Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Well, great. Good morning, everybody, and thanks for joining us for the next session. I'm Matthew Harrison, one of the biopharma analysts here at Morgan Stanley. Very pleased to have Johnson & Johnson with us for this session. Before we get started, I just need to read a disclosure statement. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures. So pleased to have the team with us from J&J. I am going to turn it over to Joe Wolk, the CFO, who's going to make some opening comments, and then we'll jump into Q&A.

Matthew, certainly a pleasure to be here to represent Johnson & Johnson. I'm pleased to be joined by our R&D colleague in the Pharmaceutical segment, Mathai Mammen, who I'm sure you'll engage with on some questions. Just really briefly, I want to get to your questions so that we can address those for the audience. In terms of Johnson & Johnson's business, we feel very good about where we are. We actually believe we're stronger today than when we entered the pandemic period. We're more competitive. Our businesses has accelerated some trends in the use of technology, which certainly helps kind of the, I'll say, some of the back office stuff but also very important work with data analytics in the development of pharmaceuticals and new products within our Medical Device and Consumer businesses. And we feel we're on a very firm footing, not just to close out 2022 and run into 2023, but also for the long term. We're very excited about our Analyst Day coming up where we'll get the chance to feature on November 18 our Pharmaceutical pipeline and just how strong that is. So I'll turn it over to you to your questions, but we feel very good about where the state of our business is and the long-term trends in health care overall.

Okay. Perfect. Great. And I think there are a couple of sort of macro big picture things we should address first, and then there's, thankfully, a lot of good topics we can get into. So maybe the first is, obviously, you're having a CEO transition. I think that's a focus for everybody. So maybe if you could just make a couple of brief comments on that.

Yes. So I think this is the first time I've had a chance to publicly speak out on that. And I want to do so by acknowledging just the great career and CEO tenure that Alex Gorsky has had, having the opportunity and the pleasure, quite frankly, of working with him day in and day out, specifically for the last a little bit more than 3 years now. No one comes to the office with more energy, with more passion for the business of health care as well as passion for the development of employees. And if you just look at some of the statistics, whether it's revenue growth or market cap appreciation, it's really been a tremendous run. So I certainly want to acknowledge the accomplishments of Alex. I believe he's leaving because of what I kind of said at the opening comments. Each of the businesses has really never been stronger. I say that collectively as well as individually, and he feels this is a very good time to transition. He's turning it over to a longtime Johnson & Johnson representative in Joaquin Duato, who very much has the same type of mindset, the same type of energy. They've worked closely together for better than 20 years. So you're not going to see great departures in terms of strategy. We're still going to value research. We're going to value the development and innovation of new products and new health care solutions that benefit patients and systems around the world. And we're going to focus on the long term as we always have. And so I think investors should expect a very smooth transition and the same type of performance going forward.

Okay. Great. Good. I guess second sort of bigger picture question is just, I would say, there's uncertainty in D.C. around what's happening with drugs and pricing and things like that. And I don't -- I wouldn't expect you to know what's going on because I think it's very hard to know what's going on at this point. But I think people are obviously interested in what your position as a company might be on that. So maybe if you could just comment on that as well.

Yes. So Matthew, this has been a lingering topic of discussion, I would say, over a couple of administrations now. And I would point people to the facts, specifically around drug pricing. When you look at our performance in Pharmaceuticals, which has been above market for close to a decade now, continuing to grow even through loss of exclusivity on some significant products, our performance has been driven by introducing new products to the market, new products that are better and elevate the standard of care. Over the last 5 years, we've had on average about a 5% price decline. Now a lot gets made of list price, but I would argue, and this is more than a Johnson & Johnson comment, but the industry -- the industry's gross to net or the discount and rebate percentages that were applicable to list price was about 26% 6 years ago across the industry. Today, that's better than 50%. And so some of the things like copay caps are something that we strongly support. To your point, it's hard to know what's going on why there's just a lot of rhetoric, but there's not a concrete plan to maybe a critique or comment to. But if you just look at the facts and why are people paying more for copays than they did 6 years ago where it used to be $10, $15 a month, now it's $75 to $100 a month, yet the discount and rebate levels went up. I do think we need to look at the system in its entirety. When the Affordable Care Act was passed, the industry did contribute a little bit of price concession, and we expect that going forward. Like we just completed our strategic plan, and we built in that price decrease going forward. It's not what it was a decade ago. We can kind of rely on some price appreciation and build that into our plans. So we're acknowledging of it. We want to be part of the solution. But I do hope there's a grounding of facts and what is actually going on and transpiring in the marketplace.

Great. Great. Yes. No, perfect. Maybe a good place, and we can bring Mathai on this as well, is just to think about sort of outlooks across the businesses. Obviously, you're talking about how you're feeling good about them, but we've also had -- COVID goes up and comes down, and we're seeing continued waves. And I think a lot of people are just sort of uncertain about how that plays out, especially throughout the second half of the year. So maybe just be willing to make some comments across each of the businesses and sort of the outlook through the second half.

Yes. So let me briefly comment on the businesses, and then I'll turn it over to Mathai in terms of the overall state of COVID-19 and how vaccines may or may not play into ending the pandemic and making it more endemic. With respect to consumer business, it's hard to look at any one quarter and say that's representing good or bad performance. We tend to look across all of our businesses versus 2019 because we think that's much more representative of what the steady state should be. But Consumer, with their focus in self-care, which is over-the-counter medicines, as well as Skin Care, so NEUTROGENA and AVEENO, were doing extremely well. We expect to grow at or above the market this year. And what I'm really pleased about that team has done a tremendous job with Thibaut Mongon's leadership to improve operating margins. About 3 years ago, we were below the competitive set in a significant way. We are now upper quartile based on some of the efficiencies, focus and improvement we've done there. With respect to our Pharmaceutical business, it's hard to think of a better business right now in the industry. We've had 10 years of better than above-market growth. We continue to work through the loss of exclusivities and not have that boomer bus cycle that is common to many businesses. And I can tell you, again, we're excited about November 18 with respect to the pipeline that we're going to be able to demonstrate not just on a typical time horizon through 2025, but actually a little bit of a preview into the second half of this decade and just how strong that portfolio is. The last time Mathai the team had a chance to talk about our pipeline was 2018. It was very strong and well-received then. I think it's even stronger this time around. And then lastly, Medical Devices. That's where we had our most significant impact due to COVID-19, elective procedures being curtailed. I would -- I do want to complement and applaud health care administrators around the world in health care systems, how quickly they adapted to make sure that their businesses remain viable, but also that important solutions and therapies and procedures were being done for the state of health care. We are seeing a little bit of a slowdown right now as many of the participants in your conference have commented to over the last 1.5 days with respect to the Delta variant on the rise. We do think that's very manageable. It's certainly in terms of our outlook for the business overall and that those procedures aren't going to go away. They're just going to be delayed. Whether they come back in the fourth quarter or first quarter, it's hard to say. The one interesting note that we're starting to see, though, is really, I'd say, worker shortage within the hospital systems that's becoming a little bit of a new dynamic. And it's not due to stimulus checks or anything like that. It's really due to worker fatigue and vaccine hesitancy, whether it's beyond the part of the patients or some hospital systems that are now mandating it where health care workers decide to make a personal choice. So the procedures aren't going away. The demand is there from what we hear, but it's tough to have technicians and nurses fully staffed in order to accommodate the influx of demand. But let me turn it over to Mathai to give you kind of the landscape of COVID-19 and vaccines and how they may play and maybe even a little bit about the data that we've got coming out in the next couple of weeks.

Sure. Yes. So on vaccines, generally, just if you zoom out, there has been a steady climb in vaccination rates in this country and all over, which is really good news. We have seen this Delta variant come in. And the reason it's had such traction as a virus in this country is that some of the vaccines have waned a little bit in their effectiveness. So what's happening right now in full partnership with multiple parts of the U.S. government, namely FDA, CDC and others, we're basically going to be introducing boosters into the system. And when that happens, the data -- our own data and others' data are that you get to an even better place from a protection standpoint, immunological standpoint than you did after the first vaccine or the first priming regimen. And so we're in a situation where we're going to feel a lot more comfortable and doing things that we all want to get back to doing after I think we go through a wave of boosting and a lot of people are boosted, which I'm hoping is in advance of the winter season this year. Our own data, like -- so I made some general statements, but our own data is pretty interesting in this regard. We put out information on publication and through other channels a few weeks back where our data -- our vaccine distinguishes itself in a couple of ways. It is a very durable vaccine. So out of 8 months, it hasn't waned at all, and that's very interesting. We will be putting out data in the coming couple of weeks or imminently that show a further cut of that information from a clinical protection standpoint and using the largest real-world evidence study that's ever been done. And I think everyone will find that really, really good information when we put it out. But that's a very, very important element. And secondly, we put out data a few weeks back that you get all the advantages of durability with a virally vectored vaccine, this Ad26 vaccine. But there is a risk always that the boosting might be blunted. And here, what we showed is a tremendous boost, 9 to twelvefold boost on giving a second dose at 6 months. So we think we can get people with a second dose here to a very high level of protection that lasts a very long time. And that's something really to look forward to not just for our company, of course, but for recipients of the vaccine.

Okay. Okay. Great. And then maybe just while we're on this topic, could you maybe talk about your view on sort of efforts around global vaccination? Because obviously, many of the Western countries have been able to achieve high levels of vaccination, but many of the other emerging market countries have not. And I think your vaccine is a significant contributor to a lot of those countries. So maybe just give us a little bit on that.

Absolutely. This is a very, very important point. I think it's been said that we're not entirely safe until the world is vaccinated because variants develop wherever and mobility is such that variants can come in. So we, as Johnson & Johnson, have been very committed to providing vaccine through various channels through Gavi and COVAX countries where we've made pretty substantial commitments of vaccine supply. We're manufacturing in parts of the globe where that distribution would be easy, including in India, in South Africa. We recognize that the advantages of a single-shot vaccine we're tracking -- in regions we're tracking is more challenging, is very important. We understand that our vaccine being able to be stored in just a regular refrigerator for up to 6 months is a tremendous advantage, and vaccines that are a lot harder to store or use basically are extraordinarily difficult to use. So -- and the data that I just cited a few minutes ago on the strong and stable response that the vaccine gives especially to severe end points where it's hospitalizations and death, that's all very comforting on what we'll be able to do for the world. So manufacturing is the name of the game, and we're committed and confident about being able to supply a lot both this year and well into next year.

Okay. Great. And Mathai, while we're sort of talking about this, maybe you -- if you're willing, give us a little bit of a preview on what to think about for November 18 in terms of what people can expect to see.

Yes. No, this is good. And it's November 18, that's the live day. And just to note, November 17, we'll be putting out a lot of rich data, and I encourage everyone to take a good look at that. And we can have a good conversation then on the 18th through various Q&A panels and discussions. So Joe teed it up very nicely. Like the Pharmaceutical business is going extraordinarily well right now. It has been for a decade. It's a confluence of things that gives us confidence that this will continue for another decade and beyond. And part of it is this exceptional desire that we have to win and win for patients. So every project -- this is a problem with many organizations, but every project right now has looked at through the lens of, is it sharply differentiated and will offer extreme benefit to patients? Is it going to transform a life or not? And so if the answer is no, then we'd rather invest our dollars elsewhere, even in cases where one could draw a profit of continuing. So that mentality that's shared by Jennifer Taubert, myself, the company as a whole has stood us in good stead for a long time, and it will. Second, we're going to be unveiling a series of products that we certainly haven't kept veiled intentionally but are just not fully appreciated by the community. Some of these are in oncology, Cilta-cel, our CAR-T product; this product called RYBREVANT in combination with lazertinib for non-small cell lung cancer, extraordinarily happy with that; a whole strategy and approach into bladder cancer that's through localized therapy in combination regimens that include a systemic component as well. These therapies can achieve our aspiration to get closer and closer to cure. And so as an organization, we'll not stop working until we get to that sort of outcome. In the immunology space, we see -- we're going to highlight several products, but one of them is going to be nipocalimab. This is the FcRn antagonist that -- the name of the game here will be about understanding the diseases that we're in so that, a, we can tell what portion of those diseases are truly impacted by autoantibodies versus other parts of the immune system and identifying the patients appropriately, the diseases appropriately that we can tackle; and b, being able to operationalize in a variety of diseases that the industry is not accustomed to. And so we're feeling confident in both regards there, and we'll share some of the reasons why and our outlook on November 18. In the vaccines area, so we talked about COVID, but we're extremely enthusiastic about our RSV vaccine, and we'll share more about why there. But just a brief background on that. There are competitors that have made a big deal of beginning their Phase III program on the heels of a challenge study, and that's good. We have completed an entire very large Phase II program that is very compelling. And we haven't disclosed the data yet, but I'll tell you, it's very compelling. And that's what allowed us to kick off our large Phase III program as well, and we're going to be a very competitive RSV vaccine. And there are others. And so there are a variety of products, probably a dozen, 15 products that you'll see that were, again, not intentionally veiled, but we'll describe them in full, so that the community can appreciate what's happening in the next 3 to 5 years, yes, but also well beyond that. And we're using a strategy right now of biology first unmet need. So we marry up where we think the biology is headed and the unmet need exists in the most precise way we can. Always true. But in areas where we will create regimens, we will create the whole of the therapy and have it in an area that not everyone is in, so we're more apt to be able to have some runway that we've seen, for example, with IMBRUVICA and DARZALEX and others, too. So this is the basis of our strategy. We are agnostic in important ways. We're agnostic about the modalities, the tools that we use. It may be a pill. It may be an antibody. It may be a complex biologic. It can be a cell. It can be a gene therapy. That's not -- we'll figure out as a company -- as a sophisticated company we are how to use those tools, but it's about the biology and the unmet need. And the other that's a cultural achievement over the last 10 or 20 years that I'm just incredibly impressed by the organization with is our agnosticism as to the source of innovation. There's tremendous pride in what we do, but that never turns into prejudice. So we are part of a very vibrant ecosystem. Because of the skills and the intent and the capabilities basically we have, we're often a partner of choice in many of the areas in which we are. So we're able to attract as partners, true partners, some of the best assets that are out there, and we'll continue to be exactly like that.

Okay. Great. No, that's wonderful. I want to tick through a couple of products that I think people have maybe specific questions on. But maybe quickly before we do that, Joe, if we could just -- I think one of the other sort of business people -- business pieces that people focus on is obviously some of the litigation issues. It looks like we might be starting to see the other end of some of those. So maybe if you could just comment on opioid and talc.

Sure, Matthew. So with opioids, I think it's a very fair classification. We are starting to see the end. There was some very good progress as you likely read in the news over the last couple of weeks in terms of the number of states that signed up for the, we'll call it, global settlement. We're now going through some of the municipalities, counties, districts to see what kind of participation rate they are going to engage at. But overall, we're very pleased, and we think the amounts that we reserved for in the past will cover any of the opioid litigation, not just current, but anything that would be out there going forward. This should be an end to that. With respect to talc litigation, again, I'll stand by the years -- really decades of science by independent parties that concretely confirm there's no link between ovarian cancer and talc. That being said, we were very pleased with the Daubert hearing of the multi-district litigation, which really curtailed a number of the theories and even testimony that the so-called scientific experts from the plaintiff side could put forth. None of our testimony, none of our scientific experts were curtailed in any manner. And we'll have some of the first cases in the multi-district litigation coming to trial in the early part of next year, I would say, first quarter, second quarter. So we'll play that out. I would say with all litigation, we certainly look for those opportunities to find a reasonable party on the other side because we do appreciate that there is investor uncertainty around some of these topics, but we also want to be good stewards, specifically when the science supports the theory that we're trying to defend.

Okay. Perfect. Mathai, I think there's a handful of things. Maybe we could start with Cilta-cel. Obviously, you've seen your competitor, Abecma, launch. And I think people have been surprised by the demand there, but also maybe a little bit surprised by some of the supply issues they're facing. So maybe just give people briefly your outlook on the market and if you can confirm that you feel good about your supply picture.

Yes. So first, let me comment just on the product, Cilta-cel. Cilta-cel has some of the best data I've ever seen in my professional career associated with it. These are late-stage multiple myeloma patients with now a depth of effect and a durability effect that's unmatched among the approaches to multiple myeloma, including other BCMA CAR-T cells that we're aware of. So that's one. And two, we know that the manufacturing of such products is nontrivial. It's not like a monoclonal antibody, more complicated than that. And we've been preparing with an outstanding internal team for exactly that. That said, there are global supply issues because of COVID with essential components, bags, kits, lentivirus. So these are components that are common to all the companies that do have some impact, but we feel confident that we have plan Bs and Cs because we knew this was in place that we've been implementing right now so that apart from -- we will intentionally, for medical reasons, go through a launch where we want to observe what's happening. We want to make sure that in a real setting that our therapeutic is being well used. But we do not have any intention of letting supply get in the way as the product settles into regular use. It's too valuable for patients. It's too big a commitment for us to let that happen.

Okay. Great. And then another product -- maybe it gets a lot of airtime because you obviously have a partner here as well, but I didn't hear you mention Factor XI when you were talking about November 18. So maybe just -- I guess the key question for me is comment on your confidence in being able to have a better bleeding profile than the currently available agents out there.

Yes. That's a good question. By the way, I didn't comment on a lot of programs that I'm super excited about. And so if we had more time, we could -- and November 18, we'll have plenty of time. But there are many -- Factor XI, milvexian being one of those. So we're running 2 large Phase II studies right now, one in total knee replacement and one in secondary stroke prevention. The total knee replacement is versus Enoxaparin, and the total knee replacement adds milvexian on top of clopidogrel and aspirin, which is state-of-the-art standard of care right now. So the honest answer is we have to look at all the data and be able to assess where we are. But the data going into it are a combination of some other people's data on siRNA and genetics. So the genetics is worth dwelling on just for a moment. There's a disease -- there's a form of hemophilia called hemophilia C, [ it was in cat ], that is not well known. It wasn't recognized until that recently because people that have it don't suffer from these major bleeds. But they do have little like nuisance bleeds like where they're brushing their teeth or that sort of thing, but they are -- it seems like they are protected from some of the major clotting events -- thrombotic events. And so on the basis of that kind of data, there were numerous Factor XI programs that were kicked off a number of years back. A small molecule Factor XI inhibitor is a daunting task. And our partners at Bristol-Myers Squibb did a phenomenal job, like their team did a phenomenal job developing that, and we are proud partners with BMS in developing this asset right now. So we hope to have data in the not-too-distant future that we could talk about. But the basis of the enthusiasm is very high, and we're investing heavily in manufacturing and other elements about anticipating a successful outcome.

Great. Maybe one more for you. You talked about FcRn. Obviously, the first -- or potentially the first FcRn is going to come to market towards later this year. I think a lot of the companies have been pretty clear. There's a broad path in terms of number of multiple indications that you can develop these against. So I guess, for me, the question is, as you look at the profile of sort of the leading FcRn out there, how do you think about differentiation? And what's your view on how to compete there in terms of the data you need to generate?

Yes, it's a good question. Like with any competitor in our field, I always wish them luck, like ultimately, patients will win if they succeed and we succeed. But that said, we're confident around where we are because this is a long road. So Johnson & Johnson has had a tremendous track record with these kinds of complex programs. If you look back at REMICADE as an example, there are numerous indications to pursue there and how those were chosen and prosecuted is not trivial. Like it's a tremendous, broad effort to introduce a product of that type to the globe. And so we're confident in our ability to do that with nipocalimab. Nipocalimab right now has a very good profile. There's been a lot made, for instance, by one company over an albumin effect. And at the doses we're using, we see excellent effect without any of that unwanted side effect and the knock-on effects on lipids, et cetera. So that's not keeping me up at night. The place where I think and the team is very focused is on, as I said a few minutes ago, on deciding exactly which indications make the most sense from a biological standpoint and how to identify the patients within those indications that are more likely to respond than not to FcRn as a mechanism and then, ultimately, how to prosecute and operationalize both in the R&D phase, but then commercially into what is a very complex set of indications that range from maternal fetal type medicine to rheumatoid arthritis, like a wide span of like rare diseases and common diseases and how to go about developing it and then successfully commercializing in quite disparate types of markets. So there is where I draw a lot of confidence in how we're approaching it right now. It's a very comprehensive, very large program within Janssen.

Great. Great. Joe, maybe to finish this out, obviously, one of the things that people always want to know is capital allocation and specifically BD priorities. So maybe you could just give us a flavor for how the company is thinking about that.

Yes. Matthew, it's the same way. We've been thinking about it for quite some time right now, right? So if there's a strategic fit, there's some level of capability that we have. Whether it's scientific expertise or global scale, we'll look at opportunities. And then we really go to the next part of that question is, are we creating enough value to compensate shareholders for the risk that we're bearing on their behalf? We are, just as Mathai talked about, being agnostic to where great innovation comes from. We're agnostic as to where we might place those between the 3 segments that we have at Johnson & Johnson. We're looking for the best opportunities to complement our portfolio and leverage some of the skills that we have. So there's really nothing new there other than we continue to scour the landscape across all 3 of our business units, monthly meetings with management to ensure that we're looking at those opportunities that will complement our existing portfolio and solidify the future.

Okay. Great. Well, listen, Joe and Mathai, thanks for being here. Thanks for your comments. We very much appreciate it.

Thank you, Matt. Good luck with the rest of the conference.

Thank you, Matt.