Johnson & Johnson

Good morning and welcome to Johnson & Johnson's third 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, please press star zero to reach the operator. I would now like to turn the 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 third quarter business results and full year financial outlook. 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 this presentation contains forward-looking statements regarding, among other things, the company's future operating and financial performance, market position, and business strategy. 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 the date of this recording 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.jnj.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 start by reviewing the third quarter sales and P&L results for the corporation and highlights related to our two businesses. Joe Wach, our CFO, 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. Joaquin DeWato, our chairman and CEO, John Reed, and Amit Tuzel, our innovative medicine and med tech R&D leaders, as well as Eric Haas, our VP of litigation, will be joining us for Q&A. To ensure we provide enough time to address your questions, we anticipate the webcast will last approximately 60 minutes. As a reminder, on August 23, 2023, Johnson & Johnson announced the final results of the exchange offer and completion of the separation of Kenview, Inc. Unless otherwise stated, the financial results and guidance highlighted today reflect the continuing operations of Johnson & Johnson. We will report the consumer health financial results as discontinued operations. Additionally, going forward, the pharmaceutical segment will be referred to as innovative medicine. Starting with Q3 2023 sales results. Worldwide sales were $21.4 billion for the third quarter of 2023, an increase of 6.8% versus the third quarter of 2022. Operational sales growth, which excludes the effect of translational currency, increased 6.4% as currency had a positive impact of 0.4 points. In the U.S., sales increased 11.1%. In regions outside the U.S., our reported growth was 1.6%. Operational sales growth outside the U.S. was 0.7%, with currency positively impacting our reported OUS results by 0.9 points. It is important to note that operational sales in Europe were negatively impacted by the COVID-19 vaccine and loss of exclusivity of Zytiga. Excluding the net impact of acquisition and divestitures, adjusted operational sales growth was 4.9% worldwide, 8.9% in the U.S., and 0.3% outside the U.S. Turning now to earnings. For the quarter, net earnings were $4.3 billion and diluted earnings per share was $1.69. versus diluted earnings per share of $1.62 a year ago. Excluding after-tax and tangible asset amortization expense and special items for both periods, adjusted net earnings for the quarter were $6.8 billion and adjusted diluted earnings per share was $2.66. representing increases of 14.1% and 19.3%, respectively, compared to the third quarter of 2022. On an operational basis, adjusted diluted earnings per share increased 13.9%. I will now comment on business sales performance. unless otherwise stated, percentages quoted represent the operational sales change in comparison to the third quarter of 2022, and therefore exclude the impact of currency translation. Beginning with innovative medicine. Worldwide innovative medicine sales of $13.9 billion increased 5.1%, with growth of 10.9% in the U.S., and a decline of 2.3% outside of the U.S. Operational sales growth increased 4.3% as currency had a positive impact of 0.8 points. Excluding COVID-19 vaccine sales, worldwide operational sales growth was 8.2%, with growth of 10.9% in the U.S. and growth of 4.3% outside of the U.S., Sales outside the U.S., excluding the COVID-19 vaccine, were negatively impacted by approximately 500 basis points due to the loss of exclusivity of Zytiga in Europe. Innovative medicine growth was driven by our key brands and continued uptake from recently launched products, with 11 assets delivering double-digit growth. We continue to drive strong sales growth for both Darzalex and Arleta with increases of 20.7% and 27% respectively due to continued share gains and market growth. Within Immunology, we saw growth in Stelara and Tramphya with increases of 15.8% and 21.5% respectively. This growth was predominantly driven by favorable patient mix and market growth. Turning to newly launched products, we continue to make progress on our launches of Carvicti and Spravato. We are also encouraged by the early success of our launches of Tecvali and Tauvi, sales of which are driving the growth in other oncology. We expect to begin disclosing Tecvali sales in Q1 2024. Total Innovative Medicine sales growth was partially offset by the loss of exclusivity of Zytiga and Remicade, along with a decrease in Imbruvica sales due to competitive pressures. I'll now turn your attention to MedTech. Worldwide MedTech sales of $7.5 billion increased 10%, with growth of 11.6% in the U.S. and 8.3% outside of the U.S. Operational sales growth increased 10.4% as currency had a negative impact of 0.4 points. Abiomed contributed 4.6% to operational growth. Excluding the impact of acquisition and divestitures, worldwide adjusted operational sales growth was 6%. On a pro forma basis, utilizing sales in the prior year from Abiomed as a standalone company, Medtech's growth for the quarter would be 6.4%. Medtech was negatively impacted across all platforms by international sanctions in Russia worth approximately 60 basis points in volume-based procurement in China, primarily in five Medtech platforms, spine, trauma, endocutters, energy, and electrophysiology. As communicated last quarter, we saw a return to more normalized seasonality with moderate deceleration in the third quarter. The interventional solution franchise delivered operational growth of 48.1%, which includes $311 million related to Abiomed. This reflects growth in Abiomed patient procedures in the high teens and continued strong adoption of Impella 5.5 technology in surgery. Electrophysiology is a major contributor to this growth with a double-digit increase of 20.3%. This reflects strong growth in all regions, including Europe, driven by our global market-leading portfolio, including the most recently launched QDOT-RF ablation and Optrel mapping catheters. Operational growth of 3.2% in surgery was driven primarily by procedure recovery and strength of our biosurgery and wound closure portfolios. Growth was partially offset by the impacts of volume-based procurement in China and supply challenges. Global growth of 5.4% in vision was driven by price actions in contact lenses and other, as well as strength of new products, including AccuView Oasis one-day family of products and contact lenses and Tecnis Eye Hands, our monofocal interocular lens and surgical vision. Growth of contact lenses was partially offset by strategic portfolio choices and supply challenges, although these continue to improve. Global vision growth was negatively impacted by 100 basis points due to the blink divestiture. Orthopedics operational growth of 2.6% reflects procedure growth, success of recently launched products, such as the global expansion of our VELUS digital solutions and expansion in ambulatory surgical centers, partially offset by the impacts of volume-based procurement in China in spine and trauma. Now turning to our consolidated statement of earnings for the third 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 margin was flat due to favorable patient mix and lower COVID-19 vaccine supply network-related exit costs in the innovative medicine business, partially offset by commodity inflation, unfavorable product mix, and restructuring related to excess inventory costs in the med tech business. Selling, marketing, and administrative margins deleveraged 40 basis points driven by increased expenses across the enterprise. We continue to invest strategically in research and development at competitive levels, investing $3.4 billion, or 16.2% of sales this quarter. R&D was leveraged by 120 basis points, primarily driven by portfolio prioritization, partially offset by higher milestone payments in the innovative medicine business. Additionally, IPR&D impairments were $206 million in the third quarter of 2023. Interest income was $182 million in the third quarter of 2023 as compared to $99 million of income in the third quarter of 2022. The increase in income was driven by higher interest rates earned on cash balances partially offset by higher interest rates on debt balances. The other income and expense line was an expense of $499 million in the third quarter of 2023, compared to an expense of $226 million in the third quarter of 2022. This was primarily driven by higher unrealized mark-to-market losses on public securities partially offset by the lower COVID-19 vaccine-related exit costs and lower litigation expense. Restructuring in the third quarter was $158 million, primarily related to the innovative medicine restructuring program announced in the first quarter. Regarding taxes in the quarter, our effective tax rate was 17.4% versus 16.7% in the same period last year. This increase was primarily driven by a non-deductible, non-recurring pre-tax charge that occurred in the current quarter. Excluding special items, the effective tax rate was 15.6% versus 15.9% in the same period last year. As a result of the completion of the exchange offer, Johnson & Johnson is presenting the consumer health business financial results as discontinuing operations, including a gain of approximately $21 billion. I encourage you to review our upcoming third quarter 10Q filing for additional details on specific tax and separation related 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 third quarter of 2023, our adjusted income before tax for the enterprise, as a percentage of sales, increased from 35.3% to 37.6%, primarily driven by favorable patient mix and innovative medicine, partially offset by unfavorable product mix and commodity inflation and med tech. Innovative medicine margins improved from 41.4% to 45.4%, primarily driven by favorable patient mix and R&D portfolio prioritization. Medtech margins declined from 25% to 24.7%, primarily driven by commodity inflation and unfavorable product mix partially offset by a divestiture gain. This concludes the sales and earnings portion of the Johnson & Johnson third quarter results. I'm now pleased to turn the call over to Joe Locke. Joe?

Thank you, Jessica, and thanks, everyone, for joining us today. This quarter's call marks a new era for Johnson & Johnson with a sharpened focus on innovative medicine and med tech. What has remained consistent is our credo and our commitment to patients. We are privileged to build upon our 137-year legacy of tackling the world's most complex healthcare challenges and helping patients with serious unmet health needs around the world. As we look forward, we are well-positioned to grow our business and innovate across the spectrum of healthcare. We are excited about what's ahead and what we can achieve in the future. Before we dive into our performance, I want to briefly touch upon other items important to our business. The first is a brief recap of the Kenview separation, which was formally completed during the quarter. The transaction was executed within our targeted timeframe and under budget, while generating significant cash and value for our shareholders. Through the separation, we raised $13.2 billion in cash proceeds through the Kenview debt offering and IPO. We reduced Johnson & Johnson's outstanding share count by 191 million shares, or approximately 7%, without the use of cash and in a tax-free manner. We maintained our current quarterly dividend per share, and we retained approximately 180 million shares of Kenview stock that provides cash proceeds for future flexibility. We will see the full impact to EPS of the share reduction in 2024. Another item warranting comment is the Inflation Reduction Act. We continue to believe the IRA's price-setting provisions are damaging to innovation and will prevent the delivery of transformative therapies and cures to patients. As we await adjudication of legal proceedings initiated by us and others, we did submit all requested information in compliance with CMS's drug price setting scheme to continue supporting patients' access to our medicines that help them stay healthy and live longer. Moving to segment highlights in the quarter, as Jessica previously shared, our teams delivered strong results in the third quarter while continuing to advance our pipeline to enhance future growth. Within the innovative medicine business, two important regulatory milestones were announced during the quarter. Specifically, we received European Commission approval for a reduced biweekly dosing frequency for Tecfali for eligible patients with relapsed and refractory multiple myeloma, and U.S. FDA and European Commission approval of Talve, a first-in-class bispecific therapy for the treatment of patients with heavily pretreated multiple myeloma. Regarding clinical data, we are excited to have an unprecedented seven late-breaking abstracts, including three featured in the Presidential Symposium being presented at the European Society of Medical Oncology meeting this weekend. Highlights will include the results from all three Phase III studies of ribovent in lung cancer, including Mariposa, Mariposa 2, and Papillon. Additionally, updated data from the SUNRISE-1 study of TAR-200 in non-muscle invasive bladder cancer will be shared, as well as the first-ever data of TAR-210 in patients with FGFR mutations. We also look forward to presenting Phase II data for nipocalamab in rheumatoid arthritis at the American College of Rheumatology annual meeting in November and have already launched a Phase II combination study in RA. Lastly, we plan to initiate multiple clinical development programs for our targeted oral peptide JNJ2113. This includes the initiation of the Anthem Phase 2B study in ulcerative colitis, which will begin this month, and the Phase 3 clinical program titled Iconic for adults with moderate to severe plaque psoriasis, expected to begin in November. Moving to MedTech, Notable highlights in the quarter include significant advancements in electrophysiology across our cardiac ablation platform. We've received FDA clearance from multiple atrial fibrillation ablation products in our portfolio to be used in a workflow without fluoroscopy. This FDA indication is unique to Johnson & Johnson and is a significant advancement where caregivers and patients are not exposed to harmful fluoroscopy-related radiation during their cardiac ablation procedures. It also allows for the removal of heavy lead protective equipment that may lead to orthopedic complications for care teams. In pulse field ablation, we have completed our clinical trial in Europe and submitted for CE mark for our varipulse catheter. We expect the completion for our U.S. varipulse study to occur in the fourth quarter. We are also simultaneously advancing clinical studies for two additional pulse field ablation catheters, the STSF dual energy catheter, capable of delivering both PF and RF energy through the same device, and OmniPulse, a large tip focal catheter. Beyond electrophysiology, We have completed enrollment in the Abiomed Impella ECP clinical study, a landmark pivotal trial designed to demonstrate the safety and efficacy of the Impella ECP during high-risk PCI procedures. Impella ECP is the world's smallest heart pump and the only heart pump compatible with small bore access and closure techniques. While not a clinical advancement, we have also taken steps in the quarter to improve MedTech's future margin profile, implementing a restructuring program designed to simplify and focus the operations of our orthopedic business. As part of this two-year program, we expect to exit certain markets and product lines across that business. We anticipate some short-term modest revenue disruption in orthopedics of approximately $250 million in total over the next two years, given the market and product line exits, but believe these actions will improve our ability to meet demand, resulting in accelerated growth and enhanced profitability. The program is expected to be completed by the end of 2025, with total program costs estimated to be between $700 million and $800 million. Let's now turn to cash and capital allocation. We ended the third quarter with approximately $24 billion of cash and marketable securities and approximately $30 billion of debt for a net debt position of $6 billion. Free cash flow year-to-date through the third quarter was approximately $12 billion, up from the $5 billion we reported year-to-date in the second quarter of 2023. Our capital allocation priorities remain unchanged. We will continue to execute a strategic and disciplined approach, utilizing our strong credit profile and robust free cash flow generation to prioritize continued investment in our business, increasing dividends on an annual basis, executing strategic business development initiatives for inorganic growth, and executing share repurchases when appropriate. Moving on to our 2023 guidance update. Based on the strong results delivered in the quarter and the first nine months of this year, balanced with planned investments in the fourth quarter, we are raising the ranges for full-year sales and EPS guidance. We now expect operational sales growth for the full year 2023 to be in the range of 8.5% to 9.0%, or up $600 million at the midpoint in the range of $84.4 billion to $84.8 billion on a constant currency basis, and adjusted operational sales growth in the range of 7.2% to 7.7%. Just a reminder, our sales guidance continues to exclude any COVID-19 vaccine revenue. While we do not speculate on future currency movements, utilizing the euro spot rate as of last week at 1.06, we now anticipate an incremental negative currency impact of $400 million, resulting in a full-year impact of negative 1% or $800 million. Looking across the P&L, adjusted pre-tax operating margin is still expected to improve by approximately 50 basis points versus prior year, driven by stronger margin profile and business mix. Net other income is also being maintained, ranging from $1.7 billion to $1.9 billion. Due to higher interest rates earned on our cash, we now expect net interest income in the range of $300 million to $400 million. And finally, based on current tax law, our estimate for the effective tax rate for 2023 will be between 15.0% and 15.5%. These revised estimates translate to an increase in our adjusted operational earnings per share guidance by 10 cents at the midpoint. Our new range is $10.02 to $10.08, or 12.5% growth at the midpoint. and adjusted reported earnings per share in the range of $10.07 to $10.13, or 13% growth at the midpoint. Since January, we've been able to increase our guidance throughout the year for a cumulative impact of $3 billion on operational sales and $0.25 on adjusted operational earnings per share, which includes absorbing $0.10 for our licensing deal with Cellular Biomedicine Group announced in the second quarter of 2023. Now, I appreciate that many of you are turning your attention to 2024, and our teams are actively finalizing our plans for next year. With that context, allow me to provide some preliminary perspectives for you to consider. For innovative medicine, we remain confident in our ability to deliver growth from key brands and anticipate continued progress from our newly launched products, all while advancing our robust pipeline with many exciting data readouts, filings, and approvals ahead of us. This includes data presentations and regulatory submissions for TREMFIA in IBD, presenting data from our Phase III study of nipicalimab in myasthenia gravis, and readouts from two Phase III or leader trials in early-stage prostate cancer. We do not expect the entry of Stellara biosimilars in the United States during 2024. However, as a reminder, Stellara does have a composition of matter patent expiry in mid-2024 in Europe. For MedTech, we expect our commercial capabilities and continued adoption of recently launched products across all MedTech businesses will continue to drive our growth and improve competitiveness, while continuing to advance our pipeline programs, including innovation in pulse field ablation, abumed, and surgical robotics. We expect procedures in 2024 to remain consistent with elevated 2023 levels. With respect to tax, As you may be aware, the European Union member states are in the process of enacting the EU's Pillar 2 Directive, which generally provides for a 15% minimum tax rate as established by the OECD Pillar 2 Framework. The first EU effective date for certain aspects of the law is January 1, 2024. As a result, we currently estimate it up to a 1% tax rate increase in 2024. In addition, the U.S. Treasury's current perspective on Pillar 2 will be harmful as it relates to the treatment of U.S. incentives for innovation and will result in U.S.-based multinational companies paying more tax revenue to foreign governments. Regarding share count given the Kenview separation, the full benefit of the approximately $191 million net share reduction in Johnson & Johnson shares outstanding from the exchange offer will be reflected in our 2024 financials. And finally, while we don't speculate on future currency impact, utilizing the current euro spot rate would yield an approximate 15-cent negative currency impact on 2024 full-year adjusted earnings per share. We are pleased with our strong performance during the first nine months of this year and have positive momentum as we move into 2024. We look forward to sharing more about the strength of our business, promise of our innovative medicine and medtech pipelines, and the long-term strategy of Johnson & Johnson at our upcoming Enterprise Business Review on December 5th at the New York Stock Exchange. More information, including an overview of the day's schedule, will be shared shortly. We hope you will be able to join us either in person or on the available webcast. I want to conclude my remarks by thanking our teams around the world for their continued hard work and unwavering commitment to excellence on behalf of our patients. We are confident that our strategy will position us to deliver long-term growth and create significant value for our shareholders. With that, it's my pleasure to turn to Kevin and begin the Q&A portion of the call.