Johnson & Johnson's (JNJ) Management Presents at Raymond James 43rd Institutional Investors Conference (Transcript)

Johnson & Johnson (NYSE:JNJ) Raymond James 43rd Institutional Investors Conference March 8, 2022 1:05 PM ET

Company Participants

Joe Wolk – Chief Financial Officer

Jess Moore – Vice President, Investor Relations

Conference Call Participants

Jayson Bedford – Raymond James

Jayson Bedford

All right. Let’s get started here. My name is Jayson Bedford. I’m the Medical Device Analyst here. Again, welcome to the second day of the 43rd Annual Raymond James Institutional Investors Conference and Happy International Women’s Day. So with us, we have the senior management team of Johnson & Johnson. The largest healthcare company in the world. We have the company’s CFO, Joe Wolk. We have the company’s VP Investor Relations, Jess Moore. And we also have Lisa Romano upfront here.

So with that, I’m going to give Joe a couple minutes just to talk about why he’s excited about J&J’s positioning and what excites him going forward. And then we’ll jump into to Q&A.

Joe Wolk

Great. Thanks, Jayson. Certainly it’s a pleasure to be here with all of you here in the room in person. I want to complement and congratulate Raymond James. This is the first healthcare conference that I’ve been in person that probably two years and I imagine many in the room can say the same thing. Listen Jayson, I think there’s a lot of reasons to be excited about Johnson & Johnson’s business moving forward into 2022, but also well beyond if I think about our pharmaceutical unit, which quite frankly we think is best-in-class.

We’ve got a great inline portfolio today that’s going to deliver growth above market. We believe for the 11th consecutive year. And then we’ve got a pipeline right behind it that will really serve the second half of this decade extremely well overcoming any loss of exclusivity concerns that folks may have.

The team just does a great job with the scientific expertise in a really focused way across six therapeutic areas a handful of disease states where they are not just the best in our company, but really the best in the world at assessing those opportunities. Our med tech business has obviously been impacted by COVID over the last two years. We see a light at the end of the tunnel. I say that in somewhat guarded fashion because we’ve been here before but we’ve been able to improve our competitiveness over that period of time.

We continue to invest in R&D last year, we were able to deliver more than 20 new products to our medical device portfolio. That’s a significant improvement from where we were in 2017 and 2018. And that same outlook of more than 20 is really on the horizon for 2022. And then obviously a lot of news around the consumer health business, the pending separation there. We feel that we’re on very good strategic grounds as to what the success criteria is going forward for to succeed in consumer health versus maybe medical devices and pharmaceuticals, but also that business has really improved their performance over the last several years.

Back in 2018, we were really at the bottom of the peer set with respect to operating margins, sales were sporadic in terms of the quarterly growth. Now it’s much more consistent and we’re above the median with respect to operating margin performance. So we feel that business is it’s the right moment in time, given the strategic reasons, but also the financial reasons as to why, they can be very, very successful in their own right on their own.

Jayson Bedford

Great introduction, Joe. So maybe just to start and feel a little obligated to ask the question, your exposure to Russia and the Ukraine.

Joe Wolk

Yes. So let’s first acknowledge what’s going on in that part of the world and hopefully folks can find their way to a safer resolution. Our exposure is somewhat limited about 1% of our sales. And I would say that’s predominantly in Russia – between Russia and the Ukraine. If we look at Russia about 50% of that business is pharmaceuticals. And the other part of that business is split between medical devices and consumer, but even in consumer health, a majority of that product portfolio is within the essential health space of over the counter medicines.

So when you think about our business and exposure there, there will certainly be some impact you can’t help, but think there wouldn’t be, but in terms of sanctions or anything with respect to that, we think it’s very important just as we’ve seen with other sanctioned practices that there’s an exception carved out for healthcare. Literally if our products don’t get to the patients in need, people will die or have severe consequences.

And we hope that that kind of prevails in this case as well. So after ensuring that our employees in both of those countries are accounted for and safe, which we’ve done as recently as of last night we want to make sure that there’s a good product flow and supply. There’s challenges to that. I mean we know that air and sea are very limited means of transportation right now. So we’re kind of pigeonholed into roadway, but even there at the borders, there’s a backup at customs checkpoint.

So we want to make sure that we’re doing all we can to make sure that we get to those patients in needs. It also extends to a country like Poland, where now there’s better than a million refugees. We make sure that our product supply is available there as it’s likely there will be constraints and burdens on that healthcare system. So ensuring that our products, whether they be medical devices therapeutics or in some cases consumer that they’re available for patients as well.

Jayson Bedford

Are there any big supply chain risks that you’re looking at or thinking about because of the conflict?

Joe Wolk

Yes. It changes by the day. You can imagine that we went into this year across our entire portfolio without this conflict in mind knowing that we were facing commodity, price increases, commodity shortages. So we had a – I’d say a very healthy level of inflation or cost increases built into our plan. That’s probably gotten a little steeper over the last couple days. If you think about some of the factors such as oil production, titanium has spiked in the last couple days, some of those products go directly into the products that we have. And so I think it’s manageable at this point, but I say that again guardedly given that we don’t know where the conflict will resolve itself or when it will resolve itself.

Jayson Bedford

Yes. Understood. The situation is obviously extremely fluid. So let’s move on talk a little bit about the macro and you alluded it to it earlier, but dare I say, we’re coming out of COVID. Historically COVID has had an inverse relationship to procedure volumes here in terms of spike in COVID. What are you seeing on the out there in field today? Are you seeing now that COVID is dying down? Are you seeing a bit of a lift in procedures?

Joe Wolk

Yes. We’ve seen I think a steady progress in procedures maybe fits and starts throughout 2021. But the early data in the first couple months of this year suggest that we are seeing a more sustained and predictable recovery. We look to really some predictive indicators such as diagnostic procedures. So colonoscopies things of that nature to suggest, well, what’s going to be the horizon for surgical procedures. And we are seeing as we did at the end of 2021 higher performance rates relative to 2019 a more normal year. So we thought that was a pretty good indicator.

The one thing we continue to watch and it’s been in place really since the middle of last year are shortages one in the form of staffing shortages and also in terms of blood supply. So those are obviously critical elements to having successful procedures. But there is a steady climb back and hospital administrators are doing a great job managing both of those shortage scenarios.

Jayson Bedford

And just on the staffing shortages within hospitals, is that curbing your top line growth and procedures or is it just kind of slowing it down?

Joe Wolk

I’d say it’s slowing it down. I – again, I don’t think you’re going to see a the backlog that’s being built. I don’t think you’ll see a standout quarter or something that’s just completely off the charts. That would be my guess at this point. I think it’s going to be more of a sustained, continued improvement as the year goes on. I also think COVID across all types of workforces have made people take a step back and how are they going to work differently going forward.

We know that nurses and frontline workers were under tremendous stress, not only during COVID, but probably beforehand. And so I think there’s probably going to be a moderation if you will as to the level of volume that maybe hospital procedures will be done in a week’s time. I think those procedures don’t go away by and large, it’s just going to happen over a longer duration.

Jayson Bedford

Okay. Joe, you mentioned backlog. You’ve talked about backlog in the past. Do you believe there is a sizeable backlog out there from a patients who have deferred procedures and is that contemplated in the 2022 guide?

Joe Wolk

Yes. So I would say it depends on the market that you are referencing Jayson. So if you think about electrophysiology where the market leader, you had that first quarter of COVID that impacted that business after that they were back up into double-digit mid-teen levels of growth as the market leader. I would say trauma probably other than people doing less activities for the first couple months really went back to somewhat more of a normal level.

Knees were probably the most impacted, I would say there were points in time where vision corrective diagnosis was probably a little bit under pressure. But I think those have mostly come back to more normal places at this point. So, I would expect if you any type of major backlog is out there, it’s probably in the knee area. And we feel pretty good about the VELYS robot that we wanted last year is to being able to take some market share when that recovery comes. It is that recovery, even though it’s somewhat of an unknown and not as quantifiable as other parts of our forecast is contemplated to some degree in our 2022 guide.

Jayson Bedford

I guess just from a supply perspective, you’ve talked about it a little bit, but supply chain situation is dynamic. It’s an industry-wide issue. Where are you seeing the biggest factors from a cost perspective? Where are the big weights?

Joe Wolk

Yes. So absent, let’s say, the last week and half aside, I would say that was largely in our Consumer Health business, which, to some degree, benefits us in that like our competitors in that space, we’re able to pass those costs on to the consumer without hurting elasticity too much. So there are certain commodity shortages that impacted not only the cost, but just really the availability of product. So, we have really good point-of-sale demand metrics for the products we have on the shelf. Unfortunately, we don’t have enough to replenish that shelf once it goes bare. And so we’re looking at probably the second half of this year. There’s already been some positive developments on that front with respect to suppliers coming much more online in the second half of last year as well as the early part of this year. So, we think that’s a first half phenomenon for our Consumer Health business, more than a full year sensation.

Jayson Bedford

Okay. And in terms of the impact of COVID on the business generally, you’ve showed some nice margin improvement last year. The expectation is you show some margin improvement in 2022. Has COVID made the business more efficient? And can you point to examples where hey, we’ve been able to capture some margin because of COVID?

Joe Wolk

Yes. I think there’s a couple of things that have really accelerated because of COVID. One is probably more related to top line, and that’s just the awareness of how important good health is for everybody, whether we’re in a pandemic or not. And hopefully, that will be sustained going forward. In terms of the investment level front, technology has proliferated in a way that I think has benefited the efficiency of your P&L. So if you think about how we train medical professionals on some of our surgical instruments. We’re able to do that to a large degree – we were able to do it during the pandemic. I think that’s a sustainable business model going forward.

Listen, we’re all here today, and we’re taking – we’re putting value in having personal interaction. I don’t think that goes away. But do we need to do it as often as we did. I think there is an element that will live on within the P&L. We hope to redeploy that back into research and development. And that’s another area that really has accelerated during COVID and that’s the use and dependency on data science as an analytical tool. So screening candidates in our pharmaceutical pipeline for success and then developing clinical trials in a way that is going to result in a better outcome or a better predictive outcome with respect to what that therapeutic could solve and who might benefit from it, I think, has the potential to make clinical trial cost less onerous going forward.

Jayson Bedford

So let’s talk about the segments a little bit. Your med device franchise post-spin, I think it will be about a third of sales. Joaquin has talked about med devices being a key priority for his legacy as the CEO of J&J. What does that mean? Meaning what is the key priority really mean?

Joe Wolk

Yes. So I think a key priority, I think, as you’ve seen with our medical device business, we’ve been on a couple of year journey here where – to credit Ashley McAvoy and her team we’ve improved performance pretty steadily, take out the year of 2020 because of COVID aside, we’ve been improving about one point of growth since 2017 on. So 1.5 to last year, about 4.6% growth when you compare that to 2019, again, a more normal year. That is still not where the market is today. So, I think when we think about success at Johnson & Johnson, it’s certainly in the number of patients that we serve. But also we want to be number one or number two in the markets in which we play. 4.6% growth won’t cut it right now as it stands.

So when Joaquin talks about his legacy, it’s really bringing up that med device performance to the level of what we’ve seen in pharmaceuticals. There’s a number of ways we can do that, and some of it has been, I think, demonstrated under Ashley’s leadership over the last couple of years with improved execution, whether that be on the commercial side or just what we’ve been able to generate out of our pipeline. But I also think when Joaquin says it, he’s thinking about some acquisitions that could be meaningful playing in spaces that are – I’ll use the word at Jason, although it’s probably not a perfect word adjacent to where we play today that are in higher growth spaces. So, we can continue to improve the execution as we have over the last couple of years. But some of our markets are just lower growth. They’re more in that 4% to 6% range when we really benefit our portfolio from being in something that’s 8% to 10% growth as a market.

Jayson Bedford

Okay. So there’s a lot there that you just threw out. So it sounds like his legacy will be a combination of taking the current portfolio and bringing it up to market plus growth rates – market plus is five plus.

Joe Wolk

I think continuing on the current trend that Alex and Ashley had started, getting that to a point with the portfolio we have today is that first piece of the puzzle. The second piece is how do you complement the business, much like we have in pharmaceuticals with meaningful collaborations, licenses or acquisitions that catalyze us to go above market. Right now, the market is 4% to 6% growth in med devices overall. Med devices is kind of unique and that some companies are very singularly focused and have much higher growth. It’s hard to find a comparator to the portfolio that Johnson & Johnson. It’s not that they’re not out there, but it’s just much less comparable than, say, four or five other companies that are out there and more singular focus with higher growth.

Jayson Bedford

Okay. And I wrote down meaningful acquisitions in adjacent spaces. So, what does that exactly mean? To me, I kind of feel like that’s a bigger deal. Your predecessor and the CFO spot would always say, smaller deals are a little bit easier because J&J can add more value to the business. I assume that’s still correct, but at the same time, meaningful acquisition kind of suggests bigger deals?

Joe Wolk

Yes. So my predecessor was absolutely right. We certainly want to add value to deals. I wouldn’t want to give anybody any different impression. But what I think we’ve made about $10 billion in acquisitions in med tech over the last five years. Probably many of you would be hard-pressed to name any of those, right? And so what I would say is more meaningful relative to that context. It doesn’t mean the biggest deals. We look at them, right? But to be real candid with all of you, we do a great job in valuing those companies. They’re usually led by pretty more than competent management. And so when you add a premium that’s commanded today in the marketplace, it’s really hard to make the financials work. Not to mention something that’s often overlooked, and that’s the integration complexities that go along with some of those larger sized acquisitions. So when I say meaningful, I think if you – I don’t want to put a dollar figure around it, but you can think in the billions of dollars, and that could be meaningful within the med tech landscape today.

Jayson Bedford

And the goal over time, you said to match or get close to pharma growth levels. And I guess I’d have to go back, but pharma seems like under J&J, it’s been more high single digits.

Joe Wolk

Yes, I might have misspoken there. So, I would say we want to be at the top of the peer set relative to med tech.

Jayson Bedford

There’s a lot to be played here. Okay. And – but there is a desire and interest you play right now in devices in fairly well-defined markets, right? Surgery, EP, vision, ortho, but it sounds like there is an appetite to go to adjacent markets outside of those core key end markets?

Joe Wolk

Yes. Again, if I look at the medical device approach, it really should emulate the success that we’ve had in pharmaceuticals. And the success we’ve had really comes back to the talent and people we have. They’re the best oncologists, immunologists, neurologists in the world, making calls very early in the development process to say we can add value there, whether it’s through our clinical development process or just the ability to see multiple indications and applications for a particular therapeutic. We have to have that same type of insight. So I would say that even about the consumer health business, no matter where we go, we want to make sure we’ve got a unique insight that’s going to create more value than where it’s being held today. And if we can’t do that, while it may be a great strategic fit, it’s likely we couldn’t meet the financial metrics that you guys require of us.

Jayson Bedford

That’s very clear and very helpful. So pharma. It’s been obviously an incredible growth engine for the company. It will account for two-thirds of the new post-spin asset base here. Let’s start with the most recent approval in CARVYKTI. Can you just talk about the steps to rolling this product out? What it means for the pharma franchise?

Joe Wolk

Yes. So what – it’s important to the pharma franchise because it continues to evolve our portfolio within multiple myeloma, a very hard-to-cure disease, which really needs multiple alternatives. I think we’ve certainly learned from past experiences with folks who have launched CAR-Ts that we want to have a phased approach and making sure that we’re serving each and every patient, which enrollment has already begun shortly after the approval here that we’re serving them as best we can. I do think there is the need for multiple approaches in multiple myeloma. Mathai, I know, was at the Cowen, I probably shouldn’t name the competitor, I’m sorry,

Jayson Bedford

That’s right. They’re nice guys over there.

Joe Wolk

Nice guys. But he mentioned a little anecdote yesterday where somebody was on CARVYKTI for a few years in full remission and then was not. And then we put them in our teclistamab trial, and again, they achieved full remission. So it’s going to – patients are very different. This is almost to the degree of personalized medicine. And so we think multiple approaches in multiple myeloma will be needed, and that’s why it’s key to Johnson & Johnson keeping that, I would say, leadership in multiple myeloma with CARVYKTI.

We’re very excited about the launch. We do know that just based on data, based on what Mathai would tell you, it has the potential to be best-in-class. 91%, I believe, overall response rate, overall survival rate in the low 70 percentile. So again, very, very promising. And again, that goes back to just the scientific expertise. That was not the first CAR-T out there but the scientists were able to look at it and say, even though it’s third to market, this has a chance to be best in market. I don’t know if there’s anything you want to add from a comment yesterday?

Jess Moore

I think Mathai who is an incredible scientists so that this is some of the best data that he’s ever seen in his career. It gets us really excited about the impact of some of our patients.

Jayson Bedford

At least just didn’t mention Cowen.

Joe Wolk

Now you have.

Jayson Bedford

So you’ve talked about CARVYKTI being a $5 billion drug at some point. What are the factors that get you to $5 billion? What are the steps?

Joe Wolk

Yes. I think it’s, again, making sure that we do have a reliable manufacturing supply chain process. We are going to go in a phased approach. Again, we want to make sure that we serve the patients that we have today in the best possible manner. But as we get more proficient with cell-based therapies, I think that’s really the only gating factor in terms of that seeing its full potential.

Jayson Bedford

And you had your Pharma Day a few months ago, you talked about a 5% CAGR through 2025. If that were not to happen, if you fell short of that 5%, what would be the reason?

Joe Wolk

That’s a really good question, Jayson. I would say because I consider that 5% to 2025, very derisked. That will get us to a $60 billion company, but that growth is really coming from products that are in the market today. So think about DARZALEX, ERLEADA, the long-acting injectables like INVEGA, the pulmonary hypertension drugs, TREMFYA. We’re not looking for – we’re looking for new indications, but not novel compounds.

Some of the things that we’re excited about in our pipeline will really serve the second half of this decade in a much more profound way. So the number that we threw out there, we think is very achievable. It does power through the loss of exclusivity on STELARA, which we knew was a concern for us. But quite frankly, it’s not like we woke up one morning and say, STELARA going to face exclusivity challenges in 2023. We planned for that back in 2016, 2017, knowing what the horizon is, and that’s how we look at our portfolio.

Jayson Bedford

Okay. And the inverse of that question, if you were to grow much north of 5%, is the reason, hey, some of these newer compounds do better than expected?

Joe Wolk

I would say that could be a part of it, but also some of the market share or market uptake of some of the current in-line products also accelerate. The lion’s share of the products through 2025 is really what we have in our portfolio today. And as you know, TREMFYA is really good example. We’re currently enrolling Phase III UC and Crohn’s data which we think looks really promising as well. So nipocalimab, maybe one to surprise on the upside, an asset we acquired with the Momenta acquisition two years ago. So there’s a lot of things to be excited about. I just think that, that 2025 number and 5% CAGR, getting us to $60 billion is highly derisked at this point.

Jayson Bedford

Okay. Good to hear. From a deal perspective, does the relative softness in biotech valuations make M&A more enticing in biotech here in pharma?

Joe Wolk

It does. You still need a really good idea and a good insight to make it work, right? And so I personally don’t get overly enamored or fall out of favor with valuations. Even on the med tech side, I think some folks might argue, while valuations are still relatively high. But people are saying that about some companies five and six years ago when they were half the market cap they are today. So I think really, you have to get a buyer, a seller, an insider an expertise to make that one deal work, and that’s how we approach them. They’re singular and independent. We will certainly want to be opportunistic when valuations fall in our favor, and we’re mindful of that. It’s just the premise that we’re going to go do a deal now because valuations in general look low isn’t really the full complement of the discussion.

Jayson Bedford

And are you fairly agnostic pharma med devices in terms of deals? Or do you lean more devices just given that’s the area where it probably needs a little bit more help from a growth perspective?

Joe Wolk

I would say we are agnostic. I mean, our approach to innovation and science it is probably best described as agnostic. In pharmaceuticals, we’ve been successful because we’ve shelved things that were in-house because we saw better science on the outside. We’ve got a very broad, I’ll call it, ecosystem where we’ve got what we call JLabs, where we bring in entrepreneurs with their ideas and provide them with lab space where they would otherwise not be able to afford. We’ve got a Johnson & Johnson Development Corp. armed that has close to $1 billion in investable assets.

So we’re looking at this through many different angles in addition to innovation centers. I think just based on the comments that Joaquin made on January earnings call, there might be a little bit of a preference there, but we’re going to be beholden to the best opportunity. And I probably am doing that in this service, the best opportunity is plural, right? Because we do have, as we approach a net cash position, the opportunity to deploy capital in a very meaningful way around acquisitions.

Jayson Bedford

Does some clarity on the talk case accelerate the – either the operational strategy or the deal flow?

Joe Wolk

It hasn’t been a hindrance to how we’ve assessed deals over the last four years. So if we have the opportunity to get some clarity and remove some of the uncertainty around that, it would certainly help, but it hasn’t been a deterrent thus far.

Jayson Bedford

Okay I’m getting the hook back there. Okay. So I think we’ll end it there. Jess, Joe, certainly appreciate the time. Thank you.

Joe Wolk

Thank you, Jayson.

Question-and-Answer Session

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