Johnson & Johnson (JNJ) Q4 2012 Earnings Report, Transcript and Summary

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 fourth quarter and full year of 2012. Joining me on the podium today are Alex Gorsky, Chairman of the Board and Chief Executive Officer and Dominic Caruso, Vice President, Finance and Chief Financial Officer. A few logistics before we get into the details. This meeting is being made available to a broader audience via a webcast accessible through the Investor Relations’ section of the Johnson & Johnson website. I’ll begin by briefly reviewing highlights of the fourth quarter and full year of 2012 for the corporation and highlights for our three business segments. ] Following my remarks, Alex will comment on the 2012 results and provide a strategic outlook for the company. At the completion of Alex’s remarks Dominic will provide some additional commentary on the third quarter results and discuss guidance for 2013. We will then open the call to your questions. We will conclude our formal presentations at approximately 9:45 and following Q&A with some final remarks by Alex, we’ll conclude this portion of the meeting around 10:15. Following a break, we will resume at 11 and begin the medical devices and diagnostics business review that was rescheduled because of Hurricane Sandy. That program will include presentations by Gary Pruden, Worldwide Chairman, Global Surgery Group; Karen Licitra, Worldwide Chairman, Global Medical Solutions Group; and Michel Orsinger, Worldwide Chairman, DePuy Synthes Companies. We will break for lunch and the technology displays around noon, and resume the presentations at approximately 12:45. We will include a question and answer panel at the end of the presentations, and expect to close the meeting around 2:30. Included with the press release that was…

We also generated significant free cash flow of approximately $12.5 billion. Importantly, we continued our track record of delivering consistent performance, with 29 straight years of adjusted earnings increases, and 50 consecutive years of dividend increases, making us only one of six companies in the S&P 100 to achieve that record. You can see our products are making a difference in the care of people around the world, as approximately 70% of our sales come from the number one or number two global market share position. And our commitment to investing in R&D is also paying off, with about a quarter of our sales being generated from products that have been introduced in just the last five years. The solid shareholder returns are a hallmark of Johnson & Johnson. Founded in 1886 and listed on the New York Stock Exchange since 1944, our commitment to managing for the long term has made Johnson & Johnson a solid investment choice for decades. In 2012, a total shareholder return of just under 11% exceeded the Dow Jones Index. And although a nice return, it trailed the other indices we compare to, and as we move forward, we’re focused on decisively shaping our portfolio to deliver even more meaningful innovations to patients and customers. Here are results by segment, reflecting our broad base of leadership in healthcare. Pharmaceuticals generated $25.4 billion, or 38%, of our total sales. It had a strong operational growth rate of 6.8%. Medical devices and diagnostics, our largest segment, generated $27.4 billion, or 41%, of our total. Operational growth was 8.7%. Excluding the net impact of the acquisition of Synthes in June, operational growth was about 1%. Overall growth in this segment was impacted by our decision to exit the drug eluting stent market and the continued economic pricing…

Thank you Alex, and good morning everyone. I’d like to provide some comments on our 2012 fourth quarter and full year results, as well as provide guidance for you to consider as you update your models for 2013. It is a great pleasure to report solid financial results for 2012, a year where we also saw many successes that positioned us very well in the marketplace. At the beginning of 2012, I provided you with an outlook of our financial performance for the year. Specifically, we guided to net income margin that would remain at approximately the same level as in 2011, but that operating margins would improve over 2011 by 100 to 150 basis points due primarily to improved leverage across all operating expenses.As a reminder, we updated our original guidance in July 2012 to include the impact of the Synthes acquisition, including the incremental amortization expense and we forecasted that with good expense management we could still achieve that same 100 to 150 basis point improvement in operating margins.With the completion of the divestiture of our (Varicose) business late in the fourth quarter, the other income and expense line resulted in a higher net gain for 2012 than the guidance we had provided in October.As has been our practice, we take the opportunity to redeploy those types of gains in higher growth areas with additional investments in the business. This additional gain was offset by additional R&D expenses related to the licensing and collaboration deals we entered into in the fourth quarter, such as the collaboration with (Astellas) for the development of a new (jack) inhibitor and milestone payments to other collaborations that have advanced in our pipeline.Even with these additional investments and the incremental amortization expense associated with Synthes, I am pleased to report that we did…

We also look, obviously, at the future pipeline. Could we, in fact, and did we see a path forward to be able to be in a more competitive position. And three, how did we see it fitting in a more complementary way with some of our other businesses. And while we certainly believe in the future of diagnostics, we think that that will more likely be in an area outside of clinical diagnostics such as molecular diagnostics, biomarkers, some of the other things that we’re already working on with some of our oncology programs. So when we looked at that in total, we felt that stepping back and looking at broader strategic options for that business was, in fact, the best thing to do for that business longer term, as well as for more broadly across Johnson & Johnson. And I also just think it’s indicative of the need for us to continue to look for ways, again, to make a better difference for patients and to drive growth in our organization. Now, to your second question, if I look more broadly across consumer, I’d start by saying that we remain very committed and excited about the future of our consumer group. It’s been essential to J&J for many, many years, and as we look to the future, there’s a couple of aspects that I think are very important. One, and something that we’ve been extremely consistent about over the past several years, is returning and repairing some of the quality and supply issues that we’ve had in our OTC, particularly in the McNeil U.S. division. I’m very pleased with the progress that we’re making in that. We mentioned to you that the consent decree that we had designed in conjunction with the FDA was approved and reviewed in October,…

We also look, obviously, at the future pipeline. Could we, in fact, and did we see a path forward to be able to be in a more competitive position. And three, how did we see it fitting in a more complementary way with some of our other businesses. And while we certainly believe in the future of diagnostics, we think that that will more likely be in an area outside of clinical diagnostics such as molecular diagnostics, biomarkers, some of the other things that we’re already working on with some of our oncology programs. So when we looked at that in total, we felt that stepping back and looking at broader strategic options for that business was, in fact, the best thing to do for that business longer term, as well as for more broadly across Johnson & Johnson. And I also just think it’s indicative of the need for us to continue to look for ways, again, to make a better difference for patients and to drive growth in our organization. Now, to your second question, if I look more broadly across consumer, I’d start by saying that we remain very committed and excited about the future of our consumer group. It’s been essential to J&J for many, many years, and as we look to the future, there’s a couple of aspects that I think are very important. One, and something that we’ve been extremely consistent about over the past several years, is returning and repairing some of the quality and supply issues that we’ve had in our OTC, particularly in the McNeil U.S. division. I’m very pleased with the progress that we’re making in that. We mentioned to you that the consent decree that we had designed in conjunction with the FDA was approved and reviewed in October,…

By the time all those products get back on the shelf, the MD&D business will do better in 2013 than in ’12. And the growth rate in the pharma business, of course in ’12, was dramatically fueled by the launch of the new products that came into the market, so the growth rate in ’12 versus ’11 is impacted by that, and we don’t have that same phenomenon in ’13 over ’12. Those products continue to do well, but relatively speaking, compared to the two years, the growth rate in pharma would be not as dramatic as the growth rate we saw in ’12 over ’11. You asked about why the conservatism, and look, it’s early. You know, it’s January 22. So we’ll keep you posted throughout the year. Matt Dodds – Citigroup: By the time all those products get back on the shelf, the MD&D business will do better in 2013 than in ’12. And the growth rate in the pharma business, of course in ’12, was dramatically fueled by the launch of the new products that came into the market, so the growth rate in ’12 versus ’11 is impacted by that, and we don’t have that same phenomenon in ’13 over ’12. Those products continue to do well, but relatively speaking, compared to the two years, the growth rate in pharma would be not as dramatic as the growth rate we saw in ’12 over ’11. You asked about why the conservatism, and look, it’s early. You know, it’s January 22. So we’ll keep you posted throughout the year.

By the time all those products get back on the shelf, the MD&D business will do better in 2013 than in ’12. And the growth rate in the pharma business, of course in ’12, was dramatically fueled by the launch of the new products that came into the market, so the growth rate in ’12 versus ’11 is impacted by that, and we don’t have that same phenomenon in ’13 over ’12. Those products continue to do well, but relatively speaking, compared to the two years, the growth rate in pharma would be not as dramatic as the growth rate we saw in ’12 over ’11. You asked about why the conservatism, and look, it’s early. You know, it’s January 22. So we’ll keep you posted throughout the year. Matt Dodds – Citigroup: By the time all those products get back on the shelf, the MD&D business will do better in 2013 than in ’12. And the growth rate in the pharma business, of course in ’12, was dramatically fueled by the launch of the new products that came into the market, so the growth rate in ’12 versus ’11 is impacted by that, and we don’t have that same phenomenon in ’13 over ’12. Those products continue to do well, but relatively speaking, compared to the two years, the growth rate in pharma would be not as dramatic as the growth rate we saw in ’12 over ’11. You asked about why the conservatism, and look, it’s early. You know, it’s January 22. So we’ll keep you posted throughout the year.

By the time all those products get back on the shelf, the MD&D business will do better in 2013 than in ’12. And the growth rate in the pharma business, of course in ’12, was dramatically fueled by the launch of the new products that came into the market, so the growth rate in ’12 versus ’11 is impacted by that, and we don’t have that same phenomenon in ’13 over ’12. Those products continue to do well, but relatively speaking, compared to the two years, the growth rate in pharma would be not as dramatic as the growth rate we saw in ’12 over ’11. You asked about why the conservatism, and look, it’s early. You know, it’s January 22. So we’ll keep you posted throughout the year. Matt Dodds – Citigroup: By the time all those products get back on the shelf, the MD&D business will do better in 2013 than in ’12. And the growth rate in the pharma business, of course in ’12, was dramatically fueled by the launch of the new products that came into the market, so the growth rate in ’12 versus ’11 is impacted by that, and we don’t have that same phenomenon in ’13 over ’12. Those products continue to do well, but relatively speaking, compared to the two years, the growth rate in pharma would be not as dramatic as the growth rate we saw in ’12 over ’11. You asked about why the conservatism, and look, it’s early. You know, it’s January 22. So we’ll keep you posted throughout the year.

By the time all those products get back on the shelf, the MD&D business will do better in 2013 than in ’12. And the growth rate in the pharma business, of course in ’12, was dramatically fueled by the launch of the new products that came into the market, so the growth rate in ’12 versus ’11 is impacted by that, and we don’t have that same phenomenon in ’13 over ’12. Those products continue to do well, but relatively speaking, compared to the two years, the growth rate in pharma would be not as dramatic as the growth rate we saw in ’12 over ’11. You asked about why the conservatism, and look, it’s early. You know, it’s January 22. So we’ll keep you posted throughout the year.

By the time all those products get back on the shelf, the MD&D business will do better in 2013 than in ’12. And the growth rate in the pharma business, of course in ’12, was dramatically fueled by the launch of the new products that came into the market, so the growth rate in ’12 versus ’11 is impacted by that, and we don’t have that same phenomenon in ’13 over ’12. Those products continue to do well, but relatively speaking, compared to the two years, the growth rate in pharma would be not as dramatic as the growth rate we saw in ’12 over ’11. You asked about why the conservatism, and look, it’s early. You know, it’s January 22. So we’ll keep you posted throughout the year. Larry Biegelsen – Wells Fargo: By the time all those products get back on the shelf, the MD&D business will do better in 2013 than in ’12. And the growth rate in the pharma business, of course in ’12, was dramatically fueled by the launch of the new products that came into the market, so the growth rate in ’12 versus ’11 is impacted by that, and we don’t have that same phenomenon in ’13 over ’12. Those products continue to do well, but relatively speaking, compared to the two years, the growth rate in pharma would be not as dramatic as the growth rate we saw in ’12 over ’11. You asked about why the conservatism, and look, it’s early. You know, it’s January 22. So we’ll keep you posted throughout the year.

By the time all those products get back on the shelf, the MD&D business will do better in 2013 than in ’12. And the growth rate in the pharma business, of course in ’12, was dramatically fueled by the launch of the new products that came into the market, so the growth rate in ’12 versus ’11 is impacted by that, and we don’t have that same phenomenon in ’13 over ’12. Those products continue to do well, but relatively speaking, compared to the two years, the growth rate in pharma would be not as dramatic as the growth rate we saw in ’12 over ’11. You asked about why the conservatism, and look, it’s early. You know, it’s January 22. So we’ll keep you posted throughout the year.

Larry, thanks for the question. What I would say is if we look at the U.S. business, particularly in the back end of the year, as you noted I think it started strong with our pharmaceutical business. We saw very strong performance, and particularly in our launch brands: XARELTO, ZYTIGA, with some of the new indication information, data that was being released. But really across that portfolio, even the immunology as well. Very strong performance. As we look at MD&D, we did have some challenges in certain areas of our business. I think it’s important to acknowledge that. Some of them due competitively. Some of them due to some disruptions in supply. But I would characterize those as, I think, more event-driven versus systemic in nature. And I think you’ll hear later today from Gary and Michel and Karen about their pipeline, about their competitiveness, about some of the very innovative programs they’re driving, that you’ll walk away confident with the plans that they have in place. And just a couple of things I would note there. One was we’re really starting to see a pickup in our vision care business. For example, in the fourth quarter this year, as you heard, 6% and 7% growth respectively. We’ve got a very exciting portfolio there, and so we’re excited about opportunity. And as I just mentioned a couple of minutes ago, in Synthes in particular, in core hip and knee business, we also saw some strong performance. And remember, offsetting that in orthopedics, in Synthes, we did have the nail recall in trauma, which was, again, more event-specific than, I think, longer term. And I really think that the DePuy Synthes team has done a great job in managing that. In fact, by later in the quarter, very early in January, we had product back in the operating rooms, and we’re real confident in our ability in managing that going forward. Now, if I look at consumer, there were some areas of softness that, again, we think were more related to some regulatory actions earlier in the year related to our Skillman facility. But if we look more broadly, and we look at things like our OTC performance - and again, this was a business that’s been under a significant amount of pressure, in a very competitive category. And to drive the kind of growth they did in upper respiratory, we’re really proud of that team. And oral care, also, turned in a strong performance as well. So as Dominic just mentioned, we look at all of these markets right now, given the macroeconomic issues, and we have to be realistic. But nonetheless, I think overall the trends that we mentioned we think are manageable, and you’ll see that as performance grows in 2013.

Okay. Rick?

First, for Dominic, and then for Alex, Dominic, both you and Alex have mentioned the seemingly better performance for ortho. Just can you help us understand, is it product driven? Is it comps? Was there any difference in selling days? It seemed like a nice step up versus the the quarter. Alex, a broader, bigger question for you. I’m always fascinated by leadership and change in leadership. Every leader brings a special passion and differentiates themselves versus their predecessors, no matter how excellent. Today, you’re talking about decisiveness, many opportunities to manage the portfolio, technology. Can you help us understand how we should be holding you accountable, or thinking about your plans, or what’s truly a special sauce, if you will, you’re going to bring to the job?

Kristen Stewart – Deutsche Bank:

Thank you for the thoughtful question. I think we’ve been fairly consistent in the way we’ve articulated our strategy around M&A. You know, first really starting with where is there unmet need where we feel we should or can be a part of the solution. And that can start with great technologies, that can start with great companies, and there are examples of both that we’ve had historically, that resulted in us going out and acquiring something new. I think more and more we’re looking at the second aspect, of how does it fit in a complementary way with our other businesses, as part of making a broader offering, similar to what we’re seeing now in Synthes, and our vision. And so we’re always looking for businesses that can complement, just don’t replicate, but truly complement and synergize, with some of our existing businesses or some of our platforms. I think the other area that we’re also acutely aware of is how do we drive additional growth globally, particularly in emerging markets. And we’ve done that, I believe, in a disciplined and selective way so far. And I mentioned the recent acquisition we did in China to expand our biologics platform. But here we’re very excited about the patient and the business opportunity represented by our biosurgical franchise. And it’s another example of where we started with a product, a technology, and we’re building an entire platform to reshape the way that the bleeding is controlled. And an important component of that is not only to do that in developed markets, but how do we do that in developing markets? How do we source the right kind of capabilities? So by doing this in China, we think that’s going to give us a great opportunity. We’ve done it in our consumer group, with some of the products I mentioned in Russia, Dr. Mom. So that’s an area where we realize that if we only rely on endogenous growth in some of those markets, we won’t accelerate at the rate that we’re hoping for. That being said, we need to be very thoughtful about which companies, and how we go about it, in some of those markets. Those are a few examples of, I think, areas of interest for us.

Tony?

Alex, one for you and then two quick ones for Dominic please. Alex, I’m just curious if we could just go back to comments you made earlier about Washington, and not knowing which way the wind blows there. And I think we all would agree, but what is your view of the dual eligibles? And do you think there’s a resolution in the near term? And then Dominic, just two brief questions. One on VELCADE. Could you discuss the tenders, and what happened in this particular quarter, Q4, and also comments around the flatness sequentially in ZYTIGA?

Look, our approach all along has been that it’s very important to make sure that as we work our way through healthcare reform, that we stay focused on solutions that do improve or provide access for people who are either un- or under-insured in this country. And we think it’s unacceptable there’s such a high number, and so we’ve tried to work very closely with our trade organizations, with governments, to make sure that patients can get access. So we think that’s important, number one. Number two, specifically as it relates to dual eligibles, we try to work with our trade partners at pharma, with the government, in good faith, toward the additional ACA, and we think that by and large, that program run, Medicare Part D, has been very successful. And we just need to be aware that as we make commitments, as we create programs, that we do so in a way that leads to a consistent approach, and number two, that ensures we continue to reward innovation. Because if we don’t reward innovation, we’re not going to have the next ZYTIGA, we’re not going to have the next ibrutnib, and some of these wonderful compounds. And by only focusing on costs, we will not cure Alzheimer’s, we will not take care of diabetes in the way that we should. And so that’s why we’re very anxious to work with a lot of other partners on coming up with the way that we’re preserving this underlying encouragement and motivator for innovation, and that’s something that we’re working on.

And this year we’ll continue delivering innovative new products and solutions for consumers, for patients around the world, by implementing the long term priorities that we outlined, as well as our short term priorities. And I look forward to updating you on our progress against them as we move through the year. So I’d like to say, thank you again, and turn it back over to Louise. , : And this year we’ll continue delivering innovative new products and solutions for consumers, for patients around the world, by implementing the long term priorities that we outlined, as well as our short term priorities. And I look forward to updating you on our progress against them as we move through the year. So I’d like to say, thank you again, and turn it back over to Louise.

And this year we’ll continue delivering innovative new products and solutions for consumers, for patients around the world, by implementing the long term priorities that we outlined, as well as our short term priorities. And I look forward to updating you on our progress against them as we move through the year. So I’d like to say, thank you again, and turn it back over to Louise. David Lewis – Morgan Stanley: And this year we’ll continue delivering innovative new products and solutions for consumers, for patients around the world, by implementing the long term priorities that we outlined, as well as our short term priorities. And I look forward to updating you on our progress against them as we move through the year. So I’d like to say, thank you again, and turn it back over to Louise.

And this year we’ll continue delivering innovative new products and solutions for consumers, for patients around the world, by implementing the long term priorities that we outlined, as well as our short term priorities. And I look forward to updating you on our progress against them as we move through the year. So I’d like to say, thank you again, and turn it back over to Louise.

And this year we’ll continue delivering innovative new products and solutions for consumers, for patients around the world, by implementing the long term priorities that we outlined, as well as our short term priorities. And I look forward to updating you on our progress against them as we move through the year. So I’d like to say, thank you again, and turn it back over to Louise.

And this year we’ll continue delivering innovative new products and solutions for consumers, for patients around the world, by implementing the long term priorities that we outlined, as well as our short term priorities. And I look forward to updating you on our progress against them as we move through the year. So I’d like to say, thank you again, and turn it back over to Louise.

Thank you Alex and Dominic, and we will now take a short break and resume at 11 o’clock. Thank you.