Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Welcome to the Wells Fargo Healthcare Conference. Before we get started, if you are a member of the press or media, please disconnect at this time. This is a restricted line. Any unauthorized party in this meeting or any unauthorized use of the information communicated in this meeting is subject to prosecution to the fullest extent of the law. Any unauthorized person, including the media, that is on the line at this time, please disconnect. Please note, today's call is being recorded.

Good morning. I'm Larry Biegelsen, the medical device analyst at Wells Fargo, and it's my distinct pleasure to host this session with the incoming CEO of Johnson & Johnson. All these sessions are special, but it's not every day you get to be the first analyst to host the incoming CEO from Johnson & Johnson. So this is really a thrill. So with us, of course, we have Joaquin Duato, who's currently the Vice Chairman of the Executive Committee and of course, the new CEO effective on January 3, 2022. In terms of format, this is going to be a 30-minute fireside chat. And if anyone has a question they want me to ask on their behalf, please e-mail it to me. So Joaquin, welcome and congratulations.

Thank you, Larry. And look, I am very glad to be able to have my first opportunity to be in public after being appointed to be the CEO of Johnson & Johnson in January next year. It's a great opportunity for me. And I also wanted to recognize the job that you do over my long career in health care. I have been in contact with you, and I read all your reports with a lot of attention and dedication. And I'm always impressed by the level of detail and insight that you provide. And I'm always a follower of your reports. So thank you for having me here today.

Thank you for those kind words.

So let's jump in. J&J announced the transition a few weeks ago, and this came as a bit of a surprise to some people in the investment community to see -- not to see Alex retiring when he did. So at a high level, can you talk about your vision for the company and how you're thinking about the strategic direction and how it may be different under your leadership?

Thank you. So this -- I -- let me start a little bit of a -- with my history in the company. I work for Johnson & Johnson for more than 30 years. And in the course of this long career with Johnson & Johnson, I have spent time in all 3 sectors, in Consumer, in Medical Devices and in Pharmaceuticals, where I have a longest experience. I have worked half of my career here in the U.S. and then the other half internationally, and I also have had the opportunity to run some of the largest functions in the company like information technology and supply chain. So Johnson & Johnson, over the course of my more than 30-year career, has prepared me well for this situation. I have the honor to be the CEO after 30 years, especially replacing a leader of the caliber of Alex Gorsky, which -- who I think is a once-in-a-generation leader from whom I have learned a lot. And I have worked side by side with Alex for a long time, particularly over the decade long -- almost decade long of his tenure as CEO, I have been with him, and I have worked with him and learned from him. When I think about the feature of Johnson & Johnson and when you have to think about how we see it, I think that Johnson & Johnson is always underpinned by 2 things. One is our principles, which are encapsulated in our credo. The other one is our purpose of changing the trajectory of health of humanity. So those are things that never change and that will stay there because part of the fundamentals that have made Johnson & Johnson what is it today. Both Alex and myself believe that the way we achieve our purpose of changing the trajectory of health of humanity is through medical innovation. And we'll continue to be focused on that strategy of utilizing medical innovation to bring changes -- meaningful changes in these areas of health that are still unresolved. So in that sense, you are going to see a transition, which is going to be smooth, and it's going to have very little noise. Johnson & Johnson has a strong leadership team in place, in every sector, in Medical Devices, in consumer, in Pharmaceuticals, strong financial management with our CFO. And we are very confident with our strategy and with our leadership team today. Are there going to be areas that we are going to continue to evolve? Absolutely. I think that part of the reason that Johnson & Johnson has been able to have this long-term trajectory of success, being a company with a long history, more than 135 years of history, is precisely because of that, because we have a strong muscle of evolving our capabilities, our go-to-market, our innovation to meet patient and consumer demands, and that, we will continue to do. And that muscle of innovation and evolution will always remain there. And it's part of the key capabilities that when you think about the routes of our success, it's there. So the combination of our values, our purpose of changing the [ data ] of human health, our belief of medical innovation and our ability to continue to evolve, that's going to remain, and it's going to continue.

That's super helpful. Joaquin, what is your commitment to J&J's diversified business model?

So my -- first of all, look, I want to underscore that, that diversified business model has served us very well during a long period of time. And it does have benefits that all of you know, mainly in providing consistency and navigating different business cycles. As a matter of fact, in a situation like the COVID situation and when you look at our second quarter results, the company is doing and is stronger than ever. So it's -- we are -- we have a very strong base. I was proud to report the second quarter results in which -- in every single sector, Consumer, Medical Devices and Pharmaceuticals, we beat consensus and we had a very strong performance overall. So we are coming from a very strong base, and we are coming from a situation in which every sector is doing well. I mean when you think about Pharmaceuticals, we had 7 key brands presenting double-digit growth. We have extraordinary growth, in particular of DARZALEX and STELARA. When you think about Medical Devices, it also beat consensus driven by market recovery, coupled by strong new [ process ] introductions and good commercial execution. And then you saw Consumer that also beat consensus with a strong growth, especially coming from over-the-counter medications. I'm sure we'll have more time to talk about that, but I want to reinforce that we are working with a strong base of business based on our model that we have today. This model has been successful for a long time, and we continue to believe that we are going to invest in all sectors. In Pharmaceuticals, we'll continue to invest and to perform. We are going to have the Pharmaceutical business review in November, and you guys are all invited to this Pharmaceutical business review. And there, you are going to hear more of our plans for the next 5 years, and we continue to be excited in our ability to deliver above-market growth. So you're going to hear much more about our plans, and we can talk more about the Pharmaceutical business later. But we continue to be very excited that based in a trajectory of 10 years, a decade of our market growth, we're going to be able to continue to deliver above-market growth in the next 5 years. So that's an important piece. In Medical Devices, what we are seeing, it's an overall improvement in our performance. In 2019, pre-COVID, the growth in Medical Devices, which is shy of 4%, so that's a continuous improvement in our performance, which is based on better commercial execution, coupled with the ability to launch new products. In the first half of 2021, we were able to launch 17 new products, which is the highest number in the first half of the year that we have had in the last 5 years. And then in Consumer, finally, we are focusing our science-based brands, iconic brands that are doing really well, for example, LISTERINE or TYLENOL, especially in the context of this pandemic in which the attention to personal health has been heightened. So we see all our [ sectors ] moving forward, and we think that the strength of our sectors is what is resulting in this performance of Johnson & Johnson that, as I said in the second quarter, beat analyst consensus as a whole and in every single sector.

That's super helpful. One last big picture question for you on your new role. When I look back at Alex' 10 years or so, I think about, if my numbers is right, Devices were bigger than Pharma as a percent of J&J sales. Today, Pharma is much larger. So under Alex' leadership, the Pharmaceutical business has performed phenomenally well, but you've obviously divested a few Medical Device businesses, and it's a smaller part of J&J. Your history is primarily in the Pharmaceutical business, although you have experience in all 3 divisions at J&J. How do you see the mix evolving under your leadership? Is this move towards more Pharmaceuticals going to continue under your leadership?

We don't have a percentage in mind as far as the right mix. So I mean, as I said before, our approach is that we invest in the 3 businesses and then different factors like market opportunities, their own performance, drive the actual result in the mix. So we don't have a preconceived idea of a certain mix. We want each sector to be competitive in its own right and then have a synergistic effect in the combination towards Johnson & Johnson. So that is the philosophy that we have, and that has served us well for a long time. Do -- I mean, I continue to see opportunities, as I told you, in all businesses, continue to see significant opportunities coming out of COVID-19 situation. I do think that this is a special moment of opportunity for health care companies and for diversified health care companies like Johnson & Johnson. On one side, I see at a macro level, and we may talk about the headwinds, too, because we have headwinds -- at a macro level that there's going to be an increased focus on health care and in innovation because that's what is taking us at the pandemic. And I also see at a macro level that technology is going to play a very important role, opening new opportunities. The combination of new insights in biology and data science in Pharmaceuticals is going to help us deliver new medicines and deliver them faster. The combination of robotics, digital, it's going to help us improve the standard of care in surgery. The opportunities that digital is opening in Consumer to establish new relationships with consumers. So I do see a moment of opportunity focus in health care as more important for society and the combination of science and technology driving that improvement. And I see opportunities across the 3 sectors to be able to do that. And what I want to underscore is that, yes, we are in a situation with COVID-19 that I'm sure we'll discuss now that is creating volatility and significant tensions at many levels, socially, geopolitically. We are in a situation in the U.S. with a change of administration that is putting pressure especially on the industry, in the pharmaceutical industry. But when I take a step back and I look to the long term, I do see this as a movement of opportunity for a health care company and especially for a health care company like Johnson & Johnson.

That's super helpful. So you touched upon COVID and the recovery we saw in the second quarter. Obviously, we've seen a resurgence with the Delta variant. The J&J, as you mentioned, the diversified business model has served the company well through the pandemic. I think people -- listeners would love to hear from you, given your breadth of products, what you're seeing from the resurgence of the Delta variant, what you're seeing from COVID across your different business sectors. I think people would probably be most interested to hear about the device business and the impact COVID is having. So would love to hear your perspective on that.

Yes. So at a macro level with COVID, certainly, it's been a disruptive actor and a catalyst for change in society and in our business, as I was commenting before. Overall, with some volatility -- and as you know, we have been always humbled by COVID predictions, right, because many of the predictions that we have, have proved wrong. So from a humble position, I see that the overall trend is for recovery with some volatility. But the overall trend is for recovery, COVID becoming an endemic disease and something that would be able to be managed through vaccination, especially when it comes to severe disease and hospitalization. So that's the way we see it. And it's not going to be a linear path, but we see a trend to recovery, COVID becoming endemic and something that we'll be able to learn how to live with because it will be manageable through vaccination, especially when it comes to severe disease and hospitalization. So that's the way we see COVID. So we see it as an important situation, an important pandemic, a humanitarian crisis, but something that is in the way to recovery at different paces in different countries and affecting different sectors in a different way. But I want to underscore, look, we cannot be swayed by the moment today. We need to think about the opportunities that this situation is going to create and the overall trend to recovery. The market fundamentals in health care are stronger than ever. For every single sector, the medical need is there and the opportunity to bring innovation is better than ever. When I look at the sectors, let me start by the relatively easy ones, Pharmaceuticals, in general, with some volatility by country. In the U.S., we are starting to be at pre-COVID levels. There are some areas that are softer, for example, in chronic lymphocytic leukemia. But in general, we are at pre-COVID levels as far as market and new patients starts. We may have some countries, as I said, that may be affected like Brazil or Japan because of the lockdowns and the situation that are there. But generally, we're getting back to pre-COVID levels. When it comes to Consumer, again, there's some geographic and category volatility, for example, in cough and cold because of the lockdowns, you're going to see -- or you saw historically more volatility in the cough and cold area. But overall, we're seeing a recovery with some volatility, and it's creating an intense interest in personal health, which is benefiting the categories that we compete both in skin health and in self care, and we are seeing good trends both in demand and in market share for our Consumer business. And then finally, Medical Devices, which is the one that has a more direct impact of the pandemic because of the impact that hospitalizations have in non-COVID procedures. So I mean, again, I'm not in the business of projecting the moment because that -- as I told you, we've been proved many times wrong in the past. What we see is a path that necessarily is not going to be linear. If I take the second quarter of '20 as when this -- all this started, overall, we have seen a trend toward recovery, and those results were there in the second quarter of 2021. And we continue to see a trend towards recovery driven by strong market fundamentals that we have in the Medical Device sector. And at the same time, now in the recent months, we have seen the surge of the Delta virus in the U.S. and in other countries, which is having an impact in different countries. And the U.S., in particular, is having an impact with geographic and procedural differences. Geographically, we're having -- we're seeing a bigger impact in the South and the Southeast. In procedural, we are seeing an impact in elective procedures, for example, in knees. So with that, look, we see the impact of the delta in elective procedures especially. It's difficult for us to predict when that impact is going to peak. But if I look at the history, this all has a cycle. And eventually, this is going to peak. And once this peaks, we're going to see a strong recovery. And the strong recovery, it's going to be driven by the fact that there is a significant backlog of procedures that will drive a strong recovery. So we are very optimistic about the potential for recovery. We also think that the health care system overall is adapting to manage the COVID and non-COVID workflow, and they are doing a wonderful job in being able to manage those things. So yes, while we may see some impact due to the Delta virus now, our belief is that, that impact will be temporary, and the overall trend towards recovery will continue and the market fundamentals eventually will prevail and there's a significant backlog that will drive the recovery back.

That's super helpful. We've only got about 10 or 11 minutes left. Let's -- I wanted to give you an opportunity to talk about the COVID vaccine, and there's a lot of different things we could cover there. But I wanted to give you an opportunity to talk about upcoming milestones for the 2-dose regimen and how you're thinking about that opportunity, if you will, I hate to use that word, but how you're thinking about J&J's -- the COVID vaccine for J&J.

So thank you for talking about the COVID vaccine. So look, first of all, we are very proud of having been able to participate in addressing the COVID pandemic through our development and approval of our COVID vaccine. So that's a proud moment for Johnson & Johnson. And we have had some ups and downs. But overall, when I look back, and I look back to 2020 and the fact that we were able to develop a COVID vaccine in record time is something from which we are proud. Could we have done better in some areas like in manufacturing, for example? Absolutely. But overall, I think it's been a good thing for Johnson & Johnson in its contribution to society, in its contribution to be able to address the pandemic. So we are proud of having done our part in this unprecedented situation. So look, there's 2 topics that people are normally asking us now. One is the booster and how are you guys doing with the booster? And what are you planning in the booster side? We have a number of clinical studies addressing boosting our one-shot vaccine. Some of this data has been already published, showing that we have a ninefold increase in antibodies when we are boosting our vaccine, and we are sharing that data with the FDA and getting their guidance about how to submit that data. So that's the situation regarding the boosters, right? So we are confident that we have a path and the data -- clinical data. We have shared -- demonstrate that our boosters are effective in increasing the antibodies, and we are working with the FDA in how to translate that. At the same time, as you know, we also had a Phase III study with 2 doses. To clarify, it's not a booster. It's just 2 doses with a shorter interval. And we are in the process now of evaluating the interim results. The study is fully closed, and we'll share it with the FDA and with the public once we have that there. Overall, when I look at our one-shot COVID vaccine, what we are seeing, leaving aside the booster or the 2-dose study, is that the responses that we are producing are very stable. So we are very satisfied with the responses of our one-shot COVID vaccine as we speak right now. So I think that is important to be clear. We have commented on the fact that we see the guidance for this year around $2.5 billion in sales overall. As you know, our intent is to continue to work in a way that we facilitate access of our vaccine globally, and we see a significant part of our manufacturing, of our production going into the lower and middle income countries where our vaccine does have a very important utility given its conditions of being one shot and its simpler distribution. So we continue to work on our vaccine in every angle, and we'll continue to work with governments in order to try to use it as much as we can to address this pandemic with an accent on trying to generate global access. If I take a step back from the COVID-19 vaccine, we also see the vaccine platform and the vaccine area as an important growth area for Johnson & Johnson in the future. You know that we have an RSV vaccine, also a vector-based vaccine, which has received breakthrough designation from the FDA, and we continue to work in a number of vaccines and vaccine technologies in order to grow this vaccine platform. And you will see us investing in the vaccine area with an eye towards the second half of this decade. So vaccine, it's an important component for us. And when we go to the Pharmaceutical Business Review Day, you will learn more about the efforts we are having on vaccines beyond COVID.

So it sounds like the 2-dose regimen, you have the data in hand, if I understood correctly, Joaquin, and we'll see that -- so it sounds like it might be imminent.

I don't exactly know where the data is, but the study is fully enrolled. And we are about to be able to or add -- I'm not sure where we are exactly. The study is fully enrolled. And then once we have it, immediately, we'll share it with the FDA.

So sticking with the Pharma side, and you touched upon the analyst meeting coming up in November, maybe give us kind of a sneak preview, if you will, on what we can expect and what you're really excited about.

You're going to -- first of all, I mean, we're excited about the format that we're going to have for the first time. So we are going to give you pretaped presentations before the actual day. So you have time to review the information that normally we have presented in the [ main event ]. So that's going to be an innovation. And then we're going to use most of the actual day for the attendees to be able to ask questions to our R&D leaders and to address some of the areas that you may have think about while you were listening to the presentation. So that's going to be an innovative factor, and we're excited about that. We're going to give you a picture of the next 5 years in which, as I said before, we're confident to be able to deliver above-market growth, and that will be focused in 2 areas. One is the existing platforms and the existing medicines like DARZALEX, IMBRUVICA, ERLEADA, TREMFYA, our CNS or neuroscience portfolio with INVEGA SUSTENNA and the recent approval of INVEGA HAFYERA, which is going to be 2x per year, also our PAH portfolio. So all our growth drivers that are in market products, we'll talk about them. And then we'll put some particular emphasis on the near-term launches or potential launches. For example, we'll talk about amivantamab. We'll talk about our CAR-T, BCMA CAR-T. We'll talk about nipocalimab. So we'll try to give you a better understanding of these opportunities that are in front of us that are going to be launching in these coming years so you have a better view of the potential of these medicines to really be transformational and change the standard of care. Also, we're going to try to give you a peek of what's going to happen beyond 2025. We want to see the new modalities that we are developing, for example, in gene therapy. We want to see new diseases that we are entering. So we'll give you a peek on our platforms beyond 2025, so you see the opportunities that we have in the second half of the decade also to realize meaningful innovation. So if you want, there's going to be like 3 pieces. One is going to be our existing products and the potential for addressing more patients there, let's call it, the near-term launches, which I think some of them are underappreciated. So we'll help you in understanding better these near-term launches. And then finally, we'll give you a peek into the opportunities that will pan out beyond 2025 that are going to be into new modalities and new diseases in which I'm sure you are -- you have curiosity and want to learn more about that. Overall, you're going to see a pharmaceutical business in great shape, continue to deliver the performance that we have delivered in the past. Obviously, we'll discuss about the upcoming patent expirations and how we plan to overcome them through all this innovation that we are discussing. We'll talk about how we are approaching R&D and how we are using data science to improve the way we discover and develop medicines, how we are focusing in diseases to be able to develop full regimens, for example, what we are doing in multiple myeloma or how we're also looking at certain pathways in order to utilize that biology to address different diseases, for example, as you will see in nipocalimab. So I think it's going to be an exciting moment that is going to give you more visibility towards the opportunities that we have today and also in the future.

That's great. Last question, I want to give you an opportunity, because we're almost out of time, to talk about pharmaceutical pricing reform. Obviously, it's been in the news recently. The Biden administration continues to pursue this. How are you thinking about managing that risk for Johnson & Johnson?

Thank you. And Larry, you've been a long time here. I've been a long time, and you know that there's not a single meeting in my more than 10 years leading the pharmaceutical group that I have not had a question on pharmaceutical pricing. So I mean what I'm saying that -- I'm not saying that to minimize what we have in front of us, but just to say that this is not a new issue and that this has been something that with every change of administration, we always have faced, especially in the U.S., remember, with the Obama administration, with the Trump administration and now with the Biden administration. So it's a secular issue that reflects an underlying tension that is never going to change between affordability and innovation. That is an underlying tension that will exist there. So for me, it's important to take some perspective when we look at the pharmaceutical pricing issues. Look, I mean, what are our principles? Our principles are we want to be a constructive actor in health care. When you talk about pharmaceutical pricing, it's important to put it in the context of overall health care and overall health care expenses. So Johnson & Johnson, being the largest health care company, we will always going to be a constructive actor, and we also want to maintain the ability to maximize patient access, to maximize choice for patients and at the same time, to be able to do it in a safe way and maintain our ability to continue to innovate, which is going to be important for today and for future generations. What we are seeing now for the administration, it's basically something which is akin to price setting, and price setting will affect innovation. There's this report of CBO stating the number of new products that we may forfeit if we're going to price setting. It will affect jobs in the U.S. It will affect the leadership that the U.S. has in biopharmaceuticals because other countries are going to take this opportunity to try to advance. And it's not going to address the main issue here, which is patient affordability. And I do think that the key issue here is patient affordability. Medicare Part D and Part B already benefit, and that is something that is ignored from very robust private sector negotiations. You know very well that plans in Part D negotiate very strongly and very dynamically. And also Part B, the government is benefiting through the average selling price reimbursement system from the negotiations that private sector is doing. The result of that is that our average discount in the U.S. is more than 50%. So there is already significant negotiation done by private sector to improve the pricing that Medicare gets today. And that's something that the industry has not been able to communicate because negotiation exists already. What we don't want to have is price setting that would be very detrimental for the industry's ability to continue to innovate and will have a significant impact on jobs. At the same time, being a constructive actor as we have to be, we have to recognize that we have to put our skin on the game in order to address the patient affordability issues, especially on Part D that are real. And we are willing to be able to put our skin on the game to, on one hand, address the patient affordability issues that exist that are real, that are at the root of our problems in the U.S. and also help with other actors in trying to improve the quality and reduce the cost of health care. So we are very willing to participate on that. We think that a policy of price setting is misguided. I can give you some perspective on that, but I understand it creates uncertainty for people like you following pharmaceutical companies. So I understand that, that creates uncertainty. What I can tell you is in the middle of that uncertainty, Johnson & Johnson is very well positioned, is very well positioned because of our diversified health care model. So the fact that we have about half of our sales in Consumer and in Medical Devices give us, if you want, a hedge of these situations. And at the same time, within our Pharmaceutical sector, we have a very broad portfolio. We don't depend on any particular area, Part B, Part D, private or public, and we participate in many different areas. And we have been able to demonstrate [ overall ] that our growth is not based on price but based on volume. So even if you have concerns about the situation that we are going now on the pricing despite of me giving you some reassurance that this is not a new thing and that the need for innovation is always be there, Johnson & Johnson in that context is a good place to be based on our diversification, both from a sector perspective and also within the pharmaceutical group.

Perfect. Well, unfortunately, we're out of time, but this was a great discussion, Joaquin. I wish you the best of luck in the new role.

Thank you very much, Larry, and thank you to all of you for listening today. Thank you.

Thank you so much.