Johnson & Johnson’s (JNJ) CEO Alex Gorsky on Q2 2014 Results – Earnings Call Transcript

Source: Seeking Alpha

 

Johnson & Johnson (NYSE:JNJ)

Q2 2014 Earnings Conference Call

July 15, 2014 8:30 AM ET

Executives

Louise Mehrotra – VP of IR

Alex Gorsky – Chairman of The Board of Directors and CEO

Joaquin Duato – Worldwide Chairman, Pharmaceuticals

Paul Stoffels – CSO, Johnson & Johnson and Worldwide Chairman, Pharmaceuticals

Dominic Caruso – VP, Finance and CFO

Analysts

Matthew Dodds – Citigroup

Michael Weinstein – JP Morgan

Derrick Sung – Sanford Bernstein

Larry Biegelsen – Wells Fargo

Matt Miksic – Piper Jaffray

Josh Jennings – Cowen & Co.

Rick Wise – Stifel

Glenn Novarro – RBC Capital Markets

Bruce Nudell – Credit Suisse

David Lewis – Morgan Stanley

Kristen Stewart – Deutsche Bank

Jay Olson – Goldman Sachs

Operator

Good morning, and welcome to the Johnson & Johnson Second Quarter 2014 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer session of the conference. This call is being recorded. If anyone has any objections, you may disconnect at this time. (Operator Instructions).

I would now like to turn the conference call over to Johnson & Johnson. You may begin.

Louise Mehrotra – VP of IR

Good morning and welcome. I’m Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson and it is my pleasure this morning to review our business results for the second quarter of 2014. Joining me on the call today are Alex Gorsky, Chairman of The Board of Directors and Chief Executive Officer; Joaquin Duato, Worldwide Chairman, Pharmaceuticals; Paul Stoffels, Chief Scientific Officer, Johnson & Johnson and Worldwide Chairman, Pharmaceuticals; and Dominic Caruso, Vice President, Finance and Chief Financial Officer. 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 & Johnson Web site. I’ll begin by briefly reviewing second quarter results for the corporation and for our three business segments. Following my remarks, Alex will provide some additional commentary on the business and an update on our near term priorities. Next, Joaquin and Paul will provide an update on our pharmaceutical business, and lastly Dominic will review the income statement and provide guidance for 2014.

We will then open the call to your questions. Included with the press release that was issued earlier this morning is a schedule of sales for key products and/or businesses to facilitate updating your models. These schedules are available on the Johnson & Johnson Web site as is the press release. Please note we will be using presentation to complement today’s commentary. The presentation is also available on our Web site.

Before we begin, let me remind you that some of the statements made during this review are or may be considered forward-looking statements. The 10-K for the fiscal year 2013 identifies certain factors that could cause the Company’s actual results to differ materially from those projected in any forward-looking statements made today. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The 10-K is available through the company and online.

During the review, non-GAAP financial measures are used to provide information pertinent to ongoing business performance. These non-GAAP financial measures should not be considered replacements for GAAP results. Tables reconciling these measures to the most comparable GAAP measures are available in the press release and on the Investor Relations section of the Johnson & Johnson Web site at investor.jnj.com.

A number of products and compounds discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide lists the acknowledgment of those relationships, not otherwise referenced in today’s presentations.

Now, I would like to review our results for the second quarter of 2014. Worldwide sales to customers were $19.5 billion for the second quarter of 2014, up 9.1%. On an operational basis, sales were up 9.4% and currency had a negative impact of 0.3%. In the U.S., sales were up 14.9%. In regions outside the U.S., our operational growth was 5%, while the effect of currency exchange rates negatively impacted our reported results by 0.6%.

On an operational basis, the Western Hemisphere excluding the U.S., grew by 6.5%, Asia Pacific, Africa region grew 5.3% and Europe grew 4.1%. The success of new product launches and continued growth of key products made strong contributions to the results in all regions. Excluding the impact of divestitures net of acquisition, underlying organic operational growth was 10%.

Turning now to earnings; net earnings were $4.3 billion and earnings per share were $1.51 versus $1.33 a year ago. As referenced in the table reconciling non-GAAP measures, 2014 second quarter net earnings were adjusted to exclude a charge of $449 million for after tax special items. Second quarter 2013 net earnings were adjusted to exclude a charge of $456 million for after tax special items. Dominic will discuss special items in his remarks. Excluding special items for both periods, net earnings for the current quarter were $4.8 billion and diluted earnings per share were $1.66, representing increases of 11.3% and 12.2% respectively as compared to the same period in 2013.

Turning now to business segment highlights, please note percentages quoted represents operational sales change in comparison to the second quarter of 2013 unless otherwise stated and therefore exclude the translational impact of currency. I will begin with the Consumer segment. Worldwide Consumer segment sales of $3.7 billion increased 3.6% with U.S. sales down 0.5%, while outside the U.S. sales grew 5.8%. Excluding the impact of net divestitures, worldwide growth was approximately 6% with U.S. growth of approximately 5%.

Major drivers of the results were over-the-counter products, skin care, baby care, as well as international sales of oral care and feminine protection products, partially offset by the divestiture of the North American Sanitary Protection business.

OTC sales were strong due to analgesic growth of nearly 17% worldwide and nearly 25% in the U.S., driven by market share gains as we continue to return products to the shelves. Upper respiratory products, digestive health and antismoking products also made strong contributions to the results.

Skin care results were driven by share gains for both NEUTROGENA and AVEENO with new product launches supported by robust marketing campaigns, category growth, as well as an increase in trade inventory levels. Baby care results were driven by strong sales across the number of categories. International oral care results were driven by strong results for LISTERINE due to new product launches and successful marketing campaigns.

Moving now to our Pharmaceutical segment. Worldwide sales of $8.5 billion increased 21.1% with U.S. up 36.6% and sales outside the U.S. up 6.9% driven by both strong sales of new products as well as core growth products. A major driver was our recently launched hepatitis C product called OLYSIO in the U.S. and EU and SOVRIAD in Japan. Excluding sales of the hepatitis C products, OLYSIO and INCIVO, underlying growth worldwide, U.S. and outside the U.S. was approximately 10.5%, 15% and 6.5% respectively.

Other significant contributors to growth were immunology products; STELARA, REMICADE and SIMPONI, SIMPONI ARIA, as well as XARELTO, ZYTIGA, INVEGA SUSTENNA/XEPLION, INVOKANA, PREZISTA and recently launched IMBRUVICA. Partially offsetting the growth were lower sales of ACIPHEX and CONCERTA due to generic competition and INCIVO with competitive entries.

The strong results for immunology were driven by double-digit market growth complemented by increased market share for STELARA and SIMPONI. We continue to be the U.S. market leader in immunology. XARELTO sales were up over 90% compared with the same quarter last year and grew over 13% on a sequential basis. Total prescription share or TRx for the quarter in the U.S. anti-coagulant market grew to over 13% with cardiology TRx estimated at over 23%.

The strong results for ZYTIGA in the U.S. were driven by increased market share in the combined metastatic castrate-resistant prostate cancer market and estimated market growth of nearly 11.5%. ZYTIGA has captured approximately 34% of that market. Continued strong market uptick and progress on reimbursement drove the strong results outside the U.S.

ZYTIGA is approved in more than 90 countries. Increased market share drove results for INVEGA SUSTENNA/XEPLION and PREZISTA. INVOKANA sales contributed over 2.5 points to the U.S. pharmaceutical growth rate and for the quarter achieved 2.3% TRx within the defined market of type 2 diabetes excluding insulin and metformin, up from 1.8% in the first quarter of 2014. TRx with endocrinologists grew to 7% for the quarter, up approximately 1% sequentially.

I’ll now review the Medical Devices and Diagnostic segment results. Worldwide Medical Devices and Diagnostic segment sales of $7.2 billion increased 0.9%. U.S. sales declined 1.4%, while sales outside the U.S. increased 2.6%. Growth was driven by orthopedics, cardiovascular care and specialty surgery, partially offset by lower sales in diabetes care, vision care and diagnostics. Lower price primarily related to competitive bidding continue to impact the diabetes care business in the U.S., while reversal of the noted customer inventory build from the first quarter and competitive pricing dynamics impacted growth for vision care.

Excluding OCD and diabetes care, worldwide growth was approximately 2%. Orthopedic sales growth was driven by trauma and hips. Trauma was up 7% worldwide with sales outside the U.S. up 11% due to a successful tender offer as a result of our comprehensive portfolio offering. Hips growth of 5% worldwide was driven by strong volume growth, partially offset by continued pricing pressure. Primary stem platform sales were a major contributor to the results. Knees worldwide increased 1% with the U.S. flat and 4% growth outside the U.S. Increased sales due to the successful launch of ATTUNE were partially offset by price pressures across the region and softness in the U.S. market.

Cardiovascular growth was driven by a 14% worldwide increase in our BioSense Webster business due to new catheter launches and continued market expansion. Specialty surgery results were driven by energy and bio-surgery outside the U.S. with new products driving market growth and market share. There were some notable developments in the second quarter which we have summarized on this slide to assist as you develop your models. Alex, Joaquin and Paul will provide some additional commentary in their remarks.

That concludes the segment highlights for Johnson & Johnson second quarter of 2014. It is now my pleasure to turn the call over to Alex Gorsky. Alex?

Alex Gorsky – Chairman of The Board of Directors and CEO

Well, thank you very much, Louise and thanks to all of you who are participating in today’s call, welcome. It’s a very dynamic time in the healthcare industry led most importantly by significant advancements in the care of patients and consumers. Treatment options have never been greater. Today hepatitis C and certain cancer treatments are more promising than ever and while diabetes and heart disease which we are unfortunately still seeing rates increased, they are much more manageable for the patient with oral medication that are increasingly convenient to take.

That being said, all of us in healthcare realized that there is still so much more work to do to improve the lives of patients around the world. It is encouraging to see that healthcare reform initiatives are taking hold around the world which will enable more people to see a doctor or to have procedures they needed, it may not have had the means to do so in the past. Over the past several years, we have been discussing with you how Johnson & Johnson has been taking a consistent series of steps to ensure we are best positioned to serve the needs of patients and consumers in this dynamic and rapidly evolving environment.

I would like to begin our discussion today by reviewing some of these issues. Much as we had anticipated the medical devices landscape is evolving as innovations, scale and breadth become more important to meeting the needs of the customer. At that time we noted that due to market dynamics in segments like orthopedics, the industry would likely need to consolidate, which was one factor that led to our acquisition of Synthes. In the larger device space, what the industry is now realizing is the companies like Johnson & Johnson with larger portfolios are better able to partner with hospital systems and managed care organizations to find the right balance of innovation, value and service.

And as we are all observing, there are many dynamics happening in the pharmaceutical industry as well. We noted several years ago that a focused portfolio, consistent investments in R&D and overall increased productivity in our development capabilities would be the key to driving our innovation. Since making the decision to focus our portfolio on five therapeutic areas where our expertise and the opportunity to make a significant difference aligned, our pharmaceutical business has been exceptionally productive with 14 new compounds launched since 2009, making it the fastest growing of the top 10 pharmaceutical businesses in the U.S., Europe and Japan.

These innovations and indeed the innovations that we’re making in each of our segments enables us to meet the growing demand for health care products and services and creates new opportunities to address unmet medical needs. I want to now briefly review our perspective on where we see health care today. As I mentioned in January, the worldwide market is immense with an overall spend of over $8 trillion. At $2.4 trillion, products account for nearly 30% of the spend, growing at about 3% to 5% a year.

In medical devices, we’re still seeing that utilization rates in the U.S. remain depressed both in admissions and surgical procedures but we continue to believe that as the economy recovers and healthcare reform gains momentum, utilization rates will increase. In terms of prescription rates in the first half of the year, trends have modestly continued upward versus 2013 with the U.S. Rx volume increasing through May by approximately 1% over the prior year. And global growth and GDP forecast remain above 3% on stronger momentum in advanced economies such as the U.S. and Europe, while key emerging economies including Brazil and India continue to be challenged.

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Given the positive demographic trends we’re seeing globally in the underlying strength of our businesses, we remain confident about the long-term growth prospects of the health care market and with our comprehensive and diverse portfolio of consumer health products, medical devices and pharmaceutical, Johnson & Johnson has a distinct competitive advantage in meeting the needs of patients.

We re-implemented the strategic framework, a very disciplined and focused approach to evolving our position as the world’s largest and most diverse healthcare company. Grounded by our credo, we identified four growth drivers which by now all of you should be very familiar with, creating value through innovation, global reach, local focus, excellence in execution and leading with purpose. We are executing against these growth drivers and capitalizing on our scale and breadth across Johnson & Johnson to ensure that we’re effectively positioned to drive and sustain strong global growth over the long-term.

Now in the near-term, we also have clear priorities for the businesses including achieving our financial targets. As announced earlier today, we had record sales in the quarter of $19.5 billion which is a 9.4% operational increase as compared to the second quarter of 2013. These strong results reflect a continued success of our new product launches and progress we made in achieving our near-term priorities.

In our Medical Device and Diagnostic segment, we are leading the industry with the largest most comprehensive business in the world. And while combining businesses with overlapping products and different business models can be disruptive, our integration over the past two years of DePuy and Synthes which we mentioned earlier has gone well. Given that we’re largely through it, we set a strong foundation for capturing the full growth potential we envisioned at the onset and we’re pleased with the revenue and cost synergy we’ve begun to realize.

And despite the market pressures, we remain optimistic about the future in this segment and are seeing strong performance in many of our MD&D businesses. In hips, we experienced strong operational growth at 5% in the quarter and continue to complement this growth with new product introductions such as the recently launched CORAIL Revision Hip System in both the United States and Europe. We also continue to see solid growth in trauma at 7% for the quarter which is built on the strength of our portfolio and the positive impact of a tender we were awarded in the Middle East as a result of our comprehensive offerings.

In our global surgery business, we continue to see progress in many areas including consistent double-digit growth of our BioSense Webster electrophysiology portfolio. We also have a steady cadence of new product offerings exemplified by the recent FDA approval of our supplemental PMA with the SEDASYS System which we anticipate introducing into the U.S. market in the latter half of 2014 as well as the launch of the HARMONIC ACE +7 Shears with advanced hemostasis, the first purely ultrasonic device with a 7 millimeter sealing indication; it’s really a great technology.

And as you heard at our MD&D Investor Meeting in May, our strategy for sustainable long-term growth is driven by building on the strong market leadership positions we hold on the majority of our key platforms, as well as the contributions we anticipate from our recently launched products and future pipeline which includes more than 30 major filings planned by the end of 2016, many on which we have already made good progress since our presentations in May.

Finally, in-line with our emphasis to tighten the focus within our MD&D portfolio, we’re creating value through divestiture opportunities and completed the divestiture of our ortho clinical diagnostics business to The Carlyle Group which Dominic will discuss in his remarks. OCD plays a very important role in health care and we’re confident that it is well positioned to continue serve in the interest of patients, customers and employees.

Turning now to our consumer business, where growth is closely tied with GDP trends, we’re pleased with the progress of the business and executing the strategy we outlined last summer. We have successfully exited a few business categories recently, enabling us to focus on delivering above market growth in our core business. And we anticipate greater opportunities to expand the business in the future as global economies recover and the middle-class continue to grow.

Our consumer brands are important for the equity of Johnson & Johnson and consumer health care truly is strategic for us with the potential to serve the 2 billion additional consumers who are predicted to join the growing middle-class in emerging markets. We made significant progress in this segment over the last few years and have plans for the coming years to accelerate the growth of this business through new innovations, brand building and strategic collaborations, working off with foundation that starts with deep consumer insights.

As part of our strategy, we have defined 11 key need states where with our expertise we can make a difference to consumers and grow our business. We are also focusing on 12 mega brands including LISTERINE, AVEENO, TYLENOL and JOHNSON’s Baby to ensure they are exceeding consumers’ expectations around the world and the strategy is working. We are capturing share in these and several of the other key categories. For example, we have seen strong growth in our oral care business outside the U.S. at 7% operationally. Our skin care and baby businesses are both up 7% operationally in the quarter.

And we are also developing innovative collaboration models with retailers across the globe where we are working to create an unparalleled experience for shoppers in OTC categories like cold and flu, by sharing insights and developing ways to reduce complexity for consumers and drive visibility for our offerings. In our U.S., OTC business, we continue making good progress in restoring brands to the shelves, delivering above market growth and continue to meet each of our obligations under the consent decree.

 

While we still have work to do, our goal is to ensure all of our U.S., OTC products are available every time a consumer is reaching for them. And I’m confident that we are on a good path to meet that goal. Turning now to our pharmaceutical business and as results show the current business is very strong, driven by new innovative products that are clearly addressing the unmet medical needs of patients worldwide and the future is bright with the continued advancement in our pipeline. By any measure, our performance has been outstanding in this segment and we are leading the industry on numerous fronts.

Clinical through commercial and later this morning you’ll hear more from Paul and Joaquin, who I am pleased to have joining us on the call later today.

You’ll recall that in the late 2000s, our pharmaceutical business faced significant patent expirations as products worth roughly $8 billion went off patent. We have to rethink that business model and really focused on areas where we could make a difference. We needed to streamline our organization and made tough choices to gain efficiencies and reduce headcount in developed markets by nearly 25%. But through our diversified business model, with consumer and MD&D continuing to grow during this time, we were able to continue to invest in our pharma business.

We are also continuing to invest in R&D in our five therapeutic areas at approximately 20% to 21% of sales and we have put those dollars to work with plan to file more than 10 new drugs and 25 line extensions between 2013 and 2017. Additionally, we are complementing that investment with smaller scale acquisitions and early stage licensing agreements surfaced through our innovation centers. For Johnson & Johnson, this model has been an excellent source of value creation. And I am delighted that Paul Stoffels, Joaquin Duato are joining the call today to provide an update on their tremendous work.

A little over a year ago, we created the Johnson & Johnson Research and Development Management Committee led by Paul. This group brings together the senior most R&D leaders across Johnson & Johnson to foster cross-sector collaboration and deliver transformational new medicines and medical devices. Under Paul’s excellent leadership our enterprise R&D leaders are harnessing our deep internal expertise and platform capabilities throughout the organization to develop customer focused solutions that combine our capabilities and expertise across our portfolios.

And the commercial pharmaceutical strategies led by Joaquin, are delivering outstanding results in very competitive global markets where we’re continuing to gain share and we’re also securing reimbursement and access at accelerated rates. The teams they have put in place have positioned us for continued success for many years to come in our pharmaceutical sector. I am please now to turn the call over to Paul and Joaquin.

Joaquin Duato – Worldwide Chairman, Pharmaceuticals

Thank you, Alex, and good morning everyone. Paul and I are delighted to speak to you today about our continued success at our pharmaceutical group. When we look at the pharmaceuticals market, we’re very optimistic about the future with an estimated 4.5% growth anticipated through 2017. While we recognized we’ll continue to experience headwinds, we also see numerous positive drivers, including changing demographics and substantial unmet medical needs.

As a result, there is significant opportunity to improve the lives of patients by bringing transformational medical innovations to the market. As Louise mentioned, we’re reporting 21.1% operational growth in the second quarter of 2014. This is our 17th consecutive quarter of growth including the six consecutive quarters in double-digits. Without our hepatitis C products, our growth in the last quarter was 10.5%.

I am often asked, Joaquin, is this just a lucky run or is there something more to it. After facing significant challenges in the early 2000, we made a number of strategic changes to our business including building key development manufacturing market access and commercial competencies and focusing our innovation to produce a consistent stream of differentiated new products. These changes are directly responsible for the success we’re seeing now and we believe position us to continue to succeed in the future.

Specifically with our focus on the five strategic priorities that you see on this slide, I will speak to you about the first two of these priorities and then hand off to Paul to cover the remaining three. When we look at our commercial performance, the first thing to note is that our success is global. We are the fastest growing top 10 global pharmaceutical company in the U.S., Europe, and Japan by a significant margin.

Key to the success has been both the sales of our core growth products and the sales of new products. Regarding our core growth products, you can see that REMICADE, VELCADE, and PREZISTA all continue to deliver strong growth. 2013 REMICADE sales were 6.7 billion, which were 9% higher than 2012. In the second quarter of this year, sales grew at 8.7%. This is a product that has been in the market since 1998. VELCADE remains a backbone of multiple myeloma treatment, delivering 6.2% growth in the second quarter.

Finally PREZISTA is the number one HIV protease inhibitor in the U.S. and Europe and we’re pleased to note the recent approval in Canada of PREZCOBIX, our fixed dose combination with Gilead’s cobicistat with a file for approval also in the U.S. and in Europe. We have achieved remarkable success with our new products. As you can see on the left, worldwide sales of new products launched since 2009 have already generated $5.9 billion of revenue this year and represent nearly 40% of our second quarter sales.

In the United States alone, our cumulative sales of new products launched since 2009 is more than our next two closest competitors combined. I would now like to spend a few minutes speaking about the specific products that have driven this performance. ZYTIGA is the most successful oral oncology launch in history. It is now approved for the treatment of metastatic castrate resistant prostate cancer in more than 90 countries. And the metastatic castration sensitive registration trial is on track. As you can see ZYTIGA continues to hold significant market share in U.S., gaining 1.2 points versus the first quarter this year.

Worldwide, we generated second quarter sales of $562 million, representing more than 40% growth year-over-year. Nearly 60% of the sales in the quarter were outside the U.S. As for B-cell malignancies in the last year we launched our oral oncology drug IMBRUVICA, developed in collaboration with Pharmacyclics with a worldwide license agreement for a 50-50 profit split. IMBRUVICA is launched in the U.S. for the treatment of chronic lymphocytic leukemia and for the treatment of mantle cell lymphoma in patients who have received at least one prior therapy.

Both indications are based on an overall response rate and improvement in survival or disease related symptoms has not yet been established. Moving forward, we’re pursuing a global regulatory strategy for IMBRUVICA in all major markets with European MCL and CLL decisions expected later this year. IMBRUVICA has been investigated in a number of global chemical trials across potential indications.

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In immunology, we are proud to note Janssen was the number one company in total U.S. sales in 2013. This was of course driven by REMICADE, which I mentioned earlier and by STELARA and SIMPONI. STELARA is the fastest growing biologic in psoriasis in major markets, including number one new-to-brand share in the U.S. This is in large part due to STELARA, key psoriasis and Psoriatic Arthritis approvals and because we are able to demonstrate the five year safety and efficacy of STELARA through real-world trials and registry data. For SIMPONI its ulcerative colitis indication is approved in 43 countries and I’m pleased to note that the IV formulation for rheumatoid arthritis has launched in the U.S. and in Canada. Both of these products have seen robust growth this quarter more than 40% and 60% respectively.

Turning to XARELTO, we have established a highly competitive position in the U.S. with six FDA approved indications and more than 1.6 million patients treated. XARELTO is a number one novel, oral anticoagulant among U.S cardiologists. This is impart due to the fact that XARELTO has broad market access with more than 90% coverage of insured patients and the lowest co-pay of any branded novel anti-coagulant. And also because XARELTO offers a strong customer value proposition with once a day dosing convenience. As a result, we are reporting strong sales of $361 million in the second quarter, up more than 90% year-over-year. In the last quarter alone, we saw a sequential growth greater than 13%.

Another example of our innovation is INVOKANA, our SGLT2 inhibitor we launched recently in collaboration with our Diabetes Care franchise. INVOKANA is a once daily medication offering improved glycemic control, reduction in body weight and reduction in systolic blood pressure. These are all extremely important factors in the treatment of type 2 diabetes. INVOKANA is approved in 45 countries and our fixed dose combination with metformin, VOKANAMET is approved in Europe. We expect the FDA decision for this fixed dose combination in the third quarter.

This year alone we have had seven major launches of INVOKANA and have received key reimbursement approvals in the U.K., Switzerland and the Netherlands. As you can see, we are number one in new-to-brand share among U.S. endocrinologist in a very competitive landscape. As Louise mentioned, INVOKANA contributed more than 2.5 points to the U.S. pharmaceutical growth rate.

In schizophrenia, we continue to provide medicines and solutions to improve patient care. In the U.S. we are pleased to note that the FDA granted priority review of INVEGA SUSTENNA One Month for schizoaffective disorder with a PDUFA date in November. We also recently leveraged a first of its kind real-world clinical trial with INVEGA SUSTENNA to support the filing of a sNDA. It includes data for the label demonstrating significant delayed time to relapse in schizophrenia compared to oral antipsychotics.

The chart on the right shows the strong launch performance of INVEGA SUSTENNA outperforming Abilify Maintena which in the second quarter resulted in sales of $394 million, representing a 34.4% growth year-over-year. The last example I will discuss is our recently launched hepatitis C treatment with brand names OLYSIO, GALEXOS and SOVRIAD. We continue to see significant market potential in the hepatitis C area and estimate nearly 97% of the infected population in G7 countries remains untreated.

As you are aware interferon free treatment options represent a significant advance for patients. OLYSIO is approved for the use in interferon free treatment in combination with other medicinal products in Europe in genotype 1 or 4 patients who are interferon ineligible or intolerant. In the U.S. the FDA granted priority review of our sNDA based on the COSMOS trial data for the use of OLYSIO with sofosbuvir, currently marketed at Sovaldi by Gilead with a PDUFA date of November the 6.

In-line with the AASLD and IDSA guidelines, we have seen very strong adoption in the first half of this year with second quarter sales totaling $831 million. Moving forward we recognize there will be increased competitive activity with the entrance of new interferon treatment options beginning later this year and thus we expect the current run rate is unlikely to continue into 2015. We are planning studies to evaluate simeprevir with other agents to offer physicians and patients increased flexibility.

Turning now to emerging markets, our strategy is focused on a strong innovative brand growth through targeted capability building and novel access models. In particular, we are harnessing innovation. One example of this is the opening of our Shanghai Innovation Center expected in October this year. We’re also improving local manufacturing capacity by building factories such as our state-of-the-art facility in Xi’an, China and through technology transfer to local organizations.

Finally, we’re pioneering new business models through public-private partnerships, leveraging the strength of our Johnson & Johnson organization to improve access to our medicines. As you can see, we have had remarkable global success. This success is the direct result of a strategic choices and changes that we made to our business years ago. Going forward, we’re focused on two critical success factors to maintain our momentum. First, we will continue to leverage our world class capabilities in clinical development, regulatory manufacturing, market access and commercial, to promote the ongoing success of our new products.

In total, six of these products have each sold more than $ 1 billion in the last four quarters and two more are on track to reach this threshold. As you saw on the previous slide, several have robust growth rates of 40%, 60% and even 90%. Second, we are deeply committed to sustaining long-term growth and Paul will now tell you more about how our total emphasis on innovation has built a strong pipeline of transformational products that we believe will catalyze the next wave of growth for our business. Paul?

 

Paul Stoffels – CSO, Johnson & Johnson and Worldwide Chairman, Pharmaceuticals

Thank you Joaquin and good morning everyone. It is my pleasure today to discuss with you our pharmaceutical R&D strategy which is focused on delivering transformational medical innovation and create the cycle of success that positions us for continued growth in the future. Our vision to enter R&D strategy has not changed. As a leading healthcare company, we believe that by focusing on transformational innovation, medical need and differentiation, we can make a significant difference in the world and build a sustainable growing business.

We have some of the world’s leading scientific and medical experts who bring deep insights to select and prioritize the best science, internal or external, to tackle those diseases. We have established unparalleled global development capabilities and have set industry benchmark for timelines for filing submissions and productivity and also for speed to market. We launched 14 new products in the past five years in major markets around the world, including three new molecular entities or NMEs that we launched since our pharmaceutical’s update in May last year; OLYSIO, IMBRUVICA and SYLVANT, that strategy is delivering.

In the last update at a Pharmaceutical Analyst Day last May, we told you that we anticipated to filing more than 10 potential NMEs and more than 25 significant line extensions between 2013 and 2017. We are on track to deliver. Since last May, in addition to launching three new products, we have received 20 additional approvals for line extensions in major markets. The significant line extensions approved are SIMPONI for ulcerative colitis, SIMPONI ARIA for rheumatoid arthritis in the U.S., IMBRUVICA for previously treated CLL, VELCADE for multiple myeloma retreatment combination therapy and transplant, OLYSIO for treatment of experienced patients, STELARA for psoriatic arthritis and VOKANAME fixed dose combination with metformin immediately release formulation for type 2 diabetes in Europe.

Our winning formula has been consistent. First, we believe in focus. We focused on the few key disease areas where we can really make a difference and we prioritize our investments in those areas. The disease area focus has allowed us to attract the world’s leading scientists and medical experts and build a great depth of expertise in those areas. Second, our experts select and source the best science and technology through our own internal research or by accessing the best science externally through partnerships, collaborations, licensing and acquisitions.

Third, we leverage the present scale of our global development organization. Our global capabilities have allowed us to simultaneously develop, file and launch drugs across the globe with industry-leading efficiency, quality and success rates. And finally, one of our key success factors has been our ability to accelerate cycle times and achieve industry-leading timelines for regulatory submissions. I will focus on each of these success factors next.

Our focus on innovation is a critical aspect of the strategy. We focus our research in five therapeutic areas and within those areas we focus on specific disease areas where there is a high unmet need, where there is transformational science that we can leverage and where we have deep expertise and capabilities that we can bring to bear. Today, we’re focused on 18 disease areas and in each of these areas we have leading expertise and know-how to select the best science thereby increasing the probability of success. We have also entered into the exciting area of immuno-oncology where there is promising new signs and has established several collaborations.

This slide shows our entire end-to-end strategy on one page. Build a rigorous approach to sourcing innovation, to global development, and the key characteristics of a strategy that sets us apart. In addition to the deep internal expertise within our therapeutic areas, we have strong research capabilities in biomarkers and world-class capabilities in our centers of excellence in small molecules, bio-technology, vaccines and diagnostics. We complement this with external innovation. We access early innovation to our J&J innovation centers in London, Boston, San Francisco and Shanghai. Today we have over 100 projects in discovery and about 50 NMEs in early development.

In addition, we have more than 300 collaborations externally and over 50 companies located in our incubator. To access innovation in the early development stage, we leverage venture capital to invest in exciting growth opportunities, explore new areas and accelerate assets. In late-stage, we access innovation via traditional licensing, partnerships and acquisition example of which include our recent deals with Genmab on multiple myeloma, with Aragon on prostate cancer, with ViiV Healthcare on HIV and with Vertex on influenza A.

As I mentioned, we have world-class global development capabilities. We have built strong medical and scientific teams with disease area, clinical and regulatory expertise. We are increasing the value of our R&D portfolio by optimizing outputs, time, cost and quality. Our 24×7 development operations, speed-to-market and global execution make us a partner of choice in the industry.

These capabilities along with our market access and launch excellence, represent some of our key strengths and differentiators. They have enabled us to simultaneously file and launch our products globally, generate compelling value evidence and deliver successful launches of our products in multiple markets. And the flexibility and commercialization models with partners and our ability to collaborate and leverage our strength and capabilities, enable us to achieve industry-leading success and growth. A deep understanding of the innovation landscape is key to our ability to source innovation.

Our experts define an innovation strategy, conduct a holistic scan of the innovation landscape and prioritize all accessible opportunities, internal or external to select the best assets. Here you see a bulls eye chart of the innovation landscape for B-cell malignancy. The inner circles represent later stage products and the outer circles the early stage preclinical products. We take this rigorous approach to evaluating and sourcing innovation in each of the disease areas.

Our development organization continues to deliver. We have a flexible R&D operations engine which can pivot from execution of mega trials to execution of trials for rare diseases and today is supporting about 75,000 patients across 400 clinical studies annually. These capabilities have accelerated our speeds to market. They have enabled a successful execution of notable comprehensive and large clinical programs which are outcomes-based and use adaptive study designs. We have round the world, round the clock capabilities in all aspects of the clinical development and a critical path culture that enables the speed while maintaining quality.

Our fourth critical success factor has been our ability to accelerate cycle time. Because of our focus on medical need and differentiation, of the last 10 new NMEs we launched, five received priority review status. In addition, we received breakthrough designation for five indications with three of our products. Today, average cycle time from database to submission is about two months better than industry median making us the leader in time to submission. These capabilities have enabled us to have industry-leading NME success rate with fastest cycle times. Compared to our competitors, we have a higher development success rate resulting in more NME approvals per year.

Looking to the future, we have an exciting pipeline. On the left you see the three NME approvals since May 2013 and the number of significant line extensions approved since last May. In the middle you can see some of our key NMEs which are under clinical investigation as potential treatment for key unmet needs in a variety of areas.

Daratumumab, the first anti-CD38 monoclonal antibody for treatment of patients with multiple myeloma, a compound with breakthrough status which we licensed from Genmab; ARN-509, an androgen receptor inhibitor for pre-metastatic prostate cancer which came to us from the acquisition of Aragon; FGFR kinase inhibitors for solid tumors discovered in a collaboration with Astex Pharmaceuticals; Sirukumab, the first anti-IL-6 therapy for patients with RA and other autoimmune diseases; Guselkumab, the first anti-IL-23 antibody for psoriasis and potentially other autoimmune diseases; Fulranumab, an anti-NGF antibody for osteoarthritic pain licensed from Amgen; and Esketamine, the first NMDA antagonist for patients with treatment-resistant depression also with breakthrough designation.

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And VX-787, a first-in-class influenza A specific oral polymerase inhibitor, a compound we recently licensed from Vertex. We also have a number of key line extensions in development including for key products such as XARELTO and INVOKANA. We have Paliperidone

Palmitate three-month formulation, the first three-month long-acting injectable treatment for patients with schizophrenia. And ibrutinib the first BTK inhibitor oncology drug for the treatment of several B-cell malignancies.

Our people are driven by a sense of purpose to care for the world. At times we develop a product just because it is a right thing to do. We have the privilege to serve in health care and we also have a responsibility. One example of this is SIRTURO the first therapy with novel mechanism of action against TB approved by the FDA in more than 40 years. SIRTURO is now approved in U.S., Europe, Russia and Korea and the file is under review in seven other countries.

We have established multiple product development partnerships and through our agreement with the Global Drug Facility, we are making SIRTURO available to critically ill patients in 130 countries. We also established a collaboration with the International Partnership for Microbicides for the development of TMC120 for prevention of transmission of HIV, which is now in large scale clinical testing. We are providing access to products by not enforcing patents on PREZISTA in Sub-Saharan Africa and least developed countries and by licensing of HIV products to generic producers. And finally to a vaccine unit, we also make critical vaccines available to children around the world and we’re developing new vaccines for polio and HIV.

In summary, we are in an extraordinary cycle of success. We have world-class commercial capabilities driving our growth. Our accelerated emerging market performance is sustaining a momentum. Our focus on innovation, medical need and differentiation sets us up to deliver future growth. We have a leading R&D pipeline with differentiated therapies addressing major unmet needs in significant markets. Our innovation is delivering growth and our growth is sustaining our ability to invest in innovation. We believe our business is well positioned to succeed for the long-term. Thank you and now, let me turn it back to Alex.

Alex Gorsky – Chairman of The Board of Directors and CEO

Thank you, Paul and Joaquin. I hope you can see why we’re also proud of the Pharmaceutical segment and very optimistic about our future growth in this area. So, I would now like to turn it over to Dominic Caruso for more detailed review of our financial performance.

Dominic Caruso – VP, Finance and CFO

Thanks, Alex, and good morning everyone. As you’ve heard on the call, we’re very pleased with our progress and strong results thus far in 2014 and we’re well positioned for continued growth in this dynamic health care environment. I’ll take the next few minutes to review our financial performance in the second quarter as well as the recently completed OCD divestiture. I will then provide guidance for you to consider in refining your models for the balance of the year.

Turning to the next slide, you can see our condensed consolidated statement of earnings for the second quarter of 2014. Please direct your attention to the box section of the schedule where we have provided earnings adjusted to exclude special items. We are pleased to report adjusted net earnings of $4.8 billion in the quarter which was up 11.3% over the second quarter of 2013. And adjusted earnings per share of $1.66 versus $1.48 a year ago, up 12.2%, which exceeded the mean of the analyst estimates as published by First Call.

These results were driven by strong operational sales growth of 9%, primarily from our recently launched pharmaceutical products including hepatitis C treatment OLYSIO or SOVRIAD which is the brand name in Japan. The net impact of our hepatitis C products including OLYSIO, SOVRIAD and INCIVO contributed approximately 4% to the worldwide operational sales growth. As referenced in the table of non-GAAP measures, the 2014 second quarter net earnings were adjusted to exclude certain charges for the following special items. Cost associated with the continued integration of Synthes and additional reserves for litigation expenses.

Now let’s take a few moments to talk about the other items on the statement of earnings. I am pleased to point out that we saw a very good operating performance this quarter. Overall, our pretax operating margin increased 230 basis points and a major driver of that increase came from sales of OLYSIO. Cost of goods sold was 30 basis points higher than a same period last year, primarily due to pricing dynamics and the impact of the devaluation of the Japanese yen partly offset by positive mix of the business. Selling, marketing and administrative expenses were 200 basis points lower as compared with the second quarter of 2013, due to the growth of new products in our pharmaceutical business and overall good management of cost primarily in our MD&D business.

Our investment in research and development as a percent of sales was down compared with the prior year, primarily due to timing of various R&D programs, as we expect to continue to make important investments for the future. Interest expense net of interest income of approximately $100 million was slightly higher than prior year. Other expenses net of other income was $226 million in the quarter compared to $172 million in the same period of last year. Now excluding the special items that were included in this line item, other expenses net of other income was actually a net gain of $194 million compared to a net gain of $394 million as prior year reflected the gain we recognized on the sale of our shares in Elan Corporation.

This year, the net gain reflects the divestiture of our K-Y brand partly offset by some asset write-downs. Excluding special items, the effective tax rate was 21.1% compared to 20% in the same period last year, due primarily to geographic mix of the results in each period. Early in the third quarter, we completed the divestiture of Ortho-Clinical Diagnostics to the Carlyle Group for approximately $4 billion subject to customary adjustments.

On an after-tax basis and we will record a net gain of approximately $1 billion which we will treat as a special item in the third quarter results. Since we will no longer recognize sales or earnings from this business going forward, we plan to buy back shares with the cash proceeds to mitigate the EPS impact on future earnings. Now I will provide some guidance for you to consider as you refine your models for 2014. Before we discuss sales and earnings, I will first give some guidance on items we know are difficult for you to forecast; beginning with cash and interest income and expense.

At the end of the quarter, we had approximately $14.5 billion of net cash, which consists of approximately $31.6 billion of cash and marketable securities and approximately $17.1 billion of debt. For purposes of your models assuming no major acquisitions or other major uses of cash, I suggest you consider modeling net interest expense between $400 million and $500 million which is consistent with our previous guidance.

Regarding other income and expense, as a reminder this is the account where we record royalty income as well as gains and losses arising from such items as litigation, investments by our development corporation as well as divestitures, asset sales and write-offs. We would be comfortable with your models for 2014 reflecting other income and expense excluding special items as a net gain, ranging from approximately $450 million to $550 million, which is lower than our previous guidance.

And now a word on taxes; our guidance for 2014 anticipates that the R&D tax credit will be renewed by congress, although that has not yet occurred. We would be comfortable with your models reflecting an effective tax rate for 2014 excluding special items of approximately 19% to 20%. If the R&D tax credit is not approved, it will negatively impact the tax rate by approximately 0.5%. As always, we will continue to pursue opportunities in this area to improve upon this rate throughout the year.

Now turning to guidance on sales and earnings. As we have done for several years, our guidance will be based first on a constant currency basis reflecting our results from operations. This is the way we manage our business and we believe this provides a good understanding of the underlying performance of our business. We will also provide an estimate of our sales and EPS results for 2014 with the impact that current exchange rates could have on the translation of those results.

Our sales and earnings guidance for 2014 takes into account several assumptions that I highlighted to you in April. For sales, our assumptions remains consistent from earlier guidance that PROCRIT will not have biosimilar competition in 2014 and for INVEGA SUSTENNA and RISPERDAL CONSTA, we do not anticipate generic entries for these products this year.

Further, our guidance now reflects the divestitures of OCD and the net incremental sales of our hepatitis C products. Considering the factors I just noted, we would be comfortable with your models reflecting an operational sales increase on a constant currency basis between 4.5% and 5.5% for the year. This would result in sales for 2014, again on a constant currency basis, for approximately $74.5 billion to $75.3 billion which is lower than our previous guidance, reflecting the net impact of the adjustment for the divestiture of OCD and incremental hepatitis C product sales.

Our underlying operational growth in 2014 guidance excluding the hepatitis C products and OCD for the full year is approximately 4%. As you know we are anticipating that OLYSIO will face significant competition from new hepatitis C products later in the year, the full impact of which is difficult for us to predict at this point. And while we’re not providing guidance for 2015, this will certainly pose a headwind next year.

We’re also not predicting the impact of currency movements but to give you an idea of the potential impact on sales, if currency exchange rates were to remain where they were as of last week for the balance of the year then our sales growth rate would decrease by nearly 0.5%; plus under this scenario we would expect reported sales growth to range between 4% and 5% for a total expected level of reported sales between approximately $74.1 billion to $74.9 billion, which is lower than our previous guidance, again now adjusted for OCD and hepatitis C products as noted earlier.

Moving on to earnings; there are factors to note about foreign currency fluctuations that impact real economic transactions as opposed to only translation. As we have discussed in the past, the devaluation of the Japanese Yen versus the U.S. Dollar is expected to have a negative impact on 2014 gross margins of approximately 60 basis points or negative impact to EPS of approximately $0.11. As a reminder, our guidance does not include the impact of an official devaluation of the Venezuelan Bolivar or any other currency.

Our 2014 guidance reflects the strong performance we saw in the second quarter. The second half impact of the divestiture of OCD, a lower level of net gains at other income and expenses and our plan to continue investing in future growth. Given those factors, we suggest that you consider full year 2014 EPS estimates, excluding the impact of special items of between $5.80 and $5.87 per share on an operational or constant currency basis.

Again while we are not predicting the impact of currency movements, to give you an idea of the potential impact on EPS of currency exchange rates would have remained where they were as of last week for the balance of the year then our reported EPS excluding special items would be positively impacted by approximately $0.05 per share due to exchange rate fluctuations. We therefore suggest that you model our reported EPS excluding special items in the range between $5.85 and $5.92 per share or a growth rate of 6% to 7%; this is higher than our previous guidance. And as a reminder, our earnings include intangible amortization of $1.4 billion on a before tax basis or an impact of approximately $0.38 on EPS.

As you update your models for the guidance I just provided, you will see that we do expect that our pre-tax operating margins will show a stronger improvement in 2014 over 2013 levels than we previously expected. This is due to the strong performance of our business primarily driven by new product launches including the significant benefit from OLYSIO this year.

In summary, we are very pleased with our strong results through the midpoint. Our strong performance in the second quarter has allowed us to offset the negative earnings impact that will occur in the second half of this year from the recently completed divestiture of the OCD business. Although we expect to see lower other income and expense gains and along with our intent to invest in future growth, we are very comfortable with an overall increase in our earnings guidance.

And now I’d like to turn things back over to Louise for that Q&A portion of the meeting. Louise?

Louise Mehrotra – VP of IR

Thank you, Dominic. Jennifer, could you please give the instructions for the Q&A session?

Question-and-Answer Session

 

Read the Full Transcript here

 

 

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