pharmaceuticals and 1/3 med tech. We want to make sure, and I think Jake's done an excellent job in this regard and making sure we're playing in higher growth markets where we have a right to win. I think our business has got a better level of clarity now to like all of you with respect to where we think those areas that we can win are in pharmaceuticals, oncology, immunology, neuroscience. In med tech, it's surgery, where we've had a long-standing presence, vision. And then finally, it's cardiovascular, where we beat our presence there. So I would say it does provide some advantages to think about our business where you have some overlap when regulatory policy is being made and they think about a cancer patient, -- it's good to know that Johnson & Johnson can be there if that cancer patient needs a surgical procedure or a therapeutic because Johnson & Johnson has expert voices in the room. And often, an oncology patient does need that overlap. Cardiovascular. We've got a partnership with Bristol-Myers for Milvexian with a promising drug potentially to treat AFIB that complements our cardiovascular business very nicely. So those are just some examples. But I wouldn't want anyone to leave here under the premise that Johnson & Johnson is about those convergences. If those convergences happen, it's nice. But each business, we hold accountable to competing against its peer set. It has to stand on its own and making sure we've got our right to win, either #1 or #2 in that respective marketplace. So from a CFO perspective, I like the diversification it offers, right? So as we approached a few years ago, the Salar loss of exclusivity. Even with an okay medtech business back then, we were still able to invest in our R&D pipeline on pharmaceuticals because we had that balance, right? And so I think it provides a lot of flexibility, not just for the company, but for how investors can look at us.

Let's talk for a minute about growth. You guys announced a great Q2 revenue was up 6.6%. You raised your outlook for 2026. You've talked about the ability to maintain a 5% to 7% growth rate over the long term. What gives you confidence that you're able to generate that durable growth as we look into the future?

Yes. So it's been a good year so far, I would say that 5% to 7% range is something that we committed to you back in our Investor Day in 2023. We have, and hopefully, many of you will be able to attend another Investor Day coming up on December 8. You're going to see growth rates that are better than that. Okay. You've heard Joaquin, -- you've heard myself say publicly, we see double digits, a clear line of sight to double digits for the enterprise over the next few years, by the end of the decade. Let's get into that a little bit. So 27, you've got a weird dynamic in 2026, where we have an extra week of sales. So think about 1.5 points to 2 points worth of growth. When you normalize for that, we'll be up next year over that, if you adjust for each period. And then after that, it's really unencumbered. What's amazing about next year is let's say, you're going to have equivalent reported growth, but actually operational growth a little bit better when you account for that 53rd week. There's about $2 billion to $4.5 billion of products that are losing exclusivity, right? That's more than what we experienced STELARA's loss of exclusivity impact in year 1 of that biosimilar coming out. So it truly is a made you think about XARELTO, loss of exclusivity. I don't think it's really appreciate about $2 billion, the PAH franchise, about $1.5 billion. Symphony and STELARA combined another $1 billion, yet nobody is focusing on that, right? And that's the amazing part of our portfolio. So what gives me confidence. One you've got largely a derisked portfolio, things that are on the market today or close to approval. -- don't have a lot of risk left in them. We maybe have indication risk or things like that. But these are things that are pretty well known markets that are continuing to grow that are underpenetrated. You think about icotide, which we just launched for psoriasis. Fantastic start. Maybe we'll talk about it a little bit later. But that's going to get likely indications in IBD somewhere down the road. You think about we're moving beyond multiple myeloma, where we've had a presence for probably the last decade in prostate cancer into different types of cancer like bladder cancer, lung cancer, head and neck, colorectal cancer. -- and more therapies for multiple myeloma on the horizon. In med tech, we continue to have strong presence in non closure and biosurgery Vision Care. Contact lens is a good, steady business that's highly profitable within our portfolio. And now Surgical vision is starting to emerge with some of their Tecnis platforms. Otaba was just recently approved. We will go slow there to go fast later on. but that's an exciting new development that don't really have a material financial contribution for the balance of this decade relative to the scope of Johnson & Johnson, but really promises to be something big to support the next decade. So we're thinking 2031 and beyond at this point, placing those bets to make sure it's solidified. But we feel very comfortable with not just 5% to 7% growth. But as you've heard us say publicly, we've got line of sight to double-digit growth over the next few years. The one thing I think we've always thought about how do we replenish the portfolio when you have these loss of exclusivity events, right? A number of our peers are facing that now in the pharmaceutical industry. And it's nothing new to have that skill set. A matter of fact there's been one other company that's been able to grow through a period where they've had a significant biosimilar and to the market or a significant loss of exclusivity seat of the company was Johnson & Johnson back in 2018 with REMICADE. We've done it now with STELARA. We're going to do it again whenever the next big LOE hits, and we think about it that way. We probably need to get a little bit more forthcoming with how we're positioned for that, so investors can appreciate that. But there's a really good stable that John Reed and his team are working on that promise well for a good long time. But we feel really good about the balance of this decade.

How do you think about the relative growth between the pharma and the med tech businesses. And if you want to drill down a little bit further into that, thinking about pricing, market share gains, potential acquisitions going forward?

Yes. So that's a great question, John. I think the markets, if I look at it, a top-tier pharmaceutical market growing in a day is going to have a higher growth profile than what you'll see for a top-tier medtech company. But what I can say, really, with a lot of confidence is both our Medtech segment and our Innovative Medicine segment, are positioned to have higher growth rates than where they are today. That growth rate is not going to come from price. We just simply don't play in markets that allow for price. A matter of fact, the growth in pharmaceuticals for us has probably overcome 3% to 4% price erosion on an annual basis for at least the last 7 to 8 years. okay? Medtech has never really had a lot of price flexibility. Maybe you see a little bit of that in contact lenses, more of a consumer-facing product, but that's even few and far between in terms of the years that occurs. Our estimates are not really bolstered by or assuming any acquisitions. We'll continue to do acquisitions to fortify the portfolio but we're making these comments based on the portfolio or the pipeline that's in place today. So it would be additive. The good news is that should something go wrong, we've got the firepower to be able to do a smart acquisition. But it's got to make strategic sense, it's got to make financial sense.

Great. And then in terms of just the geographic split of the business today, do you see any shifts to be more U.S. focused OUS focus for...

As long as I've been with the company, I think it's always kind of been a 50-50 split 48-52, -- it's a little ambiguous now with some of the MFN deals and pharmaceuticals and how that may play out. We certainly do need to see, particularly Europe, I think, step into reimbursing for quite frankly, innovations that are highly valued that extend and improve lives significantly. So it's hard to say that, but I wouldn't see a dramatic shift from the roughly 50-50 split that exists today.

That's great. Thank you. So we've got an ever shifting U.S. health care policy landscape right now, whether that's Medicare drug price negotiations, shifting insurance coverage, payer mix, evolving tariffs, an ever-evolving FDA environment. What do you see as the net impact of more of the macro situation you see here in the U.S.?

Yes. I mean that's a good question. I think the -- the way I think I'd like to answer that question, there's a lot of topics in there is that Johnson & Johnson as well as the industry has been at the forefront of having constructive dialogue with the administration for better business here in the U.S. What does that mean? Well, with respect to pricing, we did step into MFN, certainly participated in IRI. As a matter of fact, 1 of the things that commentators on news broadcast often common. Two, is -- the only thing that hasn't been inflationary is drug pricing. And I think we need to refocus the discussion. If you think about health care costs overall, right? In the U.S., it's about 19% in GDP, $5 trillion. Pharmaceutical spending is only about 9% of that. So the savings that we're talking about are already where there's been cost containment the savings are to be had in other parts of the health care system. And I think we need to do a matter of fact, on prescription drugs, 90% of them, not in terms of dollar value, but in terms of quantity, are actually generic prescriptions, right? So the system kind of works. And if you think what therapeutics do, they keep people out of the more highly costly hospital stays. So you think about I'm old enough to remember when Magic Johnson declared he had HIV and we thought, that's a depth sense, right? Here he is 40 years later, thriving, right? The same is happening in cancer when we started a journey with multiple myeloma about 7 or 8 years ago. It was 1- to 2-year life expectancy. Now we have people who started on that original therapy of argenx still living today and not just living and getting by, but living healthy, high-quality lining. So I think there needs to be that focus. The other thing is from a U.S. perspective is it provides really good jobs to the economy, right? China is closing the gap pretty quickly. where probably 15 years ago, they had maybe 9% of investments in the R&D pipeline globally, took to 30% now, right? U.S. is none we've got a sizable lead. We want to maintain that lead, 1 for the economic benefits, some for national security, but because that's where cutting-edge innovation occurs. That's why we were so pleased to advocate for and then see the passage of the tax bill. -- right? Because it could provide some permanency where we were able to make a declaration that beginning about 1.5 years ago, we were going to invest $55 billion in U.S. capabilities over the next 4 years. And we're well on our way to doing that because we now have a tax system we can rely on, tap into the venture capital nature of the U.S., the ecosystem, whether that be just innovation workforce or the university system, which we think really leads to some of the things that we're seeing today in terms of not just treating people potentially carrying them.

It was exciting to hear you say earlier that you think you can do better than the 5% to 7% over the course of the near to medium term. As you think about it from an investor perspective, what 2 or 3 KPIs should they be focused on that would indicate you're able to deliver that growth and continue to generate phenomenal shareholder returns?

Yes. I don't think it's anything that's going to be groundbreaking here. So I would point investors to make sure that we're meeting the success of these new product launches. So whether it's iodide, whether it's TREMFYA in inflammatory bowel disease that received indications early last year. It's just getting started. But here's a product that's been on the market for about 5 years and we had 80% growth in the second quarter, right? These are big, big markets. Ocaba, while the early days, are we placing -- are we getting good feedback from positions we've seen in some of our peers that if you have a failed launch, those are hard to recover from. We're going to do this. Like I said, we're going to go slow to go fast. That means white glove service, getting feedback from the operating rooms to make sure we've got a high-quality product that people can rely upon. I would say if we have that growth, and again, I am confident we will have that growth. investors should expect some margin improvement along the way, right? We're going through a pretty deep exercise right now with the separation of our orthopedics unit to really look at our company and making sure the infrastructure is appropriate. We've got the benefit maybe of technology and AI. We'll see how all that plays out. But we did the same thing when we separated our Consumer Health business. Let's take not just stranded costs not being part of the conversation, but something that improves margin, which could help EPS growth, but then also be redeployed in R&D to really fund the future because when a $100 billion company becomes a $125 billion company, you're going to need to place more bets along the way. We're well positioned to do that. And now I would say, as the CFO, cash conversion is pretty important. This year, I think we've targeted and are on track to hit $21 billion, which would be a high watermark. I expect that to grow substantially, and we'll have some more information at our Investor Day on December 8 in the coming years. It will be meaningful, which will provide us even more flexibility to deploy capital in a number of areas.

Maybe one more question before we bounce to med tech. You mentioned the consumer separation in 2023. You mentioned the orthopedic separation that's ongoing. In both cases, you elected, as you've said publicly to get out of those businesses to move into higher growth, higher-margin areas. Do you think the work is done now? Or do you expect to continue to monitor the portfolio and include those types of assets on a go forward?

Yes. That's a good question, Karl. I'll say this right upfront, that we love our portfolio. We love the 6 areas that we are in today. Make no mistake about that, and I may even repeat that in this answer. So no ambiguity. But part of our remit as an executive committee is to continually look at our portfolio. Are we in those areas that are making a difference for patients, elevating the standard of care? Is there innovation to be had? And are we the right stewards to make sure that, that innovation gets done. . If you think about oncology, immunology, neuroscience, surgery, vision and cardiovascular, we believe we've got the right portfolio now to make that work. So you never say never, but I think part of the remit of any management team is to continue to look at those areas where you're going to be really good at. And it's important to know what you're good in, right? So we did an acquisition back in 2017, Actelion. It was a good business. It was a value-creating acquisition, what has been pulmonary hypertension. But here we are, the products we're losing anticipate and there's really no carry through, right? So that it was good to do at the time. REMICADE was an unknown in terms of how that was going to react to a biosimilar competitor. So it made a ton of sense. But it wasn't an area we knew particularly well. We'll often get asked, "Hey, are you going to get into GLPs. Well, you've got really good companies that know that space pretty well, and they're ahead of us. Let's still make a difference where we can actually make a difference for patients. patients, and that usually translates into a pretty good business model. So again, we love our portfolio as where it stands today.

That's great. Why don't we spend some time on med tech before we switch back to the pharma side of things. I really want to start around the acquisition strategy -- if you look back a few years ago, you did some really sizable transactions with Abiomed and Shockwave. It's been relatively quiet over the last 18 months on that front. Any commentary around new areas you want to go into in med tech or areas you want to beef up?

We're always looking for, again, those areas that we think we know well that we've got some expertise that -- that will include adjacencies. I don't have a list to pull out of my pocket and say these are the companies we're interested in even though that's what probably the list everybody wants. But what I would say is it doesn't matter that valuations are depressed. When we did those deals, the M&A markets were kind of quiet Yes, J&J moved ahead and did thing. So it's going to be situational. Again, when we talk to our Board, 75% to 80% of the discussion is what is that strategic fit? What's the scientific expertise, what's the commercial capability, maybe sometimes it's global reach that Johnson & Johnson brings to the table that's going to make that asset more valuable in our hands than where it currently resides. And then the other 20% of the conversation is about, okay, how does it compare to other investment alternatives, does it make financial sense for Johnson & Johnson. And that's really the discussion. It's not overly sophisticated. And if you can answer that first 80%, you're well on your way to doing something that's going to be instrumental in the portfolio, not just for the near term. It is a luxury that I believe I have as a CFO in that because of our broad-based portfolio, I never feel like I've got to plug a 1- or 2-year gap, right? I never have to go out and do a bad deal just to plug a gap. And so it's truly is a luxury that I have in my position that we don't have that pressure.

Great. I want to spend some time on some specific products and end markets that are in the portfolio, starting first with pulse field ablation been a lot of commentary from some of the competitors in the market, whether that's Boston Scientific or Medtronic with their products and the growth rates that they're seeing in those end markets -- any commentary you could provide around Farapulse both here in the U.S. and then VerapulsePro in Europe and plans to ultimately bring that to the U.S. ?

Yes. Yes. So listen, EP is certainly a market we know well, we help build with the RF technology. PFA has come out. And it's really translated into EP becoming 1 of the most, I'd say, fastest-growing markets within the tech, but also 1 of the most competitive, right. In terms of we've got a nice installed base with our cargo mapping system. I think there's 60 systems that we're in because of that. It is advantaged versus the competitors. And we also have the benefit, I'd say, of integration with our CAS or our clinical account specialists who are often there during the procedure, guiding the positions and the relationship that's been built there, there's stickiness to that. The VarePulse has treated now more than 100,000 patients worldwide. -- the feedback in terms of the usability workflow, safety is getting stronger and stronger. ValepulsePro, which was launched in Europe. We hope to launch soon here in the United States. -- has received really good feedback. We've got faster ablation times. They are complementary of the workflow. So we think that bodes well when we bring that to the U.S. market. The team is focused on innovation. You're going to compete here, you're going to have to continually innovate making the systems, the catheters better. The team is committed to, I believe, it's a new therapeutic invention per year over the next 3 years being introduced to the market. So omni pulse Souls, -- we'll continue to make upgrades to our cardo mapping system, which is already, I think, the premier mapping system out there. So we should be well positioned. And we'll continue to look in how do we support that business. with maybe inventions that aren't part of Johnson & Johnson's portfolio right now, we'll have the capability to do that.

Great. And then moving to the IVL market. You've got Boston launching their seismic products here in 2027. -- any notes that you could say around potential market share changes or impacts on the broader market because of that launch?

Yes. Listen, I think competition is a sign of a good market, right? And we always expect it when we acquired Shockwave that there would be competition. Here too, you've got physician familiarity. We've got physician relationships. We've got a generator that's distinguished. That team is on their fifth generation. The -- it's probably in all my visits across the company. 1 of the management teams that is -- that's mostly what they talk about. How are they going to continue to innovate going to new areas. So in terms of circulatory restoration, it's been a great acquisition. We feel really good despite competition coming in. that we will have the preeminent leadership position in that space going forward. .

Great. And something I think everyone has been really focused on and you spoke at length about and mentioned earlier in this chat is around the robotics. Obviously, everyone is really excited to see what that looks like in the years to come. Any commentary around the acceleration in the commercial launch as that's been obviously brought to market? And how you view that relative to the rest of the med tech portfolio in terms of -- is that where the growth for the broader group of products you have is going to come from?

Yes. It's not primarily the growth. When you have a again, a company that has 28 platforms that generate more than $1 billion in revenue, a lot of those growing double digits. It's hard to -- the good news is we don't have to hang our hat on just one. But we are extremely excited about what this could mean for hospital systems and for patients overall. There's about 300 million surgical procedures today, 50 million here in the U.S. depending on what source you use, anywhere from 15% to 25% are subject to some post-op complication. There's room for improvement. There's room to elevate the standard of care. Now we make -- we're not misguided in terms of -- we know there's a very strong competitor out there. But we think our offering is differentiated. It's got integrated architecture. So that helps with workflow. There's no booms. It allows for a better workflow amongst the participants in the operating room. We've got in motion. So the patient doesn't need to be reduced. You don't have to delay procedures. You've got Ethicon instruments, right, even today without our robotic system, a high percentage of procedures are using our sealing and stapling capabilities. And then you've got what we were calling an open network or poly which allows the operating room to almost have a suite of surgeons in the presence of that surgical procedure as well as building a database to make that surgery inform the next for a better outcome. So we think these are all different -- again, we're going to go slow. We're going to -- I wouldn't -- we're not reliant. This is the luxury of maybe the position of where our portfolio is today. We're not relying on this being successful for success in 28 or 29. This is really about a next decade play. But getting these first couple of launches for 10, 20, 30 launches exactly right. That means a white glove service around those. -- is really what we're focused on. We were pleased to announce the first account, Chinon Memorial Herman down in Texas. We think there's going to be a couple of -- a number of other announcements in the coming months. And so we feel really good about where that positions and we think it is differentiated. But by no means do we don't think the competition is cost going to lay down for us. We've got to improve our value case, and we think we're in a position to do that.