Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Hi. Good morning, everybody, and thank you for joining us here for the Barclays Global Virtual Healthcare Conference. I am Kristen Stewart, the medical supplies and devices analyst here at Barclays. I'm very excited to have Johnson & Johnson here for this session. Just as a reminder, if you want to ask any questions, you can e-mail me directly. You can also chat me on Bloomberg. Before we kick it off with Ciro Roemer, who's the company group Chairman for Medical Devices in North America, I'm going to turn it over to Matt Stuckley, who's going to read some very riveting information for all of you. So make sure to pay attention. Matt?

Thank you, Kristen, for that great introduction. So good morning, 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 results through and including the fourth quarter of 2019. Thank you. Back to you, Kristen.

Thank you. That was very entertaining. All right. Ciro, thank you for joining us today. We really appreciate your time. And also, thank you for your understanding and patience as we converted this over to a virtual conference.

I'd like to kick it off with an obligatory question on COVID-19. It's obviously on the forefront of everyone's minds. This is obviously a very fluid, dynamic situation. J&J, obviously, has a number of divisions. I know that you are head of North America for Medical Devices. But to the extent you can help shed some light on just what J&J is thinking more holistically as well as just, obviously, on the Medical Device side, which may actually have a little bit potentially more exposure, what are kind of the thoughts overall just for COVID-19 and the impact that might occur at J&J? Thank you so much again for joining us.

Well, Kristen, thank you for having us. It's a pleasure for us to be here and represent Johnson & Johnson. I would say, first of all, Johnson & Johnson being the global health care leader it is, is closely monitoring the coronavirus situation. And we're trying to take steps to prevent, first of all, help the spread of the virus as well as exploring the potential for a vaccine. I think you know that we have a division in our pharm organization that is very much involved with vaccines in regards to Ebola but also now with the COVID virus. We understand that the impact of the coronavirus, certainly is a devastating health issue. We remind ourselves of our credo, and that's what's guiding us at the moment. Just for context, we have provided over 1 million surgical masks across the world. We're very actively involved with our consumer department, providing enough medicines. I think we donated 11,000 cases of MOTRIN; 50,000 bottles of BAND-AID alcohol. We're donating generators and other medical devices to hospitals. And certainly, we have activated our global team of scientists to work on a vaccine and other solutions. As you can imagine, we're closely monitoring the coronavirus situation. Of -- an area of impact and interest certainly for you all is manufacturing. Our manufacturing centers are producing medical and pharmaceutical products as we speak. Also in China, to a large extent, we're back online and producing products. Of course, we're in close alignment with the Chinese government to ensure that we can continue to provide and supply critical products to our customers. The impact that we are seeing is more on elective procedures. As you can imagine, in China, Japan and South Korea, the impact has been meaningful. Those procedures are starting to come back online. But I would say they're not back to historic levels. We're starting to see a similar trend in certain parts of Europe. And in the U.S., I would say we're in the early innings of this whole event evolving. We're -- it's a fluid situation, I would say. We're closely monitoring it. I think what I can share is that many institutions have told their surgeons and their medical personnel not to travel. I don't know if you're aware, but the AAOS made the decision yesterday to cancel their meeting in Orlando. That's the most important orthopedics congress that happens every year, around 17,000 health care providers join that congress. It's canceled. It was going to be held at the end of the month. So that's not going to continue. We expect that large meetings, certainly in March and April, will have a tendency to be canceled. And then last but not least, we're getting information and request from our -- from institutions to limit our sales organization and our organization to enter the premises. As you can imagine, certain procedures where our technical staff is really important and plays a critical role in the outcome of the procedure, exceptions are being made. So we still have entrance in some of the institutions. But to a large extent, there is, I would say, more diligence around who enters the institutions. And we're starting to see some slowdown in elective procedures.

So I guess just from an orthopedics perspective that strikes me as probably the most at risk of seeing procedures in the United States being pushed off. Is there any way that you can help us think about -- or maybe what you've seen in China, Japan or Korea or maybe in Europe, how should we just think about what the risk is there? Some other companies have said it's a very large percentage, 80% or something like that. Is that the right way to think about that? Or how should we just think about number or sizing it or something like that? Because I know that salespeople typically are -- the reps are in the room with those types of procedures for the most part. And if they're not going to be in there, are those procedures going to be done? How should we just think about that?

Yes. I think -- listen, certainly, I think the first statement I would like to make, yes, we're going to see an impact on procedure volumes, right? I think it also depends on the area we're talking about, right? So if we talk about China, if we talk about South Korea, most likely Italy right now, the procedures are going to be down significantly. And that certainly is something that will happen. We know that in the Washington state and the New York area, we have some hotspots in the U.S. We have seen elective procedures being delayed or stopped in certain instances. Having said so, it's too early to tell what the impact is going to be in the U.S. It certainly will depend on the evolution of this virus getting exposed. And as testing is starting to happen more and more, I expect that the number of cases is going to go up. That is one. But also having such a broad portfolio in orthopedics, I think we need to make the distinctions between the platforms, right? So in trauma, where most of the procedures that are being done are nonelective, meaning if you fall down and you break your bone, you're going to get surgery, right? So I expect there to be less impact. But in hips and knees and in spine procedures, certainly, those are elective. And we can expect if this virus situation gets worse, that more procedures will be canceled. It's very difficult to give you a percentage right now. I think we're ready to say that, certainly, in the first quarter, it will have an impact, but I think we all need to realize that long term, right, these procedures are going to happen. And the outlook is still positive.

And -- okay. And then I guess, overall, I mean, I think you had said you're starting to see some -- or I guess you're hearing some of the procedures are starting to come back in some of the regions where trends are starting to ease, like within China and some of the other regions within Asia. Is that fair to say?

Yes. That's certainly fair to say. I would say we have started to see a normalization of the situation in these areas. Having said so, we're not at levels before the issues. But certainly, activities are starting up, both from a manufacturing perspective in the industry. There, we see more and more factories come online. At least from a J&J perspective, we're back to normal there. And also in elective procedures being done, I think there is a normalization of procedure volume.

Okay. Perfect. All right. Great. So let's put COVID-19 aside. Let's stay on the orthopedics franchise and maybe just talk strategy here. The overall orthopedic business has been a little bit more of a drag, I would say, across the medical device franchise. It looks like you guys are starting to adopt more of this digital surgery sort of framework within orthopedics. Around December, it looks like you've announced this VELSYS (sic) [ VELYS ] strategy, probably not saying that correctly. But can you just talk about what the overarching strategy is to really accelerate the growth profile of the orthopedic franchise? What's going to get you back to more of a market growth position? And if anything, I'm sure the aspiration is to regain some market share within those franchises, too.

Sure. Thank you for the question. Well, first of all, I want to remind everybody that we're the largest global orthopedics business and very much committed in improving competitiveness of that portfolio, right, moving forward. I think it's also important to mention that the orthopedics returned to positive growth in 2019, improving our performance by almost 2 points, accelerating in each major platform. I think based on our market share position in trauma, where we have a very strong leadership position, we'll continue to do well there with the introduction of new products. Our hip business grew at market in the fourth quarter with growth over 4%. I really feel we're very well positioned there with our leadership position and the Anterior Approach with strong demand of our ACTIS stem. As you know, that's the stem that was designed specifically for the Anterior Approach. And that, combined with the enabling technologies that we have acquired, KINCISE being one, which is an automatic mallet that will help the surgeon get better outcomes but also helping him with fatigue; and then JointPoint, which is a software program that helps surgeons position the cup in the ideal position. So we feel good about trauma and hip. Knees, we returned to growth in 2019 and also in the fourth quarter. In the U.S., we returned our knee franchise to growth. And I think it was critically important for us to complete the ATTUNE portfolio. As you know, we already had the primary fixed bearing and rotating platform systems in the ATTUNE system. We now also launched the cementless and the revision systems and very well received in the market. And then as you know, and you talked about VELYS, which is a combination of a package of digital solutions that we're going to offer to our customers. I think the most important part of that is our intention to submit for regulatory approval of our Orthotaxy robot in the second half of this year, and combining the ATTUNE -- completed ATTUNE platform with our robotic solutions is certainly something that creates a lot of excitement in the market. If we move to sports, I think we can say we grew middle -- mid-single digits in 2019, mainly driven by our MONOVISC. In the U.S., we continue to do extremely well. We became the largest provider of MONOVISC in the U.S. We also continue to see very strong performance in Asia Pacific with our sports business. So that's, I think, well positioned. And the area we're focused on in Spine, right? It's still trailing the market. I think the good news is that the spine market has stabilized at around 2% growth. We went from losing double digits to declining 3%, so certainly an improvement, but we're not happy where the Spine business is currently. We're focusing on making sure that we provide value in important areas of the spine market. And for us, those are 3: complex cervical cases, minimally invasive surgery and degenerative spine and deformity, and they're going to be supported by new launches in our core portfolio, combined with digital and robotic surgery solutions. So a lot of work and a lot of words said about orthopedics. But in summary, we feel we are committed, number one, to our orthopedics business. We're the largest and certainly aim to start gaining market share. We do that by strengthening our core portfolio and adding digital solutions to make sure that we have a good offering. I would say, trauma, hips and sports are in good positions. With knees, we're returning back to growth and certainly expect a lot with the completion of our ATTUNE platform, combined with our robotic solutions pretty soon. And then in Spine, we have more work to do, but we have concrete plans to turn around the business and play an important role.

Maybe you could just dig in a little bit on the area of robotics within orthopedics. I guess how competitive do you think the VELYS Orthotaxy robot will be? And how do you feel like you're going to really be able to compete over the next year or so until you have that system really rolled out and in the marketplace? We've been seeing certainly a lot of success with Stryker's Mako, and Zimmer Biomet seems to be really doing, I guess, pretty well, it seems, based upon their recent acceleration, too, which they're crediting, at least, in part, to some pickup with their ROSA system as well.

Yes. Listen, I feel really excited about the robotic solutions we're going to be able to offer. And I think it was important to us to really think about how we were going to enter the robotics market in orthopedics, and we make a conscious decision to listen to the feedback of customers of current robotic solutions and then try to improve it, but more importantly, also, take in consideration where the majority of the orthopedic procedures are going to move to, right? And that's going to be in ambulatory service centers, right? So I think the big advantage that we have is that we have -- we will have robotic solutions, which is very small in footprint that you can move from one operating theater to another that you can move into ASCs, where you have a very small learning curve and where the surgeon remains very much involved in the procedure. And that combines not only to have a robot but in a comprehensive offering of digital solutions, where we can provide value preoperatively, helping the surgeons make the right decisions, do the right planning, then go in surgery, making sure that the execution is exactly according to planning, and then more importantly, also provides value postoperatively by providing monitoring systems so that the software becomes smarter over time. So I think, first of all, the robot itself, how it's been designed, is going to bring additional value than the current systems that are on the market. But more importantly, it will fit into a digital solution that will provide value, not only during surgery, but also preoperatively and postoperatively.

Okay. And then on the Spine side, I know that you have a relationship with Brainlab, and I know you have an agreement with TINAVI in China. But kind of how do you think about robotics, I guess, in the U.S.? And really, I guess I struggle a little bit just to see how do you really fix the Spine business. I know you talked about complex and MIS and focusing on degenerative spine, but what really do you think is going to turn that Spine business around? And at what time line do you think you can do it?

Well, I've learned one thing is not to give time lines, right? But certainly, listen, in regards to -- first of all, I would say digital solutions are important in Spine, right, more and more. And I think the exciting part is that, today, we can offer our customers the Cirq robot, which is a co-marketing agreement with Brainlab. And we have seen a lot of traction from our customers there. We also have an agreement with TINAVI in China and are able to leverage and provide robotic solutions to our customers in China. So that helps us today. And certainly, while the knee market is the most important area of focus for our orthopedics robot, spine closely follow there. So we expect to be able to compete today with Cirq and with TINAVI and in the future with the robotic solutions in the spine market.

Okay. And then I can't go on a conference call without asking about, and I'm talking about robotics, the Verb robot. You've closed the Verb acquisition. What can you share about the Verb robot?

Well, what I can share is that we have an analyst meeting in May, and I think it's important for you to be there because we're going to provide a lot of info, right, around the journey we're having with Verb. But listen, I think it's fair to say that after a comprehensive assessment we did internally, we thought it was important to acquire Verb Surgical. We closed that acquisition, as you know, at the end of February. And the rationale behind that was that we felt it was better to combine internally all the assets we have, right? And to remind everybody, it's Verb Surgical is one. Auris -- the acquisition we did for Auris with its Monarch system is number two. And then, of course, C-SATS and our Ethicon franchise because we feel it's really important not only to have a robotic solution, but also the products that are going to go on the robot combined in one team, right? So with the acquisition of Auris, we were very fortunate to have Dr. Fred Moll join us. As you know, he was a pioneer at Intuitive. He's brought a tremendous expertise to Johnson & Johnson and is helping a dedicated team under the leadership of Celine Martin work on making sure that we speed up the process but also bring the right solutions to the market. So that's one. I'm not able to be able to give any timing right now in regards to when the Verb solution is going to hit the market. But listen, if you look at our Monarch system today, it's something we can offer. As you know, in the area of the lung, we doubled the number of installations in 2019. I think over 2,000 procedures were done with the Monarch system. It's a system that, today, is being used to go very distally in the lung to do biopsies. We expect to be able to move that to the next phase where we can also start treating some of those lesions in the lung, which is very exciting, because, today, you need to get very aggressive in invasive surgeries to be able to deal with the lesions at the end of the trachea and then move quickly into urology, and then last but not least, into the GI space. So it's certainly an area we're focused on. But more importantly, I -- we felt combining those platforms together under one team is critically important for the success.

Okay. Then I guess the other area that I'd like to just spend a couple of moments on in the few moments that we have is within the interventional portfolio. You obviously have Biosense Webster. You also have CERENOVUS. How should we just think about that business because -- is it something that we should just think about as just being those main 2 franchises? Or should we think about J&J is potentially broadening out into something else? Or how should we just think about that interventional franchise?

Yes. Let me start with the cardiovascular space. I think we have a jam there. It's called Biosense Webster, as you know, an area where I think it's only 5% of patients that have symptomatic issues are being treated, 11 years of double-digit growth. We have a significant market share there. We expect that franchise to continue to do extremely well based on, first of all, the market share, our commercial infrastructure and products that we will continue to launch. We certainly have an interest in the cardiovascular space, specifically around heart failure and structural heart. We have done some equity investments in certain areas. V-Wave is certainly an attractive area. It's an atrial shunt. That's one area. We also did the acquisition of Coherex Medical. That certainly will help drive value in that segment. And we don't exclude any acquisition in that area, certainly an area of interest for J&J. And then in the CERENOVUS business, the CERENOVUS business, as you know, was created by combining our legacy Codman Neurovascular business together with 2 acquisitions, Pulsar and Neuravi. We're doing really well there. It's the second consecutive year of double-digit growth. I think we grew 22% last year. We have key products that we have launched there. CERENOVUS EMBOTRAP is one, doing -- it's going to be an advanced stent retriever. That certainly will have an impact in the market. And BRAVO is the new flow diverter that we intend to launch soon. So I think it's certainly an attractive area for J&J. It's prevalent and devastating. I think 1 in 6 people will get a stroke in their lifetime. And right now, very few people are being treated. So certainly an area that we will continue to invest in, and I would say both internally and externally.

Is, I guess, transcatheter valve still an area of interest? I know that was one that has always been talked about quite regularly.

Yes. Listen, we're looking at across the cardiovascular space for areas, right? And I think what is important for us is what is the clinical need and what is the value we can bring as an organization in providing solutions. And if it's an attractive market with significant growth where we feel we can play a critical role, that's certainly an area we will be looking at.

Okay. Perfect. I know that we are probably butting up against time. Is there anything that -- any last thoughts that you might want to leave with the audience today, just in terms of broad strokes on the outlook for the Medical Device business from your perspective?

Listen, I would say, in summary, that we are experiencing momentum in Medical Devices at Johnson & Johnson. Our 2018 performance was better than '17. '19 was stronger than '18 with a growth percentage of 3.9%. We expect that trend to continue. Having said so, growth is never linear. We need to deal with the coronavirus impact. Certainly in the first quarter, that will have an impact. But what I think is most important is that long term, this is an attractive area of growth, 4% to 5% globally. And Johnson & Johnson is committed to grow above market as we do in any business, right? So at least the fundamentals of the Medical Device business are strong and certainly an area that is attractive to many of us.

Perfect. Well, Ciro and Matt, thank you so much for joining us today on the virtual healthcare conference webcast, and May 13 is the Medical Device review day. So we will all mark that date on our calendar. We'll stay tuned for updates for that. And thanks again for joining us. Thanks for the understanding in converting this over, and thanks for everybody on the line. Everybody stay safe out there. So thanks again everyone.

Thanks for having us. Take care. Bye-bye.

Thanks, Kristen.

Thank you. Take care. Bye-bye.