Johnson & Johnson (JNJ) Management Presents at Barclays Global Healthcare Conference Call (Transcript)

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About: Johnson & Johnson (JNJ)
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Johnson & Johnson (NYSE:JNJ) Barclays Global Healthcare Conference Call March 14, 2019 10:15 AM ET

Company Participants

Lesley Fishman - IR

Chris DelOrefice - VP, IR

Catherine Owen - President, Immunology

Tom Cavanaugh - President, Oncology

Conference Call Participants

Geoffrey Meacham - Barclays Bank

Kristen Stewart - Barclays Bank

Geoffrey Meacham

Good morning. Welcome to the third day of the Barclays Global Healthcare Conference. My name is Geoff Meacham, I'm the senior biopharma analyst here. And I have Kristen Stewart, our med device analyst up on stage as well. So we're thrilled to have Johnson & Johnson. And we have Tom Cavanaugh, who is President of Oncology, here to my right; and then Catherine Owen is President of Immunology to my right. And my -- to my left here is Chris DelOrefice from the IR team; and then Lesley Fishman, who's also from the IR team.

So we're just going to do a fireside chat today. But I think, Lesley, you wanted to read out the forward-looking statement, and then we can get right into it.

Lesley Fishman

Thank you, Jeff. I promise to be brief. Please be aware that some statements made today may be considered forward-looking. Please refer to our SEC filings, in particular our 10-K, which discuss risks and uncertainties that could cause results to differ materially from those projected today.

In addition, we may refer to non-GAAP measures. See our website at investor.jnj.com for reconciliations to comparable GAAP measures. And finally, all remarks regarding financial performance represent results through and including the fourth quarter of 2018. Thank you.

Back to you, Geoff.

Question-and-Answer Session

Q - Geoffrey Meacham

Okay. Thanks, Lesley. Let's start off with a couple of high-level pharma questions from a -- and then we'll get into some product specifics. But when you think about pharma growth for J&J, this year, there's a little bit of a downtick, but the following year should see reacceleration. You guys have a nice, young product cycle. I think you do have some, obviously, headwinds from generic ZYTIGA, which were not surprising. But maybe just give us a sense for maybe your confidence in the near- and longer-term outlook when it comes to having above-market growth.

Tom Cavanaugh

Sure, Geoff, I can take that. Good morning, everyone. It's a pleasure to be here with all of you. I'd like to just begin and maybe say a few words about Janssen. Janssen is the pharmaceutical company of Johnson & Johnson, and we have a vision where there's a future where disease is a thing of the past. We know that's aspirational, but we put our money where our mouth is. We invest over $8 billion into R&D, and we feel the only way to do that is by focusing on disease areas where we feel that there's still a significant unmet need. Hence, we focus on 6 areas of science: cardiovascular and metabolism, oncology, immunology, infectious disease and vaccine, neuroscience and pulmonary hypertension. So the answer to your question, we feel very confident in our pharmaceutical business.

As you mentioned, despite some potential headwinds that we have in 2019 through erosion of both biosimilars and loss of exclusivity of some of our products, we feel confident we're going to grow in 2019 and come back to above-market growth in 2020. We're going to do that because we have one of an industry-leading portfolio of products. We have over 11 products that are blockbuster status. Many of these products are early in the life cycle and have the potential for over 10 line extensions across the portfolio. Those line extensions, the value of them are in excess of $500 million or $0.5 billion, so we are very confident in the current portfolio of products as well as the new products in which we're launching. Most recently, we've launched TREMFYA for psoriasis, ERLEADA for non-metastatic CRPC. We just received approval for SPRAVATO, the first new mechanism of action for depression in decades. And we're anxiously awaiting the upcoming approval of erdafitinib in metastatic urothelial cancer. We invest heavily in R&D, and we have one of the most productive R&D organizations in industry. Beyond that, as you are probably well aware, in 2018, we've shown that 10 of our products are growing at double digits. So we're very confident in the portfolio. And despite some of the headwinds in 2019, we feel confident in 2020 and beyond of getting back to above-market growth.

Geoffrey Meacham

And, Tom, you mentioned the therapeutic categories. I wanted to ask you a big theme in pharma and large-cap biotech is just diversification of therapeutic areas. You guys have a number of them already, but maybe what's the tolerance for the strategy to further diversify into new categories? Is that worth it? Or is it expanding in your legacy assets where you have core strengths?

Tom Cavanaugh

Catherine, you want to...

Catherine Owen

I think we continue to invest where the science takes us. So as we know in many of the therapy areas that we lead in, there still remains high unmet medical need for our patients. In immunology, for instance, it varies between 30% to 70% of patients being treated with a biologics. There's huge unmet need for patients to have access to biologics, and we continue to invest there. But we invest where the science is, and we continue to have a strong presence in all areas of scientific investment. We have our JJDC team. We have our innovation labs. We have our innovation centers. So we feel very strongly that we're well placed to follow the science globally, and we will invest in areas of high unmet medical need.

Tom Cavanaugh

And just to piggyback on that, I still think there is diversification within the therapeutic areas in which we are playing. For example, in oncology, we have what we call the Disease Area Strongholds, where we're focused on prostate cancer, heme malignancies as well as these solid tumor-targeted therapies, in addition to I/O. And we're at just the forefront of I/O research in the industry. A lot of it is in the checkpoint inhibitors or CTLA-4. We have over 16 compounds in development: 8 of them in the clinic, 8 of them in the preclinical setting. So we'd look at diversification even within the therapeutic areas which we are working.

Geoffrey Meacham

And the last sort of higher level one and is not a topic that investors are unfamiliar with by any stretch, but just the ongoing drug pricing debate. We just had the recent Senate hearings. And Jennifer Taubert from J&J, did a great presentation there. But I wanted to ask you, and you guys have been at the forefront, by the way, in disclosure, in visibility with respect to pricing. But maybe what is the -- what do you feel like are the likelihood of having real reform this year? We have a lot of headwinds, for example, from rebate reform and a lot of discussions there. But I mean, I think for the past 2 years, there's been more talk, really, than action. But I want to get a sense for kind of do you think there's going to be some tangible sort of legislation? And what is your -- what are your guys view on that?

Catherine Owen

I think we continue to want to be part of the discussion and the debate. As you rightly pointed out, Jennifer, as well as other CEOs, were at the Senate recently to take part in that debate. And we have a strong commitment to offering value to the health care system, offering access to our patients but also developing a business that can invest in the future and the future innovations that we feel very strongly are needed in the health care system. So being part of the debate is important. We have a very strong team who work both out of D.C. and out of New Jersey to develop plans to offer to the administration. That administration discussion continues, and we look forward to being part of the resolution. I think you rightly point out that we have been at the forefront of transparency. We're the first pharmaceutical company to publish a transparency report, indicating how we price our products, indicating where the rebates flow through the system. And we continue to operate under for the last 2 years, as you know, Geoff, net price decrease. And while doing that, as Tom has already pointed out, we're industry-leading investor in R&D, so we are continuing to perform in the U.S. under a net price decrease scenario, continuing to invest in innovation and in R&D for the long term and continuing to want to be part of the debate and the resolution.

Geoffrey Meacham

Yes. Let's go to some product-specific questions. So, Tom, you mentioned ERLEADA, so a new launch for J&J. You obviously have a strong presence in prostate cancer. And so obviously, investors are expecting in the U.S. ZYTIGA to face erosion. But I wanted to ask you for ERLEADA, I know you have differentiation going way upstream to pre-metastatic. That's not an area that most urologists are used to writing a script yet, but it is a very attractive long-term area. So what would you view of maybe as a tipping point for investor -- for oncologists to finally -- or urologists to just start more broadly writing scripts earlier in the paradigm for prostate?

Tom Cavanaugh

No. You're absolutely right, Geoff. I think, one, first and foremost, we're quite excited about ERLEADA. We see ERLEADA be a multibillion-dollar product, primarily for a few reasons. One, as you touched on it, not only is ERLEADA -- not only can ERLEADA be used upstream, so early in the treatment continuum in prostate cancer, but we also have strategies in the metastatic disease, so across the spectrum of disease continuum in prostate cancer. As you pointed out, we just recently launched as of last year ERLEADA in the non-metastatic CRPC patient population. So before that approval, the indication did not exist in the marketplace. So there's been quite a lot of education around the market development of that population. The patients predominantly sit in the urology office but because of diagnosis and late diagnosis might sit in the oncology office.

So there is a lot of education that is being conducted there, identification of these patients. As you know, the trial that led to the approval was looking at the high-risk population, the doubling of PSA less than 10 months. So identifying these patients when they're coming in maybe every 3 months, evaluating PSA is a critical education gap before we started at the launch, but we're seeing a dramatic uptake in that setting and are very confident in the intent to prescribe. I'd be remiss not to touch on, from an ERLEADA standpoint, we just recently communicated top line results of the TITAN trial. This trial is in the metastatic castrate-sensitive population. Looking at all-comers in that population where we met the co-primary endpoint of PFS as well as the overall survival. So our strategy is looking at an early upstate and localize [the disease] [ph] before non-metastatic with the ATLAS trial, all the way to the metastatic disease which we are also looking at, combination strategies on -- predicated upon the antigen annihilation approach in prostate cancer in combination with ZYTIGA with ACIS trial.

Geoffrey Meacham

Then a couple of questions for you on myeloma. DARZALEX has been a very meaningful asset, very impressive growth over the past couple of years, and with the MAIA result, even more of a leverage point going forward. But maybe help us with when you think about the newly diagnosed, maybe the earliest upstream in myeloma, how sustainable do you feel like the growth is? And then I want to ask you after that, just the cell therapy aspect of it.

Tom Cavanaugh

Absolutely. First and foremost, what an amazing story, DARZALEX. It's the first biologic in multiple myeloma. We are already on the fifth approval, which is 4 years on the marketplace, and as you mentioned, significant growth. In 2018, we grew to 60%. We reached the $2 billion mark, and we see significant potential ahead of us. As you point out, we just recently completed our filing for the MAIA data, which is the combination of DARZALEX in combination with REVLIMID and dexamethasone, which is the standard treatment here in the U.S. based upon the MAIA trial that was released at ASH, showing a 44% reduction of risk and/or death in multiple myeloma already on a very significant base.

So we see significant potential with the launch or potential launch of the MAIA trial in the U.S. more, as you said, in the upstream. But also, just recently, we released the top line results of the non-inferiority trial that we have for the subcutaneous formulation compared to IV, which we feel also to be a major catalyst for us. As you know, as you get in the earlier-line setting, the majority of these patients sit in the community, and convenience of administration is important. So taking a product that is, from a first infusion, anywhere between 6 to 8 hours, now down to less than 10 minutes, combination with REVLIMID and dexamethasone, we see that to have broad penetration in the earlier lines and beyond the treatment continuum.

Geoffrey Meacham

And later lines of therapy, BCMA has been a really hard target of late. There are a lot of companies targeting this antigen with different modalities, and J&J has access to different modalities when it comes to cell therapy and bispecifics. But in the cell therapy space, where -- what inning are we in terms of J&J's development to this modality, to the technology platform in myeloma but then more broadly speaking?

Tom Cavanaugh

Yes. Absolutely, I think BCMA in multiple myeloma is a validated target. I think we know that today. We're taking multiple approaches to that target and in other targets within multiple myeloma. We have our partnership with Legend, which is the BCMA CAR-T, which we have first patient dose last year once we brought it and started manufacturing in the U.S., and we are accelerating the development. The answer to your question, I think we're in the first inning as we're looking at the development of that product. We have a long history of accelerating drug development. DARZALEX is a great example of that, that I touched on, and we foresee that to be a game changer with regards to multiple myeloma. But that's not all. We have bispecific antibodies. BCMA is also a target of CD3 redirection that we are aggressively developing as well in multiple myeloma. So multiple shots on goal, and a lot of these can be played with together, and combination strategies are looking at induction and in preparing for CAR-T therapy.

Geoffrey Meacham

So cell therapy could be a broader platform for J&J beyond just myeloma and multiple indication?

Tom Cavanaugh

Absolutely.

Geoffrey Meacham

And then last one on oncology. Just wanted to ask you about J&J's immuno-oncology strategy. Obviously, it's been a major driver for other companies in the space, and you guys have assets. But I wanted to ask you maybe where does this fall in the strategic priorities within pharma? And what do you feel like you need to add? Or what do you think investors are missing with J&J's current capability?

Tom Cavanaugh

Great question. I would say, first and foremost, immuno-oncology is one of the most active areas in research and development at J&J. And you can tell that from our licensing, in acquisitions but also in our development. We have 16 assets: 8 in the preclinical setting, 6 in the clinical setting. But our strategy is agnostic. We're going to follow the science, as I mentioned. We're kind of at the forefront of research in immuno-oncology. We're discovering a lot, just across industry with academics, and we see opportunistic ways in which we can accelerate our development through combination strategies. We're looking at targeting T cell direction, whether it be CAR-T, CD3 redirection and vaccine strategies, but also complementing that with immune modulators or immune combination therapies. Just recently, at the end of last year or middle of last year, we acquired BeneVir, which is the oncolytic virus platform that can be complementary to the I/O portfolio as well towards the end of the year with the checkpoint CD70 with the argenx deal, looking at AML and high-risk MDS.

Geoffrey Meacham

So a little bit of a build by end partner type of market?

Tom Cavanaugh

Correct.

Geoffrey Meacham

Okay. So, Catherine, I want to switch gears to immunology. And REMICADE has been -- J&J was at the forefront of the whole TNF space. And we're seeing now the erosion curve of that, but there are great follow-ups to that. I mean, you guys -- STELARA, TREMFYA and SIMPONI have all been really an aggressive growth phase. When you look at TREMFYA, the revenue base is obviously not big enough, but the trajectory looks really good. Maybe help give us some context for that. How do you guys view TREMFYA relative to your other launches in the immunology space? And maybe what's the future there in terms of the sustainability of growth?

Catherine Owen

Yes, sure. Let me sort of take that in order. So as you know, we started our immunology business with REMICADE, and then we subsequently launched golimumab or SIMPONI; and then in 2009, IL-20 -- IL-12/23, STELARA; and then most recently, TREMFYA, our IL-23 pathway. So as a business and a company, we have strong heritage and alternative mechanisms of action in the immunology space. STELARA, just for a second, has 4 end market indications and a very strong focus on the pipeline development of STELARA. They're a $3.5 billion brand last year. We were, in Q4, the largest asset within J&J, and we continue to believe very strongly that STELARA has huge growth potential for the future. Very excited about its success in Crohn's disease and meeting the unmet need of patients there but very excited also to look forward to ulcerative colitis.

We were just in Denmark at the ECCO meeting, sharing the results for our unified data, and I'm excited to see the impact of that on patients with ulcerative colitis. And as you know, we have development plans for STELARA beyond that in lupus. And we continue to believe that STELARA, as a pathway, has a strong trajectory of growth moving forward. As you rightly point out, TREMFYA, our most recent launch, over $450 million in the U.S. last year, the fastest-growing product in the PSA market in terms of market share and a very strong contender in terms of efficacy. We have invested heavily in competitive data for TREMFYA. We now have efficacy versus Humira head-to-head versus Cosentyx head-to-head and in STELARA non-responders. We continue to invest in TREMFYA for the future in IBD and beyond. And so together, we believe, with our portfolio of products and immunology, we have a very strong current track record and a very exciting future for all the patients that have huge unmet need in immunology. I think people forget that patients with immune disease, it's a chronic disease. It's a remitting disease. And most patients at the end of a couple of years start to remit and lose response, and so there's always a need for new mechanisms of action in immunology. And so our focus has always been to continue to advance meds and to go where the science is, and we have some very exciting products in our pipeline to address those needs as well.

Geoffrey Meacham

I guess the penetration of biologics, biologics has been around for a long time in the inflammation market, such as RA, psoriasis, PSA, but I think the overall utilization of biologics is still low and leaves kind of a pretty high ceiling for -- on a peak basis. So maybe give us a sense for that where you see -- perhaps IBD is probably one of the bigger opportunities that biologic overall use could grow in a dramatic way going forward.

Catherine Owen

I think what's interesting because immunology, obviously, is treated by different types of doctors with different types of disease focuses. So in dermatology, patients with psoriasis and psoriatic arthritis, the derms think very differently about the use of biologics and perhaps the gastroenterologists in IBD. And because of that, you see different penetrations in those different areas. So in psoriasis, less than 50% of patients are on a biologic. In Crohn's disease, it's probably near a 70% of patients. But in ulcerative colitis, it's probably less than 50% again. So you see these big differences in the use of biologics. And it's down to the different disease states. It's down to the doctors' understanding of biologics and their focus on safety. I think in days past, doctors, particularly, were concerned about safety of biologics. And what's amazing about what we've been able to do is build up a database to provide evidence. The safety story now have years and years and years of evidence of safety of biologics. And so we're able to communicate that effectively with our doctors but continue to ensure that patients have access to biologics, and that is key in a lot of our markets.

Geoffrey Meacham

And then there's been, of late, a lot of focus on some of the newer markets. You mentioned lupus is a focus area but refractory asthma, atopic dermatitis, things of that nature. So maybe just give us kind of some guidepost in terms of what -- strategically what J&J looks at as newer opportunities across the immunology inflammation space.

Catherine Owen

Yes, I'd be happy to. So as you rightly point out, lupus is an area of high unmet medical need. Just one product launched in the last 50 years or so. So we are very actively looking at opportunities in lupus. We have a strong program behind STELARA, and we also continue to look, through our BD strategy, other opportunities there. Atopic dermatitis is a huge potential market for patients with a severe skin disease that often goes undertreated and underdiagnosed, and we continue to look at atopic derm as a market for the future. The other area that we're looking at, Geoff, is oral. And so we're looking at orally acting biologics to enhance the patient experience, and we have some nice BD partnerships there that we're going to share more about in our meeting in May. But we continue to look at both unmet areas of medical need but also new formulations and new ways of delivering a biologic to enhance the patient experience in terms of both efficacy and safety.

Geoffrey Meacham

I want to take advantage of Kristen Stewart, our device analyst, who probably has a couple of questions on that segment.

Kristen Stewart

Sure. So maybe I'll just keep it pretty high level for this discussion purpose. Can you maybe just talk more about just how J&J's management team is currently viewing the Medical Device business just in terms of the growth trajectory? There's clearly been some commentary around M&A within the broader space. You guys have a great interest in robotics. You just announced the acquisition of Auris not too long ago. Yesterday, you guys hosted a session at the orthopedic conference and talked about a late 2020 launch for Orthotaxy there. And then you have the Verb Surgical program as well, which sounds like 2020 is going to be the year of robotics for you. So maybe just talk to us about how you're feeling about the composition of business, the need for additional M&A activity and just what we should expect.

Chris DelOrefice

Sure and happy to. Thanks for the question. So as most of you know, our Medical Device business is one of the largest, most comprehensive businesses out there, and there's a lot of strong foundations of strength to build on, right We've got 12 $1 billion platforms. 70% of our sales come from platforms or products that are #1 or #2 in the marketplace, so there's a significant area of strength. It's a very profitable business where we're above peer set, generating strong cash flow. With that said, as we talked to the -- with this community in the May time frame, we're not satisfied ballistically where that total portfolio is performing. And we made a commitment by the end of 2020 to be performing at above-market levels. Now with that said, we have a very complex portfolio, right. I think within that portfolio, there are a lot of real areas of strength. So take our EP business, it grew 14% in the fourth quarter, 10 years of double-digit growth, area of high unmet need, very underpenetrated, so a critical platform over the long term. Our Vision Care business, contact lenses, growing in kind of that mid-single-digit range. Past 3 years has been at or above market, performing very well.

Even areas like Advanced Surgery, strong OUS footprint, in particular in emerging markets. Fourth quarter grew about 5.5% holistically. We have a biosurgical platform growing 9%. Energy business grew mid-5% range. So there are a lot of areas of strength in that business. I think the recovery will come from two primary areas. One, we're always very aggressive in looking at portfolio, both on the acquisition front, as you had mentioned, but also the divestiture side of things. So we had an underperforming diabetes business. We view ourselves as a medical innovator. We want to be number one or number two in the markets we participate in. That was a business that we exited that was having significant double-digit declines.

So the portfolio management, that will help with our growth going forward. And then Orthopaedics, given the size of that business, it's a significant portion in that portfolio. Market growth rates as well in the orthopedic business are much lower, 2% to 2.5% range, I would say, based on the best data that we have. Our hip and trauma portfolios are performing basically in line with market. Anterior Approach in hips continues to perform very well. The core areas where we needed to make improvements there were spine and knee, so a lot of that will be on the back of innovation. Spine, you've actually seen significant progress. It went from almost double-digit declines at the end of 2017 to approaching flat by the end of 2018. We've got a 1% decline. That market is probably about flat 1%. But that said, there's still significant unmet need in the spine market, so opportunity to innovate. Our knee portfolio also had been experiencing some challenges. Again, innovation, we have cementless launching in 2019, which is one of the fastest-growth segments. We got to actually positive growth by the end of last year. Holistically, that business, from '17 to '18, improved by a full point.

So I think just with our current portfolio that we have and the progress we're making with a focus on innovation, we launched 21 significant launches in 2018. 2019, we're looking to increase that or at least be minimum of that range, but we're talking about 20 to 25 launches. We have innovation in each of those. Pillars that I've talked about, I talked about cementless, for example, that will help propel knees. And then even beyond that, we've already identified about 40 to 50, again, substantial. There's oftentimes smaller innovations that go to the marketplace for 2020. So innovation is really the back of -- the core of our plan in terms of getting to those above-market levels in 2020. Robotics, we remain very excited about. I would say that's more of a midterm play. It's not as significant as it relates to that 2020 objective. However, the importance of robotics, and more importantly, the way we like to define it is digital surgery and kind of a full connected ecosystem. So the way we're looking about is you listed the three platforms.

We're very excited about the Verb-Verily-Ethicon partnership that we have. In General Surgery, we have Orthotaxy in robotics for knees. It's a great system. It's a very small footprint, so were looking for capabilities that can actually enhance outcomes. Some of the things that -- the current offerings in the marketplace, we want to bring something differentiated, so faster throughput time, improving outcomes, things like that. Auris is another -- kind of think of it as a swim lane or platform that gets us into endoluminal with lung diagnosis initially. There's obviously opportunity to take that beyond diagnosis into direct treatment. We have an ablation business. Think of ablating lesions or even eventually we have a world without disease with lung to assess potentially delivering a pharmaceutic therapeutic benefit. But more importantly, we're also building kind of a broader digital ecosystem that sits on top of all 3 of those things. We really want to connect the patient and the physician digitally. So we have a Health Partners platform that connects with the patient on preop, post-op, following them through the process to help improve the outcomes. We have a C-SATS system that we acquired. It's about professional education and training and education that can provide continuous learning that we can benefit from as we go through these. And I think of on Alios platform that sits on top of this that again where all the data is interconnected, and it can improve outcomes for the patient and actually help the physician. So it's very excited for the, call that, more that midterm time period.

Kristen Stewart

And innovation internally is enough to get you to above-market? Or do you feel like M&A is going to have to play a role there?

Chris DelOrefice

Yes. Well, yes. Thanks for the follow-up. Yes. I mean, we will remain -- we've been very active in M&A. I would say we're more focused on these tuck-in type of deals. In 2017, we invested about $5 billion in M&A. $4 billion of that was the AML acquisition, but there was about another $1 billion of tuck-ins. That tends to be J&J's strategy. You have kind of an early read on innovation complement your portfolio. 2018, we also did deals that were more in the $600 million range, and we will continue that rhythm of tuck-ins. But that said, we look at everything. We will look at larger deals. The benefit of J&J is we have the financial strength to look at everything. It's just the larger the deals get, everyone here sitting in this room, you guys do a good job of valuing assets. They're well-run companies, and you put a premium on top of something of size. It's hard to create incremental value. But we look at those as well, and we've not shied away from doing them when the opportunities present themselves, but I would say look for more tuck-in type deals.

Geoffrey Meacham

With that, we're out of time. So, Chris, thank you very much, Tom, Catherine. Breakout session is in Poinciana 3. Thanks.