Johnson & Johnson : 2022 Second-Quarter Earnings Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

JNJ.N - Q2 2022 Johnson & Johnson Earnings Call

EVENT DATE/TIME: JULY 19, 2022 / 12:30PM GMT

OVERVIEW:

Co. reported 2Q22 sales of $24b, adjusted net earnings of $6.9b and adjusted diluted EPS of $2.59. Expects full-year 2022 midpoint of adjusted operational sales to be $97.8b and adjusted EPS (on constant currency basis) to be $10.65-10.75.

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JULY 19, 2022 / 12:30PM, JNJ.N - Q2 2022 Johnson & Johnson Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Jessica Moore Johnson & Johnson - VP of IR

Joaquin Duato Johnson & Johnson - CEO & Director

Joseph J. Wolk Johnson & Johnson - Executive VP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Chris Shibutani Goldman Sachs Group, Inc., Research Division - Research Analyst

Christopher Thomas Schott JPMorgan Chase & Co, Research Division - Senior Analyst

David Reed Risinger SVB Securities LLC, Research Division - Senior MD

Joanne Karen Wuensch Citigroup Inc., Research Division - MD

Joshua Thomas Jennings Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

Lawrence H. Biegelsen Wells Fargo Securities, LLC, Research Division - Senior Medical Device Equity Research Analyst Louise Alesandra Chen Cantor Fitzgerald & Co., Research Division - Senior Research Analyst & MD

Terence C. Flynn Morgan Stanley, Research Division - Equity Analyst

P R E S E N T A T I O N

Operator

Good morning, and welcome to Johnson & Johnson's Second Quarter 2022 Earnings Conference Call. (Operator Instructions) 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.

Unidentified Company Representative

Please note that today's meeting may include forward-looking statements relating to, among other things, the company's future financial performance, product development, market position and business strategy and the anticipated separation of the company's Consumer Health business. You're cautioned not to rely on these statements, which are based on current expectations of future events using the information available as of today's date and are subject to certain risks and uncertainties that may cause the company's actual results to differ materially from those projected.

In particular, there is significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. A further description of these risks, uncertainties and other factors can be found in our SEC filings, including our 2021 Form 10-K, which is available at investor.jnj.com and on the SEC's website.

Additionally, several of the products and compounds discussed today are being developed in collaboration with strategic partners or licensed from other companies. These slides acknowledge those relationships.

Joaquin Duato - Johnson & Johnson - CEO & Director

Good morning, everyone. This is Joaquin Duato, Chief Executive Officer of Johnson & Johnson. Thanks for joining us today. I am accompanied by Joe Wolk and Jessica Moore, and we have the privilege to share our second quarter financial results and answer questions you have regarding Johnson & Johnson's business.

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JULY 19, 2022 / 12:30PM, JNJ.N - Q2 2022 Johnson & Johnson Earnings Call

During my first 6 months as CEO, I have had the opportunity to reconnect in person with colleagues, customers and stakeholders around the world. These conversations have energized me about the future of Johnson & Johnson. They have also made clear the critical role our company plays as a leader in bringing innovative health care solutions to patients and customers, both today and long into the future. And they further validated that the 3 strategic priorities I outlined earlier this year will continue to guide us in 2022 as we deliver on our mission to transform the future of human health.

Let me remind you of those priorities. First, we will continue to advance our industry-leading success in pharmaceuticals by delivering the innovative pipeline we highlighted at our Pharmaceutical Business Review last November. This includes our goal to grow this sector to $60 billion by 2025, with growth in every year, including years facing the STELARA loss of exclusivity and continuing to deliver above-market compounded annual growth of at least 5%.

In the second quarter, we saw evidence of this plan coming to fruition with the launch of CARVYKTI in April. And in May, we received conditional marketing authorization in Europe. In addition, talquetamab was granted FDA Breakthrough Therapy designation in June. I have great confidence in the strength of our current portfolio, which remains underappreciated, and in our robust pipeline to meet our long-term goals and to deliver transformational medicines that help improve and save lives.

Our second priority, continue to strengthen our performance in MedTech. Over the past several years, this acceleration in performance has been driven by the delivery of differentiated solutions as well as improved commercial execution. We expect this improvement to continue, enabled by our innovative pipeline as well as the potential for expansion into higher-growth market segments.

Currently, 11 MedTech platforms each deliver over $1 billion in revenue annually. And based on the most recent results, we are gaining or holding share in nearly all of these. With the positive momentum in this business and our improvement in competitiveness, MedTech has delivered 6% adjusted operational growth in the first half of 2022. We believe MedTech will continue to be a significant source of value for our investors and our stakeholders.

Third, we are separating our Consumer Health business to create 2 market-leadingstand-alone companies. This separation can be a significant opportunity for value creation. The 2 new global entities will be well positioned to thrive in their respective markets and drive greater strategic and financial success. We are making excellent progress and remain on track to complete the separation in 2023.

In the second quarter, we announced the global leadership team for the new Consumer Health organization led by Thibaut Mongon as CEO designate and Paul Ruh as CFO designate. Having worked with both Thibaut and Paul for many years, I'm confident that we have selected the right leadership team to lead the new Consumer Health company in its next chapter.

The new Johnson & Johnson comprising our Pharmaceutical and MedTech businesses will remain the largest, most diversified healthcare products company in the world with over $80 billion in sales. With enhanced operational focus, the new Johnson & Johnson will be poised to bring integrated, comprehensive, disease-centric technology and innovative solutions to enhance patient care. Our balance sheet will remain strong, allowing us to pursue both organic and inorganic opportunities in higher growth markets across both segments, while maintaining our strong dividend distribution.

With these clear priorities in place, we are confident in our ability to execute on both our short-term and long-term objectives. We are very pleased to have delivered solid sales and earnings growth through the first half of 2022, reporting adjusted operational sales and EPS growth of 8% and 8.5%, respectively.

Joe and Jess will share details reflecting above-market adjusted operational sales growth from Pharmaceuticals and continued resiliency in both MedTech and Consumer Health results that stand out given the current global macroeconomic challenges. We are well positioned across the globe to sustain our leadership position in healthcare. We aspire to accelerate growth while maintaining the diversification in our business and our discipline around capital allocation, which have been foundational to our success for over the past 135 years.

I look forward to addressing your questions soon. But for now, I will turn the call over to Jessica Moore to discuss those details. Jess?

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JULY 19, 2022 / 12:30PM, JNJ.N - Q2 2022 Johnson & Johnson Earnings Call

Jessica Moore - Johnson & Johnson - VP of IR

Thank you, Joaquin. This is Jessica Moore, Vice President of Investor Relations for Johnson & Johnson. As a reminder, you can find additional material, including today's presentation and associated schedules, on the Investor Relations section of the Johnson & Johnson website at investor.jnj.com.

We continue to implement enhancements in order to assist you in evaluating our performance. In addition to today's presentation and associated schedules, we will be posting the transcript of today's call as well as an Excel version of key financial schedules.

I will now review the second quarter sales and P&L results for the corporation and the 3 segments. Following, Joe will provide additional business and financial commentary, before sharing an overview of our cash position, our capital allocation priorities and updated guidance for 2022. The remaining time will be available for your questions. We anticipate the webcast will last up to 60 minutes.

Now let's move to second quarter results. Worldwide sales were $24 billion for the second quarter of 2022, an increase of 3% versus the second quarter of 2021. Operational sales growth, which excludes the effect of translational currency, increased 8% as currency had a negative impact of 5 points. In the U.S., sales increased 2.3%.

In regions outside the U.S., our reported growth was 3.8%. Operational sales growth outside the U.S. was 13.9% with currency negatively impacting our reported OUS results by 10.1 points. Excluding the net impact of acquisitions and divestitures, adjusted operational sales growth was 8.1% worldwide, 2.4% in the U.S. and 14.2% outside the U.S.

Turning now to earnings. For the quarter, net earnings were $4.8 billion and diluted earnings per share was $1.80 versus diluted earnings per share of $2.35 a year ago. Excluding after-tax intangible asset amortization expense and special items for both periods, adjusted net earnings for the quarter were $6.9 billion and adjusted diluted earnings per share was $2.59, representing increases of 4.3% and 4.4%, respectively, compared to the second quarter of 2021. On an operational basis, adjusted diluted earnings per share increased 10.9%.

I will now comment on business segment sales performance highlights. Unless otherwise stated, percentages quoted represent the operational sales change in comparison to the second quarter of 2021 and, therefore, exclude the impact of currency translation. As stated last quarter, we plan to keep our comments brief to leave more time for Q&A. Please refer to the slides for additional segment and franchise commentary.

Beginning with Consumer Health. Worldwide Consumer Health sales of $3.8 billion decreased 1.3%, with a decline of 3.6% in the U.S. and growth of 0.6% outside the U.S. Operational sales growth, which excludes the effect of translational currency, increased 2.3% as currency had a negative impact of 3.6 points. Excluding the impact of acquisitions and divestitures, worldwide growth was 2.9%.

Results were primarily driven by strategic price increases, growth in OTC outside the U.S. due to a strong cold, cough and flu season and digestive health category recovery. This growth was partially offset by a weaker allergy season and supply constraints in the U.S., although these have improved from prior quarters. Furthermore, the Consumer Health business was negatively impacted by regional COVID-19 mobility restrictions, mainly affecting the Skin Health/Beauty franchise.

Moving on to our Pharmaceutical segment. Worldwide Pharmaceutical sale of $13.3 billion increased 6.7% with growth of 4.2% in the U.S. and 9.8% outside of the U.S. Operational sales growth, which excludes the effect of translational currency, increased 12.3% as currency had a negative impact of 5.6 points. Excluding the impact of acquisitions and divestitures, worldwide growth was 12.4%. Excluding COVID-19 vaccine sales, worldwide operational sales growth was 8.6%. Results in the quarter were impacted by unfavorable prior-period adjustments, offset by favorable discounts.

Pharmaceutical growth was driven by our broad portfolio of products paired with strong commercial access and execution, enabling us to continue to deliver above-market adjusted operational sales growth, including 5 assets with double-digit growth in the quarter. Growth was due to strength from DARZALEX, STELARA, ERLEADA and TREMFYA, along with our paliperidone long-acting portfolio, which was partially offset by biosimilar competition for REMICADE, along with a decrease in IMBRUVICA sales.

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JULY 19, 2022 / 12:30PM, JNJ.N - Q2 2022 Johnson & Johnson Earnings Call

DARZALEX and ERLEADA continued to drive strong operational sales growth with increases of 46.1% and 56.9%, respectively. STELARA growth of 18.6% was driven by strong market growth and meaningful share gains in Crohn's disease and ulcerative colitis. This represents 5.4 points and 7.4 points of share gain, respectively, in the U.S. Results in the quarter benefited from favorable discounts, partially offset by unfavorable prior-period adjustments for a net favorable impact of approximately 400 basis points.

TREMFYA grew 29.7%, driven by market growth and share gains in psoriasis and psoriatic arthritis. This represents 2.3 points and 3.2 points of share gain, respectively, in the U.S. Results in the quarter were impacted by an unfavorable prior-period adjustment of approximately 750 basis points in unfavorable patient mix.

IMBRUVICA operational sales declined 7.2% worldwide due to increased competition, particularly in the U.S. IMBRUVICA maintains its market leadership position worldwide and continues to drive operational growth outside of the U.S. despite ongoing competitive pressures. Given these results, we remain confident in our ability to deliver our 11th consecutive year of above-market adjusted operational sales growth in 2022.

I'll now turn your attention to the MedTech segment. Worldwide MedTech sales of $6.9 billion decreased 1.1% with growth of 1.6% in the U.S. and declines of 3.6% outside of the U.S. Operational sales growth, which excludes the effect of translational currency, increased 3.4% as currency had a negative impact of 4.5 points. Excluding the impact of acquisitions and divestitures, worldwide growth was 3.4%. Operational sales also grew sequentially versus the prior quarter despite headwinds related to regional COVID-19 mobility restrictions as well as labor and supply constraints.

Drivers for growth across the MedTech business include procedure recovery, focused commercial strategies and differentiated new products driving enhanced or sustained market share positions in nearly all of our 11 priority platforms, each generating over $1 billion in annual sales. For additional context, all franchises were affected by regional COVID-19 mobility restrictions, and selling days had an immaterial impact on results in the quarter.

Now turning to our consolidated statement of earnings for the second quarter of 2022. I'd like to highlight a few noteworthy items that have changed compared to the same quarter of last year. Cost of products sold deleveraged by 50 basis points, primarily driven by increased supply network-related cost with the COVID-19 vaccine and inflation, partially offset by favorable mix. We continued to invest strategically in research and development at competitive levels, investing 15.4% of sales this quarter. The $3.7 billion invested was a 9.1% increase versus the prior year, primarily due to portfolio progression in Pharmaceutical and MedTech.

The other income and expense line was an expense of $273 million in the second quarter of 2022 compared to a net income of $488 million in the second quarter of 2021. This was primarily driven by litigation, higher unrealized losses on securities and Consumer Health separation costs in the current year, partially offset by favorable employee benefit plan-related items.

Regarding taxes in the quarter, our effective tax rate was 17.6% versus 5.8% in the same period last year. This was primarily driven by a 2021 one-time tax benefit from an internal reorganization of certain international subsidiaries. Excluding special items, the effective tax rate was 15.4% versus 14.8% in the same period last year. I encourage you to review our upcoming second quarter 10-Q filing for additional details on specific tax matters.

Lastly, I'll direct your attention to the box section of the slide, where we have also provided our income before tax, net earnings and earnings per share adjusted to exclude the impact of intangible amortization expense and special items.

Now let's look at adjusted income before tax by segment. In the second quarter of 2022, our adjusted income before tax for the enterprise as a percentage of sales increased from 33.4% to 34%, primarily driven by favorable product and segment mix, partially offset by inflation and portfolio progression in R&D.

Pharmaceutical margin improved from 39.4% to 42%, primarily driven by favorable product mix and brand marketing expense leverage. MedTech margins declined from 28.6% to 26.5%, driven by inflation, unfavorable product mix and increased investments to support new product launches and research and development. Finally, Consumer Health margins declined from 28.6% to 25.9% due to commodity inflation, partially offset by supply chain efficiencies and one-time favorable items in 2021.

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