Johnson & Johnson

Good morning and welcome to Johnson & Johnson's first quarter 2022 earnings conference call. All participants will be in a 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 Joe Wolk, Executive Vice President and Chief Financial Officer of Johnson & Johnson. Thank you for joining us today to discuss our company's first quarter 2022 financial results and full year 2022 outlook. While many things have changed in the world since our last call, much has stayed the same for Johnson & Johnson. We continue to deliver reliable growth and generate meaningful free cash flow, enabling us to invest and advance our pipeline and increase our dividend for the 60th consecutive year, and continue to make a positive impact across the landscape of healthcare. It is, however, important to take a few moments to recognize the current events that are impacting the world we're living in. Today, while we're all still managing through the global pandemic, as evidenced by the current surge of cases in China, we also acknowledge the increasing hardship brought on by the war in Ukraine. We remain focused on the safety of our employees and their families. Guided by our credo and grounded in our purpose, our hearts are with all those affected by these crises and hope for a rapid resolution to both. Now I'd like to turn the program over to Jessica Moore, Vice President, Investor Relations, to take you through our Q1 results.

Thank you, Joe. 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 regarding, among other things, our future operating and financial performance and the anticipated separation of the company's consumer health business. 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 significant 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 2021 Form 10-K, 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 first quarter sales and P&L results for the corporation and the three segments. Following, Joe will provide additional business and financial commentary before sharing an overview of our cash position, our capital allocation priorities, and updated guidance for 2022. The remaining time will be available for your questions. During the Q&A portion of the call, Joe will be joined by Ashley McAvoy, Executive Vice President and Worldwide Chair, MedTech, Thibault Mangon, Executive Vice President and Worldwide Chair, Consumer Health, and Jennifer Talbert, Executive Vice President and Worldwide Chair, Pharmaceutical. We have heard your feedback and are implementing a few enhancements this quarter. First, we are now providing select earlier phase clinical trial information on our pharmaceutical pipeline to streamline your data collection efforts from clinicaltrials.gov. Second, rather than sharing detailed business performance commentary on each part of the business, I will summarize significant business drivers, leaving more time for Q&A. You can find additional detailed segment commentary in our earnings presentation. We anticipate the webcast will last up to 60 minutes. Now let's move to the first quarter results. Worldwide sales were $23.4 billion for the first quarter of 2022, an increase of 5% versus the first quarter of 2021. Operational sales growth, which excludes the effect of translational currency, increased 7.7%, as currency had a negative impact of 2.7 points. In the US, sales increased 2.7%. In regions outside the US, our reported growth was 7.2%. Operational sales growth outside the US was 12.6%, with currency negatively impacting our reported OUS results by 5.4 points. Excluding the net impact of acquisition and divestitures, adjusted operational sales growth was 7.9% worldwide, 2.8% in the US, and 12.9% outside the US. Turning now to earnings. For the quarter, net earnings were $5.1 billion and diluted earnings per share was $1.93 versus diluted earnings per share of $2.32 a year ago. Excluding after-tax intangible asset amortization expense and special items for both periods, adjusted net earnings for the quarter were $7.1 billion and adjusted diluted earnings per share was $2.67. representing increases of 3% and 3.1% respectively, compared to the first quarter of 2021. On an operational basis, adjusted diluted earnings per share increased 6.2%. I will now comment on business segment sales performance highlights. Unless otherwise stated, percentages quoted represent the operational sales change in comparison to the first quarter of 2021, and therefore exclude the impact of currency translation. Beginning in 2022, certain over-the-counter products previously reported under the pharmaceutical segment have been reclassed to consumer health. These products represent roughly $100 million of sales per quarter. Please refer to the supplemental sales schedules for prior year restatements. Also, as stated in our 2021 10K, effective January, our medical devices segment is now referred to as MedTech. Beginning with consumer health, worldwide consumer health sales of $3.6 billion increased 0.8% with a decline of 3.4% in the U.S. and growth of 4.1% outside the U.S. Excluding the impact of acquisitions and divestitures, worldwide growth was 1.6%. Consumer health was negatively impacted by industry-wide external supply constraints, primarily due to ingredients and packaging availability, as well as labor shortages largely reflected in our skin health and beauty business, worth approximately 280 basis points worldwide and 500 basis points in the U.S. Adjusting for these constraints, consumer health delivered solid results, primarily due to above-market growth in OTC driven by increased Tylenol, Motrin, and upper respiratory product sales. Moving on to our pharmaceutical segment. Worldwide pharmaceutical sales of $12.9 billion increased 9.3%, with growth of 2.9% in the US and 16.7% outside of the US. Base pharmaceutical growth was driven by our broad portfolio of products paired with strong commercial execution. enabling us to deliver above-market adjusted operational sales growth, including six assets with double-digit growth in the quarter. Base business growth was due to strength from Darzelex, Tramfaya, Stellara, Erlita, and our Paliperidone long-acting portfolio. Growth was partially offset by LOE pressures from both Remicade and Zytiga, along with decrease in Imbruvica and Xarelto sales. Darzalex continues to drive very strong operational growth, with sales increases of 40.3%, driven by subcutaneous formulation penetration and meaningful share gains across all lines of therapy and in all regions. Imbruvica sales declined 3.9% worldwide due to increased competition from novel oral agents, particularly in the U.S. and Bruvica maintains its market leadership position worldwide and continues to drive growth outside of the U.S. despite ongoing competitive pressures. Xarelto sales declined 13.8% in the U.S., driven largely by a net unfavorable prior period price adjustment and increased costs for patient access, partially offset by continued demand and market growth. The COVID-19 vaccine also contributed approximately $500 million to sales in the quarter. Given these results, we remain confident in our ability to deliver our 11th consecutive year of above-market adjusted operational sales growth in 2022. I'll now turn your attention to the MedTech segment. Worldwide MedTech sales of $7 billion increased 8.5% with growth of 5.6% in the U.S. and growth of 11.1% outside the U.S. Excluding the impact of acquisitions and divestitures, worldwide growth was 8.6%. We see strong performance in Q1 driven by market recovery, focused commercial strategies, and differentiated new products driving enhanced or sustained market share across most of the 11 priority platforms. We continue to monitor potential impacts on elective procedures driven by COVID-19 resurgences across various markets. Before highlighting the financial performance for the segment, I'd like to share a few notable first quarter MedTech events that demonstrate our stated aspirations of entering higher growth market segments and continuing to build upon digital technologies across the portfolio. Two acquisitions were closed in the quarter, Crossroads Extremities, with a differentiated portfolio of Bunyan and Hammer Toe Solutions in the fast-growing elective foot and ankle market, and Cuptimize, which will be a new addition to the VELUS digital surgery platform of connected technologies. The Cuptimize solution is designed to give surgeons an easy-to-use tool to better understand and address the impact of abnormal motion between the spine and pelvis in some patients who require total hip arthroplasty and may help reduce the risk of dislocation related to pelvic tilt. I am also pleased to share that Fast Company selected Johnson & Johnson MedTech as one of its top 10 world's most innovative health companies of 2022, recognizing MedTech's success and commitment to delivering breakthrough scientific innovation and reimagining health in an increasingly digital world. The Interventional Solutions franchise delivered another quarter of worldwide double-digit growth at 17.4%, with double-digit growth in both the US and OUS regions, driven primarily by success of new products and electrophysiology, commercial execution, and continued market recovery. Worldwide surgery grew 5%, driven by strong performance in wound closure and biosurgery, where we continue to gain market share. Monarch-enabled procedures now exceed 14,000 since launch. providing continued evidence of the adoption of Monarch technology in patient treatment regimens. The worldwide orthopedics franchise grew 5.6%, reflecting COVID-19 recovery, continued penetration in the U.S. Ambulatory Surgery Center channel, or ASCs, and penetration of new product launches, such as enhancements to VELUS hip navigation, VELUS robotic-assisted solution, and a tuned cementless knee system. partially offsetting this growth with softness and spine procedures in the U.S. The Worldwide Vision franchise continued its double-digit growth, growing 13.9% this quarter. Contact Lens' global growth of 10.6% 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 to find fresh. Surgical Vision delivered global growth of 23.8%, with both the US and OUS posting growth above 20%, fueled by market recovery and share momentum due to the success of recently launched products, including Technus IHance and Technus Synergy. As a reminder, additional sales commentary for all of our segments can be found on the slides. Now turning to our consolidated statement of earnings for the first quarter of 2022, I'd like to highlight a few noteworthy items that have changed compared to the same quarter of last year. Cost of products sold deleveraged by 70 basis points, driven by unfavorable mix in the med tech business and commodity inflation in the consumer health business. Sales, marketing, and administrative deleveraged by 110 basis points. driven by higher brand marketing expenses in consumer health and timing of brand marketing expenses in the pharmaceutical segment. We continue to invest strategically in research and development at competitive levels, investing 14.8% of sales this quarter. The $3.5 billion investment was an 8.9% increase versus the prior year primarily due to portfolio progression in pharmaceutical and med tech. In process research and development reflects an impairment expense of $610 million for certain indications associated with BermeciMab, the investigational compound acquired from exBiotech Inc., as disclosed in our previous SEC filings. This impairment was driven by the termination of development of BermeciMab for atopic dermatitis based on efficacy data. The other income and expense line was net income of $102 million in the first quarter of 2022, compared to net income of $882 million in the first quarter of 2021. This decrease was the result of lapping prior year gains on the divestiture of Doxil, Calix, and Evra in 2021, higher unrealized losses on securities, and consumer health separation costs. This was partially offset by favorable returns associated with our employee benefit plans. Regarding taxes in the quarter, our effective tax rate was 12.2% versus 16.6% in the same period last year. The decreased tax rate was primarily driven by lower U.S. income due to higher unrealized losses on securities and the impairment of Burmecumab IP R&D compared to prior year divestiture gains. Excluding special items, the effective tax rate was 13.3% versus 16.5% in the same period last year. I encourage you to review our upcoming first quarter 10 filing for additional details on specific tax matters. Lastly, I'll direct your attention to the box 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 first quarter of 2022, our adjusted income before tax for the enterprise as a percentage of sales decreased from 37.1% to 35.1% due to product mix, commodity inflation, increased brand marketing expense, portfolio progression in R&D, and comparisons to gains from prior year divestitures. Pharmaceutical margin declined from 45.5% to 44.1%, primarily driven by timing of brand marketing expenses and general portfolio progression in R&D. Medtech margins declined from 30.6% to 27%, driven by unfavorable product mix. Finally, consumer health margins declined from 26.8% to 22.1% due to commodity inflation and higher brand marketing expenses. This concludes the sales and earnings portion of the Johnson & Johnson first quarter results. I am now pleased to turn the call back over to Joe Walk.

As Jess just mentioned, Johnson & Johnson posted solid performance for the quarter, continuing to invest in the business for the long-term success while overcoming multiple macroeconomic headwinds, including inflationary pressures and higher input costs. These external challenges include limited availability and rising prices of certain commodities, as well as increased costs for labor, energy, and transportation. These impacts are pervasive across the enterprise, but most notable in consumer health. We expect these pressures will continue to some degree throughout the remainder of 2022. However, mitigation efforts are underway, including cost improvement initiatives, strategic price increases, and contract negotiations with external supply partners. We are committed to sustaining supply of the products, medicines, and treatments that consumers and patients want and need. Turning to our segments and notable events in the quarter. MedTech led our enterprise performance with nearly 9% adjusted operational sales growth. We continue to drive this business forward and are increasing the value of our pipeline through innovation, internally and externally. We were pleased to see a steady uptick in surgical procedures this quarter with the easing of COVID restrictions in many parts of the world, but we recognize that the situation is fluid, which requires monitoring. Building on more than 20 major new product launches in 2021, Medtech announced the addition of two new innovations to our Attune knee portfolio. The Attune Cementless Fixed Bearing Knee with Affixium 3DP technology and the Attune Medial Stabilized Knee System. In our pharmaceutical business, we continue to deliver above-market growth driven by volume as evidenced by our recently published 2021 Janssen U.S. Transparency Report which reflects our fifth consecutive year of price decreases across the portfolio, despite inflationary pressures. We also continue to advance our pharmaceutical pipeline. This quarter, we received FDA approval for Carvicti, a CAR-T therapy for the treatment of multiple myeloma, developed together with our partner, Legend Biotech. We are partnering with clinics, utilizing a phased approach to begin patient dosing, and the feedback to date has been positive. We also filed to Clistamab, our BCMA CD3 bispecific antibody seeking EMA approval, and we also received priority review from the FDA, potentially expanding our multiple myeloma portfolio further. In our consumer health business, we remain focused on delivering on our 2022 performance objectives, continuing to achieve above-market growth in our over-the-counter medicines business while navigating industry-wide supply constraints that have primarily impacted our skin health beauty business. We continue to be excited about the activity related to the announcement we made in November on the creation of two new industry-leading companies, the New Johnson & Johnson and the New Consumer Health Company. For the New Johnson & Johnson, the portfolio will remain well diversified, with 25 brands delivering over $1 billion in sales annually, holding market-leading positions across key therapeutic areas and franchises. The financial hallmarks of Johnson & Johnson will remain the same, including a well-defined capital allocation strategy, a disciplined approach to inorganic growth, and a strong balance sheet, while also creating opportunities to sharpen focus on execution and clinically differentiated innovation. The new consumer health company will also have a strong financial profile and be better positioned to drive incremental growth, realizing increased potential in new markets through a more agile operating model. The company will continue to deliver science-backed innovation and enhance digital consumer-centric solutions. The consumer health separation team is making substantial progress related to our efforts in establishing the new independent company. As previously mentioned, we cannot disclose new financial information specific to consumer health in order to preserve optionality on the various separation pathways. Our timelines remain unchanged. We anticipate announcing key executive leadership appointments for the new consumer health company in the coming months with plans to provide the new company name and headquarters location around the middle of this year. In the second half of 2022, we plan to provide the updated path forward and applicable financial information, such as refined standup cost estimates and potential short term to synergies. Finally, consistent with previous communications, we expect to execute the separation in 2023. You have our ongoing commitment adhering to the regulatory framework to provide transparent updates for material decisions on a timely basis. Turning now to cash and capital allocation. We generated free cash flow for the quarter of nearly $3.4 billion. At the end of the first quarter, we had approximately $30 billion of cash and marketable securities and approximately $33 billion of debt for a net debt position of approximately $3 billion. Our capital allocation priorities remain unchanged. Internal innovation remains critical to our future growth and a top priority. In the first quarter, we increased R&D investment by approximately 9% compared to the first quarter of 2021. We also continue to evaluate opportunities to complement the current portfolio with acquisitions that build upon our capabilities, address portfolio gaps, or play in higher growth markets while yielding solid financial returns. As I mentioned earlier, we were pleased to announce today that our Board of Directors approved an increase in our quarterly dividend for the 60th consecutive year. from $1.06 per share to $1.13 per share, an increase of 6.6%. Moving to full year 2022 guidance and key considerations. I'll start with comments on our COVID-19 vaccine and foreign exchange impacts, essentially the only items with updates from our January guidance. As market demand for all COVID-19 vaccines is currently challenged by global supply surplus and vaccine hesitancy in developing markets, we have made the decision to suspend guidance for sales of our COVID-19 vaccine. This will enable investors to focus on the performance of our core businesses, which drive the current and future value for investors. We are maintaining the total adjusted operational earnings per share guidance we provided in January, absorbing, if need be, the modest income impact from the COVID-19 vaccine. Regarding foreign exchange, as you know, we don't offer guidance or predictions on currency movements. But to give you a sense of the impact currency may have on potential full-year reported results, utilizing the euro spot rate relative to the U.S. dollar as of last week at 1.08, there is an incremental unfavorable currency impact of $1.1 billion on reported sales and an unfavorable 25 cents for reported adjusted earnings per share versus the calculation related to January's guidance. The full year unfavorable impact is now projected to be $2.5 billion on reported sales and 45 cents on reported adjusted earnings per share. All other line items for which we provide guidance remain the same as communicated in January. To reiterate, we are maintaining our adjusted operational earnings per share guidance. We don't provide quarterly guidance, but do understand that you find value in us providing some qualitative considerations as you update your models. In consumer health, we expect supply constraints to continue throughout the year, but not to the same extent in the second half. As a result, we anticipate that the back half performance will improve over the first half. For MedTech, while the first quarter demonstrated faster recovery than we anticipated, our full year expectations remain fairly intact. We anticipate continued market recovery and uptake from recently launched products and are monitoring the ever-changing COVID dynamics, particularly the surging cases in China. Similar to consumer health, we expect the second half to be stronger than the first half As a reminder, with respect to growth rates, the second quarter was the strongest quarter for MedTech in 2021. The expectations for the pharmaceutical-based business remain the same. We anticipate delivering another year of above-market adjusted operational sales growth with relatively consistent growth throughout the remainder of the year. In summary, Johnson & Johnson had a solid start to the year despite managing macroeconomic headwinds and we remain confident in our business. I would like to recognize the continued efforts of our 144,000 global colleagues focused on delivering our innovative healthcare solutions to our Credo stakeholders. Their unwavering dedication and support continue to inspire, and on behalf of the executive team, I'd like to extend our gratitude. I am now pleased to welcome to the call Ashley McEvoy, Thibault Mongon, and Jennifer Calvert, our worldwide chairs, to address your questions. Kevin, can you please provide instructions and open the line for Q&A?

Ladies and gentlemen, if you'd like to ask a question at this time, please press star, then 1 on your telephone keypad. If you'd like to withdraw your question, press star, then 2. Please limit your questions to one question only. Our first question today is coming from Larry Bagelson from Wells Fargo. Your line is now live.

Good morning. Thanks for taking the question. So many different places to go, but Joe, I'll start with M&A. There are comments on the tape stating that you're eager to deploy cash to M&A, especially for devices. So maybe for you or Ashley, can you add more color to your thinking there and the types of opportunities to consider? You've talked about reaching the top of the peer set in devices. That would seem to require a relatively large deal or a series of small to medium size deals to move the needle. Is that a fair way to think about it? Thanks for taking the question.

Yeah, so Larry, I'll start and then I'll turn it over to Ashley for some thoughts specific on medical devices. But before I answer, Larry, I do want to compliment you and your team for the foreign exchange report that you guys issued back, I think it was on April 13th. That was just, it's a tough topic to really grasp. And you guys did a fantastic job in assessing what it meant for the medical device industry. It was really a fantastic report, so well done. With respect to cash, as you heard us in January, we are reaching our lowest levels of net debt, and we remain very active. You could talk to TiVo, Jennifer, and Ashley with respect to ideas that they are bringing forth. We continue to have the same principles that we've had historically. We want to make sure there's a strategic fit. And by that, I simply mean we've got capabilities, we've got scientific expertise. Perhaps it's just our scale that adds more value to that asset than where it currently resides. And then we want to make sure that we compensate shareholders for the risk that we're bearing on their behalf when we do so. I would not get overly locked into size. Johnson & Johnson, quite frankly, has been built through a number of smaller acquisitions, and really the outliers are these larger acquisitions. But we look at really the strategic merit and then the financial value creation and don't get locked into saying something is too small or too big with respect to adding to our already dynamic internal portfolio and pipeline. Ashley, I don't know if you want to comment on that.

Yeah, no, Larry, maybe before I get to M&A, just kind of some macro thoughts on MedTech and the quarter. You know, I'm pleased with the results of the quarter. We saw positive signs of the market recovery. You know, clearly, while COVID has not disappeared, you know, health systems around the world are becoming increasingly more resistant with each passing wave. And as we know, the world is is a lot more equipped to manage the pandemic, and quite frankly, so is Johnson & Johnson. So, encouraged to see in quarter one that we continue to maintain our path to above-market performance. You know, we referenced that this is kind of a growth at scale, if you will, 11 $1 billion platforms, really most of them growing or maintaining share, and we saw robust sales growth across all four of our franchises and all four of our regions. You know, some standouts encouraging to see both vision surgery and vision care, both double-digit performance and growing market share, really fueled by innovation in Acuvue and Technus. We are the world leader in electrophysiology, still a category that has significant underpenetration. We've had 11 consecutive years of double-digit performance and really significantly enhanced our share gain. We're the world leader in biosurgery. The business was up almost 10%. really driven by a clinically differentiated portfolio. And then finally, and enthusiastically, I say we had strong performance in joints, really by penetrating some new sites of care like ASCs, both with hips and knees. So when I look forward, I'm encouraged by the organic agenda that we see in innovation, like with the likes of the FDA approval on Accu-V Theravision, the first drug-eluting contact lens. As Joe mentioned earlier, around really shoring up high-growth segments in knees with the tuned fixed bearing. And then really with Serenovus, the launch of Emberguard, the balloon catheter. So continue to advance robotics and digital surgery. You'll hear us talk about Monarch, 14,000 cases with a big pipeline of new indications. And then VELUS completing over 2,000 cases. So when I think about the future of M&A, Larry, we're going to continue to do tuck-ins and to really digitize the patient experience. You heard us talk about Cuptimize as an example around really adding a precise delivery to hit navigation to improve outcomes. You're going to see us continue to penetrate fast-growing segments like what we have in neurovascular, as an example. 90% of our capital deployment has been to a billion dollars or more, but we do intend to make sure that we are well-positioned to be in the highest growth end-state markets.

Thank you. Our next question today is coming from Chris Schott from J.P. Morgan. Your line is now, Lyle.

Great. Thanks so much. Maybe, Ashley, just following up on some of your MedTech comments, can you specifically comment on on China in terms of the impact you're currently seeing to the business and your outlook for that market specifically given some of the lockdowns that we're seeing there. And then my kind of core question was just on Imbruvica. It seems like prescriptions here are really starting to see some erosion, and I'm trying to understand the dynamics you're expecting going forward. So is this, especially maybe the U.S. market, are you expecting that this erosion continues, or do you see dynamics in place that we could start to see some of those prescription trends start to stabilize a bit? Thanks so much.

Yeah, sure, Chris. So first, you know, we have a, I would say, very strong and healthy business in China where the world, we are number one in med tech in China. We have a very diversified portfolio from surgery to orthopedics to interventional as well as vision. We did experience an impact probably in the March timeframe due to the recent surge of the viruses happening and the lockdowns, particularly in Shanghai and now other regions. We do anticipate that to continue in April and through the month of May. But like we've seen, I think China might, you know, come down a bit faster, but it comes back faster too. We have very strong leadership there, and there are a lot of patients that need care. I'll turn it to Jennifer maybe to talk about your second question.

Great. Thanks a lot. Hi, Chris, and hello, everybody. A few comments on the pharmaceutical business, and then I'll get to the question on Imbruvica. First, for our farm business, I was really proud that we delivered $12.9 billion in worldwide sales. We're definitely above market adjusted operational growth of 9.3%. And this is our sixth quarter where we achieved worldwide sales exceeding $12 billion. And as I look across the globe, the growth was really broadly based across our portfolio in the regions with particularly strong growth in EMEA, Asia-Pac, and Latin America. During the course of the quarter, we really continued to maximize the value of our key brands, so strong double-digit growth across six of them, including Darzalex, Erleada, Tramphia, and Vegas Estenis, Bravado, and Endedurant. And we also had a number of important milestones, the first being the FDA approval of CARVICTI, which is our first cell therapy for patients with relapsed or refractory multiple myeloma. The Teclistamab filing in the EU was mentioned. The FDA approved expanded label indications for Cabinuva to be administered every two months for the treatment of HIV in virologically suppressed adults and adolescents. And we presented great new data on Tramphia in our approved indications of psoriasis and psoriatic arthritis, as well as from our Phase II studies where we're evaluating the product in Crohn's disease and also in UC. So if we take a look at Imbruvica more specifically, Imbruvica sales did decline for the quarter, 3.9%, and this really was a U.S. story. Outside the U.S., our sales actually grew 4.5%. In the U.S., performance was impacted by both competitive factors with a number of new competitors in the market, as well as market softness. We haven't seen that market fully rebound to the pre-COVID levels yet. As we take a look at Imbruvica, boy, Imbruvica has really changed the standard of care for adults with CLL and other B-cell malignancies. And it is the only BTKI that's demonstrated overall survival and a high rate of progression-free survival at five years with up to eight years of safety follow-up. So we remain really confident in the efficacy and safety profile of the product. It's the market share leader and continues to be the most comprehensively studied and prescribed BTKI with over 250,000 patients worldwide. So we continue to work to develop the asset. We do see further growth opportunities through the introduction of new indications and new combination therapies as we take a look at Imbruvica plus Venetoclax. that we're working to develop and we filed in the EU. We're also taking a look at first line and CL and really trying to bring that forward. So I think you can anticipate there will, you know, continue to be strong competition in that market. We continue to believe in and invest in Imbruvica.

Thank you. Our next question is coming from Joanne Wench from Citi. Your line is now live.

Good morning and thank you for taking the question. I'd like to spend a little bit of time talking about the middle of the income statement with all of the multiple headwinds on those factors. How do you think about managing it? What are the levers to pull? And how do you think about raising prices in this environment for each of your key divisions?

Good morning, Joanne. Thanks for the question. With respect to operating margins overall, which is really, I think, at the heart of your question, in the front, the first quarter, I should say, we do tend to adopt a little bit more of an aggressive approach to advertising and promotion in hopes of getting the full-year benefit of that promotion to the top-line lift throughout the year. And I would say on R&D, It's also a little bit front-end loaded this year simply from the standpoint of the progression of our pharmaceutical pipeline as well as digital robotic surgery. So in pharmaceuticals, think about nipocalimab, our RSV vaccine. Those had very nice progression. Declistamab may be moving a little bit faster than we anticipated as well as being able to launch Carvicti. There was a healthy amount of inflation built into our P&L in the January guidance. What I think our teams have seen in the, let's say, the first four months of this year is an uptick in that inflationary impact of about 10% or 15%, so still very manageable. Again, as you heard in some of the prepared remarks, we anticipate inflation. that that inflationary pressure as well as commodity scarcity will subside a little bit in the second quarter and then hopefully more pronounced in the second half of this year. If it doesn't, it's certainly something that will keep our attention. And we have the resources to adjust accordingly to ensure that we not only meet the needs of long-term value creation, but also meet short-term performance expectations. So we all think it's very manageable at this point in time, but it's something that we're not taking for granted. We're being very active with cost initiative programs as we look to separate the two companies. We are looking at ways to streamline technology processes, things that will lead to leverage on the P&L.

Thank you. Our next question today is coming from Chris Shibutani from Goldman Sachs. Your line is now live.

Thank you. Good morning. I appreciate the opportunity. Perhaps directed at the pharmaceutical segment for Jennifer, two products I'd like to focus on, one being Stelara and the other on Xarelto. With Stelara, could you perhaps elaborate a little bit more in terms of some of the underlying dynamics across the various indications, i.e. the DERM versus perhaps the IBD in terms of what the growth trends and outlook you are seeing and you expect there. And then for Xarelto, part of your commentary in the prepared segment discussed and mentioned about patient access. Could you just elaborate a little bit further on how that was an impact on the commercial dynamics? Thank you.

Sure. Hi. Thanks for the question. So let me start off with Stellara. So Stellara sales were $2.29 billion in the first quarter, and that was 9% growth. And we continue to see a lot of strength in Stelara. Ex-US, the product had nearly 18% growth. In the US, what we saw was growth around 3.6%. And what this really was due to, we saw an impact in the US due to the Omicron variant and the impact that it actually had on staffing. resources that particularly impacted a number of areas where you had more resource intensive delivery of care and GI offices was definitely one. As we take a look at Crohn's disease and ulcerative colitis, our share positions remain strong and with very strong positive momentum. We actually gained over five share points in CD and six share points in ulcerative colitis, so really strong growth in momentum. And in psoriasis, as anticipated, with tremphia and the very strong growth there in psoriasis and psoriatic arthritis, you know, we expected the Stelara sales there to start tailing off, and that's in line with our expectations. So we continue to have a very strong, a very positive outlook for Stelara going through the rest of the year in CD and in Crohn's, excuse me, Crohn's and ulcerative colitis, where we've really been realizing the growth. And likewise, when you take a look at Tremphia, we saw 44.5% growth in psoriasis and psoriatic arthritis in the quarter. So together, really, really nice performance there. Question on Xarelto. So Xarelto in the U.S., we did see sales decline. That was largely driven by a net unfavorable prior period adjustment, and most of this had actually been a positive adjustment that took place in 2021. So when you do the comparables, It was negative. And so that was really due to the vast majority of that. With Xarelto, we continued to see really nice share gains and growth at a prescription level across the indications, whether we're talking about CAD and PAD, really the newest indication set, but also across AFib and VTE. And so it really was around the net unfavorable PPA and a little bit of channel mix as well. with some of the mix shifting into 340B and Medicaid and some of the lower-priced channels.

Thank you. Our next question today is coming from Louise Chen from Cancer Fitzgerald. Your line is now live.

Hi. Thanks for taking my question. So I wanted to ask you about CARVIC-D and what gives you confidence in your ability to meet some of the manufacturing complexity associated with CARVIC-D And how much capacity do you think you'll be able to bring online this year, both in the U.S. and potentially globally as well? Thank you.

Thanks for the question. So we're real proud about our approval and our launch to date on Carvicti. What I can say is that it is going well and it is on track. with our expectations. We're real pleased. As you know, this is a customized therapy where the supply chain is literally built around each patient. We've got about a four to five week period that goes from the collection of the cells, the processing and manufacturing, and the return shipment of the final product, and then ultimately the infusion back into the patient at the treatment center. As we've mentioned before, we really are taking a thoughtful and a phased approach to scaling this launch to ensure a predictable and a reliable experience for the patients and for the treatment centers. We really tried to learn from the other launches in the market in this area, and so far we're off to a really good start there and have been very pleased with the feedback that we're getting back from our customers. So we have activated our initial round of treatment centers, and we did this based on folks who were very well experienced from our clinical trials and also very broadly dispersed throughout the U.S. to help ensure patient access. We're working through all of the orders and the slots that we have and actually have product now that's been shipped back, has been manufactured and shipped back to the patients for infusion into the into the patients. So we're going to continue in a planned and thoughtful, responsible approach to this scaling, both in the United States as well as we do as we, you know, scale outside the U.S. and throughout the world as well. Now, we discussed before around lentivirus because there is an industry-wide shortage of lentivirus. That is something that we are also working and investing in to scale all of our internal capabilities to be able to meet the demand both now in our initial launches in the relapsed refractory setting as well as our ultimate goal to be able to move into first-line setting here. And so we would have internal control on that as well. So I hope this answers your question.

Thank you. Our next question is coming from Josh Jennings from Cowan. Your line is now live.

Hi. Good morning. Thanks a lot for taking the question. Joe, since Joaquin made some public commentary on his commitment to support Ashley and her team to drive revenue growth acceleration in the medical devices unit, the focus has been on M&A opportunities. But how should we think about the level of internal investment to fuel growth of the devices franchise? You don't break out the percentage of R&D spend allocated to devices, but one data point we do have is from the 19 Pharma Day when you related $8.4 billion of the $11 billion in R&D expense from 18 went to pharma initiatives, and that's north of 75%. But just, I mean, has that stepped up, just the level of investment in the devices business over the last couple of years, and will that step up even further? And just to be clear, Ashley did not plant this question with our team.

I'm going to check the transcript on that, Josh, just to be sure. But listen, I think what you would hear if Joaquin was sitting here is that he supports all the businesses with respect to innovation. We realize that our calling card is innovation, and we're going to have growth across all of our franchises when we have products that that matter, that are differentiated, that are beyond the current standard of care and meeting consumer needs as well. I actually want to credit Ashley and her team for the way they've managed their P&L. They've been conscious about moving more of their investment into R&D. You saw a record number of 20-plus new product launches last year that are considered meaningful. We're going to be very close to probably a very similar number this year. And so that portfolio has taken very much the same approach that I would say pharmaceuticals did almost a decade ago when the focus is very well understood and where we want to play because we've got a strategic or competitive advantage will be capitalized upon. I don't know, Ashley, if you want to add anything more, but I think that certainly there is continued support, but a lot of the credit goes to Ashley and her team in terms of managing their levels of investment throughout the P&L.

You know, thanks, Joe. I mean, Josh, I would say that we are investing at a competitive level, and I'm really pleased with the state of execution of You know, we have in our pipeline right now 27 $100 million-plus EMPV projects. That number three years ago was six. So they continue to, you know, focus the pipeline on medium to higher growth segments and really execute. And we're off to a good start in 2022. Okay.

I would maybe underscore, too, is that gives us the confidence to go out and add in inorganic opportunities when the opportunity presents itself using the criteria of strategic fit as well as financial value creation. So, you know, a stronger internal pipeline that gets hopefully success out in the acquisition markets.

Just to reference our 10K, we do provide the breakout of R&D by segment on an annual basis for reference.

Thank you. Our next question today is coming from Terrence Flynn from Morgan Stanley. Your line is now live.

Great. Thanks so much for taking the questions. Jennifer, I was just wondering if you could elaborate a little bit more on the COVID recovery and the pharma segment. I know you touched on staffing issues on the gastro.

Yeah, so I understand Terry's comment really was around the U.S. and what we're seeing in terms of COVID. So, you know, as we exited last year really in the December timeframe and entered this year into really January and February, we did see the Omicron variant impact the U.S. business. And what we saw there really, as I mentioned before, we did see staffing shortages because so many people got sick, people weren't able to go into work. And so in the higher, more intensive resource settings and some of the markets, we did see slowdown in terms of, you know, delayed visits and new patient starts. What we are seeing now is we're in, you know, looking towards the end of March and in early April, we're seeing nice recovery there. And so this really, you know, hopefully was something really just, you know, at the end of last year and the beginning of this year. And it does look to be more specific to the U.S. than to any of the other markets.

Thanks, Jennifer. Tebow, maybe give some insight, too, on the consumer segment and how COVID's impacting. Obviously, It was much more tumultuous, I'd say, in 2020 and 2021. But what are you seeing to the early start of this year?

Look, clearly, we continue to see the impact of COVID on the life of our consumers. And that has a differentiated impact by category. We are looking at China very specifically right now to see how the situation evolves there. But I would say that COVID has really shifted consumer behavior to digital space and digital solutions. And we see it in the continued growth of our e-commerce channel. representing more and more of our business. So that's what makes our world more resilient. This ability to count on multiple channels is something that is serving us well in a COVID environment. Having said that, we need to continue to monitor how the situation evolves around the world. Thanks.

Thank you. Our next question today is coming from Matt Mixick from Credit Suisse. Your line is now live.

Thanks. Thanks so much for taking the question. So maybe for Ashley, I was hoping you could provide a little bit more color on med devices in Q1 and the trajectory exiting March. You had pretty impressive growth across the board, so congrats on that. But investors are often trying to figure out the difference between inpatient segments like orthopedics or cardio or advanced surgery and how those are recovering potentially at different rates in the US and what you might be seeing there. as well as any color you could provide on how, say, you know, Europe and Japan, you know, overseas developed markets compare with the recovery trends we've seen in the U.S. Thanks.

No, thanks, Matt, for the question. You know, it's April 2022. We're still talking about this. So just huge acknowledgement for our healthcare workers who are still battling through this. But I would tell you, you know, EMEA really bounced back nicely in quarter one. It was pretty broad-based within EMEA. I would say Asia, with the exception of China recently, also bounced back. And then U.S. really gained momentum. I always look at two data points in the U.S. as an example. I look at, like, how were diagnostic procedures performing in the U.S., And then how are surgical procedures performing? And probably at our trough when Omnicron was hitting in the U.S. in January, you know, we had about flat diagnostic procedures and we were looking at surgical procedures down near double digit, down 10%. Encouragingly, as we exited March, we started to see diagnostic procedures tick up to high single digits. and start to see a flattening of surgical procedures. I expect, you know, in the month of April in the U.S. to see it go north of 2019 levels, really driven by cardiocardiac ablation, bariatrics, and colorectal surgery.

Thank you. Our next question today is coming from Jeff Meacham from Bank of America.

Your line is now live.

Hey, guys. Good morning. Thanks so much for the question. I just had a couple. Jennifer, in the myeloma market, we'll see Revlimid generic soon, and I realize that combinations with Darzalex are standard of care, but what are your expectations for broader market disruption going forward, either from a pricing or share perspective? And then a quick follow-up on the M&A front for Joe. When you think about the P&L or cash flow impact from the consumer separation, to what degree does this inform or impact plans for a larger scale BD or M&A for either MedTech or pharma. Thank you.

Thanks for the opportunity to talk about our multiple myeloma portfolio in response to your question. As we take a look at the myeloma market, despite the advances to date in therapies, there is still so much unmet need there given the underlying heterogeneity of the disease. And so it's really important that there are treatment choices and what we're really trying to do is to have a strong portfolio of highly effective treatments and actually ultimately shoot for a cure. And so as we take a look at the market with Darzalex and Darzalex FastPro right now, we're really seeing this as a foundational therapy for multiple myeloma. And so irrespective of others and LOE and those types of things, as you noted, it's a lot of combination therapy and things like that. That does not fundamentally change the opportunity for Darzalex and FastPro. What I'm also really excited about is then you add in Carvicti that was recently approved, as we mentioned, for triple refractory multiple myeloma. And we really think that this will ultimately become a preferred treatment for patients with relapsed refractory multiple myeloma. We also mentioned teclistamab and the filing of teclistamab. And this really is the first ever BCMA CD3 bispecific. And we think that this is, you know, going to be a great off-the-shelf option. and for patients who really are triple-class exposed and who are really not eligible for CARBICTI or don't have access. And then in the future, we're not stopping there. We're also working on telketamab, and this would be the first and potentially best-in-class GPRC5D bispecific that we think could be potentially sequenced and combined to help transform outcomes. And so as we take a look at our portfolio, we really think that these assets are additive and complementary, versus something where they would be cannibalizing each other. And we really think that these are the important advances that are going to really help transform multiple myeloma in the future and going forward versus any of the older therapies.

And, Jeff, with respect to cash flow and M&A, I think I'll answer that in two parts. I think short-term we certainly have the credit rating to warrant more firepower should we need it. As you have observed earlier, Our cash flow generation over the last couple years has picked up to new levels north of $20 billion or around $20 billion from when we were just maybe $17 billion a few years ago. As the consumer company separates, I think that's going to be actually liberating for both sides. We still have opportunities to improve our cash flow with inventory management and receivables, but as we move to a higher growth segment, we think we'll be able to generate similar cash flow with a higher level of sales growth, managing the P&L appropriately. So I've got every confidence that we'll be able to do small, medium, and large scale acquisitions should the right opportunity present itself. I also think it's liberating for the consumer health segment because they'll be able to focus their cash flow generation to value creating opportunities through their particular lens, being fit for purpose in a digitized environment that Thibault spoke to. So whether it's near-term or long-term, I think we're in a very good position to utilize today's cash and hopefully that which we generate tomorrow. Kevin, maybe we've got time for one more question.

Certainly. Our final question today is coming from Danielle Antalfi from SVB Lyric. Your line is now live.

Hey, good morning, everyone. Thanks so much for squeezing me in. This is a question for Ashley, and it's the commentary around the ASC penetration. And I'm just curious, Ashley, as that side of care becomes increasingly important, where you guys think you are relative to the market from a penetration perspective and where you think you can grow, how meaningful of a growth driver will your recent success in the ASC be over the next few years? Thanks so much.

Well, thank you, Danielle. Appreciate the question and hope you are well. The ASCs, I think, it's still relatively low penetration, I would tell from a macro US, less than 20%, but I think it's the fastest growing as we know. In a COVID environment, we've seen the model evolve to create a safe, more patient-friendly experience that addresses the patient sentiment of not wanting to go into a hospital setting. Certain procedures have gone there sooner than later. I'd say hips are migrating there and knees, less spine per se, less complicated obviously trauma cases still happening in the hospital setting. We've done a lot of work recently to modify our business model to make it a capital efficient flow, if you will, in inventory management. on the personalization of care using digital assets to kind of make your pre-op and your post-op experience less full of friction. And, you know, we're taking a lot of that experience in the U.S. ASCs to really what we're doing in China in the Tier 2 and the Tier 3 cities as well as we deliver care. So I'm optimistic that this channel will continue to evolve. I do think that we've increased our competitiveness there, and we're making sure that we really have a sustainable business model going forward. Thank you.

Thank you, Danielle. And thanks to everyone for your questions and your continued interest in our company. We apologize to those who we couldn't get to because of time, but don't hesitate to reach out to the investor relations team as needed. I will now turn the call back to Joe for some brief closing remarks.

Great. Thanks, Jess. And as Jess alluded to, we certainly do appreciate your questions and the chance to interact with you. I'd like to remind everybody as we close that we do have the opportunity to engage with shareholders at next week's annual meeting on April 28th. Also, be on the lookout for an update on our commitments to ESG. On June 8th, we will be issuing our Health for Humanity report, which is an in-depth review on the progress we are making on our 2025 goals. Thank you for your time and your interest in Johnson & Johnson. Have a great day.

Thank you. This concludes today's Johnson & Johnson's first quarter 2022 earnings conference call. You may now disconnect.