Johnson & Johnson

Good morning. Welcome to Johnson & Johnson's third 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 you have 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 call over to Johnson & Johnson. You may now begin.

Good morning. This is Sarah Wood, Senior Director, Investor Relations for Johnson & Johnson. Welcome to our company's review of business results for the third quarter and our updated financial outlook for 2021. On today's call is Joe Walk, Executive Vice President, Chief Financial Officer. And during the Q&A portion of the call, Joe will be joined by Ashley McEvoy, Executive Vice President and Worldwide Chair, Medical Devices, Thibault Mangan, Executive Vice President and Worldwide Chair, Consumer Health, and Jennifer Taubert, Executive Vice President and Worldwide Chair, Pharmaceuticals. 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 and other marketplace dynamics. This means that 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. These materials 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 third quarter sales and P&L results for the corporation and the three segments. Joe will provide some additional business and financial commentary before providing an overview of our cash position and capital allocation. and then conclude with updated guidance on 2021 results. The remaining time will be available for your questions. We anticipate the webcast will last up to 60 minutes. Now let's move to the third quarter results. Worldwide sales were $23.3 billion for the third quarter of 2021, an increase of 10.7% versus the third quarter of 2020. Operational sales growth, which excludes the effect of translational currency, increased 9.9% as currency had a positive impact of 0.8 points. In the U.S., sales increased 7.9%. In regions outside the U.S., our reported growth was 13.8%. Operational sales growth outside the U.S. was 12.1%, with currency positively impacting our reported OUS results by 1.7 points. Excluding the net impact of acquisitions and divestitures, adjusted operational sales growth was 10.6% worldwide, 8% in the U.S., and 13.5% outside the U.S. Turning now to earnings. For the quarter, net earnings were $3.7 billion and diluted earnings per share was $1.37 versus diluted earnings per share of $1.33 a year ago. Excluding after-tax intangible asset amortization expense and special items for both periods, adjusted net earnings for the quarter were $7 billion and adjusted diluted earnings per share was $2.60. representing increases of 18.7% and 18.2%, respectively, compared to the third quarter of 2020. On an operational basis, adjusted diluted earnings per share increased 16.4%. 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 third quarter of 2020 and therefore exclude the impact of currency translation. Beginning with consumer health, worldwide consumer health sales of $3.7 billion increased 4.1%, with growth of 4.5% in the U.S. and growth of 3.7% outside of the U.S., Excluding the impact of divestitures, worldwide growth was 5.7%. Although there is variability across the franchises due to the impact of COVID-19, the overall portfolio is performing well. When comparing to 2019, the consumer health business grew approximately 8% operationally in the quarter. Over-the-counter medicines saw strong growth of 18.2% globally due to share gains in the U.S. along with an increase of pediatric fever incidences and demand for vaccination symptom relief that drove increased sales of Tylenol and Motrin globally. Additionally, category recovery increased demand for cough, cold, flu, and digestive health brands such as Imodium. Sales outside the U.S. benefited from prior year comparisons specifically prior year reduction in consumption in China. Our skin health beauty franchise declined by 3% globally, largely due to the 330 basis point impact of the divestiture of Sedona, the salon-based portion of Dr. Salabo in Asia Pacific. Excluding this impact, The franchise experienced modest growth driven by strong performance in Aveeno and Neutrogena facial moisturizing and body care driven by COVID-19 market recovery and e-commerce growth, partially offset by external supply constraints and lost sales from the sun aerosol recall. Oral care declined 4.5% globally, largely due to the impact of divestitures worth approximately 300 basis points. Excluding this impact, the franchise declined due to external supply constraints for Listerine in the U.S. and negative comparisons to prior year COVID-19-related impacts in EMEA, partially offset by strong performance in Asia-Pacific, driven by strong promotions and brand building behind Listerine's germ-fighting ability. The baby care franchise declined 1.2% globally, resulting from Asia Pacific COVID-19 lockdowns and competitive pressure, mostly offset by strong Aveeno performance, along with category and e-commerce growth in the U.S. Our women's health franchise grew 0.8% globally, primarily due to lapping prior year COVID-19 impacts. And finally, our wound care franchise declined 4.8% globally, driven by unfavorable comparisons to prior year stocking in the U.S. and competitive pressure in Asia Pacific. Moving on to our pharmaceutical segment. Worldwide pharmaceutical sales of $13 billion increased 13.2% with growth of 12.2% in the U.S. and growth of 14.6% outside of the U.S. Excluding the net impact of acquisitions and divestitures, worldwide growth was 13.8%. Additionally, as a reminder for comparison purposes, Q3 of 2020 was negatively impacted by access-related constraints due to COVID-19, resulting in a decrease of roughly 200 basis points in total across key brands. Our strong portfolio of products and commercial capabilities continue to enable us to deliver adjusted operational growth at above market levels. The Immunology portfolio delivered strong global sales growth of 11.7%, driven by double-digit performance of Stelara and Tremphia, offset by declines in Remicade due to biosimilar competition. Stelara continued to show strength in all regions, growing at 21.7%, driven by market growth and share gains of roughly four points in Crohn's disease and nearly seven points in ulcerative colitis in the U.S. Tramphia was up 63.5%, with strong double-digit growth worldwide due to continued positive share growth and additional penetration into the psoriatic arthritis indication. U.S. share increased over two points in psoriasis and over three points in psoriatic arthritis. Oncology also delivered another strong quarter with global sales growth of 16.5%. Darzalex continued its double-digit performance with 42.9% growth in the quarter, driven by share gains, increased penetration of the subcutaneous formulation in the U.S. and EU, and continued launches globally, Darzalex grew share across all lines of therapy, with nearly five points of share growth in the U.S. this quarter, as an example. Erleada also continued its global uptake, with growth of 65.8% in the quarter, driven by global market share gains, which increased in the U.S. alone by nearly two points across all indications, led by the metastatic indication. Imbruvica grew 2.5% globally due to the brand's market-leading share position, but was partially offset by modest share losses in the U.S. and a market that remains constrained due to temporary COVID-19 impact on new patient starts. In addition, growth was negatively impacted by a prior period adjustment in the U.S. that was worth nearly 350 basis points on worldwide Imbruvica growth. Neuroscience grew 4.6% globally, driven by paliperidone long-acting portfolio, posting market and share growth due to increased new patient starts and strong persistency in the U.S. The cardiovascular, metabolism, and other business declined 12.4% globally due to competitive pressures in Invokana and biosimilar competition for Procrit. Pulmonary hypertension achieved strong growth of 16.1%, driven by upsummit growth of 17.1%, and uptravi growth of 18.8%, both driven by market penetration and share gains. And lastly, global sales in the quarter included a $502 million contribution from the COVID-19 vaccine, bringing the year-to-date total to $766 million. Through the first nine months of the year, revenue has been recorded at a not-for-profit price of $7.50. I'll now turn your attention to the medical devices segment. Worldwide medical devices sales of $6.6 billion increased 7%, with growth of 0.8% in the U.S. and growth of 13.3% outside of the U.S. Excluding the impact of divestitures, worldwide growth was 7.6%. In the medical devices segment, we have seen mixed marketplace recovery as the COVID-19 Delta variant and related factors impacted our sales across most of the categories in which we participate within the quarter. With certain procedures, such as spine and knees within orthopedics, deemed to be more elective in nature, continuing to lag in terms of recovery. The interventional solutions franchise delivered another quarter of worldwide double-digit growth at 13.2%, driven by market recovery, success of new products in both electrophysiology and neurovascular, and strong commercial execution. Worldwide surgery grew 10.2%, primarily driven by recovering procedure volumes and market expansion in Asia Pacific. Advanced surgery grew 12.6% globally, driven by the positive impact of procedure recovery, new product introductions, and China Tier 2 and 3 hospital market expansion across endocutters, biosurgicals, and energy, partially offset by continued competitive pressure in endocutters and energy in the U.S., Building on the Monarch robotic milestone communicated last quarter, we reached another significant commercial achievement, now enabling over 10,000 bronchoscopy procedures. General surgery grew 8.1% globally. Wound closure is the largest contributor, with growth driven by procedure recovery, China Tier 2 and 3 hospital market expansion, and continued competitive growth in both traditional and barb suture markets. The worldwide orthopedics franchise declined 0.3%, with U.S. declines of 4.5%, reflecting the impact of COVID-19 on procedures within the quarter, partially offset by 6.8% OUS growth. Trauma grew 3.7% globally, 5.3% increase in the U.S., and a 0.9% increase outside the U.S., Results reflect global market recovery dynamics and the success of recent product introductions like our cannulated compression headless screws, advanced nailing systems, and Fibulink. HIPS grew 2.3% globally, driven by recovery and procedures, primarily outside the U.S., and continued leadership in the interior approach, supported by our robust portfolio of new products such as actus femoral stem, pinnacle dual mobility, and vellus hip navigation. In Q3, we introduced new image guidance capability for vellus hip navigation, which supports surgeons who prefer the posterior approach in addition to the anterior approach. Needs grew 2.1% this quarter, reflecting recovery of procedures, especially in markets outside of the U.S., growth in the U.S. outpatient surgery channel, and continued momentum from recently launched products, including the VELUS robotic-assisted solution and our AttuneMe portfolio. Results in the quarter also benefited from the timing of international tender orders worth approximately 350 basis points of global growth. Lastly, within orthopedics, Spine declined 11% globally, driven primarily by a deceleration in procedure volume related to COVID-19. The Worldwide Vision franchise grew 10% this quarter, primarily driven by market recovery, commercial initiatives, and new products driving enhanced competitiveness. Contact Lens global growth of 6.4% reflects continued positive momentum for our market-leading AccuView portfolio, success of commercial initiatives, and recently launched products such as AccuView Oasis Multifocal and AccuView Define Fresh. The decline of 4.3% in the U.S. includes a negative impact of prior year stocking worth about 10 points. Surgical Vision delivered global growth of 22.1%, driven by market recovery across all regions and success of recently launched products continuing to enhance competitiveness, including Technus IHance and Technus Synergy. Now regarding our consolidated statement of earnings for the third quarter of 2021, I'd like to highlight a few noteworthy items that have changed compared to the same quarter of last year. cost of products sold improved by 200 basis points driven by recovery from prior year COVID-19 related impacts and favorable enterprise mix from growth in pharmaceuticals. We continue to invest strategically in research and development at competitive levels, investing 14.7% of sales this quarter. The $3.4 billion investment was a 20.5% increase versus the prior year due to portfolio progression. In-process research and development reflects a partial impairment expense of $900 million for assets associated with the acquisition of ORIS. The other income and expense line changed from a net expense of $1.2 billion in the third quarter of 2020 to net expense of $1.9 billion in the third quarter of 2021, primarily due to an increase in litigation-related charges. Joe will provide more details on both the IPR&D and litigation-related charges. Regarding taxes in the quarter, on a GAAP basis, our effective tax rate was 4.7% in the third quarter of 2021 compared to 19.2% in the third quarter of 2020, mostly driven by unfavorable tax reserves and positions from the prior year, which did not reoccur. along with lower income and higher tax jurisdictions driven by one-time current quarter special items. Excluding special items, the effective tax rate was 13.5% versus 19% in the same period last year. I encourage you to review our upcoming third quarter 10-Q filing for additional details on specific tax matters. Lastly, I'll direct your attention to the boxed section of the slide where we have also provided our income before tax, net earnings, and earnings per share adjusted to exclude the impact of intangible amortization expense and special items. Now let's look at adjusted income before tax by segment. In the third quarter of 2021, our adjusted income before tax for the enterprise as a percentage of sales remained fairly consistent to the prior year with some changes between our three segments. Pharmaceutical margins declined from 46.4% to 43.9%, driven by research and development investment to enable portfolio progression. Medical devices margin improved from 21.6% to 25.5% driven by recovery from prior year COVID-19 related impacts and overall expense leveraging resulting from sales recovery. Finally, consumer health margins declined from 24.4% to 23.3%, driven by a 2020 one-time item and increased brand marketing expenses, partially offset by COGS improvement. That concludes the sales and earnings portion of the Johnson & Johnson third quarter results. I'm now pleased to turn the call over to Joe Walk.

Thank you, Sarah, and good morning, everyone. We appreciate you joining us to discuss our third quarter results, which reflect a continued strength in our pharmaceutical and consumer health businesses and solid growth in medical devices despite COVID-19 variability across geographies. How do we see the current medical device landscape? In the U.S., surgical procedures across most specialties in which we compete decelerated in late July and August with the highest impacts consistently in those procedures deemed to be more elective, such as knees and spine. Globally, new cases of COVID-19 and hospitalizations related to the Delta variant have gradually declined in recent weeks, and we are encouraged by more positive procedure trends in many Western European markets where restrictions are beginning to ease. Some hotspots still remain in parts of the U.S., the U.K., Eastern Europe, and Southeast Asia, and the growing impact from reduced medical staffing are constraining procedure volumes. We continue to believe these variables are more short-term in nature, and the medical devices market remains attractive as the long-term factors leading to the need for medical and surgical intervention have not changed due to COVID-19. The segment leaders on the call will provide more insights into each of their businesses during the Q&A, but let me briefly touch upon some pipeline updates for the quarter. We continue to advance our strong pipeline of innovative medicines and products. This progress is supported by our commitment to investments in R&D that have increased $1.9 billion or 23% on a year-to-date basis. In the quarter, We received U.S. approval for Invega-Hafira, the first and only twice-yearly treatment for adults with schizophrenia. And we announced the start of a phase three study of our investigational RSV vaccine in older adults. Subsequent to the quarter, the FDA granted orphan drug designation for nipicalimab in chronic inflammatory demyelinating polyneuropathy, or CIDP, a rare neurological disorder of the peripheral nerves characterized by gradually increasing sensory loss and weakness associated with loss of reflexes. This represents nipicalimab's fourth orphan drug designation. We also anticipate U.S. approval for our BCMA CAR-T later this year, which will represent a third new product approval in 2021. However, we are stopping further investigation in the fontan-paleated population of massatentin, 10 milligram, in pulmonary hypertension, as results from the Roboto Phase III trial did not yield sufficient clinical benefit. Regarding our COVID-19 vaccine, We are pleased that on Friday, the FDA's Vaccines and Related Biological Products Advisory Committee voted unanimously to recommend emergency use authorization for a booster dose of the Johnson & Johnson COVID-19 vaccine for adults aged 18 and older at least two months following initial single-shot vaccine. The recommendation is based on the totality of evidence, with clinical and real-world data showing that while a single shot offers strong and lasting protection, a booster increases protection, particularly against symptomatic COVID-19. We are very excited to share more about the entirety of our robust pharmaceutical pipeline and long-term growth outlook at our business review on November 18th. In our medical device business, we built upon a record number of 17 significant product introductions in the first half of 2021 by introducing the enhanced shoulder system in the third quarter. a first-to-market fully integrated shoulder arthroplasty system designed to treat a broad range of cases in hospital or outpatient settings where economic value and operational efficiency are important considerations. We also announced results from a real-world study showing that the Echelon Circular Powered Stapler is associated with a major reduction in serious complications following colorectal surgery when compared with manual staplers, reinforcing clinical evidence as a meaningful differentiator in product selection. Let's transition to financials, starting with commentary on special items for the quarter. Other income and expense in the third quarter includes a $2.1 billion charge of litigation expenses, primarily driven by an incremental $1.4 billion charge associated with the recently announced Qualified Settlement Fund for current and future talc claims. The Qualified Settlement Fund is intended to facilitate a final, equitable resolution of all talc litigation in a structured manner through established bankruptcy law precedent. Additionally, there is another $800 million legal expense in the quarter representing final resolution of outstanding claims related to Risperdal. Another special item worth noting is on the in-process research and development line. We have a broad offering across the digital robotic surgery landscape and continue to make meaningful progress in advancing differentiated solutions across our portfolio. We are very pleased with the adoption of our Monarch platform for lung bronchoscopy and are well on our way to expanding Monarch indications, including initiating a clinical trial exploring the potential for localized drug delivery for the treatment of lung cancer and submitting an application to the FDA for Monarch to be used in the treatment of kidney stones. Our VELUS robotic-assisted solution for total knee replacement is commercialized in the U.S., has received several OUS approvals, and we are experiencing higher utilization on the systems placed to date than we projected. We continue to be committed to the development of a general surgery offering with OTAVA, but as Sarah mentioned, we recorded a partial in-process R&D charge for $900 million in the third quarter. The accounting for this charge contemplates a first in human delay of approximately two years from our earlier projections of the second half of 2022, reflecting technical development challenges and COVID-19 related disruptions, including supply chain constraints being experienced broadly across all industries. Clearly, we realize the importance that a differentiated digital robotic platform can have for patient outcomes and the market. We continue to invest in and be committed to the platform and will provide updates to the external community as warranted. Let's transition to a few comments on our cash position. We continue to generate strong free cash flow with $15 billion year-to-date. We ended the third quarter with $31 billion of cash and marketable securities and approximately $34 billion of debt, resulting in $3 billion of net debt. Our financial position and balance sheet remain strong, and we are well positioned to continue to deploy capital in a strategic, value-creating way consistent with our priorities that will benefit stakeholders over the long term. Moving to our full year 2021 guidance, given where we are in the year, our current assumptions around continued recovery in medical device markets and confidence in the business we are tightening our adjusted operational sales range to 12.9% to 13.5%. This adjusted operational sales growth is on a constant currency basis, consistent with how we assess our business performance. This guidance also incorporates the estimated $2.5 billion of COVID-19 vaccine sales, consistent with our July guidance. We are maintaining our estimate for the net impact of acquisitions and divestitures of approximately 50 basis points, resulting in an operational sales range of 12.4% to 13.0%, or $92.8 billion to $93.3 billion for a midpoint of 12.7% or $93.1 billion. As you know, we do not predict the impact of currency movements. But utilizing the euro spot rate relative to the U.S. dollar as of last week at 1.16, there's an estimated positive impact of foreign currency translation of approximately 150 basis points, consistent with our July guidance, resulting in estimated reported sales growth between 13.9% and 14.5% compared to 2020, or $94.1 billion to $94.6 billion. Moving to other items of the P&L. Consistent with our previous guidance, you can expect our operating margins to be nearly a 200 basis point improvement over last year. Given year-to-date trends, we are modestly increasing and tightening our other income estimate to be a range of $900 million to $950 million. Regarding interest expense, again, based on our year-to-date experience, we are also tightening the range of our estimate to $100 million to $150 million. And finally, we are lowering our effective tax rate estimate to a range of 14.5% to 15.5% based on the occurrence of certain one-time favorable tax positions and settlements both in the U.S. and abroad. Considering those updates, we are comfortable with adjusted earnings per share guidance ranging from $9.65 to $9.70 on a constant currency basis, a guidance increase of 13 cents at the midpoint. While not predicting currency movements, but to provide some insights on the potential impact on EPS, a reported adjusted EPS would be positively impacted by approximately 12 cents per share. Accounting for that, we would be comfortable with your models reflecting reported adjusted EPS ranging from $9.77 to $9.82, an increase versus 2020 of 22% at the midpoint. 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. As always, none of our achievements are possible without the hard work of our world-class team of employees around the globe, whose dedication ensures that we deliver for all our stakeholders. We continue to make significant strides towards our mission of improving human health and well-being of everyone, everywhere, and I am grateful for their efforts and commitment. I'd like to close my prepared remarks by briefly commenting on the CEO transition that was announced earlier in the third quarter. First, I want to acknowledge Alex for his leadership and contributions to Johnson & Johnson during his tenure. It has been my pleasure to work alongside him, particularly over the last three years, and to observe and to learn from him both professionally and personally. I'm also pleased to congratulate Joaquin on his new role starting this January. I know firsthand that he shares the same commitment to patients, employees, and society that Alex considered core. Joaquin similarly values innovation that underscores our strategy for long-term success. Both gentlemen will be featured at the previously mentioned November 18th Analyst Day, sharing their thoughts on our business and plans for the future. I am pleased our worldwide chairs, Ashley McEvoy, Thibault Mangan, and Jennifer Talbert, are here with me today to address your questions. Jen McIntyre from our investor relations team will facilitate the Q&A portion of the call, so I will now turn it over to her to begin the Q&A. Jen?