Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Okay. Great. Thank you, everybody, for joining us for the next fireside chat as part of our virtual Las Vegas Health Care Conference here. We're absolutely honored and thrilled to announce our next fireside chat is with Ashley McEvoy, who, as everybody knows, leads the J&J's Medical Device business, which obviously is the largest medical device business in the world. And Ashley is, obviously, EVP and Chairman of Medical Devices. So Ashley, I just wanted to sort of formally on behalf of Bank of America, thank you for joining us today, and welcome.

Thank you very much, Bob. My pleasure. Looking forward to engaging in a good discussion.

Yes, absolutely. So we'll just do mostly fireside chat here. And -- so I'll just go ahead with some questions, and we look forward to a good discussion here.

So I just -- I wanted to start out with -- maybe with kind of a softer question, if you will, because I wanted to take a look back at the last couple of years because it's -- we can all see it in the growth rate, something has changed inside J&J's device business over the last couple of years, and growth rates have improved. And so I just wanted to kind of get your -- get a quick history lesson and your perspective on what's changed that's allowed the improvement in growth rates from your perspective. Was it a change in strategy? Was it new product launches, a little bit of everything? I just wanted to get your historical perspective on what's driven the turnaround.

No, great. Obviously, it's been -- I would have to say, wild ride, particularly the past 16 months, Bob. So let me kind of first just acknowledge quite frankly, what a privilege it is to be in health care, and health care humbles everybody. And I think that we've never experienced anything like we have in COVID. And I couldn't be more proud of kind of our J&J, our 70,000 strong in med tech and 130,000 plus in J&J who, quite frankly, we do what we're trained to do. We always talk about that with our surgeons. And we just put the patient in the middle and customers in the middle and want to serve and really serve from a very selfless point of view. And I just really couldn't be more proud of all our health care professionals all around the world. As you know, some are in full recovery. Some are still in the world of hurt. So we just have tremendous source of gratitude for our profession and really how health care has really been put on the map all around the world. So let me kind of first start with that. I do think that we are exiting COVID much stronger than we entered, and I can spend a little bit of time just telling you why. And the first has to do with the team. This team is battle-tested. Now this leadership team has been in place for 3 years. There's oodles on med tech experience there. As I mentioned, 70,000 colleagues who were put into a crisis like many of our other colleagues around the world, and really just went in to put the customer in the middle and the patient in the middle and to just be really focused on creating value. And that goodwill of collaboration of doing what's right to get hospital systems back up and going, I think, is going to serve us well coming out of COVID. And you asked a little bit about strategically, what are we doing? I don't necessarily think it's a magic recipe. I think, number one, you can never underestimate the value of execution. And we needed to get our top 2 markets, the U.S. and China, well above the marketplace and growing from a focus on a clinical point of view. China, as you know, we have a rich history there, and we really want to double down in China. We'll talk a little bit about that later. But really started to lay the groundwork to do that, Bob. And then North America, our largest region, I am encouraged this year that we'll come out to at-the-market or slightly above-the-market. And that really had to do with end-to-end customer execution. From a supply chain reliability point of view, from a call point of view, from going to where the growth is on certain channels, from standing up all new ways of digitally engaging with customers, I would say that, that's execution. The second is obviously innovation. And I couldn't be more proud that our team, led by Dr. Peterson, who leads all of our R&D, has really been very focused on, importantly, not just filling portfolio gaps, but really creating new standards of care. I'd love to share some of those ideas this year. We've doubled the value of the pipeline over 3 years. We used to have, 3 years ago, about 6 100 million NPV projects. We now have 20 in the pipeline. And importantly, we are really elevating the standard of care. And then I go to how the modernization of med tech and how we are going to digitize the whole customer experience and the patient experience and really skill up surgeons and improve their judgment. And then probably the last thing, Bob, is just about this notion of access and equity for all of our patients. And we're doing a lot at J&J to use our big for good to ensure that we are making significant advances on health equity. So those are a little bit of kind of the 4 strategies that have been in place, and now we're starting to bear some of the fruit.

Great. That's helpful. And I just -- I wanted to -- before I move on to the next question, I just want to follow up on one thing you said there that the digitization of the whole customer experience. You guys have talked a lot about that from the very beginning. But the different people means different things, digitization. So I just wanted to kind of maybe have you follow up a little bit on that comment on the digitization comment and kind of at a little more granular level, kind of what you're referring to there when you make that statement.

I think, quite frankly, health care has been a little bit of a laggard of kind of digitizing the whole experience unlike fintech and the retail experience. And so we're -- what we pay attention to is how can we make medical interventions smarter, less invasive and more personalized. And said differently, how do we kind of reduce the variation and procedures to improve patient outcomes at a reduce cost. And digital technology should be in service of that. And so what we're building at J&J is almost like the J&J iOS, with a lot of partners of how we get our hardware to be connected and to be "smart." How do we really have the house of digital architecture that is cybersecured, has privacy and has one way that we can engage with customers? And then how do we kind of have an open innovation model on a lot of the applications that help us really marry those jobs of skilling up surgeons and improving their judgments from how they do pre-op planning, how they do real lifetime navigation inter-op, how we monitor patients at home, post-op and really also use the advantages of not always having necessarily in-location service, but really taking advantage of remote service as we go forward. So that's a little bit -- I would say, I think the industry is under construction on that, and we really are going to [ take the fact ] that we have on health care and technology and marry the intersection there.

And how far beyond your robotic offering, does that go? Because obviously, the robotic offering facilitates that process. So I assume you're talking about your robotic platforms, but I assume you're also talking about just broadly across the entire medical device franchise.

Yes. Absolutely. I mean the robots, we refer to those as like the hardware, and they're going to be smart. But we are -- surgery today, 50% is open, 30% is laparoscopy. We enjoy market leadership there, and we are absolutely going to have an offering in endoluminal and robotics. But we really want to see how all of the OR standards of care change, not just robotic surgeries. And I think J&J is uniquely positioned given, quite frankly, our 130-year history in med tech, and that footprint in open-end lab to bring, quite frankly, the best of software, the best of med tech, and quite frankly, the best of pharmaceuticals. If you look for the future of innovation, those 3 things coming together are really going to help solve the most significant causes of mortality.

So to -- I mean, it's a huge undertaking over the next couple of years. And it kind of lends itself to my next question because J&J has got a lot going on in its medical device franchise right now -- franchises right now. But at the same time, there's also a lot of exciting areas within med tech where J&J doesn't have a stake in the ground at this point, whether that's TAVR or -- I mean, there's a couple of different markets, one could mention spinal cord stimulation. So is your focus as the leader primarily on realizing this vision of digitization? Or is there room for you to simultaneously get into new white spaces, some of the more exciting growth areas and med tech that you're not in today?

Yes, Bob. Let me first kind of acknowledge, just enjoy, we were structuring [ hard-to-reach ]. But yes, we pay close attention to those areas. I'm rooting for those areas. I think they're going to make a lot of difference in patients' lives, and we will continue to assess those to see how we can create value. But I think what's really helpful is to say, where are we? What are we paying attention to now? And again, I think that we are on the precipice of some just remarkable shifts in how care can be delivered that are going to have a big impact on patient care. And I'll give you some examples of this. And we've really -- again, we think the sweet spot of those are our interventional approaches are taking the best advantage of med tech of giving you access to hard-to-reach areas and implanting and also maybe some pharmaceuticals. And we kind of take a step back and we say, of the 5 leading causes of mortality, J&J med tech is helping solve problems in all 5 of those from cardiovascular to oncology, to accidents, to respiratory health, to stroke. And I'll highlight just a couple, to demonstrate how we've really started to dream bigger to really have a much bigger impact, quite frankly, in patient care. And it starts with Monarch. You heard us talk about this at the MD Analyst Day. Very grateful that this major enabling technology came about with the Auris acquisition. We've done over 7,000 [ forecast ] today. The first generation allows us to take a big, big area like lung cancer, #1 cause of cancer in the world and start to really intercept the disease before it sets into Phase IV and Phase V. First generation is a very minimally invasive diagnostic, allows you to access very distal parts of the lung in a very accurate and predictable fashion. We are in aim to be in first-in-humans with our ablation technology to actually ablate the lung lesion. And we actually have an active program to disperse oncolytic viruses at the point of the lung lesion. Above that, radically changes how lung cancer is managed around the world. And we are in assessment of how we take that use case and really bring it to bladder cancer, to kidney cancers and to GI cancers. And then I go to areas like sight. And myopia is becoming in 2030 and 2050, one of the biggest pandemics is sight. And how do we similarly intercept disease before it sets in? And we have a myopia progression program in our eye health business to really intercept myopia as a disease and slow down the progression of that disease. We just got an FDA designation for that -- breakthrough designation, very similar to what we got in NeuWave. So there's been really good regulatory collaboration. And then I go to our category you guys know well, which is cardiac ablation and managing AFib which, again, is a precursor to stroke. And so there's a common theme of intercepting and taking care of your health before you're at an acute case. And we have less than 5% penetration in using cardiac ablation to treat AFib. And our whole strategy there is to get better maps of the heart, deliver a better lesion, make the procedure more predictable, more safer, more efficient, and we have a market-leading pipeline over the next 5 years to really double the penetration of that procedure around the world. I think I lost you, Bob, on audio.

Sorry about that. Yes. No, that's helpful. It puts everything in perspective. A lot going on with the core business. So I wanted to just shift gears a little bit and ask a few questions about orthopedics because obviously, it's a big division within medical devices for J&J. There's been a lot of talk over the last few years about the spine and knee franchises and how those have lagged. And we can -- you guys are nice enough to give us the numbers, so we can see some of the progress that we're starting to see there. But just wanted to get your perspective with kind of a specific question. And that is, when would you set expectations for those divisions to be growing in line to ahead of markets? How are you viewing the progress in the recovery in those business?

Yes, Bob, I'll absolutely address the point on knees and spine, 2 things I talk a lot about. But before I do that, let me kind of step back and say, very grateful to the leadership that Aldo Denti and Steve White in R&D have done to this business over the past few years. These folks are not novices to orthopedics. They've dedicated their careers. And they really have been very deliberate in taking the world's leading orthopedics company and positioning it for the future to make a difference in patients' lives. And we are the world's leader in trauma, and it has a very healthy pipeline of putting bones back together again in a very modern way, using sensors and using the latest technologies, and I expect trauma to continue to perform in the future. We have a world-leading hip business. We really -- we're the pioneering the anterior approach. There's a whole wealth of innovations from the dual mobility hip to a hip navigation. I was just down there 2 weeks ago, seeing how we're going to take our whole digital system to change how hip procedures are done to make them much more personalized and much more predictable. And then I'll go to knees and spine. Knees is really going to be this year is an important year for us. We have a very strong implant, as you know, called ATTUNE. It's the most modern implant on the marketplace with a very compelling scientific evidence. And we will have now a robust portfolio to compete in the fastest-growing segments within the knee portfolio. So we will be launching -- we launched revision. We are a leader in the revision segment. That was a segment that was somewhat depressed during the COVID era, and we were overdeveloped in revision. So you'll see that rebalance out. We have launched our cementless rotating platforms already in the market. We will be launching our fixed-bearing cementless in the end of quarter 2 this year. And we will be launching our digital surgery offering called VELYS. We start cases this week at the end of quarter 2. I was able to spend some time with, again, the inventors of this just 2 weeks ago. It's gotten very good surgeon feedback. We've been able to benefit from not being first in this category. It is a very capital-efficient footprint. It allows much improved precision and better reduction and variability on the implant placement as well as the soft tissue balancing as well as saving you from CT scans and to make the procedure much more -- the workflow much more user-friendly. And as you know, knees, there's still 20% of folks who just don't have satisfaction with knees. So I expect with that amount of innovation and our geographic footprint, going into next year, 2022, you should start to see us really at-the-market, if not a little bit above. And spine, we are the #2 spine player in orthopedics. It's the largest, as you know, orthopedics market. Some of the technology has been somewhat relative to other segments in med tech. I would say, a laggard of embracing digitization in new ways in addition to plates and screws. We have launched and strengthened our competitiveness in our spine market, led by Russell Powers, really to advance 2 key areas. One is cervical spine, something I know well. And we -- and really, that's also a really nice impact to patients. I will tell you with the launch of SYMPHONY and the launch of CONDUIT, which is our 3D-printed interbody cage. And then we also have image guided with Sentio. We're working with TINAVI and Brainlab to kind of digitize that experience, both in China as well in the U.S. So I think spine is going to -- it's a highly competitive market. We're #2. We're improving performance. And I really think over the next 18 months that we should start to see at-market performance.

Great. That's helpful. I always appreciate getting your perspective on the pace of those turnarounds. Just one question to follow up a little bit more shorter term. How are you feeling about the pace of the recovery in kind of just -- it's really more of a market question, but in hips and knees in the United States, are things going about as you expected? And it's really a question on sort of the recovery in the middle of COVID. I mean are you -- are things going to -- just kind of want to get your top-down view on how you view that recovery in the United States right now. Because it seems to me, when I look at the numbers that obviously, soft Q1 for everybody. March seems better. It seems like things have continued to progress. Just wanted to get some top-down thoughts from you on how you view the market for hips and knees right now.

Yes. Maybe let me take a quick step back, and then I'll get specific to that. We obviously look at around the world, and we're very pleased with how China is performing. Japan is a little sluggish due to their slowdown in vaccination rates. We expect that to slowly pace itself going forward. India, as you know, is in a world of hurt. We go to Europe, they're just starting to kind of get released on their lockdowns right now and open up and vaccinations starting to start to accelerate. We look at waiting list in the U.K. and are optimistic of that. Pre-COVID, there used to be 1,700 folks waiting for procedures. Now's 300,000 for medical -- for surgery procedures. So we're working very closely with a lot of the customers to go -- to really pace that over the substantial quarters going forward. And then in the U.S., listen, we were slow in December and January. We have seen sequential pickup. We just hit record highs in our electrophysiology business as we did 1,000 cases in a day. Typically, that's at max around 680. So that really is our North Star, and we're starting to see colorectal come back, bariatric surgery come back. And I would say that orthopedics are definitely coming, but at a slower rate relative to the others. And what we're seeing is a lot of that is a shift to the ASC centers. But I think that what we're confidently seeing is hospital systems adeptly able to now start to recover post-COVID patients.

Okay. Okay. Well, that's an impressive backlog number in the U.K. for -- that was for hips and knees?

That was for all surgical procedures.

Oh, all surgical procedures. Okay. Okay. Helpful. And then just a couple more on the orthopedic space generally. Some of your competitors like Zimmer and Stryker are talking a lot more about sensor-enabled implants on the knee side. And I just kind of wanted to get your take on what J&J may or may not do in that space. Will you be offering a sensor-based implant at some point? How long will it take for you to come up with that? Or maybe you don't view it as an important space? Just wanted to kind of get your thought or take on that.

Yes. I would say we're not doing digital just for digital. It really is what job is it trying to do to have an impact in the health care system. And so we are really focused on -- in our orthopedics business, making the medical intervention smarter, less invasive and more personalized. And if digital technology can enable that, we'll pursue that. And we are, and we're really looking at the patient pathways, let's use a knee procedure and how do we do free-up differently and engage the patient in a much more efficient fashion, relevant fashion. How do you do inter-op live, live pictures of the anatomy, real lifetime feedback so that you can get the precision needed to place the implant with perfection for that personalization experience, reduce the variability, ensure there's really good soft tissue rebalancing, which helps with healing. And then looking at post-op outcomes of how do we make sure the pain, mobility, infection, there's a lot of remote monitoring that we can use to get that kind of best outcome. So yes, we do have programs active in our pipeline around smartphones, implanting sensors into bones for trauma or other areas of our orthopedics business.

Okay. Okay. But nothing specific to talk about right now in terms of knees?

Not -- really, it's around kind of how we change that patient care pathway. And if you were to think 5, 10 years from now to the discussion that I had around software and med tech and pharmaceuticals, similar to what you see on our sutures of antimicrobial sutures or contact lenses, which have an antihistamine in it for allergy relief. If you look at our orthopedics portfolio, they're absolutely looking at infection management, as an example, or pain management and not just have to be an implant alone.

Okay. Okay. Great. That's helpful. So one other topic I want to hit on is your performance in China has been, at least relative to any other company that gives me numbers, the best in med tech by far. You've been growing your whole medical device franchise really nicely in China. But obviously, we are starting to get some questions from investors about the outlook for tenders in China and specifically in orthopedics and hips and knees. So just wanted to get your take on what you see coming in terms of national tenders on the hip and knee side here over the next couple of months?

Yes. Bob, I give a lot of credit for, quite frankly, a lot of the colleagues that preceded me. We've been in China for 35 years, and we are the leading med tech company in China. We have remarkably strong business continuity there, really strong local leaders. We have very strong -- a very diversified portfolio. When we show up in the market, we bring the best of total Johnson & Johnson to bear with the stakeholders, whether it be they be government relationships or customer relationships. We've invested. We have 9 plants on the ground there. Our largest innovation center is in Shanghai. So I -- and China has been leading the way. You saw that we had not just 70% growth versus 2020, but around 50% growth versus 2019, just in quarter 1, and we grew 7% last year relative -- for 2020 versus 2019. So -- and we've done that through, yes, market recovery, but we've done that significantly through market share gains and local innovation. Now I'll still tell you, we are maniacally focused on cybersecurity and compliance and privacy. And we -- total enterprise sales, China is about 5% of our revenue. So still small. Med tech is a bit more of that. So we're always trying to aim for balance. But I would -- we're in there for the long haul. Now listen, when it comes to some of the volume-based procurement, it went through IOLs, and we benefited from that. We had lower volume. We took over the #1 position in IOL, so we gained volume. Similarly in joints last year, we never saw pricing like, I want to say, the stents that were like down 70%. I think the pricing was like down 15% to 20%. We ended up gaining volume last year in orthopedics. And I think -- listen, when we think about energy and endo-mec, they're going to probably be more at the conventional level, not the national level. So it's something we absolutely pay a lot of attention to. And if things change, we'll have to change the business model. And the local team were working hand-in-hand, but they've been navigating that very adeptly.

Yes. That's -- would -- that incredible growth member that you just mentioned, I mean, is that broad-based across the franchise? Or are there a few things that are really driving it in China more than others?

No, it's very broad-based. I would tell you, from our vision performance to electrophysiology is double-digit and still low penetration there to our Ethicon franchise, I would tell you, has probably been our historic stronghold there, performing well. And orthopedics has been from trauma and spine and joints point of view. There are always fluctuations, you'll hear us talk about on days or distributor inventory that we're always very transparent about those. But from the -- I would say, the health of the business, we have a very diversified portfolio, and that enables us to really balance out the risk profile. And we've really invested a lot in bringing access. So there's 1.4 billion people in China, and we're only touching on -- in the urban center. So how do we go to tier 2 and tier 3 cities? We've invested significantly over the -- throughout COVID, and that investment has given us a very healthy return, quite frankly, faster than I ever expected.

As you look forward to that business, in light of everything you know about the business including the potential for significant cuts in hips and knees and local tenders and national tenders, I mean, you still view China as a growth market for J&J as you look forward. Really, this is more of a near-term question because I know these hip and knee tenders are coming. Is it still a growth business for you as we look on the other side of COVID in 2022 and 2023?

Yes. I do. I mean, the spirit, the volume-based procurement is for them to kind of simplify and it's really more for what they would say the more commodity products. And so what we have to do as industry leaders is make sure that we're staying ahead of the S-curve on innovation and really bringing differentiated, meaningful innovation. And that's what the team is focused on. We've had -- again, in 2020, we've had several of these volume-based procurements in joints and have benefited from those. So -- but we're not naive to say the cheese could move fast, and we have to pay attention that if the business model, and it's not a place for certain competition, and then we're going to pick places that we know we can win.

Yes. Yes. I also want to kind of wrap up here in our last minute by just having you talk kind of top-down about how you view the growth outlook for the business for the whole medical device franchise. And how is that pretty consistent with what you guys articulated at the Analyst Day? Are there parts of it were of change? Just kind of looking for a comment to add on how you view the growth outlook for your business over the next couple of years?

Yes. No. Thanks, Bob. Again, I would probably wrap with wow, the honor in health care and the honor in med tech and how inspiring are the health care professionals and surgeons and regulators and our J&Jers who have been doing cases all throughout this crisis, I think it's given us a renewed enthusiasm really in patient care. And I think that the market, as we've discussed, I think there are really healthy end state markets in med tech. I do anticipate the recovery to be paced differently depending upon where you are in the world and what kind of vertical clinical space you are. But I do think that there's a huge incentive to go responsibly start to manage all the patient care that, quite frankly, wasn't able to get done during the pandemic. And then I think about J&J med tech, and I hope what you're starting to really see is, listen, we have an unbelievable legacy and standing. We are the second largest med tech company, Bob, actually, $7 billion, $11 billion, $1 billion business is #1 or #2. So we're not like a $7 billion med tech. We're #2. We're very diversified. We have leading programs. We've revamped our innovation agenda. We are digitizing the med tech experience. We have a seasoned credible leadership team, and I think our best days await us ahead. And I expect us to in 2021 get to at or a little bit above the market versus 2019. And that's what we're aiming for. And I couldn't be more inspired and grateful for team J&J and quite frankly, the whole med tech industry.

Ashley, thank you very much for your time today. We're out of time, but I really appreciate your willingness to participate in our conference. And I know how busy a schedule you have. So on behalf of Bank of America, thank you very much for your participation.

Thanks, Bob. Stay safe. Take care. Bye-bye.

Thank you very much. You too. Okay.