Johnson & Johnson

Good morning and welcome to Johnson & Johnson's second quarter 2024 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 to Johnson & Johnson. Please go ahead.

Hello everyone, this is Jessica Moore, Vice President of Investor Relations for Johnson & Johnson. Welcome to our company's review of the second quarter business results and our full year financial outlook for 2024. 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 the 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 2023 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 second quarter sales and P&L results for the corporation, as well as 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 guidance for 2024. Joaquin DeWato, our chairman and CEO, will then provide some closing remarks before we open it up for questions. Jennifer Taubert, John Reed, and Tim Schmid, our innovative medicine and med tech leaders, 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. Unless otherwise stated, the financial results and guidance highlighted today reflect the continuing operations of Johnson & Johnson. Furthermore, the percentages quoted represent operational results and therefore exclude the impact of currency translation. Turning to our second quarter sales results. Worldwide sales were $22.4 billion for the second quarter of 2024. Sales increased 6.6% with growth of 7.8% in the U.S. and 5.1% outside of the U.S. Excluding the impact of the COVID-19 vaccine, sales growth was 7.2% worldwide and growth of 6.4% outside of the U.S. Sales growth in Europe excluding the COVID-19 vaccine was 6%. Turning now to earnings. For the quarter, net earnings were $4.7 billion and diluted earnings per share was $1.93 versus diluted earnings per share of $2.05 a year ago. Excluding after-tax intangible 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 $2.82, representing increases of 1.6% and 10.2%, respectively, compared to the second quarter of 2023. I'll now comment on business sales performance in the quarter. Beginning with innovative medicine, worldwide innovative medicine sales of $14.5 billion increased 7.8% with growth of 8.9% in the U.S. and 6.4% outside of the U.S. Excluding the impact of the COVID-19 vaccine, operational sales growth was 8.8% worldwide and 8.7% outside of the U.S. Innovative medicine growth was driven by our key brands and continued uptake from recently launched products, with 10 assets delivering double-digit growth. We continue to drive strong sales growth across our multiple myeloma portfolio. Darzalex growth was 21.3%, primarily driven by share gains of 4.6 points across all lines of therapy and 9.4 points in the frontline setting, as well as market growth. Pervicti achieved sales of $186 million with growth of 59.9%, driven by continued capacity expansion manufacturing efficiencies, and strong demand. Tech Valley sales achieved $135 million in the quarter with growth of 43.5%, reflecting a strong launch and the relapsed refractory setting. Demand remained strong while sequential growth slowed due to adoption of recently approved longer duration dosing intervals. Erlina continues to deliver strong growth of 32.5%, primarily driven by share gains and market growth in metastatic castrate-sensitive prostate cancer. Other oncology growth was driven by continued strong uptake of TauVe, our GPR-C5D bispecific, and Ribirvant, our bispecific antibody for non-small cell lung cancer. Within immunology, we saw sales growth in Tramphya of 30.7%, driven by market growth, share gains in PSO and PSA, and favorable patient mix. Zolara growth of 4.9% was driven by market growth, partially offset by net unfavorable patient mix. We continue to anticipate biosimilar entry in Europe later this month, while in the U.S., we expect continued volume growth largely offset by price declines as we move towards biosimilar entry in 2025. In neuroscience, bravado growth of 60.8% continues to be driven by increased physician and patient confidence. In pulmonary hypertension, ophthalmic grew 9.1% due to share gains and market growth, partially offset by unfavorable mix. Obtravi growth of 8.1% was driven by market growth and share gains, partially offset by inventory dynamics. Total innovative medicine sales growth was partially offset by a decline in other neuroscience, unfavorable patient mix in Xarelto, and competitive pressures in Imbruvica. I'll now turn your attention to MedTech. Worldwide MedTech sales of $8 billion increased 4.4%, with growth in the U.S. of 5.7% and 3.2% outside of the U.S. Acquisitions and investitures had a positive impact of 40 basis points on sales growth in the quarter. Growth was driven by commercial execution, strength of new product introductions, and continued strong procedure volume, partially offset by performance in China and competitive pressures in U.S. distributor stocking dynamics and vision. In cardiovascular, electrophysiology delivered double-digit growth of 13.4% with strong growth across all regions. Performance was driven by global procedure growth, new product uptake, and commercial execution, partially offset by the previous one-time inventory build in Asia Pacific from the prior quarter. In addition, Abiomed delivered growth of 15.4%, driven by double-digit growth in all regions, and continued strong adoption of Impella 5.5 and Impella RP technology. Results include $77 million associated with the acquisition of Shockwave, which closed on May 31st. Contact lenses adjusted operational sales growth, excluding the blank divestiture, was 2.1%. Growth was driven by strong performance and AccuView OASIS one-day family of products, partially offset by U.S. distributor stocking dynamics and competitive pressures and Japan macroeconomic pressures. The blank divestiture negatively impacted growth by approximately 130 basis points. Surgical vision grew 1.2%, driven by technics eye hands, our monofocal interocular lens, partially offset by China VBP and refractive softness in the U.S. Surgery-adjusted operational sales growth excluding the aclarant divestiture was approximately flat. Performance was driven primarily by competitive pressures in energy and endocutters, China VBP, prior year China recovery, EMEA tender timing across advanced surgery, and supply constraints and wound closure. This was partially offset by strength of new products. The declarant divestiture negatively impacted growth by approximately 110 basis points. Orthopedics growth of 3.3% was driven by strong performance in hips and knees due to procedure growth, strength of new products, and AMIA tender timing in knees. This growth was partially offset by competitive pressures and impacts of China VBP in spine and sports. Now turning to our consolidated statement of earnings for the second quarter of 2024. I'd like to highlight a few noteworthy items that have changed compared to the same quarter of last year. Cost of product sold margin deleveraged by 60 basis points, primarily driven by product mix within innovative medicine and macroeconomic factors across both sectors. We continue to invest strategically in research and development at competitive levels. investing $3.4 billion or 15.3% of sales this quarter. We invested $2.7 billion or 18.8% of sales in innovative medicine compared to 22.2% of sales in 2023. As a reminder, last year included an upfront payment of $245 million associated with the ABLEdata partnership. In MedTech, R&D investment was $0.7 billion, or 9% of sales, an increase driven by continued investment in strategic platforms. Other income and expense was a net expense of $653 million in the second quarter of 2024, compared to income of $384 million in the second quarter of 2023. The increase in expense was primarily driven by costs related to the closing of the shockwave acquisition, the loss on the completion of the debt for equity exchange of the retained stake in Tenview, and prior year favorable intellectual property litigation settlements in MedTech. This was partially offset by the gain on the declarant divestiture. Regarding taxes in the quarter, our effective tax rate was 18.5% versus 14.7% in the same period last year. This increase was primarily driven by unfavorable one-time international audit settlements and the continued impact from Pillar 2. Excluding special items, the effective tax rate was 18.6% versus 15.9% in the same period last year. I encourage you to review our upcoming second quarter 10-Q filing for additional details on specific tax-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 second quarter of 2024, our adjusted income before tax for the enterprise as a percentage of sales increased from 37.2% to 37.4%. Innovative medicine margin improved from 42.3% to 44.6%, primarily driven by an upfront payment of $245 million associated with the ABLE-DATA partnership in 2023, partially offset by product mix and cost of products sold. Medtech margin declined from 28.2% to 25.7%, driven by prior year favorable intellectual property litigation settlements worth approximately 300 basis points. This concludes the sales and earnings portion of the call. I'm now pleased to turn it over to Joe.

Thank you, Jessica, and hello, everyone. Thank you for joining today's call. Overall, Johnson & Johnson delivered solid top and bottom line, as well as free cash flow growth in the quarter. Our innovative medicine business made great progress in the second quarter. We have strong momentum with key in-market products and continue to advance our pipeline with significant clinical and regulatory milestones being attained. Our MedTech business delivered growth that fell below our expectations of growing in the upper range of our markets, which, as you recall, correlates to a weighted average market growth rate of 5% to 7% from 2022 through 2027. We came into the year thinking 2024 would be in the upper end of that range. With acceleration planned in the second half, given some of the first-half dynamics Jessica outlined, we now expect growth closer to 6% for 2024. To me, this reflects the power and breadth of our company, where we can more than offset quarterly volatility in one part with overperformance from another part of our business. Before I get into the numbers, I'd like to provide some qualitative business highlights from the quarter. Starting with innovative medicine, in oncology, we continue to make meaningful progress across our disease areas of focus. Of note, We received FDA approval for CARVICTI in earlier lines of therapy and reported positive top-line overall survival results from the CARTITUDE-4 study. We also submitted a filing with the FDA for our subcutaneous formulation of RIBIRVAN. We presented updated results for TAR-200 and TAR-210, and we met primary endpoints for two Darzalex studies, Cepheus and Aquila, where results will be presented in an upcoming major medical meeting. Turning to immunology, we achieved key milestones for TRIMFIA, an inflammatory bowel disease, including the presentation and filing of Phase III studies in ulcerative colitis and Crohn's disease, as well as the filing of our subcutaneous formulation, which would make TRIMFIA the only IL-23 inhibitor with a fully subcutaneous regimen. We also expanded our immunology portfolio with the acquisitions of Proteologix and NM26. These bispecific antibodies will further strengthen our portfolio and enhance our ability to address significant unmet need in atopic dermatitis. Finally, spanning immunology and neuroscience, we presented positive results for nipicalumab in Sjogren's disease and myasthenia gravis. But it doesn't stop with the second quarter. We are excited for what awaits in the second half of this year. with the anticipated approval and launch of both Riborvant plus Lisertanib in frontline EGFR-positive lung cancer and Tremphia in IBD. We also expect data from J&J 2113, our targeted oral peptide in psoriasis and ulcerative colitis, J&J 4804, our co-antibody therapeutic in IBD, and Nipicalimab in rheumatoid arthritis. As we continue to bring new innovations to market and execute against clinical and regulatory milestones, innovative medicine is well positioned to achieve sustainable growth in both the near and long term. Turning to MedTech, we continue to advance our pipeline, launch new commercial products, and integrate strategic acquisitions that broaden and further differentiate our portfolio. In cardiovascular, we are enhancing our portfolio and shifting into higher growth markets through strategic acquisitions, such as Shockwave Medical. In May, we announced the launch of our Cardo 3 version 8 electroanatomical mapping system. This is the latest version of our 3D heart mapping system, which has machine learning capabilities that increase efficiency, reproducibility, and accuracy in maps electrophysiologists use to treat atrial fibrillation and other arrhythmias. In pulse field ablation, we initiated the commercial launch of the VariPulse platform in the EU and Japan, receiving early positive physician feedback in the external evaluation period. We also delivered results from the pivotal phase of the ADMIRE trial. where the Varipulse platform demonstrated 85% peak primary effectiveness with minimal adverse events, short PFA application times, and low fluoroscopy exposure. In orthopedics, we received five 10K FDA clearance for the clinical application of the VELUS robotic-assisted solution in unicompartmental knee arthroplasty. This is designed for both medial and lateral procedures, enabling surgeons to guide precise implant placement without a CT scan. In surgery, we launched the Echelon 3000 in the US, which combines 3D stapling and gripping surface technology to enable greater staple line security. This has been shown to deliver 47% fewer leaks, reduce surgical risks, and improve surgical outcomes. In surgical vision, We launched Technus Odyssey in the U.S. and head into a full market launch in the second half of 2024. For the remainder of the year, we will continue to advance our electrophysiology and cardiovascular pipelines as we prepare for the anticipated U.S. approval of Varipulse, as well as the submission of Impella ECP for regulatory approval. Within robotic surgery, we are on track to submit an investigational device exemption to the FDA for Otava in the second half of the year. Before turning to cash flow and guidance, I wanted to provide an update on the talc litigation. As announced on May 1st, the company has committed to pay ovarian claimants a present value of approximately $6.5 billion or $8 billion nominally over 25 years, resolving 99.75% of all pending talc lawsuits against the company and its affiliates in the United States. We are currently in a voting period for the plan where, for the first time, claimants are able to vote for themselves for or against the plan. The last day of voting is scheduled for July 26th. It will then take a few weeks for the vote administrator to vet and tally the votes. Once that process concludes, we plan to make a public announcement on the next steps regarding a prepackaged bankruptcy filing. Our confidence that we will reach the requisite 75% vote is bolstered by the continued support of council representing the vast majority of claimants with whom the plan was developed as well as the announcement of support by additional prominent plaintiff law firms recently, including Aylstock, Keller Postman, and Miller. Additionally, in furtherance of our goal of achieving a comprehensive solution, we finalized the previously announced agreements reached with all states that advanced talc claims and the Emirates and Cypress entities, owners of the mines that supplied talc to the company. In the second quarter, we continued to make progress with mesothelioma claimants, with 95% of claimants now settled. Turning to cash and capital allocation, we ended the second quarter with approximately $25 billion of cash and marketable securities and approximately $41 billion of debt for a net debt position of $16 billion. Free cash flow year-to-date was approximately $7.5 billion compared to $5.5 billion in the prior year period, which included cash flow from the consumer health business. During the quarter, we exited our retained stake in Canview, bringing the separation to a close. The net proceeds from the secondary offering were $3.6 billion. Our capital allocation priorities remain unchanged. We maintain a strong balance sheet, which continues to enable us to strategically invest in and grow our business while returning capital to our shareholders. Innovation remains core to our strategy. In the second quarter, we invested more than $3.4 billion, or 15.3% of sales, in research and development. In terms of acquisitions and licensing, during the first half of 2024, Johnson & Johnson has deployed approximately $17 billion in strategic value-creating inorganic growth opportunities. This includes Shockwave, Proteologics, and the NM26 bispecific antibody transaction announced last week, as well as more than 20 other smaller complementary business development transactions. While we will always explore strategic deals of any size that can create value, we foresee modest tuck-in deals as the preferred route over the near term. Now turning to our full year 2024 guidance. Given the moving parts associated with the acquisitions this quarter, I'll start where I usually end, with earnings per share. Before the impact of recent acquisitions, our outlook for adjusted operational EPS performance is once again being increased. As this schedule reflects, we are expecting a $0.05 per share increase in our operational performance. This would result in year-over-year EPS growth of 8.2% at the midpoint. To account for the completion of Shockwave, Proteologics, and the NM26 bispecific antibody transactions, and as previously disclosed, our adjusted operational EPS guidance now includes dilution of $0.68 per share. All of this yields an updated adjusted operational EPS guidance in the range of $10 to $10.10 per share. In addition, to assist with your future models, these transactions are expected to have a smaller impact of 33 cents to adjusted operational EPS in 2025. Now to address all elements of P&L guidance for 2024. As a reminder, our sales guidance continues to exclude any impact from COVID-19 vaccine sales. We are increasing our operational sales guidance for the full year by $500 million to reflect the completion of the shockwave acquisition. We now expect growth in the range of 6.1% to 6.6% compared to 2023, with a midpoint of $89.4 billion, or 6.4% at the midpoint. Excluding the impact from acquisitions and divestitures, we are maintaining our adjusted operational sales growth to the range of 5.5% to 6.0% compared to 2023. As you know, we don't speculate on future currency movements. We are utilizing a euro spot rate relative to the U.S. dollar of 1.08, consistent with last quarter. However, there have been notable strengthening of the U.S. dollar versus other currencies, specifically the Japanese yen and Chinese yuan. As a result, we estimate an incremental negative foreign currency impact of $500 million, resulting in a full-year impact of $1.2 billion. As such, combined with the Shockwave acquisition, we expect reported sales growth between 4.7% to 5.2% compared to 2023, with a midpoint of $88.2 billion, or 5% growth. Turning to the rest of the P&L. Based solely on the dilution from the transactions, we now anticipate our 2024 adjusted pre-tax operating margin to decline by 120 basis points, more than offsetting the previously communicated 50 basis point improvement. We project a net interest income between $300 million and $400 million, lower than previous guidance, driven by interest expense associated with financing of our recent acquisitions. Other income is anticipated to be in the range of $1.5 billion to $1.7 billion and increased versus previous guidance driven by year-to-date performance. Our effective tax rate is now expected to be between 17.5% and 18.5% for the full year, much higher than 2023. largely due to the impact of OECD Pillar 2, as well as the non-deductible nature of the recently announced NM26 bispecific antibody acquisition. While we do not provide guidance by segment or on a quarterly basis, I'd like to provide some qualitative considerations to support your modeling. We continue to expect innovative medicine sales growth to be lower in the second half of the year compared to the first half, given the anticipated entry of Stelara biosimilars in Europe beginning the last week of July. This headwind will be partially offset by continued uptake from our recently launched products. While we had COVID-19 vaccine sales in the second quarter, we do not anticipate any future sales. Finally, it is worth noting that distribution rights for Remicade and Symphony in Europe will be returned in the fourth quarter. In preparation for this transfer, we expect limited third quarter sales in Europe. Turning to Medtech. As previously stated, we expect growth to accelerate back in line with our long-term expectations in the second half of the year. This will be driven by recovery in contact lenses, evidenced by sequential monthly improvement within Q2, further expansion into high-growth segments, including the integration of Shockwave, and continued growth of new products and commercial execution across the portfolio. As you think about our adjusted operating margin, we continue to expect it to be higher in the first half of the year compared to the second half. Again, this is due to the IPR&D charge for the NM26 bispecific antibody transaction in Q3, as well as the anticipated entry of Stelara biosimilars in Europe later this month. Lastly, as a reminder on share count, We only expect a partial benefit in the third quarter resulting from the share count reduction following the Canview Exchange offer in August of 2023, with the fourth quarter being neutral. As we move forward, we remain focused on advancing our differentiated portfolio and achieving key clinical and regulatory milestones across innovative medicine and med tech. We remain confident in our ability to deliver sustained growth and long-term value for patients, customers, and shareholders. With that, I am now pleased to turn the call over to Joaquin for concluding remarks before taking your questions.