Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Okay. I guess we have to start. Okay. Hi. Good afternoon, everyone. Thanks for joining us. My name is Danielle Antalffy. I'm one of the senior med tech analysts here at SVB Leerink. And we are very lucky for the second year in a row to have Ashley McEvoy from Johnson & Johnson. She's Head of the Devices Group. Before we get started, we also have Matt Stuckley from Investor Relations, and he will read forward-looking statements.

Thanks, Danielle. Good afternoon, everyone. Please be aware that some statements made today may be considered forward-looking or utilize non-GAAP measures. Please refer to our SEC filings, in particular our 10-K, which discuss the risks and uncertainties around forward-looking statements as well as our website at investor.jnj.com for reconciliations to comparable GAAP measures. Finally, any remarks regarding financial performance represent the results through and including the fourth quarter of 2019. Thank you. Danielle?

Thanks, Matt. Well, Ashley. So now 1.5 years into your role, I believe, as Head of Devices. So maybe a good place to start would be, talk about how you view the current status of J&J's device business and how it's evolved in the 1.5 years that you've been there.

Yes, sure. Well, it's great to be back. It's amazing. It's been already a year. And I think, wow, what has gotten -- what we've gotten done in the past year. I would say a couple of things. First is the market that we compete is pretty awesome. And it's pretty special. And I always remind people, our 70,000 colleagues at J&J med tech, that we serve patients and many, many, many times, we're actually saving lives. And we like to say we ignite all that's possible in everybody, and it's a really awesome uberpurpose. And I purposely say, no, we're not in the alcohol business, the tobacco business or in Juul. What we do really matters. And so, listen, we had a great foundation, J&J med tech. We have 4 large franchises. You know us as we have DePuy Synthes, which has been our problem child. I'll talk a little bit about how we've been improving that. But the world leader in orthopedics, really preparing for the world of digital there, Ethicon. J&J, we're actually in our 134th year. And you can't say J&J without saying J&J med device because we were really on the ground for over 100 years ago, really the first to sterilize operating theaters. So with that kind of incumbent is that responsibility to kind of have first-in-kind. So our Ethicon trust mark, which is the face of our surgery business -- obviously, we're going to talk a little bit about the future of surgery today. And then we have a smaller, but I would say, very feisty interventional business. And our electrophysiology business is going to cross the $3 billion mark this year, 11 years consecutive double-digit performance. We've entered a nascent space in our neurovascular business, about $0.25 billion business, growing double digit, really committed to building out that area. And then eye health, I know it's been in the news today. Very committed to eye health, very formidable worldwide contact lens business and very committed to building out our vision surgery business. So we've been really making sure we have a highly seasoned leadership team at all the critical levels all around the world. We've been making sure that we are rebuilding our pipeline. We've been really playing to win in digital surgery. You'll hear me talk a little bit about that. We've racked and stacked every kind of end state market in med tech over the past year. We looked at 200 different disease states area, 100 different tech companies to kind of start to map out where do we want to be in year 3 and year 5. So that's just to begin the past 12 months.

You've done like nothing?

No, just in -- I mean yes.

So let's focus specifically -- so actually, I'd like to, if we could, start with Q4 and then take a look at 2020. Because I think in Q4, there was a little bit of disappointment that you've been pretty transparent about the fact that this is not a straight linear trajectory upward.

That's correct.

So maybe talk a little bit about what transpired in Q4, and what's set up for acceleration in 2020? And where do you see the biggest needs for improvement as we move over the next 12 months? So where will you focus most over the next 12 months on improving?

Yes, sure. I mean I will declare again, I don't think growth is ever linear. And we're not a small tiny start-up company. We're a $26 billion, second largest med tech company that while we want to be fast and agile, it takes a lot to move that. So what we've been very deliberate on is accelerating the revenue curve year-over-year. So you saw us post 1.5% growth in '17; and in '18, 2.6% growth; and last year, almost at 4%, 3.9%. All my numbers are excluding M&A. And for me, that's what I think good looks like. And so 2020, I expect us to do better than we did last year. But every quarter is not going to be this perfect linear build. And because the market has ups and downs, there's one-timers in countries, there's tender management timing, there's a thing called the Japan consumption tax, so there are market factors which influence customer buying patterns. And what we always pay keen attention to is what's that operational run rate. And what I was pleased to see exiting '19 are 2 areas that are very large in scale and quite frankly, have been more dilutive to our overall performance, showed meaningful progress. The first is our largest region, which is North America. The largest med tech market, and we posted 2% performance. We actually -- we unfortunately did have some product disruptions in 2019, some supply challenges. That number would have been around 40 basis points higher. So we posted about 100 basis points of improvement operationally in North America. Now clearly, that's not above market yet. So we need to do better this year and the following year. But what really enabled that in North America was getting our Orthopaedics business, U.S. Orthopaedics business, which was down about 0.5 point the prior year to actually up about 1.4 points. So that's a 180 basis point swing year-over-year. And you go through the platforms. That was about where -- we are the world leader in trauma. We have to keep that going. We have a very competitive hips portfolio that performed. We were woefully underperforming in knee. I was very encouraged to see us exiting 2019 with growth in knees and worldwide growth. And our Ethicon business is, in the U.S., more challenged than OUS. 70% of our Ethicon Energy and endocutter business is actually OUS, growing very nicely, high single digit. But in the U.S., it was compressed. So we are looking this year, even ex robotics, to kind of shore up the competitiveness in Ethicon.

And how do you -- so thanks for going there because I wanted to talk about -- ahead of robot, you guys have called out share loss to robotics in that business. How do you stabilize that, shore that up ahead of a general surgical robot launching?

Yes. I mean we posted almost, I'm going to say, 3% total Ethicon last year performance. And some of the things I like to say, we're very fortunate that we have a very strong portfolio. So wound closure, we're the world leader in wound closure. We want to have a moat around that and continue to innovate. That platform, one of our largest platforms -- I mentioned we have actually 11 $1 billion platforms. So we have 13 platforms, 11 of those are over $1 billion. Our wound closure is over $3 billion. So getting that with differentiation -- people say that it's a commodity business. I say absolutely not. I say we have Plus Sutures, which are going well above the market average and barbed sutures. Biosurgery, sealing leaks, treating bleeding, very important for surgical procedures, one of the world leaders in there. That was somewhat depressed last year because we had some product supply challenges. So that was not our friend. I expect that to be our friend coming into this year. As I mentioned, our energy business and endomechanical business grew mid-single digit, really healthier OUS, challenged in the U.S., really due to some portfolio gaps we have in energy, which we are addressing in advanced bipolar, and we are addressing some of the reprocessing trends, but some really strong strength in our endocutter business.

So do you think you can stabilize share? Will 2020 be a year in which you can at least stabilize share and grow with the market again in that business?

I think our core businesses ex the robotics business should absolutely compete with the market.

Okay. Got it. Okay. And then moving on to the -- I mean that's a big launch coming up over the next few years, very much talked about, very much a focus of investors. And first and foremost, what should we expect to see? You have an Analyst Day coming up in May. I mean what can we expect to see? Are we going to see a robot? Are we going to see a picture of a robot?

Well, we're going to be here in New York on May 13, I want to say. So...

But the robot's transportable.

And you will -- so let's talk about what you're going to see and what you're going to experience. A lot has happened in the past year. So I think it was a year ago, I was sitting here talking about this little acquisition called Auris. And now I can talk about Auris and Verb. We've closed on Verb. We actually had our day 1 integration on Monday. What we've been committed to doing is really the following. We want to make surgeries smarter, more precise, more personalized and to improve outcomes. And we weren't first. So we better come in with something that's very differentiated. And we're going to do so not just in how a classic stand-alone med tech company is going to do so because we're part of J&J. And we have access to disease experts in oncology and immunology, and we have experts -- and I'll give you some -- share what's been fun to see when you start to get kind of an amazing community of experts with tremendous brain power in a room, solving problems. So one example, with Auris, I like to say we are the leader in open. We are the leader in minimal -- but we are now live in endoluminal surgery, which is, in essence, doing surgery from the inside out using the natural orifices. And with the Monarch system, which you will see in hands-on, we've done over 2,000 bronchoscopies. And what we -- the fun thing about this is really to demonstrate how J&J is going to enter this space in -- albeit in a different way than what the precedence has been. And what do I mean by that? So you're going to hear us talk about how we take our lung cancer team. So world experts in oncology and pulmonology, coupled with Dr. Fred Moll, who's a general surgeon, who is one of the founders of intuitive surgery who founded Auris and the team with Monarch and say, "How can we really disrupt how care is delivered in lung cancer?" And let me give you an example. Most people get diagnosed at Stage III or Stage IV. You have less than 5 year -- the vast majority, 80%, have less than 5 years to live. And it's because people don't get diagnosed earlier or in a very minimally invasive way, that could be scaled and really democratized. So now with the advent of Monarch, the Monarch system, it is a very minimally invasive way to access very distal parts of lung lesion. So you're actually getting a diagnostic of the lesion itself. And that's generation 1. Generation 2 is you then -- we bought a little ablation company, NeuWave. You could then couple them, potentially treat at site, at the lesion or potentially disperse oncolytic viruses. We just bought a company on oncolytic viruses. So what I say is, this isn't just a device-only company. It really is how J&J is going to solve big, meaningful needs, and you can take that for lung cancer. We're looking at other areas like bladder cancer, like stomach cancer. Right now, the standard of care, if you have colon cancer, you're basically taking a chunk of your colon out. So imagine, if you could go in a very minimally invasive way to access the colon and really debride the lesion and treat it at the point in the colon without taking a big chunk of the colon out. Very similar to taking a lung dissection, which is really right now the standard of care. So that's what we're playing for. We are going to compete in our general surgery platform on typical indications, but we're going to do so in a different way. You're going to hear about general surgery. You're going to hear about different indications in specialty surgery. I talked about lung cancer. We're looking at endourology, really managing kidney stone treatment. Most people who go get a kidney stone treatment, it takes 2 to 3x, and you have to have repeat procedures. We are looking to get 90% stone removal on the first time as one example. And then we have a big portfolio in orthopedics. And so we are looking to file this year for our orthopedics robot. And again, we were not first so we have the benefit to learn. If you're not going to be first, you better learn how you can come in and really have differentiated value. So it's a very capital-efficient play. It's the size of a shoebox, I say. It attaches to the OR. It doesn't require an X-ray and we're getting really, really nice outcomes. So you're going to see that application in knee, go to hips and we have other applications to come to spine.

What -- just a follow-up on the Orthotaxy robot. What's the regulatory pathway for that? What sort of clinical data are you going to need to collect to file and get approved?

Yes. In the U.S., it's the 510(k), but we all are looking at evidence. Everybody has their own evidence strategy of clinical, preclinical and clinical data. So we are looking at that.