Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Good afternoon, everybody. I'm Chris Schott from JPMorgan and I'm joined by my colleague, Robbie Marcus, and we're very pleased to be hosting a fireside chat with J&J this afternoon. From J&J, we have Jennifer Taubert, Chairman of the Pharmaceutical division; as well as Ashley McEvoy, Chairman of Medical Devices. Before we start, I did have to read an FD disclosure quickly here, and then we'll jump into questions. Please be aware, some of the statements we're making today may be considered forward-looking or utilize non-GAAP measures. Please refer to J&J's SEC filings, particularly the 10-K, which discusses the risks and uncertainties around such forward-looking statements as well as the website, investor.jnj.com, for reconciliations of comparable GAAP measures. Finally, any performance metrics today may represent results through and including the third quarter of 2019.

So with that out of the way, let me kick off with the first question for Jennifer. You've targeted above-pharma industry average growth as we look out through 2023. I think it's been a topic where the street has been slowly raising numbers, but it's still below that growth target. So maybe just talk a little bit about what gives you confidence in that outlook? And are there any major gaps when you look at your -- how you're thinking about the business versus consensus?

Well, thanks, Chris, and hello, everybody. We are very confident in the strength of our business and in our ability to be able to deliver above-market growth, really taking a look at the time frame from now through 2023, which is what we've covered externally and through our analyst meeting. Our growth is broadly based. It's across our therapeutic areas. It's across our geographies. And we've got very good reasons to believe that we're going to continue to be successful. A couple that I'd like to highlight. So the first reason why we've got a lot of confidence in the strength and further growth of our business is our current stable of products. We are industry leader in terms of number of blockbuster assets at 11, and there is a lot of additional growth potential that we see in these assets, so additional market share to be gained, earlier lines of therapy. And also a number of line extensions that we're working to develop to advance us into new populations, bring forward better dosing regimens, et cetera. So our existing base of blockbusters products, such as DARZALEX, IMBRUVICA, STELARA, TREMFYA, I won't list them all, but a lot of confidence in our existing base of business. If you take a look at our growth projections, in fact, we believe about 75% of our growth through 2023 is going to come from these existing assets. So we believe that this is largely de-risked because these are assets that are already approved and on the market, but with a lot of runway. The second reason for optimism is around our pipeline. And we've got what we believe to be an industry-leading pipeline with at least 10 NMEs that we believe we're going to file or launch by 2023. And so these are in our existing areas of business, such as our BCMA CAR-T in multiple myeloma as well as new areas that we'll be going into, hopefully, such as cusatuzumab for AML, lazertinib for lung cancer, we've got seltorexant for major depressive disorder, a very impressive array that we believe will deliver incremental growth. And then last but not least, we're really investing in new modalities and platforms for that further rate of growth. So we're not looking only now through 2023, we're also taking a look further out in the period and investing in new modalities. I mentioned cell therapy with our BCMA CAR-T. It's important. We've also got a partnership in gene therapy for inherited retinal diseases. We're taking a look at oncolytic viruses, RNA interference for hepatitis B and so on and so forth. So we believe we've got a lot of reasons for optimism and confidence in our above-market growth through '23.

Great. And one part of that seems to be that you have a significant amount of these line extensions, and it seems like an area The Street always under-appreciates the size of some of those. Maybe point us to 3 or 4 that we should be most focused on in that part of the portfolio.

I think -- I'm taking away we need to come up with a better word than line extensions because I don't think it does justice to the true level of innovation that we're looking at. So if I start off with DARZALEX. Most recently, we've got approval for frontline indications in both transplant eligible as well as transplant ineligible, particularly with our MAIA data. So I think that is a growth driver. I think our subcu infusion for DARZALEX is also an important growth driver. This is going to take what's a number of hours infusion down to under 5 minutes. So you can imagine how that can be really helpful in getting into earlier lines of therapy and also making sure that we're pushing treatment to the lowest cost sites of care and out-of-hospital and into the community setting. For TREMFYA, an important asset, we're anticipating an approval in psoriatic arthritis, PSA. And that will be a catalyst not only for PSA, but also for psoriasis, since a lot of patients have both skin and joint inflammation. If I take a look at IMBRUVICA, one of our big growth drivers, there, we're really focused on penetrating frontline and frontline in combination. And most recently, we've had 4 separate combination regimens that have surpassed those current standards of care and we're the only level 1 evidence product that is recommended for frontline usage. And I could go on across our 6 therapeutic areas, but we're really investing in maximizing the potential of these really key products for us and making sure that we're able to reach as many patients as possible. So...

Opposite end of the -- opposite side of the coin, I guess, is pricing. I think you've had a number of years of price declines within the pharma business. Is this the new norm we should be thinking about for pharma that we're going to see price erosion on an annual basis?

I think -- I don't see pricing getting easier going forward as we take a look throughout the world. So I do anticipate that pricing pressure will continue, particularly when you end up with 3 or 4 or more products in a given therapeutic area or class. What's really important for us at J&J is that our growth, particularly as you take a look at the past few years, is 100% driven on volume. So we are reaching more patients, gaining more share, and that's really how we've been delivering our growth over the past few years. So we believe we're really well positioned in this environment where pricing is going to be hot, but we believe that we're well positioned. Additionally, as a transformational medical innovator, we're really looking to go into new populations and to try to get there first and to make sure that we're delivering a very robust data package, that delivers on a very robust value proposition, and that we can ultimately secure the appropriate access and reimbursement and enough reward for innovation that gives us the ability to continue to invest.

And if I kick it over to Ashley here. When we look over the past 2 years at the Medical Device business, we've seen a clear improvement in the organic growth rate. Part of that's come from divesting some of the lower, no growth businesses, part of that's also from improving underlying growth rate in the remaining businesses. So when you think about your overarching strategy, what are some of the strategic pivots you've made in the Medical Device business to drive that improvement in growth? And when you look out over the future, how do you think about -- how do you think about the business? Is it better in our hands or is it better in someone else's?

Well, thanks for the question, and it's a pleasure to be here. And it's about time that our med tech colleagues kind of help out our pharm colleagues because they've been kicking butt for a while. I'd say a couple of things. One is the market is on our side. So med tech has posted very healthy total shareholder returns, lots of unmet need so that's in our favor. I would say we come from a very strong foundation. J&J med device is the second-largest med tech company, $27 billion. We have 11 brands that are over $1 billion. We have very strong cash flow. We have a very strong geographical footprint, so -- and particularly in areas like Asia. So we had, I would say, a healthy base. We have 4 franchises. We're the world's leading orthopedics company. We are a world leader in surgery with Ethicon, over 100-year-old company. We have a strong, nascent, but feisty, scrappy business in interventional soon to pass in Biosense Webster, a $3 billion business, 10 years double-digit growth. And then a strong #2 in Vision, but we're very bullish on that end state market. So I would say a couple of things. I would say we actually are in the middle of, I think, experiencing a momentum shift. You look at our performance through quarter 3 2019, and we're near that number 4% and that number a year ago was around 2.6%. And I would say it's probably 5 things. One is we have a very strong, seasoned management team that has been around med tech for many years, has great global experience and very committed to life-saving innovation. When I go around the world, again, it's about keeping our Asia Pacific business growing well. We had experienced double-digit growth. All of our franchises are posting very healthy performance in Asia Pacific, again, through very seasoned, continuous strong leadership there. Our EMEA business in Europe is low single digit. I'd like to see that be in the mid-single digits over a period of time. And quite frankly, where we've put a disproportionate amount of our energy is getting our largest region, North America, $11 billion business, growing. And I am pleased to share that, that has experienced a momentum shift from around 1% in 2018 to around 2.2% through quarter 3 2019. And in North America, our largest region, it really is about getting U.S. orthopedics growing again from negative 1% to a positive 1%. And that really is about getting our trauma business to above market, getting our joint business, which we're very strong, getting that growing again and then starting to participate in some of the higher growth segments in sports. In North America, we have a very strong interventional business growing double-digit and then a strong U.S. Ethicon surgery business. So that was about North America. And then it was this little business called Orthopedics, $10 billion world leader, getting that from negative performance to positive performance, again, through geographical prioritization, very strong commercial execution and rebalancing the pipeline to start to participate in the faster-growing areas.

There's a number of very attractive, high-growth, underpenetrated markets within med tech. Many of them you participate in, some of them you don't. How do you balance, whether it be organic or inorganic growth, how do you think about the opportunity set to move into these fast-growing markets? And how does J&J think about their future participation?

Yes. I mean I would say that we are very fortunate to compete in several fast-growing, high unmet need areas. Like, I talk about the area of cardiac ablation, it has less than 5% penetration. So even though we've been at this for 20 years, we're still in the early innings. I think of the world of vision care, there's a significant unmet need that, that category should be going north of 5%. I'll come to the world of Ethicon, digital surgery. A lot has happened in the past year, so it clearly was not an area that we were pioneers in. I give a lot of credit to the market leaders in that space, but we've also had the benefit to learn from not being first and to come in with something that we think will be very highly differentiated. If we look back over the past year, there's been several strategic moves to pivot into the world of digital surgery through -- with the acquisition of Auris. We've been looking at really convening a community of world-class experts, really with Dr. Fred Moll at the helm, was one of the founders of Intuitive, really leading up all of our robotic development work, coupled with our very strong pedigree and history in instrumentation under Ethicon, our partnerships with Verily to really create a connected OR of the future. And then really taking advantage of that global infrastructure. And not to mention, our strong base in science and disease understanding, particularly in areas like oncology. Our welcoming of data and science and clinical data and post-market surveillance. So we really view that as the recipe to compete in digital surgery. Stay tuned for more in our quarter 2, we'll have our May Analyst Day. And then we will be filing in orthopedics for digital surgery in the second half of this year.

Building on Robbie's question on integrated growth on the pharma side, it seems like you've had a lot of success with mid-stage in-licensing. So we -- just broadly talk about how you see inorganic playing as you build out that portfolio? And is there a need to deviate from the strategy? It seems like if I look at some of your more successful assets, you've been able to identify products fairly early, pay a low price, and it's worked.

So I think part of our special sauce at J&J is really that we are truly agnostic to the source of the innovation. And there's a number of folks who can say that, but saying it and doing it are 2 very, very different things. And so the win for us is truly being able to ensure that, that right asset gets developed and is able to reach the patients, and that is the goal. It doesn't matter so much where it comes from, whether it comes from our labs or whether it comes externally. And so through our innovation engine, through our scientific finders, our BD folks, R&D and commercial, we are constantly scanning the landscape and looking to try to find the best assets that are out there and even -- if better than what we have in-house and to be able to bring them in. I think we have a very great track record of flexibility and being able to work with partners to really help understand what their needs are and to be able to partner to bring these assets forward in a very compelling way. And then I see us continuing to do that. So it's going to be based on the science on that innovation and what the partner needs and what we need to be able to bring it forward. So I think we're going to continue to build upon the successful strategy that we've had there.

Has the robust funding environment for biotech changed that dynamic at all? Or are you still seeing pretty fruitful dialogue with some of these smaller companies to [indiscernible]?

Yes, we're still seeing -- we're still having very productive dialogue because of our great track record. So you look at what we were able to do in collaboration with Pharmacyclics for IMBRUVICA. You take a look at what we're doing with DARZALEX, which had originated with Genmab. When you take a look across a number of the assets across our portfolio that are very successful, they have actually come from somewhere else. And so that track record and those references give us credibility in working with other partners. And so we find there still is a really good appetite and ability to partner even though there's other funding mechanisms and things out there. We bring an extraordinary development engine to be able to really bring the assets to market quickly. We bring the resources to be able to develop the assets, to fully optimize them, to develop them in the right lines of therapy, to develop them in the right combinations, to go after all the right populations, to make sure that we're truly being able to optimize it. And then we've got outstanding commercial capabilities to help make sure that we're bringing forward the products with the right value proposition, and we're getting the access and reimbursement and ability to bring it forward globally. So we're finding it -- still continued appetite and desire to be able to work with us in collaboration.

Just pivoting a bit. I know certainly, in my pharmaceutical world, health care reform has been dominating conversations, it seems like, for the last how many years here. But within your pharma business, you've got reasonable exposure to Medicare Part D as well as Part B. What are you watching most closely as we think about potential reform that could come out of Washington over the next several years?

So I'd like to think of our business as being balanced rather than exposed. So if you take a look at our business globally, rough number is about 50% U.S., 50% ex U.S. Then within the U.S., you can break it about 50% commercial and the other 50%, some type of government pay, be it Part B, Part D or Medicaid. So we think that there's breadth there. I think that some of the reforms have the potential to be very positive. So things that, for example, have the potential to lower patient out-of-pocket costs, we are very much advocating for, and we think could be very, very helpful. That'll take many players throughout the system and potentially legislation, but Senate finance has a bill going on there, which we think setting an out-of-pocket limit in Part D could be very good. There are other elements, which I don't think address the fundamental problem, which is patient out-of-pocket costs. So things such as international reference pricing we don't think is helpful. I'm sure most of the people here have seen the recent news around cancer deaths and cancer overall survival rates and across a number of different areas, how dramatically those survival rates have improved. And then also taking a look at it, seeing that those highest survival rates are in the United States. So trying to import foreign price controls. And in all cases, where -- what that really means is delays and restrictions to access to therapy I don't think is going to be helpful. So we're working as Johnson & Johnson, we're working with our partners at pharma and bio and others to try to advocate for things that we believe are really pro patient and can be helpful going forward.

Ashley, maybe a question in a similar vein for you. We've recently got a tailwind in the form of the repealed med tech tax at the end of last year. As we think about moving forward towards the election, are there any programs -- I remember we had the comprehensive joint CCJR that looked at bundling and outcomes in medical devices. Do you expect any similar programs or any programs we should be aware of as we move towards the elections?

I think med tech, it's a little bit of an adjacent area in health care than classic pharma around -- I think we've already seen a lot of experimentation in value-based care. Many of us in the industry are partnering with hospital systems on performance-based metrics, whether that be hip fracture programs or cardiac aplasia, where we can scale up through professional education and have a little bit of standardization and making sure that the outcomes are getting a lot more predictable. I think we see a lot of consolidation in -- particularly in the U.S. hospital system to kind of shore up our customers' ability to execute on some of these value-based care. I still think that we're at the very early innings of this. Clearly, we want to have a healthy FDA. We want the U.S. to be first in innovation. So there's a lot of partnering with them to make sure that we understand this world of digital health and systems approaches to create a connected OR experience. So having a healthy FDA, regardless of what regime is in the election, is important.

Kind of just pivoting to the core portfolio. Within pharma, immunology is, obviously, has been a great growth driver for J&J. So I feel like it's one of the more controversial categories as we try to assess this balance of high-volume growth, but an ever more competitive landscape. Can you just talk a little bit about the growth opportunity you see ahead when we think about TREMFYA and STELARA, kind of balancing that competition versus underpenetrated markets?

Yes. Thanks. So we actually have 6 very robust therapeutic areas, of which immunology is currently the largest and immunology and oncology are our fastest growing. And in immunology, STELARA is our largest product and is demonstrating very, very strong growth. And that is through Crohn's disease and what we've been able to do in bringing forward that new mechanism of action for patients there. If you take a look at the market, we believe there is a lot of additional growth potential in Crohn's disease. 70% to 80% of patients on anti-TNFs are not in remission at 1 year. And so there's a very large pool of patients, in addition to the patients who haven't been penetrated with biologics yet to begin with. And so for STELARA, we think that there is continued growth. We also just got an indication in ulcerative colitis, which is going to further help develop us in inflammatory bowel diseases. So we think growth in STELARA. For TREMFYA, an IL-23 mechanism, we're off to a robust start in psoriasis, and we've filed for psoriatic arthritis. And we think that, that is going to be a further catalyst really because a lot of patients have both skin and joint disease. And so when you have the pairing of those indications, it can be a really nice catalyst. And so we've filed for that, and we're looking forward for further growth there. TREMFYA, we believe, in the IL-23 pathway, has a lot of further application and a lot of further growth potential. So we're also studying the product in Crohn's disease and are going to be looking at other areas. I think as you take a look at immunology going forward, there are a number of diseases really that biologics have not yet penetrated or we're only at the very beginning. We have got development programs looking at atopic dermatitis, which we think is a very relevant and important area and HS, hidradenitis suppurativa. Am I pronouncing that correctly? And we just in-licensed bermekimab or brought it in from XBiotech at the end of last year, which we believe has the potential to be further assets there. And so we're really looking at expanding, further penetrating and doing all that we can right now in sort of the existing areas such as psoriasis and Crohn's disease and IBD, and then expanding into new areas in immunology, where, again, we can be to market early with really meaningful transformation for patients. And what will result if we're early in with that, it ends up being a lower competitive environment in early days, too.

Makes sense. Great. One of the main trends we've seen in recent years has been an increasing focus on the use of navigation and robotics in surgery and orthopedics. Just last year, we saw the acquisition of Auris to bolster your existing surgical robotic program, doing the deal with Tanabe to bring their spine and trauma robot into China, while also remaining on track for a knee robot to launch in 2021. So as we see the impact of robotics clearly moving towards the role of the future, how do you think about that as it relates to Johnson & Johnson's Surgical and Orthopaedics business?

No. I mean I -- quite frankly, we are really bullish around like the future of how care can be delivered both surgically and interventionally. And I think we're going to start to see a little bit of a hybrid approach. You saw us at the end of the year, we bought our rights to Verb, so we're going to take full advantage of the capabilities in our Verb colleagues. And really what's changed is really how sophisticated technology has been around how to change pre-op planning, intraoperatively how to make live decision-making practical and relevant and then post-op. We have an application called C stats, which lets surgeons know how their case performed versus some of the top world key opinion leaders. And as we know, surgery is craftsmanship and surgeons want to get better and better and skill up. So I think that we're going to see surgery be smarter. I think we'll see it be less invasive. I think we'll see it be much more personalized. And quite frankly, the patient wins in all of this. And we are very -- even though we're 20 years in, we are very much at the early innings. And this is going to change the standard of care not just for the next 10 years, but for the next 20 and 30 years.

All right. I think we're about out of time. We'll continue the discussion across the way, but thanks very much for joining us.

Thank you.

Thank you very much.

Thank you very much.