Johnson & Johnson

Good morning and welcome to Johnson & Johnson's second quarter 2021 earnings conference call. All participants will be in listen-only mode until the question and answer session of the conference. The 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 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 Jennifer Talbert, Executive Vice President and Worldwide Chair, Pharmaceuticals. Thibaut Mangon, Executive Vice President and Worldwide Chair, Consumer Health, and Ashley McEvoy, Executive Vice President and Worldwide Chair, Medical Devices. 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 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 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 review the second quarter sales and P&L results for the corporation and the three business segments. Joe will provide insights about our cash position and capital allocation deployment and will outline our updated guidance inclusive of the COVID-19 vaccine for 2021. Then we will begin the Q&A session with each of the segment leaders providing a brief update on their respective businesses. 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 second quarter results Worldwide sales were $23.3 billion for the second quarter of 2021, an increase of 27.1% versus the second quarter of 2020. Operational sales growth, which excludes the effect of translational currency, increased 23%, as currency had a positive impact of 4.1 points. In the U.S., sales increased 24.9%. In regions outside the U.S., our reported growth was 29.5%. operational sales growth outside the U.S. was 20.9%, with currency positively impacting our reported OUS results by 8.6 points. Excluding the net impact of acquisitions and divestitures, adjusted operational sales growth was 23.8% worldwide, 25.1% in the U.S., and 22.4% outside the U.S. Turning now to earnings, for the quarter, net earnings were $6.3 billion, and diluted earnings per share was $2.35 versus diluted earnings per share of $1.36 a year ago. Excluding after-tax intangible asset amortization expense and special items for both periods, adjusted net earnings for the quarter were $6.6 billion, and adjusted diluted earnings per share was $2.48, representing increases of 49% and 48.5% respectively compared to the second quarter of 2020. On an operational basis, adjusted diluted earnings per share increased 44.9%. I will 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 second quarter of 2020, and therefore exclude the impact of currency translation. Beginning with consumer health, worldwide consumer health sales totaled $3.7 billion and increased 9.2%, with increases in the U.S. of 12.4% and growth of 6.3% outside of the U.S. Excluding the impact of divestitures, worldwide growth was 10%. Year-to-date adjusted operational growth was 3.3% and is more reflective of performance given the quarterly fluctuations of COVID-19 impacts. Over-the-counter medicines grew 8.9% globally, driven by strong growth in Zyrtec, due to both the timing of and increased incidence in the allergy season. Digestive health grew double digits, driven by U.S. Pepsid, new SKU stocking in the Club Channel, coupled with share growth, and increased COVID-19-related healthcare professional recommendations for the hydration benefit offering, Orsal, in the Asia-Pacific region. The Skin Health Beauty franchise grew 12.9% globally, with the U.S. increasing 23% and OUS increasing 1.4%. Skin Health Beauty outside the U.S. was negatively impacted by approximately 300 basis points due to divestitures. Worldwide growth was driven by market recovery in key markets, increased U.S. stocking for new products, and comparisons to COVID-19-related destocking dynamics. Neutrogena and Aveeno delivered strong performance in the U.S., primarily due to market recovery, new product innovation, and higher stocking due to the Neutrogena rapid firming product launch, partially offset by competitive pressures. OGX and Maui growth was driven by share gains and market growth in hair care. WorldCare grew 2.5% globally due to strong OUS performance for Listerine. reflecting accelerated category and increased demand from continued successful promotional campaigns. Divestitures in the quarter negatively impacted results by 310 basis points. The baby care franchise grew by 5% as a result of market recovery and OUS strength in Johnson's and Aveeno Baby in e-commerce. Wound care delivered strong growth of 13.4%, driven by U.S. market growth with increased consumer behaviors focused on preparedness and infection prevention and seasonal stocking versus prior year COVID-19 destocking dynamics. Moving on to our pharmaceutical segment. Worldwide pharmaceutical sales of $12.6 billion grew 13.6%, with strength in both the U.S. increasing by 12.2%, and OUS with sales increasing by 15.4%. Excluding the impact of divestitures, worldwide growth was 14.1%. Global sales in the quarter included a $164 million contribution from the COVID-19 vaccine. Additionally, as a reminder, for comparison purposes, Q2 of 2020 was negatively impacted by access-related constraints due to COVID-19 resulting in a decrease of roughly 300 to 350 basis points in total across key brands. Our strong portfolio of products and commercial capabilities continues to enable us to deliver strong, adjusted operational growth at above market levels. Our immunology therapeutic area delivered global sales growth of 17%, driven by strong double-digit performance of Stelara and Tramphia, offset by declines in Remicade due to biosimilar competition. Stelara continued to show strength in all regions, growing at 30.5%, driven by increased market growth and share gains, with U.S. share increasing roughly four points in Crohn's disease and nearly eight points in ulcerative colitis. Tramfio was up 36.8% with strong double-digit growth worldwide due to share gains, continued global expansion into new markets, and additional penetration into the psoriatic arthritis indication that was approved in 2020. U.S. share increased over two points in psoriasis and nearly three points in psoriatic arthritis in the quarter. Our oncology portfolio delivered another strong quarter with growth of 21.5%. Darzalex continued its exceptional performance trajectory, growing 53.8%, driven by share gains and increased penetration of the subcutaneous formulation in the U.S. and EU. Darzalex continues to grow share across all lines of therapy, with nearly four points of share growth in Line 1 in the U.S. this quarter. Erlita also continued its global momentum, with growth of 73.7% in the quarter, driven by market share, which increased by nearly two points across indications, and penetration gains, especially in the metastatic indication. And Rubica grew 12.5% globally due to volume gains driven by our market-leading share, but was partially offset by modest share losses in the U.S. to novel oral competition and a market that remains slightly depressed due to temporary COVID-19 impacts on new patient starts. In neuroscience, our paliperidone long-acting portfolio had strong double-digit growth of 10.6%, driven by market and share growth due to increased new patient starts and strong persistency. Cardiovascular metabolism other declined 7.3% this quarter, driven by continued biosimilar competition for Procrit and competitive pressures in Invacana, which was partially offset by growth of 1.8% in Xarelto due to continued demand strength. Lastly, our pulmonary hypertension portfolio achieved growth of 8.7%, with Epsomic growth of 11.9%, and Abtravi growth of 9.8%, both driven by market penetration and share gains. I'll now turn your attention to the medical devices segment. Worldwide medical devices sales of $7 billion grew 57.2%, with the U.S. increasing 77.2%, and OUS increasing 41.9%, primarily due to the recovery of procedures from COVID-19 restrictions that occurred in the second quarter of 2020, coupled with the success of recently launched products and commercial activities across the business. Selling days had a minor positive impact on growth this quarter. We expect the full year impact from selling days, excluding the impact of the 53rd week in 2020, to be minimal. Given the extent of the procedure disruption from COVID-19 in 2020, I thought it may be helpful to provide context for our current quarter performance versus the second quarter of 2019. Worldwide medical devices grew about 7% versus Q2 2019, with eight of our $11 billion platforms showing growth versus 2019. The pace of market recovery in knees, spine, and vision surgical has been slower than the other markets in which we compete as these procedures are perceived to be more deferrable by patients. Geographically, both the US and Asia Pacific markets surpassed Q2 2019, while AMEA and Latin America markets have been slower to recover and Q2 results remained at or below 2019 levels. Looking at results for each of our platforms, Interventional Solutions delivered another strong quarter with worldwide growth of 71.3% and strong double-digit growth versus the second quarter of 2019. Electrophysiology reinforced our global market share leadership position, growing 74.4%, driven by recovery in the market coupled with our market expansion activities, the strength of our broad-based portfolio, and new products. Worldwide orthopedics delivered 48.6% growth versus the prior year, driven primarily by market recovery and success of newer product launches. Worldwide trauma delivered growth of 24.8%, reflecting market recovery, strength of our comprehensive portfolio, and success of newer product introductions. This quarter, we expanded our market-leading portfolio of products with the launch of a next generation variable angle clavicle plate system designed to enhance plate to bone fit on a broad range of patients and simplify implant selection for the surgeon. And we launched an advanced tibial nailing system designed to provide a more stable implant solution and create efficiency within the healthcare system by streamlining instrumentation across our portfolio. Worldwide hips grew 68.1% this quarter, driven by market recovery, our continued leadership position in the anterior approach, demand for the active stem aided by our other enabling technologies, such as VELUS hip navigation, and innovative commercial programs focused on expanding coverage and access for hip fracture patients in parts of Europe and Latin America. Knees returned to growth this quarter, increasing 94.6% globally, primarily due to market recovery. Results reflect continued COVID-19 challenges and the related impact on procedures in markets like India, Japan, and Australia, and other dynamics, including faster recovery trends in primary knee procedures compared to revisions. This quarter, we began commercialization of our VELUS robotic-assisted solution for total knee procedures in the U.S., We believe this launch, along with our differentiated VELUS digital solutions and a tuned knee platform, including the second half 2021 launch of a tuned cementless fixed bearing knee with a Fixium 3D printed technology, will enhance our portfolio and competitiveness as procedures continue to recover. Spine returned to worldwide growth this quarter, increasing 51.7%, reflecting market recovery and positive impact from recently launched products, Symphony, Conduit, and FiberGraft, as well as strategic partnerships which further enhance our offerings, such as the XPAC expandable cage. Advanced surgery grew 44.3% versus prior year. In addition to the positive impact of procedure recovery, Biosurgery delivered sales growth of 48% and positive share momentum driven by new products and commercial strategies to expand market penetration and adoption. Endocutters and energy both grew around 40% globally, primarily due to procedure recovery, new product introductions, and China Tier 2 and 3 hospital market expansion activities, partially offset by competitive pressure in the U.S., We also achieved a significant milestone within the quarter with our Monarch robotic platform surpassing 100 customers and 8,000 procedures. General surgery grew 67.8% globally, with wound closure growing 50.1% globally, driven by recovery in the markets, continued strength of our market-leading suture portfolio, including our Plus Sutures and Stratafix Barb Suture family, and a change in channel inventory levels in the U.S., contributing about six points to global growth. Global general surgery sales were positively impacted by 23 points due to a prior year unfavorable pricing adjustment in the U.S. we communicated last year. Worldwide vision grew 66% this quarter, primarily driven by market recovery. U.S. contact lens growth of 73.6% reflects the strength of our market-leading AccuView portfolio. Commercial initiatives, such as our Prioritize Your Eyes campaign, launched to raise awareness around the importance of routine screenings, new products, including early success from AccuView multifocal, and an inventory build contributing about five points. Growth outside the U.S. of 43.1% reflects market recovery and strength of AccuView One Day and recent Asia Pacific AccuView Define Fresh Beauty Launch. Global Surgical Vision delivered growth of 115.8% driven by market recovery and positive momentum related to new products like Technus Eyehance, Technus Synergy, which both launched this year in the U.S. market, and Veritas, our next generation phacoemulsification device. Now regarding our consolidated statement of earnings for the second 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 $2.48 reflects a reported increase of 48.5% and an operational increase of 44.9%. 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 by 340 basis points, primarily driven by the recovery in medical device from prior year COVID-19 related inventory impacts and fixed cost deleveraging. Selling, marketing, and administrative margins improved 110 basis points, due to the recovery of medical device sales from the prior year's negative COVID-19 impact. We continue to invest in research and development at competitive levels, investing 14.6% of sales this quarter. The $3.4 billion investment was a 25% increase versus the prior year due to portfolio progression. The other income and expense line showed net income of $488 million in the second quarter of 2021, compared to net expense of $24 million in the second quarter of 2020, primarily due to reduced litigation-related items, partially offset by lower unrealized gains on securities. Regarding taxes in the quarter, on a GAAP basis, our effective tax rate declined from 8% in the second quarter of 2020 to 5.8% in the second quarter of 2021, primarily driven by a one-time tax benefit the company recognized in the second quarter 2021, resulting from an internal reorganization of certain international subsidiaries. In the second quarter of 2020, the company recorded additional tax benefits related to the transitional provisions of Swiss tax reform which benefited the 2020 tax rate. Excluding special items, the effective tax rate was 14.8% versus 16.7% in the same period last year. I encourage you to review our 10-Q for additional details on specific tax matters. Let's now look at adjusted income before tax by segment. In the second quarter of 2021, our adjusted income before tax for the enterprise as a percentage of sales increased from 29.1% to 33.4%. The following are the main drivers of change to the adjusted income before tax by segment. Medical devices margin improved from 1.2% to 28.6%. driven primarily by overall expense leveraging resulting from the COVID-19 related sales recovery. Consumer health margins improved by 380 basis points, primarily driven by supply chain efficiencies, including the benefit from our skew rationalization program, partially offset by increased investments in brand marketing expenses. Pharmaceutical margins decreased by 450 basis points, primarily driven by increased research and development investment inclusive of the COVID-19 vaccine net costs and general portfolio progression. Moving to important developments. Here's a slide summarizing notable developments occurring in the second quarter. I'll highlight a few starting with our pharmaceutical business. We continue to make positive progress advancing our strong pipeline of innovative medicines and therapies. As we've shared previously, we are rigorous in focusing on differentiated, transformational medical innovation. In the quarter, we announced our decision not to continue a collaboration and license agreement for Cusatuzumab, an investigational therapeutic antibody that targets CD70. The decision is based upon Janssen's review of all available data and in consideration of the evolving standard of care for the treatment of AML. We received EU approval for Ponvory in relapsing multiple sclerosis and also US approval of Riborvan for the treatment of patients with locally advanced or metastatic non-small cell lung cancer with epidermal growth factor receptor exon 20 insertion mutations. In addition, we completed our EU filing for Cilta-Cell, a BCMA CAR-T for the treatment of multiple myeloma. We anticipate US approval for our BCMA CAR-T later this year which will represent a third NME approval this year. Within our medical device portfolio, we continue to make meaningful advancements in our innovation pipeline, launching 17 major first country launches in the first half of 2021, including eight products this quarter. As noted earlier, we received FDA approval and launched Technosynergy and Technosynergy TORIC II intraocular lenses in the U.S., These are next-generation presbyopia-correcting lenses and deliver the widest range of continuous vision and the best near vision among leading PCIOLs. Finally, within the surgery business, the Enseal X1 curved jaw tissue sealer launched in the U.S., expanding the Ethicon advanced bipolar energy portfolio. That concludes the sales, P&L, and pipeline highlights for Johnson & Johnson's second quarter. I'm now pleased to turn the call over to Joe Wolk.

Thank you, Chris. Good morning, and thanks to all of you for joining us today to discuss our strong first half of 2021, specifically the high growth we experienced in the second quarter and our updated outlook for the balance of the year. I hope everyone is having a safe, healthy, and enjoyable summer. As Chris referenced, Johnson & Johnson's businesses remain leaders or are better positioned within the markets in which they compete. While the pandemic makes it difficult to reliably gauge what results will be in any given quarter, you likely noticed that all three segments beat your expectations. We continue to be poised for further growth and value creation, not just in 2021, but more importantly, for 2022 and beyond. Over the past 18 months, our people have been a driving force behind our success and, guided by our credo, They have demonstrated resilience and agility while remaining committed to ensuring our life-saving medicines and products reach patients and consumers around the world. Thanks to the efforts of our 136,000 colleagues across the world, Johnson & Johnson continues to make significant strides towards our mission of improving human health and well-being of everyone, everywhere. Foundational to any healthy business is a focus and commitment to broader stakeholder stewardship. We are proud to share the progress we are making in a transparent and accountable manner. A few weeks ago, we held our annual ESG Investor Update following the publication of our 2020 Health for Humanity Report and our 2025 goals. Through these goals, we aim to deliver even greater long-term value to our broad set of stakeholders. I hope you had the opportunity to view this webcast. If you have not, the replay is still available on the Johnson & Johnson website. Let's get into the results with an update on our cash position. We continue to generate strong free cash flow with approximately $8 billion year-to-date. We ended the second quarter with approximately $25 billion of cash and marketable securities and approximately $33 billion of debt, resulting in $8 billion of net debt. Our financial position and balance sheet remain strong. As we enter the back half of the year, we are well positioned to continue to deploy capital in a strategic, value-creating way that will benefit stakeholders over the long term. Our dividend remains a key priority, and during the quarter, we distributed $2.8 billion to shareholders. Regarding M&A, we continually evaluate strategic opportunities that have the potential to further enhance our business while also driving better health outcomes for patients and consumers. Since Chris covered highlights from our second quarter performance, and our worldwide chairs will provide sector-specific commentary to open the Q&A session, I will now move directly to providing the update to our full year 2021 guidance, which reflects our strong year-to-date performance. For clarity, I will first comment on our core business revenue and then remark on our anticipated COVID-19 vaccine revenue, which is now included in our enterprise guidance. For full year 2021, we continue to expect our base business defined as excluding our COVID-19 vaccine to remain strong. Based on this confidence, we are increasing and tightening our adjusted operational sales range to 9.5% to 10.5%. 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, which accounts for previously completed divestitures in medical devices, consumer health, as well as within other oncology and pharmaceuticals, resulting in an operational sales range of 9.0% to 10.0%, or $90 billion to $90.8 billion for a midpoint of 9.5%, or $90.4 billion. While we don't predict currency movements, utilizing the Euro spot rate relative to the U.S. dollar as of last week at 1.18 and in consideration of other currency movements, there is no change from our previous estimates resulting in favorable currency impact of $1.3 billion or a year-over-year increase of 150 basis points. This results in estimated reported sales in the range of $91.3 billion to $92.1 billion, an increase of 10.5% to 11.5% or 11% at the midpoint versus 2020. Now, a few words on the expected contribution of our COVID-19 vaccine to our updated full year 2021 guidance. Our goal is has always been to bring forth our scientific capabilities and resources to develop a safe and efficacious vaccine that would complement other measures to end the global pandemic. We are proud to have been part of the unprecedented collaboration in the healthcare industry that has led to a number of authorized vaccines in the marketplace. Chris shared earlier that we recorded vaccine revenue in the quarter. Specifically, our COVID-19 vaccine contributed $164 million in revenue in the second quarter, bringing the year to date total to $264 million. At this point, revenue from the first half of the year was provisionally recorded at $5 per dose, given that volumes during the pandemic period were uncertain. Currently, we expect the ultimate final not-for-profit price could be as much as $8 per dose. The final not-for-profit price will fluctuate until the end of the year when we know precisely all the variables that go into the calculation, namely the net cost incurred as well as volumes produced during the pandemic period. Given the firm contracts we have in place, pending advance purchase agreements, we expect to recognize vaccine sales of approximately $2.5 billion in 2021. with more than half of that revenue likely to occur in the fourth quarter. Regarding vaccine manufacturing, we continue to expand our global network to include 10 manufacturing sites for various stages of production. On July 2nd, the European Medicines Agency's Committee for Medicinal Products for Human Use approved an expansion of our facility in the Netherlands, increasing our capacity to produce active drug substance. The FDA also released five batches of drug substance manufactured at the Emergent Biosolutions Bayview facility under the emergency use authorization, and we continue to work with health authorities on the approval of additional drug substance manufactured at Emergent. Now, I do appreciate that many of you are understandably looking beyond 2021 to 2022. It is simply too early to provide specific information on a 2022 outlook for our COVID-19 vaccine given the uncertainty on the need for boosters and new variants. But as recent published clinical data indicates, our vaccine appears to have durability for at least eight months and is effective against the recent Delta variant and other highly prevalent viral variants. At this time, I'd caution you to wait to include future year vaccine projections in your models for our business. The COVID-19 vaccine market will continue to evolve, and we look forward to sharing additional details as more data become available, including the role our vaccine will play for you to forecast future years. Given this and what I already provided on our base business, our new updated guidance expectations are reflected on this slide, reflecting an enterprise total revenue of $94.2 billion at the midpoint. Moving to other items of the P&L. We are now expecting our operating margins to be nearly a 200 basis point improvement over last year, slightly less than our prior guidance as we continue to invest for the long term. We are increasing our other income estimate to a range of $800 million to $900 million. This increase is primarily attributable to increased investment returns related to our employee benefit programs. As a reminder, Pension service costs are recorded in operating expenses while any investment performance related to our employee benefit programs are recorded in other income and expense. Moving to interest expense, based on our year-to-date experience, we are lowering our estimate to a range of $100 million to $200 million. Finally, we are lowering our effective tax rate estimate to a range of 16.0% to 17.0% based on certain one-time benefits realized in the first half of the year. The result of these updates translate to increasing our earnings guidance. We are also tightening the guidance range. The new adjusted operational per share guidance range is 18.4% to 19.6% or $9.50 to $9.60 with a midpoint of 19% or $9.55 per share. While not predicting currency movements, but to provide some direction on the impact of currency fluctuations on our reported adjusted EPS, we expect a slight change from what we communicated on the Q1 earnings call. Currency will now impact EPS by 1.2%, or $0.10 per share. Accounting for that, we would be comfortable with your models reflecting reported adjusted EPS ranging from $9.60 to $9.70, or a midpoint of $9.65, increasing 20.2%. Consistent with what we shared before, given the not-for-profit nature of the vaccine, there is no significant EPS contribution in 2021, and therefore, the EPS guidance I provided is inclusive of the vaccine revenue. I am now pleased and want to thank our worldwide chairs, Jennifer Calvert, Thibault Mangon, and Ashley McEvoy, for their participation in the Q&A portion of our call today. I know this audience values having these leaders on earnings calls from time to time. So before we jump into the Q&A portion of the call, I'd like to ask Jennifer, Thibault, and Ashley each to provide a brief business segment update and qualitative outlook for the remainder of 2021. Jennifer, let's start with the pharmaceutical segment.