Louise Mehrotra - Vice President, Investor Relations
Alex Gorsky - Worldwide Chairman of our Medical Devices & Diagnostics Group
Dominic Caruso - Vice President, Finance and Chief Financial Officer
Rick Wise - Leerink Swann
Matt Dodds - Citigroup
Matt Miksic - Piper Jaffray
Catherine Arnold - Credit Suisse
Bob Hopkins - Banc of America-Merrill Lynch
Mike Weinstein - JP Morgan
David Lewis – Morgan Stanley
Larry Biegelsen – Wells Fargo
Eric Snyder - UBS
Tao Levy - Deutsche Bank
Johnson & Johnson (JNJ) Q3 2009 Earnings Call October 13, 2009 8:30 AM ET
I’m Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson and it is my pleasure this morning to review our business results for the third quarter of 2009. Joining me on the podium today are Alex Gorsky, Worldwide Chairman of our Medical Devices & Diagnostics Group, and Dominic Caruso, Vice President, Finance and Chief Financial Officer.
A few logistics before we get into the details, the audio and visuals from this presentation are being made available to a broader audience via a webcast accessible through the Investor Relations section of the Johnson & Johnson website. I’ll begin by briefly reviewing highlights of the third quarter for the Corporation and highlights for our three business segments. Following my remarks Dominic will provide some additional commentary on the third quarter results and guidance for the full year of 2009. Alex will then provide an update on our Medical Devices and Diagnostics business and we will open up the floor to your questions.
We will conclude our formal presentation at approximately 9:30am and following Q&A with some final remarks by Dominic, we’ll conclude the meeting around 10:00am.
Distributed with a copy of the press release that you just received is a schedule with actual revenues for major products and/or business franchises. For the listening audience these are available on the Johnson & Johnson website as is a copy of the press release.
Before I get into the results let remind you that some of the statements made during this presentation may be considered forward looking statements. The 10-K for the fiscal year 2008 identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward looking statements made this morning. The company does not undertake to update any forward looking statements as a result of new information or future events or developments. The 10-K is available through the company or online.
Last item, during the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. These measures are reconciled to the GAAP measures and are available in the press release or on the Johnson & Johnson website. Now I would like to review our results for the third quarter of 2009. If you would refer to your copy of the press release, let’s begin with the schedule titled supplementary sales data by geographic area.
Worldwide sales to customers were $15.1 billion for the third quarter 2009 down 5.3% as compared to the third quarter of 2008. On an operational basis sales were down 2.8% and currency had a negative impact of 2.5%. In the US sales declined 8.1%. Outside the US our operational growth was 2.4% while the affect of currency exchange rates negatively impacted our reported results by 4.9 points. The Asia/Pacific/Africa region grew by 3.5% operationally while Europe grew 2.1% operationally. The Western Hemisphere excluding the US grew 1.5% on an operational basis.
If you’ll now turn to the consolidated statement of earnings. Net earnings on a reported basis were $3.3 billion and earnings per share were $1.20. This compares to $3.3 billion and $1.17 in the same period in 2008. I would not like to make some additional comments relative to the components leading to earnings before we move on to the segment highlights.
Cost of goods sold at 29.4% of sales was 60 basis points less then the same period in 2008 with lower costs offsetting the impact of the change in the mix of the business. Selling, marketing and administrative expenses at 31.6% of sales were down 100 basis points versus last year driven by cost management across the businesses. Our investment in research and development as a percent to sales was 10.7%, 100 basis points less then the third quarter of 2008 due to a change in the mix of the businesses and reductions in spending levels due in part to increased efficiencies.
Interest expense net of interest income of $114 million compares to $25 million in the third quarter of 2008. The increase in net expense was due primarily to a lower interest rate on our cash balances. Other income net of other expense was $96 million in the third quarter of 2009 compared to $224 million in the same period last year. As discussed last year in 2008 we received a settlement payment from Amgen for $200 million. In the third quarter this year we received a settlement payment from Medtronic related to spinal screws of which $115 million is reflected in this account.
Our effective tax rate was 21.2% in the third quarter of 2009 versus 22.8% in the third quarter of 2008. Dominic will provide more commentary on taxes in his remarks.
Now turning to the consolidated statement of earnings for the first nine months of 2009. Consolidated sales to customer for the nine months of 2009 were $45.3 billion a decrease of 6.6% as compared to the same period a year ago. On a year to date basis sales declined by 1.8% and currency had a negative impact of 4.8 points. On the consolidated statement of year to date earnings I’d first like to draw you attention to the boxed section. Net earnings of $10.1 billion in 2009 compares to adjusted net earnings of $10.3 billion in 2008. In 2008 a charge for in process research and development has been excluded. With that adjustment for the nine months of 2009 net earnings were down 2.1%. Adjusted earnings per share at $3.61 was equal to the 2008 results.
Turning now to business segment highlights. Please refer to the supplementary sales schedule highlighting major product or business franchises. I’ll begin with the consumer segment. Worldwide consumer segment sales for the third quarter of 2009 of $4 billion decreased 2.7% as compared to the same period last year. On an operational basis sales increased 1.1% while the impact of currency was -3.8 points. US sales were down 4.4% while international sales grew 5.2% on an operational basis.
For the third quarter 2009 sales for the over the counter pharmaceuticals and nutritionals increased 0.5% on an operational basis compared to the same period in 2008 with US sales down 5.9% and sales outside the US up 8% on an operational basis. Inventory builds of product in anticipation of the flu season have been partially offset by lower seasonal trade inventory builds in allergy. Intensified competitive pressures including private label have impacted growth in this category.
Our skin care business achieved operational sales growth of 1.3% in the third quarter of 2009 with sales in the US up 3.4% and sales outside the US down 0.1% on an operational basis. Growth in the US was driven by AVEENO with the launch of the Nourish Plus Hair care line. Outside the US pressure from the economy impacted many of the brands, offset by sales from Dabao products acquired in the third quarter last year and strong growth in the Le Petit Marseillais products.
Baby care products were down 2.6% on an operational basis when compared to the third quarter of 2008. Sales in the US were down 10.5% primarily due to lower sales for babycenter.com compounded by pressure on the overall category growth. At the end of 2008 babycenter exited the online retail business while continuing to focus on online content. Sales out side the US were down 0.7% operationally with growth in hair care and baby oil offset by softness in other categories.
Women’s health achieved operational sales growth of 3.6%. Sales in the US were down 13.4% primarily due to lower sales of KY products. The year on year comparisons were impacted by the 2008 launches of new products. Sales outside the US were up on an operational basis by 11.7% primarily due to the acquisition of the Vania products.
Sales in the oral care franchise were down 1.4% on an operational basis. In the US, sales were down 8.3% due to softness in the category. Sales outside the US increased 4.8% operationally driven by strong growth for Listerine.
Sales in the women’s care other category were up 10.5% on an operational basis due to the recent acquisitions of two businesses in our wellness and prevention platform and the Vania and Polive acquisition.
That completes the review of the consumer segment and I’ll now review highlights for the pharmaceutical segment.
Worldwide net sales for the third quarter of $5.3 billion were down 14.1% versus the same period last year. On an operational basis sales were down 11.9% with a currency impact of -2.2 points. Sales in the US decreased 19.2% while sales outside the US decreased on an operational basis by 1.9%.
Our results continue to be impacted by generic competition on some of our products namely Risperdal Oral, Topamax and Razadyne. The marketing exclusivity for Risperdal expired in the US at the end of June 2008 and there are generic competitors for Risperdal in most markets. The marketing exclusivity in the US for Topamax expired this past March and multiple generics have entered the market. Generic competitors for Razadyne entered the US market in the latter half of 2008.
Also early in the quarter a generic version of Ortho tri cyclen Lo was introduced impacting the third quarter results. A subsequent settlement was reached whereby the competitor ceased further shipments of the products. The combined impact from these products has reduced the third quarter worldwide pharmaceutical operational growth rate by approximately 13 points with the US impact estimated at 21 points and the impact outside the US estimated at 2 points.
Additionally, as we highlighted last year, the third quarter 2008 results outside the US were favorably impacted by a reduction to reserve for sales rebates of approximately $135 million related to Concerta. Excluding the negative impact of generics and the impact of the 2008 reduction the underlying operational growth was approximately 4%.
Now reviewing the major products. Sales of Remicade a biologic approved for a treatment of a number of immune mediated inflammatory diseases were up 5.9% when compared to the third quarter of 2008, with sales growth in the US at 5.7%. In the US double digit market growth was partially offset by lower market share due to new competitive entrants and additional indications for competitive products.
Export sales to our customer for markets outside the US were up 5.1% and adjusting for the fluctuation in inventory levels growth was estimated at 13%. Procrit Eprex declined operationally by 10% during the quarter as compared to the same period last year with Procrit down 10.5% and Eprex down 9.6% operationally.
Procrit results have been impacted by a volume decline in the market versus the third quarter of 2008 estimated at 9%. Procrit aggregate share across all markets was approximately 49% in the third quarter of 2009 up approximately one point versus the same period last year. Increased competition impacted the sales for Eprex.
Sales of Levaquin our anti-infective were down 5.7% on an operational basis when compared to the same period a year ago. Total prescriptions in the US anti-infective market are estimated to be up slightly in the quarter. Levaquin script share was down versus the same period a year ago due to increased competition from generic products.
Risperdal Consta our long acting injectable formula of Risperadone achieved third quarter sales growth of 9.9% on an operational basis. US sales growth was 9.3% while sales outside the US were up 10.2% operationally driven by increased share. Additionally, the launch earlier this year of Risperdal Consta in Japan contributed to growth outside the US.
Concerta a product for attention deficit hyperactivity disorder declined 27.2% operationally in the third quarter as compared to the same period last year. Sales outside the US were down 59.2% operationally due to the 2008 reserve reversal mentioned earlier. Excluding this item, sales outside the US were up approximately 16% on an operational basis with strong growth seen across the major regions. Sales in the US were up 7.9% due to strong market growth partially offset by lower market share.
AsipHex as its known in the US market and Pariet outside the US is a proton pump inhibitor or PPI that we co-market with [Asai]. On an operational basis sales were down 4.4% with US sales up 0.8% and sales outside the US down 9% operationally. In the US dollar share in the third quarter was the same in both periods while script share has declined by just under a point. Sales outside the US have been impacted by pressure on the PPI category.
Velcade, a treatment for multiple myeloma co-developed with Millennium Pharmaceuticals continued to improve its market leadership position. Operational sales growth was strong at 30.5% driven by additional approval last year for front line therapy.
Prezista, a protease inhibitor for the treatment of HIV grew operationally 99.5% with the US growth over 125% and sales outside the US growing 77% on an operational basis. Expanded labeling to include treatment naïve patients contributed to the continued positive momentum in share.
Invega, an atypical anti-psychotic grew 12.3%. Sales in the US were down 16.4% due to reductions in inventory levels and a modest decline in share. Sales outside the US grew over 140% driven by steady progress in market share growth.
Wrapping up the review of the pharmaceutical segment is an update on the status of the Rivaroxaban complete response; we have met with the FDA and come to an agreement on a plan to address the points raised in the complete response letter. As a reminder, no new clinical or non-clinical studies to evaluate the efficacy to your safety were requested. Based on these discussions we are working towards submitting our response before the end of the year.
I’ll now review the medical devices and diagnostic segment results. Worldwide medical devices and diagnostic segment sales of $5.8 billion grew 4.1% operationally as compared to the same period in 2008. Currency had a negative impact of 1.8 points resulting in total sales growth of 2.3%. Sales in the US were up 4.5% while sales outside the US increased on an operational basis by 3.8%. Results have been impacted by lower sales of drug eluting stents due to increased competition. Sales excluding the impact of lower sales of drug eluting stents grew nearly 6% operationally.
Now turning to the franchises and starting with Cordis. Cordis sales were down 6.6% operationally with US sales down 10% and sales outside the US down 4.6% operationally. Cordis results were impacted by lower sales of Cypher, our sirolimus-eluting stent, partially offset by solid growth in balloons and our Biosense Webster business. Cypher sales were approximately $210 million down 28% on an operational basis versus the prior year. Sales in the US of approximately $55 million were down 45%.
In comparison to the third quarter of 2008 the US drug eluting stent market is estimated to be down 7%. PCI procedures were down 6% while penetration rates were estimated at 75% up from 71% a year ago. The estimated price for Cypher in the US is down approximately 2% versus the third quarter of 2008. Estimated share in the US of 12% was down two points sequentially and down 11 points from the third quarter of 2008 due to increased competition.
Sales outside the US of approximately $155 million declined 19% operationally. The estimated market share in the quarter of 24% was down one point on a sequential basis and down six points from the third quarter of 2008. Increased competition has impacted the share outside the US. Cypher estimated worldwide share for the third quarter was 19% down two points sequentially and down nine points from the third quarter of 2008. In September the 2.25 millimeter Cypher stent was approved by the FDA providing an important new option for treating small vessel disease.
Biosense Webster, our electro physiology business achieved 9% operational growth in the quarter due to the strong performance of both specialty diagnostic and therapeutic catheters.
Our DePuy franchise had operational sales growth of 6.7% when compared to the same period in 2008 with the US growing 6% and the business outside the US growing by 7.6% operationally. Pressure on pricing continued as a result of the economic trends, however, positive mix due to continuing product innovation has mitigated much of that impact.
Hip growth on a worldwide basis was approximately 6% operationally with the US growth at approximately 8% and the growth outside the US at 5% on an operational basis. On an operational basis worldwide knee growth is approximately 4% with the US up 5% and outside the US up 3% operationally. Spine achieved strong operational growth of approximately 11% due to the successful launch of a number of products with the US up 9% and sales outside the US up 15% operationally.
Mitek, our sports medicine business grew approximately 13% operationally with similar results both in an outside the US.
The diabetes franchise was down 2.7% operationally in the third quarter of 2009 with US business down 4.9%. While volume was up modestly versus the same period last year pressure on pricing continued. Outside the US sales decreased 0.4% operationally. Animas, our insulin pump business grew 30% on an operational basis due to new product launches and continued development of the international market.
Ethicon worldwide sales grew operationally by 9.4% with US up 18% and sales outside the US up 3.8% operationally. The acquisitions of Mentor and Omrix partially offset by the divestiture of the professional wound care business added approximately 3.5 points to the worldwide operational growth. Sales for our newly acquired aesthetics products for Mentor were in line with 2008. On a worldwide basis double digit operational growth was achieved in biosurgicals and meshes.
Ethicon endo-surgery achieved operational growth of 8.4% in the third quarter of 2009 with the US sales growing 5.5% and sales outside the US growing an operational basis by 10.9%. Double digit operational growth for both the endo-mechanical and harmonic products was driven by strong performance in markets outside the US. Additionally, in the US the recently acquired NCL products from our acquisition of SurgRX contributed to the results.
Advanced sterilization products achieved strong growth in the quarter driven primarily by the continued growth in markets outside the US. Ortho clinical diagnostics achieved operational growth of 8.2% in the third quarter. Sales growth in the US was 9.2% while sales outside the US were up 7% on an operational basis. The recently launched Vitros 5600 and 3600 made strong contributions to results of the quarter.
Rounding our the review of the medical devices and diagnostics segment, our vision care franchise achieved operational sales growth of 0.2% in the third quarter compared to the same period last year. Sales in the US increased 0.8%. Sales outside the US were flat on an operational basis. The worldwide lens market is estimated to be flat to down slightly compared to the same period last year with the modest growth in the US offset by a modest decline outside the US. Estimated worldwide market share was in line on a sequential basis.
Despite the softness in the market Acuvue Oasys and Acuvue Oasys for astigmatism achieved strong double digit growth. Additionally, the introduction of One-Day Acuvue True Eye in major product markets in Europe made strong contributions to the sales outside the US.
That completes highlights for the medical devices and diagnostics segment and concludes the segment highlights for Johnson & Johnson’s third quarter of 2009. I’ll now turn the podium over to Dominic.
I’d like to add my own welcome to members of the investment community who have joined us here today and to those who are listening via the webcast and conference call. I will keep my remarks relatively brief since we would like to allow time for the update on our medical devices and diagnostics business and to answer your questions.
During the third quarter we continued to make progress in advancing our pipeline of new products to the market with several regulatory approvals and launches. We also completed several transactions that will add external new sources of growth. I’d like to review these accomplishments with you today and also provide some overall comments on our financial results this past quarter as well as an update to our guidance for full year 2009 but first some general comments on the business.
This year continues to present challenges to certain parts of our business due to the ongoing impact of the economy as well as difficult year over year comparisons caused by the loss of US market exclusivity for Risperdal and Topamax. We continued to deliver solid operational results and are pleased with the underlying strength across our broad base of healthcare businesses. Overall, excluding the impact of generics and the launch of new drug eluting stent competitors, the underlying business is growing at approximately 3% to 4% operationally despite the general economic slowdown.
These are challenging times but the people of Johnson & Johnson continue to manage the business very well. Focusing on the factors we can control in terms of execution and cost management and ensure that we remain focused on the long term opportunities that will benefit our patients and customers and drive sustainable growth. We see promising signs in several franchises and products, signs that give me confidence in our ability to maintain and grow our market leadership positions as economic conditions improve.
In the consumer business we have seen a continued impact of the recession on consumer volume patterns in the US as well as reductions in inventory levels by our distributors. Our continued focus on scientific innovations that differentiate our products as well as our focus on developing strong consumer brands remain core strategies for continuing to grow our consumer business.
Our newer brands outside the US have helped to stem some of the challenges we are seeing in the US market. In the pharmaceutical business we continue to make good progress in advancing our pipeline. During the third quarter the FDA approved Stelara for the treatment of adult patients 18 years or older with moderate to severe plaque psoriasis. The FDA also approved Invega Sustenna for the acute and maintenance treatment of schizophrenia in adults. This is the first once monthly long acting injectable atypical anti-psychotic approved in the US for this use.
Just last week the European Commission approved Simponi as a once monthly subcutaneous therapy for the treatment of moderate to severe active rheumatoid arthritis, active and progressive psoriatic arthritis and several active ankylosing spondylitis.
In 2009 we have launched four significant new molecular entities in the US and two were also launched in Europe. I’m pleased to tell you they are all off to a good start. We continue to supplement our internal development with acquisitions and collaborations that will broaden our research platforms and provide new areas of growth for Johnson & Johnson.
This past quarter we closed our agreement with Elan Corporation where we have acquired substantially all of the assets and rights to its Alzheimer’s immunotherapy program as well as an equity interest in Elan Corporation. We will continue development activities for Bapineuzumab a potential first in class treatment that is in phase three clinical trials.
Also this past quarter we closed on our acquisition of Cougar Biotechnology which strengthens our presents in oncology with a late stage first in class prostate cancer treatment.
We also entered into a licensing and collaboration agreement with Gilead Sciences for the development and commercialization of a new once daily fixed dose anti-retroviral product which will include our investigational compound TMC278 and Gilead’s Truvada.
Early in the fourth quarter we entered into a collaboration agreement and purchased an equity interest in Crucell. This agreement focuses on the discovery, development and commercialization of monoclonal antibodies and vaccines for the treatment and prevention of influenza and other infectious as well as non-infectious diseases. We are very excited about the potential for these agreements and as always we continue to look at ways to invest in long term growth of our business both internally and externally.
We’re also seeing important developments in our medical devices and diagnostics portfolio which Alex Gorsky will discuss with your later this morning.
Now some comments on our recent quarterly results. We continue to manage our cost structure in a disciplined way to improve operating margins and deliver solid earnings growth. We are developing plans to deal with business and macro economic pressures but never losing focus on investing for growth. Our third quarter results continue to reflect an improvement in our pre-tax operating margin which we expected for the year when we provided our annual guidance in January.
The year to date effective tax rate of 23.5% when compared to our guidance of between 24% and 25% had a positive effect on earnings in the third quarter contributing approximately $0.05 per share. This reduction in the effective tax rate results primarily from additional foreign tax credits.
Now let me turn to currency, which continues to have an impact on our financial results. The negative impact of currency translation on sales was approximately 2.5% and the negative impact on earnings per share was approximately $0.03 per share that’s compared to the prior year. Therefore, our third quarter 2009 EPS of $1.20 reflects approximately $0.06 of operational EPS growth offset by the approximately $0.03 per share of negative currency translation impact versus the third quarter of 2008.
I mentioned a moment ago what the tax rate improvement was in the third quarter as compared to our previous guidance. When comparing a tax rate improvement to the prior year the lower effective tax rate contributed $0.02 per share to our operational growth of $0.06 per share over the third quarter 2008.
Now I’d like to provide some guidance for you to consider as you refine your models for 2009. Let’s start with a discussion of cash and interest income and expense. At the end of the third quarter we had approximately $2.7 billion of net cash. This consists of approximately $14.3 billion of cash and investments and $11.6 billion of debt. This represents a $1.6 billion improvement in our net cash position during the third quarter and we used approximately $1.9 billion of cash during the third quarter to close the Elan and Cougar transactions.
As we said previously we have slowed the pace of our share repurchases due to the deployment of cash for transactions like the Cougar acquisition and the Elan and Crucell agreements. As we stated when we initiated the share repurchase program we would always remain flexible should opportunities arise to deploy our cash to build the business. To date we’ve purchased approximately $8.9 billion of our stock, we will expect to complete the remaining $1.1 billion under this repurchase program but at a slower pace then previously anticipated.
Our financial position remains strong. We continue to generate strong cash flows and maintain AAA credit rating, allowing us to continue to have good access to the credit markets for our financing needs at reasonable rates. As always, we will examine the best uses of our financial strength to invest in long term growth of our business and to return value to our share owners.
For purposes of our models, assuming no major additional acquisitions and the slower pace of completion of share repurchase program I’d suggest your consider modeling net interest expense of between $300 and $400 million a slightly higher level of net interest expense then our previous guidance, reflecting lower interest income on our cash balances.
Turning now to other income and expense, as a reminder this is the account where we record loyalty income as well as one time gains and losses arising from such items as litigation, investments by our development corporation and asset sales or write offs. This account is difficult to forecast, but assuming no major one time gains or losses I would recommend that you consider modeling other income and expense for 2009 as a net gain ranging from approximately $200 to $300 million consistent with our previous guidance.
Now a word on taxes. Through the end of the third quarter of 2009 the company’s effective tax rate was 23.5%. We suggest that you model our effective tax rate for 2009 in the range of 23% to 23.5% a lower effective tax rate then our previous guidance. As always, we continue to assess opportunities to improve upon this rate throughout the balance of the year.
Now turning to sales and earnings. It remains very difficult to predict movements in currency exchange rates and their impact on sales and earnings, especially given the ongoing economic volatility and the resulting monetary policy changes that governments around the world are employing to address the situation.
As we have said throughout the year, our guidance for 2009 will be based first on a constant currency basis reflecting our results from operations assuming that average currency rates for 2009 would be the same as they were for 2008. This is the way we manage the business and we believe this provides a good understanding of the underlying operational performance of the business. We will also continue to provide an estimate of our reported sales and EPS results for the year with the impact that current exchange rates could have using the Euro as an example.
Turning to sales and taking into consideration the loss of US market exclusivity of both Risperdal Oral and Topamax which have about a 4% to 5% negative impact on our overall sales growth rate, we would be comfortable with your models reflecting an operational sales change on a constant currency basis of between -1% and 1% consistent with our previous guidance. This would result in sales for 2009 from operations on a constant currency basis of between $63 and $64 billion.
While we are not predicting the impact of currency movements, to give you an idea of the potential impact, if average currency exchange rates for the remainder of 2009 were to remain where they were as of last week, and using the Euro as an example, this would imply an average rate for the Euro of $1.39 for the year, which means our sales growth rate would be negatively impacted by approximately 3% or approximately $2 billion.
Thus under this scenario we would expect reported sales to decline to a range between -2% and -4% for a total expected level of reported sales of between $61 and $62 billion slightly above our previous guidance range but due solely to the impact of currency movements.
Now turning to earnings. When I last checked the recent first call mean estimate for our EPS for full year 2009 was $4.52 per share. As a reminder, our three recent transactions with Cougar Biotechnology, Elan and Crucell were expected to have an aggregate dilutive impact of between $0.06 and $0.10 per share on 2009 earnings, as we indicated when we announced each of these transactions. We incurred $0.01 of this dilution in the third quarter and we expect that $0.06 to $0.07 of this dilutive effect will be reflected in our fourth quarter results.
The lower effective that we are now estimating versus our previous guidance will add approximately $0.07 per share to our 2009 earnings per share excluding special items, offsetting the dilutive impact of the transactions I noted earlier of approximately $0.07 to $0.08 per share. With that in mind, and considering the strength of our operational performance thus far this year, as all of the fact that we are now into our fourth quarter, we are now narrowing our full year 2009 operational EPS guidance excluding special items to between $4.65 and $4.70 per share on an operational basis, that is assuming the same average exchange rates for 2009 as in 2008.
While we are not predicting the impact of currency movements to give you an idea of the potential impact on EPS of currency exchange rates for the remainder of 2009 were to remain where they were as of last week, with the average Euro for the year at a rate of $1.39, that our EPS growth rate would be negatively impacted by approximately 2% or approximately $0.11 per share.
This is approximately $0.04 better then our original estimate we provided in January of approximately $0.15 per share. Therefore we would be comfortable with your models reflecting full year EPS excluding special items, of between $4.54 and $4.59 per share. Given the uncertainties that remain with respect to the pace of any potential economic recovery we would be comfortable with your models reflecting the mid point of this range.
Finally, just a reminder, we recently reached an agreement with Boston Scientific to settle certain stent litigation cases for approximately $716 million a significant portion of which will be include in our fourth quarter results. This gain is not included in our earnings guidance as we will treat this gain as a special item.
That concludes my update on our operating performance this quarter and guidance for 2009. Let’s move on now to the next portion of our program today.
As you know, we regularly communicate with the investment community about our long term strategies and prospects for growth. Many of your joined us last year in New Brunswick for a full review of our medical devices and diagnostics business and today we are going to bring you up to date on our progress in the MD&D business and some of the major developments we described for you then.
Recently we consolidated our comprehensive care and surgical care organizations and reintegrated them into one medical devices and diagnostics management structure. Alex Gorsky who most of you know from his recent tenure running our surgical care business is now Worldwide Chairman of MD&D and will walk you through an update. At the end of Alex’s presentation we look forward to taking your questions.
It is now my pleasure to present my friend and colleague on the Executive Committee of Johnson & Johnson, Alex Gorsky.
It’s my real pleasure to be here with you to discuss Johnson & Johnson’s medical diagnostics and devices businesses. Let me start, as Dominic said, by taking you back to June of last year when we met with many of you in New Brunswick to conduct a day long MD&D review. At that meeting we shared with you why we’re so excited about the growth opportunities in the global MD&D market and why we believe that Johnson & Johnson is uniquely positioned to take advantage of these opportunities.
Despite some obvious headwinds since then, which we’ve all experienced, we’ll share with you why we’re still bullish on the long term potential of this market and in our ability to drive above market growth over the long term. Last year, at that same meeting, we shared with your our plans to grow our core MD&D businesses through innovative line extensions. Today I’m going to update you on some of our most promising new line extensions in five of our core businesses; sutures, joint reconstruction, diabetes care, contact lenses, and clinical labs.
At that same meeting, we also shared with your our plans to invest in break through innovation, new products and technologies with a potential to advance the standard of care for patients and drive significant growth for Johnson & Johnson and shareholder value. We spoke about products like Sedasys; the first computer assisted personalized sedation system.
We spoke about the Nevo drug eluting stent which as the potential to transform coronary stenting. And we spoke about the fibrin pad, a unique example of convergence within Johnson & Johnson that addresses the persistent problems associated with bleeding in surgical settings. Today we’re going to share some exciting progress we’re making on all three of these innovations along with others.
At that meeting we also shared with you our plans to accelerate growth in emerging markets. Today we’re going to share some specific examples of how we’re executing our plans in countries like Brazil, Russia, India and China. With that as a backdrop let’s go ahead and dive in.
Globally the medical devices and diagnostic market continues to be very attractive, estimated at about $335 billion and projected to grow at approximately 6.5% over the next several years. As you can see on the right, we currently participate in a large majority of the total MD&D market, those noted by the blue print. Geographically the market is split almost evenly between the United States and outside the United States with outside the United States markets expected to grow about two percentage points faster then the US.
The medical technology market offers tremendous growth opportunities given favorable trends like rapidly aging populations, significant unmet medical needs, scientific and technological advances, and geographic development opportunities. At the same time, we know that there are considerable market challenges that lie ahead, including things like increasing cost pressures, the need for better access and affordability, requirements for new standards of evidence, and the evolving demands of patients and customers.
At Johnson & Johnson we’re proud of the fact that we’re the world’s largest medical devices and diagnostics business with more than $23 billion in sales in 2008. Over the past five years we have grown sales at a compounded annual growth rate of 7% operationally growing in line with the market. Johnson & Johnson’s MD&D segment is well positioned for growth. We are number one or number two in the majority of markets in which we compete and these markets are either large or fast growing or in many cases both.
We have significant competitive advantages including global capabilities in scale, deep patient and medical insights, and strong scientific and technological expertise. Very importantly we’ve got the depth and breadth at Johnson & Johnson which gives our companies access to resources, capabilities and expertise, our consumer, pharmaceutical, and MD&D businesses. Few if any competitors can claim similar advantages.
This slide I’m particularly proud of because I believe our MD&D segment is comprised of seven extraordinary franchises:
DePuy is the leader in orthopedics, sports medicine and neurosurgical devices.
Ethicon is a leader in sutures, tissue repair products and aesthetics.
Ethicon Endo Surgery is a leader in minimally invasive surgery.
Cordis and Biosense Webster are leaders in the treatment of cardiovascular disease, the world’s leading cause of death
Ortho Clinical Diagnostics is the leader is diagnostics products which impact more than 60% of healthcare decisions.
Lifescan and Animas are leaders in the diabetes area which affects almost 250 million people worldwide today and will affect almost 400 million people by the year 2025.
Vision Care Franchise is a leader in the global contact lens market.
Earlier, Louise shared with you the third quarter sales and growth rates for each of our seven MD&D franchises. On this slide you’ll see the same information through the first nine months of the year. DePuy, Ethicon, Ethicon Endo, and OCD all generated operational growth in the high single digits, a testimony to the leadership positions they hold and the markets in which they compete and to the relative stability of these particular markets.
Our vision care and diabetes care franchises have been impacted the most within MD&D by the weak global economy and you can see that in their results with operational sales in vision care up 1% and sales in diabetes care down 4%.
Finally, sales were down 11% in our Cordis franchise. Excluding drug eluting stents, however, sales in Cordis actually grew at approximately 10%, a good indication of the strength of our other cardiovascular businesses that is sometimes overshadowed by the challenges we’re facing with the drug eluting stent market.
All told, nine month sales in MD&D topped $17 billion with a 3.3% operational growth rate. Excluding drug eluting stents, nine month sales grew at approximately 6% operationally.
As I mentioned earlier we see tremendous growth opportunities for growth in the MD&D segment and we are pursuing four key growth strategies to take full advantage of these opportunities. First, we’ve got to grow our core businesses in large part due to exciting new line extensions. Second, we’re launching break through new products and technologies in some of the largest and/or fastest growing segments in which we compete. Third, we’re accelerating our growth in emerging markets. Fourth, and finally, and as always, we’re going to drive operational effectiveness and efficiency.
Let’s take a quick look at the progress we’re making with each of these strategies. As I mentioned earlier, we compete in a number of very large and well established markets. I’ve highlighted five of these markets here and they provide us with a very large and relatively stable and predictable foundation upon which to build our business. Still, we don’t take our success for granted in these markets. We are committed to growing share and we’ve become very proficient in the type of continuous new product innovation that will allow us to do so. What follows are a few specific examples.
In recent years, our Ethicon portfolio has evolved from a line of products that perform a mechanical function like closing a wound to a line of products that can actually impact the physiology of a surgical sight by helping to inhibit bacterial growth in and around the suture. Infection reduction will continue to be a primary driver of growth in the suture market. Out of the more than 30 million surgical procedures performed each year in the United States, close to half a million will results in surgical sight infections. When these infections occur they can be extremely problematic for the patient and expensive to treat for the hospital.
Addressing this eminent need drives the growth of the anti-bacterial synthetic suture platform, a platform we invented. Our Vicryl Plus antibacterial suture introduced in late 2003 took the science of sutures to the next level. This suture was the first in its kind to the market and is one of a kind worldwide. Its code is with the purest forms of tri cyclen to inhibit colonization of the most common bacteria that cause surgical sight infections. We doubled Vicryl Plus sales and recently expanded our Plus portfolio with the launch of Monocro Plus and PDS Plus in the US offering added protection from multiple layers of closure. We intend to increase the penetration rate of our Plus portfolio through multiple country launches later this year.
Now let’s talk about our DePuy franchise. In this franchise the pinnacle complete acetabular cup system is the first ceramic on metal bearing being considered for approval by the FDA. It’s intended for use as a primary hip replacement in adult patients suffering severe pain and disability due to structural damage in the hip joint from non-inflammatory degenerative joint disease including osteoarthritis or post traumatic arthritis.
Clinical and laboratory data showed that the ceramic on metal bearing in the Pinnacle Complete System combines the durability and stability of metal on metal bearing and the enhanced wear characteristics of ceramic on ceramic bearing. More than 95% of the patients in the complete clinical study reported a decrease in hip pain and need for pain medication, increased function and overall satisfaction with the surgery. At DePuy, ceramic on metal bearing has been marketed in 40 countries around the world outside the US since 2007.
If approved by the FDA health professionals will have a new option for their patients based on specific patient anatomy, lifestyle, medical condition, and surgeon preference. The Pinnacle Complete System was presented to an FDA advisory committee in August and I’m very pleased to report that the committee unanimously recommended FDA approval.
The number one patient need regarding blood glucose strips and meters is confidence in the accuracy of the test results. Lifescan is launching a new blue OneTouch Ultra test strip with double sure technology for accuracy. Double sure technology performs two separate glucose tests with every strip and a self test to confirm accuracy. OneTouch Ultra test strips are glucose specific and eliminate the risk of falsely elevated results from other sugars.
They also have nearly seven years of proven accuracy to patients and healthcare practitioners can rely on. This innovation launched in the US last month, leverages Lifescan’s competitive advantage of a one strip platform used by multiple meters. Its works in all current and future OneTouch Ultra meters. It protects and serves our existing customer base while providing a platform for growth it doesn’t require costly trade out programs to upgrade patients to new meters in order to receive new benefits. I should also add another important point. Like all Lifescan products this does not contain the GDHPQQ enzyme that the FDA warned about in August.
Since 1987 when we introduced the world’s first disposable contact lens under the Acuvue brand name, Johnson & Johnson vision care has continued to maintain its leadership position with the launch of numerous innovative eye care products. Today Acuvue remains the world’s most widely prescribed contact lens.
One Day Acuvue True Eye is the world’s first daily disposable silicone hydrogel and the most exciting breakthrough in contact lens technology in years. It is the world’s first lens to deliver on all four dimensions of eye health shown on this slide, to particularly suit today’s patients with busy, demanding and active lifestyles. One day Acuvue True Eye was launched in the UK in August 2008 followed by numerous other outside the US markets in the second quarter of this year. A US launch is planned for the second and third quarters of next year which will enable us to maximize the global learning’s of our outside United States launches.
Our Ortho Clinical Diagnostics franchise competes in the clinical laboratory blood tying and blood screening segments. Within the clinical laboratory segment the largest of these three segments OCD offers a very competitive menu of tests on our Vitro systems. These tests range from routine cholesterol level testing to more sophisticated oncology and infection disease tests. In the fourth quarter of 2008 the FDA approved two new Vitro systems, the 5600 and the 3600. With these approvals the size of the markets served by OCD has doubled from 4.6 billion to 9.8 billion.
With the 5600 we have entered the fast growing integrated market segment. The 3600 gives us access to the medium and high volume immunoassay stand alone segment. The systems are designed to deliver high quality results with optimized turn around time and work flow efficiency for OCDs primary customers, hospitals and reference labs.
These systems are also key to running new medical content which we define as assays that are just beginning to emerge and assays that have yet to be validated. Some examples include Vitamin D and system C, a marker for kidney and heart disease. The key strategic opportunity in healthcare is reducing chronic illness and enabling wellness worldwide to reduce costs. The Vitro systems enable OCD to address these unmet medical needs.
While line extensions are critical to achieving steady growth, we’re also working on a number of break through new products and technologies that we believe will drive significant growth for us in the years ahead. Some of these products and technologies are in categories where we already compete, drug eluting stents for example, others are in newer adjacent categories, computer assisted personalized sedation and biosurgicals for example. Let’s take a closer look at a few of these.
Within our Cordis franchise we believe that our new Nevo stent has the potential to return us to a leadership position in the $5 billion global drug eluting stent market. Nevo is the first and only drug eluting stent utilizing rez technology which incorporates hundreds of small reservoirs each acting as a depot into which drug polymer compositions are loaded. This unique design allows drug delivery from a stent with a surface that is 75% bare metal upon insertion and which becomes purely bare metal in approximately three months, based on Nevo data.
Nevo also contains sirolimus the same drug as our Cypher stent, data supporting the safety and efficacy of sirolimus in coronary application is now available up to six years and this body of clinical evidence is completely unmatched by any other DES. Nevo will also be highly deliverable. It’s made of cobalt chromium which makes the stent flexible and conformable with thin struts to maximize vessel coverage.
Our confidence in Nevo is reflected in a robust and extensive and clinical trial program and strategy that will provide comparative data for Nevo against [Taxus levertay], against Zion the current market leader and against our own Cypher the gold standard for safety and efficacy. In May we presented data from the Nevo Rez one trial showing that Nevo demonstrated superiority to the [Taxus levertay] stent with respect to in stent late loss, the trials primary end point and did so across all major subgroups such as patients with diabetes.
We expect the Nevo two trial versus Zion to start sometime in the first part of 2010 and the Nevo three trail to begin after that. In August we started a Cypher trial in the US that will serve as the control arm for Nevo three.
In terms of regulatory filings we plan to file Nevo for CE mark approval in Europe in the first quarter of 2010 with a PMA submission in the US to follow in 2012.
Within our cardiovascular franchise, Biosense Webster is the world leader in advanced diagnostic, therapeutic and mapping tools used in the treatment of arrhythmias through ablation. Biosense Webster is increasingly focused on atrial fibrillation or AFIB. An estimated 22 billion people worldwide suffer from AFIB making it the most common heart rhythm disorder and a leading cause of stroke among people over the age of 65. Despite the high prevalence of AFIB only about 88,000 people are treated with ablation each year.
Earlier this year Biosense received FDA approval for the Navistar Thermocool Catheter for the treatment of AFIB when used with compatible 3D mapping systems. It’s the first and only catheter approved in the US for this indication.
We’ve also begun the outside the United States launch of Carto three a new catheter based navigational mapping system. Carto three provides incredibly detailed full color, 3 dimensional images of the heart enabling letro physiologists performing catheter ablation to pinpoint exactly where the abnormal heart rhythm originates. We’re awaiting FDA approval for Carto three.
The 2008 acquisition of SurgRX has allowed our Ethicon Endo Surgery franchise to expand its leadership in energy based surgical instruments. These instruments are used to cut, coagulate, and seal tissue during minimally invasive and open surgical procedures. By combining end seal products from SurgRX with Ethicon Endo’s Harmonic line of instruments we can now offer surgeons an expanded portfolio of surgical instruments for use in a wide variety of surgical procedures.
Johnson & Johnson leads the industry in developing and next generation of advanced hemostats to address the persistent clinical problems associated with bleeding in surgical settings. A truly unique example of convergence three Johnson & Johnson companies; Ethicon, [Senacore], and the recently acquired Omrix Biopharmaceuticals have been working together to develop one such hemostat that we call the Fibrin pad.
With our heman plasma based biologics embedded directly into proprietary matrix the fibrin pad has the potential to uniquely and effectively dress bleeding challenges that are currently unmet by traditional hemostats. It’s designed to combine the functions of mechanical sealing and biological hemostatis. Upon contact with blood the biodegradable device causes a clot to form rapidly and stop bleeding without any other action. A BLA for the fibron pad is targeted for submission by the end of 2009.
Our MD&D companies have a rich history of transforming the art of surgery with unprecedented innovations. Sedasys, the first computer assisted personalized sedation system makes it possible for physician nurse teams to deliver the sedative propofol during routine medical screenings. Sedasys integrates drug delivery and state of the art monitoring, making is possible for physician/nurse teams to provide personalized sedation based upon patients unique physiology.
The system is designed to achieve minimal to moderate propofol sedation levels, continuously monitoring patient vital signs and reduce the risk of patients slipping into deeper sedation levels then intended. Sedasys will be used initially during colonoscopies and screenings of the upper GI tract. In the US alone there are some 16 million patients undergoing these routine procedures every year. Beyond the GI market we plan to study the application of the Sedasys system in other procedures as we continue to advance the standard and science of sedation.
Sedasys was presented to an FDA advisory committee in May of this year and received a favorable recommendation. We’re in ongoing discussions with the FDA regarding final approval.
As I mentioned earlier, slightly more then half of our MD&D sales come from outside the United States. Despite the impact of the global recession, we continue to see especially attractive growth rates in Brazil, Russia, India and China. In fact, the growth rate for the MD&D industry in the BRIC market over the next five years is expected to be more than double the mat of the total global market. To win in emerging markets we’re focused on developing market appropriate products that not only address unmet medical needs but also address the issue of market access and affordability.
A good example of this is our [Synsil] synthetic absorbable suture in China. We also recognize the importance of working with governments that are eager to bring quality healthcare to an increasing number of citizens and we understand the need to be on the ground in the emerging markets in order to gain meaningful local insights and so we are expanding our footprint throughout BRIC.
For example, we’ve established R&D centers in China and India, manufacturing facilities throughout BRIC including a new campus in Suzhou China where DePuy products are now being made, and surgical training institutes to address the shortage of skilled surgeons in these markets and a branch of the Johnson & Johnson Diabetes Institute in China.
Our final growth strategy is to drive operational effectiveness and efficiency. As you can see, we’ve made significant improvement to our operating profit over the last five years. The improvement is primarily attributed to gross profit improvements and leveraging of SG&A. You can also see their operating profit increase as a percent of sales from 22.6% in 2003 to over 30% in 2008. In addition, MD&D contributed approximately 40% of Johnson & Johnson’s total segment operating profit in 2008.
I trust that I’ve given you a better sense of our strategies to enhance patient care, create shareholder value and drive continued growth within MD&D. We believe that our long track record of success at MD&D will continue for a number of reasons. We have a strong history of delivering clinically relevant solutions. We see favorable demographics and significant unmet needs globally. We have market leading franchises with established growth platforms and robust pipelines. We possess broad technologies, scientific and regulatory expertise. We can take advantage of our global infrastructure capabilities and networks.
We also have an exceptional financial profile that’s enabling continued investments in new markets, companies and technologies. In closing let me add that I’m very privileged and humbled to work with a group of great leaders and associates who are doing their best to improve patient care and drive value for our shareholders each and every day.
With that I’ll thank you and let me turn it back over to Louise.
We will now open the floor to questions. If you could wait for a microphone as we are webcasting the meeting.
Rick Wise - Leerink Swann
Clearly device group had a terrific quarter, very solid performance this quarter but when you look at some of the pieces, let’s say Biosense Webster, my impression is its a little slower growth then the stronger double digits we’ve seen. Are you seeing any change, any rebound in procedures, more broadly or conversely are you seeing any signs of procedure slowdown anything getting worse? I’m asking post the St. Jude pre-announcement talking about inventories or procedures.
There are a couple of points to consider. First of all what we’re using today is second quarter data, we don’t have the third quarter data yet so it’s important. One of the things I found in my transition from Pharma to Devices is the challenge of trying to read the data very accurately. Most of our comments, really all of our comments are predicated upon second quarter data. What we saw is obviously in any areas where there were discretionary procedures or elective procedures we’ve seen the impact of the global economy. Specifically in things like aesthetic procedures we’re seeing those down about 20%.
We also felt in areas that were associated with any capital spending obviously that was an issue for us in our ASP business, some of our Biosense Webster. We also have a pretty good indicator, we believe, of the general surgery market by our sutures. We think they’re actually a good analog. Usually that market grows at about 1% or 2% in volume over time at a pretty steady pace. What we saw earlier this year was that market was actually down about 1% or 2%. We think that’s a good baseline of where the overall market is. Clearly we think it’s affecting those discretionary, optional surgery areas more then the baseline.
Regarding Biosense it’s difficult to say, we saw the softness in the stent market so that we think there may be people avoiding surgery for a number of reasons. We’re obviously watching it very closely to see how it compares later. Finally what I’ll say whenever we’re looking at year to year comparisons it’s important to remember what happened the previous year that may have impacted the results and that’s certainly the case I think in the cardiovascular side of things.
Rick Wise - Leerink Swann
Maybe you could catch us up on your latest thoughts about healthcare reform and the Baucus tax proposal how concerned, what you think the outcome there? Last, on operating leverage you showed some very solid P&L given slightly lower sales then I look for, can we expect this economy rebound more dramatic operating leverage as we get into the next couple of years?
Let me deal with the first question on healthcare reform, a couple overall comments on healthcare reform. Just to put it into perspective we obviously are supportive of quality affordable healthcare for all citizens of the United States. One thing to keep in mind is that the healthcare industry in the US is one of the foremost industries of the United States and leads innovation around the world. We’re very mindful that some of the changes proposed by the legislation should not have unintended consequences of creating an industry that’s less competitive globally.
Having said that, we are supportive of contributing to the overall cost of healthcare reform. We do favor the Senate Finance Committee version of the proposed change in healthcare reform as compared to the House version. We do think that there’s a good mix of appropriate measures in the Senate Finance Committee version of healthcare reform that includes bipartisan discussions and appropriate industry cooperation such as the agreement with the pharmaceutical industry which is included in Senator Baucus’ proposal.
We are concerned, however, you referred to tax, and I think you were referring to the medical device fee which is sometimes referred to in the legislation. We do feel that that’s a little unfair today in the way it’s crafted, it’s a bit excessive we believe, when you compared it to the industry at large and compare it to other proposals. We’re hopeful that that will moderate a little bit as we move forward with the legislation.
On operating margin improvement we’re very pleased with the way we’ve improved our operating margin throughout the year. As I’ve said many times when we’ve spoken in the past, we typically don’t just cut costs; we actually implement structural changes to the business so that cost containment can be sustained over future periods. Obviously as sales improve and as the economy improves we would expect our ability to maintain our costs in check and continue to enjoy operating leverage as our top line grows therefore improving, obviously our bottom line as well.
Matt Dodds - Citigroup
You showed the slide about the operating margin improvement in MD&D. A lot of your peers, when you talk about your peer med tech peers haven’t seen that kind of leverage. Can you say broadly is it coming from SG&A, is it coming from manufacturing, where are you showing that difference? When you look at the fourth quarter impact of Elan, Crucell, and Cougar $0.06 to $0.07 how much of that is one time versus what should we be thinking about those acquisitions in 2010 are they still going to be dilutive in 2010 broadly.
We believe that’s one of the real benefits of J&J scale is our ability to leverage some of those what we would call non-customer facing aspects of our business. In the G&A area when you combine all of MD&D when you look at some of the other leverage that we have in J&J regarding procurement, manufacturing and other operational be it, IT and support functions we do think that that really gives us the competitive advantage versus many of the competitors that we face every day.
On the dilutive effect of those three transactions keep in mind that these were closed later in the year and so the $0.07 or $0.08 that I’m talking about is actually just a very small component of dilution. Some of that is restructuring charges and those types of costs that are only done upon the initiation of the transaction. All three of these transactions include significant investment by our company to further the technology that we acquired. We expect that they will also be dilutive in 2010 and until the products are eventually launched.
Matt Miksic - Piper Jaffray
Following up on Rick’s question on volumes, the hip and knee procedures we saw in the quarter spine, Ethicon, Ethicon Endo all up sequentially in what normally we think of as a seasonally slow quarter. I’m wondering underlying that as you mentioned with sutures are you seeing volume trends up or are there other factors driving that business like I’m thinking of mix or price or anything else or is it just an underlying volume improvement rather then I think what we’ve heard from your peers its something more like stability?
Let me caveat that we’re still working off the second quarter data as we don’t have the third quarter data in quite yet. What we’ve seen in hip and knees is about halving of the growth rates. That market was growing at around 7% or 8% we’re seeing it growing around 3% or 4% right now. We’ve seen some slight softness in price offset by some mix so overall we’re seeing it about flat. I think the way that characterizes we have not seen any additional deterioration in those markets that you mentioned.
Matt Miksic - Piper Jaffray
Thinking about opportunities for investments as you evaluate the benefits and risks across the three businesses that you can plan, and maybe US or OUS if you could talk a little bit about how you’re looking at the benefits and the risks of business development, strategic action in those areas and maybe if you’re seeing any preferences given the environment, given maybe your availability of cash is if that’s a consideration?
In terms of preferences as you know we’re broadly based across the spectrum of healthcare so we actually don’t have a favorite spot necessarily, we’re investing as you’ve seen us invest over time in all three segments of the business. We do favor the types of deals that you’ve seen us do quite frankly, deals where we can acquire a new technology where our expertise and the people of Johnson & Johnson can take the products and the technologies that have developed that some other very fine companies further then perhaps the company alone could take it. Those types of transactions we do favor and it doesn’t matter to us quite frankly whether it’s in pharm, MD&D or consumer. Bringing in new technologies that we can exploit is what we try to do.
In terms of where we would or how much cash perhaps we’d use or how we would invest in the future, our strategy really hasn’t changed even in this particular economic climate. Our strategy is always looking for transactions that will provide significant shareholder value over time and our definition has remained the same; its internal rates of return that are sufficiently in excess of our cost of capital to compensate our shareholders for the use of their capital and the amount of sufficient premium over our cost of capital has to do with the risk involved in the transaction. That is really a disciplined approach to acquisitions and deals, quite frankly, at Johnson & Johnson and hasn’t changed for many years. I think it serves us well as we look at any transaction going forward.
Matt Miksic - Piper Jaffray
The consideration of cash US or OUS not a consideration in your evaluation of those opportunities?
The first consideration is, are we going to achieve significant shareholder value, that’s really the threshold consideration.
Catherine Arnold - Credit Suisse
A question for you on healthcare reform, in terms of the device tax could you speak to what your understanding is with regards to the dimension of that in terms of the size of the business. Is there any differentiation as you look across your MD&D business. I think everybody is trying to figure out what exactly this tax is and how it’s defined and how it will affect you.
I was hoping you could talk a little bit about with healthcare reform impacting the government as a purchaser for both med devices and pharma how you guys are thinking about that in terms of commercial cost reduction in those divisions, I would think beyond G&A there may be opportunities based on the decision making power with government as such a big customer.
You think about the market to which the device fee pertains to in the US. I think it’s roughly somewhere in the neighborhood of $125 billion market in the US. Currently a $4 billion tax or fee is a pretty significant piece of overall revenues in the industry its about 3% or 4% of the revenues in the industry. If you think about it as a tax that would be if you just assume that in the US we pay 35% tax on our earnings so that translates into almost about 11 point increase in the US effective tax rate.
That’s what I meant by I thought that our view of this is that it’s a bit onerous for the industry no matter which way you look at it. We represent I guess about 7% of the industry so you can size up the impact it could have on us based on that.
I think it’s a little too early though to model anything like that. I think we want to see it proceed through legislation. We’re comfortable that there’s enough dialogue with the Senate Finance Committee around this proposal and we’re hopeful that actually the fee or the tax will be moderated going forward.
There are still a lot of things in motion. We have to see exactly what classes of devices this cover, are there going to be any other thresholds involved. We’re working closely with our trade group partners in this circumstance as well as directly with the White House and people on Capital Hill. We’re hopeful that we can get legislation through that is fair but it also leaves an environment that’s open to innovation and promoting continuous innovation because we still think there’s a lot of unmet medical need out there. Some of these could get onerous if taken to the extreme.
Can you repeat the second part of your question?
Catherine Arnold - Credit Suisse
I’m trying to evaluate where the cost trends are going really in pharmaceuticals and med devices. It’s been much talked about in pharma that the physician has a lower influence on decision making power. As we enter, assuming healthcare reform goes through, and the government is just a full stop larger payer of both medical devices and pharmaceuticals I would think that in terms of contracts and formularies and the like there may be a lower influence that a sales representative or marketing program can make.
Are we talking about an opportunity that is noteworthy in your mind or in the pharma costs and your med device costs and the commercial side? I’m not going to try to put words in your mouth but I’m trying to get a directional sense, is there an opportunity for reasonably material percentage decline in commercial costs as you look out over the next three to five years?
I’ll start with on the device side. Clearly we’re feeling increasing pricing pressure on the MD&D side. I think that’s part of what’s going on in the economy that’s part of consolidation of payers, of all the dynamics that you just mentioned. Regarding the shift in decision making from surgeon to payer to hospital we’re seeing some of that in some cases. We’re seeing where the hospital is taking on an increasing role in determining what products may or may not be available.
However, what we see in most cases is that in working with them, taking the breadth of Johnson & Johnson, working together across our entire portfolio of products its important to maintain access but also to ensure that physicians do have some choice because we think that there is a lot of patient variation. We think it’s important for them to have a say so in that overall decision. That’s what we see happening basically are decisions being made by teams of doctors, hospital administrators and other payers in the decision. Where that ultimately ends up I think it’s difficult to predict. I think its going to be important for us and for the industry to respond in a way that accounts for that with our commercial model.
Catherine Arnold - Credit Suisse
Why would it not be more reasonable then not to expect that commercial costs come down? What would the counter argument why given the change in the model in the United States?
I think it depends how things evolve. Things like continuing medical education, training programs for physicians particularly on new instruments, it’s where I see the device industry different then pharma where there is clearly a need for ongoing training because of the hands on nature of the use of some of the products that we have. I think you may see shifts in some of the investments from one area to another but I still think that you’re going to need to have an appropriate level of investment to be able to introduce and educate on the new technologies. Clearly it’d be a shift from some areas to others.
We’re obviously always looking at the appropriate mix of our cost structure. We’re going through that right now through our business planning cycle and so it would be a little premature for us to comment to what extent. Obviously we see what could happen in the future given healthcare reform, we’re taking that into consideration as we plan our future business plans. Obviously when we talked to you about guidance going into 2010 we can give you some more insight into that as we finalize our decisions.
Bob Hopkins - Banc of America-Merrill Lynch
I wanted to follow up on the questions for Alex regarding pricing. Specifically do you have the information for the third quarter from a pricing perspective for the hip and knee franchises? Did pricing slip a little bit more than in the second quarter or don’t you have that information yet?
We do have data on pricing. Basically what we saw was a softness of about 1% or 1.5% we saw that offset by mix. If you net everything out we basically stayed flat, fairly consistent with what you saw in Q2. That was related to my earlier comment around we don’t see further declines although we don’t have all the data yet.
Bob Hopkins - Banc of America-Merrill Lynch
Bringing it up a notch to the total medical device group 4.1% do you have a sense as to what pure price contributed to that or what was the negative headwind from pure price. As you think about the business going forward from the entire corporation what kind of impact do you think pricing might have on your ability to grow?
We don’t compute pricing that way across all MD&D.
We don’t break it out on a specific segment. Dominic can give you some color for the corporation if you’d like.
Bob Hopkins - Banc of America-Merrill Lynch
I was thinking just more about MD&D in terms of how you were thinking about the business going forward from a high level in terms of how price might impact.
In most of our strategic models we’ve been fairly conservative on our pricing assumptions. We realize that we’re likely to face increasing pressures going forward and that’s why we think its more and more important to provide this continuous stream of new product innovations, I was talking today about whether its line extensions or brand new technologies. I think that’s where our greatest emphasis is. Obviously we’re going to have to adapt our commercial model as we talked about earlier as well. We’re projecting a fairly conservative view of repricing in these markets.
Mike Weinstein - JP Morgan
Just to clarify, the guidance commentary for the full year, the implication for the fourth quarter would seem to be $0.96 would be the mid point of your range. I want to make sure we’re on the same page.
Of course we don’t give fourth quarter guidance but it’s pretty hard not to give that when you have three quarters in and we gave you guidance for the year. We feel pretty comfortable at the mid point of that $4.54 to $4.59.
Mike Weinstein - JP Morgan
Let me ask a couple pharma products one if you could update us on what your expectations there and then [Zeptara], [Zeptabiprole] was it NDA resubmission there what’s the timeline?
For [Zeptara], [Zeptabiprole] we actually submitted our responses, the responses were accepted by the FDA in early September and we expect that we may hear something back from the FDA before the end of the year.
On Confide we received the complete response on it and we will respond to that likely next year. Nothing for this year in terms of response.
Mike Weinstein - JP Morgan
In 2009 in Washington your discussions around healthcare reform and you’re being asked to pony up across your healthcare businesses, your pharmaceutical and device businesses to help pay for that. How concerned are you that after 2009 discussion and the 2010 discussion is tax reform and then as a multi-national US company you’re going to be asked to pony up in 2011 in terms of a higher corporate tax rate for being a multi-national US company. You take a hit you basically end up having to give in 2010 because you’re a healthcare company and then give in 2011 because you’re a multi-national company?
It’s obviously a concern. I could tell you, you probably saw the headline in Wall Street Journal today that apparently the administration is backing off on the elimination of deferral for multi-national corporations. I would say that we’ve seen this be a bit of a see-saw kind of situation. It was originally proposed by the President in his budget proposal early in the year. Many of us were in Washington describing what a significant impact it would have to the global competitiveness of US multi-nationals and then obviously that would end up having a negative impact on US employment.
The administration seemed to back away from that in terms of a pay for, for healthcare reform. It looks like that’s not a direct pay for in healthcare reform. I do think there is still concern amongst the industry at large that once broader tax reform discussions take place after healthcare reform is a bit behind us that this may again become an area of discussion with the administration. We’re hopeful that we’ll still have the open dialogue that we had with them earlier in the year. We do think it would obviously impact negatively the global competitiveness of US corporations should the US tax burden increase for our businesses simply because we happen to be doing business outside the US where we are global competitors. It is still a very valid concern amongst the industry.
David Lewis – Morgan Stanley
I felt today you made more specific comments on capital deployment, maybe its positive change. Clearly you pulled back on share buy backs and you’re increasing your external investments through strategics. Some may infer from that J&J sees more opportunities outside the company than inside the company. Talk to why that would not be the case and are there certain triggers that could cause you to reverse that process by deploying capital internally versus externally.
I don’t think it’s a particular sign either way. We’ve been very consistent over time that we prefer organic growth first and we invest heavily in organic growth. We’re pleased with the pipeline we’ve developed in pharmaceuticals and as Alex described today the pipeline that’s developing in medical devices as well. We supplement that always with external collaborations where we believe there’s something that another entity has that we could take further then that entity has.
We overlay that with strategic acquisitions. I think the timing of that depends on what’s available in the marketplace, what our view of the technology is. I don’t want to give you any signal that we’ve changed our overall strategy on priority investing in organic growth first, supplemented with licensing and partnerships and then add on strategic acquisitions where they make sense.
David Lewis – Morgan Stanley
Now that we have stabilization in the core business specifically with generic headwinds beginning to ease, what have you seen so far for the first three quarters of 2009 that gives you the confidence that you can hold or fix the cost infrastructure so that we do see top line acceleration in ’10 you’re going to see material leverage, are there two or three things you can point to in terms of dynamics on fixing that cost infrastructure this year?
One thing I would say is that the business overall, and our business leaders like Alex and the folks that run the businesses actually are very in tune with creating cost structures that are sustainable over the long term. We don’t typically cut costs; we typically restructure, rearrange our business, and reconfigure the business as sustainable cost structure. We have much more improvements now in technology infrastructure which is becoming to be an important leverage point for us going forward.
You’ve heard me talk about all of our standardization efforts, they’re actually gearing up and we’ve employed the various shared service centers around the globe to allow us to, when we have more volume to administer that volume at much less costs. I think all of those things combined give me confidence that we’ll be able to maintain robust margins going forward.
David Lewis – Morgan Stanley
If you go with the AF franchise in the last 18 months it appears that Biosense has been maybe a net share loser as opposed to a gainer. Do you agree with that statement? Do you see increased economic pressure within Biosense and what are the implications for Carto three could that start becoming an accelerant for this business or the ability to gain share?
We think their share has actually been pretty steady, based on all of our reports I think that any of the challenges that they’ve been experiencing have been more macro economic versus competitive. We’re actually quite excited about the Carto three launch and the change in the improvement that will offer both patients and physicians. We feel very confident and optimistic about that business.
One comment I’d make to pick up on one of Dominic’s I think that as he said, obviously we’re always focused on being as cost conscious as we can be but at the same time I think its important to note that we think its really important to be able to invest in growth opportunities that I discussed today. If you take a look at the clinical development program for Nevo it’s quite extensive. We’re excited about the early data that we have on that product when you combine it with the other additional studies that we plan to have a launch. When you look at the development program behind the Fibrin pad we think that that’s truly one of a kind for a hemostat and the way that it can change things.
There are a lot of examples why we’re managing in certain areas; we want to make sure that we can invest in other areas to produce the kind of long term growth that we were describing.
Larry Biegelsen – Wells Fargo
The full year organic sales guidance implies an acceleration in the fourth quarter if my math is correct, to about 4% on the low end, constant currency growth. Is my math right? What’s driving that, are you expecting the pharma and consumer businesses to accelerate?
You’re absolutely right if you do the math we should see a positive fourth quarter in terms of even on a constant currency basis. There are two factors; there are some launches that we’ve talked about that are now going to obviously see much more acceleration in the fourth quarter then we’ve currently seeing because they’ve just been recently launched. We talked earlier, last year we have a 53 week year. This fourth quarter will actually have more days of sales then we had in the third quarter so that’ll add to the operational growth and that’s been included in the guidance we’ve been giving all year.
Larry Biegelsen – Wells Fargo
On the Med Tech fee or tax any chance you see that being pushed out to 2013 where you can get the volume offset? If it’s reduced let’s say in half to $2 billion a year what’s your ability to offset that?
Obviously we’re hopeful that it will be reduced. The unusual part of the legislation is that the costs that are being asked of the industry to contribute are not offset by increased patient volumes until much later. We’ve obviously had lots of dialogue about that with the Administration. Both are valid points that we’ve raised. It’s not our expectation though that it will be delayed, it’s our expectation is that whatever appropriate level is eventually enacted it’ll be enacted in the near term.
I completely agree with Dominic’s comments. I think we’re working hard right now Aven Med and with others to make sure that we really explain, what could potentially be unintended consequences from some aspects of the pending legislation. In just the areas that you mentioned as far as the timing, as far as what’s included, what’s not included I still think there’s some moving pieces and we’ll so it all comes together. We’re hopeful that we can make some additional headway there.
In terms of offsetting that I think similar to the comment that Catherine raised, I’ll have to answer it the same way, which is we’re going through that process right now, it’d be premature for us to comment. We want to focus our attention on getting it right with the Administration first and then we’ll take the appropriate steps and we’ll obviously advise you of that when we’re ready to do so.
Eric Snyder - UBS
On ASPs and ortho you described your view going forward as conservative with respect its pure price. Do you still expect that the mix benefits in the US and/or outside the US will offset those price pressures, do you expect it to stay even, and do you expect it to be benefit, forward looking? Also, you expectations for sustainable worldwide unit growth in major joints?
In terms of mix we do think there will end up being opportunity for a positive impact of mix. We do think that the technology and the innovation required to demonstrate that positive mix is going to be increasingly challenging. We see a net positive from mix, whether it will offset the entire price is yet to be determined, we’ll have to see how pricing evolves. From what we’re seeing now, if we continue to offer improvements and whether its knees, hips, spine, other areas there can be an offset in mix that we’re see in at least the recent quarters and we would project that going forward.
Regarding overall unit volume, it’s difficult to say but if we look at this past year we do think that the macro economic issues have had an impact and that can range from people not wanting to step out of their job or their workplace and to be out of work for an extended period of time. It can be over concern of insurance coverage. Outside the United States it can actually be the results of increasing queues as governments try to tighten their budgets and reign in some of their healthcare spending.
We don’t think fundamentally that the unmet medical needs; the need for knees and hips has changed. We do think that it will return to somewhat of a more normal state once we get through this current economic period. That’s a project on our part but we don’t see any other factors that would suggest that the underlying rate of replacement for those types of procedures would change.
Eric Snyder - UBS
With respect to Ziralto which I think you noted you expect to file in the fourth quarter, are you waiting for the Einstein extension data for that are you comfortable before seeing that with the bleeding profile of the product.
The Einstein extension data will be shared at the end of the year but it’s not contingent on us completing the response.
Tao Levy - Deutsche Bank
To be clear on the inventory stocking and impact from healthcare reform, do you see any changes in the quarter on hospital behavior, specifically in the third quarter?
We haven’t seen any noticeable changes at that level.
Tao Levy - Deutsche Bank
PCI volumes were very challenged this quarter. Is there anything that happened here in the third quarter in the overall markets?
It was down 2% in the second quarter; Louise talked about down 6% to 7% this quarter. That’s compared to about a 4% rate I believe in growth rate in prior quarters. We believe it’s due to the more macro economic conditions. There could also be some anomalies regarding year to year comparisons because of data releases in previous years. That’s our best thinking at this point.
We’ll have some final comment from Dominic.
Let me just offer these final thoughts. We continue to invest in our broad base of healthcare businesses with a long term view. And we focus on innovation and we continue to make progress in bringing our pipeline of products to the market. We recognize these are challenging factors today and the environment remains challenging but we’ve remained financially strong, disciplined and focused on developing and executing plans that will keep us well positioned for long term growth.
I’m confident in our ability to innovate and execute on the growth opportunities we see. Thanks for the dedication and focus on the talented people across the Johnson & Johnson family of companies. I look forward to updating you on our full year 2009 results when we meet with you in January. Thanks very much and have a great day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!