Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

I want to welcome you to Morgan Stanley Healthcare Conference 2020. Thanks for joining us here for the first 2 days, and we're excited, obviously, about the back half of the week. It is my pleasure to have with us here this morning, continuing our conference this morning, the CEO and Chairman of Johnson & Johnson, Alex Gorsky. It's always a pleasure, Alex, to be with you, and I appreciate you taking time to be with us here this morning.

Sure. Well, David, it's good to be with you today, albeit remotely, but thanks a lot for having us and I look forward to the conversation.

Great. I appreciate it, Alex. So I want to start strategically, and this is one of my -- and only [ been a goody ], Alex, but I feel like I want to ask it again. It's funny time, right? You have all these disparate businesses. The Consumer business is benefiting from pantry-stocking. The Pharmaceutical business, right, is the hallmark of vaccine development, trying to get us back to work in the time that the device business, obviously being acutely affected, and the hospital system has been impacted. So 3 disparate businesses being impacted all different ways. Does it make you feel now that the benefit of having all these businesses together, are you more emboldened that's the right decision for Johnson & Johnson? Or does it make you think maybe this is the time in a post-COVID world to think about a Johnson & Johnson that's more effective in its parts versus the whole?

Well, again, David, thank you very much for having us on. And look, I think, more than ever, what this demonstrates is that J&J was really built for times like this. And maybe before I get into a discussion around the portfolio, which I do think is important, though, I just want to start off by thanking all of our colleagues at J&J, who, frankly, have just been doing awesome work over the last 6 or 7 months. I mean to think back in February, March when we first got word about this, what we were doing and they've been able to keep serving patients and consumers, and we've been able to keep our employees safe. When you think about, not only the impact on our core business, but the way that we've been able to accelerate development of a vaccine that could truly have an impact on the world at this particular time, let alone the extraordinary work that's been going on in communities, particularly during times of a lot of racial and social unrest certainly here in the United States, at the same time, staying focused on delivering strong competitive results to the business and for our shareholders, I couldn't be more proud. And what's really important is that while we have about 150,000 employees, many of them working remotely, doing the Zoom, just like we are right now, about 50,000 of those have been going to work every day. And they've been in our manufacturing facilities. They've been in our laboratories, making sure the products and services that are so important for health care systems and patients, so that they can still get access. And that we're not seeing a slowdown in our clinical trials or gaps in either the patient care or in the data sets that are being developed. So I think it's really important to acknowledge them and thank them upfront. And secondly, I think it's also a real testament to our model during these kind of times that, frankly, our business is doing as well as it's doing. If you think about our Pharmaceutical performance, for example, you mentioned, first half of the year is seeing about 7% growth. And you look at all of our different categories, whether it's oncology, immunology, cardiovascular. We're seeing really good, solid performance, in many cases, actual share gains. The way the teams have rallied to ensure that patients could continue to get access, that we continued compliance, that we were still reaching out to physicians, getting patients the kind of access programs they needed. Our consumer group, like you just said, you can imagine the volatility in some of the demand. When you see Tylenol up 78% in North America due to some of the pantry-stuffing. The offset in other areas, nonetheless, we've been able to ensure consistent and continuous supply throughout that and, by the way, also adjusting our supply chain so that we could add a hand sanitizer ready. And in our Medical Device business, there, too, when you see surgeries around the world extensively shut down for several months. But what's really impressive, and I know we can talk about this more, David, is when you look at the resiliency of the hospital systems, clearly here in the United States, but around the world, in coming back, getting online, making sure that elective procedures are being performed. And we've been partnering, collaborating with them on that to make sure that they've got the tools, the devices and the other services that are required. So really -- and then by the way, while we were doing all that, we've also been working on a vaccine and doing what would normally take 5 to 7 years, being able to do it in about 5 to 7 months to ensure that we have a safe, effective vaccine that's accessible to people around the world. So we really think that the only way that we could do that is because of, frankly, the diversity, the scale, the reach and the capabilities in total of Johnson & Johnson. And we think that's not only what has delivered long-term, sustainable, historical returns and, frankly, innovations historically, but that's what will also ensure that we continue to do that in the future.

Okay. So it's an impassioned defense of the existing J&J structure, and you still seem very committed this is the right structure for Johnson & Johnson.

Yes. But David, I would add one other element to that, and that is that I think, as you have seen, certainly over the past 9-plus years now, we put a very high standard on place on where we choose to compete and where we choose not to compete. And I think if you look at our track record of divestitures of making sure that, look, if we're not #1 or #2 in a market, if we don't see a strong business, if we don't see a strong path of innovation going forward, if it's not complementary to one of our other businesses, we'll exit that business, and we'll put that capital to use in other areas where we think we can make a better difference for patients and consumers and actually generate better returns. So it's very much performance-based. Each one of our sectors is benchmarked against their respective area. We also look for conversion opportunities, which we see in areas, for example, like in lung cancer, more and more in oncology, potential urology and other areas in the future. So it's not just a strategy that we are attached to historically, but it's one that we truly think best positions us for the long term where health care is going in the future.

Okay. So let's dive into some of these segments, Alex, and see kind of the progress you've made. You talked about the resiliency of the U.S. hospital system. J&J was actually early. You set the mark on talking about Medical Device recovery. And to be honest, when you first said it, I'm not sure who really believed you. The reality is we have seen pretty robust even V-shaped-type recovery. How has Medical Device recovery fared in the acute care setting here since the second quarter? I mean we've heard a lot of commentary about a month-over-month improvement. Are you still confident in sort of steady cadence of month-over-month improvement? And how are you feeling about getting back to normal here in the fourth quarter?

Well, look, here, too, major kudos go out to the U.S. hospital system. I mean throughout this pandemic, David, I was reaching out, talking with a lot of the CEOs from around the country. And the efforts, the commitment that the doctors, the nurses, all the support staff put in to managing this pandemic, particularly the eye of the hurricane, you might say, in areas like New York, New Jersey, other hotspots that came up later on and you see the tremendous increase that we've seen in mortality rate, it's quite remarkable. And look, one patient dying is too many, but I think it's really important to acknowledge the steps that they took. And on top of that, they remain very committed to getting their hospitals back up in these other areas because we know that every day that a procedure is delayed for cancer patients, frankly, for an orthopedic patient, that has long-term consequences in terms of morbidity and mortality. And so we've seen them put the right protocols in place, testing procedures, getting the right PPE, sectioning off different departments, moving some patients to an ambulatory setting, where possible. And as a result, I think, throughout the United States and really throughout the world right now, we're seeing return rates to about 90% to 95% of pre-COVID, which, look, I'm proud of the projections that our team made. If you remember back when we did first quarter results, you're right. There was probably some skepticism, but our team did their homework. We tried to take a very fact-based approach. And what we've seen, frankly, our results quite consistent, in fact, a little bit better. Now if we look past -- if you remember, our second quarter, our business was down about 33%, but we saw sequential improvement in April, May and June with June being down only about 20%. Since then, we've seen positive momentum. And look, it won't be linear. We still have to navigate our way through. We've seen these surges in certain places. We have to keep our eye out for -- as people, perhaps, do go back to schools, to the work environment, how that impacts the fourth quarter. We don't believe that it will be -- have the same impact that we saw back in the second quarter. We think hospitals are much better prepared. They've got better medicines, better protocols. But it's something that we're going to have to watch. But look, we're optimistic going forward. And we've remained very committed to make sure we're doing everything we can to supply them and support them as they work their way through the backlog. And I think -- look, I think the other thing we need to keep our eye on are what about that new patient inflow. And as I talk to the physicians, making sure the primary care visits, the diagnostic procedures necessary to identify those patients and get them prepared for surgery, that those things keep on flowing as well.

Okay. Are you confident with this patient willingness dynamic, Alex, that you referenced? I mean are you confident, as you get into '21, the health care system is functioning relatively normally? Are you concerned somewhat about these patient willingness dynamics?

Look, I think I understand the patients can be concerned. And if somebody has had family members who have actually been in the hospital, seeking care during this time frame. With somebody who has a lot of knowledge, I can understand that. But look, I think, again, the hospitals have demonstrated, for the most part, as I talked to CEOS, is we haven't seen significant increases in infection rates. We've seen really good protocols put into place. We've seen patient satisfaction scores remain high. And so -- and I think as time goes on, as hospitals and the health care system continues to deliver care in that manner, that you'll see increasing confidence. Now again, we can't predict will there be other surges. We're hopeful for right now actually about the flu season. If we look to places like Australia, New Zealand, so far, the flu season in those areas has actually been dramatically low because people are taking a lot of protective measures, masking, washing their hands, social distancing, that should help the flu season. But look, we all need to remain very vigilant and cautious, frankly, until we have a vaccine onboard and we stamp this virus out.

Okay. Well, look, another attention, during a time of significant tumult, you've not been afraid to deploy capital, right? So recently, you moved to acquire Momenta. They said [indiscernible], "Why Momenta?" I think people forget immunology is your biggest business within broader pharmaceuticals. Why is Momenta the right asking? What's the enthusiasm around Momenta?

Well, David, you're right. I think the first step -- the first question we had to answer is how do we continue to serve patients and consumers; second, how do we take care of our employees; third is how do we keep our core businesses going in a healthy way. At the same time, we wanted to do that and not sacrifice the long-term opportunities that we saw out in the field. And so look, Momenta, I think, is representative of a classic J&J long-term success deal. And if you think about our portfolio, whether it be in immunology, with our acquisition of Centocor and REMICADE many years ago, you think about how we build our oncology franchise, it's where we identify a very unique mechanism. In this case, it's auto antibodies, where we've got a lot of clinical development expertise, a lot of regulatory expertise, a lot of commercial reimbursement expertise. We apply those to this very early promising data that we have at nipocalimab right now. If you look at it, it's somewhat derisked in that it's not just in one indication, but it's spread across multiple indications. We're very excited, for example, in areas such as myasthenia gravis. We know it works not only in neuro but obviously in immunology as well. If you look in other areas like AIHD -- or HDFN, excuse me, there's really good opportunities. So this is a classic Janssen Johnson & Johnson kind of opportunity. And we think collaborating with Momenta in this way gives us an opportunity to build, you might say, a sixth or seventh leg to our pharmaceutical stool. And it's on a time line that we also think is very attractive to us in the interim. And so look, we're very hopeful, and I couldn't be more proud of the work that Jennifer and Mathai and the rest of the team did to make that possible.

Okay. How are you feeling -- and this is in the construct of pharmaceutical acceleration. There are several reasons why we upgraded the stock late last year. One was a more balanced J&J. One was pharmaceutical acceleration. The other was our view on legal liability, which we'll, I'm sure, touch on here for a few minutes, at least. But look, pharmaceutical acceleration is probably the key tenet of that, and you're definitely seeing it in the first half of the year. How do you feel about sort of pharmaceutical acceleration? And how does sort of Momenta make you feel about you have some generic substitution events in 2023, so pharmaceutical acceleration this year and with Momenta and the pipeline programs, the ability to continue to grow above market share these next few years?

Look, we are very confident in our ability to continue to grow our Pharmaceutical business. I think it's very well positioned in its core business. Look, if you look at the strength, the depth, the breadth of our current oncology portfolio, whether it's DARZALEX, whether it's ibrutinib, the great uptake that we're seeing in those areas, if you take a look at immunology, the uptake that we're seeing with STELARA, TREMFYA, if you -- all of those categories, we're seeing solid growth. We're seeing earlier penetration. We're seeing access to additional patient populations. And as a result, we saw 7% growth through the first half of this year, which, again, given all the other dynamics, is quite remarkable. Now if we look at the back half of the year, while we are continuing to see an increase in physician visits and positive signs regarding new patients being identified in continuation of therapies, we'll have to watch that closely. We also know that the second half of last year, we saw particularly strong growth in our Pharmaceutical business, so comparatives will be a bit different. But fundamentally, we're going to -- our goal is to continue to grow at and above the market growth rate. And we think -- but through, number one, the derisked opportunities that we have by expanded indications, as you know, overall, we have more than 50 over the next 4 years, 10 of which we think about -- have about $0.5 billion of opportunity. Our core business growth opportunities, the 10 new compounds that we expect to either file a launch between now and 2024 with $1 billion opportunity. You put the Momenta deal on top of that, we think it positions us very well. And last but not least, David, what I would say is just look at our history of performance. I mean time and time again, people could have potentially been skeptical about our ability to launch into oncology in a major way 9 years ago. They were skeptical about our ability to withstand the REMICADE launch of biosimilars in that area, ZYTIGA. And you look, and our team has continued to innovate. They've continued to execute. They've continued to deliver throughout that period.

Okay. Every time a big pharmaceutical is into an election cycle, I feel like I'd be remiss just to bring it up very quickly. Is there anything about the ongoing clinical climate? I feel that there's been assault against pharmaceutical and pharmaceutical innovation the last several years. So part of me says, there's really nothing this election could bring that we haven't already seen or heard or answered. Is that sort of how you see it? Are there any concerns investors should have heading into this new election cycle about pharmaceutical innovation, pricing, any upcoming regulations?

Well, look, we all know that we're heading into a very political season, and I think what we try to communicate through all this is really just the important role the biopharmaceutical industry plays in overall health care. And so in spite of much of the noise and sensationalism that we're likely to hear over the next 48, 49 days and even beyond, making sure that, look, let's look at the current situation. It is remarkable that we have more than 200 approaches on a vaccine overall, about 10 of which literally are in Phase I, but somewhere between Phase I and Phase III as we speak, and that's been done over the last 5 or 7 months. And the only way that we're going to be successful in truly eradicating this virus -- and when I say eradicate, I use that loosely because I think we're going to be dealing with it for years, but we'll certainly bring it under much better control with a vaccine and with therapeutics, is because the biopharmaceutical industry has been investing literally billions of dollars for the last several decades that's enabled this kind of acceleration. And so whether you look at the portion of overall health care spending at about 14% that's invested in pharmaceuticals, if you look at the percent -- the impact that that's had on life expectancy, likely 50% to 75% the increase in life expectancy. When you look at the fact that usually after 5 to 7 years, many of these compounds are available literally for pennies once they become generic or once others are launched, it shows that the system does work. Now there are clearly areas where improvements can be made, and areas such as co-payments, particularly in our system for Medicare patients. We need to get those reduced, especially given the tremendous improvement that we're seeing in patients' lives attributed to the pharmaceutical products, the fact that 25% of the average co-pay for a pharmaceutical product is coming out of the patient's pocket versus only less than 5% for hospital care. That's something that -- it should be addressed. Are there ways of doing contracting in different ways that are more outcomes-based? Absolutely. We're trying to work with payers and providers to do that. But what we don't want to do is we don't want to sacrifice the innovative nature of this industry and that's required and that's producing all of the kind of breakthroughs that we're talking about. We tried to take a very bipartisan approach on both sides of the aisle to educate. That being said, look, we know this is a very political season, and we need to do an even better job of communicating that, not only to legislators and to the government, but, frankly, to consumers as well.

Okay. Very helpful, Alex. And a couple of topics I want to hit before we close out our time. One is just sort of litigation. It was a tough topic to talk about. Publicly, there's probably limited things you can disclose. But look, there are 2 components of this. That's the opioid piece and the talc piece. We've seen a fair amount of movement in opioids and even more movement here in a post-COVID world. How are you feeling about some of the dollar figures that have been thrown out there? We saw initial settlements. We're seeing new settlements around that $5 billion. Are you feeling better about the ability to sort of range down the risk for investors around opioid? And what about the timing to resolution, getting the money back to the communities? Do you get any better sense of timing? Is it something that can be resolved in the next 6 months?