Johnson & Johnson (JNJ) Q3 2017

Dominic Caruso – EVP and Chief Financial Officer

They want a reform of the tax system

“To level the playing field with other industrialized countries, tax reforms should include three fundamental elements, a lower corporate income tax rate in line with other industrialized countries, the adoption of a modern, globally competitive International tax system allowing U.S. companies to manage their cash without tax penalty and of course greater incentives for innovation in the U.S”

Johnson and Johnson at Barclays Notes

Jorge Mesquita – EVP, Worldwide Chairman, Consumer

There’s a lot of disruption in our industry

“But the reality is that the pace of change in our industry is truly accelerating as Lauren said, in fact where I want to spend my time with you here today is to talk about that our industry is really being disruptive. If you look at our last few decades in this industry, there were a series of barriers for entry or sources of competitive advantage that were well established but those are becoming less and less unique. It used to be that companies like ours would acquire the best talent through our recruiting human resources mechanism, but it’s never been easier for you to source great talent across the world on demand.

Our ability to build and nurture brands, brand building competencies used to be again a source of competitive advantage but the reality is it’s very easy for you to start building a business, building a brand from scratch and you really don’t need a ton of money to get a community of active users that support you. Large scale manufacturing assets used also to be a source of competitive advantage. But the reality is if you want to compete in this industry, you can access high quality contract manufacturing work any place in the world.

Retailer relationships used to be also a source of advantage and a barrier for entry, but as you all know, new companies can now sell directly to consumers profitably in most markets. Innovation used to also be a big barrier for entry but again you have an ability now through a network of external partnerships to access innovation even crowd sourcing. And then financial firepower for companies like J&J is not as critical as it used to be because new startup entrants can access capital relatively easy through VCs.

So what you see is a result of these barriers coming down, you see new class of competitors emerging and now we have our classic multi-national, well established competitors and you have these new entrants to contend with. So this disruption that is happening is digitally enabled and is changing the face of our industry. You see these new players coming into our category and at the heart of this disruption, there is a new consumer centric paradigm and that’s challenging completely the cost of goods scale and the value scale as we know it and its forcing a change in both the retail and the media landscape.

New playbook ks asset light infrastructure and control of the consumer relationship via data

“And what we’re seeing now is there is a new playbook emerging, a new how-to-win playbook that is really characterized by an asset light infrastructure. And the control of the consumer relationship,via the acquisition of the sports party data that allows for you to have a highly personalized iterative on demand consumer experience. And the ownership of this relationship with consumers and associated ecosystem that comes with it is now the new playbook. It is now the greatest new source of competitive advantage.”

Small players are succeeding because they are committed to breakthrough innovation, stay close to customers, build digital brands first and are hyper efficient

“What is it that is allowing them to succeed, because by and large if you look at our categories, these small players are the ones that are gaining shares and majority of large companies are losing market share. So we’ve found five things that we think these players are doing uniquely well.

First, they are really committed to breakthrough innovation by staying really close to consumers and customers and staying on top of consumer trend. They see where the product is going and they are designing to what that emerging consumer need is. They are focused on building digital first brands that have a clear purpose and a reason for being that resonates with millennial consumers.

They capitalize on the rise of emerging channels. They don’t just play in the legacy channels but they figure out what are the new shopping behaviors, new emerging channel trends and they disproportionate drive growth in those channels. They are hyper efficient. Normally have very lean cost structures, flat organizations, no bureaucracy and as a result they move very fast. Speed is a great currency for them.

Johnson and Johnson 2Q17 Earnings Call Notes

Alex Gorsky

We’re pleased that the admin is listening to business leaders

“First in terms of our interactions with the US Administration, we’re pleased that senior officials are continuing to listen to business leaders, when considering the impacts of legislation and we’ll continue to participate in these conversations as well as those with other world leaders to make sure our voices are heard on these vital issues. In fact, I’m here in Washington DC today meeting with U.S. and global leaders driving forward discussions on the important issues impacting healthcare today. On the topic of Healthcare Reform, we continue to support initiatives that expand access to affordable healthcare and improve long-term sustainability of the U.S. healthcare system.”

Monitoring AHCA

“We’ve been monitoring the ongoing development of the AHCA with great interest and think that as our political leaders bring the new healthcare bills through Congress, it is important that they consider how these efforts will ensure stability within the system, while enhancing the competitive market and fostering continued innovation for new treatments and cures.”

Pharma pricing thoughts

“In terms of the potential Executive Order on pharmaceutical pricing, we understand the concern about the cost of healthcare and believe we have a responsibility to ensure our products are both assessable and representative of the outcomes and value they deliver. We recognize the important role pharmaceutical drugs play in improving healthcare outcomes. We know these medicines represent only about 15% of overall healthcare spending as they also represent a critical component of effectiveness and efficiency in the healthcare system. As we note in our 2017 Janssen US Transparency Report, we’ve maintained a responsible approach to pharmaceutical pricing, generally limiting our aggregate annual price increase to single-digit percentages below those of our competitive set. We’ll continue working with all our stakeholders to ensure sustainable future for America’s healthcare ecosystem.”

Tax code disadvantages US companies

“Finally, while we remain optimistic that there are opportunities from modernization of the corporate tax code in the near future, we’ll continue to monitor any developments or progress as Congress prioritizes this among other pressing needs. As we said before, we believe fundamental elements of our current tax system are outdated and disadvantaged U.S. companies against our international competitors who have reduced tax rates, domestic-only taxation and have incentives for innovation and investments.”

Johnson and Johnson at Jefferies Conference Notes

Alex Gorsky

Healthcare makes up 20% of the US economy

“healthcare now makes up almost 20% of the economy in the U.S.; about 10% in a lot of the other major economies around the; world given demographics, 65 plus population, I think latest figures in the U.S.; we got about 40 million people who are at the age of 65 that number is going to go to 80 million over the next 20 or 30 years; and if you look at every age category, from 70 to 80, 80 to 90, you see very similar statistics, I think the number from 90 plus is going from like 2 million to 10 million. And of course, the corresponding increase in medical and healthcare consumption with that aging, it’s pretty remarkable. And by the way, it’s not only in the United States, it’s in Japan right now 25% of the population of 55 plus that number is going to 40%.”

When people move up the economic ladder they want healthcare

“And as I travel around whether it’s a Mumbai, whether it’s a Memphis or Moscow, this tissue of aging demographics and increasing middle class and I think it’s pretty — it’s been shown that once people have food, once people have shelter the next thing they consume more of is they move up the economic ladders, healthcare that it puts a lot of pressures on governments and systems. ”

Incredible explosion of innovation thanks to technology

“The flip side of that is the incredible explosion of innovation that we’re seeing right now. And I think a lot of that is enabled frankly by technology, it’s enabled by Big Data, it’s enabled by new innovation approaches in some cases that we couldn’t even have imagined 10 years, 15 years ago or if we did it was side by. And I think that makes it quite exciting. I think if you look — just look back in my carrier, we’ve seen HIV go from a death sentence where if you were diagnosed in the early 80s with HIV you perhaps had about two years of life left. Today, I believe the numbers with support of the Epidemiologist poor thing it take two years of the average life span. And if you think of going forward areas like oncology and the potential that we’re seeing vis-à-vis a better understanding of genomics and applying those insights into new therapeutic options is very exciting.”

*Consumers have been switching back to brands from private label

“I think there was a lot of skepticism not only can you fix the quality issue but number two is once you do reintroduce once patients made the switch to private label, particularly at the depth of the recession, will you ever get them switch back to brands like Tylenol. Today, if you look at our core share with Neutrogena, with Tylenol, with other brands, they are definitely on the upswing, not quite back yet to where they were, but well underway.”

Johnson & Johnson (JNJ) Q1 2017

Dominic Caruso – EVP and CFO

Acquisition of Actelion almost complete

“…we have had many positive developments concerning the steps needed to close the Actelion transaction and we expect to complete our acquisition of Actelion by the end of the second quarter. ”

Cost management bearing fruit

“Cost of goods sold decreased by 20 basis points, primarily due to manufacturing cost improvements which were partially offset by transactional currency impacts. Selling, marketing and administrative expenses were 26.6% of sales, or 20 basis points lower as compared to the first quarter of 2016 due to cost management.”

On taxation

“With respect to tax reform and what we expect to happen, I was actually just in Washington last week and one of the things that I think is very clear is that the House has a plan that they want to move forward which includes the border adjustment tax, that has not yet been adopted by the Senate, although everyone agrees that some innovation in the way jobs will be created in the U.S. is important and I would say the grand summary from my takeaway was that both the House and the Senate are waiting for guidance from the White House on whether they prefer the border adjustment tax or whether they have another vehicle that they would like to implement. And while everyone is waiting for that, things have in fact stalled…, but I am confident that we’re talking about the right things, we’re talking about a lower U.S. tax rate, we’re talking about a territorial system and we’re talking about some innovation and some incentive for job creation in the U.S.”

Price trends

“I would say no significant acceleration or change in the pricing dynamics that we’ve been seeing. So steady as she goes with respect to slightly negative price across the industry”

 

Johnson & Johnson’s (JNJ) Q4 2016 Earnings Call

Alex Gorsky – Chairman and Chief Executive Officer

They want a modernized tax code

“…we also are advocating for the modernization of the US tax codes. As both sides in the aisle in the Washington have noted, the US tax code for business is outdated and in many cases makes the US a more costly place to do business leaving US workers and the US economy at a disadvantage. We are very encouraged by the proposals currently in discussion and we will support business tax policy that is competitive with most developed countries and encourages innovation and growth. 

..and they are confident it would spur growth

“so far, I remain very confident in discussions that we’ve had that ultimately we will make changes to the overall tax system that will be a stimulus for growth and that ultimately will help Johnson & Johnson and many other companies grow at an even faster rate going forward.”

Thinking of your portfolio as your children when divesting

“it’s always a difficult decision and when you look at your portfolio and as I frequently describe, it is little bit like your children, you love all of them just from time-to-time we are trying to make decisions that we think ultimately are in the best long-term interest of our customers, stakeholders and our shareholders and we think diabetes is clearly an area of a lot of unmet medical need….That being said, we do feel that based upon the broader market dynamics, particularly things such as pricing in certain areas has led us to the point where we say the right thing for us to do is to consider strategic options for these three particular areas of the business.”

Dominic Caruso – Executive Vice President and Chief Financial Officer

On the Affordable Care Act

We did not see any significant impact uptick in business as a result of the implementation of the Affordable Care Act. Certainly there was not much of an impact at all in the Pharma business on our Device business because of the nature of the type of device products we have, we did not see much of an impact. So therefore, any change going in the opposite direction, we don’t think will be negative. We did see an impact in terms of the cost associated with the Affordable Care Act, but as we said before, we’ve incurred approximately $1.4 billion between the pharmaceutical fee, increased rebates et cetera even excluding the currently postponed medical device tax. So we’ll have to see when new legislation is announced, whether or not these fees and cost associated with the Affordable Care Act remain or if they are authored at any way. But those have already been incorporated in our business. ”

 

Johnson and Johnson at JP Morgan Healthcare 2017 Notes

Alex Gorsky – Chairman and CEO

My plate has never been so full with new opportunities

“It starts really first of all which is science innovation, and I think by far the best part of my job is I get to sit in rooms all day long with a diverse array of some of the world’s best scientists seeing groundbreaking innovation across a number of different disciplines and domains from pharma to biotechnology to medical devices to consumer. And I can tell you never has my plate been so full with new opportunities, and it’s very different than from the ’90s when we were on the 17th PPI and I’m sure people in this room were wondering is pharma ever going to show a breakthrough.”

It’s not an accident

“Today, it’s just the opposite. It’s how are we ever going to make the right portfolio decisions. And look, I don’t think that’s an accident. I think it happened because the people in this room and the people in our industry have invested billions of dollars in understanding the genome and really understanding some of the underlying biology and pathophysiology of these conditions whether it’s in oncology, neuroscience, immunology. So I think it’s a very exciting time and I think it’s picking up. And what you see more and more is that while there’s one good opportunity, there may be five more opportunities the next day.”

clinical development, regulatory and reimbursement capabilities

” if a great opportunity presents itself, we’ve got a lot of clinical development capabilities, a lot of regulatory capabilities, a lot of reimbursement capabilities that we can put to bear on something that maybe an adjacency. So that’s the way we tend to think about it.”

Haven’t seen hospital volumes ever really rebound from the recession

” it was one of the first times really that we saw elasticity in demand in healthcare along with the more general economy, things really slowed down. We saw especially in medical devices, you saw most categories go from 6%, 7%, 8% growth rates down to 2%, 3% in a very short period of time. What we’ve seen since then is hospital volumes have not rebounded significantly. It’s been in the low-single digits as you know from the different data sources and that’s by the way in terms of hospital admissions, in-patient admissions, surgical procedures.”

There will be good things and bad things from corporate tax reform

“Now when we talk about change at first there’s a lot of enthusiasm for it and I think we should be and I think the overall outcome really has the potential to be positive. But we should also understand that there are going to be some things that all of us really like that are likely going to go away. There’s going to be other things that we don’t necessarily like that may be introduced as part of that. Based upon the conversations that we’ve had, the opportunity to go to more of a territorial-based system will result in us being much more competitive hopefully taking out some of the anomalies that cause us to do inversions, other factors that may result in us being less competitive. So I think that could be a very good thing.”

Johnson and Johnson 3Q16 Earnings Call Notes

Johnson & Johnson (JNJ) Q3 2016 Results

Dominic Caruso

September hospital admissions are a little better

“In Medical Devices, consistent with some recent analyst reports about the market, we believe the industry experienced lower hospital admissions and procedure rates during the mid summer months. Late in the quarter, several reports showed higher levels of activity, and in fact the data that we recently saw published for September looked encouraging…once September hit, the data showed quite a rebound from the summer months, and the rate of growth in September was actually faster than what we saw in the first quarter, which was the highest growth quarter year-over-year in terms of penetration. Now whether that remains at that level or whether it’s a rebound effect from the summer, we’ll have to see. But I think this is all well-chronicled in the multiple reports that many of you I’m sure have seen. So overall, I’d say we’re now in a stable environment in hospital procedures.”

There is probably going to be some international tax reform after the election

“With respect to international tax reform and what we’re hearing, I can tell you that I visit in Washington often and speak with members of the House Ways and Means Committee and the Senate Finance Committee and the tax staffs are busily working and working very collaboratively with U.S. multinationals on an appropriate tax reform package. We think there is more [by-parts] [ph] to support now than there has been in the past. We think that often we hear, as you mentioned, the benefit of investing in U.S. infrastructure as a result of those repatriated earnings coming back into the U.S. So that would be a positive. And we think that overall the climate for international tax reform post the election, quite frankly, is more positive than it’s been in the last year or so.”

Proposition 61 is “misguided”

“Thank you. I mean as you were saying, Dominic, despite of the rhetoric about pharmaceutical pricing, it’s always good to take some perspective on that. Pharmaceuticals represent 14% of total expenditures and we understand that we need to work with different stakeholders in order to try to manage our healthcare cost and we have advanced different ideas in that area as you were describing, Dominic, such as value-based contracting, and we need to work there in order to try to eliminate the regulatory barriers that do not help in that area. As far as Proposition 61, as an example of that rhetoric, as Dominic said, there are different groups that oppose that measure that includes even veteran groups and seniors and unions, the reason being it’s unclear what the effects of Proposition 61 would be. It is clear that it would be difficult to operationalize and also would create some access barriers to patients. So overall, we don’t see Proposition 61 as the right way to try to work on pharmaceutical pricing. We think it’s a misguided action.”

Johnson & Johnson (JNJ) at Morgan Stanley Notes

JNJ’s 24 billion dollar brands–and its diverse portfolio in general–gives it insight and connections with large customers that are increasingly consolidating.

“You take we’ve got 24 brands that are billion dollar platforms at Johnson & Johnson, the first and best in many different areas. And we think that that provides a certain financial stability as we think about the long-term future and really investing for the long-term. We think that that diversified portfolio, however, provides us a number of other benefits. It provides us certain insights… We think it gives us breadth and depth with large customers that are increasingly consolidating, whether it’s large independent healthcare systems, whether it’s governments outside of the United States, particularly in emerging markets where the diversified and even consumer branded Johnson & Johnson is very important. It’s a philosophy and it’s a strategy that’s also grounded in competitiveness.” Alex Gorsky – Chief Executive Officer

 

Growth is split about 50-50 between organic and inorganic.

“In about slightly over 50% of the time, depending on the timeframe, it can range from 55% to 60% of the time, we tend to benefit from organic growth opportunities, things that we develop within our labs. About 40% to 45% of the time it’s been through inorganic growth.” Alex Gorsky – Chief Executive Officer

 

Over the next 30 years, 350 million people worldwide are aging past 65. This will create opportunity for the healthcare industry, but will also create pricing pressure.

“I think absolutely we should be expecting ongoing pricing pressures in the industry. It’s just the fact that if you look at the macroeconomic issues around the world, given aging populations, the fact that each of us are getting there faster by the minute. But about 12% of the population is over the age of 65, that number is probably going to go to 25% certainly here in the United States. If you’re in Japan, you’re already at 25%, but if you’re in Germany and places like that, you’re rapidly approaching that same number. When you consider the fact that once you turn 65 you tend to consume about 5 to 7 times the amount of healthcare you consumed before you were 65. And then if we go to emerging markets, China, Brazil, India, Russia, other areas, you’ve got two dynamics. One, you have an aging population in many of those places. I think there’s about 150 million people over the age of 65 in China. That number will go to 350 million over the next 30 years.

So imagine a population the size of the United States. And then you combine that with an increasing middle class and once people get shelter, food, what’s the third thing they want to consumer more of as they move up the economic ladder? Healthcare. So we think all of those are going to being a lot of pressure on payers and healthcare systems and therein lies the opportunity I think for us. But I think clearly that will result in pricing pressure” Alex Gorsky – Chief Executive Officer

 

Large acquisitions focus on synergy, smaller acquisitions focus on innovation

“Large acquisitions by definition are more complex, they’re messier. Rather than focusing on innovation, they frequently focus on synergies. And so that’s what we would prefer.” Alex Gorsky – Chief Executive Officer

 

As the hospital and pharmaceutical ecosystems evolve, they prefer to deal on a broader basis.

“We see that as systems get larger in the United States that there’s a preference to talk across category. Now it’s fair to say that hospital systems are still evolving in this area. There’s some of them that still need to mature, that need to build their systems to deal on that kind of basis. But we’re seeing a greater and greater appetite for that as we speak. We certainly see it outside the United States in dealing with places like the UK, Germany and in emerging markets where they want to deal on a broader basis.” Alex Gorsky – Chief Executive Officer

 

The JNJ brand is associated with the smell of baby shampoo.

“We believe the consumer business at J&J is an absolute integral part of our company. And it starts with what you just said. I mean wherever I go around the world, if you say what do you think of with Johnson & Johnson, I mean people smell baby shampoo. And it brings an affinity to the brand of Johnson & Johnson, it makes us different.” Alex Gorsky – Chief Executive Officer

Johnson & Johnson (JNJ) at Wells Fargo Conference Notes

JNJ grows its pharma business in the US through market share gains and penetration by way of clinical evidence, as opposed to pricing

“Overall, for Johnson & Johnson, in total, price is a very small component of growth, in sort of the half a percent range on a worldwide basis. If you talk about pharmaceutical pricing, and I think you may be specifically referring to US pharmaceutical pricing, what I can tell you is that the vast majority of our growth in the US pharma business is due to volume and not price. I can also tell you that our average price increases over the last five years have been below our competitor set. So we’re not really dependent on price because, as I just described, our philosophy is to expand indications and grow market share and penetration through clinical evidence and not grow through price increase.” Dominic Caruso – Executive Vice President and Chief Financial Officer

 

Pharmaceutical pipeline is robust

“as you may remember, that a year-and-a-half ago, we announced that we’re on track to file 10 new products by 2019, each of which had individually more than $1 billion market potential. So, therefore, we feel really good about that pipeline and that pipeline is coming to fruition… So I think that business of creating a robust pipeline within a product by multiple expansion, indications and also licensing in the product, as you mentioned with our strategy of developing that product, that’s a sustainable model for us. I think it will help us withstand patent expirations and the like and continue a very healthy growth trajectory.” Dominic Caruso – Executive Vice President and Chief Financial Officer

 

Med tech segment is undergoing restructuring, Pharma segment has already been restructured, and some supply chain opportunities remain in Consumer segment

“We’re now undergoing a restructuring in our Medical Device business and we commented that we would see that $800 million to $1 billion of savings from that restructuring by 2018, the vast majority by 2018, that part of the business is the business that’s mostly disparate within Johnson & Johnson. So the supply chain and consolidations of that business are where there is opportunities, for example, than in Pharma. Pharma had already been through that. Consumer, there’s still some opportunities with globalization of brands and that provides for more efficiency in the supply chain and they’re also doing that.” Dominic Caruso – Executive Vice President and Chief Financial Officer