Johnson & Johnson Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 19, 2022

There are 15 speakers on the call.

Operator

Good morning, and welcome to Johnson and Johnson's First Quarter 2022 Earnings Conference Call. This call is being recorded. The end of the call. I would now like to turn the conference call over to Johnson and Johnson. You may begin.

Speaker 1

Good morning. This is Joe Wolk, Executive Vice President and Chief Financial Officer of Johnson and Johnson. Thank you for joining us today to discuss our company's Q1 2022 financial results and full year 2022 outlook. While many things have changed in the world since our last call, much has stayed the same for Johnson and Johnson. We continue to deliver reliable growth and generate meaningful free cash flow, enabling us to invest and advance our pipeline, increase our dividend for the 60th consecutive year and continue to make a positive impact across the landscape of healthcare.

Speaker 1

It is, however, important to take a few moments to recognize the current events that are impacting the world we're living in. Today, while we're all still managing through the global pandemic, the end of the quarter. As evidenced by the current surge of cases in China, we also acknowledge the increasing hardship brought on by the war in Ukraine. We remain focused on the safety of our employees and their families. Guided by our credo and grounded in our purpose, our hearts are with all those affected by these crises and hope for a rapid resolution to both.

Speaker 1

Now, I'd like to turn the program over to Jessica Moore, the conference call will be available on our Investor Relations to take you through our Q1 results.

Speaker 2

Thank you, Joe. A few logistics before we get into the details. This review is being made available via webcast, accessible through the Investor Relations section of the Johnson and Johnson website the end of the call, at investor. Jandj.com, where you can also find additional materials, including today's presentation and associated schedules. Later.

Speaker 2

Please note that today's presentation includes forward looking statements regarding, among other things, our future operating and financial performance the end of the year. We encourage you to review the cautionary statement the conference call is recorded in today's presentation, which identifies certain risks and factors that may cause the company's actual results later this call will be recorded. In particular, there is significant uncertainty about the duration the end of the quarter. This means that results could change at any time in the end of the quarter. The contemplated impact of COVID-nineteen on the company's business results and outlook is a best estimate later today's date.

Speaker 2

A further description of these risks, uncertainties and other factors a listen only mode can be found in our SEC filings, including our 2021 Form 10 ks, along with reconciliations of the non GAAP financial measures they are fully utilized for today's discussion to the most comparable GAAP measures. These materials are also available at investor. Jnj.com.

Speaker 3

The end of the call. Several of

Speaker 2

the products and compounds discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide acknowledges those relationships. Moving to today's agenda. I will review the first quarter sales and P and L results for the corporation and the three segments. Following, Joe will provide additional business and the Q2 of fiscal 2020.

Speaker 2

Before sharing an overview of our cash position, our capital allocation priorities and updated guidance for 2022. The end of the call. During the Q and A portion of the call, Joe will be joined by the

Speaker 3

end of the call. Ashley McEvoy, Executive Vice President

Speaker 2

and Worldwide Chair, Medtech Thibault Maungan, Executive Vice President and Worldwide Chair, Consumer Health the end of the call. And Jennifer Talbert, Executive Vice President and Worldwide Chair Pharmaceutical. We have heard your feedback and are implementing a a few enhancements this quarter. First, we are now providing select earlier phase clinical trial information on our pharmaceutical pipeline the end of the call to streamline your data collection efforts from clinicaltrials.gov. 2nd, rather than sharing detailed business performance commentary later.

Speaker 2

On each part of the business, I will summarize significant business drivers, leaving more time for Q and A. You can find additional detailed segment commentary in our earnings presentation. We anticipate the webcast will last up to 60 minutes. The

Speaker 3

end of the quarter. Now let's move to the Q1 results.

Speaker 2

Worldwide sales were $23,400,000,000 for the Q1 of 2022, an increase of 5% versus the Q1 of 2021. Operational sales growth, which excludes the effect of translational currency, increased 7.7% as currency had a negative impact of 2.7 points. In the U. S, sales increased 2.7%. In regions outside the U.

Speaker 2

S, our reported growth was 7.2%.

Speaker 3

The end of the quarter.

Speaker 2

Excluding the net impact of acquisition and divestitures, adjusted operational sales growth was 7.9% worldwide, 2.8% in the U. S. And 12.9% outside the U. S. Turning now to earnings.

Speaker 2

The end of the call. For the quarter, net earnings were $5,100,000,000 and diluted earnings per share was $1.93 versus diluted earnings per share of $2.32 a year ago. Excluding after tax intangible asset amortization expense later. And special items for both periods, adjusted net earnings for the quarter were $7,100,000,000 the end of the call. And adjusted diluted earnings per share was $2.67 representing increases the end of 3% and 3.1%, respectively, compared to the Q1 of 2021.

Speaker 2

Performance highlights. Unless otherwise stated, percentages quoted represent the operational sales change in comparison to the Q1 of 2021 and therefore exclude the impact of currency translation. Beginning in 2022, certain over the counter products previously reported under the Pharmaceuticals segment have been reclassed to consumer health. These products represent roughly $100,000,000 of sales per quarter. Please refer to the supplemental sales schedules for prior year restatements.

Speaker 2

Later. Also as stated in our 2021 10 ks, effective January, our Medical Devices segment is now referred to as MedTech. Later. Beginning with consumer health. Worldwide consumer health sales of $3,600,000,000 increased 0.8% the end of the quarter with a decline of 3.4% in the U.

Speaker 2

S. And growth of 4.1% outside the U. S. Excluding the impact of acquisitions and divestitures, the end of the quarter. Worldwide growth was 1.6%.

Speaker 2

Consumer Health was negatively impacted by industry wide external supply constraints,

Speaker 4

the end of the call,

Speaker 5

primarily due to ingredients and packaging

Speaker 2

availability as well as labor shortages largely reflected in our Skin Health and Beauty business, the quarter end of the quarter, worth approximately 280 basis points worldwide and 500 basis points in the U. S. Adjusting for these constraints, consumer health delivered solid results, primarily due to above market growth in OTC, driven by increased Tylenol, Motrin and upper respiratory product sales. The end of the call. Moving on to our Pharmaceutical segment.

Speaker 2

Worldwide Pharmaceutical sales of $12,900,000,000 increased 9.3% the conference call with growth of 2.9% in the U. S. And 16.7% outside of the U. S. Base Pharmaceutical growth was driven by our broad portfolio of products paired with strong commercial execution, enabling us to deliver above market adjusted operational sales growth, including 6 assets with double digit growth in the quarter.

Speaker 2

Base business growth was due to strength from DARZALEX, Tremfya, later this quarter. Thank you, Lara, Erlita and our paliperidone long acting portfolio. Growth was partially offset by LOE pressures the end of the call from both REMICADE and ZYTIGA, along with decrease in IMBRUVICA and Xarelto sales. DARZALEX continues to drive very operational growth with sales increases of 40.3 percent driven by subcutaneous formulation penetration IMBRUVICA maintains its market leadership position worldwide and continues to drive growth outside of the U. S.

Speaker 2

Despite ongoing competitive pressures. Xarelto sales declined 13.8% in the U. S, driven largely by a net unfavorable prior period price adjustment an increased cost for patient access, partially offset by continued demand and market growth.

Speaker 3

The end of the call. The COVID-nineteen vaccine also

Speaker 2

contributed approximately $500,000,000 to sales in the quarter. Given these results, we remain confident in our ability to deliver our 11th consecutive year of above market adjusted operational sales growth in 2022. Later. I'll now turn your attention to the MedTech segment. Worldwide MedTech sales of $7,000,000,000 increased 8.5% the end of the call, with growth of 5.6% in the U.

Speaker 2

S. And growth of 11.1% outside the U. S. Excluding the impact of acquisitions and divestitures, worldwide growth was 8.6%. We see strong performance Q1 driven by market recovery, focused commercial strategies and differentiated new products driving enhanced or sustained market share across most of the 11 priority platforms.

Speaker 2

We continue to monitor potential impacts on elective procedures driven by COVID-nineteen resurgences the conference call will be recorded. Before highlighting the financial performance for the segment, I'd like to share a few notable first quarter medtech events that demonstrate our stated aspirations of entering higher growth market segments and continuing to build upon digital technologies across the portfolio. Two acquisitions were closed in the quarter, Crossroads Extremities, with a differentiated portfolio of bunion and hammertoe solutions in the fast growing elective foot and ankle market the end of the call. And Kustomize, which will be a new addition to the Velas digital surgery platform of connected technologies. The customized solution is designed to give surgeons an easy to use tool to better understand and address the impact of abnormal motion between the spine I am also pleased to share that Fast Company selected Johnson and Johnson Medtech as one of its top 10 World's Most Innovative Health Companies of 20 Thank you, recognizing MedTech's success and commitment to delivering breakthrough scientific innovation the conference call and reimagining health in an increasingly digital world.

Speaker 2

The Interventional Solutions franchise delivered another quarter of worldwide double digit growth 11.4 percent with double digit growth in both the U. S. And OUS regions, driven primarily by success of new products in electrophysiology, commercial execution and continued market recovery. Worldwide surgery grew 5%, the FDA's FDA approved, providing continued evidence of the adoption of Monarch Technology in patient treatment regimens. The worldwide orthopedics franchise grew 5.6%, reflecting COVID-nineteen recovery, continued penetration in the U.

Speaker 2

S. Ambulatory Surgery the end of the call center channel or ASCs and penetration of new product launches such as enhancements to Velas hip navigation, Velas Robotic Assisted Solution and Attuned Cementless Knee System, partially offsetting this growth

Speaker 3

the end of the quarter with softness and spine

Speaker 2

procedures in the U. S. The worldwide vision franchise continued its double digit growth, growing 13.9% this quarter. The end of the call. Contact Lens' global growth of 10.6% reflects continued positive momentum for our market leading AccuView portfolio, the success of commercial initiatives and recently launched products such as AccuVu Oasis Multifocal and AccuVu Define Fresh.

Speaker 2

Surgical Vision delivered global growth of 23.8 percent with both the U. S. And OUS posting growth above 20%, fueled by market recovery and share momentum due to the success of recently launched products, including Technis IHANCE and Technis Synergy. The end of the call. As a reminder, additional sales commentary for all of our segments can be found on the slides.

Speaker 2

Now turning to our the consolidated statement of earnings for the Q1 of 2022. I'd like to highlight a few noteworthy items that have changed compared to the same quarter of last year. The cost of products sold deleveraged by 70 basis points, driven by unfavorable mix in the medtech business the end of

Speaker 3

the quarter, and commodity inflation in the consumer health business.

Speaker 2

Sales, marketing and administrative deleveraged by 110 basis points, later, driven by higher brand marketing expenses in Consumer Health and timing of brand marketing expenses in the Pharmaceuticals segment. We continue to invest strategically in research and development at competitive levels, investing 14.8 percent of sales this quarter. The $3,500,000,000 investment was an 8.9% increase versus the prior year, primarily due to portfolio progression the end of the call, and Pharmaceutical and MedTech. In process research and development reflects an impairment expense of $610,000,000 the call for certain indications associated with bermekimab, the investigational compound acquired from X Biotech Inc, later as disclosed in our previous SEC filings. This impairment was driven by the termination of development of vermecimab for atopic dermatitis later this quarter, based on efficacy data.

Speaker 2

The other income and expense line was net income of $102,000,000 in the Q1 of 2022, compared to net income of $882,000,000 in the Q1 of 2021. This decrease was the result the end of the quarter, lapping prior year gains on the divestiture of Doxil, Calyxt and EVRA in 2021, the end of the quarter, higher unrealized losses on securities and consumer health separation costs. This was partially offset by favorable returns the end of the quarter associated with our employee benefit plans. Regarding taxes in the quarter, our effective tax rate was 12.2% the

Speaker 3

Q4 of

Speaker 4

2018 versus 16.6% in the

Speaker 5

same period last year.

Speaker 2

The decreased tax rate was primarily driven by lower U. S. Income due to higher unrealized losses on securities and the impairment of bremekumab IP R and D compared to prior year divestiture gains. Excluding special items, the effective tax rate was 13.3% versus 16.5% in the same period last year. The end of the call.

Speaker 2

I encourage you to review our upcoming Q1 10 Q filing for additional details on specific tax matters.

Speaker 3

The end of the call.

Speaker 2

Lastly, I'll direct your attention to the box section of the slide where we have also provided our income before tax, the end of the call. Net earnings and earnings per share adjusted to exclude the impact of intangible amortization expense and special items. Later. Now let's look at adjusted income before tax by segment. In the Q1 of 2022, our adjusted income before tax for the enterprise the end of

Speaker 3

the call. As a

Speaker 2

percentage of sales decreased from 37.1 percent to 35.1 percent due to product mix, commodity inflation, increased brand marketing expense, portfolio progression in R and D and comparisons to gains from prior year divestitures. Pharmaceutical margin declined from 45.5 percent to 44.1 percent, primarily driven by timing of the end of the call, brand marketing expenses and general portfolio progression and R and D. Medtech margins declined from 30.6% listen to 27%, driven by unfavorable product mix. Finally, Consumer Health margins declined from 26.8% the quarter to 22.1 percent due to commodity inflation and higher brand marketing expenses. This concludes the sales and earnings portion of the Johnson and Johnson First Quarter Results.

Speaker 2

I am now pleased to turn the call back over to Joe Walk.

Speaker 1

Later. As Jess just mentioned, Johnson and Johnson posted solid performance for the quarter, continuing to invest in the business for the long term success, the next quarter while overcoming multiple macroeconomic headwinds, including inflationary pressures and higher input costs. These external challenges the Q1 includes limited availability and rising prices of certain commodities as well as increased costs for labor, energy and transportation. These impacts are pervasive across the enterprise, but most notable in consumer health. We expect these pressures will continue to some degree throughout the remainder of 2022.

Speaker 1

However, mitigation efforts are underway, including cost improvement initiatives, strategic price increases and contract negotiations with external supply partners. We are committed to sustaining supply of the products, medicines and treatments the next quarter. Turning to our segments and notable events in the quarter. MedTech led our enterprise performance with nearly 9% adjusted operational sales growth. We continue to drive this business forward and are increasing the value of our pipeline through innovation internally and externally.

Speaker 1

We were pleased to see a steady uptick in surgical procedures this quarter the end of the quarter, but we recognize that the situation is fluid, which requires monitoring. Building on more than 20 major new product launches in 2021, MedTech announced the addition of 2 new innovations to our Attune Knee portfolio. The attune cementless fixed bearing knee with affixium 3 DP technology and the attune medial stabilized knee system. In our Pharmaceutical business, we continue to deliver above market growth driven by volume as evidenced by our recently published the 2021 Janssen U. S.

Speaker 1

Transparency Report, which reflects our 5th consecutive year of price decreases across the portfolio, the end of the quarter, we also continue to advance our pharmaceutical pipeline. This quarter, we received FDA approval for CARVICTI, a CAR T therapy for the treatment of multiple myeloma developed together with our partner, Legend Biotech. We are partnering with clinics, utilizing a phased approach to begin patient dosing and the feedback to date has been positive. We also filed teclistamab, our BCMA CD3 bispecific antibody seeking EMA approval and we also received priority review from the FDA, potentially expanding our multiple myeloma portfolio further. In our consumer health business, we remain focused on delivering on our 2022 performance objectives, continuing to achieve above market growth in our over the counter medicines business, while navigating industry wide supply constraints that have primarily impacted our Skin Health Beauty business.

Speaker 1

We continue to be excited about the activity related to the announcement we made in November on the creation of 2 new industry leading companies, the new Johnson and Johnson and the new consumer health company. For the new Johnson and Johnson, the portfolio will remain well diversified with 25 brands delivering over $1,000,000,000 in sales annually, holding market leading positions across key therapeutic areas and franchises. The financial hallmarks of Johnson and Johnson will remain the same, including a well defined capital allocation strategy, a disciplined approach to inorganic growth a strong balance sheet, while also creating opportunities to sharpen focus on execution and clinically differentiated innovation. The new consumer health company will also have a strong financial profile and be better positioned to drive incremental growth realizing increased potential the end of the call, we will continue to deliver science backed innovation and enhance digital consumer centric solutions. The end of the year.

Speaker 1

The Consumer Health separation team is making substantial progress related to our efforts in establishing the new independent company. As previously mentioned, we cannot disclose new financial information specific to consumer health in order to preserve optionality on the various separation pathways. The end of the call. Our timelines remain unchanged. We anticipate announcing key executive leadership appointments for the new consumer health company in the coming months with plans to provide the new company name and headquarters location around the middle of this year.

Speaker 1

In the second half of twenty twenty two, we plan to provide the updated path forward and applicable financial information such as refined stand up cost estimates and potential short term dis synergies. Finally, consistent with previous communications, we expect to execute the separation in 2023. You have our ongoing commitment adhering to the regulatory framework to provide transparent updates for material decisions on a timely basis. Turning now to cash and capital allocation. We generated free cash flow for the quarter of nearly $3,400,000,000 the end of the Q1, we had approximately $30,000,000,000 of cash and marketable securities and approximately $33,000,000,000 of debt the call for a net debt position of approximately $3,000,000,000 Our capital allocation priorities remain unchanged.

Speaker 1

Internal innovation remains critical to our future growth and a top priority. In the Q1, we increased R and D investment by approximately 9% compared to the Q1 of 2021. We also continue to evaluate opportunities to complement the current portfolio with acquisitions that build upon our capabilities, address portfolio gaps or play in higher growth markets while yielding solid financial returns. As I mentioned earlier, we were pleased to announce today that our Board of Directors approved an increase in our quarterly dividend for the 60th consecutive year from $1.06 per share to $1.13 per share, an increase of 6.6%. Moving to full year 2022 guidance and key considerations.

Speaker 1

I'll start with comments on our COVID-nineteen vaccine the end of the call and foreign exchange impacts, essentially the only items with updates from our January guidance. As market demand for all the COVID-nineteen vaccines is currently challenged by global supply surplus and vaccine hesitancy in developing markets. We have made the decision to suspend guidance for sales of our COVID-nineteen vaccine. This will enable investors to focus on the performance of our core businesses, which drive the current and future value for investors. We are maintaining the total adjusted operational earnings per share guidance we provided in January, absorbing if need be the modest income impact from the COVID-nineteen vaccine.

Speaker 1

Regarding foreign exchange, as you know, we don't offer guidance or predictions on currency movements. But to give you a sense of the impact currency may have on potential full year reported results, utilizing the euro spot rate relative to the U. S. Dollar as of last week at 1.08. There is an incremental unfavorable currency impact of $1,100,000,000 on reported sales and an unfavorable $0.25 the Q4 reported adjusted earnings per share versus the calculation related to January's guidance.

Speaker 1

The full year unfavorable impact is now projected to be $2,500,000,000 on reported sales and $0.45 on reported adjusted earnings per share. All other line items for which we provide guidance remain the same as communicated in January. To reiterate, we are maintaining our adjusted operational earnings per share guidance. We don't provide quarterly guidance, but do understand that you find value in us providing some qualitative considerations as you update your models. In Consumer Health, we expect supply constraints to continue throughout the year, but not to the same extent in the second half.

Speaker 1

As a result, we anticipate that the back half performance the Q1 will improve over the first half. For MedTech, while the Q1 demonstrated faster recovery than we anticipated, our full year expectations remain fairly intact. We anticipate continued market recovery and uptake from recently launched products the and are monitoring the ever changing COVID dynamics, particularly the surging cases in China. Similar to consumer health, we expect the second half to be stronger than the first half. As a reminder, with respect to growth rates, the second quarter was the strongest quarter for MedTech delivering another year of above market adjusted operational sales growth with relatively consistent growth throughout the remainder of the year.

Speaker 1

In summary, Johnson and Johnson had a solid start to the year despite managing macroeconomic headwinds and we remain confident in our business. I I would like to recognize the continued efforts of our 144,000 global colleagues focused on delivering our innovative healthcare solutions to our Kratos stakeholders. Their unwavering dedication and support continue to inspire. And on behalf of the executive team, I'd like to extend our gratitude. I'm now pleased to welcome to the call Ashley McEvoy, Thibault Mongan and Jennifer Calvert, our worldwide shares to address your questions.

Speaker 1

Kevin, can you please provide instructions and open the line for Q and A.

Operator

Our first question today is coming from Larry Biegelsen from Wells Fargo. Your line is now live.

Speaker 1

Good morning. Thanks for taking the question. So many different places to go. But Joe, I'll start with M and A. There are comments on the tape stating that you're eager to deploy cash to M and A, especially for devices.

Speaker 1

So maybe for you or Ashley, Can you add more color to your thinking there and the types of opportunities to consider? You've talked about reaching the top of the peer set in devices. That would seem to require a relatively large deal or a series of small to medium sized deals to move the needle. Is that a fair way to think about it? Thanks for taking the question.

Speaker 1

Yes. So Larry, I'll start and then I'll turn it over to Ashley for some thoughts specific on Medical Devices. Before I answer, Larry, I do want to compliment you and your team for the foreign exchange report that you guys issued back, I think it was on April 13. That was just it's a tough the topic to really grasp. And you guys did a fantastic job in assessing what it meant for the medical device industry.

Speaker 1

It was Really a fantastic report, so well done. With respect to cash, as you heard us in January, we are reaching our lowest levels of net debt And we remain very active. You could talk to Tivo, Jennifer and Ashley with respect to ideas that they are bringing forth. We continue to have the same principles that we've had historically. We want to make sure there's a strategic fit.

Speaker 1

And by that, I simply mean we've got capabilities, we've got scientific expertise. Perhaps it's just our scale that adds more value to that asset than where it currently resides. And And then we want to make sure that we compensate risk, compensate shareholders for the risk that we're bearing on their behalf when we do so. I would not get overly locked into size. Johnson and Johnson quite frankly has been built through a number of smaller acquisitions, and really the outliers are these larger acquisitions.

Speaker 1

But we look at really the strategic merit and then the financial value creation and don't get locked into saying something is too small or too big

Speaker 3

the call. Yes.

Speaker 4

No, Larry, maybe before I get to M and A, just kind of some macro thoughts on MedTech in the quarter. I'm pleased with the results of the quarter. We saw positive signs of the market recovery. Clearly, while COVID has not disappeared, health systems around the world are becoming increasingly more resistant with each passing wave. And as we know, the world is a lot more equipped to manage the pandemic and quite frankly, so is Johnson and Johnson.

Speaker 4

So encouraged to see in quarter 1 that we continue to maintain our path to above market performance. We referenced that this is kind of A growth at scale, if you will, dollars 11,000,000,000,000, dollars 1,000,000,000 platforms, really most of them growing or maintaining share. Vision Surgery and Vision Care, both double digit performance and growing market share, really fueled by innovation in Acuvue and Teknus. We are the world leader in electrophysiology, still a category that has significant under penetration. We've had 11 consecutive years of double digit performance and really significantly enhanced our share gain.

Speaker 4

We're the world leader in biosurgery. The business was up almost 10%, Really driven by a clinically differentiated portfolio. And then finally and enthusiastically, I say we had strong performance in joints really by penetrating some new sites of care like ASCs, both with hips and knees. So when I look forward, I'm encouraged by the organic agenda that we see in innovation like with the likes of the FDA approval on Accuvue Theravision, the first drug eluting contact lens. The end of the year.

Speaker 4

As Joe mentioned earlier around really shoring up high growth segments in knees with the tuned fixed bearing and then really with CeraNovus, the launch of EmboGuard, the balloon catheter. So continue to advance robotics and digital surgery. You'll hear us talk about Monarch 14,000 cases with a big pipeline of new indications and then Velas completing over 2,000 cases. So when I think about the future of M and A, Larry, we're going to continue to do tuck ins and to really digitize the patient experience. You heard us talk about Kustomize as an example around really adding a precise delivery to hip navigation to improve outcomes.

Speaker 4

You're going to see us continue to penetrate fast growing segments like what we have in neurovascular as an example. 90% of our deployment has been to $1,000,000,000 or more, but we do intend to make sure that we are well positioned to be in the highest growth end state markets.

Operator

Thank you. Our next question today is coming from Chris Schott from JPMorgan. Your line is now live.

Speaker 1

The end of the call.

Speaker 6

Great. Thanks so much. Maybe, Ashley, just following up on some of your MedTech comments. Can you specifically comment on China in terms of the impact you're currently speaking to the business and your outlook for that market specifically given some of the lockdowns that we're seeing there. And then my kind of core question was just on IMBRUVICA.

Speaker 6

It seems like prescriptions here are really starting to see some erosion. And I'm trying to understand the dynamics you're expecting going forward. So is this the end of the year. Especially maybe the U. S.

Speaker 6

Market, are you expecting that this erosion continues? Or do you see dynamics in place that we could start to see some of this prescription trends start to stabilize a bit. Thanks so much.

Speaker 2

Yes, sure, Chris. So first,

Speaker 4

we have, I would say, very strong and healthy business in China where the world we are number 1 in medtech in China. We have a very diversified portfolio from surgery to orthopedics to interventional as well as vision. We did experience an impact probably in the March timeframe due to the recent surge of the viruses happening and the lockdowns particularly in Shanghai and now other regions. We do anticipate that to continue in April and through the month of May. But like we've seen, I think China might come down a bit faster, but it comes back faster too.

Speaker 4

We have very strong leadership there and there are a lot of patients that need care. The next question comes from the line of Jennifer. I'll turn it to Jennifer maybe to talk about your second question.

Speaker 2

Great.

Speaker 7

Thanks a lot. Hi, Chris, and hello, everybody. A few comments on the Pharmaceutical business and then I'll get to the on IMBRUVICA. First, for our farm business, I was really proud that we delivered $12,900,000,000 in worldwide sales. We're definitely above market adjusted operational growth of 9.3%.

Speaker 7

And this is our 6th quarter where we achieved worldwide sales exceeding $12,000,000,000 And as I look across the globe, the growth was really broadly based across our portfolio we maximize the value of our key brands. So strong double digit growth across 6 of them, including DARZALEX, ELLIDA, TREMFYA, INVEGA SUSTENNA, SPRAVATO and ENDURANT. And we also had a number of important milestones, the first Seeing the FDA approval of CARVICTI, which is our first cell therapy for patients with relapsed or refractory multiple myeloma. The teclistamab filing in the EU was mentioned. The FDA approved expanded label indications for Cabanueva we get to the next stage of the study, in virologically suppressed adults and adolescents.

Speaker 7

And we presented great new data on TREMFYA in our approved indications of psoriasis and psoriatic arthritis as well as from our Phase II studies where we're evaluating the product in Crohn's disease and also in UC. So if we take a look at IMBRUVICA more specifically, IMBRUVICA sales did decline for the quarter, 3.9%, and this really was a U. S. Story. Outside the U.

Speaker 7

S, our sales actually grew 4.5%. In the U. S, performance was impacted by both competitive factors With a number of new competitors in the market as well as market softness, we haven't seen that market fully rebound to the pre COVID levels

Speaker 5

the end of the year.

Speaker 7

Yes. As we take a look at IMBRUVICA, IMBRUVICA has really changed the standard of care for adults with CLL and other B cell malignancies. And it is the only BTKI that's demonstrated overall survival and a high rate of progression free survival at 5 years with up to 8 years of safety follow-up. So we remain really confident in the efficacy and safety profile of the product. It's the market share leader and continues to be the most comprehensively studied and prescribed BTKI with over 250,000 patients worldwide.

Speaker 7

So we continue to work to develop the asset. We do see further growth opportunities Through the introduction of new indications and new combination therapies, as we take a look at IMBRUVICA plus venetoclax, that we're working to develop and we filed in the EU. We're also taking a look at first line and CL I've been really trying to bring that forward. So I think you can anticipate there will continue to be strong competition in that market. We continue to believe in and invest in we go.

Operator

Thank you. Our next question is coming from Joanne Wuensch from Citi. Your line is now live.

Speaker 8

Good morning and thank you for taking the question. I'd like to spend a little bit of time talking about the middle of the income statement. With all of the multiple headwinds On those factors, how do you think about managing it? What are the levers to pull? And how do you think about raising prices in this environment for each your key divisions.

Speaker 1

Yes. Good morning, Joanne. Thanks for the question. With respect to operating margins overall, which is really I think at the heart of your question, In the front, the Q1, I should say, we do tend to adopt a little bit more of an aggressive approach to advertising and promotion in And I would say on R and D, it's also a little bit front end loaded this year simply from the standpoint of the progression of our pharmaceutical pipeline as well as digital robotic surgery. So in pharmaceuticals, think about nipocalimab, our RSV vaccine.

Speaker 1

Those had very nice progression. Taclistumab may be moving a little bit faster than we anticipated as well as being able to launch CARVICTI. There was a healthy amount of inflation built into our P and L in the January guidance. What I think our teams have seen in the, let's let's say the 1st 4 months of this year is an uptick in that inflationary impact of about 10% or 15%. So still very manageable.

Speaker 1

Again, as you heard in some of the prepared remarks, we anticipate that that inflationary pressure as well as commodity scarcity the Q2 will subside a little bit in the second quarter and then hopefully more pronounced in the second half of this year. If it doesn't, it's certainly something that will keep our attention. And we have the resources to adjust accordingly to make sure that we not only meet the needs of long term value creation, but also meet short term performance expectations. So we all think it's very manageable at this point in time, But it's something that we're not taking for granted. We're being very active with cost initiative programs.

Speaker 1

As we look to separate the 2 companies, we are looking at ways to streamline technology processes, things that will lead to leverage on the P and L.

Operator

Thank you. Our next question today is coming from Chris Shibutani from Goldman Sachs. Your line is now live.

Speaker 9

Thank you. Good morning. I appreciate the opportunity. Perhaps directed at the Pharmaceutical segment for Jennifer, 2 products I'd like to focus on, one being STELARA and the other on XERELTO. With STELARA, could you perhaps elaborate a little bit more in terms of some of the underlying dynamics across the various indications, I.

Speaker 9

E. The derm versus perhaps the IBD in terms of what the growth trends and outlook you are seeing and you expect there? The end of the year. And then for Xarelto, part of your commentary in the prepared segment discussed and mentioned about patient access. Could you just elaborate a little bit further on how that was an impact on the commercial dynamics?

Speaker 9

Thank you.

Speaker 7

Sure. Hi. Thanks for the question. So let me start off the end of the call. So STELARA sales were $2,290,000,000 in the Q1, and that was 9% growth.

Speaker 7

The end of the quarter. And we continue to see

Speaker 3

a lot of strength

Speaker 7

in STELARA ex U. S. The product had nearly 18% growth. The end of the year. In the U.

Speaker 7

S, what we saw was growth around 3.6%. And what this really was due to we saw an impact in the U. S. Due to the omicron variant and the impact that it actually had on staffing resources that particularly impacted A number of areas where you had more resource intensive delivery of very strong positive momentum. We actually gained over 5 share points in CD and 6 share points in ulcerative colitis, so really strong growth in momentum.

Speaker 7

And with in psoriasis as anticipated, With TREMFYA and the very strong growth there in psoriasis and psoriatic arthritis, we expected the STELARA sales there to start tailing And that's in line with our expectations. So we continue to have a very strong a very positive outlook for STELARA going through the rest of the year in CD and in Crohn's excuse me Crohn's and ulcerative colitis where we've really been realizing the growth. Later. And likewise, when you take a look at Tremfya, we saw 44.5% growth in psoriasis and psoriatic arthritis in the quarter. So together, Really, really nice performance there.

Speaker 7

Question on XARELTO. So XARELTO in the U. S, we did see sales decline. That was largely driven by a net unfavorable prior period adjustment, and most of this had actually been a positive adjustment that took place in 2021. So when you do the comparables, it was negative.

Speaker 7

And so that was really due to the vast majority of that. With Xarelto, we continue to see really nice share gains and growth at a prescription level. Across the indications, whether we're talking about CAD and PAD, really the newest indication set, but also across AFib and VTE. And so it really was around the net unfavorable PPA and a little bit of channel mix as well with some of the mix shifting into 340B and Medicaid and some of the lower priced channels.

Operator

Thank you. Our next question today is coming from Louise Chen from Cantor Fitzgerald. Your line is now live.

Speaker 5

Hi. Thanks for taking my question. So I wanted to ask you about CARVICTI and what gives you confidence in your ability to meet some of the manufacturing complexity associated with CARVICTI and how much capacity do you think you'll be able to bring online this year both in the U. S. And potentially globally as well?

Speaker 5

Thank you.

Speaker 7

Thanks for the question. So we're real proud about our approval and our launch to date on CARVICTI. What I can say is that it is going well and it is on track with our expectations. We're real pleased. As you know, this is the customized therapy where the supply chain is literally built around each patient.

Speaker 7

We've got about a 4 to 5 week period ultimately the infusion back into the patient at the treatment center. As we've mentioned before, we really are taking a thoughtful and a phased approach To scaling this launch to ensure a predictable and a reliable experience for the patients and for the treatment centers, we really try to learn from the other launches in the market in this area. And so far, we're off to a really good start there and I have been very pleased with the feedback that we're getting back from our customers. So we have activated our initial round of treatment centers, And we did this based on folks who were very well experienced from our clinical trials and also very broadly dispersed throughout the U. S.

Speaker 7

To help ensure patient access. We're working through all of the orders and the slots that we have and actually have the product now that's been shipped back has been manufactured and shipped back to the patients for infusion into the patients. So we're going to continue in a planned and thoughtful responsible approach to this scaling both into the in the United States as well as we do as we scale outside the U. S. And throughout the world as well.

Speaker 7

Now we discussed before around lentivirus because there is an industry wide shortage of lentivirus. That is Something that we are also working and investing in to scale all of our internal capabilities to be able to meet the demand both now in our initial launches in the relapsed refractory setting as well as our ultimate goal to be able to move into first line setting here and so we would have internal control on that as well. So hope this answers your question.

Operator

Thank you. Our next question is coming from Josh Jennings from Cowen. Your line is now live.

Speaker 10

Hi, good morning. Thanks a lot for Thank you for taking the question. Joe, since Joaquin made some public commentary on his commitment to support ASH and her team to drive revenue growth acceleration in the medical devices unit, Your focus has been on M and A opportunities, but how should we be thinking about the level of internal investment to fuel growth of the devices franchise? You don't break out percentage of R and D spend allocated to devices, but one data point we do have is from the 2019 pharma day when you related $8,400,000,000 of the $11,000,000,000 in R and D expense from 2018 went to pharma initiatives and that's north of 75%. But just I mean, has that stepped up, just the level of investment in the devices business over the last couple of years?

Speaker 10

And will that step up even further? And just to be clear, Ashley did not plant this question with our team.

Speaker 1

I'm going to check the transcript on that, Josh, just to be sure. But Listen, I think what you would hear if Joaquin was sitting here is that he supports all the businesses with respect to innovation. We realize that our calling card is innovation and we're going to have growth across all of our franchises when we have products that matter that are differentiated that are beyond the current standard of care and meeting consumer needs as well. I actually want to credit Ashley and her team for the way they've managed their P and L. They've been conscious about moving more of their investment into R and D.

Speaker 1

You saw a record number of 20 plus new product launches last year that are considered meaningful. We're going to be very close to probably a very similar number this year. And so that portfolio has we've taken very much the same approach that I would say Pharmaceuticals did almost a decade ago when the focus is very well understood And where we want to play because we've got a strategic or competitive advantage will be capitalized upon. I Ashley, if you want to add anything more, but I think that certainly there is continued support, but a lot of the credit goes to Ashley and her team in terms of managing their levels of investment throughout the P and L.

Speaker 4

Thanks, Joe. I mean, Josh, I would say that we are Investing at a competitive level and I'm really pleased with the state of execution. We have In our pipeline right now $27,100,000,000 plus e NPV projects, that number 3 years ago was 6. So they continue to focus the pipeline on medium to higher growth segments and really execute. And we're off to a good start in 2022.

Speaker 1

The I would maybe underscore too is that gives us the confidence to go out and add in inorganic opportunities when the opportunity the company presents itself using the criteria of strategic fit as well as financial value creation. So, a stronger internal pipeline

Speaker 2

Just to reference our 10 ks, we do provide the breakout of R and D by segment on an annual basis for reference.

Operator

Thank you. Our next question today is coming from Terence Flynn from Morgan Stanley. Your line is now live.

Speaker 6

Great. Thanks so much for taking the questions. Jennifer, I was just wondering if you could elaborate a little bit more on the COVID recovery in the pharma segment. I know you touched on staffing issues on the gas strip.

Speaker 7

Yes. So I understand Terry's The comment really was around the U. S. And what we're seeing in terms of COVID. So as we exited last year really in the December time frame and entered this year into really January February, we did see the omicron variant impact the U.

Speaker 7

S. The end of the business. And what we saw there really, as Lonnie mentioned before, we did see staffing shortages because so many people got sick, people weren't able to go into work. And so in the higher, more intensive resource settings in some of the markets, we did see slowdown in terms of delayed visits and new patient starts. What we are seeing now is we're looking towards the end of March And in early April, we're seeing nice recovery there.

Speaker 7

And so this really hopefully was something really just at the end of last next year and the beginning of this year, and it does look to be more specific to the U. S. Than to any of the other markets.

Speaker 1

Thanks, Jennifer. Thibault, maybe give some insight too on the consumer segment and how COVID is impacting. Obviously, It was much more tumultuous, I'd say, in 2020 and 2021. But what are you seeing to the early start of this year?

Speaker 11

Look, Clearly, we continue to see the impact of COVID on the life of our consumers. And that has an impact differentiated impact by category. We are looking at China Very specifically right now to see how the situation evolves there. What I would say that COVID has really Shifted consumer behavior to digital space and digital solutions. And so and we see it in the continued growth of our e commerce channel, representing more and more of our business.

Speaker 11

So that's what makes our world more resilient. This ability to count on multiple channels is something that is serving us well in a COVID environment. Having said that, we need to continue to monitor how the situation evolves around the world.

Speaker 3

Thanks.

Operator

Thank you. Our next question today is coming from Matt Miksic from Credit Suisse. Your line is now live.

Speaker 12

Thanks. Thanks so much for taking the question. So maybe for Ashley, I was hoping you could provide a little bit more Color on that devices in Q1 and the trajectory exiting March. You had pretty impressive growth across the board. So congrats on that.

Speaker 12

But investors are often trying to think to just to figure out the difference between inpatient segments like orthopedics or cardio or advanced surgery and how those are recovering potentially at different rates in the U. S. And what you might be seeing there, as well as any color you could provide on how, say, Europe and Japan overseas the developed markets compare with the recovery trends we've seen in the U. S? Thanks.

Speaker 4

Thanks, Max, for the It's April 2022, we're still talking about this. So just huge acknowledgment for our healthcare workers who are still battling through this. But I would tell you, EMEA really bounced back nicely in quarter 1. It was pretty broad based within EMEA. I would say Asia with the exception of China recently also bounced back, and then U.

Speaker 4

S. Really gained momentum. I always look at 2 data points in the U. S. As an example.

Speaker 4

I look at like how were diagnostic procedures performing in the U. S. And then how are surgical procedures performing? And probably at our trough when Omicron was hitting in the U. S.

Speaker 4

In January, We had about flat diagnostic procedures and we were looking at surgical procedures down near double digit, down 10%. Encouragingly, as we exited March, we started to see diagnostic procedures tick up to high single digit and start to see a flattening of surgical procedures. I expect in the month of April in the U. S. To see it go north of 2019 levels, really driven by

Operator

Thank you. Our next question today is coming from Geoff Meacham from Bank of America. Your line is now live.

Speaker 13

Hey, guys. Good morning. Thanks so much for the question. I just had a couple. Jennifer, in the myeloma market, we'll see Revlimid generic soon.

Speaker 13

And I realize that the combination with DARZALEX are standard of care, but what are your expectations for broader market disruption going forward, either from a the end of the quarter. And then a quick follow-up on the M and A front for Joe. When you think about the P and L or cash flow impact the consumer separation. To what degree does this inform or impact plans for a larger scale BD or M and A for either medtech or pharma? The end of

Speaker 3

the call.

Speaker 7

So thanks for the opportunity to talk about our multiple myeloma portfolio And in response to your question, so as we take a look at the myeloma market, despite the advances to date in therapies, there is still So much unmet need there, given the underlying heterogeneity of the disease. And so it's really important that there are treatment the next few quarters. And what we're really trying to do is to have a strong portfolio of highly effective treatments And actually, ultimately, shoot for a cure. And so as we take a look at the market with DARZALEX and DARZALEX FASTPRO right now. We're really seeing this as a foundational therapy for multiple myeloma.

Speaker 7

And so irrespective of Others and LOE and those types of things, as you noted, it's a lot of combination therapy and things like that. That does not fundamentally change the opportunity for DARZALEXXAN and Faspro. What I'm also really excited about is then you add in CARVICTI That was recently approved, as we mentioned, for triple refractory multiple myeloma. And we really think that this will ultimately become a preferred treatment for Patients with relapsedrefractory multiple myeloma. We also mentioned teclistamab and the filing of teclistamab.

Speaker 7

And this really is the first ever BCMA CD3 bispecific. And we think that this is going to be a great off the shelf option and for patients who really are triple class exposed and who are really not eligible for CARVICTI or don't have the next question comes from the line of Alex Kedemab. And then in the future, we're not stopping there. We're also working on talketimab. And this would be the 1st and potentially best in class GPRC5D Bi the specific that we think could be potentially sequenced and combined to help transform outcomes.

Speaker 7

And so as we take a look at our portfolio, we really think that these assets are additive and complementary, versus something where they would be cannibalizing each other. And we really think that these are the important advances that are going to really help transform multiple myeloma in the future and going forward versus any of the older therapies.

Speaker 1

And Jeff, with respect to cash flow and M and A, I think I'll answer that in 2 parts. I think, short term, we certainly Have the credit rating to warrant more firepower should we need it. As you have observed, Our cash flow generation over the last couple of years has ticked up to new levels north of $20,000,000,000 or around $20,000,000,000 the quarter. We were just maybe $17,000,000,000 a few years ago. As the consumer company separates, I think that's going to be actually liberating for both sides.

Speaker 1

We still have opportunities to improve our cash flow with inventory management and receivables. But as we move to a higher growth segment, we think we'll be able to generate a similar cash flow with a higher level of sales growth, managing the P and L appropriately. So I've got every confidence that we'll be able to do small, medium and large scale acquisitions should the right opportunity present itself. I also think it's liberating for the consumer health segment because they'll be able to focus their cash flow generation to value creating opportunities through their particular lens being fit for purpose in a digitized environment that Thibault spoke look to so. Whether it's near term or long term, I think we're in a very good position, to utilize today's cash and hopefully that which we generate tomorrow.

Speaker 1

Kevin, maybe we've got time for one more question.

Operator

Certainly. Our final question today is coming from Danielle Antalffy from SVB Leerink. Your line is now live. The end of the call.

Speaker 14

Hey, good morning, everyone. Thanks so much for squeezing me in. This is a question for Ashley and it's the commentary the ASC penetration. And I'm just curious, Ashley, as that site of care becomes increasingly important, Where you guys think you are relative to the market from a penetration perspective and where you think you can grow? How meaningful of the growth driver will your recent success in the ASC be over the next few years?

Speaker 14

Thanks so much.

Speaker 4

Well, thank you, Danielle. Appreciate the question and hope you are well. We in U. S, The ASCs, I think, it's still relatively low penetration, I would tell from a macro U. S, less than 20%, but I think it's the fastest growing as we know.

Speaker 4

In a COVID environment, we've seen the model evolve to create a safe, more patient friendly experience that addresses the patient sentiment of not wanting to go into a hospital setting. Certain procedures have gone there early sooner than later. I'd say hips are migrating there and knees, less spine Per se, less complicated, obviously, trauma cases still happening in the hospital setting. We've done a lot of work recently to modify by our business model to make it a capital efficient flow, if you will, on inventory management, on the personalization of care using digital assets to kind of make your pre op and your post op experience less full of friction. And we're taking a lot of that experience in the U.

Speaker 4

S. ASCs to really what we're doing in China in the Tier 2 and the Tier 3 cities as well as we deliver care. So I'm optimistic that This channel will continue to evolve. I do think that we've increased our competitiveness there and we're making sure that we really have a sustainable business model going forward.

Speaker 2

Later. Thank you, Danielle, and thanks to everyone for your questions and your continued interest in our company. We apologize to those who we couldn't get to because of time, but don't hesitate to reach out to the Investor Relations team as needed. I will now turn the call back Thank you, Joe, for some brief closing remarks.

Speaker 1

Great. Thanks, Jess. And as, Jess alluded to, we certainly do appreciate your questions and the chance to interact with you. I'd like to remind everybody as we close that we do have the opportunity to engage with shareholders at next week's Annual Meeting on April 28. Also be on the lookout for an update on our commitments to ESG.

Speaker 1

On June 8, we will be issuing our Health for Humanity report, which is an in-depth a review on the progress we are making on our 2025 goals. Thank you for your time and your interest in Johnson and Johnson. Have a great day.

Operator

Later. Thank you. This concludes today's Johnson and Johnson's Q1 2022 earnings conference call. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Johnson & Johnson Q1 2022
00:00 / 00:00