Johnson & Johnson (JNJ) CEO Alex Gorsky Presents at 2018 Wells Fargo 13th Annual Healthcare Conference (Transcript)

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About: Johnson & Johnson (JNJ)
by: SA Transcripts

Johnson & Johnson (NYSE:JNJ) 2018 Wells Fargo 13th Annual Healthcare Conference September 6, 2018 9:45 AM ET

Executives

Alex Gorsky - CEO

Matt Stuckley - Investor Relations

Chris DelOrefice - Vice President of Investor Relations

Analysts

Larry Biegelsen - Wells Fargo

Larry Biegelsen

Hi. Good morning, everyone, I’m Larry Biegelsen, the medical device analyst at Wells Fargo and it’s my pleasure to introduce, Johnson & Johnson. We’re thrilled to have back J&J at our healthcare conference this year. And we’re especially thrilled to have the Chairman and CEO once again, Alex Gorsky; and the new Vice President of Investor Relations, Chris DelOrefice. I think it’s Chris's first investor conference if I’m not wrong. And so before we get started, Matt Stuckley of investor relations will read the forward-looking statement. And then there will be moderated Q&A. Matt?

Matt Stuckley

Hi. Good morning, everyone. Please be aware that some statements made today may be considered forward-looking or utilize non-GAAP measures. We ask you to refer to our SEC filings, in particular the 10-K, which discusses 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 second quarter of 2018. Thank you very much.

Question-and-Answer Session

Q - Larry Biegelsen

Thanks, Matt, so Alex, let’s start with an overview of where you see Johnson & Johnson today?

Alex Gorsky

Sure, well first of all, Larry, thank you very much for having us here today. I don’t know what it is about the Boston and investor conferences, like every time I’m up here, there’s a seminal live event. The last time, it was my birthday and last night or yesterday it was my 31st wedding anniversary. So anyway it’s good to be here and thanks all of you for attending. And given our time, I won’t -- and I trust that many of you are quite familiar with Johnson & Johnson. So I won’t spend a ton of time going through and elaborate background here.

I think my overall statement would be Larry that I think J&J is very well positioned overall, not only for 2018, but well into the future. And when I say that, it starts with a quick recap of our pharmaceutical sector, where I really think by any measure over the past several years, we are seeing superlative performance. Most importantly with products are really making a big difference for patients around the world. But secondly, just by the remarkable trend of new product launches, more than 15 during that time with more than half of those being $1 billion plus blockbusters and with a very strong pipeline as well for the future.

I think as we look across the other sectors, if we look at our Consumer group, there’s been a lot of work going on there. I think recently the performance wasn’t what we would be expecting, but we think those were more of a one-time natured. If we look at the back end of this year, we see opportunity for acceleration in growth, even in more challenging CPG markets. If we look at our Medical Device group, and again as we started this year, we started a bit slower than we would've projected, however, we did see a pickup in the second quarter. In fact that was our strongest quarter performance which I believe was third quarter of 2016. And if we look ahead into back end of this year with the number of launches and frankly other changes that we make in terms of execution, we’re confident that we’re going to see good growth. And if you add all that up, what it means is that again we remain very confident and our projected reported growth of about 6% for this year in top-line sales, we would expect to be quite consistent with our overall guidance regarding EPS, which is about 11%. And by the way if you put that in a context of our long-term projections of growing at or slightly above the market in terms of sales and having EPS grow at or slightly faster, in EPS, we think that that puts a very compelling long-term total shareholder return in place. In fact if you go back over three, five, 10, 20 year period, what you see is that we’ve done very well against our competitive composites.

Now we’ve done that while also not taking our eye off the long-term. What you will see is that we’re investing over $10.5 billion in research and development. That places us among the very top companies in terms of healthcare but even I believe in the top 10 if you compare it more broadly to all industries. We’ve put about $35 billion worth of capital to work last year in terms of M&A. And so, again, we think that those actions lead to both a solid focus on near term but also a long-term sustainable growth pattern as well and that’s frankly why we have been able to deliver 56 consecutive years of dividend increases and 50 -- excuse me, 34 consecutive years of operational EPS increases as well.

And last but not least, what I would say is we do that in a manner that we believe is consistent with our credo, it’s interesting. This is the 75th anniversary of our credo at J&J. And I always try to begin all of my conversations about the company with that because I think particularly in today's world where there's a lot of demands on corporations, on businesses that there should be, particularly those of us that are fortunate to participate in healthcare but making sure that we have the right balance between patients, consumers or customers, our employees, the communities and ultimately our shareholders is we believe what ensures that over the long-term is most important for Johnson & Johnson. Thanks, Larry.

Alex Gorsky

Thanks, Alex. When I think about your tenure as CEO, you started I think in 2012 as CEO, there's been a big shift at J&J in terms of the mix of the businesses. If I look at the numbers in 2012, Medtech was actually your largest business, 41% of sales; Pharma was 38%, Consumer 22%. If we look at 2019 our estimates after some of the divestitures you’ve announced, Pharma is going to be over half, Medtech only 32% and Consumer about 17%. So my question is what was the thinking behind the shift and how do you see that evolving let’s say over the next five years?

Alex Gorsky

Sure, Larry, well, Like a lot of things in life these days I think it's important to add some context to some of the figures you just started with. And for me it’s hard to believe that coming up in the early part of 2019 it will be seven years in the role. What I would tell you is that when I stepped into the role, I was thinking a lot of things, but one that wasn’t was necessarily that we would have X percent of our business in Pharma, X percent in Consumer, X percent in Medical Devices. And I think our belief is that over the long haul having a diversified business model is definitely in the best interest of our long-term stakeholders and by that look there are changes in technology and innovation and customer basis, and reimbursement and global opportunities that allow us by having a diverse portfolio frankly to be able to seize opportunities regardless of where they exist. And if we go back to 2012, one of the factors was frankly that our pharmaceutical business at that time had gone I think what I believe is about $25 billion, if I got the number right, had lost close to $8 billion in sales due to patent expiries and really required a massive remake of our pipeline, but also of our business model.

And sitting here today now and if we look at the growth that segment is seeing, much of we do -- and by the way as we looked at in terms of what was unmet medical need, if you were to believe when we are sitting here, let's call it seven years ago, that we would have so many different options for things in immunology that would be close to coming the cures in areas of cell-based areas and oncology or frankly that we were in pure hepatitis C immuno. And so it's not necessarily an algorithm but what we try to do is where -- look at where is unmet need, where do we see the science moving the fastest and I think clearly that's happened in Pharma. At the same time, right about that time, we had seen a slow down significantly in Medical Devices. We saw hospital admissions particularly in the developed markets. We saw surgical procedures slow down significantly. We saw less investment in terms of venture capital, in terms of medical device. We saw CPG coming on the consumer side, also starting to be changed. So again it’s not a particular proportionality that we’re looking for but overall we try to go where we think the greatest opportunity, the most of unmet need is and again what makes the best long-term sense for the company.

Larry Biegelsen

I mean I think the basis of my question was really, I think I would agree with what you said going back to 2012 and the opportunities in Pharma and Medical Devices but as we sit here today we’ve seen an acceleration in the medical device market. We have seen a lot more innovation. We see what I would call more efficient, industry-friendly FDA and so how does that now influence your thinking going forward?

Alex Gorsky

Hey, Larry, you’re right. I think at a more macro level, as I look across the industry. I can't think of a more optimistic time. That might sound counterintuitive when you hear some of the rhetoric coming from different places. But at a high level when I think about the science and by far one of the best parts of my role is getting a chance to look across the pharmaceutical, the medical device, the consumer, technologies and have some eye into where we might be in five and 10 years. And after more than 30 years in this industry what I can tell you is across each one of those domains I have never seen more promise in those areas, and whether it's what you're seeing with some of the cell-based therapies in Pharma, whether it’s our better understanding the gene, I am just -- how quickly we’re advancing in some of the other sciences there. If I see how technology usually associated with our devices that they can be incorporated into medical devices making them better and better, when I think of the ways that we can touch consumers, all those things make me more positive about the opportunities. And to your point, what the good news is that we have seen that, certainly seen that in Pharma. Concerns about reimbursements, however, I remain optimistic that we'll be able to work our way through those. Medical Devices, the regulatory environment, with our take into the FDA, with the past several leaders of the FDA, I think have kept a strong balance on efficacy and safety. But at the same time speed to innovation which is very, very important. And I think the other thing we have seen is reimbursement systems have evolved likely at a slightly slower pace. But I think looking forward it's fair to say that that could accelerate to a certain extent, but I think in the long run that will require companies to adapt to evolve the way that we think about reimbursements but look I remain optimistic and bullish both on our Pharma as well as our device and our Consumer opportunities as they exist today.

Larry Biegelsen

Obviously the investor focus has been on turning around devices, one of the focus has been get to pharma as well. But -- so what role do you see M&A playing in this return to above market growth in your device business by 2020? You had added for example, AML, but you probably subtracted a lot more in devices than you've added. So what role do you see M&A playing within the device business going forward?

Alex Gorsky

Yes, let me start with a broad statement about our Medical Device business and that is that it has not performed in a manner consistent with the way that we expected to. And so we made a number of changes and I can address those more specifically later. And I think that's an important underpinning to have. I think as it relates to M&A, I think what I would say there is, look over the long haul we have sourced about 50% of our innovation through inorganic means and whether it’s through licensing, M&A, the overwhelming majority of those opportunities have been smaller under a $1 billion, they have been multi-hundred million dollar tuck-in deal licensing agreements in number of different ways. And so, we think that that is part of our normal cadence across all of our different businesses and we would expect that to continue, by and large acquisitions are more challenging than are identifying those technologies earlier or bringing them in and growing them. Nonetheless, from time-to-time when the opportunity is right, we will do what I would call more significant transactions. We have not seen compelling data that would suggest very large transactions. What I mean is doing, talking about a $100 billion type [that ever] long-term resulted in significant value creation for shareholders. So we think our model is better suited. What I would tell you is that we’re thoughtful, we’re disciplined but we will also be competitive in those processes. We still use a DCF model. And we want to make sure that strategically from a science perspective as well as a financial and operationally that it makes sense. I would also submit that over the past six years we've been more active on the divestiture side. And what we've done is we've pulled together a very clear and explicit outline and goals for our businesses; are you number one or number two in the market? Are you growing faster than your competitive set? Do you have a healthy and compelling P&L? Do you have a strong pipeline for the future? Are you complementary to the rest of other businesses, horizontally or vertically across the organization? And if the answer to those different criterion are no, over several years, then we say perhaps we should have a different conversation. We don't look at ourselves as a holding company certainly, but we also think it's important to have that kind of rigor and discipline in a company that is always supporting strong performance. So, it’s not that those would be bad businesses. By other measures those may be good companies for companies. But relative to other opportunities that we may have to help patients, to grow our business, we then make decisions. So if you go back to Cordis, OCD, Codman on the neurosurgery side, more recently of course with diabetes and with ASP, those are example as well as in our other franchises where we have taken some of the steps all with the objective of making sure that we’re maximizing return on the capital that we’re deploying across our portfolio.

Larry Biegelsen

That's helpful.

Alex Gorsky

And Larry, just one other thing I would say is very important is on the acquisition side, another part of disciplined execution is tracking that consistently. And what I can tell you is that we do that not only with our senior leadership team but with our Board of Directors, that’s something that we hold ourselves and our leaders are accountable for going forward as well when you take a look at the integration and meeting the pro forma plans we’ve put together to justify those kind of investments.

Larry Biegelsen

Alex, upfront you talked about the performance in 2018, the guidance that you’ve given and long-term growing at or above the markets in EPS slightly faster than sales. If we think about just next year, I would think Consumer continues to get a little bit better as you outlined at the Analyst Meeting.

Alex Gorsky

In 2019.

Larry Biegelsen

2019, 2018 --- 2019 Medtech and Consumer you expect group performance going forward. You were very clear about that I think at the Analyst Meeting in May or June. Any high-level thoughts on 2019 Pharma, well maybe this is a good segway into Pharma because I think you’ve been clear on Medtech and Consumer, you expect better performance on Pharma. How should we be thinking about the sustainability of the growth you’ve seen there?

Alex Gorsky

And let me start with where we are in 2018, and we certainly do expect performance in the two other sectors to pick up as we head into the back end of the year and is consistent with the discussions that we’ve had going back to our Investor Relations Day or the guidance that we issued at the end of second quarter. And it's too early to project too far into 2019. But at a higher level what I would say is, we’re very confident about our Pharmaceutical Group. And it starts with the reason the performance has been so strong in the first half of 2018, and that’s the growth of our core brands. So if you -- overall, what you see is about 11% growth in the second quarter and that's driven by DARZALEX growing at 70% with a long line of future indications as well going earlier and earlier in the treatment of multiple myeloma, you see about 60% growth in ZYTIGA. You see 34% growth in IMBRUVICA and STELARA mainly driven through new indications earlier in lymphoma with -- for IMBRUVICA, but also with STELARA in Crohn’s disease, you see about 12% growth in our portfolio, in our long-acting antipsychotics. We saw about 6% growth in the cardiovascular. So the core brands coupled with multiple new indications and line extensions, and in fact, over the next several years we expect to have 50 and many of these over $1 billion in potential will continue to drive what we consider to be our core business. We couple that with the launches of the things like TREMFYA, ERLEADA, we’re also encouraged by the opportunity. And again these categories, for example, in immunology, we think that the immunology category is only about 35% penetrated. Cardiovascular about 45% of patients are still on warfarin or traditional anticoagulants.

Long-acting antipsychotics really have less than 15% penetration rate. So if you look at the penetration rates combined with the new indications, we think that there's a lot of opportunity for our core brands. And then you compound that with -- just yesterday, we submitted esketamine which we’re very excited about, treatment resistant depression, unfortunately all of us probably know a friend or family member who is affected by that condition and frankly there’s been possibly new treatments in that area. So they come out with a very new approach with impressive early data, we’re excited about, we think that’s going to be great. Erdafitinib, we think there’s another opportunity for solid tumors, starting in bladder but also bile duct cancer and other areas. And so with those new launches we remain very optimistic. So -- and even if we consider the headwinds of things like more generic launches around Tracleer, PROCRIT and CONCERTA, even if we consider that the 30 month stay on ZYTIGA goes through the later October, remember only 50% of ZYTIGA sales are in United States, 50% are still outside the United States where we have patent protection. And even if we pull ZYTIGA out of the 11% growth rate that I talked about, you get an 8% growth rate in the second quarter. So if we add all that up, we still think that our core business, our growth through line extensions and increasing penetration, our new product launches I just talked about, TREMFYA, ERLEADA, esketamine, Erdafitinib, compounded with the Actelion growth, where we want to go to patients earlier because we know we treat them earlier, they have better outcomes, more combination therapy, better outcomes, that we add that together that we can still grow that business at a very compelling rate at the market rate going forward. And I think that’s quite a statement when you consider now that we've been doing that for more than seven years in our Pharmaceutical business.

Larry Biegelsen

That’s helpful. So one more on Pharma, you are hosting a call on September 13 to review the Pharmaceutical business. Historically you've done such calls with conjunction with an earnings call. So why this standalone call this year, what you hope to accomplish on that call?

Alex Gorsky

Larry, we think transparency when you have it in a conversation, which is a good thing and I believe it's actually been part of our normal rhythm and cadence to do this call given that it’s been more than 18 months since we did the Pharma update. On the last update we focused on the Medical Device and our Consumer business. We’ve got a lot of exciting things going on as we just talked about in our Pharmaceutical business and so we think highlighting that is the right thing to do.

Larry Biegelsen

Okay. One more on devices given that we’re focusing on surgical robotics here. We’ve got 10 companies that are in the surgical robotics space or hoping to be, planning to be, you’re one of those planning to be. So could you give us -- I think you have two programs. One is Orthotaxy for Orthopaedics. The other is the joint venture with Google. Both expected I think to launch in 2020. Can give us an update on your robotics program and what are some of the milestones that we should follow and just kind of at a high level your confidence in those timelines?

Alex Gorsky

Sure, look, Larry, I applaud you for putting such a focus on technology and robotics and the impact it could have on our industry going forward. And what I might even do is start and kind trying down the road five or 10 years from now and what I believe would be a tremendous impact on healthcare overall by applying these different kinds of technologies. And what I mean by that, I mean can you imagine in five years from now you could be a successful Pharma company if you don't have pretty remarkable data analytics, big data capabilities inherent in the organization that I could argue could be as important if not even more important given some of the work that we're doing with the genome and other areas that has great chemistry and great biology. Could you imagine a device company that is that is not incorporating visualization, tracking, guidance, real-time learning into some of their applications and certainly consider consumer company that is not very well embedded into the Internet of things being able to connect with customers, consumers in dramatically different way. So I believe that type of technology is going to be completely ingrained in just about every component of healthcare going forward.

And so as we look specifically at robotics, we -- I’d put the caveat upfront, I think initially we are probably a bit conservative or skeptical. I think over the past several years though, it’s become more eminently clear to us about the importance of that technology going forward. We’re very pleased and excited about the opportunity that we have with Verb and Verily and Google and our teams working together. They’ve made a tremendous amount of progress. And I think that -- look this is a field that you do have to play the long game length and frequently people ask me, how do you feel about your robotics program, you’re going against a strong competitive right now and it’s already got a significant footprint out there and I would say yes. And just imagine if we were here at this meeting let’s call it seven years ago, how many of us had one of these next to our side. I would say a majority of us had a blackberry. And when you went from simply taking a software and making your emails more accessible or your calls more accessible to applications and digitizing our lives, which is what this did. I think that there is likely a close metaphor for what we could see taking place in surgery into the future is not only robotic surgery but digital surgery. And in digital surgery -- it again goes from simply enabling it to actually improving outcomes to helping make the procedure better, to looking at very different ways around reimbursement, to simplifying the footprint the way it is implemented in the operating room. And remember overall today less than 5% of surgeries are being done in this area. So the growth opportunity is, there’s not going to be just one player, it’s not going to be just one technology, it’s going to be multiple technologies. And so we’re truly trying to approach it with that kind of a construct in place. And while you would actually differentiate it saying you have got the Verb and Verily and you got Orthotaxy, we look at it more overall, how do you think about robotic surgery suite in the future and how could we make sure the platforms that we have in place make it convenient, our database is actually improving outcomes and adding value as we think of that platform with a general surgery arm, with an orthopaedics arm and other arms that can be associated with it. So thus far what I would tell you about the project itself is, we’re on track. They are working diligently right now with procedural developments. I’m sure you can appreciate preclinical setting, we’re talking with regulators, we’re talking -- we’re working on the supply chain, we’re looking at the different commercial aspects. I think that they are making very solid progress. And look overall, I think we’re on track, where we really see this is a long-term secular shift kind of opportunity and that's where we’re approaching.

Larry Biegelsen

Perfect. Alex, thanks so much for being here.

Alex Gorsky

Thank you.