Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Well, everybody, thank you for joining us for the next session of the Citi Healthcare Conference. This one, I'm very pleased to have with us, Ashley McEvoy from Johnson & Johnson. Ashley, thank you for joining us this morning.

Joanne, it's a pleasure to see you. Although I'm not there live with you, but I'm looking forward to that time. Thanks for having me.

Me too. Enough of the virtual stuff.

Yes.

Anyway, I do have to ask about what you're seeing in the current backdrop of procedures, because as earnings cycle has moved on, we're hearing more and more about calling the buying of the elective procedures. And I'd love to get your sort of your view.

Sure, Joanne. I mean I would -- I didn't think that we still would be talking COVID February 23, 2022. But as we enter year 3, I am -- I will tell you, I'm more optimistic when I look ahead at 2022. And I remind all of us before we were entering 2021, I don't think we fathomed that we'd have 3 different variants from quarter 1, and then Delta and then Omicron. So we did have a slower exit to 2021 in December and then in January, and I spoke a little bit about this, and that really was predominantly due to Omicron in Europe and then the U.S. I am starting to see improved recovery since that last time. I think at our trough, I used U.S. data in January. When you look at diagnostic procedures, we're trending flat versus the 2019 baseline. Typically, we saw that north of mid to high single digit all throughout 2021. And then surgical procedures at its trough were down about 10%. Now some were better: cardiac ablation, stroke, trauma. Some were worse: knees, spine. So I'm hoping from all the data that we're looking at that December and January were low points. And I'm already hearing a month post that, Europe is really opening up, and the United States, predominantly the Northeast and states like Florida and Texas, I think, California is a little bit more sluggish than the other regions, but people are preparing, Joanne, to really start to recover and start to get after that patient backlog.

One of the things we saw last year coming out of whatever we were in last December was a real pickup, almost monthly, March, April, May, before we had to worry about Delta. Is there any reason we won't see that type of recovery this year?

I think we're going to see a couple of things. Some of the challenges -- so the good news is that cases are coming down. The good news is that we have a lot more medical interventions to manage this virus. But I would say the pinch points, Joanne, that the industry's experienced is labor, obviously, is front and center. And that -- I don't think that that's going to be out of the woods in a quarter. I think that's a multiple quarter effect. I think there's some supply chain pinch points, as an example, that hospital systems are working through. There's blood supply. And then we're trying to stand up patient sentiment and get people to go back and take care of their care. And I think similar to what we've seen in the past 2 years where certain procedures, predominantly also a lot of the ones that could be done in ASC studies that are maybe perhaps a little bit more immune, I think they're going to -- the volume is going to take off. I think some cases that were less elective like trauma and stroke and cardiac ablation really started to be the pacesetter. And -- but I do think, given where we are now, if we can work through some of the labor challenges -- orthopedics are going to have to recover because there's such a patient backlog, and that's what a lot of folks are talking about not just for hips, but -- and not just trauma, but hips and knees and even spine. And so they have been laggards, but if I think of how we exit this year, I think that they're going to be picking up the pace.

Excellent. Is there something -- you mentioned something, which I've been struggling with, patient behavior. Has there been a change in patient behavior? And that's a big question because it could be anything from you're not taking vacations, who cares if your knee hurts, you're afraid to go out. How do you think about that? And how do you think about people sort of coming back out into the world?

I really -- I think all of us need to start to live life a little bit is what I would say around the world. But it's been -- none of us have been through this in 100 years. So we're learning as we go, Joanne, I would say. A couple of things, though, I perhaps get encouraged by. And that is the fact that front and center, health care has been, I think, permanently repositioned in consumers' minds around the world. it has been the unbelievable unifier and equalizer around the world. Two, the collaboration that I saw with customers during COVID around how to triage care, so their engagement, I think, is here to stay. I think consumers now, patients have basically said, "If I can do a telemedicine or a tele-op or post-op at home, I'm willing to go do that. And I'm not -- I don't feel as if I'm sacrificing care." And so from a patient expectation point of view, I think there's a willingness there, and I think that's here to stay. I think of how where patients seek care. We've seen emerging channels open up. In China, the Tier 2 and the Tier 3 cities, all of the day surgery centers being stood up in Europe, all of the ASCs in the United States. So I'm encouraged that there's a willingness and openness to really go to where you -- where care is best delivered. So those are just a couple. I do worry -- I mean, Joanne, I worry about the mental stability of our global population. Obviously, our customer base, the clinician base, nurses. We have to be mindful of mental and physical fitness in coming out of this.

Yes. That makes complete sense. While we've spent way too much time on the pandemic. Is there anything else you'd like to add to this section?

No, thank you. We're ready to go to the future. But we're cognizant, as I always say, it's not a linear line. And we'll go through it together. And patients are waiting now for us to really take care of their health care in addition to COVID.

Excellent. And this is a great segue to the big announcement last year was the spin-off of the Consumer division, which shines a bit more light on -- in you in medtech. So how do you see this maybe changing your marching orders or what you have the flexibility to do?

Yes. I mean, listen, I'm encouraged with the declaration that we made with the consumer health, and we want that business to thrive and really modernize, and are giving every ounce of energy to enable that. And then we pivot our attention as well as to what does this new co J&J look like. And we need to be super competitive in both verticals, pharmaceuticals and medtech. I would tell you, Joanne, the team at medtech right now is coming up on 4 years. So it's a seasoned crew. And we look at the following couple of things. We say, number one, the markets in which we compete -- medtech is a very attractive market. Despite COVID , the structural health of the market remains intact. We look at things like unmet medical need. We look at the state of technology and where is it on the S-curve. We look at the investment dollars going in. We look at total shareholder returns and PE values in medtech. It's an attractive market to compete, number one. Number two, I'd love for you to start to think of us as a growth company at scale. And we have been very focused on performance acceleration at scale. And we've taken our revenue performance from 2% to just shy of 4% as we exited 2019. We exited 2021 with growth of around 4.6% versus '19, so 70 basis points improvement. Importantly, when I look at our competitiveness of market share data through quarter 3, we grew or maintained market share in 8 out of 11, with 7 posting clear growth, that number 3 years ago was 1. It was a 4 in 2020. So having 7 be standout. And then I just think about the innovation agenda. And we want to make sure that we bring meaningful innovation that gets rewarded in the marketplace. And our team has been very focused on bringing meaningful innovation. We've doubled the value of the pipeline. I always look, Joanne, a couple of years ago, we had about 6 projects that were over about $100 million NPV. That's an important milestone. And we just had a portfolio to review this week, and we have 27 projects over $100 million in NPV. And really, at the same time, setting new standards of care. I think of what we're doing on cardiac ablation, and we're still [indiscernible] [ 100% ] penetration in that category. How do we make that procedure more standardized? How do we improve the evidence? How do we bring in different ways to cut the cycle time? And the team has really been working on that. And then I think of first-in-kind innovations, like what we're doing in vision on slowing down the progression of myopia, on what we're doing on the first-ever Acuvue contact lens with allergy relief. Let alone, what are we doing to really set new standards of care in lung cancer. And this is where it brings out the best of Johnson & Johnson. And lung cancer is the leading cause of cancer, and we get treated way too late because we don't get diagnosed early on. Through the acquisition of RS, we acquired a very differentiated technology, called Monarch. We've done over 12,000 cases to do a minimally invasive biopsy. We've submitted to the FDA. We're in trials right now through an acquisition to ablate the lung lesion, Joanne, and also in active clinical trials to deliver localized drug effects. And that's going to make a major change in lung cancer survivors around the world, and we're taking that to endourology with an ambition to go to other minimally invasive areas of interventional oncology. So that's just to name a few. And last, obviously, we are in robotics. We have done over 1,500 cases with VELYS, which we launched in July of last year. It's approved in 4 to 5 countries. It's a very capital-efficient, simple procedure. It allows personalized care. No CT scan, no x-ray. You don't have to have an additional tech. We get very strong customer feedback around it's really enabling them to get a more precise fit. And we plan to take that technology into hips, into shoulders. I talked about Monarch. I was just with the Ottava, our soft tissue team a month ago. They are making very good progress of a multiple generational release on our soft tissue robotic offering. And while, yes, I would love to have that in the market today, I have to be patient with transformative innovation and know that this is really a decades play ahead of us.

So I can now go in many different directions because you've mentioned, I don't know, a dozen interesting projects. But I do want to spend the time a little bit on Monarch because it gets to one of the things that came up last fall, that in some ways, leveraging the now, I don't want to call it marriage, but partnership of medtech and pharma. And that's a great example, I think, of that. So play that out a little bit for me and then maybe think about other ways where now that it's 2 silos in the J&J house, how they can work together.

Yes. I would say -- I mean, first, let me just go back to what you should expect of us, is that we have very competitive benchmark performance in our pharmaceutical sector as a stand-alone and our medtech, and that's what we're chartered with. The fun begins also around what could we collectively do dinner -- different to solve the 5 leading causes of mortality in the world, I say, like cancer, cardiovascular, respiratory health, traffic accidents, stroke. What could we do? I think our lung cancer is the most visible to the world. So I'd like to say, one, that is a leading cause of death. It has a big, huge unmet need. We're really agnostic of what the intervention needs to be -- so we really look at it and say, how could we -- and I have to give a huge acknowledgment to Bill Hait and the team and our oncology team and our robotics team, how can we intercept disease before it sets in and you're in stage 3, stage 4. And that really is the thesis. And I think that we have a very live use case in utilization right now, Joanne, of getting minimally invasive lung biopsies to let you know, do you have cancer or not. And two, actually dispersing either through very localized ablation or localized drug therapy to manage lung cancer. And that changes the entire standard kit. We're looking at that as examples. We're assessing other areas in bladder, in kidney. Again, can you take the minimalized fashion to go get a diagnostic and have a very precise localized effect either through energy or through localized drug that can really change the standard of care. Now we're also looking at it in eye health. I mentioned that we have Acuvue contact lenses, which also has an antihistamine on that for itch relief of allergies. So we work closely with our Janssen colleagues. As you know, they're in trials right now for a back-of-the-eye innovation, which also takes a medical device to get you access to the right anatomy in the eye. So there's a beautiful collaboration in that regard. But I also kind of take a step back and say those are the 5 leading causes of death. What are the enabling capabilities, Joanne? We're all using data science. Coming in out of COVID where there's a labor crunch and a supply chain price, how do we use the breadth and depth of Johnson & Johnson to procure supply in today's world. How do we stand up digital capabilities to do remote clinical trials, to train our sales forces to do telemetry with physicians. Those are common capabilities used within both the pharmaceutical sector as well as medtech.

Sorry. So there's more to come is what I'm hearing you say?

I think so.

Okay. Good. One of the things on the last earnings call that really stuck out for me and many investors was a little bit more, I don't want to say aggressive, optimistic might be a word, on M&A as it relates to medtech. And could you maybe -- I mean, other than the obvious, what it means, maybe give us a little bit more background on how you're viewing this and the language shift?

Yes. So you picked up on that, Joanne. I'd say, listen, M&A has always been a really important value creation lever for Johnson & Johnson and J&J medtech. And maybe I'll talk a little bit of historic and what we're focused on now. Let me kind of start with something that doesn't get as much attention, which is in the medtech market, having close proximity to the ecosystem in the venture community and the start-up so that we can nurture all the ingenuity and pioneering spirit has always been a critical part of our business model. We've deployed over $1 billion over the past decade through our Johnson & Johnson Development Corp to invest in the ecosystem. And we nurture that to a certain part. And then what we do best is spotting that and nurturing that, investing it, and then bringing that to scale. And we have numerous examples on our current portfolio where that has been very value-creating. We've deployed $10 billion of capital over the past 5 years. A chunk of that went to access eye health and to get into the #1 procedure done around the world, which is cataract, which has amazing outcomes and restores sight. It gives patients that wow effect. So we'd like to be in the areas that have unmet clinical need. That business is going to be in a nice growth curve. We've been growing market share in vision surgery. So I think that we can get that business to high single-digit growth. And then we've obviously deployed that into robotics. That's where Monarch came from. That's where our Ottava came from. That's where we put Verb and RS together. And then we've also invested in adjacencies like neurovascular business, which is adjacent to our electrophysiology business, which has been growing double-digit for the past 3 years. So that's been a little bit of historic. And then we look at, Joanne, where are the areas that have highest unmet need, clinical need, our fast-growing end state markets that we can have some sort of leverage given current footprint. We prioritize that versus just pure white space because we want to be able to have differentiation and sustained differentiation going into the future. We're obviously looking in our strong and very competitive EP business and neurovascular business, how do we have a stronger footprint in cardiovascular and interventional cardiovascular peripheral interventional. We also, as I mentioned, in our Ethicon franchise, with the advent of miniaturization and navigation and AI and ML around how you can get lifetime data to change surgeons' skill and judgment and access difficult-to-reach anatomies and then potentially actually add therapy to that. We're very interested in interventional oncology. And then we also do tuck-ins, like we just did the past 30 days in a fast-growing adjacent space in trauma. We're the world leader in trauma. We just bought our elective foot and ankle business in Memphis. And that market segment is growing 2 to 3x the category average in trauma.

So for future, should we think larger? Or should we think more tuck-ins?

Yes. I would say it's always going to be a combo of both. I mean 90% of our M&A have been less than $1 billion. I think we've done a lot of those. I think you'll see us -- our key focus is really around access to the highest growth segments that are going to affect patient care and have a materiality effect on our growth trajectory going forward.

Shifting gears a little bit. A lot of people know the Johnson & Johnson name. But if they were new, they woke up this morning and they went, "Oh, let me hear Ashley speak." What are the key brands or key products that you're like, these are the things that drive the revenue.

Yes. I would say, first of all, we have over 100-year-old trust work under Ethicon. And that business is a strong foothold and pioneer in surgery. And they are leading the world in open surgery, which are 50% of the cases, in laparoscopic surgery. We're now live in aluminal surgery and will be in robotic surgery. So Ethicon, -- you know us as we use -- we have a world-leading suture business, which is used to put tissue back together again. We are right in our main surgeons doing very complicated colorectal cases to prevent bleeding and eliminate leaks so your body can heal. I would tell you, we're in very, very deep parts of science in Ethicon. I'll then come to a large world-leading orthopedics business. And we keep people moving. We're the world's largest trauma business. We put 306 bones back together again. As people tell me, every single bone fracture is like an individual snowflake. So I'm really encouraged with the new technology to allow that kind of personalization, 3D-printed joints, smart bone plates, which allow you to know when is your bone healing on your iPhone. These are all areas in our pipeline. Getting people moving in hips and joints and keeping your spines healthy, not just lumbar and cervical, but really acute deformity, saving people's lives. And that will draw your attention to the business of sight. We all want to -- sight is one of our most valuable senses, and yet it's woefully underpenetrated. Most folks in the world have not had an eye exam, and your eye exam is your window to 265 different health care conditions. So we're just early innings, 30 years in into eye health, but lots of unmet need of myopia, on keeping people spectacle-free, Joanne, in presbyopia. And making sure that they can see well into 100, age 100. And that I'll probably wrap with something around very along the lines of disease interception, and that really is the spirit of our electrophysiology business under Biosense Webster. We are the world leader. We have built this business over 30 years, continue to deliver double-digit growth. And really, it is the essence of disease interception to treat cardiac arrhythmias to prevent a stroke from occurring. And it's a very high science business, high customer intimacy, and that team really just understands unmet clinical need and the science. So that's a little bit about J&J medtech, second largest medtech company on its way to really be known as a growth company at scale.

And let's just spend a minute on orthopedics because that is an area that has suffered with the pandemic. How do you think about that recovering? And it seems to me you may have all the pieces of the portfolio, but I wonder what your view is on that?

I would say, listen, Orthopedics is one of the most important line items in a hospital system. And if you look at all the unmet needs of movement and demographics and opening middle class and people living longer, movement is the biggest side of mortality. And so our business is really in the business of keeping people moving. And I'd start with areas like trauma. We're a world leader trauma has been more insulated during the COVID. We are the world leader in trauma. We continue to gain market share in trauma. The team continues to innovate in the highest growth segments in trauma like nails or extremities. I'll then go to joints, into hips and to knees. Hips are a little bit less elective than a knee. So in COVID, hip procedures trended higher than knee procedures. We've been really a leader in the world of making that -- turn that into a day procedure, Joanne, and make it a much more customized, personalized procedure. So with the introduction of our hip navigation system, which is a software, which helps you do pre-op very differently in a modern way, which helps inter-op to get the precision on the cup and the pelvic tilt, to really improve the outcome in hip replacements. And we really are pioneering the anterior approach in hips, and we continue to grow market share in hips. Knees have been a lagger for us, and we -- I would say that they've been a lagger in terms of procedure recovery in COVID because they're more elective, there have been a delay. Now I think many folks are going to go get their knees repaired in the back half of this year and futures to come, there is a backlog. We have a, I will tell you, a world-leading knee implant under ATTUNE, unbelievably, study. We now are participating, Joanne, in the faster-growing segments in knees. So if knee, typically, primary knee is around 3% growth, our revision knee and our cementless knees are 2x that category average. We now have a full portfolio. And we have a robot, a robotic offering, a digital. In VELYS. We've done, as I mentioned, over 1,500 cases, very strong uptick on VELYS. And we plan to take that kind of model of VELYS insights and navigations to hips and to shoulders and to spine.

Okay. Do you want to quantify the backlog or -- do you want to go there?

Well, I guess the best example I'd give is we just got a letter from the NHS from Lord Prior, and my goodness, there are like 6 million patients on backlog in the U.K. And over 380,000 orthopedic patients waiting more than a year. And we were just asked around how can we free up the backlog of patients who've been on waiting list for 2 years to get that through by June this year. That's a big challenge. And then folks that have been on a waiting list for 1 year by March of 2025. So I will tell you a couple of things. I would say labor is probably the gating item, Joanne, related to orthopedic procedures. Nurses and technicians, there's been a big shift in the sites of care, which is here to stay. There's been a big shift in using digital solutions to improve that episode of care and to do more telehealth recruiting upstage to get patients into the patient funnel and then to do follow-up care and to free up capacity and time and labor, I think that's here to stay. And then quite frankly, it's around just making sure -- I think the state of technology is available, and I think that the supply is there. That's the one thing that we've been paying close attention to is to really prepare that we've got very strong business continuity to say yes to when all those procedures come back.

Excellent. I want to shift a little bit to Vision Care. I mean I think we just blanket Vision Care. It's got to be impacted a little bit. There's contact lenses. There's your cataract franchise. You mentioned myopia management. Pull that apart a little bit for us, please? And how do you think about that?

Yes. I mean I would say vision is, first of all, at large, look at the total, including spectacles, it's like an $80 billion market, which we think should be growing, in a post-COVID world, around 5%. We think that we can have the capability to really treat consumers from birth until the end of life. And it starts with early on, slowing down the disease of myopia and the progression because Asia has a significantly high amount, near 75% of children in China, as an example, are high myopes. And left untreated, that can result in retina detachment. So the value of sight, we believe, is precious for all consumers around the world. And so we start with myopia, and we enter with -- contact lenses are a business of self-esteem. And how can you restore that, kick in the step and allow people to do their sports or do -- perform on stage or perform surgery with a frictionless experience. And then we have the aging eye where many of us have a little bit of difficulty reading that dinner menu. And we don't always want to have our readers if we're going out to dinner. And so how can we provide a solution in contact lens. Allergy season, people stop wearing their contact lenses. How can we keep them wearing lenses during allergy season? Dry eye is one of the side effects of the digital experience that we've been having for the past 2 years. How can we have a solution on dry eye? Unfortunately, the vast majority of us are going to have cataract surgery because your lens atrophies over time. And versus get that at 80, many more folks are getting that at 55, with a shelf life of to 100. So how do you get back that precision vision, peripheral vision, near, medium, far? And then retina diseases. We have an active program right now with Janssen on restoring sight with folks with complex retinal diseases. So I really think that we think of that patient continuum from birth to end of life and how can we -- using patient insight and customer insight and very differentiated technology regardless of intervention, really create value.

So in the cataract area you launched recently, 2 new intraocular lenses. And when you think about introducing new products to the market, give us a little bit of background on the development cycle for, at least in Vision Care right now.

Yes, Joanne, I would tell you that team has done a very nice job, particularly over the past 18 months, of launching some first-in-kind innovations under the TECNIS family. TECNIS has huge equity with ophthalmologists around the world. It's a 20-year-old brand. It's a fine art and science, I will tell you, getting a permanent implant in your eye. For the most part, getting the optics right, getting the comfort in the material right, getting the precision accurate. And again, relative to perhaps other procedures, the patient satisfaction and the outcomes are among the highest about many different medical procedures. So it was really important that we look at first, where is the highest volume, and monofocals around the world are the most commonly used intraocular lens. And so the team launched the newest innovation in 20 years under Eyhance. It's the fastest-growing brand right now in monofocals very strong clinical performance, very strong global uptake. The surgical vision team then launched a new innovation in the premium intraocular lens for presbyopia. And those are areas for presbyopia or for astigmatism. That category grows 2x to 3x the global category average. It is a premium-based intraocular lens. Again, it's an implant, permanent implant. And the optics and the lack of trade-offs you have to make from near, medium and far vision, had very strong clinical performance and as a result, has had very strong adoption. That team has been growing market share for the past 5 years. And I really expect as procedures come back for them to continue to lead.

This is another example of patients coming back. I always think cataracts as an elderly procedure. But you're right, it's moving down the curve. Help me think about that dynamic?

I think this is [indiscernible], and this is why I was so excited about the future of medtech. I mean, this is what we always say we want to reimagine the future help today because technology has gotten so much more advanced than it was even 5 years ago. And the business model has really evolved. So a lot of -- first of all, folks are not waiting at age 80 to go get their cataracts. They want to be spectacle-free in their 60s. And so they're willing to go get -- it's a day surgery. It's done in a couple of hours, your home, for half a day. You can see within 24 hours again. I mean the before and the after, there's nothing like experiencing that wow effect, and that creates friends of family who say, okay, I'm going to take care of my eyes, as one example. We hear the same thing, I'll tell you, in hip procedures. People wait to go get a hip replacement and they deal with the pain and the lack of mobility. And then they look at the procedure then the outcomes are pretty compelling. And so I get encouraged with the patient experience going through a modernization, how we can give their fears at ease and release that anxiety that has been pent up in COVID, ensure the safety and the responsibility in the care environment, whether that be in the ASCs or the Tier 2 and Tier 3 cities, making sure that our surgeon base -- the one thing I will tell you over COVID, they have skilled up on education, leveraging technology, whether it be new evidence-based guidelines, in stroke management, whether it be new robotic offerings and how to have a very personalized effect in a knee repair. I give huge credit to our clinicians who've used this downtime to optimize their work environment, their patient experience, their flow with supply chains, and quite frankly, how can they -- rather than do 4 cases, how can they do 6 cases in a high-quality day to work through this backlog.

So Ashley, we only have a few more minutes. I don't know really where the time goes. And -- but I want to ask the question that when you and I are sitting here talking, hopefully, live next year, what are we going to look back and say, "This is what J&J medtech has achieved?"

Thanks, Joanne. Well, we can't control the virus. So I'm going to be an optimist at that. We're getting better at managing variants. But I will tell you, I see it's a market in recovery. I think we'll be -- I think we'll be satisfied with the growth curve, again, pending no major shifts with COVID. I think with J&J medtech, you're going to see us continue on that performance acceleration. We have, again, aspirations to go get to be above that 5% market performance on revenue. We'd like to beat that. You're going to see us continue to improve our market share and our competitiveness. We had 8 out of 11 holding or growing market share. I expect that number this year to be 10 out of 11. And then you're going to see us lead in the innovation cadence. We had 20 new products last year. We doubled the value of the pipeline. We gave an ambition to continue to increase the value of the pipeline and keep up that pace. I talked about 6 of those $100 million NPV products, now 27. Some of those are going to be coming into the marketplace this year. We're in robotics right now. I'm encouraged with VELYS. We're going to launch in more countries. We're going to improve the number of cases done. We're getting very good feedback on utilization rates. We're continuing to innovate in life cycle managed Monarch in lung cancer and in endourology, and we are absolutely committed to bringing together -- bringing to the market a very competitive soft tissue under the Ottava brand name. So stay tuned. And we just want folks to -- quite honestly, huge gratitude to health care professionals and hospital systems and everybody in our plants and in R&D who -- and in the field who -- health care is a calling, Joanne, as you know, and these folks were called to serve, and I couldn't be more proud of them.

Excellent. Well I look forward to that conversation and our pathway from here. So Ashley, thank you so much for joining us today, and we'll talk soon.

Thanks so much, Joanne. Have a good day. Take care.

Bye-bye.