Johnson & Johnson (NYSE:JNJ) UBS Health Care Conference May 21, 2018 10:00 AM ET
Matt Stuckley - IR
Sandra Peterson - Executive VP & Group Worldwide Chairman
Vikramjeet Chopra - UBS Investment Bank
All right. Good morning, everyone. Thank you for being here. My name is Vik Chopra with UBS Research. Very happy to have Sandi Peterson, Executive Vice President and Group Worldwide Chairman of Johnson & Johnson. We also have Matt Stuckley from Investor Relations who's going to kick the session off for us. Matt?
Thanks, Vik, and good morning, everyone. Please be aware that some statements made today may be considered forward-looking or utilize non-GAAP measures. Please refer to our SEC filings, in particular the 10-K, which discuss the risks and uncertainties around forward-looking statements, as well as our website at investor.jnj.com for reconciliations to comparable GAAP measures. Finally, any performance references made today represent results through and including the first quarter of 2018. Thank you. Vik?
Thanks. We also have a app where you can send your questions through, which I'll go get the iPad over here, so feel free to do that. Sandi, thank you for being here. If you want to kick it off with an opening statement.
Sure. So thanks, Vik. Thanks for having us and it's great to be here today. I'll just say a couple of things. First of all, so my responsibilities at JNJ is I have responsibility for our Consumer business, our Device businesses, supply chain and technology and a couple other things. And for those of you who were able to either participate live or via webcast last week on Wednesday, we did our Investor Day. We covered both our Consumer and Medical Device businesses last week.
I think all of you know JNJ well, but we are the most diverse health care company in the world with Pharmaceutical, Medical Devices and Consumer businesses and we believe that's a huge strength for us as a company. As the needs of patients and health care systems around the world continue to evolve and change, we always try to stay at the forefront of those changes.
And as a result of our 132 year history, which is quite remarkable, we have continued to seek out new opportunities to enable people to get well and stay well. And we will continue to do that and we really do believe that, that has led to really quite remarkable financial performance over many, many years where we have continued to increase our dividend for, I guess, it's for now at 59 quarters.
So with that, I'd love to have a conversation with you, Vik, talk a little bit about the business and what's going on in the world of health care.
Q - Vikramjeet Chopra
All right. Great. Thank you, Sandi. So just maybe starting off with a high level question. Post-tax reform in the U.S., how has your corporate allocation strategy changed, are there any changes? How do you guys think about that now?
So our corporate allocation strategy really, our capital allocation strategy has really not changed as a result of tax reform. The one thing that, of course, it does is it gives us some flexibility to be able to move capital around a little bit more easily because of tax reform. But we have a very simple formula about how we think about capital allocation.
First and foremost, capital gets deployed to the best uses inside the business, so things to support our manufacturing, our R&D, our commercial execution and any kind of technology that we do, so that's first and foremost, and then, clearly, the next stop on the bus, so to speak, is dividends.
And clearly, we have healthy cash flow that enables us to not only meet our debt and dividend commitments, but of course, we've been increasing our dividends over many, many years. We then look at the next best use of that capital, which is acquisitions and deals that we do to acquire technology or do a licensing deal.
And I think the thing that's very important for most people to understand about how we think about that, we get a lot of questions about, do you think about the three businesses that each get a certain percentage of the pie? How do you think about the pie? And the answer to that is we are agnostic. The way we manage looking at acquisitions is we collectively - the businesses, of course, look at opportunities where it can be accretive, it makes sense for us to own this business and it provides incremental shareholder value above our cost of capital, but we are, quite honestly, agnostic.
So people ask us a lot, well, do you - is it – so and so just did an acquisition, so there's another sector gets the next opportunity and that's really not how we think about it. It has to be consistent with our strategy as a business.
And we look at all of these deals in a fairly agnostic way, and so once all of those uses of cash and capital are used, then we will look at whether it makes sense for us to do buybacks. So that's how we think about it. But as it relates to tax reform, it does not change our fundamental approach to how we deploy capital in the M&A context.
Okay. Great. You also recently announced some global supply chain initiatives. I'm just wondering how that came about, what led to that decision and when can we expect to see the bulk of those savings you announced?
Yeah. So our supply chain, I'll give you a little bit of context. We did make an announcement that we're taking some actions to further optimize our network and I'll explain to you why that is.
But about five years ago, we had changed our approach at JNJ to how we manage our supply chain around the globe to enable us to have much more global consistency, to drive better flexibility in our supply chain, but also to ensure that we've got the right quality and compliance in all of our manufacturing sites around the world, both internal and external.
And when we started along this journey, we had commitments of how much costs we were going to be able to take out of the business over that time horizon. We've met all of those commitments. But in the last 1.5 years, we've looked at our network one more time and, given the changes in our businesses and the need for newer technologies and the fact that most of our business is very diversified globally.
So more of JNJ's business is sold outside of the U.S. than inside the U.S. today, we needed to make sure that we had the right network that was purpose-built for the changes that are change - happening in our portfolio, in technology, in those sorts of things. So that is the genesis of the decision to take these network actions.
The thing I would say about them is twofold. One is that they're very balanced around the globe, number one. Number two, they are very balanced by sector. So there are things that we're doing in all of our sectors to improve our footprint internally.
We, as a company, also have today and will continue to have going forward strategic partnerships with third party manufacturers where it makes sense for us to have those and this also is - are activities associated with this that enable us to continue to do that.
But equally importantly, these actions are being taken to enable us to invest in other places where we need to make incremental investments in some of our manufacturing to drive better cost performance, whether it's the most recent announcement we made in Pharma as it relates to CAR-T in the United States, whether it's some of the things that we're doing to continue to stay one step ahead of the world in our physician business where we have a serious competitive advantage relative to everybody else in the industry. So there are investments being made there.
And then, obviously being there and really driving a better footprint in our Consumer business to meet the needs of consumers who are buying eaches as opposed to retailers who are buying cases.
So all of those things are part of the work that we're doing. And in our announcement, we said that we should start seeing the positive impact of these changes in about 2020, continuing over 3 or 4 years from 2020 on.
Okay. Great. Just switching topics to your devices. Last week, you spoke about 15 to 20 new launches in 2018 and then going beyond that in 2019 and 2020. But just wondering, is that broad based product launches or is that specifically in select businesses?
So it's across all of our businesses. So our Medical Device business, we spent time talking about this last week. We really compete in 4 large markets. We compete in the vision market. We compete in the orthopedics market. We compete in what we call interventional, which is electrophysiology and neurovascular. And then, we compete in the surgery business.
And so those 15 to 20 launches are across all of those businesses. We actually have more than 15 to 20 launches this year, but those are the largest ones that will have the biggest impact.
So for example, in spine alone, we have six product launches this year, but not all of those would be defined as major product launches, okay. So there's significantly more than that, but there are at least 15 to 20 major product launches this year.
And last year, our cadence of launches was twice what it had been the prior year. So we are back in a very aggressive innovation cadence mode in Medical Devices, both through things that we've done organically, as well as things that we have either partnered with other companies or acquired companies and built out much larger launch cadence going forward in our business.
Okay. I have a question on the app. Any game changer product in Medical Devices in the near future comparable to the way stents were earlier?
I don't know. I hope that many things in our portfolio are game-changing. And hopefully, they will have longer-term sustainability than the stent market also. So I think that's the way that we'd like to think about it.
I can - I'll try to do this relatively quickly because I could probably spend 2 hours talking about this, which is exactly what we talked about last week. So let me run through the businesses quickly and try to give you a sense.
I'll start with vision. We have a number of game-changing things that we're doing in our Vision Care business. We have the accommodating lenses, which is the first of its kind that was just approved by the FDA, which accommodates for light and not just external light, but actually light due to all of these amazing devices that we use all the time that cause a lot of damage to eyes. And so it's a first-of-a-kind product in the marketplace.
We also, last week, talked about the first-of-a-kind platform that we're building that is a lens with a drug delivery. And that product will launch, first and foremost, in Japan, the first platform technology. It is an allergy lens and there clearly are many other medicines that you could think of that could actually be used in that context in addition to that.
We also have a game-changing lens that uses technology and has even onboard microchips and batteries. We have over 150 patents in this space and it really is electronic accommodating lens in -- for presbyopia in a way that probably nobody's thought about. And others have talked about it, but we actually own the patent state in that area and we're very far along in that product.
Obviously, in our cataract business, we're continuing to innovate with IOLs and we have a number of things that we're doing in refractive surgery to reinvent that business. So that is just one of the 4 areas where we're -- we have significant game-changing things that we're doing.
In our interventional business, we have new balloons that we're doing in EP. We also, as we talked about last week, we have made a commitment to build out our neurovascular business because stroke is such a horrific condition that happens to people and there are not sufficient solutions for that.
And we just got approval about a week ago, 1.5 weeks ago for our new retriever device called EmboTrap and so that is a major launch I -- that will, I think, have a really positive impact on preventing ischemic strokes or stopping the negative impacts of a ischemic stroke through that product.
And then, obviously, in our Orthopaedics business, we have a number of things that we're launching that are game-changing, whether it's a combination of suite of products that really automate and improve the standard of care and has digital technology and robotics in them.
So we have a thing called the Impactor, which is the last piece of hip and knee surgery that needs to be automated, and we have the only technology in the marketplace that will do that.
It's launched already in hip. It will be launched shortly in knees. We just acquired a company called Orthotaxy, which is really going to change the nature of robotic surgery in orthopedics, and it's fundamentally different than anything -- anybody else has in the market or is contemplating. So we're very excited about that.
And the way to think about our orthopedics portfolio is that we're trying to raise the standard of surgery capability. We're trying to significantly automate and take 30% to 40% of the time out of the OR and then make sure that pre and post surgery, the patient is actually preparing themselves for surgery appropriately and getting recovery to be much quicker afterwards. So there's a lot of things that we're doing in orthopedics that we believe are going to change the face of orthopedics.
And then, as it relates to surgery, we -- there's two things that we are doing that we believe are quite different than others. One of them, of course, is our version of robotics in digital surgery. We believe it's fundamentally different and better than what's in the market today.
But then in addition to that, we have a platform that we're building in oncology and ablation and using endoluminal technology that really can get to small lesions both in the lung and the liver in a way that nothing else exists in the market today.
And we're very excited about the work that we're doing there with new ways that we acquired and with Oris [ph] where we have a strategic partnership to build out this technology. Now, some of that is in the market today, but some of that last one are things that will be built out over the next couple of years and launched.
So we have lots of things that I would describe as game changing in the way which stents were, but my hope is they will also be a longer term sustainable platform as we build them out around the globe.
Okay. Great. One more question on the app. What are your key focuses in digital health and are there any technologies you would look to acquire?
So thank you for asking the question about digital technology. So I'll give you a little bit of context of everything that we're doing at JNJ in technology.
So in the last five years, one of the first things that we did, and it sounds kind of not very sexy and interesting, but it was absolutely critical for us as a company, but also to have a very different approach to using technology with the science that we have at JNJ, which is we completely re-platformed and rebuilt our whole existing infrastructure at JNJ as it relates to technology. And why did we do that?
We were the first Fortune 500 company to take 90% of our workloads to the cloud. And so it gives us mass flexibility and mass scalability as a company and significantly reduces the capital required to do all of that. That was one thing that we did.
We also rebuilt a lot of our application services and our APIs as a company. So we've got greater standardization, greater security, greater flexibility around the globe in all of those things that we do. It enables our employees and our partners to clearly do better work and it takes costs out of the system and gives us flexibility.
But with those two capabilities plus our world-class capability in cybersecurity and privacy, we then are able to build products that are connected to our physical products and deploy them with our customers and with end consumers and patients. So all of that foundational work was critical.
We, as a company, have strategic partnerships with all of the big technology providers and they're deep strategic partnerships that we have, but we also have acquired a lot of technology companies and we partner with mid and small technology companies as well. I'll just give you a couple of examples.
In 3D printing, we have 50 strategic partnerships in 3D printing that enable us to do some really unique and interesting things to change how we actually design products, build products, launch products. It changes the nature of how you do instrument sets in orthopedics.
But it also allows us to prototype and build things in a very different way in our Consumer and Medical Devices businesses globally. We have a lot of data and analytics partnerships where we can do some very different things than others can to use AI and machine learning in our businesses.
And in our Consumer space, which is the place that most people would think a lot of this stuff happens, is it meant that for both our Vision Care contact lens business, which is very much a consumer-directed business, it's the largest consumer brand JNJ has, as well as across our whole Consumer portfolio, we are really doing very interesting work.
We have more than 50% of all of our "marketing" is now consumer engagement marketing. It's digital marketing. It's performance based marketing. It's engagement with the consumer in a very different way. But because we have the data, we have the analytics capability and we have the ability to manage that data, we can do some very different things to find the right people, engage with them.
It creates mass efficiency in how we spend each marketing dollar, but it's how consumers want to engage with brands today. It's how they want to purchase things. So it gives us a very different way of looking at it.
So we have a very broad breadth of what we do in technology. We also do a ton of work in Pharmaceuticals. We could not have the kind of robust R&D pipeline in Pharma without the extent to which we have our ability to manage data and use AI and machine learning to understand these pathways and evaluate what's in our pipeline and also change what -- how clinical trials happen, and we use data and technology to do that also in a different way.
Great. Okay. Just sticking with your Devices business. You've had the strategy of trimming lower-growth, lower-margin businesses and then looking at smaller tuck-in acquisitions. Should we expect that to continue or do you think that will change now given the trimming, the pruning that you've done over the last couple of years?
Yes. So I think what you should expect from us is, in the last couple of years, we've been very disciplined about our portfolio in terms of businesses that probably are lower growth and where there's less innovation capability or they're a better strategic fit in somebody else's hands.
So you know of some of the ones that we've already divested, whether it was OCD, Cordis, Codman and the diabetes divestiture, which we've announced and which will be completed this year. And with that divestiture, we will see a -- just a 1-point acceleration in the growth in Medical Devices overall with that divestiture.
We also, in addition to divesting businesses, we've also done a lot of work in the last couple of years of pruning our SKUs. So 11% of all of the SKUs in our Medical Device businesses, we have sort of been trimming out of the pipeline because it just -- they were legacy products that didn't make sense to be in our pipeline. So that helps from a margin and a focus of our sales forces as well.
You should expect -- and then, last year, we also spent $5 billion in acquisition deals, whether they were acquisitions or licensing deals or other kinds of strategic partnerships. And we did 30 deals last year.
So what you should expect to see from us for the next couple of years is we will continue to look at our portfolio and see if there are other things that don't make sense in our hands that may make sense in somebody else's. You should expect to see the cadence of deals that we will be doing going forward being equivalent to at least what we did last year.
The biggest deal last year, of course, was Abbott Medical Optics, but in addition to that, we did smaller tuck-in deals. And we are on pace to-date this year to have the same number and frequency of deals that we are doing this year. We've already announced a couple of acquisitions and a number of partnerships already this year. So you should see that happening this year.
I will answer the question that we always get asked. I will preempt that question, which is are you interested in doing a very large [indiscernible] sized deal in Medical Devices? I think we would -- our answer to that question is we will always look at those.
Those deals are always harder to do because they're usually fully valued in the marketplace and then you have to pay a premium on top of them. And then, of course, large deals require some form of significant integration and work and, frequently, there are things in the portfolio that need to be divested.
So we would never say never, but they're less likely to be the kinds of things that we will do. I think, more likely, there are things like we did with Abbott Medical Optics and with all of the midsized tuck-ins that we've been doing in the last 18 months.
Okay. Great. Just switching gears to your Consumer business now. As you are rolling out initiatives to accelerate topline growth, I guess, in that business, how should we think about the impact of those initiatives on your margins?
Yeah. So let me just give you a little teeny bit of context with our Consumer business. You know that we, unfortunately, had a Consent Decree in that business, which had a significant impact on our margins because we made the investments that were necessary to bring that business fully back up to the standards of the industry.
And the one thing I would remind people of is when we went through this process, many people said, there's no way you're ever going to get through this Consent Decree. Nobody's ever done it before nor will you ever get your brands back to the health that they were before the Consent Decree.
The great news is we got through the Consent Decree. We brought the brands back. We brought all the products back that we wanted to bring back and we've gained back the market share that we have lost prior to that Consent Decree.
And I'm only telling you that for two reasons. One is it did - that enabled us to start the march to get our margins back to industry averages, which they are about at industry average today, but it also is a great testament to the resilience and the ability of our organization to tackle challenges in the marketplace.
And we all know that the industry, in general, not J&J alone, last year, it was a down market, relatively speaking, in consumer for all sorts of reasons. One of the largest ones is the impact of e-commerce started having more of an impact globally in the consumer space than it had in prior years. We knew it was coming, but it had a bigger impact last year.
And a lot of these small brands that could just pop up because of the ability to acquire manufacturing capabilities and go online as opposed to doing it the other way. I jokingly call them the ankle biters.
There are a lot of them out there, but if you add them all up, they do have some impact on your business. That had an impact on our business last year as well.
But we saw a significant margin improvement last year despite having basically flat revenue performance in totality last year because of all of these onetime events. The prior few years, we were gaining market share.
So you should expect to see us, as the year progresses, to not only get back to market and above-market growth, but also continue to improve our bottom line more than our top line for the next few years.
And quite honestly, that has been the way J&J thinks about our performance overall. We should grow our bottom line slightly higher than our top line every year, year after year. And we've been able to do that and we should expect that from our Consumer business this year and the years going forward.
So we're about at comparable margins to the average of our competitor set in consumer today, but that's not where we want to be. We want to be at a higher margin so -- but we've got to balance top line growth with how fast we actually accelerate, but you should see acceleration in the bottom line.
Okay. Great. Just maybe one more question here since we're coming up on time. Some of these newer entrants that you've talked about last week and today in the Consumer business, how do you think about attracting younger talent as these digital disruptors also compete with the same talent?
Yeah. It's a great question. And this is a conversation we have a lot. And the way in which we attract younger talent is actually twofold. First and foremost, Johnson & Johnson is the first company, I would say in the world, that was a purpose driven company.
This year, Our Credo - the 70 - this is the 75th anniversary of Our Credo. One of the things that matters deeply to, you know, I hope everybody, but it seems like the generation under the age of 35, I'll call them now, because we're now starting to - the graduating class this year is no longer millennials. I think they're called generation Z. So we have to attract both of those.
And one of the things that's very important to all of those individuals is they want to work for a purpose driven company and a company that actually is having a positive impact on the world.
So J&J has the ability to do that more so than many, many other companies in the world have to do. We have great brands that people love. We are a very tech-savvy, tech-forward company. And we are actually able to attract many people who work at those companies to come work for us because after optimizing an algorithm to get somebody to stay on a device three seconds longer, it's really easy for us to say yes, but would you like to work with mothers and babies or would you like to help a teenage girl feel her self esteem has been improved because we helped her skin care problem or work in any of our other businesses and we're able to attract a lot of those people to come work at J&J.
But it also is our obligation that the work environment is a work environment where they are empowered to get things done. And we've changed a lot of how we work as a company. We have smaller groups of people who are fully empowered to get work done.
If you go to any of our facilities around the world now, they look and feel like what more modern younger companies look like. We've - our design organization with many of our other colleagues has really changed the footprint of what it looks like, our work spaces.
And because we are - we've got great technology, you can work where you want, how you want in a very easy way. We have a very flexible approach to how people get their work done.
So I think that also helps us attract younger people. And I think at the end of the day, if they feel like they're having an impact on the world as a purpose driven company, people are feeling like their voices are being heard and they're having an impact and they can work on some pretty cool stuff, they love to come work for us. And we haven't really had a problem attracting the under 35.
All right. Great. Thank you.
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!