Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Good day. And welcome to the Citi-hosted 'Of Hearts and Minds Johnson & Johnson Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joanne Wuensch, Managing Director of Citi Research. Please go ahead, ma'am.

Everybody, welcome to this hot Monday afternoon. Thank you for joining us as we kick off the next Citi Research health care series, Of Hearts and Minds. Today, we're thrilled to have from Johnson & Johnson Ashley McEvoy, the Executive Vice President and Worldwide Chairman of the Medical Device business. Just before we get started, if there is anybody from the press which is on this call, please disconnect as this is a call that is not for the press at this time. Okay. Moving on. So Ashley, in her role, leads the surgery, orthopedics, interventional solutions and eye health care businesses at J&J, which generated approximately $26 billion in revenue in 2019. Just to sort of ground this franchise within the Johnson & Johnson family, the Medical Devices franchise employs 70,000 associates across these franchises. So we are just thrilled today, Ashley, to have you join us.

Absolutely. It's a pleasure, Joanne, to be here. Glad to hear -- hoping everyone is staying safe and, as we say, staying as sane as we can.

There you go. The other person who is joining us on the call today is Matt Stuckley. He is the Senior Director of Investor Relations. So we've got a great showing from J&J. Thanks.

I think we could spend the whole call for the next hour talking about COVID-19, but I think I'd like to sort of focus a couple of key questions that came out as we were thinking about the second quarter earnings cycle. And I think the important thing that investors are trying to get their arms around is how do you think about the different regions as some enter second waves, some are experiencing their first wave? And how do you plan for the business as the pandemic moves across the globe?

Thanks. And it may be helpful -- I'll absolutely answer that question. It just may be helpful to say how have we mobilized during COVID really on a global basis. We have a very global footprint, if you will, from the first, gosh, second week in January until now, almost the end of July, we've been fully immersed in COVID. And I would say we really stood up a 4-legged stool to say, number one, crisis management, how do we go and reach out to those 70,000 colleagues, quite frankly, 135,000 colleagues in J&J, make sure people are safe and they have access to resources. As you know, we're in the business obviously supporting cases, and many of our colleagues, even all throughout COVID, even at the trough, we're still supporting cases. So obviously, then the second key thing is really in the crisis management bucket, how do we go serve customers from we were the first company on the ground in Wuhan with PPE gear. Our teams quickly, just through listening to what was going on in the triage centers, Joanne, went about convening a community of experts, even if we didn't even make the products, but if we could lend our expertise. As an example, we were -- we partnered with a company to create an emergency-use-only airway splitter for ventilators for emergency use. And then we set up areas like how to keep hospital systems and surgeons really connected with the latest evidence and guidelines on treating patients with COVID. And we partnered with the advancements in surgery, education partner. And I have to tell you, I participated in some of those, many doctors, as Alex Gorsky has. We have over 400,000 surgeons who have been doing these webinars to understand the latest science. So I really do think that, that will be a new way to engage customers. And then clearly, we went into a mode of business continuity planning and how can we make sure that we have consistent, reliable supply for medical goods. And we had at least 1/3 of our workforce that has consistently been in the lab and in the manufacturing facility still making our products. And then I would say the last thing in our kind of crisis response was making sure that our innovation agenda would still progress. And we looked at our top 10 and our top 35 innovations from the business continuity planning, and I couldn't be more impressed with how our R&D colleagues really figured out to still partner with regulatory authorities to really advance critical milestones. So that was really #1 of how we engaged day 1 in the crisis. Then we quickly, obviously, we're a public company, kind of think what is the impact, to your point, quarter 2, quarter 3, quarter 4? And we really brought our latest analytical prowess with our data scientists. We looked at 5 different epi models. We stood up a procedure-based model in our top 10 countries to ascertain really the effect of the virus, the effect of hospitalization, the transmission rates, the state of how many critical care beds are in certain customers, to ascertain what would happen to elective procedures as certain governments shut down elective procedures and then how fast could those procedures recover. And you'll see in April, we were the first company to really go live with our thinking on that model. And then we've refined that model in July, in quarter 2, with the latest update. And that was really part number 2 that I'll come back to. Part number 3, like many other companies, we obviously instituted more cash preservation measures as we're living in a world of uncertainty. And then I will tell you, equally, the fourth pillar of our COVID mobilization really entailed imagining the new future. And it was really about build back plans to grow market share, just bring customer delight. It was really about evolving our business models on telemedicine, on virtual case support, on procedure-based forecasting, on rethinking our end-to-end supply chain. So those are really -- we call it our plan on our page, Joanne. And I couldn't be prouder as we're beyond 21 weeks, many times in this COVID environment that we're starting to see some of the green shoots of that collaboration with the world.

So how do you think about the recovery from here? And how do you think about the -- one of the things we've been talking about all season is silver lining, so what you've learned from this that you'll take forward with you.

Yes. I think for all the models we look at, the right supply and demand, I think we're going to still be living in an area of uncertainty. I'd say and I consistently say it's not a linear line. You have to look at the area under the curve, though, over time, I am very encouraged by that. I think that we've seen -- what we've seen in quarter 2 reflected is hospital systems in EMEA, particularly in countries like Germany, is really out in front. We look at another data set, Joanne, that looks at all of our invoicing data with our top customers around the world, top 10 countries, and we look at that on a rolling 4-week basis. And I'm now looking at like the last week, reflecting the past 4 weeks, and we have -- Germany is now in the green, and Spain is in the green. And France is almost in the green. Italy is almost in the green. U.K. is a lagger, very slow recovery. But most of the top 10 markets ex the U.K. are really at 90%-plus of recovery. And I would tell you, China is out in front. You've heard us mention in quarter 2 and we've gotten a lot of wisdom and insights around how not just from a hospital system triage in COVID patients, but how do they stand up different [electrical] procedures, and how do they enhance and reinforce patient sentiment of not just willingness but ability to go seek out care. And they've been really a nice guidepost for us. They delivered double-digit growth. They were up 15% in June and very, very healthy recovery. But to your point, there's a different mix. Our electrophysiology business was really kind of first out of the gate. We're looking at that business the past 4 weeks actually being green, I mean above pre-COVID levels. Obviously, our stroke business, an area that has less elective nature to it, is also above pre-COVID levels. We're finally starting to see hips, if you think about hip fractures, not necessarily elective hips but a lot of nonelective hips, and then really starting to see trauma out ahead. Some of the laggers, I think joints are going to come back at a faster pace relative to more general surgery procedures. A lot of that has to do with the [process] centers and hospitals, but also some of the sites of care, a day surgery or an outpatient or an ASC. And the immediate oncology cases are happening, but that's probably been an area of lagger, but we've seen a lot of the traditional general surgery, nonurgent ones like a bariatric surgery is slower out of the gate in recovery.

And how has this changed just generally medtech? And this is a bigger picture question, but I think you're in a great position to see whether it's FDA approval cycles or new product adoption cycles or just even having the salespeople in the hospital on a regular basis. How does this change the way you may be thinking about these things?

Yes. I think we're pretty encouraged with our regulatory partners. I mean, in quarter 2, we had 9 regulatory approvals. And they really didn't miss a beat. We did have a couple of large clinical trials that were stalled for a little bit. Now they're back up and going again. But I am encouraged by that. We are working with also regulatory authorities to do site inspections, which is encouraging. Clearly, out of sheer need, how work gets done is really evolving. And I -- we've heard loud and clear from our orthopedic surgeons, the amount of folks who are doing all of their pre-op virtually, the folks who are ready to do some of their post-op virtually. So telemedicine is clearly here to stay. It was really slow to get off the ground, and now I think it's here to stay. We had a lot of examples where we were providing remote case support or complementary case support, connecting our electrophysiologists in Italy with some of the electrophysiologists in Wuhan because we were identifying that a lot of COVID patients post-treatment were all of a sudden starting to present with heart arrhythmias. So I think that the technology of remote and virtual case support is here to stay. I'm very encouraged with telementoring, as an example, of really bringing in some good peer-to-peer support. I think that, that really will be a new wave. And then I think supply chains from an end-to-end point of view are really going to evolve. And I think that the speed and agility of decision-making and driving off of facts and data, we have to take emotion out of this in a highly politicized world and to really get down to really facts and data and making sure that we're paying attention to the science and the technology. And obviously, the health care company, that's what we focus on 24/7, but we've been asked many times, myself, Alex Gorsky, everybody in medtech, on multiple calls with customers all around the world, what's our point of view on the virus? What's our point of view on testing? How do we help them with different protocols? We had a lot of our own J&Jers who are physicians and surgeons and critical care experts, where we gave them volunteer time to go volunteer. And you could see the unbelievable speed at how really triage teams are starting to figure this out. And we have a gentleman who worked with us at Boston Medical Center, Joanne, who's volunteered over 3 different periods over the past 12 weeks, and at stint number one, 80% of people on a ventilator were having mortality rates. Stint number two, that dropped to 40%. And just last week, stint number three, 20% mortality. So you can see the triage is getting much better.

That's amazing. I'd like to move from the COVID-19 discussion into the sort of medical device house. And one of the things that we've been watching over the last couple of years is the reacceleration in the organic growth rate from 1.5% in 2017 to 2.6% in 2018 to 3.9% in 2019. I know 2020 is going to be funky because of the COVID. But I'd like to sort of get your thinking of how do you think about accelerating the growth rate. What has worked and what has not? And how much of this is products versus execution?

Yes. Well thank you for referencing those growth numbers because that's the way I say you dig out 1 quarter at a time, 1 year at a time. We were well on track even in quarter 1 2020. Before COVID hit, we were right at that 4% number, too. So clearly, this year is an extreme, once in a lifetime kind of once in a generational kind of experience for all of us. I do believe in the health of the end state markets in medtech. And I believe in that because the significant still degree of unmet medical need, the burden of disease and quite frankly the state of -- certain states of technology that are now available to really deliver a meaningful medical intervention. So that's kind of big picture. I think the bridge of 2020 to 2021 is going to be a little bit goofy. But yes, we've been focused on -- listen, we have gem of an interventional business. We have 11 consecutive quarters of double-digit growth, gaining 9 share points. I expect that business, and I've seen it through COVID, hospitals have had to take certain bets that they haven't been able to enable as much choice as we're probably accustomed to. So we're fortunate to have a leading position in that franchise. And I expect with -- we got 4 regulatory approvals of new products in quarter 2 in that franchise to continue to really lead and drive the penetration of that procedure more broadly. Our vision business, our contact lens business has been above growth. We've been working. We bought, as you know, to diversify into cataract surgery, which is the #1 medical procedure really done around the world. That business, about 65% of our business for J&J surgical vision is OUS, and that business grew about 7% last year. So I'm very pleased with that. Our U.S. business was soft and so -- and really 2 reasons. One, we made some -- we strengthened kind of the leadership team. We've got very strong commercial prowess, I would say. And we have accelerated key pipeline initiatives in our U.S. surgical vision business. Several regulatory approvals this year, really under the umbrella. The key focus is making sure that we continue to advance the progress on our premium intraocular lens business under the TECNIS brand name. And we received recent approvals of TECNIS for astigmatism. That launch is going very well in the U.S. for astigmatism combined with a multifocal for presbyopia. That launch is going well. And then we are going to have really our next-generation premium IOL come to the U.S. market within the next 9 months. So that should be well on its way. And then really, orthopedics, we were -- my goodness, we were under the waterline for a while, and it was really nice to see orthopedics return to growth in 2019 and continue that trend through really quarter 1 from a market share point of view. So we were -- we went from negative growth in our global orthopedics business in '18 to growing 1.4%. And I am very pleased. We have very strong leadership of experts running our orthopedics business. That business has done a significant progress to double the value of the pipeline. First, we had to start with filling some critical portfolio gaps in high-growth segments like cementless knee, like revision, like the dual mobility hips to really starting to pivot to a digital offering as a key enabler. And you'll hear me talk about, but the digital program under the VELYS brand name for our knees program is on track for a filing at the end of -- for in 2020 -- at the end of 2020. And then surgery really was -- had strong growth in '19, led by our energy and endocutters really growing mid-single digits, really fueled by our OUS business. We have a very healthy business particularly in China. We're still challenged on some of the robotic penetration in the U.S. But we -- you'll see in quarter 2, wound closure started to pull its weight more and biosurgery and energy and endocutters, not in a COVID world, but I'm talking really about adoption and market share coming out of COVID. So a lot of it was commercial excellence, a keen focus on our largest region, which is North America, again, through strengthened leadership, enhancements in commercial execution, enhancements in supply chain execution and then innovation. We were able to take a business that declined 1% in '18 and have that grow to around 2% in 2019, and they're well on the way to continue that trend.

And one of the things which has always amazed me is that J&J is such a large organization, and yet it is quite nimble. And you've closed off certain or sold off certain franchises, purchased others, Codman ASP, Lifescan. Cordis is no longer part of the family. Auris, Verb, AMO, NeuWave and Neuravi are part of the family. Can you just step back and help us understand how you think about shaping that portfolio?

Yes. I mean we clearly always look at the end state markets and say, where is their unmet need? Where is the technology disruption? How does it fit with our portfolio? You always want to be in markets that are accretive, if you will, to the total market. So we clearly saw digital surgery want to play to win, and we went through the -- we've deployed about $10 billion of capital for '17. A chunk of that went to Auris. A chunk of it went to diversifying into ophthalmic surgery. And then really, we put those into smaller, fast-growing nascent categories, areas like you mentioned, to really build a stroke business. And our stroke business has delivered really nice double-digit growth. We had -- we're building a very nice pipeline in both ischemic stroke and hemorrhagic stroke, an area with unbelievable unmet need. And the technology is getting a lot better. And then areas that -- other areas that we look at around NeuWave, which is a different way to deliver ablation. And the fun thing is when you start to get a synergistic effect of those. So our digital surgery team, we bought Auris, and then we bought out Verb, and our partnership with Verily. And then we started to get buyouts from advanced instrumentation and navigation assets to help give good real, live time visualization, good data management. And then we're also partnering with Monarch, which is our approved robotic offering, to do lung diagnosis. We partnered our Monarch technology with our newly acquired NeuWave ablation technology. And we're in a clinical trial right now to see if we can not only get a lung biopsy to diagnose lung cancer but potentially to treat that lesion via ablation in a very minimally invasive, very highly targeted way. So that's where it's kind of fun to see the pieces of the puzzle come together, Joanne.

Well, this has lead into my whole -- my next section. And I think that if we couldn't spend the entire hour on COVID, we could spend the entire hour on digital surgery. And you highlighted many of these. I mean you've had, in 2015, an agreement with J&J Ethicon and Google. You got the formation with Verb. You had the Auris acquisition. You have the Orthotaxy acquisition. And there were some announcements on the second quarter call regarding the timing of certain of your digital platforms. So if I could just spend the next couple of minutes sort of pulling apart the different applications and the timing for each so that everything just doesn't get lumped into digital.

No. That's helpful, Joanne. I mean what we -- what we're -- our mission is to make medical interventions smarter, make them less invasive, make them more personalized so that we really change the standard of care and improve outcomes. We expect new procedures to be done in the future, not just digitizing current procedures. And so we took a step back because this has applications for all of medtech. And it really started with convening a community of world-class experts. And this is something that's benefited us many times over the years when we created minimally invasive surgery. It's clearly something that benefits us in pharm -- in pharmaceuticals, going from like the #5 oncology company to top 3, really convening the world-class community of experts. So Dr. Fred Moll, who's been with us over a year, I'm thrilled to have -- Fred is not a new duck to robotics. He really understands, since he was a founder of Intuitive, how the whole system comes together to, again, not just do an everyday procedure, but to create new medical procedures. So with the advent of Auris, we got access immediately to the robotics market with Monarch. And the first generation Monarch is really to treat lung -- to do lung biopsies for lung lesions for lung cancer. That was a strategic initiative at J&J we launched several years ago, where we have a cross-functional team led by Dr. Avi Spira, who's a pulmonologist, really to have what we call disease interception in lung cancer, a disease that has a high mortality rate because you get diagnosed very late, and the therapies are very intrusive. So if you can get a better diagnostic earlier on in life, in a very minimally invasive, highly accurate way, treat the lesion at the point -- at the site, either with ablation, as I mentioned, or potentially with oncolytic viruses, we can have a meaningful impact in people's lives. So that's one example of Monarch. We plan to take -- we have a multiyear portfolio of indications in Monarch to go into, as an example, endourology and the removal of kidney stones. We're looking at endo GI, on GI lesions. So that's our Monarch system. And then I'll come to the big discussion that we've been having is around general surgery. So consider that a specialty surgery offering. And then we have our general surgery offering. And we did announce that we're in a different time line. Really, there are 2 key reasons that impacted the time line. Number one, we've been in active discussions with regulatory authorities, and they have moved their expectations of what the amount of evidence and their requirements are versus the first generation. So this will not be classic 510(k), and I think that's good for patients, and it's good for hospitals. And we're going to have -- we do have an aligned path with them, the U.S. FDA and the EU. And that was really number one. And number two is we wanted to take advantage of the best that Verb had and the best that Dr. Fred Moll and the Auris team had and the best that our Ethicon endo instrumentation team has and the best that our partnership with Verily has on this connected ecosystem that drives off the data. And that took some time for them to accept all the different technologies, accept all the assets. We stood up a whole new leadership team there, really a mini company within Ethicon, really run out of San Francisco in the Bay Area with very clear milestones, very strict governance. And now they're in high-speed execution mode. Even gotten customer feedback that it's a very differentiated value proposition that was available in the market. And we plan to be first-in-human in the back half of 2022. And we plan to take a lot of the learning on this digital ecosystem around how to do pre-op differently, intraop differently, post-op differently. We plan to take some of those digital assets already into our lap surgery business beginning next year. And then as I mentioned, in orthopedics, a couple of things. One is we bought a hip navigation capability called JointPoint, and we have integrated that now into our hip portfolio and have really changed that value proposition in hips. We then, through an Orthotaxy acquisition, acquired a digital offering to our knee procedure. It's very different than what's available in the marketplace today. I always refer to it as like it's the size of a shoebox that you attach to the table. You don't need an X-ray. It keeps the tactile feel, doing the cutting. It's a very different cost structure. And we're getting very positive customer feedback on that. We plan to file with the FDA in the second half of 2020. You'll see a whole host of that combined with cementless and revision and the ATTUNE Knee System at the AAO (sic) [ AAOS ] next year in quarter 1 2021. So that really -- what we plan to take advantage of is all of these communities within J&J medtech are backed by one set of data architecture, one set of how we're going to connect with hospital system, one set of how we connect to the cloud to get good data, to have this be smarter and smarter and more predictable over time.

Well, that is a lot. You're working in many different directions. And it sounds to me just to summarize all of this, that the first step is, in orthopedics, to file for the second half of 2020 a knee application. The second, in terms of timing, might be as we think about next iterations of Monarch. And then further down the line would be a general surgery application in the second half of 2020 first-in-humans. Have I sort of summarized that as the large milestones?

That's right. That's right.

Excellent. Practically right to note itself, I tell you. [Operator Instructions] I appreciate that. I want to shift a little bit now into orthopedics. The company holds a leading market share position across hips, knees and spine? And can you differentiate how the company is working to differentiate its pipeline in the U.S. versus OUS? And how are you managing the evolving landscape? How important is it to have a robot to compete? And with certain of your competitors regaining some momentum, how does that impact the landscape?

Yes. Thanks for the question, Joanne. This is obviously one of our franchises that was a little bit wobbly and I think were playing defense. Now I'm encouraged that I think they're kind of back playing offense. And I think quarter 1 was a continued trend. And I do think implants are still going to have a role. I mean if I go to the knee system, the ATTUNE Knee really is the foundation. And we have 1 million patients worldwide since the first clinical use in November 2011, I think it was. It's a very comprehensive knee system designed to work in harmony with patient's anatomy to keep it stable. Its results are within class. It's got very good customer adoption. And now we've seen the perceived skepticism of ATTUNE really be reduced and eliminated as customers have now come back. And I always look at new data like residents coming out and their start rates, and those are all going in the right direction. And then they feel that revisions are a high growth area, higher than the global average. And cementless, both fixed bearing and rotating platform, are important areas. And then to digitize that surgery through VELYS. So I think that knees -- and similarly, hips, we've actually enjoyed. Hips has actually grown either at or above market for around 7 to 8 years. And it really has to do with a very strong portfolio. We kind of pioneered the anterior approach, again, through an acquisition, we bought an automated impactor called KINCISE. And then we've also brought, through our acquisition of JointPoint, a surgical navigation enabler for hip surgery to kind of digitize that. And hips has delivered very strong growth. Even like in June, I think quite frankly, we're surprised at the ramp-up that came back high single-digit in the U.S. When I go to trauma, we mentioned, we're a world leader in trauma. You're starting to see us pursue more in the extremities area, both elective and nonelective. We've done so less of a large acquisition, but more smaller accessible technologies versus buying out big companies. And we started to kind of bolster our trauma business in areas like taking some of our ankle technology and bringing that into hands in our Variable Angle Locking Hand System, which was launched in the U.S. and Europe. We did an acquisition of BioMedical Enterprises, BME. We took a nitinol implant for small bone fractures into the fast-growing areas of bunions and hammertoes. We've taken our deformity technology in MAXFRAME for -- into the foot and ankle area. So we've done so, I would say, Joanne, it's a balance of -- we bought a company, a small company, [ ACTIS Medical ], which is really helping, again, in the extremity space. So that's been more of a blocking and tackling. We have unbelievable access through partnerships with trauma surgeons and making sure that we have a steady case of incremental innovations but also in the fast-growing areas.

And one of the things that I keep getting asked frequently is we've looked at the world through our COVID-19 lens, but how do we look through the world in our unemployment lens? And how do you think about the orthopedics market as it relates to employment? And is there anything from previous recessions that can be applied to this one?

Yes. I mean obviously we too, what is it, 11% now, we're seeing, we're clearly looking at unemployment. We're looking at insurance. We're looking at payer mixes. Obviously, patient sentiment, I was just looking at consumer sentiment data in our top 10 countries and how that evolves over time. But I think that almost to how we were looking at COVID of the degree of elective nature of procedures, I don't think you can look at all orthopedics in a similar vein. As I mentioned, hips have come back because unfortunately there's a lot of hip fractures, very nonelective orthopedics or trauma, as an example. So I think making sure that there's a strong patient education is what I've been hearing from a lot of our orthopedic surgeons. It is an area that can be challenged given different economic conditions. So I don't think that's undeniable. But I also know in the favor is the degree that profitability creates to the hospital system and that the site of care is going in the right direction, in outpatient, in ASCs. And I know that there's a lot of collaborations to make sure that there is responsible and healthy reimbursements to incite people to go to the right different kinds of sites of care that make them maybe more comfortable over time.

What percentage of procedures do you think are now being done in the ASCs? And where do you think that, that sort of tops out?

Well, I think we see a lot of sports done in ASCs. We've seen a lot of hips going to ASCs. We're seeing some knees go to ASCs. We're not seeing any trauma in ASCs. We're not seeing a lot of spine yet in ASCs. So those would be, I would say, kind of the ones out in front and the ones that are more of a lagger.

That's helpful. And a year ago, the company combined the trauma and extremity sales force. How has this worked out? And is there anything that you would benefit from, given the pending merger between Stryker and Wright Medical?