Johnson & Johnson (NYSE:JNJ) Morgan Stanley 20th Annual Global Healthcare Conference September 14, 2022 11:10 AM ET
CorporateParticipants
Joaquin Duato – Chief Executive Officer
Joe Wolk – Chief Financial Officer
ConferenceCall Participants
Terence Flynn – Morgan Stanley
Terence Flynn
Great. Well, thanks for joining us, everybody. I’m Terence Flynn, the U.S. pharma analyst at Morgan Stanley. We’re very pleased to have Johnson & Johnson with us today. Just quickly before we get started for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.comresearchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.
Today from the company we have Joaquin Duato, the company’s CEO and Joe Wolk, Executive Vice President and CFO. Thank you both so much for being here. Great to see you in person.
Joaquin Duato
Nice to see you, Terence.
Terence Flynn
Thank you, nice to have you. Maybe I’d start just walking for you, given your new position at the company, congratulations on the role, just maybe help us think about where you’ve been spending the majority of your time since becoming CEO.
Joaquin Duato
Thank you, and I’m great to be here with you. Since becoming CEO, I have tried to reconnect in my new role with our employees globally. Also with important stakeholders like thought leaders, hospital CEOs, and government officials in many countries. And that’s where I have spent most of my initial six months, is not that I didn’t know them already, because I worked three years in the company. But I wanted to introduce myself as the new CEO. So I’ve been in Asia, in Europe, in the Americas, visiting all our important affiliates, except for China in which I could not travel, and also connecting with people. Overall, my impression when I talk to employees, investors when I talk to government officials is that they have a strong expectation of what Johnson & Johnson can do, and what can be our contribution to advance healthcare. And they have a high bar for us.
But in general, I would say people are rooting for Johnson & Johnson to be able to do a good job, and they have a positive impression of the company, there is no place where I go, where I don’t find people wanting to work with us to collaborate with us, to partner with us. So a very positive impression during these first six months in which had been reconnecting with people globally all around the world.
In the meantime, I have also solidified, what are my key priorities during this period, which I already outlined previously. And I’m going to repeat them here just to have them as a framework of my thinking of what our key deliverables in this period. One deliverable is the separation of the consumer company and the creation of our global consumer champion. This is a historical moment for Johnson & Johnson, and a historical opportunity to make the new Johnson & Johnson focus on pharma, med tech more competitive, nimbler faster and that’s what I want to take as an opportunity also on the new Johnson & Johnson site. So we are working through that. And I’ll address your questions on how the separation is doing and how are we doing with the creation of a more competitive new Johnson & Johnson.
The second priority is to be able to continue in our journey of improvement in MedTech. We want to make sure that MedTech is our best-in-class franchise for Johnson & Johnson. We are already the second largest MedTech company globally. And we are in a journey of improvement in our performance. We went from growing 1.5% in 2017, to grow 6% in the first half of 2022. And when we have now all the results in the second quarter, our MedTech group has already grown ahead of the composite in MedTech. So that’s our second priority. And I want to continue focusing on the journey of making our MedTech franchise, our best-in-class franchise.
And the third one, obviously, is to continue to fuel our success in pharmaceuticals. We have had a trajectory of more than 10 years of our market growth. I know people are looking at us to see how we are going to be able to do in face of the STELARA LOE, we have put an ambitious goal of getting to $60 billion by 2025, growing every single year, even through their STELARA LOE and I’m focused also, in been to deliver in that important goal.
So it’s been a good experience for us based on the track record of having work in Johnson & Johnson more than 30 years. But it was important for me to reconnect in my new role with a broad set of stakeholders, including investors, and also be able to transmit what are my most important goals moving forward, summarizing these three topics that I just spoke.
Terence Flynn
Great. Well, congratulations again. And best of luck in the new role again.
Joaquin Duato
Thank you.
Terence Flynn
Again, given your commentary, it sounds like you’ve been around the globe and again as I mentioned, it’s great to be back in person here in New York and everyday feels more normal than the prior one. But I know it differs across the globe. And so maybe a two-part question on the state-of-the-business just first, maybe what are you seeing across the segments? What’s in the feedback you’re hearing out there across, your key geographies and end markets, pharma, MedTech. And then this morning, the company announced a $5 billion share repurchase authorization, and reiterated your 22 operational sales and EPS guidance, Joe. So maybe just remind us about your capital allocation framework and how that fits in. So kind of two-part question there.
Joe Wolk
Want to take the second part first.
Joaquin Duato
Yes. All right. And I will take the other one.
Joe Wolk
So yes, we were very pleased Terence to announce a $5 billion share repurchase program. We think it really underscores the strength of Johnson & Johnson’s financial performance, but probably more importantly, the board and management’s conviction about our internal estimates going forward. We think the shares are undervalued, although we’ve held up relatively well, despite a volatile market in 2022.
One of the questions that Joaquin asked me when we discussed this action was, does it detract from possibly doing some other things like acquisitions that Joaquin just referenced to solidify both the MedTech and foreign portfolio. And this absolutely does not, we have $33 billion of cash and cash equivalents. Again, the shares being undervalued, we find this as an opportune time. But we also know that because of the cash flow that we generate, on an annual basis, the strength of the business currently and going forward, that when in a position to continue to grow our dividend, continue to invest in R&D on an increasing basis, being one of the pure leaders in that category, as well as do some impactful acquisitions.
Joaquin Duato
And related to the question about the state-of-the-business overall, and what I see by geography and by sector. I also want to say that this decision on the share repurchase is also an opportunity for us to reconfirm that, given what we know today, we stand behind our guidance, which I think it’s a good message, to be clear, that we stand behind our guidance.
What I see, overall, I see things getting better in the second half of the year. And this is a generalization, it may vary by sector and by geography, and there are different positives and hotspots. But overall, I see, generally, our business doing better in the second half of the year, in the first year. Why? I mean, on one hand, generally speaking, we’re seeing a recovery, two levels of pre-pandemic, mostly everywhere, with some exceptions, like China, but mostly everywhere, where our business is broadly diversified. So overall, as a business, we’re going to be able to do better. We are seeing also, our level of competitiveness increased in every single sector, MedTech, consumer, pharma, we’re seeing that we are maintaining our gaining share. So that’s helping us.
We are delivering in our pipeline, both in MedTech and in pharmaceuticals, we are increasing the value of our pipeline, and getting approvals of new products like cell therapy with CARVYKTI recently. And then finally, some of the supply chain issues that companies have seen in the first couple of the year, while they are not disappearing, they are getting better. So overall, I want to be positive about the fact that despite of all the challenges and volatility that we’re seeing, and we’re always going to see different areas of pressure bisect or by geography, the total picture is that things are getting gradually better in the second half of the year.
Joe Wolk
Terence may be just because we don’t provide quarterly guidance, it’s a good time to, again, we reaffirm this morning, as Joaquin just did, our full year annual guidance that Betterment probably happens more in Q4. I think sales from an operational perspective will be just fine, as Joaquin previously outlined, but we are seeing what we will call generally supply issues. And that’s not necessarily availability of product. That we saw on the fourth quarter and first two quarters of this year. I think that has largely abated with some very limited instances. It’s really about the cost in the P&L now. So we expect that that would probably go up or be better in the fourth quarter than what we’re seeing currently in the third quarter.
The other thing that’s probably notable, again, because we don’t provide quarterly guidance is just in our reported results, the stronger U.S. dollar has had an impact on those reported results. The euro to U.S. dollar was weaker in Q3 of last year than it was in Q4. So that’s some of the adjustments that investors may consider as they are looking on a quarterly basis.
Terence Flynn
Yes. Okay, understood. Very, very helpful context. I guess just in terms of, China specifically, again, I know, it’s hard to it predict but how are you thinking about that in the second half coming out of next year. I know it’s important geography for you guys, especially on the MedTech franchise where I think you’re the largest MedTech company there.
Joaquin Duato
So I mean, overall, if I take a step back, because there’s a lot of comments from China, we think that China is an important growth that I bid for Johnson & Johnson. And it’s an important piece of our future, let me make that clear. So I mean, we are 140-year-old company. We look for the long-term. We don’t think in intervals of a year when we think about capital allocation, we think in intervals that are longer than that. And China remains a very important component of our growth moving forward, simply a very important geographical area for Johnson & Johnson.
So and it is in every sector in consumer, in pharmaceuticals, in MedTech. Our overall China, participation in Johnson & Johnson is about 5%. So it’s a relatively important part of our business. So when I look at the situation in China, we are doing let’s say generally the recovery, it’s going through in our consumer and our pharmaceutical business, I don’t see any particular issues there, which are different from what you would see, in other countries. We see a more sporty recovery in our MedTech side. Things are getting better but we still see that some of the mobility restrictions that exist in certain provinces, it may vary by province.
Overall, we still are long-term thinkers about China and about the important potential that they will have. In the short-term, you may see somebody’s ability due to the mobility restrictions that we have in China.
Now, if I focus on our MedTech business, and I think about the growth that we are obtaining our MedTech business, when you think about the 6%, in the first half of the year, we think that things generally for MedTech are not going to get worse. So we see things even improving for MedTech two on the revenue side, as Joe was saying. So despite of the China situation, we see our MedTech revenue continue to improve from the base of the 6% that you saw in the first half of the year.
Terence Flynn
Okay, great. And maybe a follow up for Joe on just the capital allocation question. So it sounds like the share repos not going to impact your overall flex boundary, flexibility thought process. Again, something we’ve talked about in the past is just pharmaceuticals has had tremendous success. And so that business has gotten much larger than let’s say, relative to the MedTech business. So it’s a 65:35 split now. I know you guys don’t always solve — you’re not trying to solve for that mix. But how does that influence your strategy? And again, Joaquin, given your statement that MedTech is going to be a priority for you for your tenure as CEO, how are you thinking about capital deployment across those two sides of the business, given the strength of the balance sheet?
Joe Wolk
Yes, well, I think when you think about MedTech, it’s important to note that we’ve significantly improved that business over the last four years. The execution, both on the commercial side, as well as the R&D productivity is much better than what it was in 2017. On the commercial side, back then we were lucky, out of the 11 major platforms that we have today, we were lucky to be maintaining let alone gaining share in half of them.
Today 10 out of 11 are either maintained or improving share position. So great job on the execution side. And then, with respect to the pipeline portfolio of MedTech back in that 2017, 2018 timeframe, we had six assets that were expected to deliver about $100 million in net present value each. Today, that’s there’s more than 25 in that pipeline. But we do think it’s important to play in some higher growth segments. And so we’re agnostic. The nice thing about the financial strength of Johnson & Johnson is, we have the ability to pursue meaningful acquisitions in both pharma and MedTech. So we don’t really have a bias per se, we’re looking for the right opportunity where we have a skill, a capability and expertise that will enhance the value of that asset currently, and shareholders for the risk that we’re bearing on their behalf.
Terence Flynn
Okay. That makes sense. I guess that’s, maybe one last high level one, before we go into some of the segments, is just the consumer business, the spin there, Joaquin, you mentioned that any update you can provide in terms of either, structure timing at this point or still not a lot more you can say?
Joaquin Duato
The most important one is that we are on track for all the goals that we outlined earlier in 2021. Right, I mean, we told you that we were aiming for a capital market exit in the fall, or at the end of the 2023. And we are fully on track for that goal. We are aiming to be able to start coming company within a company and have an operational separation in 2023. And in the meantime, in this year, we have already appointed the CEO, the CFO and the leadership team and Chairperson. Larry Merlo, who was the former CEO and Chair of CVS.
And we have some announcements to make, as we committed in a number of areas, for example, what is going to be the name of the company, the visual identity, the headquarters, we provide information as we continue to move. So we are fully on track for our launch of our new consumer health company that we think it’s going to be a global consumer champion. We have a number of iconic brands, both in self-care, and also in skincare. And we have an incredible connection with our brands, and our consumers globally. So when I go and travel, as I was discussing before, and I meet with people, the connection that people have with our brands, like our baby products, or Tylenol, or band-aids or [indiscernible], it’s incredible. So they have been able to have these deep connections. And I’m convinced that by having a separate global consumer company, we’re going to create that champion for the long-term that is going to be globally scale with an organization that is going to be fit for purpose, and also with its own capital location priorities.
Now, at the same time, I want to reinforce that we are paying as much time to try to make sure that we use this opportunity to create Johnson & Johnson that is more competitive, that is leaner. from a cost perspective, that is one that is more aligned from a pharma MedTech, and that we continue to deliver optimal results both in pharma and MedTech and create synergies between the two sectors. Synergies that can be on making sure that we run our company more efficiently. Synergies that can mean making sure that we have more scaling certain capabilities that we can discuss later, like technology. And synergies that can translate into creating new products that combine biopharmaceutical and surgical interventions, as we are doing in interventional oncology.
So we are very keen both in launching our new consumer health company, and at the same time in taking this opportunity to accelerate the growth of the new Johnson & Johnson.
Terence Flynn
So based on those comments, Joaquin, it sounds like, again, we should expect a leaner margin expansion profile for the new Johnson & Johnson coming out of the spin, is that our expectation on the margin –
Joe Wolk
I think it’s a little early to say margin expansion at this point only because as we’ve benchmarked similar transactions, there’s an expectation for deleverage over let’s call it three to four years. We anticipate something much quicker to absorb that, that deleveraging. But the other thing that we have to see play out is just the inflationary impact in today’s market on future P&L. So more to come on that we hope to have some idea as the vehicle separation towards the end of this year, early next year, some of that’s depending on the macro environment, the broader markets and opportunities, but we’ve got a number of great options by which to do this.
Terence Flynn
Okay. Maybe shifting to pharma, obviously, tremendous success in that franchise. Again, largely, in large part due to your prior tenure in that segment, Joaquin and some of the business development as well and internal pipeline, but you’ve put out a goal of 60 billion, as you mentioned, 2025 revenue. So maybe I think consensus is slightly below there, maybe around 57, 58. So maybe just what gives you the confidence in achieving that 60 billion, obviously, STELARA is kind of the big headwind that you guys are navigating through in that period, but maybe just help us think about the drivers to get to that 60 billion.
Joaquin Duato
Thank you. So yes, you’re right. I mean, we have put a goal of reaching to 60 billion in 2025. We did it in November 2021. And we did it, because we thought that having had a track record of 10 years delivering our market growth, that we were going to have credibility by putting a stake off the ground of what is going to be our 2025 sales. We normally don’t do that. We did it just to be sure that the investor realized what was our expectation, and to send a clear message that we plan to grow through the STELARA patent expiration which is going to occur at the end of 2023 in the U.S. and at the end of 2024 in EMEA.
So I mean, for background to give more credibility to our goal. We put our goal in 2019 of getting to 50 billion by 2023, right?
Terence Flynn
Correct.
Joaquin Duato
And we reached that in 2021 and when we did that in ’19 people were looking at us are you sure, okay, we did it two years earlier. So there’s a disconnect between our 60 billion and what this [indiscernible], which I consider normal, let’s say, I’m not, I think it’s normal because we have more visibility to the trajectory of our existing assets, and also our pipeline.
I think, if I look at the silver lining of that, it’s an opportunity for us to be able to surprise and to be able to do better on the upside, because of the disconnect between the 60 and the 56, 57 [indiscernible]. So I see that as an opportunity for investors, because what is now baked in our stock is that 56, 57, not the 60. So where are the sources of growth going to come? The most, I mean, if I divide this growth between our existing portfolio, our new products to be launched, and M&A, the majority of it is going to come from our existing portfolio.
There’s going to be some contribution from our new product launches. And when we are talking about the 60, we’re not even considering M&A, just to be clear. The majority of it is going to come from our existing portfolio. So where are the disconnects in our existing portfolio? Generally, and that too, we normally overperformed versus just three expectations in our system portfolio. What are the key assets in our system portfolio, they are DARZALEX and DARZALEX FASPRO, TREMFYA, ERLEADA, our prostate cancer medicine, our long acting [indiscernible], our pulmonary arterial hypertension franchise. All these are large franchises that are going to be delivering double-digit growth during this period.
So those ones are underestimated, in part because we are not counting on some of the important line extensions and new formulations that we’re going to be launching in order to access more patient populations. For example, with TREMFYA in IBD, for example, with DARZALEX moving into first line, with ERLEADA going into earlier forms of prostate cancer, all these things are not yet fully factored. And I think that’s an area in which we have to do our homework in order to inform better you guys about those opportunities in terms of line extensions and new formulations that you’re going to be see there. But that’s where the majority of the growth is going to come from. And the positive side of that is that those are assets that are already marketed. So we are not talking about things that may be to come, they are easier for everybody to model.
The second part of it is our new products. We have clearly and I’ve been in the pharmaceutical business for more than 30 years, I can tell you that with good knowledge, we have clearly the strongest pipeline that we have had in the history of our pharmaceutical group. We told you there that we’re going to be launching in the period from 21 to 25, 14 NMEs that had a potential of more than $1 billion, five of them, we think have peak sales potential of more than 5 billion. So I’m going to dedicate just a second to each one of them. And then you can ask me questions about them.
The first one is CARVYKTI, our BCMA cell therapy, which is already approved in the U.S. that it’s having incredible demand. And it does have incredible, also very substantial response rates. Clearly, the best therapy in multiple myeloma that is how they are by a long distance.
The second one, it’s our FcRn inhibitor for auto antibody mediated diseases, which is Nipocalimab that we are developing with a wide number of indications in 11 indications. People ask me what is the differentiation about Nipocalimab, our development plan, 11 indications. For prospective, I know Nipocalimab because auto antibody mediated disease is a new field, it’s more difficult to be able to model. I mean, they are about 2 million people in the GA that have auto antibody mediated diseases. There are about 2 billion people in the GA that has inflammatory bowel disease, the market for IBD is $19 billion. The market for auto antibody mediated diseases is non-existent. So there is significant potential in that market there.
The third one, it’s a word combination of amivantamab, our cMet EGFR antibody with an oral EGFR Lazertinib, it is going to be squarely in the market where Tagrisso plays today. Our clinical trials are head-to-head with Tagrisso, and we have to win big there in order to make it through if the data follows this is a big opportunity which people can understand and can model.
The fourth one is milvexian and data was presented about milvexian in Barcelona earlier in August. The data shows strong in our opinion combined with the one in total knee replacement, and the reduction in risk in symptomatic stroke is very compelling. So we are now working in our internal processes to define what is going to be the development plan for milvexian. But the data that we see in the two-phase studies is convincing, it is positive.
And then, finally, this one is less estimated is our drug eluting device called Taris that displays in the bladder through cystoscopy that we are developing in a number of indications in early stage bladder cancer. In bladder cancer, it’s another area like we have done in prostate cancer, only multiple myeloma that our goal is to develop a significant franchise there. So those are the five new products that we think are going to have a significant impact. They’re all in Phase 3, CARVYKTI has already been launched.
And then, we have got some other products that we then comment as much during the Analyst Day in ’21. That now that we have progress have become even quite important one is Teclistamab about BCMAxCD3 biospecific antibody, which has been approved already by EMEA, and we expect an approval in the U.S. by the end of the year. And this is the most effective therapy for multiple myeloma if CARVYKTI our cell therapy, so we also think that there’s significant room for at Teclistamab.
And then in the meantime, we also got breakthrough designation for Teclistamab, which is a GPRC5d biospecific antibody that also plays within myeloma that having a different target, it opens a new line of therapy, even within multiple myeloma. So we are very, very optimistic about the success that these products can pass. And its only part of the pipeline that we have, that will continue to have a significant impact in the second half of the decade too. So we’re not only looking to 2025, but also it gives us more confidence to have a strong second half of the decade. So I think the factor will tell, but we have all the elements to be able to grow through the STELARA patent expiration.
And finally, I have to say we have done it already. We did it with Remicade. I mean, Remicade at the time was bigger than STELARA this for us today. And we were able to do it. So we’ll be able to do it again.
Terence Flynn
Great. You’re making my job easy here, Joaquin. The one follow-up I had is just myeloma. You guys have a rich history. They’re going all the way back to Velcade. And you mentioned DARZALEX, the tremendous success and impact that that drug has had in this space. You’ve given guidance for CARVYKTI of over $5 billion. As I think about the myeloma market, I think it’s about $20 billion market, you have established franchise there. Why wouldn’t these biospecifics be as large or larger than CARVYKTI because to me there are a lot of — they’re much easier to use the data is very compelling. You’ve got to have them, you can sequence them. So am I missing something about how to think about the potential for those assets?
Joaquin Duato
No, you’re not missing something. I think that this biospecific maybe it’s one underestimated asset in our pipeline. Why do I say that? Because the level of efficacy that they are showing is very high. It’s not as high as CARVYKTI, but it’s very high. And at the same time, the supply and distribution and site of care issues are less complex. So at this point, my view about these biospecifics is significantly incrementally better, and more optimistic than I had maybe a year ago. Also, the data that we have seen that has, by way of background granted breakthrough as to both biospecifics, not only Teclistamab and Talquetamab is robust of -to grant that type of uptake that you are describing. So I do believe that this biospecific is an underestimated part of our pipeline.
Terence Flynn
Okay. And maybe just the last question is just, you mentioned STELARA, and you guys have done this before with Remicade. Again, I think the one question on investors’ minds, is again, that was, Part B versus Part D injectable is HUMIRA. When we see that drug go off next year, is that a relevant proxy that we should think about for STELARA?
Joe Wolk
I think it’s certainly a factor when we consider, I think it will be a little bit different erosion curve than what we saw with Remicade, because Remicade was the first biospecific in the market. The one thing I would say is we know that HUMIRA has, I think 10 products already kind of in the queue, to come out day one where it’s the larger that we know of clinical trials going on, but nothing that’s kind of in the Q1 and ready to go. So we’re going to watch as you will to see what kind of impact that could have. But to say it’s a proxy yet or not, it’s probably just a little bit too early.
Terence Flynn
Right. And I know you guys are obviously focused on TREMFYA as well growing that brand and you have some head-to-head studies going on as well as we have data for –
Joaquin Duato
Yes. We haven’t had to hit the studies with STELARA in IBD. And also, we have presented very interesting data in the last — in a European congress with a combination of TREMFYA and SIMPONI in IBD with extraordinary response rates, which opens another line of growth, also for TREMFYA in the future.
Question-and-Answer Session
Q – Terence Flynn
Terence Flynn
Great. Well, Joaquin and Joe, thank you very much. Really appreciate you time.
Joe Wolk
Thank you.
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