Johnson & Johnson's Management Presents at Cowen and Company Health Care Conference (Transcript)

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Johnson & Johnson (NYSE:JNJ)

Cowen and Company Health Care Conference Transcript

March 4, 2014 10:00 AM ET


Dominic Caruso - Vice President, Finance and CFO

Louise Mehrotra - Vice President, Investor Relations


Josh Jennings - Cowen and Company

Chris Hamblett - Cowen and Company

Josh Jennings - Cowen and Company

[Started Abruptly]

… and honor to have Dominic Caruso, Vice President, Finance and Chief Financial Officer of Johnson & Johnson and also Louise as well. So thank you guys for joining and Dominic is going to lead with the presentation then we will have some Q&A.

Dominic Caruso

Great. Thanks, Josh, and of course, thanks for inviting us. It’s often nice to see all of you. Thanks for being here with us today and it’s our pleasure to be with you today and talk to you about our great company.

Before I do that, of course, I need to tell about the fact that we may provide some forward-looking statements. You should refer to our filings with the SEC, in particular the 10-K, which discusses all the risks and uncertainties around that.

We sometimes talk about non-GAAP financial measures. We also have reconciliations of those and we don’t provide any responsibility -- we don’t have any responsibility to correct or revise our forward-looking statements that we make today, okay.

So, with that, as our Safe Harbor statement, let me move on to just a quick company overview. I think many of you probably know our company very well, but just a few points to highlight.

Strong business and in 2013 we generated $71 billion of sales, very, very strong free cash flow generation of nearly $14 billion and pretax operating profit of nearly 27% and of course, we are one of the few AAA rated companies have remained in the world today.

We had a long heritage of fantastic brand equities, many of which you know and hopefully use in your daily rituals. We are very proud of these long-standing equities that have performed very well in the marketplace.

I would say, we are a very highly respected company by -- as evidenced by a number of sources who rate companies in terms of reputation, respect, et cetera and you can see some of those listed here. So we are very proud to be counted amongst the world's most reputable and respected companies.

And our strategic principles, which really we believe our foundation for our long-term growth aspirations is, we remained a broadly-based healthcare company. We are interested in all areas of healthcare. I will talk about each of our segments in a minute, but we think of ourselves as a broadly-based company in human healthcare.

We manage our business for the long-term. Of course, we are cognize and are aware of short-term pressures, but we try to make decisions that best position us for the long-term. We generally operate our business in a decentralized -- with a decentralized management philosophy or each of our businesses that are close to the market and even make decisions that are appropriate for their particular market circumstances.

And we have strong foundation of values [embedded] Our Credo and we in fact are very, very cognize about how important our people are and developing our people in future leaders for the futures. So those are the key strategic principles that all of our businesses operate under.

As I said, 2013 was a very good year for us. We have highlighted here some of our accomplishments. When we started the year we set out a set of near-term priorities, you can see what they are here achieving our financial targets. So we had a very good year exceeding our own expectations and the expectations of the investment community.

We are schedule to restore our reliable supply of products in the OTC marketplace. We had committed to restore at least 75% of the products we were going to launch back in the market in 2013. We achieved that.

We made great progress in the integration of the DePuy Synthes acquisition, which as many of you know is the largest acquisition we ever done. And we continue to build and we have built in 2013 on the strong momentum, which is very much above market growth in the pharmaceutical business, driven by exciting new products that are being launched and being very well-accepted in the marketplace.

We also advanced our long-term growth drivers. We -- I think we have leverage the power of our enterprise more so then we have in the past and we’ve prioritized product portfolios and made clear decisions and where we are going to play.

We’re not going to play which of course led to the divestiture of our clinical diagnostic business which we’ve announced as a sign deal and we expect it will close -- that divestiture will close by the May of 2014.

This strong business is pretty remarkable in terms of the track record, 30 consecutive years of earnings, adjusted earnings increases, 51 consecutive years of increase in our dividend.

We have very strong market positions, 70% of our businesses are in number one or number two global market share position and our products continue to be -- our growth continue to be driven by new product introductions where a full 25% of our sales comes from products that have been introduced in the last five years. So that freshness index gives you an idea of the pace of innovation in our company.

This is the breakdown of our sales by our three main segments. You could see that medical devices and diagnostics, each constitute about 40% of our business and consumer amount 21% -- 20%. And you can see the various growth rates within the pie on various businesses, pharma business in particular very, very strong growth last year at 12% and the medical device and diagnostics business at 6% was in fact -- did in fact benefit from the acquisition of Synthes.

So we had a full year of the business in 2013, half year 2012. So to give you a sort of apples-and-apples comparison, the MD&D business was essentially flat without that acquisition bump. And overall growth rate operationally or constant currency would have been 7.7, without the one-time acquisition bump would have been about 5.2. Just to put things in perspective for you in growth rates.

Here is an example of the various consumer products that I’m sure you are all very familiar with. Nearly $15 billion of sales in that business growing about 3%, we have in fact restored reliable supplier products in the market as we committed or expanding globally. And we have really 12 major brands that we’re investing behind which we think are the major growth engines in this business.

I talked about the 75%, you should start seeing more Tylenol children's advertising on TV. That's a good sign. It means we are confident but the products now are not only back on the shelves but they are back on the shelves in a reliable manner.

And we’re confident in communicating with the consumers of the various trusts, scores that we've had over long periods of time, remains strong and so we’re communicating with consumers as these product are back on the shelves. And I’m happy to tell you that once they are back on the shelves, they seem to be going off the shelves very rapidly. So the consumers are readopting these products as a main stay in their regimen.

In MD&D, this is the world’s largest MD&D business and we further expanded our presence in orthopedics by acquiring Synthes which was the world’s leader in trauma as many of you know, we had a very strong business in reconstruction in our DePuy business and both Synthes and DePuy had a spine business which together obviously make that spine business the undisputed number one -- number two player in the marketplace.

So very strong orthopedics business, world leader in orthopedics, we have good strong growth in emerging markets in our medical device business and we have leadership positions as I said across the number of categories. And while optimizing our portfolio, we have over the last several years actually divested a number of slower growth commodity like businesses in our medical device business. The most significant decision we made here was the exit to drug-eluting stent business which we determined was now quite frankly a commoditized business within the medical device sector, that’s not where we play.

We play in high growth, high innovation, great satisfaction of unmet need in the marketplace and there is still room to do more of that in the medical device business as well. Couple examples of new product launches in orthopedics, the new knee system, the ATTUNE knee system is off to a great start, this was recently launched.

It’s been accepted very well in the marketplace. In surgical care, a new tissue sealing device, which is articulating and allows for -- enables the surgeon to reach more difficult places.

And within our cardiovascular care business, our Biosense Webster business continues to be a leader in electrophysiology and here is an example on a new catheter launch at Biosense Webster of ThermoCool Catheter, which is doing very well in a marketplace as well.

Pharmaceuticals, I mentioned earlier, the 12% growth rate, it’s clearly the fastest-growing of any top 10% pharma companies. It’s delivered very meaningful innovation with new product launches since 2009 and just three new and just, in 2013 alone, three new molecular entities were approved.

Strong clinical development programs, great commercial excellence and good contracting and reimbursement capabilities. So these products not only are the clinically superior in terms of their profile, we’ve managed to have them be appropriately placed in the formularies and reimbursement, so that patients can access these products and they are doing extremely well in the marketplace.

An example of those products, XARELTO, it has the broadest indication in any of the new novel oral anticoagulant. As you can see, it’s approved in 125 countries, six different indications already in the portfolio of clinical data. It’s very, very convenient as of once-a-day dosing regimen, does not required type of monitoring that warfarin coumadin require, so that product continues to do well.

Invokana, for type 2 diabetes, this is an SGLT2 inhibitor, a new class of drug in the diabetes. Treatment regimen, it’s clearly the most successful U.S. launch of an oral type 2 agent since Januvia, which was back in 2005, 2006. It’s launched across multiple markets and we expect it will get further approvals in 2014.

ZYTIGA has changed the treatment regimen for prostate cancer dramatically. It's approved in 85 countries as you can tell for both chemo refractory and chemo naïve. Patients, again is doing very well even in the face of new competition for prostate cancer. This product has really changed the treatment regimen for men with prostate cancer. So we are very proud of that.

The pipeline within pharmaceuticals is still robust, even though we’ve launched a number of new products out of the pipeline. The pipeline has been replenished, still very robust. You could see that we plan to file 10 new molecular entities and 25 line extensions between 2013, 2017, so a very robust pipeline indeed.

Now in 2014 and beyond, one of our commitments to you as our shareholders and investors, we will achieve, we have a set of financial targets that we communicate. It’s our belief that we're in good shape to achieve those financial targets, that’s a clear priority for us.

We still are relaunching and restoring the OTC products for the marketplace. We now need to capitalize on the integrated DePuy Synthes business, that we spent time integrating in a very careful manner over the last year, so we want to capitalize on the potential, the world's largest orthopedics company.

And quite frankly, the momentum in pharmaceutical continues and we want to build on that momentum and continue to build the pipeline as I just mentioned earlier, so more and more new products come to the market as I mentioned earlier with the 10 NMEs and 25 line extensions that we expect to have filed over the next four years.

Our long-term growth drivers clearly are focus on innovation. We think that differentiates us in the marketplace. We are a very global company. We operate in all the major markets around the world, but we do have a local presence in these markets. We've been in China, for example, for well over 30 years, have a well-established business there and a local focus.

We have a priority on being excellent and how we execute in our business, so a high priority on excellence in the way we do our work. And we leave with a purpose with Our Credo as a foundation for who we are as an enterprise that drives the people of Johnson & Johnson everyday.

So with that as a quick overview of our company and some highlights, we will leave time for questions that you may have or of course, Josh and Chris, any questions you may have as well. Thank you very much.

Question-and-Answer Session

Josh Jennings - Cowen and Company

Great. Thank you very much.

Chris Hamblett - Cowen and Company

Thank you very much, Dominic. I just wanted to start up. We spoke about this a bit early this morning, but one on more impressive aspects of Johnson & Johnson’s performance last year was the operating margin expansion you secured in. I know you talked about it being the business not really restricting operating expenses, etcetera. But, can you talk about, despite the headwinds getting 90 basis points of operating margin expansion in 2013, and how we should expect that expansion metric to flow forward into ’14?

Dominic Caruso

Right. So Josh is referring to the fact that last year in addition to our strong sales growth, we did have operating margin expansion of about 90 basis points and that was driven primarily by the growth in our pharmaceutical business, which is obviously the most profitable portion of our business. This year, we do expect that our operating margins will continue to expand in 2014, not to the same extent in 2013.

The primary reason for that we discussed with the investment community is the headwind that we face as a result of the devaluation of the yen last year where we hedged -- we hedge our foreign currency transaction exposures so that devaluation do not impact us in 2013 but will in fact as headwind -- be a headwind for us in 2014. That’s 60 basis points of gross margin. So it’s a significant headwind, but to spike that significant headwind, we still expect that we will still expand pre-tax operating margins in 2014 as well.

Chris Hamblett - Cowen and Company


Dominic Caruso

Well, I think each of the divisions will have their role to play expanding margins, but it is true that pharma will continue to be the fastest growing portion of the business and that the higher margins should be a greater contributor as it was in ‘14 as well.

Josh Jennings - Cowen and Company

Touch on the MD&D business. It’s been referred to as an anchor, flat operational growth, but that includes sometimes our sutures I believe. But if you look at how you exited Q4 operationally excluding diabetes, price cuts in the diabetes segment, you gained some momentum. You are the market leader as we discussed early today as well in numerous segments and you’ve said, outperformed the market. But if you look at some of the strategies Johnson & Johnson employing, she is partnering with hospitals, some risk sharing that you pointed out in the fourth quarter meeting earlier this year. Are those strategies just to combat share loss which we think about them as potentially driving share gains and market outperformance over time?

Dominic Caruso

So it’s good to give you a little bit of context on Josh’s question. So we as a market leader in a relatively slow growth market it obviously impacts the market leader in a more than it does others because we are already a very high share. For example in sutures, we have 75% to 80% market share. So when the market grows at 1% or 2%, it’s not so easy to just gain another market share point, right, and when you are already at that high level.

So what we have done to address the slower growth in medical device market which have you all been following it, utilizations rates have been essentially flat for quite some time. That’s good news in the sense because they have been declining for many years, at least they have sort of stabilized. So what we have done to address that is two things. One, we’ve focused on particular area of the market which we think will continue to grow well because of demographic trends and because of emerging market trends in particular, so that is the reason for -- one of the primary reasons for the orthopedics acquisition in trauma.

Secondly, we’ve basically consolidated the entire surgery platform that we have across the multiple Johnson & Johnson surgery units and the one approach to surgery with the hospitals. Not only does that give us that our cost leverage in a lower growth environment but it also allows us to offer the hospital environment a more comprehensive offering in the Johnson & Johnson family of products.

So we think that eventually will lead to share gains and will lead to a much more preferential position, especially with U.S. hospital customers as they are trying to adapt to a new environment under the Affordable Care Act and under the Accountable Care Organization structure where they will be at risk and they’re looking for partners to join them in making sure that they can appropriately monitor and take that risk with someone that can help them to achieve the level of outcome as well as cost and patient’s satisfaction that they are looking for. So overall, it’s not a short-term fix, but we do think in the end as a market leader that will position us better than most other players in the marketplace and then eventually lead to share gains as well.

Josh Jennings - Cowen and Company

I think you’ve been very clear historically just about the synergies and the defensibility of your three business units. We have been getting some questions recently just with the, you have such a good star performance in the first half of the year with some stalling there, but whether or not there is a potential for the MD&D unit to be spun out and I guess any updated thoughts on that?

Dominic Caruso

So we have been very consistent, as I mentioned, in the early part of the presentation that one of our strategic areas of focus seem to be broadly based in human health care. So it’s not our inclination to divest that entire segment of our business. We have in fact looked at slower growth areas within the segment of the business, where we’re not number one or number two, or where we don’t have a clear path to become a number one or number two, or where business is not quite synergistic with rest of our businesses as the others are, then those are typically candidates for divestiture as long as they are willing buyers, willing to pay us fair value and we’re going to get fair value for our shareholders. But to think about I think comprehensive divesture or spin-out of a segment of the business, we have been very consistent that we see our business as a comprehensive broadly based human health care business as opposed to only a pharma or only a device wise or consumer business.

Chris Hamblett - Cowen and Company

So the emerging markets you think about 22% of sales to the company now, where do you see that going over the next five years in terms of (inaudible)?

Dominic Caruso

So I don’t know if everyone heard the Chris’ question. He was asking me about emerging markets which today is about 22% of our total volume of business. And just to provide another finer point on that in the BRIC markets within the emerging markets are roughly half of that, about 10% of the business is just in the BRIC markets. Those are our fastest growing markets. So we would expect that over the next several years, they will constitute a larger percentage of our total business. Our sales today just probably speaking are 56% outside the U.S., 44% inside the U.S., and we continue to see that evolution move more towards the outside the U.S.

Chris Hamblett - Cowen and Company


Dominic Caruso

Okay. Go ahead. Somebody had a question.

Unidentified Analyst


Dominic Caruso

Sure. Well, our emerging markets always present a dichotomy for any investor in that marketplace and first of all, the growth opportunities are there, secondly, the markets are not as mature and thirdly, there is obviously instability typically in those market either economic instability or political instability.

So, as I said earlier, we have been in some of these emerging markets for long periods of times, so we are just not entering these emerging markets de novos. We have been long standing players, good relationships with the government, well respected in the marketplace.

The way we operate in these emerging markets is our primary focus is actually on training and education of the physician community to built capacity in the marketplace because without that capacity, the growth, the mathematical growth of which should be, which should translate in the sales growth just because of demographic trends won’t if there isn’t the capacity to do so in properly trained medical professionals. So that's been our primary focus in the emerging market and it served us well and it’s -- and it really differentiate us from any other major player in an emerging market.

Unidentified Analyst


Dominic Caruso

Generally speaking over the last couple years and even going into next year and year after we expect emerging market spending increase so investment increase.

Unidentified Analyst


Dominic Caruso

Well, the emergence of a middle-class consumer willing to spend money on personal care products in various emerging markets is a huge opportunity we believe for our consumer business.

The Medical Device business also has great opportunities. It is somewhat tempered by the capacity in the marketplace that's why we are investing in training. But I would say the growth of the consumer and therefore the willingness to buy products that are personal care products is probably one of the greatest opportunities we have in emerging markets.

Chris Hamblett - Cowen and Company

If you look at the strategy of the Synthes acquisition in building out your presence in ortho, the breadth of the portfolio. And then being able to attack hospice systems and hospitals and specialist environment and vendor consolidation and pricing pressure. Actually in 2013, we’re now looking at our recon market, that’s most attractive, high hip implant markets that’s out there and potentially seeing some recovery in the spine market as well.

So as you pointed out in terms of your positioning in terms of the demographic trends et cetera. In ortho, that strategy seems to be, you guys are well positioned as we enter into ‘14 or running into 2014. Is that the type of strategy that you think is essential for other business used in MD&D to having that breadth of portfolio as the healthcare delivery systems evolve?

Dominic Caruso

Yeah, I think Josh, it’s a really good observation. We’ve made a conscious decision of course that having a broadly based powerhouse in orthopedics because of demographics and because of the emerging market trends is definitely the bet to make and that’s why we did the largest acquisition in our history. I think internally, we have a breadth of businesses across the surgery part of the medical device marketplace. And we've now consolidated those businesses in a much more cohesive way to go to market with hospitals and protect the hospital buying groups and integrated hospital networks.

So those two in particular, we think are really fundamental and important to the medical device marketplace. What other categories could still be available to us to do that are always a strategic question we want to address. So for example, cardiovascular, we have a great presence in electrophysiology but not a broad presence. Is that clear to us just yet whether or not that’s required because as we saw, for example, in spending but that became quite frankly a commoditized business.

So we’re watching that closely in the evolution of the new technologies in cardiovascular medicine in particular. But we’ve made no decision as to what in addition to the two main platforms that we have today that we should add going-forward.

Chris Hamblett - Cowen and Company

If you look at your sales strategy within those two units, where you have this broad portfolio in this powerhouse position in ortho and surgery. Is there any difference in the sales strategies there and your other MD&D units in terms of attacking purchasing manager and moving up to a C3 level?

Dominic Caruso

In the surgery part of the business which is the one of the reasons why we consolidated most of the offering, the discussion is mostly with the C-suite, the purchasing manager, et cetera whereas in orthopedics part of the business, although they are -- the C-suite is playing a bigger role in the orthopedics part of the business. The sales consultant is still present in the operating room.

And for example, with trauma, on call 24-hours a day, to be there because as you all know, trauma is unscheduled surgery. So that part of the business still remains very much dependent on the service level of the individual sales consultant, whereas the other part of the business is becoming more dependent upon the breadth of the offering to the C-suite.

Josh Jennings - Cowen and Company

Just to stick on ortho, if you look at that portfolio, are there are any hurdles, how are you positioning extremities, how do you position the sports medicine?

Dominic Caruso

No, I think, we’re very well positioned across the orthopedics spectrum because the Synthes acquisition basically filled the hole that we had which was essentially trauma and created, you could ask also Synthes who was number two in spine. And we would each say, we were number two in spine. So we now clearly are number two in spine. And so it really showed up a good strong sports medicine business we already had, but even the full gamut of products and services for example, Power Tools, that are used in orthopedic surgery as we have a very strong presence and also in biomaterials. So, I think that's a very well-rounded piece of our business today.

Josh Jennings - Cowen and Company

So we have one last one. With the Synthes’ integration, there has been some disruption sales force strategies in spine specifically. Can you talk about just the spine segment, where are we as we work through all those different strategic initiatives from the sales model as we move out into 2014?

Dominic Caruso

Sure, Josh. Well, when we integrated those two businesses, the overlap existed in spine. So that was really the only two businesses that we had that were overlapping. So, we've been conscientious to bring those businesses together in a way that does not disturb the customer interaction, but that takes longer then it might otherwise take and in fact there’s always some disruption. And so, I think now we basically stabilized the level of disruption that’s naturally occurring whenever you integrate businesses. So, I think we’re in good shape moving into 2014. Okay.

Josh Jennings - Cowen and Company

Actually, we run out of time here. But there is breakout session in here and tuck it very next door. Thanks so much, Dominic.

Dominic Caruso

Okay. Thank you. Thank you all very much for your attention today.

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