Johnson & Johnson

Good morning and welcome to Johnson & Johnson's first quarter 2021 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 first quarter and our updated financial outlook for 2021. Joining me on today's call is Joe Wolk, Executive Vice President, Chief Financial Officer. Also joining Joe and myself during the Q&A portion of the call will be Alex Gorski, Chairman of the Board of Directors and Chief Executive Officer, Joaquin Duado, Vice Chairman of the Executive Committee, and Dr. Paul Stoffels, Vice Chairman of the Executive Committee and Chief Scientific Officer. 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 risks and factors that may cause the company's actual results to differ materially from those projected. In particular, there is uncertainty about the duration and contemplated impact of the COVID-19 pandemic. This means that 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. A further description of these risks, uncertainties, and other factors can be found in our SEC filings, including our 2020 Form 10-K, 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 review first quarter sales and P&L results for the corporation and the three business segments. Joe will provide insights about our cash position, capital allocation deployment, and we'll spend some time on 2021 qualitative commentary, and we'll outline our updated guidance for 2021. The remaining time will be available for your questions. We anticipate the webcast will last up to 75 minutes. Now let's move to the first quarter results. Worldwide sales were $22.3 billion for the first quarter of 2021, an increase of 7.9% versus the first quarter of 2020. Operational sales growth, which excludes the effect of translational currency, increased 5.5% as currency had a positive impact of 2.4 points. In the U.S., sales increased 3.9%. In regions outside the U.S., our reported growth was 12.2%. Operational sales growth outside the U.S. was 7.3%, with currency positively impacting our reported OUS results by 4.9 points. Excluding the net impact of acquisitions and divestitures, adjusted operational sales growth was 6% worldwide 3.9% in the U.S., and 8.2% outside the U.S. Turning now to earnings. For the quarter, net earnings were $6.2 billion, and diluted earnings per share was $2.32 versus diluted earnings per share of $2.17 a year ago. Excluding after-tax intangible asset amortization expense and special items for both periods, Adjusted net earnings for the quarter were $6.9 billion, and adjusted diluted earnings per share was $2.59, representing increases of 12.5% and 12.6%, respectively, compared to the first quarter of 2020. On an operational basis, adjusted diluted earnings per share increased 8.3%. I would now comment on business segment sales performance. 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 first quarter of 2020 and therefore exclude the impact of currency translation. Beginning with consumer health, worldwide consumer health sales totaled $3.5 billion and declined 3.3%. With declines in the U.S. of 7.4%, and modest growth of 0.5% outside of the U.S. The consumer health results reflect negative comparisons due to prior year pantry loading and increased COVID-19 demand, particularly in over-the-counter medicines. Excluding the prior year COVID-19 comparison, the consumer health segment grew low single digits in the quarter. Over-the-counter medicines declined 14.8%. Globally, results were negatively impacted by the prior year comparisons I previously mentioned, coupled with continued impacts of social distancing restrictions resulting in lower cough, cold, and flu incidences. Partially offsetting declines were U.S. share gains primarily in Tylenol, Zyrtec, and Pepsid, as well as strong performance of Nicorette outside the U.S., The skin health beauty franchise grew by 2.8%, driven by strong performance outside the U.S. for Neutrogena and Aveeno due to new product innovations and strength in e-commerce. Results were partially offset by U.S. COVID-19-related market contraction in makeup removal wipes. Consumers continue to focus on products related to personal health and hygiene, including oral care, which grew 4.5%. from continued growth of Listerine mouthwash due to category growth and strong promotions, partially offset by divestitures. Worldwide growth excluding divestitures was approximately 8%. Additionally, the baby care franchise grew by 9.5% as a result of strength in Johnsons outside the U.S., primarily in the Latin America and Asia Pacific regions across all categories, coupled with Aveeno baby growth in e-commerce globally. Moving on to our pharmaceutical segment, worldwide pharmaceutical sales of $12.2 billion grew 7.1%, with strength in both the U.S. increasing by 6.4% and OUS with sales increasing by 7.9%. Sales in the quarter included a small contribution in the U.S. from Janssen's COVID-19 vaccine following its emergency use authorization in February. Our strong portfolio of products and commercial capabilities continues to enable us to deliver strong, adjusted operational growth at above market levels with seven key products realizing double-digit growth in the first quarter. Our immunology therapeutic area delivered global sales growth of 5.5%. driven by strong double-digit performance of Stellara and Tramphaia, offset by continued declines in Revacade due to biosimilar competition. Stellara continued to show strength in all regions, growing at 15.4%, driven by increased market growth and share gains. U.S. share increased roughly four points in Crohn's disease and nearly 10 points in ulcerative colitis. Stellar growth was partially offset by an unfavorable comparison to a prior period pricing adjustment in Q1 2020 and an unfavorable comparison to increased sales in Q1 2020, resulting from COVID-19-related longer script durations in the U.S. and Europe. Tramphia grew 37.8%, with strong double-digit growth in both the U.S. and OUS, driven by share gains in psoriasis of 2.7 points in the U.S., continued global expansion into new markets, and continued penetration into the psoriatic arthritis indication that was approved in 2020. Our oncology portfolio delivered another strong quarter, with worldwide growth of 14.6%. Darzalex continued its strong performance, growing 42.2%, driven by share growth across all lines of therapy and increased penetration of the subcutaneous formulation in the U.S. and EU. Darzalex continues to penetrate the frontline setting, aided by recently approved line extensions that penetrate new patient populations, posting nearly three points of share growth in line one in the U.S. this quarter. Erleada continued its global momentum with growth of 79.7% in the quarter, driven by market share and penetration gains, especially in the metastatic indication. Imbruvica grew 5.6% globally with increased volume growth, driven by our market-leading share and increased persistency as patients extend the duration of therapy. However, this was partially offset by the market contraction due to temporary COVID-19 impacts on new patient starts. Growth was also negatively impacted by one-time items, including the increased demand in Q1 of 2020 related to longer-term script durations in anticipation of pandemic-related restrictions and higher levels of clinical trial volume in the same quarter last year. Excluding the impact of these one-time events, global growth for Imbruvica would have been double digits. In neuroscience, our paliperidone long-acting portfolio grew 6.9%, driven by market and share growth due to increased new patient starts and strong persistency. Cardiovascular metabolism other declined 4.1% this quarter, driven by continued biosimilar competition for Procrit and competitive pressures in Invacana, which was partially offset by growth of 11.7% in Xarelto, driven by continued demand and a one-time favorable prior period pricing adjustment in the current quarter, which contributed over half of Xarelto's growth in the quarter. Lastly, our total pulmonary hypertension portfolio achieved strong growth of 13.7%, with a summit growth of 13.5% and a travi growth of 20.9%, both driven by market penetration and share gains. I'll now turn your attention to the medical devices segment. Worldwide medical devices sales were $6.6 billion, growing 8%. Growth versus prior year was primarily driven by market recovery from procedures impacted by COVID-19, along with continued momentum driven by commercial initiatives and our recently launched new products that are further enhancing our competitiveness across several areas of the business. Additionally, selling days positively impacted worldwide growth by 190 basis points. we expect the full year impact from selling days, excluding the impact of the 53rd week in 2020, will be minimal. While recovery dynamics continue to vary across procedure type and geography, our results reflect continued momentum with nine of our 11 priority platforms delivering global growth in Q1, with six of these delivering double-digit worldwide growth. As you consider regional dynamics, Asia Pacific was the first region to be impacted by COVID-19 and experienced the most significant sales declines in the first quarter last year. Asia Pacific realized strong market recovery, primarily in China, against this low sales base from the prior year. So that, coupled with our commercial efforts to expand into Tier 2 and Tier 3 hospitals in China, resulted in strong double-digit growth in this region. COVID-19 remains a dynamic variable in the U.S. However, the market has been resilient and continues to recover, resulting in growth of 5.4% in the U.S. Sales declined in Europe and Latin America, where there continues to be a higher level of COVID-19-related mobility restrictions and procedure deferrals. Looking at results for each of our platforms, Interventional Solutions delivered another quarter of strong double-digit growth Electrophysiology grew 25.7% in the quarter, primarily driven by recovery in the market, coupled with the strength of our broad-based portfolio, focus on commercial execution, and introduction of new products, such as an update to our CARTO3 system and the CARTO Prime mapping module, which further enhanced our market position globally. These new product introductions support improved mapping capabilities and reduce ablation times during atrial fibrillation procedures. Worldwide orthopedics grew 1.2% versus the prior year with continued COVID-19 impacts on procedure recovery. Worldwide trauma delivered growth of 9.5%, reflecting market recovery and success of our newer product introductions that continue to support our market-leading position in trauma, such as the most comprehensive cannulated compression headless screw system on the market and the REA-2 system designed for long bone grafts. HIPs returned to worldwide growth this quarter, increasing 3.2%, driven by market recovery and our continued leadership position in the interior approach and demand for the Actis stem, aided by our other enabling technologies in HIP navigation. Needs declined 9.9% globally, primarily due to slower market recovery in these more deferrable procedures, in addition to some softness stemming from business mix dynamics. We are on track for commercialization of our VELUS robotic assisted solution for total knee procedures in the U.S. We believe the combination of this launch, along with our differentiated VELUS digital solutions and a two-knee platform, including cementless offerings, will enhance our portfolio and support improved performance as procedures continue to recover. Spine decline 0.6%, reflecting the continued impact of COVID-19 on this market coupled with some one-time stocking reductions in China resulting from the consolidation to a national distribution model worth about 250 basis points globally. The decline was partially offset by success of recently launched products such as Symphony, Conduit, and FiberGraft, as well as partnerships which further enhance our offerings such as the XPAC expandable cage. Advanced surgery grew 14.3% versus prior year with double-digit growth globally in endocutters, biosurgery, and energy, primarily from robust growth in Asia driven by market recovery and market share gains due to new product launches, globalization of our portfolio, including biosurgeries, Surgiflo plus thrombin launch in Japan, and commercial investments to expand our coverage in China. In general surgery, wound closure grew 12% globally, with growth of 6.6% in the U.S. and 15.7% OUS. Results were driven by recovery in the markets, as well as continued strength of our market-leading suture portfolio, including the Stratafix Barb Suture family. U.S. contact lens growth of 7.2% reflects the strength of our commercial execution and our market-leading AccuView portfolio, including the recent launch of AccuView Oasis multifocal lenses, which were designed to provide clear vision at all distances. Channel inventory increases related to continued COVID-19 volatility and support of this new product launch contributed about 400 basis points to growth. Growth outside the U.S. of 0.9% reflects slower market recovery in Japan and Europe. Global surgical vision grew 11.2% due to a combination of recovery in both cataract and refractive procedures, as well as continued strength of recent product introductions, including Technus TORIC2 and early success of Technus iHance, driving improved share momentum in both the U.S. and OUS markets. Now regarding our consolidated statement of earnings for the first quarter of 2021, please direct your attention to the box section 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 $2.59 reflects a reported increase of 12.6% and an operational increase of 8.3%. 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 improved versus 2020 as a percent to sales due to favorable product mix in the pharmaceutical business and favorable volume and mix in the medical devices business. Additionally, the first quarter 2020 medical devices results included the establishment of a COVID-19 inventory reserve, which did not repeat in 2021. Selling, marketing, and administrative margins improved due to leveraging in the medical devices business resulting from the recovery of sales from the prior year's negative COVID-19 impact. We continue to invest in research and development at competitive levels, investing 14.2% of sales this quarter. This was higher than the first quarter of 2020 by 170 basis points, driven by portfolio progression in the pharmaceutical business. The other income and expense line showed net income of $882 million in the first quarter of 2021, compared to net income of $679 million in the first quarter of 2020, primarily due to higher acquisition, integration, and divestiture-related activity. However, as a reminder, we treat significant divestiture gains as a special item, and these gains are therefore excluded from adjusted earnings. Regarding taxes in the quarter, our effective tax rate increased from 11% in the first quarter of 2020 to 16.6% in the first quarter of 2021. This increase is driven primarily by the impact of one-time items in 2020 that did not repeat. Excluding special items, the effective tax rate was 16.5% versus 15% in the same period last year. I encourage you to review our 10-Q for further details on specific tax matters. Let's now look at adjusted income before tax by segment. In the first quarter of 2021, our adjusted income before tax for the enterprise as a percentage of sales increased from 35% to 37.1%. The following are the main drivers of change to the adjusted income before tax by segment. Medical devices margin improved by 640 basis points driven by inventory reserves recorded in 2020 associated with the impact of COVID-19 which did not repeat in the current quarter, and overall expense leveraging in 2021, resulting from the medical devices sales recovery. Consumer health margins improved by 150 basis points, primarily driven by supply chain efficiencies, including the benefit from our SKU rationalization program. Pharmaceutical margins improved by 30 basis points, primarily driven by favorable product mix, partially offset by increased investment in research and development. That concludes the sales and P&L highlights for Johnson & Johnson's first quarter. I'm now pleased to turn the call over to Joe Wolk.

Thank you, Chris. Good morning, everyone, and thanks for joining us today. When we spoke with you this time last year, we updated our full year 2020 outlook with perhaps the highest level of uncertainty Johnson & Johnson had ever faced, much like every other company in every other industry. COVID-19 cases were on the rise, worldwide lockdowns were in effect, and most were adapting to new ways of working while maintaining productivity. No one knew how long the pandemic would last, and demand forecasts were ambiguous at best. However, what was crystal clear, what we did know, was that the resilience of our business, the strength of our financial position, and an unrelenting long-term focus to develop and deliver our life-saving medicines and products to patients and customers around the globe would likely lead to a better future. We are stronger as a business than before the pandemic, and our first quarter 2021 results give us even more confidence in our ability to continue delivering compelling performance in the future. Let me begin with our cash position and capital allocation priorities. We ended the first quarter of 2021 with approximately $9 billion of net debt consisting of approximately $25 billion of cash and marketable securities and approximately $34 billion of debt. While our capital allocation priorities remain intact, The past year has reinforced the importance of managing our business for the long term through a disciplined approach and a focus on investments for innovation to further enhance our competitive positioning. In addition to disproportionately investing competitively in our R&D pipelines, we continue to evaluate and capitalize on acquisition opportunities when appropriate to create value over the long term. Paying our dividend and increasing it annually remains a key priority. Earlier this morning, we announced that the Board of Directors approved an increase of the quarterly dividend for the 59th consecutive year by 5%. The dividend increase to $1.06 per share per quarter reflects our recent performance, strong financial position, and confidence in the future of Johnson & Johnson. An indication that our capital deployment is fortifying the foundation for our future is in part illustrated on this next slide, which details pipeline developments that have occurred since our last call. I'll highlight a few, starting with our pharmaceutical business. First, we received U.S. approval and a positive opinion from the CHMP in the EU for Ponvary in multiple sclerosis, our first NME approval this year. In addition, We completed our BLA filing for Citacell, a BCMA CAR T for the treatment of multiple myeloma, and we anticipate US approval later this year. As you know, we are rigorous in focusing on differentiated transformational medical innovation. Despite showing proof of concept in initial phases of the study, we decided to discontinue the Phase II development of teslatilumab, an anti-NKG2D monoclonal antibody for Crohn's disease based on insufficient efficacy in the trial. Within our medical devices portfolio, the FDA granted approval for Tecnis Eyehands, a next-generation interocular lens. This represents the first significant innovation in monofocal technology in over 20 years. Johnson & Johnson Vision also announced a collaboration with MenaCon to deliver therapeutic contact lenses that manage the progression of myopia in children. We expect commercialization of this product by the end of 2021 under the brand name AccuView Ability, pending health authority approval. We are excited to accelerate our entry into this growing and important space for patients while we continue to advance our myopia pipeline. As Chris commented to earlier, we are pleased by the enterprise's first quarter results. I'll now provide some insights into how we are thinking about the remainder of 2021. So let's start simply with, we remain confident in our business. Our pharmaceutical segment is on track with our expectations, and in 2021, we expect to deliver a 10th consecutive year of operational above market growth. Importantly, this growth is volume-driven, not dependent on price. You may have noticed that we issued our fifth annual Janssen U.S. Transparency Report last week. While I'm admittedly biased, this is a very informative read, and you'll not only see the average price for our products declined by nearly 6% in 2020, but how more than $29 billion of rebates and discounts were allocated. In consumer health... Prior year comparisons will be choppy by quarter throughout this year due to the COVID-19 pantry loading and demand surges experienced in 2020. However, we continue to expect to grow with the market for the year in those areas in which we compete driven by our strong iconic brands that consumers rely on every day. We will also continue to focus on maintaining our enhanced margin profile driven by our skew rationalization and investment optimization programs. In medical devices, better execution, new innovative offerings, and market recovery led to growth in the first quarter. However, market variables such as patient willingness to seek care, insurance coverage, and unemployment rates, along with the easing of mobility restrictions, will influence the rate of recovery as we progress through the year. Despite those uncertain dynamics, we remain confident in the full year outlook we had in January. Let me say a few words related to our COVID-19 vaccine. Our goal has always been to bring our scientific capabilities and resources to develop a safe, effective vaccine that would complement other measures to end the global pandemic. To ensure broad access, we announced early on that we would supply the vaccine on a not-for-profit basis during the crisis period. Given the not-for-profit commitment, as previously stated, we never anticipated COVID-19 vaccine revenue would have a significant upside impact to 2021 adjusted EPS, already projected to grow at 18% or 1.8 times greater than sales growth. Paul will say a few words at the conclusion of my remarks on our COVID-19 vaccine. Regarding vaccine financials, please know that we commit to providing timely updates to actual results and guidance as warranted. Considering the qualitative factors I just referenced, here is what we expect for the full year 2021. Starting with sales, on an adjusted operational basis, we are increasing our guidance and tightening our range to reflect the ongoing confidence in the business to a range of growth to 8.7%, to 9.9%. This adjusted operational sales growth is on a constant currency basis, consistent with how we manage our business performance. We are maintaining our estimate for the net impact of acquisitions and divestitures of approximately 50 basis points, resulting in operational sales of 89.3 billion to 90.3 billion, or 8.2% to 9.4%. While we don't offer predictions on currency movement, utilizing the euro spot rate relative to the U.S. dollar as of last week at 1.19 results in a still favorable but to a lesser degree currency impact of $1.3 billion or a year-over-year increase of 150 basis points. resulting in estimated reported sales in the range of $90.6 billion to $91.6 billion, an increase of 9.7% to 10.9%, or 10.3% at that midpoint versus 2020. Regarding the balance of the P&L, we are maintaining the guidance we offered in January for all other items for which we routinely provide guidance. We are, however, comfortable tightening our range by raising the lower end, resulting in increasing the midpoint of our adjusted operational EPS by 3 cents. Therefore, our new adjusted earnings per share guidance range is $9.30 to $9.45 on a constant currency basis. While not predicting currency movement, but to provide some direction on the impact of currency fluctuations on our reported adjusted EPS, the estimated benefit is now $0.12 versus $0.15 for the full year. Accounting for that, we would be comfortable with your models reflecting reported adjusted EPS ranging from $9.42 to $9.57 or a midpoint of $9.50 to a range of 17.3% to 19.2%. We don't provide quarterly guidance, but do appreciate that you find value in us providing some qualitative considerations to keep in mind as you update your models. This slide looks rather similar to what we shared in January, with the most noteworthy call-out being the negative impact of COVID-19 experienced in the second quarter of 2020, particularly in medical devices. It is reasonable to infer that the second quarter of 2021 should have highly favorable comparisons in medical devices. Let me close our prepared remarks by acknowledging the Johnson & Johnson colleagues and all they have overcome, but more importantly, accomplished over the last year. Driven by our credo, their unrelenting dedication to continue meeting our commitments to all stakeholders has been inspiring. On behalf of the entire executive team, to all 135,000 employees around the world, thank you. Paul, Chris, and I are pleased to be joined by Alex and Joaquin to address your questions. But before we begin the Q&A, let me turn the call over to Paul.