Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Okay. So I think we're back. Thanks, everyone, for joining us. Sorry for the late start here. We had a little -- a few technical issues getting everyone together, but we're here now. My name is Matt Miksic. I cover medical devices here at Credit Suisse. And I'm very pleased to have with us today, Ashley McEvoy, Executive Vice President, World Chair of J&J's Medical Device business. Ashley, thanks so much for taking the time to join us.

Yes, it's a pleasure to be here, Matt. Thanks for having me.

Pleasure is all ours. So I thought it might be a reasonable place to start. It seems like where every conversation starts this quarter is just around the environment. You obviously were one of the first companies to talk about Q3 and talk about what you were seeing, which turned into, I think, a pattern for many other companies that followed. But things have changed since then. I wonder if you could maybe talk a little bit about what you did see in the third quarter and how you're thinking about the rest of the year, things like staffing, things like COVID pressure and so on.

Matt, I would tell you, within this, it's remarkable, 22 months into this pandemic, I have to first start with just a huge acknowledgment to the resiliency of our health care systems really all around the world and their dedication to service of treating COVID patients but also non-COVID patients. And I think, if anything, health care has been permanently repositioned in everybody's minds of being an investment in care. And so I think that we're all going to benefit from that coming out. As we talked about in quarter 3, clearly, the Delta variant had an impact on procedures and how hospital systems were really triaging care. We saw a dip in -- started to see in the United States a dip in July, maybe down 1%, then August down 5% on procedures relative to 2019 baseline. Probably at its dip, it was about down about 10% in September. We are starting to see, as we exited September, early October, that to improve a bit to maybe down single digit procedures relative to 2019 baseline. We also keep an eye on how are the diagnostic procedures to kind of start the patient funnel and we're starting to see that recover in a tick-up as well in the U.S. And we are anticipating in quarter 4 continued recovery. I never say that it will be a linear line because staffing challenges are still very real all around the world, and supply chain challenges are very real all around the world. But I think we've known the resiliency of our hospital systems. And quite frankly, just the mission to go continue to deliver care to patients who've really been putting that on hold.

That's super helpful. The -- so maybe to talk a little bit about some of the challenges you mentioned, continue around staffing and then also maybe some of the ways that the health care system has responded. You talked about triage, information stream surge, but then also sort of rebooking patients to alternate sites of care using the ASC, using the outpatient clinic, maybe just flushing out the surgical schedules in those settings because that's where cases can get done in the near term. Can you talk about what you've seen and what you expect in those -- with those 2 kind of counterbalance factors?

Yes. I mean, again, maybe I'll talk about the U.S., but I'll also give some analogues to around the world because it's very different depending upon what geography you're in. In the United States, clearly, a big shift of care to ambulatory surgery centers. We know that they're used predominantly for cataract surgery, ophthalmology, and we're starting to see more joint reconstruction moving into ASCs. You've seen a lot of the industry work on making that a very efficient, predictable procedure in an ASC setting. They've done -- I have to say hospital systems in the United States have done a very adept job of managing staffing from overtime to temporary staffing to how they use different floors within the facilities to dedicate to COVID patients and non-COVID patients. You can see certain procedures that are more insular like our cardiac ablation. Cases which happened in the cath lab have really rebounded much more expeditiously than joint replacement surgeries as an example. Bariatric procedures are starting to come back. Colorectal procedures are starting to come back, so learning how to manage through that. I think they've done a phenomenal job of using telehealth to change the pre-op experience and to change -- get them out of the hospital sooner on post op. There's a lot of new legislation and policies being under consideration to allow at the broader adoption of telehealth and a broader adoption of new sites of care. If I go to China as an example, the tier 1 cities have done a very, very strong job. We've been doing a lot of work with the tier 2 and the tier 3 cities. Just last week, I had a virtual visit with 6 different cities within China and we're in operating rooms and in tier 2, tier 3 cities like a [indiscernible], and they're doing a very strong job again of triaging COVID patients and non-COVID and also starting to use a lot of the kind of digitization of med tech tools to allow more efficiency and procedure flow. Very different than -- I was in the U.K. 2 weeks ago, spending a lot of time with NHS. And there's a significant amount of backlog there, as I talked about, over 600,000 orthopedic procedures. So as an example, 5 million people on the waiting list. So that's not going to be brought down in the next couple of months. It's going to take a couple of quarters to work through that.

Sure, at least. Okay. And maybe just to -- because we could probably spend the rest of the time talking about staffing and talking about the environment, but I think we've heard a lot about it. Maybe one just question on staffing is everyone wants to know how does this get resolved. We're clearly living with it now and through the end of the year. Does this take us a year? Does it take 6 months? Does this take us well into 2022? Or does it take it longer? How do you think about or what's your best guess at how the hospital staffing issues get fixed?

Yes. I mean I wish I had a crystal ball, Matt I mean I can tell you, I don't think it's a couple of quarters. I think -- and it's not unique to health care. It's unique to -- health care is not immune to it. And if anything, though, I will tell you that our hospital systems are getting really adept at managing flow and managing prioritization on patient care and looking at different contracting availability of procurement of resources from full time to part time to borrowing folks in different countries, folks who speak French from maybe going to France, as an example, to go procure nurses. So I think that -- quite frankly, I think it's pretty remarkable how they're managing through this. I know in the United States, the vaccine mandate is starting to play out, so that's going to work its way through. And I also just think that it's remarkable how they are able to continue to deliver care even though that is a constraint. It's weird how 22 months ago, we thought we were going to have a demand problem, and now we're having a supply problem. And so now we just have to get back as the supply challenges are going to be worked through. It's not going to be 1 quarter. It will be multiple quarters or up to 12 to 18 months, I'd say. We also have to equally work on the demand side to get people comfortable to go seek care.

Got it. Okay. So maybe changing gears. I wanted to ask a question that we get all the time. And it's not so much how is the med device business going to grow this year kind of question, but more big picture question about the 3 pillars of J&J's business, if you will, consumer, med tech and pharma. I think how -- just simply, how do you think about the synergies? What would you point out if you were trying to explain it to someone as to why these businesses belong together and work well together or able to lean and pivot off each other? What were some examples that you would give?

Yes. I mean I think we saw one from an innovation, but one from also how you manage through a pandemic. We've really benefited from being holistically together. If we were a stand-alone med tech business, you saw our performance when procedures really slowed down in quarter 2 2020, down 30%. Folks, patients were still able to receive their prescriptions and still were able to procure care in that environment. So that was able to balance out. There was a big demand for products like TYLENOL as an example. So that rebalanced out the financial profile of Johnson & Johnson. Now I would take number two, how we collectively as an industry, but particularly in the world of pharmaceuticals and med tech, how we really digitize the customer experience and the patient experience around reaching out directly to patients to go procure care. My Health Can't Wait campaign, which we launched in 15 different countries. And similarly in our pharmaceutical, going to have patient communication to go do your follow-up appointment and a telehealth appointment with your doctor. Or collectively, how we trained over 7 million health care professionals in 150 different countries on COVID-19 protocols, but also had a responsibly stand back-up care. So a lot of that back-end technology is J&J technology servicing the biopharmaceutical industry as well as the med tech industry. And then I come to the world of innovation. And you've heard us talk about how we want to solve 5 of the leading causes of death, and oncology is one of those. And lung cancer, unfortunately, because it's diagnosed late, has some of the really poor mortality rates. And so if we can really intercept that disease,before it sets in, that is taking full advantage of the best of med tech on access in a minimally invasive way and the best of ablation technology and the best of pharmaceutical technology in a very localized, precise -- localized drug effective way that J&J is fully committed to, and that's an active life program and we're using that as a use case to say what could we do in addition to lung cancer, to bladder cancer or prostate cancer. So I think that we're earlier on that in those regards. But I think these are a couple of different examples where the collective value of J&J can really make a meaningful difference in patient care.

Fair enough. Okay. Well, it's another one we could spend a lot of time talking about, but it comes up all the time, so it's worth touching on. You mentioned sort of Monarch and advanced technology for reaching nodules in the lung for -- ultimately for -- potentially for treatment and ablation. Can you talk a little bit about -- pivoting maybe to the digital strategy elements that you have crossing over your various business lines in the devices? Maybe talk a little bit about how we should be measuring and seeing success in terms of Monarch and what you would point us to in the middle of next year, the end of next year in terms of your progress on, let's say, yes, this actually is they're ahead of competition and they're disrupting and expanding care into this unmet medical need, early cancer biopsy and treatment.

Listen, it's a really important question around the feature around how digital technology will change patient care. And we -- our mission is to make medical interventions smarter and less invasive and more personalized to reduce the variability in procedures to get better outcomes at a more affordable cost. And that's what we wake up every single day with that mission. And we invite the world in to help us with that mission. And 3 years later, I can tell you, we are now actively participating in this market. which is still a new market, even though there's had some market leaders who've had 25 years of a head start, relative when you look at over 135 years, this still has very low penetration. And we are live in robotic offerings via Monarch as an example, which is our first in highly differentiated and a intraluminal approach. Right now, it's for lung biopsy. We've done 10,000 lung biopsies. That's 2x the amount that we were a year ago. We've filed for approval and are working into clinical trials of using a local ablation technology to actually treat cancer lesions in the lung, and we're also moving towards clinical development of actually dispersing drug locally, in a localized effect. We've also just filed in quarter 3 with the FDA, our regulatory submission to go manage kidney stones. And if you look at the kidney stone management market, it's -- the TAM of that is quite larger than just the lung biopsy. And the efficacy rates of going to get a kidney stone managed is usually around 50% yield, you have to go back, and we're starting to see encouraging data around 90%. So very encouraging around kidney stone management. We have an ambition to go take that from kidney into kidney cancer as well as we're assessing bladder and GI and broader GU cancers for Monarch. The second I would say is we are in the market right now in orthopedics with the VELYS knee, and we've done over 400 cases to date. We've gotten very good feedback in the U.S. It was launched during the middle of when Delta came and reared its head, so it's been a slower ramp of utilization from hospital systems just due to the Delta variant. The ones that have been placed, our utilization experience is higher than we had anticipated, which is really good news. Customers are basically saying it allows precision, it allows a degree of personalization to use the arrays to really get the individual personal biomarker data to get the right implant and the right placement, speed, capital efficiency. So I'm encouraged with the early days of VELYS. It's been approved in 5 different countries. We have a software package that accompanies that to help with the pre-op, the inter-op and the post-op experience. And then we talked about soft tissue, and we are very committed to soft tissue. We bought Verb, we bought RS. Transformational innovation is a bit of a bear. And sometimes, you take 4 steps forward and sometimes, you take 1 step back. This is a program that we are experiencing some technical challenges. We have an expert team working on it. We're going to come out of this. We're going to solve it. We are going to be off our original timeline that we shared in quarter 4 last year. The team right now is seeing how they go beat that. So we did share that we could have up to a 2-year delay, Matt, on that on the soft tissue offering. And I will tell you that they are -- yesterday, I was with them all day, seeing them kind of tackle and solve, and we're going to come back with a highly competitive offering that's -- as fast as possible and also some medium- and longer-term releases that are going to offer even more differentiation. And then I kind of wrap that to say how in the interim, we're a world leader in laparoscopic surgery. How can we take some of the best of the digital tools available to meet that mission. And I use as an example one application is called C-SATS, which is a crowd-sourcing application where we've procured over 40,000 surgical videos from cases that are linked to 400 different key opinion leaders who weigh in and really rack and stack that case for the surgeon to understand how did the performance of that case do to the competitive set. How can you get better and intraoperatively, again, in the sphere of patient care. And that's a really good thing for patient care. So that helps to improve the skill and the judgment of the surgeon to reduce that variation.

Sure. Super important for those surgeons. It seems like they're more interested in watching surgical videos than they are looking at clinical trial data, which makes them quite unique in that regard, technique and efficiency and all those things. So back to the VELYS knee for a sec. Congrats on getting that out. When these things happen, we sort of look at them and say, "Okay, so they launched this kind of on time and that's fine." But these robotic platforms are a challenge, and there's certainly complex to get through clinicals and regulatory. So congrats. You talked a fair amount about it, table-mounted smaller footprints, I think highlighting maybe some of the efficiencies around time that it might add to your case and also talked about it being more suitable to an ASC over time. I'm curious, it's very early and you're in your sort of preliminary early parts of your launch, but is that where these units are planning their way at the moment? Or is this still you're gathering feedback and running your initial cases in more traditional surgical centers?

Yes. I think we started, Matt, again, with the installed base that we're working with getting them up to full utilization where it's higher than what the industry average is on utilization of cases per month than what we've seen. So that's encouraging. The adoption curve is accelerated than what we anticipated because of its instinctive use. It's quite simple to use. We are -- capital deployment during quarter 3 with that committee was challenged with Delta, so we're working our way to how we go scale that. We want to make sure that hospital systems that have VELYS are having an amazing experience first, and then we're going to start to scale. And we already have a good funnel that's well understood to go how we start to really say yes to that demand curve. I think also, just importantly, there is a global aspect to this. So in New Zealand and Australia and other -- in Canada, we are starting to also get good feedback on the uptick. And again, this is a market even like under 10% penetration in ortho, which is larger than where we are in soft tissue as an example. But I think that there's going to be a good role of not just knees, but hips and shoulders and spine, and we are very much focused on how we bring the best of hardware and software and system engineering and data science to really improve that episode of care.

That's great. Yes. And I think it's -- with so many things going on, they all start to kind of sound and feel like the same thing. But stepping to for a sec, you were really -- Biosense Webster was really the leader in, call it, advanced technology for AFib and mapping and ablation. And that has -- you've been sort of on the forefront of that market for forever; 15 years or something, maybe 20 years now. Monarch feels a little bit like the same thing. It's sort of it's breaking ground, applying technology in a new area. And then there's businesses, I guess, on the other side, traditional orthopedic muscle scale businesses, which have been around forever. I could say they're relatively mature in their sort of volume and innovation of implants and so on. And I'm sure folks are -- you said these were shifting their seats and we can say that, but the element there is just sort of capital and consumable business that we all seem to be kind of transforming into in these implant businesses. There's a dialogue with hospitals around a robot that uses implants, supports the more accurate, reproducible, more efficient placement of implants, et cetera, and that becomes kind of the combined conversation with hospitals. I mean when do you think you'll begin to be able to have those conversations like shoulder to shoulder and if that even never happens with some of your other competitors who were pitching at the same time proposals to hospital systems and networks around VELYS, and then maybe ultimately about 5. Is that a year from now? Is that 2 years from now? How should we think about that?

So let me first kind of go back to the origins. Today, I'm with our Biosense Webster colleagues in Irvine, California. And we have built a remarkable capability from Haifa, Israel and Irvine of really putting the best-in-class heart navigation mapping system with the catheter system. And to really -- for us, it's a great example of disease interception of stroke, of managing atrial fibrillation is the precursor of preventing the occasion of a stroke. And we've had a head start on that. We enjoy a leading market leadership position on that. And really, they have the most simplistic innovation strategy that can be leveraged to other areas like lung, we just talked about, and like some other areas of the anatomy that I'll talk about. But one is about locating the lesion, and that's about navigation and the mapping of the heart. And we're on generation 7 of that right now. The second is around deliver a better lesion, make it safer, make it more efficacious. And again, we're on like generation 4 of that. And then make it safer for the patient and safer for the electrophysiologist. Less fluoro, less time underneath -- from 4-hour procedure to a 2-hour procedure. And that very simplistic strategy and innovation approach has really enabled the penetration to get to up to 10%. We're still less than 10% of eligible patients to treat. So we still have a very bright horizon, if you will, on the S-curve in cardiac ablation. And we take a very similar approach to lung, as I mentioned, around diagnosis of minimally invasive treatment so that you can have a significant impact on disease interception earlier. And muscular skeletal, I would say, was at a latter part on S-curve if you think of orthopedics. And quite frankly, that's a reflection of kind of how industries are -- grow up a bit. And I think now that industry, it's well understood that the digitization and the data management and the ability to personalize is really -- is a good thing for patients. And so how can that be, in effect, more standardized. And I think that -- I think that we've been a laggard there as an industry. And quite frankly, [ the few cities where ] were the world's leading orthopedics, we didn't lead there. We were a follower. So if we follow, we have to have something that's differentiated. So we weren't the first generation end, but we will have a second and a third generation. And we are out now with knees and with hips. You asked around shoulders and spine, I think, within the next 24 months, you'll start to see solutions there. We do have solutions, as I mentioned, in China earlier in quarter 3, where we're the leading spine company, #1 in China in spine. We have a partnership with TINAVI in Spine, which is a robotics line company. There's really good feedback from spine surgeons in China. We are seeing how we roll out that technology to the broader portfolio, as an example. So this is not about 3 to 5 to 10 years away.

Got it. That's very, very helpful. So I have one question coming in on just back to COVID. You can't escape COVID, I guess, yet. But the question is, when you think about the impact on your businesses, and of course, the impact is different, but let's just say the businesses that are affected by COVID most,call it hips, knees, spine. Do COVID cases, the volume of new COVID infections cases, matter more? Or COVID hospitalizations matter more? And then I have one follow-up here also for the same person.

Yes. I think that we look at the -- we're all looking at the similar data. We look at cases, but we really look at hospitalizations, ICU occupancy, occupancy mortality rates. We look at all of the top hospital systems, the degree of labor challenges. We're always tracking patient sentiment. I think -- listen, we know that there's a backlog of patients waiting to go get joint procedures. So how fast that clears through, I don't know. Will it ultimately work its way through? Yes. Are we seeing that across? Yes. Are we seeing good partnerships and collaborations? Again, I was just back from the U.K., the NHS, 600,000 orthopedic procedures. I mean, they have over a year waiting list. They're really working with industry of how can we do this really efficiently and effectively in day surgeries. And I think a lot of the new technology can enable that. And just how you do scheduling and how you do their own staffing deployment to better tend to different procedures that are going to be coming back at a more rapid pace. And again, we're learning from -- again, bariatrics right now has started to recover at a much faster pace than joint replacements. But that could ebb and flow a little bit as they start to kind of plateau and then joint replacements would start to take over. So we're looking at all the different procedures, Every procedure has a different, I call it, gating pace. And I will tell you that when I think collectively of the year, you're going to see the market in double-digit performance versus 2020. And Johnson & Johnson 3 quarters in, were posting north of 5% growth relative to 2019, which is really good momentum for the business versus you think we exited 2019 of near 4% growth. So that's a nice healthy acceleration. As the second largest med tech company, we have significant scale. And I think 2022 and beyond, they -- a lot of these -- the innovation agenda is going to take. A lot of the investment in health care is going to take effect. We all have to learn how to do things more efficiently. But I think that there's huge unmet need in health care that needs to be tended to.

Sure. No, that's helpful. And so then the follow-up. And I think I see where this person is going, is thoughts on the impact of the sort of COVID bills, COVID therapies on trends. What happens in whatever it is, 3, 6, 9 months from now when we have higher availability of things, which is something that early in the pandemic when we host these calls with pandemic experts and try to -- this is before the cancellation of all kinds of live events and sporting events, back when we no one really, I think, fully -- not sure some people -- or many people didn't see what we are really heading into. But folks who had seen these things before did highlight to get this under control, you need, in the past, it was an antiviral, oral antiviral, that we can give the patient. They can go home, they can take this, they can stay out of the hospital, they can get better, and then they can go back to work or whatever. And that sounds like we're on the verge of seeing some of those things. The question is, what -- how do you think that would change the trajectory of getting back to the backlog and unmet demand that we're just describing.

Yes. Listen, I mean, we are very fortunate to have access to vaccinations as I would first start because I think the data has spoken at the ability to prevent hospitalizations and mortality. And we have amazing access in the United States. Not all countries have a similar access. And you can see, when there is high utilization of vaccinations, there's a direct correlation of recovery of health care and procedures. I give huge acknowledgment to Japan. They're over 70% fully vaccinated. We're still around the 57% in the United States. So that's where we're starting to see procedures to back up fast in Japan as an example. It's why Europe, a lot of the G5 recovered fast because of their high vaccination rates. So I think, yes, clearly, we'd love more folks to get vaccinated, but there are now other tools in our armamentarium to manage COVID and to really prevent hospitalizations, which is what the objective is. So I think that those will -- the access to those, the responsible usage of those, will have an effect on the rate at which procedures can be recovered.

Okay. So positive, I guess, hard to measure, hard to quantify, obviously, like many things in the [indiscernible]. So we're coming up on the top of the hour. I guess -- let's see. We did touch on supply chain and input costs. And we can spend a fair amount of time covering that again. But I was curious, maybe if you could talk a little bit about the success you've had around your strategic investment and sort of early stage sort of collaboration J&J hub type model that -- and maybe some examples if you could on where that's getting you connected to and getting access to sort of more leading-edge technology, disruptive technology like AI, machine learning, or whether it's new mechanisms or pharma, but more focused on devices. Any thoughts or examples you could share, what you're doing there?

I think we've had a very healthy balance on organic and inorganic innovation in J&J med tech. Organically, you heard me talk about -- we've had 17 launches to date, which is twice the number that we had last year. We've doubled the value of the pipeline. We have a $10 billion in pipeline. We had about $2 billion plus, in essence, materialized in 2021, and we've replenished all that for the long-range financial plan. We're in robotics. We have a very broad-based play. But inorganically, we have a really strong history. We've deployed about $10 million of capital. Year-to-date, we've done 25 different deals or partnerships. It showed up in areas like our eye health business with getting into myopia control as an example, a segment that's very nascent, huge unmet need of kind of preventing retina detachment later in life for children. You've seen it of a lot of different software partnerships. I mentioned TINAVI in China as an example. We have a lot of software partners that we're working on around the education, as an example, of training and qualifying electrophysiologists in China so that the procedure can have broader penetration. We've tripled the amount of certification of qualified electrophysiologists to do cardiac ablation with some software partners, taking that training from 12 months down to 4 months. And let alone what we're doing in the world of orthopedics. VELYS came through an acquisition. And we put the best of our robotic offerings with a very cohesive software offering to get live data and to make sure that you didn't have to have a CT scan beforehand, and that we're also working on what we call a J&J iOS, like a housed connect to hospital system, so they don't have to have 12 different ways to connect to Johnson & Johnson, that's cybersecure and has privacy. And that is the future. We're all going into that direction. It's around making sure that, I think, J&J med tech, given the breadth of our portfolio, will have many different rooms in the house, whether it be lung cancer or eye health or cataract surgery or electrophysiology, than perhaps other market choices. But we are going to have the backing and the strength of world-class cybersecurity and privacy and lifetime data.

Well, that's helpful. I know it's much too much to try to cover in any amount of detail on a session like this, but congrats on all the investments and the progress in the internal and inorganic launches. But I think we're out of time. We should probably take that opportunity to stop there. So...

Thank you, Matt. And I just have to give a huge acknowledgment to the J&J team and our customers. Listen, couldn't be more proud. Worked with really inspiring colleagues to never lost sight of serving our customers. And it's a pleasure and a privilege to say. So thank you. .

Thank you very much for joining us. Take care.