Johnson & Johnson

Good morning and welcome to Johnson & Johnson's first quarter 2023 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 will now turn the conference call over to Johnson & Johnson. You may begin.

Good morning. This is Jessica Moore, Vice President of Investor Relations for Johnson & Johnson. Welcome to our company's review of the 2023 First Quarter Business Results and Full Year Financial Outlook. Joining me on today's call are Joe Wach, Executive Vice President, Chief Financial Officer, and Ashley McEvoy, Executive Vice President, Worldwide Chairman of MedTech. Unfortunately, Jennifer Taubert, Executive Vice President, Worldwide Chairman of Pharmaceuticals, is not feeling well and is unable to join us today. A few logistics before we get into the details. As a reminder, you can find additional materials, including today's presentation and associated schedules, on the Investor Relations section of the Johnson & Johnson website at investor.jnj.com. Please note that today's meeting contains forward-looking statements regarding, among other things, the company's future operating and financial performance, product development, market position and business strategy, and the anticipated separation of the company's consumer health business. You are cautioned not to rely on these forward-looking statements which are based on current expectations of future events using the information available as of today's date and are subject to certain risks and uncertainties that may cause the company's actual results to differ materially from those projected. A description of these risks, uncertainties, and other factors can be found in our SEC filings, including our 2022 Form 10-K, which is available at investor.janday.com and on the SEC's website. Additionally, 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 highlights related to the three segments. Joe will then provide additional business and financial commentary before sharing an overview of our cash position, capital allocation priorities, and updated guidance for 2023. The remaining time will be available for your questions. We anticipate the webcast will last approximately 60 minutes. Now let's turn to our first quarter results. Worldwide sales were $24.7 billion for the first quarter of 2023, an increase of 5.6% versus the first quarter of 2022. Operational sales, which excludes the effect of translational currency, increased 9% as currency had a negative impact of 3.4 points. In the U.S., sales increased 9.7%. In regions outside the U.S., our reported sales increased 1.8%. Operational sales outside the U.S. increased 8.3%, with currency negatively impacting our reported OUS results by 6.5 points. Excluding the net impact of acquisitions and divestitures, adjusted operational sales growth was 7.6% worldwide. 7.4% in the U.S., and 7.9% outside the U.S., with all three segments growing sequentially over the fourth quarter. Turning now to earnings. For the quarter, net loss was $68 million, and basic loss per share was 3 cents versus diluted earnings per share of $1.93 one year ago, primarily driven by the $6.9 billion charge related to the talc settlement proposal. Excluding after-tax and tangible 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 $2.68, representing a decrease of 0.9% and an increase of 0.4%, respectively, compared to the first quarter of 2022. On an operational basis, adjusted diluted earnings per share increased 3%. I will now comment on business segment sales performance highlights for the quarter. Unless otherwise stated, percentages quoted represent the operational sales change in comparison to the first quarter of 2022 and therefore exclude the impact of currency translation. Beginning with consumer health. Worldwide consumer health sales of $3.9 billion increased 7.4%, with an increase of 11.4% in the U.S. and an increase of 4.4% outside the U.S. Worldwide operational sales increased 11.3%, and outside the U.S. operational sales increased 11.3%. Results were primarily driven by global strategic price increases across all franchises. Volume growth in OTC was due to an exceptionally strong cough, cold, and flu season, most pronounced in Europe, coupled with one-time retailer restocking, primarily in the U.S., related to low inventory levels due to tripledemic demand. SkinHealth Beauty delivered double-digit growth driven by price actions. lapping prior year supply constraints and current quarter restocking, as well as strong Neutrogena and Aveeno e-commerce and club channel performance and new product innovations. Moving on to our pharmaceutical segment. Worldwide pharmaceutical sales of $13.4 billion increased 4.2%, with growth of 5.9% in the U.S. and 2.4% outside of the U.S. Worldwide operational sales increased 7.2%, and outside the U.S., operational sales increased 8.6%. Excluding the COVID-19 vaccine sales, worldwide operational sales increased 4.9%, U.S. operational sales increased 7.1%, and outside the U.S., operational sales increased 2.4%. Pharmaceutical growth excluding the COVID-19 vaccine was driven by our key brands and continued uptake in our recently launched products, with eight assets delivering double-digit growth. We continue to drive strong sales growth for both Darzalex and Arlita, with increases of 25.7% and 40.3% respectively. Solara grew 9.6%, driven by market growth and share gains in Crohn's disease and ulcerative colitis, with gains of 2.2 points and 4.8 points in the U.S., respectively, partially offset by unfavorable patient mix and price. Tramphya grew 11%, driven by market growth and share gains in psoriasis and psoriatic arthritis. with gains of 0.9 points and 2.1 points in the U.S. respectively, partially offset by unfavorable patient mix. Turning to newly launched products, we are excited to disclose Carvicti and Spravato sales for the first time this quarter. We continue to make progress on our thoughtful and phased launch of Carvicti and continue to expand access and reimbursement for Spravato. Also, we are encouraged by the early success of our launch of TechValley. sales of which are included in other oncology. This sales growth was partially offset by the loss of exclusivity in Remicade and Zytiga, along with a decrease in Imbruvica sales due to competitive pressures. Imbruvica maintains its market leadership position worldwide. I'll now turn your attention to the MedTech segment. Worldwide MedTech sales of $7.5 billion increased by 7.3% with growth of 16.6% in the U.S. and a decline of 0.6% outside of the U.S. Worldwide operational sales increased 11% and outside the U.S. operational sales increased 6.2%. Abiomed contributed 4.6% to operational growth. Excluding the impact of acquisition and divestitures, worldwide adjusted operational sales growth was 6.4%. Sales in the first quarter accelerated sequentially from Q4 for all four MedTech businesses, driven by global procedure growth, continued uptake of recently launched products, and commercial execution. As anticipated, in China, procedure volumes improved as the quarter progressed. Partially offsetting growth in the quarter was the impact of volume-based procurement in China, as well as supply constraints. The Interventional Solutions franchise delivered operational growth of 41.9%, which includes $324 million related to Abiomed. We are excited about the progress of the integration, to which Joe will provide additional context. Excluding the impact of the acquisition, this franchise delivered another quarter of double-digit worldwide growth at 12.3%. As we continue to increase our reporting transparency, beginning this quarter, we are providing visibility to electrophysiology sales. Electrophysiology continued to deliver double-digit sales growth in all regions, with the exception of Asia Pacific, which reflects impacts related to volume-based procurement in China. Orthopedics operational growth of 5.1% reflects the strong procedure recovery and success of recently launched products, especially digital and enabling technologies driving pull-through sales in areas like hips and knees. Growth was partially offset by the impacts of volume-based procurement in China, primarily in hips and spine. Global growth of 9.3% in contact lens and other reflects continued penetration of our AccuView Oasis One Day family of products, including the recent launch of AccuView Oasis Max One Day, strong commercial execution, and strategic price actions. Growth in contact lens and U.S. surgical vision was tempered by continued supply challenges. Now turning to our consolidated statement of earnings for the first quarter of 2023. 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 150 basis points driven by one-time COVID-19 vaccine manufacturing exit related costs in the pharmaceutical business and commodity inflation and acquisition related items in the med tech business. selling, marketing, and administrative margins leveraged by 60 basis points, driven by proactive management of costs given the current inflationary environment. We continue to invest strategically in research and development at competitive levels, investing 14.4% of sales this quarter. The $3.6 billion invested was a 2.9% increase versus the prior year. The other income and expense line was an expense of $7.2 billion in the first quarter of 2023 compared to net income of $100 million in the first quarter of 2022. The increase in expense was the result of the $6.9 billion charge related to the talc settlement proposal recorded in the first quarter of 2023 as previously disclosed. Regarding taxes in the quarter, our effective tax rate was 90.8% versus 12.2% in the same period last year, primarily driven by the $6.9 billion accrual for the talc settlement proposal. Excluding special items, the effective tax rate was 16.5% versus 13.3% in the same period last year. I encourage you to review our upcoming first quarter 10-Q 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 the adjusted income before tax by segment. In the first quarter of 2023, our adjusted income before tax for the enterprise as a percentage of sales decreased from 35.1% to 34.2%. Pharmaceutical margins declined from 44.1% to 43.2%, driven primarily by mix, partially offset by proactive management of costs. Medtech margins remained flat at 27%, driven primarily by inflationary impacts offset by proactive management of costs. Finally, consumer health margins improved from 22.1% to 22.3%, driven primarily by strategic price actions partially offset by input cost inflation. This concludes the sales and earnings portion of the Johnson & Johnson first quarter 2023 results. I am now pleased to turn the call over to Joe Wach.

Joe? Thank you, Jess, and thank you all for joining today's call. We are pleased to report another quarter of strong operational performance across our business. The results reflect the strength and versatility of Johnson & Johnson and our commitment to improving healthcare outcomes around the world. 2023 has many important catalysts that can drive meaningful near and long-term value for Johnson & Johnson shareholders. We remain focused on the successful separation of our consumer health business, Kenview, which will position both companies to be more agile, focused, and competitive. We are also expecting a number of pipeline advancements that will provide increased confidence in our pharmaceutical and medtech businesses. Our pharmaceutical segment delivered a strong first quarter. Growth from our pharmaceutical business continues to be driven by key assets in our existing portfolio, including Darzalex, Tramfaya, Erlita, Invega, Sustena, and Optravi, as well as uptake from new launches such as Spravato, Carvicti, and TechValley. 2023 is an important year of scientific innovation for our pharmaceutical business, and in Q1, we announced that Carvicti, our BCMA cell therapy, met its primary endpoint in the CARTITUDE IV study, a Phase III trial in multiple myeloma patients who have received one to three prior lines of therapy. We look forward to presenting these results in an upcoming major medical meeting. Additionally, our partners at Protagonist Therapeutics announced positive top-line results from the Phase IIb Frontier I study of our oral IL-23 in patients with moderate to severe plaque psoriasis. We look forward to sharing this data and future development plans at an upcoming medical meeting. Finally, as we continually review our portfolio to prioritize the most transformational assets for ongoing investment and an assessment of the RSV vaccine landscape, the company made the decision to discontinue its investigational RSV adult vaccine program. This decision is part of a broader effort to make strategic choices for our pipeline and R&D investments to focus on medicines with the greatest potential benefit to patients. Looking at the rest of the year, we expect important data from key pipeline assets, such as nipocalimab and Tremphia, as well as the potential approval of talcadamab. Importantly, I want to mention two additional highlights. First, the Mariposa study of ribavent plus lasertinib in frontline non-small cell lung cancer remains on track, with the potential for final analysis later this year. We are also excited to present data from the Sunrise 1 study of TAR200 in muscle-invasive bladder cancer at the American Urological Association's annual meeting this month. which demonstrated a promising complete response and safety profile. Regarding our pharmaceutical business, I'd like to reiterate some comments I recently made at the Cowan Investor Conference in March related to the strengthening of the U.S. dollar and the impact on the 2025 pharmaceutical sales goal the team put forth during the 2021 Investor Day. While we don't speculate on currency, Based on the current rates, the 2025 sales target of $60 billion is approximately $57 billion on a constant currency basis. In 2022 alone, FX had a negative impact of roughly $3 billion in pharmaceuticals. While that is the math, qualitatively, since 2021, a number of things have changed in our portfolio. On the plus side, we've seen acceleration of some current and potential upcoming launches, like Tecvali and Talcadamab. But to be balanced, we've also experienced competitive pressure on Imbruvica above what was anticipated in 2021. So many push and pulls, but we are striving to attain our operational goals. We are confident in our ability to exceed 2025 estimates the street has out there today of approximately $54 billion. MedTech delivered a strong quarter of sales growth. We continue to advance key pipeline programs. For example, within our electrophysiology business, We reached a few milestones this quarter related to our pulse field ablation pipeline programs, including the European clinical study INSPIRE, which achieved early success by meeting both primary safety and efficacy endpoints. Additionally, we announced completion of the first procedures in the European SmartFire clinical study evaluating the safety and effectiveness of our investigational dual-energy catheter, which combines both pulse field and radiofrequency ablation capabilities. As you know, we continue to prioritize investment in high-growth areas, as demonstrated by our acquisition of Abiomed, which closed this past December. With Abiomed, MedTech now has 12 platforms with over $1 billion in annual sales. While it is still early days, we are pleased with the integration and performance of Abiomed. Patient utilization of Abiomed technologies grew mid to high teens in both Europe and the United States and over 30% in Japan. We continue to see strong adoption of newer technologies, such as Impella 5.5, and we achieved record quarterly enrollment in both the STEMI DTU and PROTECT4 pivotal trials as we continue to advance efforts in pursuit of Class 1 guidelines. For perspective, operational sales growth compared to the same quarter last year reported by Abiumed as a standalone company was 22%. In orthopedics, just this month, we obtained CE mark for the VELUS robotic assistant solution, positioning us to expand our international footprint with this differentiated solution in total knee. Finally, the MedTech team is excited by the progress being made in regards to the Otava general surgery robotic solution, and we remain on track to share more information in the second half of this year. Our consumer health business delivered double-digit first quarter sales growth driven by strategic price actions, strong demand, and some stock replenishment. We remain on track to complete the separation of this business in 2023, assuming accommodative market conditions. Since the start of the year, we have been operating our consumer health business as a company within a company and continue to update our Form S-1 filing with the Securities and Exchange Commission, giving us the opportunity to pursue an initial public offering as a potential first step in the separation. Stand-up costs and stranded costs remain consistent with what we have stated previously, with an active program well underway to reduce the stranded costs. Turning to notable enterprise events, I'd like to briefly touch on LTL's refiling for bankruptcy on April 4th. Neither LTL's original filing nor this refiling is an acknowledgment of wrongdoing, nor an indication that the company has changed its longstanding position that its talcum powder products are safe. Our goal continues to be for an equitable and efficient resolution of the cosmetic talc litigation against the company, and we believe this refiling represents progress towards that goal. As a reminder, LTL's bankruptcy filing will not have an impact upon the Kenview separation, and the talc liabilities in the United States and Canada will remain with Johnson & Johnson. As part of the refiling, we have proposed a reorganization plan that has significant support from claimants and includes payment of $8.9 billion in present value over a 25-year period. LTL will continue to work through the process set forth by the bankruptcy court and expects to present the reorganization plan to the court in mid-May. Our capital allocation priorities remain consistent, and in 2022, we successfully executed against all pillars. R&D investment remains our number one priority and driver of long-term growth and value creation. We know the value our investors place on our dividend, and we were pleased to announce this morning that our Board of Directors has authorized a 5.3% increase, marking our 61st consecutive year of dividend increases. In addition, we continuously evaluate strategic business development opportunities that enable Johnson & Johnson to create value for patients, customers, and shareholders. Our final priority is share repurchase programs, when appropriate. In fact, this past quarter, we completed the $5 billion share repurchase program announced late last year. We are confident in our strong financial position, including our AAA-rated balance sheet, and our ability to deploy capital across all strategic priorities. We believe this strength differentiates Johnson & Johnson and enables us to pull the appropriate levers to set us up for long-term success. Moving on to our full year 2023 guidance for the enterprise. Based on our strong start to the year, we are pleased to raise our guidance. We now expect operational sales growth for the full year 2023 up one percentage point in the range of 5.5% to 6.5%, or up $1 billion in a range of $97.9 billion to $98.9 billion on a constant currency basis, and adjusted operational sales growth up one percentage point in the range of 4.5% to 5.5%. Our sales guidance continues to exclude contribution from the COVID-19 vaccine. As you know, we don't speculate on future currency movements. Last quarter, we noted that we utilized the euro spot rate relative to the U.S. dollar at 1.08. The Euro spot rate as of late last week was 1.10. We continue to estimate there would be minimal impact from foreign currency translation on reported sales for the year as the dollar has strengthened versus other select currencies. We are maintaining the guidance we provided in January for our adjusted pre-tax operating margin, other income and expense, interest expense, and tax rate. We are also increasing our adjusted earnings per share guidance by $0.05 per share and tightening the range to $10.50 to $10.60 or $10.55 at the midpoint on a constant currency basis, reflecting operational or constant currency growth of approximately 3.5% to 4.5% or 4% at the midpoint. While not predicting the impact of currency movements, assuming recent exchange rates I previously referenced, our reported adjusted earnings per share for the year would be favorably impacted by approximately $0.05 per share. This favorable currency impact coupled with our strong operational outlook results in an increase to our reported adjusted earnings per share for the year by $0.10 per share and tightening the range to $10.60 to $10.70 or $10.65 at the midpoint, reflecting growth of approximately 4.5% to 5.5% or 5% at the midpoint. While we do not provide guidance by segment or on a quarterly basis, I'd like to provide some qualitative considerations for your modeling. In pharmaceuticals, we maintain our expectation of delivering above-market growth in 2023, driven by key assets and continued uptake of our newly launched products. This growth considers the potential composition of matter patent expiry of Stellara, which we currently assume will occur in late 2023 in the United States. Further, we continue to expect 2023 impact from other post-LOE products, including Remicade, Zytiga, and Zeplion, as well as increased austerity measures across Europe. Regarding our COVID-19 vaccine, we do not anticipate material sales beyond that which were recorded in the first quarter, as our contractual commitments are complete. In MedTech, we expect continued competitive growth fueled by increased procedures and commercial uptake of recently launched products. we anticipate relatively stable procedure volumes and healthcare staffing levels for the remainder of the year with normal seasonality. Regarding quarterly phasing, given the strength of our first quarter results, we now expect relatively consistent performance throughout the year from our pharmaceutical and medtech businesses. When modeling consumer health growth rates in 2023, it is important to take into consideration prior year comparisons, as well as the robust cough, cold, and flu season and the one-time restocking that occurred in the first quarter. As a reminder, the first half of 2022 was impacted by supply constraints. A few brief announcements before we take your questions. Continuing our efforts to increase our transparency and assist with your modeling, we are planning to post a patent table, including U.S. pharmaceutical patents, to our investor website in the quarter. In addition, please mark your calendars for December 5th as we will be hosting an enterprise business review at the New York Stock Exchange focused on the new Johnson & Johnson, highlighting both our pharmaceutical and medtech businesses. We will provide additional details about the event in the coming months. Before we turn to your questions, let me state how proud we are regarding our team's continued hard work and unwavering commitment. Our sights are set on the future, focused on delivering competitive growth for the new Johnson & Johnson. We are confident that our current plans position us for near-term success, long-term growth, and value creation for our shareholders. I'll now turn the discussion to the Q&A portion of the call. Kevin, can you please provide instructions for those wishing to ask a question?