Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Good morning. I'm Josh Jennings from the Cowen Medical Devices team, representing [ Brian ] Kennedy, Neil Chatterji and Eric Anderson as well. We're starting off the medical devices track on day 3 of the 41st Annual Cowen Healthcare Conference with a one of the leading medical device businesses, but also 2 other important businesses from Johnson & Johnson. And we're thrilled to have Ashley McEvoy, Executive Vice President, Worldwide Chairman for the Medical Devices business. Ashley, thanks so much for joining today and just a high-level congratulations, and thank you to the Johnson & Johnson team for all the work they've been doing on the vaccine and then the recent emergency use authorization.

Thank you very kindly, Josh. It's a pleasure to be here.

It's always great to see you, and I wish we had more time than a 30-minute fireside chat. We've got a ton of questions here, but we're going to try and get through a number of different topics.

But maybe to start, I mean, everyone's super interested, investors around near-term elective procedure trends. And maybe from a high level, I know you just had your earnings call in January. So only been a month or so that's passed since then. But if you can -- any updates that you can share about what the Medical Device franchise is seeing on the elective procedure front.

Yes, sure, Josh, and happy to get into kind of the -- obviously, we track this weekly and daily. But before I do, I just think it's important. My goodness, we've been in this for 14 months and I just really have to first acknowledge the global community who's still on the front lines, treating COVID patients and non-COVID patients. I've -- in my 25 years at J&J, I couldn't be more proud of our customers. And clearly, there's a major fatigue factor setting in with our customers, and I think we have to help support them as they pivot in a world where not only are they managing COVID, but they're going to be managing non-COVID in an important way. And if anything, when we go around the world, health care has really been put on the map. And we're going to see a lot of reinvestment from governments all around the world in health care. And as a leading health care company, really what we've been spending a lot of time is how can we be a resource in that new normal going forward. And a lot of it has to do with different ways of how care is going to be delivered. So huge acknowledgment of COVID-19 and how we've been managing that. I have to give a lot of acknowledgment to what you're going to talk today is about industry collaboration. The med tech companies have been coming together to really stand up how clinical care gets done in a COVID environment. I hope that degree of collaboration continues post this pandemic. Obviously, J&J has been part of an unbelievable amount of collaboration and getting the vaccine out. So I think we want to keep that going forward. Note, listen, when I think of the med tech markets, I think the health of the ultimate end-state markets are going to remain intact. 2021, we do anticipate that the market is not going to be linear as we talk about. So December did have a surge in Europe, really with the shutdowns and significant reductions probably to about 10 -- down 15% in Europe in December and in January and into February. In the United States, less severe than Europe, down around 10%, but we started to see the U.S. start to come back. It really comes into a mix, Josh. So orthopedics, in the state of California, really stopped for quite a while. The Northeast kept going. We've seen the shifts of care really moving from hospital settings to ASCs. And really, when I talk to customers, what we're seeing is just the severity of cases that they're managing. So a 2-hour colorectal case is now taking 5 hours. And so that productivity in the OR has somewhat been stymied given the most sick patients are really now being triaged, which is good for patients, but it's just going to take a while for hospital systems really to get up their flow. And what we pay attention to, we think Q2, Q3, Q4 will improve. We're paying attention to, not just capacity and burnout in labor, we're looking at the payer mix as the shift goes to more Medicaid and more into out-of-commercial payers in the United States, what's the impact to hospital systems. But then we really just start to go to patient sentiment and how can we get patients comfortable: one, get a vaccine; but two, get comfortable to go seek the medical care that we know that they need.

That's some great intel. Thanks for sharing that. And just a really quick follow-up, just in terms of I think you've laid out -- your team laid out the kind of expectations for sequential improvement, as you just stated on the -- for the fourth quarter earnings call. Is there anything that's changed in terms of -- it seems like you've baked in a more challenging Q1 within overall 2021, it didn't institute med device unit specific guidance. But it seems like what's happened so far through Q1 was expected by the Johnson & Johnson team. I just wanted to check there.

Yes. I think that's fair. Joe mentioned that in quarter 1, we expect Q1 to be a little bit softer than we originally thought in October. But we really think from a full year point of view, we're still confident that patients really have to get treated. Now the pace exactly of how that gets done is a little bit unknown. We know that, as an example, day surgeries, like our electrophysiology business really hasn't missed a beat, continues to really thrive. We know that ophthalmology cataract surgeries are really more of a laggard. So we've got good benchmarks, Josh, really by mix, by how hospitals are really managing procedure by procedure and the pacing at which they do. And really, again, what we pay attention to is the capacity of the hospital. We look at the patient sentiment. We look at the economics and the ability to seek care.

Excellent. Understood. So your division, the turnaround story is in play after investor event in November when you detailed your digital surgery advancement, it's clear. The franchise is prime to accelerate organic revenue growth, in our opinion. You've been committed to return to a mid-single-digit organic revenue growth territory as you're executing on that plan. And prior to the pandemic, thinking about fourth quarter 2019, we did show some improvement in that organic revenue growth performance, excellent divestitures and acquisitions. Some of your large-cap medical device peers, including Medtronic, are shooting for 5% plus. Should we interpret -- I'm sorry to get specific, but that mid-single-digit goal is at 4% to 6%, 5% plus? And should we just be thinking mid-single digits is that 4% to 6% range, and the higher the better?

Yes. I think that's -- I mean, 2020, as you know, it's kind of these unique comps. We expect to be double digit relative to 2020, and we expect to get into that ZIP code of really where the market is relative to where 2019 volumes are.

Right. Great. And just Medtronic had a new CEO, who introduced a decentralized operating model. Wanted to just understand if you could share any details on J&J's Medical Device businesses. And had there been any strategic changes to the model over the past couple of years that have facilitated the turnaround success? And any details you can share about the organizational structure would be helpful.

Yes, sure. I mean I think organizational structure supports strategy, and we've been very -- our strategy is to be a patient-centric, growth-focused innovator. And job number one is around improving execution predominantly in our top markets, and we've seen significant improvement in execution in North America. And our second largest market, China, has really, quite frankly, been the gem of our portfolio. It grew 7% last year. We are the market leader. We have a very balanced growth in China. They've been really our North Star coming out of COVID, and we'll continue to really feed the expansion efforts in China because there's a whole host of patients that have yet to be served. Really, what we've been focusing on also is the competitiveness and how do we really improve our momentum. We've been experiencing a momentum shift, and I expect that to continue from 1.6% to 2.9% to 4% growth in 2019, and then really for this year to get back into at minimum with the market. And we have 11 $1 billion platforms. 9 of the 11 platforms last year either grew share or held share. So that's a first. We had 2 outliers. One is knees and one is surgical vision in the United States. Those are our 2 reds, I call them. And we have very deliberate plans to improve those in 2021 with knees. It's about getting our robot out there in VELYS. It's about having a broader portfolio in our 3D-printed cementless fixed bearing. And it's also really making sure that we have a balanced portfolio post-COVID. Our knee portfolio was a bit -- had a higher exposure in countries heavily hit like the U.K. and India. As well as in the United States, we were overdeveloped in the revision knees, which in a COVID environment was deprioritized versus primary knee. So we have to fix that in 2021. Surgical vision. It's really U.S. surgical vision. We have very healthy growth OUS. And our growing market share really is we've been preparing for several launches in 2021 in the U.S. surgical vision business. We experienced a 20-year anniversary of our TECNIS Symfony, TECNIS intraocular lens. So we have our first-in-kind monofocal innovation going out, it's called Eyhance. It's a first innovation in the monofocal IOLs in 20 years. We have a premium intraocular lens under the TECNIS family called Synergy. That's going out in quarter 2. And it's the first innovation that we've had in phacoemulsifiers, which help you do the procedure in 10 years, and that's going out in quarter 2. So I expect with that kind of portfolio of innovation to us to get to minimally be where the market is in the United States.

Excellent. Actually, you guys have been optimizing some of those, as you just laid out. I don't want to say underperforming fully. And as you said, you haven't been accretive to the revenue growth trajectory. You're adding tuck-in M&A effectively, and you're also pruning. Is it -- is that such we think that just more of the same as we move through 2021 into 2022 and 2023?

Yes. I mean, I think kind of rounding out the strategy and what we're focusing on, then touch on what you asked about org structure was innovation. We really had to get our mojo back of really meaningful market-leading innovation. And I'm very proud of how this community of innovators has come together over the past 3 years. I think that we've got very -- a very strong bench of experts who are collaborating both inside J&J, but most importantly, outside of J&J with a lot of partners. We've doubled the value of our new product pipeline. When I look at each line item, whether it be orthopedics, whether it be within Ethicon, whether it be our interventional business or vision, we have a very healthy cadence of short, medium and long-term meaningful innovations based upon evidence and differentiation. So I think when we kind of take a step back, we look and say how can structure support your strategy. And we moved a couple of years ago to a franchise-led, region-enabled, locally executed model that fully takes advantage of those individual vertical experts. So the global knee team, they live and breathe knee, but they're also part of the J&J med tech family. And I think what we've gotten to do a better rhythm is, when do we let the subject matter experts really just stay focused? And how can we, quite frankly, use our big for good in service of those verticals so that we can serve customers in a J&J med tech customer fashion, when in the event that they're ready to do that.

Great. You touched on innovation. It's a nice time to move into the digital surgery platforms that you unveiled at the recent Investor Day. It's very, very helpful to get that update, I think, for the sell side and the buy side of investors. Maybe just before we dig in there, just any updates just in terms of how J&J is experiencing U.S. capital spending budget environment? And I think that evolves over 2021. You can be brief if there's nothing really new. I mean, our checks with some of the major teams we talk about from...

There's not nothing major. I mean, we have less than 10% of our revenue comes from capital sales. So we haven't seen dramatic swings. Obviously, the vac committees last year were a little bit slow given COVID. They're starting to ramp up again, and quite frankly, just focusing on what the value proposition is.

Great. And just as you start to -- so you've launched Monarch. You're launching VELYS. Ottava is coming in the pipeline. I mean, how are you thinking about the sales model for those capital systems, those robotic systems? Is it -- I'm assuming, and correct me if I'm wrong, that there'll probably be a mix of outright capital sales to some customers and other customers, some volume commitment contracts, even leasing. Are you guys are going to take that hybrid approach that some of your peers have? And is that what you're doing currently with Monarch?

Yes. I think that you're going to see different archetypes around the world, Josh, of some customers want to just have an outright purchase. Some customers want to have a lease to buy. And we want to make sure that we're coming from a holistic portfolio approach where, again, we're a world leader in open surgery, laparoscopic surgery, endoluminal now and soon to be robotic surgery that we can offer customers what they need in a very agile fashion. And I don't think it will be a one size fits all even within category. We've seen differentiation even within the orthopedics world, very different than how Monarch and Interventional endoluminal is doing. And so you asked about Monarch, we've placed around 82 systems since the launch, which has very nice momentum. I would say it's market-leading momentum in that category. It's a very nascent category. We're very -- we're early on, on just really diagnosis of lung lesions. We're in clinical trial right now on our energy platform to actually use ablation technology to treat at the point of care right on the lung lesion. That's under investigation right now. And we're also assessing whether we bring in different pharmaceuticals again in the point of care. So I would say we're in the early innings of endoluminal. Orthopedics is different. We weren't first in. I always say, just like minimally invasive surgery, we were not first in. So we really have to learn from who was first in from a technology point of view and a business model point of view. You'll see our VELYS offering is -- has a very, very different capital footprint relative to the market offerings today. We just had our -- one of our top key opinion leaders, Dr. Clatworthy in New Zealand. He's done over 20 cases since December. In 5 cases, he's already gotten to significantly reduce this speed, has gotten very consistent outcomes. We've gotten a lot of feedback from over 2,000 different surgeons. What they like most about it is how the in-site platform-related to VELYS allows them to do pre-op planning differently on joint management and patient anatomy and to prepare for kind of the most accurate precise cuts and then intraoperatively really to enable them to get best-in-class cuts at a very competitive time and then post-op to really look at the recovery curve. So we -- it's a very holistic system in addition to our implants. Obviously, our ATTUNE Knee is a key piece of that. And we also are working around the footprint. It attaches to the table. It's not a -- it doesn't require additional staff in the operating room. It doesn't require a CT scan. So really, our -- what we keep focusing on is how do we reduce surgeon variability and improve patient outcomes at a reduced cost. And all of our digital surgery offerings have that really, that mission front and center.

That's a great foundation to maybe ask a couple more questions about the individual platforms that you just laid out. I mean, on Monarch, I mean, the road map you laid out for -- from early-stage diagnosis to actually intervention and potential drug delivery that could be transformational, clearly. But if we just can start, could you -- I mean, how do you guys assess the total addressable market for Monarch? I mean, there's capital, there's the disposables. But I mean, our assumption is we're still kind of formulating that, trying to build and sell. But it's a multibillion-dollar TAM, but I just wanted -- I don't know if you guys have relayed to investors your internal view of the opportunity when you did the work to bring Auris under your roof and finalize the development -- further development and commercialization of Monarch.

Yes. I would say, quite candidly, we're really putting the math on all of that now, Josh. We're having good portfolio debate based upon what the science and technology is leading us to. We were first in, in lung cancer. And to your point, it really is an end-to-end solution for lung cancer from diagnosis to treatment and various ways to treat. We're also assessing endourology for kidney stone management. We're looking at GI cancer. So we have a host -- quite honestly, we have too many ideas right now that we're trying to rack and stack and prioritize. So we will share at the right time what that portfolio unveiling for Monarch really is. We're looking at taking Monarch outside of the United States and making sure that we've got good sustainability of performance at the right cost structure for all of the top 10 markets related to cancer.

The -- you talked about the integration of NeuWave microwave energy, I think, in the previous answer. And that you're set to enter, I think, first human trials this year. When -- could you just provide a brief road map on just when the regulatory and commercial time lines for that platform? You have breakthrough designation status. I mean how meaningful is this microwave energy delivery to the Monarch platform, which seems like it's a good deal?

Yes. I think what we're most encouraged with is it's really becoming a standard of care. That's really where a lot of our energy is on. And so we are going into first-in-human in 2021, and then we'll follow-on with all the requisite clinical work. We did get FDA breakthrough designation. So I wouldn't say the next 12 months, Josh. I would say, within the next couple of years, you'll start to see this all start to -- again, pending the science and the evidence that start to reach patients.

Great. Maybe just moving on to Ottava. I have to say I like the branding effort there. Just on the regulatory pathway, I know you talked on the Investor Day about the de novo 510(k) pathway. But any more details you can share just on the update's clinical data requirements for de novo 510(k) pathway for these robotic general surgical robots?

Yes. I would just tell you that they've been very really practical with us. I have to tell you, we've had over 4 pre sub-meetings with them. We've been learning. We've done over 90 different labs of end-to-end procedures with customers using our integrated system that we revealed. Obviously, we're building and we're scaling up. We showed you one of those. We have to have tens to hundreds of those ready to go. And we've been -- they've been very clear around kind of the clinical trial size and the post-market surveillance. And really importantly, what we've been engaging with them is really the education and the professional medical education to ensure appropriate use and that we do our part to ensure responsible maximal utility of when it meets the market. We have to go -- right now, we're focused on what we call our verification and validation. We have to make sure the system does what it's supposed to do, the whole system. And we're deep in the engineering bowels of that right now. And we're also, at the same time, optimizing our commercial go-to-market model. And we're right on track from what we shared with you to really start to file for IDE next year and bring this to the outside U.S. markets as well as the U.S.

Excellent. And you talked about having some end-to-end procedures being performed. Is that -- are there specific indications? And do you expect approvals indication by indication or by general use indication?

We've been able to -- we're in discussions of finalizing all that. You'll see clusters of indications, kind of what they call family approach to certain indications. And we've been getting feedback on that family approach, whether it be bariatric surge -- like a gastric bypass, whether it be a prostectomy. We've been looking at different kinds of families of procedures so that we, quite frankly -- and it will happen over, I would say, a launch cadence of years, not everything in the year 1.

Got you. You got your team to comment on the potential for revolutionized surgery and combining a bunch of different surgical techniques to 6 arms, but also including interventional methods. Can you provide any more details on that outlook? I mean are -- and my understanding is that Johnson & Johnson wants to integrate robotic assistance into any procedure possible within Medical Device or in device-based interventions. And is this part of that? Where could we see you with the RS technology, the Ottava technology with the team that you have under your roof now, development team, think about expanding in cardiology indications, minimally invasive, spine surgeries? Where does the road map look like? Sorry, there's like 3 questions in 1 there, Ashley.

Yes. I mean -- and this is the -- Dr. Fred Moll being a founder, quite frankly, in this space many, many years ago, has just awesome vision. And what we subscribe to is that open, minimally like lap surgery, endoluminal aren't going to stay so discretely in their swim lanes. And there could be some procedures that half the procedures done laparoscopically and half's done robotically, half's done endoluminally, half's done minimally invasive. And that's why, quite frankly, the Ottavas, the architecture was built in mind to enable that down the road. And we have to get good predictability of the classic robotic procedures. But quite frankly, we think we're going to change the standard of care over time on using -- giving flexibility to the surgeon to how he or she deems most appropriate for that patient at that point of time in the procedure. And in addition to kind of the hardware that we spent a lot of time talking, we've also been investing in a lot of the software value propositions. And it really comes from understanding unmet surgeon needs. So surgeons, despite all of the advancements in surgery, Josh, they -- there's still significant variability in how a procedure gets done, and therefore, outcomes. And when you talk to a surgeon, you uncover 3 unmet needs: one, they want to learn at an accelerated pace; two, they want to better get to know patient's anatomy; and three, they want better critical decision report so that they can avoid injury to critical structures. So that led our team to go uncover how do we solve those problems. So out of that, we bought a company called C-SATS about 3 years ago. And it's a crowd-sourcing technology that brings in 350 different world key opinion leaders as kind of a panel, if you can imagine that, an ad panel. We have over 7.5 million procedures, video -- a video library of 7.5 million procedures. So it allows a surgeon, once they complete a procedure, to really rack and stack how did they do relative to themselves and prior procedures as well as relative to kind of the world experts. And so if they so choose to actually invite the experts to opine on their case. So that really hits the learning. We have a partnership with visible -- an exclusive partnership with visible patient, which gives you a 3D anatomy of the patient. It helps you do pre-op and inter-op very differently than current state. And then we also bought a company called SPI a couple of years ago. And we have over 20,000 cases. It's really a rules-based of that -- of racking and stacking, what's the best practice for every single procedure. And the OR staff follows this. And what we found when it's in implementation, we're starting to see a lot of reduction in how gastric bypass procedures are done. We're starting to see reduced length of stay and a whole host of both effectiveness as well as efficiency. So those will complement the hardware solutions when we talk about kind of the future of digital surgery.

Thanks for calling out that altogether. I mean, just -- I know it's way too early to talk about pricing on Ottava. But just -- I mean, investors historically looked at general surgery robots coming in and either competing directly head-to-head against Da Vinci or coming in at maybe a discounted price point and seeking out the non-Da Vinci hospital segment or a combination of both. I mean, is there anything high level you can share about how you see down the line, the Ottava launch? When are you going to be, I think, Johnson & Johnson is going ahead or at the content head-to-head against trying to replace Da Vinci systems? Are they up in the replacement time? Are you going to be focused on hospitals that haven't adopted Da Vinci? Or could this be a complementary system within a hospital that's already using the Da Vinci system?

We -- again, I come back to kind of the market. The market penetration is still really low and particularly OUS, very low. And we are really focused on expanding that market. And as I mentioned, you may not just see a pure robotic market. It might be a hybrid with laparoscopy. And we need to be absolutely competitive relative to what's available in the market. So we plan to have differentiation versus what's available, but we're really focused on adoption of the market. And we're looking at different models to make it more accessible.

Excellent. Just a couple more minutes left, and then we've run out of time too quickly. But just on VELYS, you described a bunch of the features and capabilities and the potential advantages over incumbent robotic systems. Any details you can share on the launch here? Are you out in a preliminary launch mode? Should we be expecting you to have a full launch of the virtual [ AOS ] in summer? Or is this kind of a stub launch year where we're starting to really see the full launch in 2022?

I would see a phasing of it. We've got an approval. We are now doing contracting with customers. We're starting all of the builds right now. We're getting a lot of customer feedback, a lot of hands-on experience. And you're going to start to see all of that rollout starting in quarter 2 and then start to really start the ramp-up.

Great. Any comments on just the pent-up demand within your -- with the DePuy loyal customer joint surgeon base? I mean, there are a lot of like low-hanging fruit out there where some of these surgeons who are interest in robotics are on the sidelines waiting just for -- because they want to continue to use the ATTUNE Knee and waiting for VELYS to be launched?

We've -- again, even in orthopedics, robotic usage, the penetration is really low. It's lower than 15%. So I think that we have really been focused on, if we're not going to be first into the market, how do we do so in a differentiated fashion? And we have very competitive implants. ATTUNE is a well-understood knee. It's one of the most modern knees on the market today with a lot of evidence. We now have a portfolio of implants from primary to revision to cementless, both fixed bearing and rotating platform. And then we'll have the VELYS navigation system in robotic. Again, they're not -- doesn't just do intraop, but does pre-op and post-op in a different fashion. And we are taking VELYS from knees into hips and to other areas within orthopedics over the next 3 years. And so I think that we've learned that low penetration, we are going to have differentiation. It's going to be a different -- we're very focused on reducing variability, surgeon variability and improving outcomes at a reduced cost. So VELYS should meet that value proposition going forward. Stay tuned to quarter 2, Josh.

Absolutely, absolutely. Just one last follow-up, just on the indication pipeline. I mean, over the next few years, I mean, can you call out any of the orthopedic applications that we could see in the coming -- you called out here, if I'm intruding, that shoulder, spine as well?

Yes, you're seeing a lot right now with our VELYS Hip Navigation. So we have KINCISE, which really changed the manual hammer. And not only do we hope that we're preventing rotator cuff injuries for orthopedic surgeons in the future, but we're getting really good feedback on the combination of our ACTIS and PINNACLE hips with the KINCISE hammer with the VELYS Hip Navigation system. Again, that came through an acquisition a couple of years ago, and it really helps very similarly with pre-op planning and intraop navigation and planning. And then we plan to take that to other areas like spine. Right now, we have a partnership with TINAVI in China and with Brainlab outside of -- in the United States, and we are planning to kind of take some of the learning from VELYS and have an application available in spine in a very capital-efficient manner.

Excellent. Well, we will definitely look out for more details on the 2Q launch of VELYS and a lot of the other progress as you move through these multiple digital surgery platforms. Congratulations all and all in that progress. And we're looking forward to tracking throughout this year and next. So Ashley, thanks so much for bringing your team and your insights and your downloads from the Medical Devices business. It's a pleasure to have you at the Cowen Health Care Conference again and can't thank you enough.

Thank you, Josh. Stay safe. Proud to be in health care. A lot of honor. Take care, guys. Get back to me. Bye-bye.

No doubt. Absolutely. Thanks, Ashley. Bye-bye.