Johnson & Johnson

Good morning, and welcome to Johnson & Johnson's second quarter 2020 earnings conference call. All participants will be in listen-only mode until the question and answer session of the conference. This call is being recorded. If anyone has any objections, you may disconnect at this time. If you experience technical difficulties during the conference, you may press star zero to reach the operator. I would now like to turn the conference call over to Johnson & Johnson. You may begin.

Good morning. This is Chris DeLorphis. Vice President of Investor Relations for Johnson & Johnson. Welcome to our company's review of business results for the second quarter of 2020. I hope everyone is healthy and continues to remain safe during these times. Joining me on the call today to address Johnson & Johnson's response to the global coronavirus pandemic, along with our second quarter results, are Dr. Paul Stoffels, Vice Chairman of the Executive Committee and Chief Scientific Officer, and Joe Wolk, Executive Vice President, Chief Financial Officer. During the Q&A portion of the call, Alex Gorski, Chairman of the Board of Directors and Chief Executive Officer, and Joaquin Duado, Vice Chairman of the Executive Committee, will also join Paul, Joe, and myself. A few logistics before we get into the details. This review is being made available via webcast, accessible through the Investor Relations section of the Johnson & Johnson website, at investor.jnj.com, where you can also find additional materials, including today's presentation and associated schedules. Please note that today's presentation includes forward-looking statements. We encourage you to review the cautionary statement included in today's presentation, which identifies certain factors that may cause the company's actual results to differ materially from those projected. In particular, there is significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. This means the results could change at any time, and the contemplated impact of COVID-19 on the company's business results and outlook is a best estimate based on the information available as of today's date. Our SEC filings, including our 2019 Form 10-K and subsequent Form 10-Qs, along with reconciliations of the non-GAAP financial measures utilized for today's discussion to the most comparable GAAP measures are also available at investor.jnj.com. Several of the products and compounds discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide acknowledges those relationships. Moving to today's agenda, I will cover consolidated and segment sales information along with some operational highlights from the P&L results for the corporation and the three business segments. Next, Paul will provide an update on our vaccine platform, including our efforts to develop and manufacture a COVID-19 vaccine. Finally, Joe will conclude by providing insights on our cash position and how we think about our capital allocation during this time. He will then provide an update on our full-year guidance. The remaining time will be available for your questions We anticipate the webcast will last about 75 minutes. Worldwide sales were $18.3 billion for the second quarter of 2020, a decrease of 10.8% versus the second quarter of 2019. Operational sales growth, which excludes the effect of translational currency, decreased 9% as currency had a negative impact of 1.8 points. In the U.S., sales decreased 8.3%. In regions outside the U.S., our reported decline was 13.4%. However, operational sales decline outside the U.S. was 9.6%, with currency negatively impacting our reported OUS results by 3.8 points. Excluding the net impact of acquisitions and divestitures, adjusted operational sales decline was 8.8% worldwide, 8.1% in the U.S., and 9.4% outside the U.S., Results were negatively impacted by the COVID-19 pandemic. However, we did see improvement throughout the quarter as countries and states began to reopen. China, for example, returned to growth in the second quarter led by strong rebound of our medical devices segment. Turning now to earnings. For the quarter, net earnings were $3.6 billion and diluted earnings per share was $1.36 versus diluted earnings per share of $2.08 a year ago. Excluding after-tax intangible asset amortization expense and special items for both periods, adjusted net earnings for the quarter were $4.4 billion, and adjusted diluted earnings per share was $1.67, representing decreases of 36% and 35.3%, respectively, compared to the second quarter of 2019. On an operational basis, adjusted diluted earnings per share declined 34.5%. Beginning with consumer health, I would now comment on business segment sales performance for the second quarter, highlighting items that build upon the slides you have in front of you. Unless otherwise stated, percentages quoted represent the operational sales change in comparison to the second quarter of 2019, and therefore exclude the impact of currency translation. I will also be providing additional insights using our best estimates on the impacts of COVID-19 to our performance in the areas where it had the largest influence. Worldwide consumer health sales total $3.3 billion, declining 3.6% with operational growth in the U.S. of 1.3% and a decline outside the U.S. of 7.4%. Our consumer health segment realized a negative estimated impact associated with COVID-19 of about 700 basis points. This impact was the result of consumers stocking products during the first quarter and lower consumption due to government lockdowns during the second quarter. Our year-to-date growth was 3.6% and normalizes for some of the timing of consumer stocking that occurred in the first quarter. Excluding the negative impact of COVID-19, our consumer health segment delivered solid performance We continued strong performance in our U.S. OTC and oral care businesses. Over-the-counter medicines grew globally almost 11%, with about 30% growth in the U.S. and a 5% decline outside the U.S. In the U.S., we estimate about two-thirds of the growth was due to the COVID-19 pandemic, as we continue to see strong demand and share gains for adult Tylenol. Additional brands driving growth include U.S. Pepsit due to share gains from a competitive withdrawal from the market and continued strong performance of Zarbi's Naturals. Outside the U.S., declines were primarily driven by COVID-19 restrictions, most notably in China, partially offset by an increase in anti-smoking consumption. Our oral care franchise was positively impacted by COVID-19. as the franchise grew 6.3% from strong demand of adult Listerine primarily in the U.S. across multiple channels. Growth outside of the U.S. was also driven by Asia Pacific from promotional activities and new product launches of adult Listerine. The skin health and beauty franchise declined 14.3% and was the franchise that was most negatively impacted by COVID-19 due to changes in consumers' skin health and beauty routines. The U.S. declined by 19.2% from reduced consumption of sun care, cosmetics, and facial care products, impacting the Neutrogena and Aveeno brands. Outside the U.S., our skin health and beauty franchise declined by 8.2%, primarily from the COVID-19 impact in Asia Pacific and skew rationalization initiatives in EMEA. And in our remaining consumer health franchises, baby care, women's health, and womb care other all declined primarily due to COVID-19. Global baby care declined 11.6% when adjusted to exclude the impact of the baby center divestiture. The U.S. grew when you exclude the impact of the baby center divestiture primarily due to increased COVID-19 demand. The COVID-19 increased demand in the U.S. was more than offset by the negative impact of COVID-19 outside the U.S., primarily in Asia Pacific. The slower performance outside the U.S. was also negatively impacted by the skew rationalization program and lapping of Johnson's Restage launch in EMEA. Globally, we continue to see strong growth in Aveeno Baby. Moving on to the pharmaceutical segment, worldwide pharmaceutical sales of $10.8 billion grew 3.9%, enabled by growth across all regions and in all key therapeutic areas, except for the cardiovascular, metabolism, and other therapeutic area due primarily to biosimilar competition on Procrit. We realized double-digit growth in eight key products. Sales grew in the U.S. by 5.8% and outside the U.S. by 1.4%. Our growth in the quarter was negatively impacted by COVID-19, driven by delayed diagnosis and slower new patient starts due to office closures and access to physician-administered drugs, as well as the phasing impact of stocking in the first quarter. The products most impacted by COVID-19 were Darzalex, Imbruvica, Stelara, Tromphia, and Vegas Estena in our pulmonary hypertension portfolio, and we estimate the impact on these products to be worth roughly 300 to 350 basis points to our worldwide pharmaceutical growth. Despite this impact, global operational growth for the first half of the year is strong at 7%, which remains above expected market growth. While not significant in total, our second quarter results did include favorable prior period pricing adjustments in the U.S. to Xarelto and Invacana, partially offset by a negative adjustment to Stellara. Our oncology portfolio delivered another strong quarter with worldwide growth of 5.7%. Our prior year results included a favorable one-time adjustment for Darzalex related to the completion of pricing and reimbursement discussions in certain European countries. Excluding this impact, growth for the total oncology portfolio was about 9% for the quarter, or 15% on a year-to-date basis. Darzalex continued its strong performance, growing 18.8% globally. Excluding the previously mentioned one-time adjustment, worldwide growth was about 33%, and excluding the negative impact of COVID-19, we estimate the Darzalex growth would have been more in line with previous quarters. The U.S. grew 32.9% with strong growth across all lines of therapy, driven by the new frontline indications for multiple myeloma. During the quarter, we launched a subcutaneous formulation in the U.S. and Europe, an innovative fixed-dose formulation which can be administered in three to five minutes and offers a clinically meaningful reduction in infusion and administration-related reactions. We are pleased with the uptake of this new product and the benefit it provides to our patients and healthcare providers. Imbruvica grew 17% globally, driven largely by market share gains and strong market growth, primarily in the chronic lymphocytic leukemia indication in the U.S., along with strong uptake outside the U.S., While negatively impacted by delayed diagnosis and the reversal of Q1 stocking related to COVID-19 in the quarter, Imbruvica growth year-to-date is strong at over 25%, as Imbruvica remains the best-in-class BTK inhibitor and is the new and total patient share leader in CLL Line 1, CLL Line 2+, and MCL Line 2+. Erleada continued its strong launch trajectory with sales more than doubling versus prior year. During the quarter, we presented results at the annual ASCO conference from the final analysis of the pivotal Phase III Spartan study, demonstrating that Erleada significantly improved overall survival in patients with non-metastatic castration-resistant prostate cancer. Slightly offsetting these results were declines in Zytiga and Velcade primarily due to generic competition. Moving now to immunology. Globally, sales grew 3% in the second quarter, driven by strong double-digit performance of Stelara and Tramfaya. Internationally, sales grew double digits at 11%, offsetting a slight decline in the U.S. of under 1%. Second quarter growth for our immunology portfolio, as well as the overall market, was impacted by COVID-19-related delayed diagnosis, access, and the impact of first-quarter stocking. Year-to-date immunology growth is 7.9% worldwide, and U.S. growth is 5.1%. Stelar growth of about 10% was driven by continued share gains in Crohn's disease, with about a 7-point share increase in the U.S., and growth from the recently approved ulcerative colitis indication. Stelar growth was negatively impacted by a prior period price adjustment impacting growth by over 250 basis points globally and was negatively impacted by COVID-19. On a year-to-date basis, Stelara growth remains strong at about 20% globally. Tramphia, the first-in-class market-leading IL-23 inhibitor therapy, grew 46% globally and achieved roughly a 10% share of the psoriasis market in the U.S., which is up about three points from the second quarter of 2019. we are excited to share that Tramfaya received FDA approval earlier this week for adult patients with active psoriatic arthritis. Sales growth was partially offset by continued erosion of Remicade of about 14% from share loss due to alternative mechanisms of action and biosimilars. In neuroscience, our paliperidone long-acting portfolio performed well, growing almost 9%, led by double-digit U.S. growth of 13.8% due to market growth in the U.S., along with share gains for Invega Sustana and Invega Trinza. We continue to progress the launch of Spravato, where the unmet need remains high. In infectious diseases, our portfolio grew 4.7%, led by strong growth of Symptuza and Jaluka for HIV, partially offset by cannibalization and increased generic competition in other products. Our total pulmonary hypertension portfolio posted double-digit growth of 15%, driven by strong growth of Upsummit and of Travi of 17.6% and 39.5%, respectively, driven by increased market penetration and share growth. I'll now turn your attention to the medical devices segment. Worldwide medical devices sales were $4.3 billion, declining by 32.7%, due to the negative impact of COVID-19 restricting elective procedures across all regions. Sales declined in the U.S. by 39.6% and declined 26.4% outside the U.S. Given the negative impact of COVID-19 across all platforms, my commentary will focus on key trends in each platform. As expected, our Q2 results included one additional selling day versus prior year positively impacting results by about 50 basis points. We expect a minor benefit in Q3 from selling days. Interventional solutions declined by 20.5 percent globally, with a U.S. decline of 30.5 percent and an OUS decline of 10.9 percent. Interventional solutions saw improvement throughout the quarter, returning to growth in June at almost 3 percent. China had a particularly strong recovery, growing double digits in the quarter. the U.S. returned to growth in June, led by electrophysiology performance. Procedures in electrophysiology over the last two weeks of the month averaged 91% of pre-COVID levels across the U.S., with the northeast part of the country recovering at the slowest rate, primarily due to the New York City metro area. Orthopedics declined by 33.9% in the quarter due to market declines from restrictions on deferable procedures and reductions in general activity such as travel and recreation that negatively impacted trauma. The U.S. saw the largest recovery of all regions with June declining less than 8% versus prior year as U.S. hips grew high single digits and U.S. trauma was flat. Knees and spine also showed improvement globally throughout the quarter with June declines of around 21% and 15% respectively. For the quarter, U.S. pure price improved slightly versus previous quarters across all platforms. Moving to the results for the surgery business, advanced surgery declined by 22.9%, with worldwide energy and endocutters declining about 27% for the quarter and less than 20% in the month of June. Biosurgery declined less than 13% in Q2, as results were positively impacted by almost nine points Due to the recovery from the surge of low stop shipment in Q2 2019, biosurgery returned to growth in the month of June, led by the U.S. and Asia Pacific. General surgery declined 39.5%. In addition to the negative impact of COVID-19, global sales were negatively impacted by 10 points due to an unfavorable prior period pricing adjustment in the U.S., The impact was primarily related to COVID-19 providing enhanced insight into the level and mix of inventory in our distributor channel, resulting in the need to increase our reserves. Wound closure declined almost 28% for the quarter, with June declining 17%. Vision declined by 39.3% in total, with contact lenses declining 33.6% and surgical declining 55.2%. Contact lenses was negatively impacted by COVID-19, which resulted in less new wearers entering the category due to the shutdown of optical stores and lower consumption for existing wearers as people spent more time at home. The e-commerce channel, which primarily serves existing wearers, is estimated to have a slight decline versus the second quarter of prior year, representing significant outperformance compared to other channels. Contact lens performance is recovering overall as geographies start to open back up with June declining approximately 26% versus prior year. I will now provide some commentary on our earnings for the quarter. Regarding our consolidated statement of earnings for the second quarter of 2020, please direct your attention to the box section at the bottom of the schedule. You will see we have provided our earnings adjusted to exclude intangible amortization expense, and special items. As reported this morning, our adjusted EPS of $1.67 reflects a reported decline of 35.3% and an operational decline of 34.5%. I'd like to now highlight a few noteworthy items that have changed on the statement of earnings compared to the same quarter last year. Cost of products sold deleveraged primarily driven by COVID-19 period costs and fixed costly leveraging in the medical devices business. Selling, marketing, and administrative margins declined, driven by the negative impact of medical device sales, partially offset by favorable segment mix, expense leveraging in the pharmaceutical business, and optimized brand marketing expenditures in the consumer health business. We continue to invest in research and development at competitive levels, investing 14.8% of sales this quarter. This was higher than the second quarter 2019 by 180 basis points, driven by the negative COVID-19 impact on medical device sales and segment mix. The other income and expense line showed net expense of $24 million in the second quarter of 2020, compared to the net income of $1.7 billion last year. This was primarily driven by the ASP divestiture gain of $2 billion in the second quarter of 2019. Regarding taxes in the quarter, our effective tax rate declined from 20.4% in the second quarter of 2019 to 8% in the second quarter of 2020 as a result of recording additional adjustments to the transitional provision of Swiss tax, which benefited the rate by approximately 7.5 points. We expect no further adjustments to the transitional provisions of Swiss tax reform and encourage you to reference our 10-Q for further details on this and other specific tax matters. Excluding special items, the effective tax rate was 16.7% versus 19.3% in the same period last year, primarily driven by Swiss tax reform adjustments. Let's now look at adjusted income before tax by segment. In the second quarter of 2020, adjusted income before tax for the enterprise declined versus the second quarter of 2019 to 29.1%. Looking at the adjusted pre-tax income by segment, pharmaceutical margins improved by 250 basis points to 44.1%, primarily driven by favorable product mix and selling and marketing expense leveraging. Medical devices declined to 1.2%, driven by COVID-19 impacts on the business, including significant sales declines coupled with continued overhead costs and idle manufacturing expenses. Additionally, 2019 results included the gain of approximately $2 billion related to the divestiture of the ASP business. Consumer margins improved by 310 basis points to 24%, driven by planned prioritization and optimization of brand marketing expenses. That concludes the sales and P&L highlights for Johnson & Johnson's second quarter 2020. I'm now pleased to turn the call over to Paul.

Thank you, Chris, and good morning, everyone. I'm pleased to provide an update on our vaccine program, particularly our progress on the development of a COVID-19 vaccine. As you know, we announced our lead COVID-19 vaccine candidate on March 30th, and since then, we have made significant progress. We have seen strong preclinical data so far, which were published in the journal Science in May. These data validated the preclinical vaccine challenge model and showed that prototype DNA vaccines were able to create strong immunity. Based on these data and interactions with regulatory authorities, we were able to accelerate the clinical development program of a COVID-19 vaccine candidate. Since then, we have initiated a study of a final at-26 vaccine candidate in non-human primate challenge model. These results will be published in a major scientific journal in the coming weeks. Based on this total package of results, we are very comfortable moving forward with Phase I-IIa studies later this month. This represents an acceleration of our timeline from our original date of September to the end of July. These studies will establish both the safety and immunogenicity of our vaccine candidate, as well as evaluate the single dose and the booster dose regimen. The trials will be conducted in more than 1,000 healthy adults aged 18 to 55 years, as well as adults aged 65 years and older. Our study sites are located in the U.S. and Belgium. We are also planning for a Phase II study in the Netherlands, Spain, and Germany, and plan to conduct a Phase I study in Japan. We anticipate the initiation of the trial on July 22nd in Belgium and the following week in the U.S. We are also in discussions with the National Institute of Health with the objective to start the Phase III clinical trial ahead of its original schedule, potentially in late September, to evaluate the effectiveness of our vaccines. We are using epidemiology data to predict and plan where our studies should take place. We also announced that in parallel with the clinical development, we are working to expand our global manufacturing capacity to be able to deliver more than 1 billion doses of our COVID-19 vaccine by the end of 2021. We have made excellent progress on this front as well. In addition to building out our internal manufacturing capabilities, We entered into collaborations with Emergent BioSolutions and Catalang Biologics and others to support commercial manufacturing of the vaccine. As you have heard me say previously, our COVID-19 vaccine program is leveraging Janssen's adenovector technology that provides the ability to rapidly develop new vaccine candidates. The same technology was used to construct our HIV, RSV, and Zika vaccine candidates. and to develop our Ebola vaccine regimen, we just received marketing authorization from the European Commission for the Prevention of Ebola Virus Disease. The EMA approval is the culmination of work that began in response to the West Africa Ebola epidemic in 2014. Achieving major regulatory approval in this timeframe is a tremendous accomplishment. The approval marks the first major regulatory approval of a vaccine developed by Janssen confirming the potential of our adenovirus technology. To date, more than 80,000 people have been vaccinated using this vaccine technology. As we have previously shared, we are also working on an HIV vaccine and are pleased to report that we have reached an important milestone. Earlier this month, an Imbocodo trial taking place across sub-Saharan Africa reached an important milestone with all people having completed all study vaccination despite difficult COVID-19 circumstances. And we expect the outcomes of this study in the next two years. Together with our partners at the NIH and the Gates Foundation, we now have the most advanced HIV candidate in clinical development. These recent milestones strengthen our confidence in our vaccine technology. The work we are doing today to help address the COVID-19 pandemic, built on more than 130 years of Johnson & Johnson's leadership in public health. We believe we have a responsibility to step in and invest in solutions for global public health crisis and are proud to be contributing to the global response to COVID-19. Our efforts to expedite the development of a COVID-19 vaccine and to identify potential treatments are enhanced by multiple collaborations with government, academia, health authorities, and others worldwide, and we are working with them to ensure the broadest possible access to people around the world. Thank you. Joe, I will now turn it over to you.