Johnson & Johnson (NYSE:JNJ) 8th Annual SVB Leerink Global Healthcare Conference February 28, 2019 11:00 AM ET
Chris DelOrefice – Vice President of Investor Relations
Ashley McEvoy – Executive Vice President, Worldwide Chairman, Medical Devices
Conference Call Participants
Danielle Antalffy – SVB Leerink LLC
Good morning. Oh, can you hear me? Okay. Perfect. Good morning, everyone. Welcome to the SVB Leerink Healthcare Conference. My name is Danielle Antalffy. I am one of the medtech analysts here at SVB Leerink. And we are very lucky to have with us from Johnson & Johnson, Ashley McEvoy. So let me make sure I get your title correct, EVP and Worldwide Chairman of Medical Devices.
And also from Investor Relations, we have Chris DelOrefice and also Matthew Stuckley. He will start us off with some of the disclosures.
Thanks, Danielle. 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, 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 measures made today represent results through and including the fourth quarter of 2018. Thank you. Danielle?
Okay, great. So this is going to a purely fireside chat format. So I will kick off questioning. If anyone does have a question, maybe halfway through, feel free to raise your hand. But Ashley, maybe let’s start with now just over six months in your role as Head of Medical Devices, can you talk about how you view the current status of J&J's device business within the competitive landscape in the overall market for Medical Devices and what your strategy is to evolve the device business over time?
And then lastly, what surprised you the most about the device business, both to the positive and the negative?
No, that’s helpful. So can you hear me okay? Is that on? Yes, that’s right.
First of all, thanks for having us.
I guess, a tiny bit about me. So I’ve been with J&J about 23 years and cut my keys early on running our over-the-counter medicines business and had the good fortune of taking what was at that time the largest acquisition in J&J's history with Pfizer Consumer Health care into McNeil and into kind of our global OTC business. And then was asked by many colleagues you know and godfathers and godmothers in medtech to join Ethicon and tended to our worldwide vision, our Ethicon business with futures.
We used to say, "Upon this thread, a life depends," kind of cool. And then about seven years ago, was asked to tend to our vision business, tiny little contact lens business that got a bit humbled. And we got that business back to above-market performance for three years and did a little shopping with AMO. Very passionate about eye health and sold the business to Platinum Equity in quarter four in diabetes. I know they’ve got big ambitions for that business. And then about eight months ago, have taken the helm of J&J's medtech business.
So 22 years, five different companies, five kids. I don’t know a lot of companies that let you do that. So that’s a little bit about me. But I think when I look at the world of J&J and medtech, I always – I’m a big believer onto the pass and build for the future. So a quick snapshot of who we are. You can’t say J&J medtech without saying J&J. J&J, we’re a 133-year-old company, and J&J medtech started in the ground floor. And we have an unbelievable history of many pioneering firsts. We were the first to sterilize the operating room. We were the first to create daily disposable contact lens on mass customization.
Really the first to create mapping and zapping for cardiac ablation. So very strong history of pioneering firsts. Over the years, we’ve built this $27 billion business. We’re the second largest medtech company. We have four franchises: Orthopaedics; Surgery. Well, we’re number one in the world in Orthopaedics; our Ethicon surgery business, where we’re number one. We have an interventional business known as electrophysiology, Biosense Webster, Number one business, $2 billion business, small nascent stroke company; and then a vision business where we’re number one in contact lens and a distant number two.
We are a growing business, benchmark profitability, strong free cash flow. So those are all the good things. $12 billion brands we have. Clearly dissatisfied, though, on our growth performance historically, and we have been underperforming the market. Obviously, we have a big ambition and very clear plans to restore this business, this collective $27 billion business to above market. Half of our platforms are performing above the market. We have four franchises, 14 platforms. We plan to flip each of those underperforming segments one at a time.
In 2018, I’d say what is encouraging is we did add 110 basis points of growth in 2018 versus 2017. Now that includes diabetes, which I just mentioned. We sold to Platinum Equity in quarter four. So that adds another point. What was really encouraging to see is each of those franchises and each of the regions, we saw year-over-year growth improvement in our momentum. So that’s just a good place to enter 2019 and to continue that growth acceleration.
Great. That’s helpful. And just to follow up on that. As you think about the seven underperforming platforms, how do you, as the head of the business overall, prioritize those platforms? I mean, can these all flip simultaneously? I assume that’s a tough task. But maybe talk a little bit about where your priorities lie here in 2019 to start to flip those.
Yes. I mean, I would – I always start with making sure our gems continue to overdeliver. So electrophysiology, $2 billion, growing double digit. That needs to continue to deliver. Our eye health business grew 6.4%. That needs to continue to outperform our wound closure business, our biosurgery business. So one is keeping those engines going. Our Orthopaedics business, we have – our knee business is in a business that’s in a turnaround.
This time last year, we were – my goodness, low mid – down 5%. We exited the year in quarter four showing growth. I expect that trend to continue. That’s really due to several of facets in knees. Really, we have very compelling five-year evidence coming out in April, speaking to the clinical registry and use of our ATTUNE platform. We absolutely stand by the safety and efficacy of our ATTUNE platform. We launched the ATTUNE Revision in 2018. We’re seeing a very healthy uptick in ATTUNE Revision.
We plan to launch ATTUNE cementless in 2019. And we’ve been doing very deliberate investments in digital surgery, looking forward to talk a little bit about that, but really planning to introduce digital surgery in knees as well as in spine.
Spine has been another platform that’s been underperforming. Again, this time last year, we were down 10%. We exited last year down about 1.5%. I expect that business to continue to improve. It’s really been done by three facets. We have dedicated Spine leadership who understand spine now at J&J in our top seven markets. We have very dedicated clinical sales forces selling Spine. We’ve launched a series of innovations in Spine over the past 18 months that have had a very nice effect that have really commanded a favorable price/mix ratio, areas like interbody cages, areas of deformity.
Our three key focuses in spine are complex cervical deformity and degenerative disc. We have a series of new launches coming out. We also have our own digital surgery platform in Spine coming. Those are just to name a few.
Yes. Just, sorry, one more follow-up on that, and then we’ll move on. But where do you – what do you think sort of went wrong in the device business that caused that business segment to fall below market growth? Was it taking the eye – your eye – not your, you weren’t head of the business then, but was it taking the eye off the ball on R&D, R&D productivity? Was it sales force execution?
Where do you think things went wrong? And now as the head, how are you confident that you have – that those problems are at least on their way to being fixed?
Yes. No, it’s a good question. I mean, we – I would say, listen, we were really preparing for a market that was going to consolidate at a faster pace than what it has. And so I do expect continued consolidation, but the pace hasn’t executed again.
So we bought Synthes, which was, at the time, became the largest acquisition that enabled us to be the number one orthopaedics company. As you can imagine in very large complicated integrations, they slow you down for a bit. I think that we – I think the worst of that is behind us. We really fixed our foundation in Orthopaedics, fixed our customer service and our supply chain. And then we’ve put Ethicon and Ethicon Endo together, again, preparing for consolidation and we created one Medical Device. And so a lot of that work was important work that needed to be done to really shore up the foundation. But it did impede our agility and our flexibility to start to kind of – to accelerate in certain areas. And so I’m very pleased that that’s behind us. And I think, again, there are very – you saw us be acquisitive.
In the past couple of years, we spent, my goodness, including Auris, almost $10 billion in investment. Obviously, that was getting into ophthalmic surgery, 10 medical procedure done around the world. That was we spent about $1.5 billion in tuck-in acquisitions in our other med device business. And obviously, we just announced the acquisition of Auris, which is really going to be a key element in our strategy to kind of play to win in the future of digital surgery.
Okay. That’s helpful. So let’s talk about the long-term med device growth outlook you guys laid out at the 2018 Analyst Day. You talked about the business as a whole returning to above-market growth rates. We paid market growth rates in the mid-single-digit range, whether it’s 4% or 5%. But what gives you confidence in achieving that because by our best guess, procedure volumes are still low single digits. Pricing is still, in general, a modest decline at this point, I would say. So where do you get that above-market growth?
Yes. Again, I look at like patient need and penetration rate. So from a patient need point of view, seven billion people in the planet, five billion don’t even have access to essential surgery. So there’s a lot of unmet medical need, particularly in places like Asia, particularly in places like Africa. When we look at kind of the population 10, 20 years, 30 years from now, you can look at where that seven billion is going, big places like Asia, particularly in places like Africa. When we look at kind of the population 10, 20 years, 30 years from now, you can look at where that seven billion is going, big places like Asia, big places like Africa
We have a very strong footprint in emerging markets, and the opening of the middle class and demographics and the people over age 60, places like Japan, doubling by – in the next 30 years. There’s a lot of unmet need. I look at areas of penetration. So I mentioned our Biosense Webster business in cardiac ablation, less than 10%, many times, many data points, less than 4%. I mentioned digital surgery. This advent of digital surgery, we’ve been at this for 25 years and yet we’re still under 2% penetration. So those are the things that make us bullish around the growth prospects within medtech.
Great. And just to clarify that 0% to 2% procedure volume, that’s just U.S. I acknowledge ex U. S. procedure volumes are growing much faster, yes. Okay, as you look at the medical device portfolio holistically, do you feel like J&J at this point has all the right pieces in place to be a leading competitor in what I believe is an ever-evolving medical devices market? And can you maybe talk about, to that point, what you see as the most important product launches over the next 12 to 24 months?
Yes. I mean, I would say let’s kind of our playbook to continue to get to – keep the momentum and get to above market. And a lot of that has to do with some portfolio choices. I mentioned we’ve got seven platforms that are 70% of our growth. We got to keep feeding those. We got to flip the platforms that are in turnaround. We are looking at commercial execution.
Our EMEA business where we deployed a lot of commercial effectiveness programs did grow above the market last year. Similarly, in Asia, the past few years, we’ve deployed a lot of commercial effectiveness programs. Our Asia business grew above the market last year. We’ve taken a lot of that learning into the United States and into North Americ a, which is a business that has been underperforming for us.
We grew about 1.5% in North America last year. It’s our largest region. It’s 50%. And I expect the learning of our commercial effect is to benefit. Obviously, innovation is a critical value driver for us. You saw us launch 20 new products last year. I expect to continue cadence 20-plus new products this year. We’ve set a big ambitious goal to double the value of our pipeline. We got to have a value of a pipeline by 2022 around $7 billion. I think that sort is going to take minimally to be competitive.
And when I think about 2019 and I think about 2020, what am I most excited about? I can talk with spring training baseball season. Sorry, it’s a U.S. thing. But we have – it’s taken us, my goodness, almost 10 years to get this product to market. But we have a light adaptable contact lens that automatically adjusts inside and outside light.
And a lot of the professional baseball players are littering around with that right balance spring season. It’s kind of strengthening your vision to 2015. And that’s the OASYS with Transitions Technology. That’s just launching in 2019. Very, very novel, first of its kind. Got a TIME magazine Invention of the Year Award, pretty cool. And then some areas that are going to really help on minimally invasive surgery. So we have a circular stapler that’s been in development that’s launching this year for really complicated cases on gastric cancer or colorectal cancer to really help with good dissection and to access very precise areas.
We have our next-generation ENSEAL on sealing technology in those areas. We have areas in, as I mentioned, cementless knees to really address that emerging segment in 2019. And then I think as a world of digital. And so many times, we always weren’t first in, but we are the market leader. And I would say digital surgery is that kind of case in point, too.
So you know we enjoy market leadership in open surgery and in laparoscopic surgery. And with the completion of our Auris acquisition, we haven’t closed yet, we will be leading in endoluminal surgery. And the Auris digital surgery platform, coupled with our very progressive program in Verb and our newly acquired orthopedic asset last year in Orthotaxy, which is a knee robot, and soon-to-be applications in Spine will really enable us, I say, to play to win in the future of digital surgery. And it’s not just about the robot. The robot is one piece, but it’s the combination of convening the world’s best experts in robotic surgery. Dr. Fred Moll, as many of you know, is one of the founders of intuitive surgery.
He will be joining J&J, reporting to me, running of our robotics program. But it’s also taking advantage of advanced instrumentation to put on the robot and you know this is Ethicon. We have world-class advanced instrumentations. We also have a partnership with Verily to really create kind of an unparalleled connected system that will allow this image-guided smart digital surgery platform that really changes how surgeons do pre-surgical planning, intraoperative surgical planning and then post-op planning to really make the surgery safer, more efficient and to really improve the experience. And they start to plug that into the J& J global commercial infrastructure and that’s really the elements that we think we can have. While we’re not first in, we think we can have meaningful value to customers and patients around the world.
Okay, that’s helpful. Really quick follow-up on that. So you mentioned you weren’t first to the market with the laparoscopic, but you’re now the market leader. How did you do it?
A lot of it is making sure that you understand all the different unmet needs in each of the categories. It’s around investing in professional education. It’s investing in, as I mentioned, not just the robot as one piece, but the tools and then the end-to-end system and then commercial infrastructure. And those – and leveraging J&J, the broad-based health care. So I’ll give an example. We bought one of the elements that was really exciting in our Auris acquisition is not just what it’s going to do to medtech, but we at J&J have a mission to kind of create a world without disease and lung cancer is one of our critical focus areas. So in lung cancer, many of you probably know this, but the vast majority of patients, unfortunately, are diagnosed at Stage III or Stage IV.
And when you’re diagnosed that late, you only have an 18% chance to fight your mortality. And so the mission for lung cancer is really to intervene in that disease earlier on to get an earlier diagnosis. And with the advent of Auris' Monarch program, it’s a tiny flexible catheter system that you insert endoluminally through your mouth to access the very, very distal parts of your lungs two times longer than the traditional bronchoscope and has the stability to actually dissect the lesion to get a proper biopsy.
And that means that you can intervene earlier with a heck of a lot more patients in a minimally invasive fashion and potentially even bring ablation. We brought an ablation company for liver in NeuWave last year. And we have an active clinical development program to take ablation into lung lesions using this minimally invasive, flexible, smart-guided, image-guided catheter into the distal to actually ablate the lesion or potentially to disperse oncolytic viruses. So that, I think, is something that J&J is uniquely suited of being a broad-based health care company than pure pharm or pure med device.
Sure. So it’s less about – well, it’s about innovation, but it’s also about the scale of J&J and the infrastructure that you guys have. Okay. Just moving on to not just M&A, but also portfolio optimization. I mean, you guys have been active on both fronts. Maybe let’s start with portfolio optimization because you guys did recently announce the sale of ASP. So any update there? Or any – and then anything beyond that, that you can talk about today as far as where you might shed slower growth, lower-margin businesses and then I’ll follow up with M&A.
Thanks, Danielle. So clearly, we’ve been very disciplined of sharing businesses with other folks who can create, we think, more value. And I guess, one of the things that I’m pleased to hear is that the businesses post close are doing quite well in their hands. And so the businesses have been well intended to, and we’ve heard that with Integra, in Codman and Cordis with Cardinal and Carlisle with OCD and then Platinum Equity with LifeScan and soon-to-be Fortive.
We plan to close ASP in early Q2. Very pleased with our partnership with Fortive. And again, really happy to see that these businesses are performing well in other people’s hands. So that’s a little bit about divesting businesses. Obviously, you talk about acquiring. But we do a huge amount of also strategic partnerships and using external innovation. 50% of our growth over the years has come through external innovation.
We have a partnership with Brainlab on navigation in spine, as an example. We have several – so in addition to just pure acquisitions that I’ve mentioned, having joint ventures, having strategic partnerships to have enabling technology is also a key recipe for how we’re going to get these freshness indexes and these innovation cadences to above market.
Yes. So just to follow up on M&A and not to get greedy because Synthes was a very big deal, but I think that was, what, 2009? And see – sorry?
Okay. Well, I was going to – I was proud of myself and now I’m not. So – and you just did announce Auris. But there are businesses in which you are under scale. So obviously, cardiology is one that really comes to mind. And I totally give you guys credit on the EP side of things. You guys are the market leader. But at what point do you think you need scale in cardiology? Are there other gaps in the product portfolio that you want to augment before you feel like scaling cardiology will be important, if it will ever be important in your view? Just love to get your view on where you guys are from that perspective.
Yes. I mean, we, like all of you, look at the big places in health care and want to play in the places that are growing and meaningful and relevant. And so I think Orthopaedics is one. I think surgery is one. I think eye health, a lot of unmet need in ophthalmology, and interventional. And so we do have a smaller footprint in interventional through our electrophysiology business. And we did acquire a stroke business in ischemic. That business is now – was $220 million, grew double digit. We have big plans to add onto that.
Cardiac is a little bit unique than some of the other areas because there are so many different specialties, interventional radiologist, interventional cardiologist, cardiac surgeon, electrophysiologist. We haven’t seen as much cross-cardiology buying patterns yet and customers not to say they may move there. So I don’t think that we’ve been impeded from our growth in that business. But I do – we obviously pay attention to the advancements in interventional and the advancements in cardio.
We’re looking at areas of tuck-in deals, and we’re looking at areas that can be value creating. And that’s our M&A strategy. We want to make sure that our 14 platforms, the areas of the high growth that we add, we add tuck-ins to those to continue to have those platforms be above market. And then we did enter newer spaces. I mentioned CERENOVUS is new. We bought NeuWave, which was an ablation technology.
And you can see – it was about $40 million to $50 million business for us last year, grew double digit. We have big plans to take that not just in liver but into lung. And you can see the value of ablation beyond heart. We brought Torax, which is a technology for minimally invasive GERD, again another area that has significant unmet need. So we’re really looking at areas of cancer. I mentioned lung cancer. The oncologic cancers are very, very important to us. So stay tuned.
Okay, that’s helpful. So I get it in cardiology. It does feel like innovation still really matters there and less about the scale in the businesses where, I mean, there is cross-selling in other areas, orthopedics and things like that. I mean, do you feel like you have any gaps in some of the other areas where there is more cross-selling that you would need to fill?
Yes. I mean, we have a pretty broad portfolio. I’ll use like North America as an example. We – probably three years ago, we had about 18% of our contracts were like multiline contracts. And now I believe last year we exited around 30% of our contracts on multiline. Do I expect that number to go up? It is, but it’s still only 30%. So I do anticipate. And we are learning on the most sophisticated accounts. We are doing risk-sharing in programs like hip fractures, where we go into the community hospital.
We established the standard of care of how to do elderly hip fractures. We’ve improved time from the ER to the OR. We’ve improved – shortened length of stay. We’ve done supply chain contracts with Intermountain Health. We won – we’ve got their MVP of the Year Award in Intermountain for supply chain efficiencies. We improved their docking to stocking time by like 40%. It used to take 48 hours to do that. We got it down to four hours.
So where those things matter. We’re in the UK with one of the large health care systems on Guy’s and St Thomas' where we actually took over the OR. And we’re doing all of the OR planning in orthopaedics to improve patient volume, reduce the length of stay. So those are examples that we have live every day and more on them are happening. But the vast majority are still these single-contract clinical beats in trauma in joints.
Okay. Well, unfortunately, we ran out of time, which is lucky for you because I have more questions. But thank you, everyone. Thank you, Ashley, for joining us.
Thank you. Thank you.