Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

[Audio Gap] 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 results through and including the fourth quarter of 2019. Thank you.

Thank you. Well, I mean, I think everyone -- the coronavirus is in front of everyone's mind, and as it should be. We're in a little bit an unknown era here in terms of how severe things could get. We've seen what's happened in China, and there's been some movement. But I think maybe to start off on a positive note, I think J&J should be commended for the work it's doing just in the vaccine development and also I think your looking -- or screening library of antivirals. Maybe you can just talk to us about those efforts. I know it's probably impossible to put a time line on it, but when I think Dr. Fauci, in one of the press conferences over the weekend, talked about 1 year, 1.5 years. Is that a reasonable time line? And then maybe just on the antiviral side, what's going on there exactly?

Yes. So well, first of all, thanks for having us, Josh and congratulations to Cowen on 40 years. It's a remarkable achievement. With respect to COVID-19, I'd have to start by just conveying how proud I am about the Johnson & Johnson organization in terms of just how they rallied around the crisis itself. So in addition to some of the vaccine stuff that we'll talk about, we were able to secure over 1 million masks for people in the Wuhan province. We had to go out to 22 different vendors of ours to make sure that, that happened. We donated about 50,000 bottles of BAND-AID isopropyl anesthetic, a significant contribution to the Red Cross in China. So what Johnson & Johnson typically does in these situations is kind of run to the fire and help put that out. And so we did that on many fronts. With respect to the vaccine, I think you're -- what Dr. Fauci had referenced in terms of 12 to 18 months is probably a very reasonable time line. If you just think about what has to happen with respect to, first, having some animal studies, making sure it's then safe in humans and then the efficacy part, that seems to be as quickly as, I think, anything can be done. With respect to our candidates for a vaccine, we are screening possible vectors. Where we have a differentiated capability, we believe, is around our scalability. So the ability to produce hundreds of thousands of vaccines is something that's not uniquely possessed within the industry. And if you think about what we did on both the Ebola and HIV front in terms of some clinical development trials that we are now conducting, those are in the hundreds of thousands. So if you remember an acquisition we did many years ago known as Crucell. They had a PER.C6 technology there that allows us to have this kind of manufacturing capacity. So whether it's a vaccine that we potentially discover or some other vaccine that may be a candidate to contain the virus, I would imagine, we're some part of the discussion. In fact, I believe, Alex and Paul are with the administration this afternoon with other health care CEOs and management to help figure out what is the best solution and best path forward. In terms of business impact because I'm sure that's on everybody's mind as well, right now, I would say I don't anticipate -- and I'll caveat my comments to be first quarter contained, right? Until we find out how long the duration of this is, the pervasiveness of the virus is, it would be hard to say we would certainly provide the best information we have available on our April call to recap the Q1 results. I would say, though, from a supply perspective, I'm not overly concerned. I think if you look at where our supply chain exists, we're pretty well covered. On the demand side, I could see some modest impact in Consumer, around Skin Care in terms of just people buying less. There's less activity in that, but perhaps that's offset by self-care. So think of MOTRIN or even LISTERINE potentially. On the Pharmaceutical side, people still will take those drugs. You may see some lower demand from closed or limited hours for infusion centers or even pharmacies. But by and large, I think we're pretty well covered there. Medical Device, as other peers in our industry have indicated there, we are seeing a much reduced level of elective surgeries. And so we'll probably track to the market there. Overall, though, I think if I look at the overall health of Johnson & Johnson's business, I see this as a temporary blip that will largely be recovered.

Thanks for that download. And maybe just to circle back on the vaccine efforts. I mean those vaccine efforts, I think, kicked off at the end of January, a bit earlier than -- I think than when we started to see more coronavirus cases outside of China. Was that due to something that Johnson & Johnson saw just with your presence in China in terms of severity, the risk that this could turn out to be a pandemic? Or is that a typical response for Johnson & Johnson? Because you guys kind of got on top of it, ran into the fire, as you said, pretty quickly.

That's a typical response from Johnson & Johnson. If you think back to 2014 -- the end of 2014 when the Ebola outbreak occurred, Paul Stoffels and his team were kind of on the frontline. It's what Paul does extremely well, in terms of infectious diseases. As you know, he was one of the pioneers with respect to HIV therapy, where I think -- I always think back to when Magic Johnson declared he had HIV, and people were thinking at that time, it was almost like a 2- to 3-year death sentence. Now it takes 2 years off a normal life span. But Paul is on the forefront of all those. I don't know that we had any specific insights because we happen to operate in China. It was just really in response to some of the news that was gathering very early.

Can you just remind us of the exposure in China just from a revenue base standpoint, what percentage of revenue...

Less than 5%.

Less than 5%. Thanks for that. And I know it's a fluid situation outside of China, and we're seeing some cases in the United States and just some incremental new cases and some deaths in Europe as well. But I mean any sense in terms of -- more so on the Medical Device franchise, elective procedures, any trends that are coming up? And again, I know it's early, but just had to check that box.

Yes. I would say it's still early. A matter of fact, when I make the comments around elective procedures, it's in some of those countries that have been most impacted, so China, Italy. It's not something that's pervasive across the globe at this point. So I'd have to defer to it being, unfortunately, too early to make any kind of credible assessment.

Understood. Well, let's dive into the core businesses here and understanding that there's a lot of unknowns out there with this era, hopefully a short-term era that we're in. But just in terms of the pharma business, and I think part of the bullish outlook and the fundamentals of pharma, particularly in the reacceleration story that you guys have laid out, maybe we can just talk from a high level. I think you guys delivered about 4.5%-ish growth in 2019, accelerated from there. Your guidance was that you'll continue to outperform the pharma market. Maybe we could start with what is your assumption there in terms of the pharma market growth. I think at your last Investor Day, pharma day, you talked about it in that 4% to 5% range. And maybe just highlight some of the drivers that are making you optimistic around acceleration in 2020 and then even into 2021.

Yes. So if you think about 2019 and some of the results we had there, we actually outperformed what we thought we were going to do in the beginning of the year. Some of that was due to our ability to retain products that were subject to biosimilar and generic competition. We were able to hold on to some of those products a little bit longer, whether it be due to the safety profile that patients and physicians prefer, the reliability of the drugs or the credibility of their efficacy. But we also had some, I would say, interesting new launches as well. If I think about ERLEADA for prostate cancer in the U.S. is off to a very good start. SPRAVATO for treatment-resistant depression, I would say that start has been a little bit slower than we had hoped, but it's still going to be a great drug for people who haven't had a novel therapy in better than 30 years. And we hope to get an additional indication for suicidal ideation potentially as early as this year. And then the core business continues to do well. So if you look at DARZALEX, IMBRUVICA in our oncology franchise. In immunology, we had TREMFYA continue to do well as well as STELARA for Crohn's disease and ulcerative colitis. If you look at neuroscience, our paliperidone franchise continues to do extremely well. It's severely underpenetrated for the long-acting injectables, which we know are really the best therapy for patients who suffer from schizophrenia. And so we continue to do really well in our core portfolio. I would say for 2020, we expect more from those products. If you think about DARZALEX, specifically, we got approved for frontline. I believe it was last year. We still have less than 6% market share there. It's the biggest population for sufferers from multiple myeloma. So we think that presents a tremendous opportunity. That's not to mention the subcu formulation, which we hope will get approved this year, which for patients is an outstanding win as well as for health care systems overall. You're taking, let's call it, a 4- to 6-hour infusion time down to about 5 to 10 minutes. So we think that will lead to more patient coverage but also better efficiency within physician offices and fusion centers. If I think about some potential approvals this year, we potentially have ponesimod, which is an asset we acquired in the Actelion acquisition, an S1P1 immunomodulator for MS. We think that's one that's probably flying under the radar in those models. I would also say we've got a PARP inhibitor for prostate cancer. And then again, I'd go back to the multiple myeloma franchise, specifically with CAR-T, which received breakthrough designation in December of this -- last year. We think that potentially has best-in-class data as we saw at ASH.

And maybe just to focus on the headwind you guys experienced last year with generics and biosimilars. A little bit later, as you said, you guys did an effective job kind of navigating that storm. Maybe to start with ZYTIGA. I think it was 40 -- down 45% in the U.S., the revenues were, in Q4. Is that kind of a stable kind of assumption as we move through 2020? Are there any new dynamics, new generic entrants that we should be considering just for that U.S. ZYTIGA franchise and just to couple that with just ERLEADA is coming on, and you're seeing some nice growth there to kind of backfill some of that ZYTIGA headwind.

I would say the impact in terms of that generic and biosimilar competition, where we expected most of it to be in 2019, that's now going to be protracted over 2 years. So I would say it's not -- it's a neutral wind, right? So it's not a headwind, it's not a tailwind as we look at 2020 compared to 2019. And I would say that for all of our products that were subject to some generic or biosimilar competition.

And just to close this piece of the discussion, but just on REMICADE specific on the biosimilar side, I mean, you got PROCRIT as well. But for REMICADE, I mean, it's still a nice chunk of revenue as a single asset. You guys have been again navigating that pricing storm as well. Any changes in terms of the outlook of 2020? I think you guys were down mid- to high teens most quarters in the U.S. and maybe just help us understand why you've been so effective.

Yes. I think the reason we've been effective is because we decided to compete on price. So when the competition came out, we didn't just close up our manufacturing facilities. We made use of those facilities as well as the capital that was employed there and continued to compete. So I think as of last quarter, we retained about 89% of the infliximab market share, if you're just looking at the pure molecule itself. I wouldn't think there's any reason that there would be a new inflection point. So that 20%-ish type of call that you've seen historically over the last couple of years, I have no reason to believe it's going to be much different in 2020.

Great. Chris?

I'm just going to say you had asked about the market as well. I think we see the pharma market at about 4% growth, and we've consistently articulated both for this coming year and as part of our Analyst Day we did last May, that we think our pharma business, based on our current in line portfolio, the pipeline Joe just referenced, has the ability to grow above market at, at least 5% over the next 5-year time horizon through 2023. And I think very importantly, too, most analysts, if you looked out longer term, had our business at south of $50 billion. We are -- we see ourselves comfortably above that $50 billion and actually see it as a relatively derisked forecast given 75% of that growth comes from actually in-line products where we have strong efficacy, safety profile and allows us to be very future-focused as we are adding things to our portfolio all the time to focus on 2023 and beyond.

And just as you gave us that -- those details, I just registered a retrieval cue for a question. Just on pricing, a big hot topic, particularly in election year, what are you guys factoring in, in terms of that pharma outlook? I know it's not -- you're not going into specifics, but maybe talk about the recent history in terms of pharma growth being volume-driven and then just pricing in general.

Yes. So -- and that's one of the things that I think we take a lot of pride in with respect to our Pharmaceutical franchise. It has been volume-driven, meeting unmet needs that were -- previously existed. If you think about the past 3 years, we've had price decreases -- net price decreases in each of those 3 years, yet we've grown substantially above the market in each of those 3 years as well. We're not forecasting anything different, whether it's for a 1-year plan of 2020 or in our strat plan. We do expect that there'll be continued price erosion. We see that in specific markets, where there's a lot of competition, so if you think about in the diabetes market, where we've got INVOKANA, XARELTO for AFib. Even psoriasis, I would say, where there's a number of different entrées and competitors, that lends itself to more pricing. I would say other markets are maybe a little bit less susceptible to that, but we continue to assume that price erosion will be part of the dynamic. It is an interesting year with respect to the politics of it all. We do share the administration's goal of reducing health care costs overall. We do think the conversation is a little bit misguided in terms of if you think about the White House Economic Council of Advisers (sic) [ Council of Economic Advisers ] came out with yet another report suggesting that pharmaceutical prices have declined again. They did the same in the third quarter. And you look at what the pain point is for patients. It's when they go to the pharmacy every month, perhaps on a fixed income, and they're paying $75 to $100 for their prescription drug when they used to pay $5 to $10. And if you couple that with some information that's been publicly resourced by the Kaiser Family Foundation, where we see the significant increase in insurance deductibles and premiums. For the first time ever, a family premium will exceed $20,000 on average. Yet pharmaceutical manufacturers have gone from roughly 29% discounts of their gross sales to better than 50% of discounts. Now the distributors, they play a significant role in the process. But I think we've got to look at the value equation a little bit more tightly. So when the administration put out in their blueprint reducing rebates or putting caps on copays for patients, we thought those were very good ideas that warranted some further discussion.

Excellent. And maybe just talk on one last question on pharma and thinking about 2020 and acceleration toward infectious disease franchise. New HIV portfolio has stepped up. Is that a sleeper? I mean is The Street, I think, understanding the potential there and the revenue ramp? Or maybe you can help us out with that HIV portfolio.

Yes. I think it's done in collaboration with some of our other brethren in the pharma group. So I don't think that's going to be a significant addition to the J&J revenue or profit profile going forward. But we're very proud to be a part of those combination therapies contributing to that, but I don't see that as something that The Street would be missing.

Great. Maybe we can move over to the Medical Device franchise, and there's -- the turnaround story is in play. I think you guys had, on an adjusted basis, delivered about 4% growth last year, at least in the back half of the year. And so a lot of initiatives you put in place. So you guys have been seeing some of the fruit there. I guess one of the -- just the ortho business. I mean you guys have historically put forward -- or years ago, put forward a model of having breadth and scale of portfolio, locking in contracts. There's going to be secular pricing pressure in that industry, and you guys have plans in place to drive acceleration there as well. But maybe just -- I think the 2 kind of anchor units or -- I mean knees and spine, those are both segments where you don't have robotics where your competitors do. Can you just talk about the importance of robotics and this digital surgery revolution that you guys are bringing to play in your portfolio but maybe specifically in knees and spine and how you think trends can reverse once you guys have potentially -- well, knees definitely, but and then we can talk about spine specifically.

Yes. So I think you're absolutely right, Josh. I think we're pleased, but we're certainly not done with some of the acceleration that we've seen in growth in -- across Medical Devices. If you go back to 2017, ex acquisitions and divestitures, normalized, as we like to call it, we grew 1.6% in 2018. It was 2.7%. Last year, it was, like you said, just a shade under 4% at 3.9%. And I think that's been largely the result of better execution across all of our platforms. We do have segments within that portfolio that grow well above market. And then we have some, like you mentioned, Orthopaedics, that somewhat lag. With respect to knees specifically, the team actually went from negative growth to positive about 1.5% last year. Not where -- again, where we want to be. But we did see a little bit of improvement there in terms of execution, but also the fact that we've had our Revision platform out there for the full year across really the entire globe as well as an entry into cementless. We've got the fixed cementless addition coming out later on this year or early 2021. So we think that will help improve it. We have seen a little bit of impact from our competitors' surgical or robotic offerings. We have plans to file this year for our Orthotaxy program, specifically for knees. And we hope that will continue the turnaround story there. In Spine, again, that's been a pretty tough market as well. We don't currently have an offering with respect to robotics, although we are exploring how we can modify the Orthotaxy platform, potentially some entry there. We do have SYMPHONY that we expect to launch this year.

I think we actually started the -- it's the full rollout this year. We rolled it out late last year.

Yes. So that's for complex cervical spinal deformity. So we hope that there's some small measures. Again, the overall Medical Device platform, if I look -- we needed to improve that cadence of innovation. We are now allocating resource dollars towards bolstering that innovation and just better execution out in the sales force as well.

We do have an isolated offering in China in robotics for Spine with a partnership we have with TINAVI. So it's a robotic arm. So that's a platform that we can build on over the longer term as well.

And do you have a collaboration in the U.S. with Brainlab?

Yes. That as well.

Yes, we do.

And just in terms of thinking about the Spine franchise independently, it's been turbulent, I think since the Synthes acquisition. So it's been a number of years you guys have been patient. You've been working hard to turn it around organically. I mean -- I guess how long is your patience rope, if you will, in terms of needing to bolster that with maybe some external business development initiatives or maybe even some tuck-ins? I think you have done some tuck-ins on some technology assets over the last couple of years as well but...

Yes. We'll continue to look -- and this is really a statement I could say across all of the business, so we'll continue to look for those tuck-ins or also larger acquisitions. We're not averse to doing that if we've got some scientific expertise or commercial capability that will enable us to be #1 or #2 in the market. In terms of our patients, I mean, we're not happy with the performance in Spine. So we're certainly looking to reposition that. We want to make sure that the foundation of what we have is stable before we start adding on there versus some other choices that we could be making across our entire portfolio.

Got it. And thinking about the -- I guess digital surgery advances that J&J has on the tailwind. Or are we going to get an update at the device day in May, I believe? But can you just -- I mean can you just help us think through, I mean, in terms of where you sit today with Auris commercialized? And I mean how many indications do you think within your Medical Device franchise could you see robotics participating in? And you think your drive is to be a market leader. When do you see that happening in terms of having enough, I guess, ammunition in your holster on robotics and this digital surgery platform to get there?

Yes. I think it's important to start off that it was about this time last year that we acquired Auris, led by Dr. Fred Moll, who's a pioneer in robotic surgery. We're certainly learning a lot from him, and we think we've got some great capabilities. We're very pleased with the acquisition and how that started off. We purchased the Monarch platform, which enabled us to really have a presence in robotic surgery. We're now marrying up and assessing, and you'll hear this from Ashley and the team in May, just what is the best profile to be differentiated from what's currently out there today. As we think about indications right now, I think there's been over 200,000 bronchoscopies. The Monarch platform is enabling the physicians to get further into the lung to detect lesions. If you think about the -- I think what could make J&J unique in this space is our ability to potentially apply therapeutics. So it's not just diagnosis, but it's also treatment perhaps in one visit. And if you think about other indications that may be appealing to us, we're targeting endourology, something that has 90% stone-free, potentially going into other parts of GI, where it's really about a factor of 2x in terms of the market size opportunity. So we continue to look at that. As you probably read, we just bought out the stake in Verb from Verily. So we think that's going to provide us with some good optical as well as digital capabilities. In terms of the market overall, it's hard to say when we think we'll arrive. We'll have to see how some of these development plans play out. But we do know that it's a relatively underpenetrated market as it stands today, less than 5% of procedures worldwide are done through robotic surgery. We think if we can come up with a smaller footprint, a more cost-effective option and better outcomes for patients that's supported by data, we think we'll have a winning hand.

Great. And I want to take advantage of having you here today to just talk a little bit about the P&L and the operating margin trajectory for 2020. I mean 100 basis points is what you guys put on the table for guidance. That's a stellar expansion year. Maybe talk about some of the drivers there. And I think just to pair that with the other income line, below the EBIT line, just there's some variability there depending on acquisitions and divestiture -- sorry, divestitures and recognizing that other income. Because it seems like this year, you've been able to buffer that decrease in other income. I mean how much flexibility do you have, I guess, in your annual planning to be able to pull that off because it's -- I mean that 100 basis points is very attractive.

Yes. So the way I think about it is -- I'm glad you actually brought up the other income line because as you saw in 2019, our results had a pretty significant favorable impact from that. And so we realized that investors count on us to offset that when the time is necessary without risking the long term, so making sure that we continue to invest in R&D or commercial capabilities that's going to help us win 5 and 10 years out. That being said, we've got some, I think, very exciting and very reasonable plans to improve our operating margins, specifically in our Consumer business. So as we go through our entire portfolio, we had SKUs that were much less profitable than some of the ones that we had on the marketplace and realize that they weren't material to customers. So we're looking to rationalize a number of those. That will primarily take place, I would say, outside the U.S. 90% of them are outside the U.S., with a focus in Europe and Middle East and Africa. So that's one opportunity. And then we should start to see some benefits from our collaboration with Jabil across all of our manufacturing, predominantly within Medical Devices. So that's a very unique arrangement where they will be manufacturing on our behalf a number of our products in our less-innovative portfolio. We're going to take some of those savings, put them back into, I would call it, more current manufacturing technology. So think 3D printing, CAR-T manufacturing, some things that are a little bit more cutting-edge, and that should enable us to get to the operating margin improvement that we have predicted in our guidance in January. That being said, Josh, if there's a great opportunity that comes along that we just can't pass up on, we're going to be smart about this and think about it for the long term. We have, I guess, in any given year, roughly $55 billion to $60 billion in resources that we deploy throughout our P&L. So finding improvement in a company of our size should be something that not only investors expect from us but what we expect from ourselves.

Maybe just a follow-up on that, and that's great detail. But just -- I guess in an era where there is uncertainty and you have that kind of reserve to invest, how much flexibility do you have to take the foot off the pedal and just to protect the bottom line, if you will, in a particular quarter? Is that something you guys consider? Is it a focus? Or is that you guys are more into the planning for the full year and into the out-years? Or does that come into play in terms of your planning?

Yes. We're not managing the P&L quarterly. I mean we certainly know that it's -- fortunately or unfortunately, it's a narrative that folks focus on, but we're going to look at the long term. So we want to make sure that we hit our annual goals as to what you expect. If there's an opportunity where Johnson & Johnson can step up and invest to prevent and contain COVID-19, you can probably expect us to do that if it makes sense for patients, for physicians as well as shareholders.

Understood. And just on capital allocation, you guys laid out consistently dividend priority. M&A is kind of in the next slot. I don't suspect there's been any acute changes since the quarterly call, which I think you were asked this as well. But maybe just to refresh in terms of M&A priorities. I mean I think I was struck, I think, at the pharma day when you kind of laid out the volume of investment for the pharma franchise. I kind of miscalculated how to -- or just didn't interpret it correctly because you have a lot of licensing deals, and it seems there's a disproportionate amount going funding pharma and development and external initiatives or licensing agreements. But just in terms of how you think of the 3 silos, I mean, is there -- are there any priorities within the 3? Or just broad-based, business leaders have their own priorities, and they all funnel them up. And the best decision or best initiative is -- kind of wins for capital allocation.

Yes. That's a good question. In terms of our process with respect to deploying capital, we don't go in thinking that the composition of our revenue pie or profit pie has to be a certain -- it doesn't have to be balanced. Right now, we do get this question a little bit more often because pharma is now over 50% in terms of top line composition. But we're really looking for that best opportunity. Where do we have that right to win? So whether that -- again, that being scientific expertise or a commercial capability or maybe just because of the fact that we've got breadth, that asset can perform better in our hands than where it currently resides. From there, we're going to apply, not just the cost of capital but a hurdle rate. So is it commensurate with the risk that we're taking on behalf of shareholders to make sure that we get an appropriate return? So we don't go in thinking, well, now we've got to do a Consumer deal because we just did a Medical Device deal. We think about it, what provides us with the best opportunity coupled with the dividends that we don't just simply pay out. We do that at an increasing rate. We've done that for 57 years now. And then we're going to be opportunistic with respect to share repurchase programs. We concluded a program in the third quarter of 2019. And that's always certainly something that we evaluate to be responsible in returning capital back to shareholders. The nice thing about Johnson & Johnson -- sorry, being the CFO of Johnson & Johnson, you're not usually forced into it's this or that. It's usually doing all things as -- at the same time as you've seen us do each of the last 4 years.

Well, excellent. I think we're -- I see the red, the zeros on the clock there. But really appreciate the time answering -- for having all the answers to our questions, and looking forward to the breakout session that's going to occur right after this, I think, down the hall. So Joe, Chris, thank you so much. Appreciate it.

Thank you, Josh.