Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Hi, everybody. I'm Lee Hambright, U.S. medical devices analyst at Bernstein. We are thrilled to host Johnson & Johnson this morning. Joining us virtually are Chairman and CEO, Alex Gorsky; and Vice Chairman, Joaquin Duato. We are scheduled for a 50-minute fireside chat. [Operator Instructions] So Alex and Joaquin, thanks so much for joining us. It's been a wild ride over the last 16 or 17 months for all of us, but I'm sure particularly extraordinary time to be the world's largest health care company. Alex, maybe you could just kick us off a bit with some opening remarks on the state of the business at J&J.

Sure, Lee. Well, first of all, thank you very much for having us today. I know Joaquin and I are both thrilled to be here with you. We're actually in our corporate headquarters here in New Brunswick, New Jersey, and we couldn't be happier to see our company, our leaders starting to come back. And your intro, you acknowledged the last 16 or 17 months. I mean, who among us could have imagined we would have had that experience. And I think all of us are likely forever changed in some way. I think it's always important to acknowledge the toll that the pandemic, the COVID-19, has taken on families, on people, on workplace. So many different aspects of society. And at the same time, I could not be more proud of the way that Johnson & Johnson has responded throughout this period. And look my overall thesis is, is that I believe Johnson & Johnson is incredibly well-positioned. And in fact, is in a stronger position today than we were 17 months ago to not only reach more patients and consumers around the world, but to actually accelerate and increase the impact that our businesses have. So look, let me just kind of hit a few high themes, perhaps as we go forward. I think, obviously, the most important thing that we had to do when this hit was to ensure that we continue supplying all of the customers, the health care systems that depend on us around the world. And when you think about the shifts in demand, particularly during the second quarter of last year, when health care systems in large part have been treating COVID patients were shut down around the world. When you think about what happened with airlines and the impact that, that had on our distribution system when you think about the shifting consumer demands, when basically we were in a lockdown situation for much of the world to be able to continue to supply is really a tribute to the almost 50,000 colleagues at Johnson & Johnson who continue to put their boots and put their masks on every day to go to work to keep that supply effort going. If you look at our fundamental businesses, Pharmaceuticals segment, our consumer segment for certain, hitting variability in demand that we had not experienced in some time. In some cases, patients did a lot of pantry stocking or getting prescriptions ahead of time to see that tail off. Of course, we saw an over 30% drop in our medical device business in the second quarter. But then you really saw the resiliency, the competitiveness and the consistency kicking in the back year. And even as we finish the first quarter to see, overall, the organization up in the mid- to high single digits and improve market shares, I think, is just, again, a real testament to what our employees were able to do during this period. Two, I think it was really critical to keep our innovation pipeline going. And there, too, we continue to make strong investments. We invested more in research and development than we have in any other year. By and large, the majority of our projects were either stayed on track through this period across our different portfolios. And so we are very proud of that. Third, the fact that we were able to ramp up the COVID-19 vaccine effort. And if you just look at the scientific, the chemistry, the biology, the political, the distribution effort that needed to happen to make that possible, I couldn't be more proud of our organization. Yes, we've had a lot of twists and turns, and we've had ups and downs. That being said, we continue to believe that we're going to impact billions of people around the world and really make a big difference globally as we continue to work our way through this pandemic. And so -- and last but not least, I think while we were dealing with all of these issues, there were just a lot of societal issues that business around the world is being asked to step up and have a voice on whether it's issues about racism, whether it's issues concerning our environment. And in all of these places, I think Johnson & Johnson stepped up, has done the right thing, doing our best to make a difference. We know that we can do more. But we remain very committed, and I believe actually making good progress in many of these areas as well. So we're really looking forward to 2021. We believe that if we look at fundamentals around health care, whether it's the increased relevance in global public health, whether it's a backlog of patients or whether it's, frankly, improving economies around the world, all of those are very good precursors for our industry and for our business, not only this year but well over the next several years. And so we're looking forward to talking to you more about that today.

Awesome. Thanks so much, Alex, for that intro. Maybe let's dive in on vaccines first. You've worked very hard to develop a single dose, easily transportable vaccine that turned out to be really effective at protecting people against severe disease and hospitalization, and you did it in record time. And like you said, there have been some twists and turns along the way with manufacturing issues and regulatory scrutiny, but it's been a really impressive effort. Despite strong vaccination rates in some countries, other countries have lagged. And I just wondered if you could start by giving us your view on where vaccination efforts stand today and what role J&J's vaccine will continue to play.

Sure. Well, it is pretty remarkable when you think about it, not only the fact that our industry -- and again, let me give a shout out to our industry because I think never before in history has the biopharmaceutical industry made such a difference at such a critical juncture around the world. When you look at these platforms, whether our adenovirus platform or the mRNA platforms, the uncertainty that we faced 17 months ago, and all of the challenges that we are going to have to overcome through the clinical development programs, let alone the scale-up and the manufacturing, the regulatory issues. And ultimately, that final mile of actually getting shots in arms globally. I think there was a fair amount of concern, whether that could be done. And now when you look at the difference that has been made, particularly here in the United States now that you probably have around 2/3 of adults vaccinated or at least with one shot and you see the impact, not only that's having in infection rates, in deaths, in hospitalizations, of course, that are very important, but also economically, as frankly, businesses can open back up, families can get back together, I'm really proud. And I think it's a really important message around the decades of investment in research and development that have been done that put us at a point where we could do this. Now in our case, as you noted, we put a lot of very deliberate thinking and planning early on to achieve a profile that we felt would be optimal around the world to ensure that not only could we have the right efficacy and safety profile, but that we could get broad access to our platform. The clinical trials demonstrated that even against the most virulent variants in South Africa. As you know, in our trials, it was a very global program, about 40% in South Africa and -- or excuse me, 20% in South Africa, another 40% in the United States, another 40% in South America. And in spite of the challenge of those variants, our efficacy rates, particularly against moderate to severe disease and keeping patients out of the hospitals and from dying was very high. We were encouraged -- very encouraged with the initial rollout. I'm very proud of the way that our team identified some of the adverse events, and we're able to quickly triangulate the data and to understand not only the signs and signals, but also the difference in treatment that we need to be implemented and quickly communicated that. We're working diligently right now here in the U.S. with regulators regarding our supply chain. And we continue to believe that globally, we're going to play a very important role. And it really gets back to the fact that it's a single dose, it's extremely effective and requires fairly moderate logistical issues regarding refrigeration. And we remain absolutely committed to making billions of doses available, not only here in the United States but around the world.

Excellent. You made a commitment, of course, to provide the vaccine on a not-for-profit basis during the pandemic. Can you share your latest thinking on how the vaccine might impact EPS this year? Is there a scenario where you could see some upside to EPS? And if you sell fewer doses than expected, is EPS protected on the downside?

The short answer is we think they have very little impact, if any, at all. And we remain absolutely committed overall to the commitments that we've made and the guidance that has been delivered. We felt it was very important, not only in the beginning to make sure that in regarding designing the vaccine in a way that could have one dose minimal refrigeration but also maximal efficacy as well as safety that making sure that we removed any other barriers to access around cost and around pricing. And so to do that on a not-for-profit basis, we felt it was very important. And we're delivering on that commitment. But if you look fundamentally, the way that we issued our guidance, we're very confident in our core businesses being -- on being able to deliver that. We'll have to see how -- once we get through some of the regulatory approvals on the manufacturing side and things get rolled out, there would be any potential upside. But fundamentally, we remain very confident in the guidance that we've issued and the trends that we're seeing.

Great. Okay. Let's shift to the core business. Alex, when you took over as CEO in 2012, the med tech business was about $27 billion of revenue. And with all the puts and takes in the portfolio, it's probably around that same $27 billion this year. Consumer revenue at the time was about $14 billion, and it's about the same size now. But in that same 9-year span, pharma revenue has doubled from $25 billion to $50 billion. What are the key factors that have enabled your success in delivering pharma growth rates that are so far ahead of market growth rates?

Look, Lee, I'm incredibly proud of the progress that all of our different sectors have made over that almost 10-year period. I mean if you reflect back at that point in time, we've just gone through a major generic cliff in our pharmaceutical business and we were relaunching. I mean at that time, I believe we had 1 or 2 oncology products that added up to less than $500 million worth of sales. And when you consider where we are today, among one of the leading oncology companies and the impact that we have on patients that along our business growth, I couldn't be more proud. If you consider our medical device business, we had the need to take a hard look at our portfolio. There were certain areas where we realize for us to be competitive, to have an impact on a global basis that we definitely needed to take a harder look and to see where and how we are going to make investments and where we think we could be best positioned. And I think on the consumer side, there were some challenges that we were facing as well on the quality piece as well as our overall portfolio. And so if you look at all of those businesses, I think they're in a much stronger position today than they were then. Regarding our pharmaceutical business, look, I think it starts with just great science and really differentiated products, number one. And we're agnostic, whether that's internal or external science. And I think the track record we have of building partnerships, about 50% of the time, we sourced our innovation externally. We're also very innovative on how we do partnerships. And I think we demonstrated there's great examples with Pharmacyclics, there's great examples with Actelion or even more recently with Momenta on our willingness to partner, again, in very creative ways that ensures that ultimately, we can reach more patients and be more successful. I think, too, the fact that we take a franchise approach. As we all know in pharmaceuticals, everything in Phase II can be promising, but making sure that we're very focused around our 5 therapeutic areas. We've expanded that obviously with pulmonary arterial hypertension. But being focused not only gives us, we believe, better capabilities and better specificity as it relates to clinical development and regulatory expertise, but also commercially as it relates to execution in the field and account management as well. It means that you don't have to recreate entire infrastructure to support those. And then finally, it's about execution. And I think if you look at the execution of our research and development and the way that not only have they been able to build up tremendous databases and science demonstrating the broad utility and the efficacy and safety of our platforms, creating literally portfolios out of a single molecule in many cases. But then the ability to execute in the field, too, even in the face of biosimilar competition in other areas. And last but not least, I think it's a relentless commitment to innovation. And if you look at our investment levels, if you look at the number of new products that have been launched. And if you look at our pipeline for the future, we believe we're even better positioned today than we were 10 years ago. So I think those are a few of the keys of success that we continue to really focus on here at Janssen and Johnson & Johnson.

Great. Thank you for that.

The result of that, the outcome of that is that we have been able to create a model that during the last decade, has been able to grow our market consistently in the face of patent expirations and setbacks. So that is the outcome of the success of the pharmaceutical group that you have described well going from $25 billion to $50 billion. It's the fact that we have been able to create a model based on our innovation engine that is able to deliver above-market growth in the face of patent expirations. And when we think about the future, and I'm sure we'll have questions about the future later, that's what gives us the confidence our past track record of 10 years that we are going to be able to continue to deliver that type of growth in the future.

Excellent.

Lee, I'd also be remiss and I'll embarrass Joaquin, I also think it has to do with the leadership of the team. I mean, if you look at Joaquin, if you look at Paul Stoffels, if you look at Jennifer Taubert, if you look at Mathai Mammen, if you look at Scott, I can go right down the list, Peter Lebowitz, these are very accomplished, very seasoned, incredibly committed leaders that really have done a remarkable job in leading the charge, so to speak, through that period and that are committed to doing that and even more over the next decade.

Excellent. There's an investor question from the audience about something you just touched on, which is external innovation. And the question is about your competitive advantage in using external innovation to source, develop and commercialize drugs in pharma. How do you think about how J&J is kind of better than others at that effort?

Look, I'll start, and then I'll ask Joaquin to jump on. I think that we see this as an absolutely critical element to the success of our overall program. And it starts, frankly, with the culture that's focused on what is the best science. Ultimately, what's going to make the best difference for patients and being completely agnostic, whether it's internally or externally focused. Now to that point, we realized that there are some areas where we've needed to build improved internal capabilities in very early development. In fact, I just had a chance to visit one of our facilities a few weeks ago, and we're seeing the results of that. But at the same time, I think, demonstrating not only a commitment but a willingness to be creative and innovative and how we actually pull those programs together. I think it gets to a mindset in the organization, but actually, the way that we reward our people as well to making sure that whether it's internal or external, that we remain committed to the same level of success. And then finally, I think it's about being able to demonstrate success so that when you go to your next partner, you can provide an example of an IMBRUVICA, a DARZALEX, other partnerships that have been developed where you show to your partners that it was a win-win. It was a success on both sides, and that becomes kind of a self propagating effort as we go forward. So Joaquin?

Yes. I echo in Alex's comments. The first thing is that we have a very talented R&D team, which is very specialized by different diseases, and they have a good view of what is going to be improving or disrupting the standard of care in the future. So that talented R&D team enables us to identify very early on opportunities that may have a higher probability of success. So by doing that and combined with the scale that we can provide in chemical development, manufacturing and commercialization, we are able to identify opportunities early on that can create significant value down the road. That means that you need to have an important bet on your R&D investment. And as Alex described before, our R&D investments in pharma were close to $10 billion last year, which is twice our sales and marketing investments. So we have a strong R&D model, which is founded on the scientific leadership that we have in our team. And based on that, we have worked tirelessly during all this decade to try to improve the way we discover and we develop medicines in order to increase our R&D productivity, too. Now we have our entire R&D team embarking a big effort to utilize technology, data science and automation to try to fine-tune both discovery and development, and that is making us more productive. As a matter of fact, the productivity of our R&D engine, as measured by the expected NPV of our portfolio divided by the R&D expenses that we have, has steadily increased significantly in the past 5 years, and we see that to continue going on. And that's based on our ability to identify the right science, and then utilize our knowhow and technology to be able to increase our probability of advancing these medicines to the clinic. So we feel very positive that at the root of the success that I described of creating a model that's been able to grow during more than a decade, it's our ability to identify and develop new medical breakthroughs that are going to have a significant potential, and we think we are going to continue to increase down the road.

Great. U.S. price reform is a topic of much interest. I wonder if you could just offer brief thoughts on sort of what the base case looks like for U.S. pharma pricing reform and maybe what the range of outcomes is that we might expect?

So U.S. price reform, there's always, always been a tension in the U.S. and everywhere else, between innovation and affordability. And that's a tension that exists now and will exist in the future. And particularly, every time which is an administration, like it happened with the Obama administration, with the Trump administration and now with the Biden administration, then the conversation about U.S. price reform increases. That's nothing new for us because we are a global company, and we have this conversation elsewhere. But I just wanted to sensitize the audience that discussions about U.S. price reform are not new, and they always happen periodically, especially when an administration changes. What's our view of U.S. price reform? First, let's identify what the problem is in the U.S. in particular. The problem is not that pharmaceutical expenses are increasing because they are relatively flat year-over-year as your audience know. The problem is that out-of-pocket expenses for the patients, especially in specialty medicines are increasing significantly, creating a problem for those who are more severely ill. So that's an area that we need to address. To the extent we can generate bipartisan support to address the main issue, which is the issue of the patient's co-pay of the out-of-pocket expenses, there's an area where both we can have bipartisan support and the pharmaceutical industry supporting. So our anticipation about U.S. price reform is that there will be areas in which we can find an agreement in order to lower out-of-pocket expenses. These areas may create some papers for the industry, which we would gladly accept in exchange of improving the system in the U.S. and providing stability. We do not anticipate any radical situations. All of these situations will have to go through legislation. And as you are seeing, there's not going to be an agreement for some of the more radical proposals. But there could be room for addressing the issue of out-of-pocket expenses and that may create some cost for the industry, which we would gladly accept to the extent it's going to provide the stability to the system for a certain period of time. 4 years from now, we'll come back to the same situation and 4 years later the same, but let's have some stability. Now I also think it's important to recognize that in the context of price uncertainty, which is normal, Johnson & Johnson and our pharmaceutical group, it's a very good place to be. Why is that? Because we have been having price decreases, net price decreases for a number of years. Last year, we have a 5.4% price decreases. All our growth is coming for volume. And we have a very diversified portfolio with more than 11 products of more than $1 billion that participates in every book of business. So when you think about what companies could do well in a situation of price reform, I think that our company clearly stands out because of its ability to growth -- be growing on volume, market and share and also the diversification of our portfolio. We don't depend on a single drug, we don't depend on a single channel. So we are more insulated, and we can thrive better in this type of environment.

Excellent. So let's -- maybe let's shift to medical devices. Ashley spoke a few weeks ago and painted a picture of a recovery that was faster in some segments and countries and slower in others. She also talked about very large backlogs in some areas and procedures flexing up well above 100% of normal to work through those backlogs in some cases. Wonder if you could give us your latest view on the state of med tech recovery?

Sure look, we do expect the med tech market to accelerate as we go through the remainder of '21 and clearly into 2022. Now I think that it's going to depend where you are in the market, but overall, we're very -- we're bullish on those trends. And so let's start with the strong points. Clearly, Asia is coming back very strong. You saw that in our performance, but really, I think, more broadly across the entire market in Q1. You're seeing, I think, a resurgence in North America, stronger in some areas than others. For example, less elective procedures like EP, trauma is coming back very strong, we're seeing areas such as knees and spine that could perhaps be considered a bit more elective, lagging behind, but nonetheless, beginning to return. And so I think those 2 markets, Asia and North America, in particular, in the specific markets that I highlighted are coming back well. Europe has continued to lag versus North America, but there, too, rates of vaccination are increasing. We're seeing those markets begin to stabilize. And South America has also continued to be somewhat soft. But again, there too, we would expect the trends to return over time. But overall, fundamentally, we think that there will be a backlog in procedures. There will be not only a delay where there were procedures that were canceled -- that were scheduled and canceled. But even at the very front end where patients just had not even been going to their primary care physician, have decided to delay seeking care. And as I mentioned earlier, that as they get more comfortable, as vaccination rates continue to increase, as their confidence in entering the hospitals increases, who, by the way, I think, have done a fantastic job through this. And I also think a correlation with the economy as people return to work, as people get greater insurance coverage, I think all of those are tailwinds that we would expect to positively impact the medical device space going forward.

That's great, Alex. I wonder if you could maybe help us think about quantifying the size of the backlog for J&J. And maybe helping us think a little bit about timing on when that backlog could come through. We had one of your competitors in orthopedics yesterday who suggested that as we come out of COVID and people are feeling some new kind of freedom, maybe they don't rush right back to the hospital to get procedures done right away, only to be laid up again for 6 to 12 weeks of rehab. Maybe people want to enjoy a bit of time with the family, et cetera, and then come back into the system a little later in the year. I wonder if you could just comment on the size of the backlog and maybe timing expectations?