Highlights From JNJ's Q4 Conference Call: International and Consumer Brands Up, Procedures Down

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January 24, 2012 4:00 PM EST
Johnson & Johnson (NYSE: JNJ) reported Q4 EPS of $1.13, $0.03 better than the analyst estimate of $1.10. Revenue for the quarter came in at $16.255 billion versus the consensus estimate of $16.29 billion. Shares are trading flat on the session.

Highlights From JNJ's Q4 Conference Call:

  • (Louise Mehrotra) Worldwide sales to customers were $16.3 billion for the fourth quarter of 2011, up 3.9% as compared to the fourth quarter of 2010.
  • On an operational basis, sales were up 4% and currency had a negative impact of 0.1%.
  • In the U.S., sales decreased 3.4%. In regions outside the U.S. our operational growth was 10.4%, while the effect of currency exchange rates negatively impacted our reported results by 0.2 points.
  • The western hemisphere, excluding the U.S., grew by 17.8% operationally while Europe grew 9.4% operationally.
  • The Asia Pacific Africa region grew 7.9% on an operational basis. The strong growth in the regions outside the U.S. was due to the success of new product launches, the impact of the amended agreement with MESHG [ph] regarding REMICADE and SIMPONI as well as acquisitions such as Crucell.
  • Net earnings were $218 million compared to $1.9 billion in the same period in 2010. Earnings per share were $0.08 versus $0.70 a year ago.
  • Net earnings on an adjusted basis were $3.1 billion and earnings per share were $1.13 up 9.3% and 9.7% respectively versus the fourth quarter of 2010.
  • For the fourth quarter, cost of goods sold at 32.8% of sales was 60 basis points higher than the same period in 2010 primarily due to the impact of the Crucell business as well as the ongoing remediation work in our OTC business.
  • Fourth quarter selling marketing and administrative expenses at 33.6% of sales were up 50 basis points.
  • Our investment in research and development as a percent of sales was 13.3%, 60 basis points higher than the fourth quarter of 2010 primarily due to the impact of the recent collaboration agreement with Pharmacyclics.
  • Interest expense net of interest income of $148 million was up $34 million versus the fourth quarter of 2010 due to a higher average debt balance.
  • Other expense net of other income was $2.9 billion in the fourth quarter of 2011 compared to $1.1 billion in the same period last year.
  • Excluding special items, other income net of other expense was $501 million compared to $123 million in 2010. Excluding special items, taxes were 14.4% in the fourth quarter of 2011, bringing our annual effective tax rate to 20.1%.
  • Now turning to the consolidated statement of earnings for the full year of 2011. Consolidated sales to customers for the year 2011 were $65 billion, an increase of 5.6% as compared to the same period a year ago. On an annual basis, sales grew 2.8 points operationally and currency had a positive impact of 2.8 points.
  • Adjusted net earnings of $13.9 billion in 2011 compares to adjusted net earnings of $13.3 billion in 2010. Adjusted earnings per share at $5 grew 5% versus the 2010 results.
  • I'll begin with the consumer segment. Worldwide consumer segment sales for the fourth quarter of 2011 of $3.7 billion increased 1.6% as compared to the same period last year. On an operational basis, sales increased 2.7% while the impact of currency was negative 1.1%. U.S. sales were up 2.4%, while international sales grew 2.8% on an operational basis.
  • For the fourth quarter of 2011 sales for the OTC pharmaceutical and nutritionals increased 4.6% on an operational basis compared to the same period in 2010. Sales in the U.S. were down 2.9% due to supply constraints on certain products, partially offset by the return to the market of other key products and the impact of the acquisition of the full ownership rights to certain digestive health products.
  • Sales outside the U.S. were up 8.7% on an operational basis due to the recent acquisition of the Dr. Mom and Rinzyea [ph] brands from JB chemicals and pharmaceuticals and the successful launch of new smoking cessation products.
  • Our skin care business grew 6.6% on an operational basis in the fourth quarter of 2011 with sales in the U.S. up 14.5% and sales outside the U.S. up 1.3% on an operational basis primarily due to the success of NEUTROGENA new product launches. Baby care products achieved operational growth of 0.6% when compared to the fourth quarter of 2010 due to increased sales of hair care and cleansers, partially offset by lower sales of lotions and creams.
  • Women's health declined 9.5% on an operational basis. Sales in the U.S. were down 24.6% while sales outside the U.S. were down 4% on an operational basis. The sales decline this quarter was primarily due to the impact of divestitures of certain brands.
  • Sales in the oral care business increased 7% on an operational basis with the U.S. up 16.1% due to the success of recently launched Listerine products.
  • Women's care other was down 0.5% on an operational basis compared to the same period last year, impacted by the divestiture of Purell. That completes the review of the consumer segment and I'll now review highlights for the pharmaceutical segment.
  • Worldwide net sales for the fourth quarter of $6.1 billion increased 6.7% versus the same period last year. On an operational basis, sales increased 6.6% with a positive currency impact of 0.1 points.
  • Sales in the U.S. decreased 8.3% while sales outside the U.S. increased on an operational basis by 25%. The loss of marketing exclusivity for LEVAQUIN in June negatively impacted worldwide pharmaceutical operational sales growth by approximately 8 points and U.S. growth by approximately 13 points.
  • Positively impacting the sales growth in the quarter were sales related to the recent acquisition of Crucell and the impact of the amended agreement with MESHG partially offset by divestitures. Excluding the items mentioned as well as the impact of inventory changes, the underlying worldwide operational growth was approximately 9%.
  • Sales in the U.S. of our key immunology products, which include REMICADE, STELARA, and SIMPONI, were up nearly 20% versus 2010 with growth for REMICADE at 14.3%, STELARA at over 70%, and SIMPONI at 10.7%.
  • With this strong growth, we continue to be the market leader in immunology in the U.S. On a combined basis, export and international sales of REMICADE increased nearly 70% due to impact of the amended agreement with Merck complemented by international market growth. As a reminder, we began recording sales of product from the territories relinquished by Merck in the third quarter and the amended distribution agreement division of contribution income split of 50% also went into effect July 1, 2011.
  • EPREX Declined operationally by 22.6% during the quarter as compared to the same quarter last year with PROCRIT down 29.3% due primarily to a double digit market decline in volume. EPREX was down 13.7% operationally due to increased competition. RISPERDAL CONSTA is a long acting injectable antipsychotic was down 0.2% on an operational basis. Sales in the U.S. were up 2.9% while sales outside the U.S. were down 1.3% operationally. The total sales of our long-acting injectables including INVEGA SUSTENNA increased nearly 20% operationally versus a year ago due to an increase in combined market share.
  • VELCADE is a treatment for multiple myeloma for which we have commercialization rights in Europe and the rest of the world outside the U.S.
  • Operational sales growth was 22.4% with strong growth in all major regions. Prezista, a protease inhibitor for the treatment of HIV, grew operationally 34.2% with the U.S.
  • increasing 28.8% and the sales outside the U.S. increasing 39% operationally due to very strong momentum in share.
  • CONCERTA, a product for attention deficit hyperactivity disorder, declined 25.4% operationally in the fourth quarter as compared to the same period last year with sales in the U.S. down 40.6%.
  • CONCERTA in the U.S. became effective May 1st, 2011. According to IMS, the authorized generic has captured approximately 80% of the combined CONCERTA script share. Sales outside the U.S. were up 11.6% operationally driven by strong growth in most major regions.
  • ACIPHEX/PARIET is a proton pump inhibitor that we co-market with Eisai. On an operational basis sales were up 1% with the U.S. down 7.6% due to the impact of generics in the category. Sales outside the U.S. increased 8.7% with strong growth across the major regions. DOXIL CALEX [ph] declined 34.1% on an operational basis in the quarter.
  • Based on the update in December from our third party manufacturing about the estimated timeframe for resuming its manufacturing operations, we do not anticipate any DOXIL CALEX [ph] produced at the supplier's facility to be available until late 2012.
  • INVEGA, an atypical antipsychotic, grew 7.8% on an operational basis with the U.S. down 5.7% due to lower market share. Sales outside the U.S. were up 28.3% primarily due to the recent approval in Japan. INTELENCE, an NNRTI [ph] for the treatment of HIV grew 27.7% on a reported basis with the U.S. up 32.4% and the sales outside the U.S. up 22.6% with market share increases achieved in the major region.
  • As an update on the pharmaceutical pipeline, regarding Xarelto, on December 29th we submitted an sNDA for an indication to reduce the risk of thrombotic cardiovascular events in patients with ACS, and we anticipate the FDA's decision on that application later this year. In the second quarter, we plan to file an sNDA for an treatment and secondary prevention of deep vein thrombosis and pulmonary embolism based on the completion of the Einstein trial. Also after further consultation with the FDA, we have decided not to file an sNDA for the use of Xarelto in the medically ill population at this time based on the results of the Magellan trial.
  • In addition, the European Commission granted marketing authorization for Edurant as a once daily treatment in combination with other antiretroviral agents for HIV 1 infection in treatment naive adult patients. We filed for NUCYNTA ER for the management of neuropathic pain associated diabetic peripheral neuropathy. The collaboration agreement with Pharmacyclics (Nasdaq: PCYC) to jointly development and market the anticancer compound PCI-32765 was completed and we recently entered into a co-development and co-commercialization agreement with GlaxoSmithKline (NYSE: GSK) for Sirukumab. Sirukumab targets the interleukin IL-6 and has completed a two-part Phase II study for rheumatoid arthritis demonstrating promising results. We are pleased to have GSK as an experienced partner who shares our enthusiasm about IL-6 as an important target in RA and look forward to moving Telaprevir into Phase III development in 2012.
  • Worldwide medical devices and diagnostic segment sales of $6.5 billion grew 2.4% operationally as compared to the same period in 2010. Currency had a positive impact of 0.3 points resulting in total sales increase in 2.7%. Sales in the U.S. were down 0.4% while sales outside the U.S. increased on an operational basis by 4.6%. Excluding drug-eluting stents, worldwide sales increased approximately 4% on an operational basis.
  • Now turning to the MD&D businesses starting with cardiovascular care. Cardiovascular care sales were down 14.5% operationally with the U.S. down 22.4% and sales outside the U.S. down 9.6% operationally. Excluding drug-eluting stents, cardiovascular care sales grew approximately 2% on an operational basis. Biosense Webster, our electrophysiology business achieved operational growth of 11% in the quarter.
  • Operationally, hips were up 1% worldwide driven by 3% operational growth outside the U.S. attributed to heads and cementless stems. In the U.S., hips were essentially flat.
  • Knees declined 3% on an operational basis with the U.S. down 5% due to increased competition and a softer market. Sales outside the U.S. were flat. The market was estimated to have declined modestly in the third quarter with the U.S. down 3% and the worldwide market down 1%.
  • The diabetes care business achieved operational sales growth of 4.1% in the fourth quarter of 2011 with the U.S. business up 3.8% and the business outside the U.S. growing 4.4% operationally. Strong sales in emerging markets and favorable mix in the U.S. drove the results this quarter. Ethicon worldwide sales grew operationally by 7.3% with the U.S. up 7% and sales outside the U.S. up 7.6% operationally. Drivers of the increase include sutures with strong emerging market growth, the strong uptake of the recently launched products secure strap and PHYSIOMESH, as well as double digit growth in bio surgical.
  • Ethicon Endo-Surgery achieved operational growth of 5.6% in the fourth quarter of 2011 with the U.S. sales up 4.6% and the sales outside the U.S. up 6.3% operationally.
  • In the U.S., growth was driven by increased market share for advanced sterilization products and our recently acquired SteroMed [ph] business. Outside the U.S., new product launches and the continued shift to minimally invasive surgery drove double digit growth for HARMONIC products and strong results for the Endo products. The launch of the advanced energy super jaw and Jenn 2 [ph] generator also contributed to the results for the quarter.
  • Ortho clinical diagnostics grew 3.1% on an operational basis in the fourth quarter with sales in the U.S. up 1.4% and sales outside the U.S. up 4.8% operationally. Sales growth was driven by the continued adoption of the VITROS 5600 platform partially offset by lower donor screening sales.
  • Rounding out the review of the medical devices and diagnostic segment, our vision care business achieved operational sales growth of 5.8% in the fourth quarter compared to the same period last year. Sales in the U.S. increased 0.9% while sales outside the U.S. increased 8.2% on an operational basis.
  • Double digit growth in both daily lenses and astigmatism lenses were partially offset by softer sales of reusable lenses.
  • (William C. Weldon) We understood that such a dynamic global and highly regulated industry as healthcare, there would always be new issues, increasing competition, and rapidly evolving economic conditions to contend with. Some we could predict like the major Patent expirations with RISPERDAL and Topamax with combined peak year sales of over $6 billion.
  • Others could not be as easily foreseen like the severe economic decline, the tightening of consumer spending and healthcare budgets, unexpected challenges with our ESA, ASR, and drug-eluting stent products as well as quality issues with McNeil.
  • We continue to invest in R&D, nearly $37 billion over the last five years. This produced nine major approvals for new pharmaceutical products in the U.S. and many other exciting innovations across our other businesses. Products like STELARA and SIMPONI in Immunology, [indiscernible] combined with constant innovation in important medical device and consumer platforms such as contact lenses, electrophysiology, advanced energy, bio surgicals, oral care, and skin care.
  • We have replenished our advanced our pipelines are exciting new compounds and technologies like the Fibrin Pad homeostasis, Angaphos [ph] for diabetes and Bapineuzumab for Alzheimer's disease.
  • We also made necessary restructurings to our business to manage our cost structure, simplify our operations, and ensure the most efficient use of our capital for the long-term benefit of patients and shareholders.
  • We saw 13% increase in operational growth in emerging markets, we generated significant free cash flow while maintaining a AAA credit rating, we invested more than $7.5 billion in R&D and advanced robust pipelines across all three segments of our business, we maintained a disciplined approach to portfolio management, we also dealt with difficult issues in a responsible manner by resolving certain litigation matters and addressing the McNeil consumer recalls.
  • As you can see here, our sales for 2011 increased by 5.6% - 2.8% operationally - reflecting the strength of our new product launches in our pharmaceuticals business, steady performance across our MD&D franchises, science based innovation in consumer and strong growth in emerging markets.
  • With our continued focus on financial discipline our adjusted earnings were $13.9 billion and adjusted EPS was $5 or 5% increase.
  • We also generated significant free cash flow of approximately $11.4 billion. Thanks to our financial discipline and the people at Johnson & Johnson we extended our track record of adjusted earnings increase to 28 years. We also have 49 consecutive years of dividend increases, making us only one of five companies in the S&P 100 to achieve that record.
  • In 2011 we strengthened our portfolios and leadership positions in many areas like immunology, oncology, surgical devices and emerging markets. And we used our focus on scientific innovations to maintain or build share in other key growth markets. These innovations address clear patient and customer needs.
  • In fact, approximately 70% of our sales are from products with No. 1 or No. 2 global market share positions and approximately a quarter of our sales last year came from new products that were introduced in the past five years. We remain leaders in important healthcare markets with a focus on meaningful innovations for patients and customers.
  • Now let me take a deeper dive in our three business segments and 2011 results. Pharmaceuticals generated $24.4 billion or 37% of our total sales. It had strong operational growth of 6.2% driven by recently launched products like STELARA, SIMPONI, PsiTeagua [ph], Inceivo [ph] and INVEGA SUSTENNA. Meanwhile medical devices and diagnostics - our largest segment - generated $25.8 billion or 40% of our total. It had operational growth of just under 2%. And consumer generated $14.9 billion in revenue or 23% of our total and saw a modest operational decline due to the McNeil recalls and continued softening in the general economy.
  • Operating profit for 2011 excluding special items was $18.3 billion, an increase of $700 million over the prior year. As a percent to sales operating profit was at 28.2%, a modest decline due primarily to ongoing remediation activities in the OTC business.
  • With $24 billion in sales, we have the eighth largest Pharmaceuticals business in the world and the sixth largest Biotech business as part of that.
  • Excluding the impact of generic competition as well as recent acquisitions and divestitures, our operations sales growth would have been 7%. Through 2011 we built on the continued success of recently introduced products which put our business back into a strong growth trajectory and continued to strengthen our leadership position in core therapeutic areas like Immunology, Infectious Disease and Oncology.
  • And when you look at the combined sales of new products launched between 2009 and 2011, Johnson & Johnson is leading the U.S. in new pharmaceutical product sales. We also strengthened our Immunology leadership and sales in emerging markets by amending our global distribution agreement with Merck on our largest selling products REMICADE and SIMPONI.
  • In terms of pipeline progress in 2011, we were the U.S. leader in new molecular entity approvals with three: Zytiga [ph] in Oncology; ZERAFIN [ph] in cardiovascular disease and Edurant in HIV. We also received approval of INCIVO [ph] in Europe for hepatitis C which is marketed by our strategic partner Vertex Pharmaceuticals in the United States.
  • Meanwhile, Medical Devices and Diagnostics is continuing to strengthen its global capabilities and pipelines during a more challenging slower growth period by investing in key growth businesses and emerging markets.
  • With $26 billion in sales, MD&D remains the largest medical device business in the world. Excluding the sales of drug-eluting stents, which we exited at the end of 2011, operational sales growth was a healthy 3% when considering the economic and pricing pressures in these markets.
  • We continue to advance breakthrough products through the regulatory process. In fact, 75% of the MD&D pipeline advanced to its next major milestone in 2011. Breakthroughs like SEDASYS, the first computer-assisted personalized sedation system, and the Fibrin Pad are progressing with the FDA.
  • And we are increasing investments in emerging markets with recently opened innovation centers in India and China while continuing to support dozens of training institutes around the world.
  • With these actions and others, MD&D has been able to sustain #1 and #2 leadership positions in 80% of our key platforms while growing or maintaining share in the majority of these. We've also made some very important portfolio decisions in this segment.
  • Finally, our consumer segment continues to innovate with new products, business models, and a growing presence in emerging markets, while getting its OTC business back in shape, re-launching many of the brands that made the business a global leader. With $15 billion in sales, consumers the sixth largest consumer healthcare company in the world. For consumer, we saw an operational sales decline of just under 1%, given the remediation and supply issues associated with our U.S. OTC business. Excluding OTC acquisitions and divestitures, the consumer segment grew about 2% operationally. Our consumer business saw solid growth in certain franchises like skin care and oral care with strong performances from the NEUTROGENA and Listerine mouthwash brands.
  • Given our proven ability to build on a stable of iconic consumer brands and deliver science based innovation along with the restoration of supply of some of our OTC products, we feel positive about where our consumer business is headed in 2012
  • Populations in the developed world are aging rapidly, and we consume more healthcare as we grow older. In fact, those over the age of 65 consume an average of seven times more healthcare per year than those under that age.
  • Our investments continue to be aligned with these market opportunities. Government is another important force to consider. As health care reform evolves around the world it will remain critical to identify those opportunities where we can make the most important differences for patients, customers and payers.
  • Amidst all the forces I have mentioned healthcare remains a compelling and growing market. Over the past five years the global healthcare market has had compounded annual growth of nearly 7% and it should continue to see strong mid-single digit growth over the next five years.
  • Emerging markets are projected to grow their share of global GDP from 36% in 1980 to 57% in the year 2020. Meanwhile over the projection period of 2010 to 2020, 35% of the growth in healthcare spending will be coming from emerging markets. This trend will increase the emerging markets' influence on healthcare and improve their ability to address a significant need for affordable quality healthcare in their countries.
  • Specifically, our late development M&A success rate for Phase III development and registration has been trending around 75%, well above the industry mean of 50% to 55%. We continue to rank among the top third of our peers in overall development cycle times and we have dramatically improved our submission cycle times while maintaining quality, resulting in a cost per MMA approved that is well below the industry mean.
  • Finally, we continue to approach our portfolio management in a disciplined fashion, adding assets and businesses that can provide us with new capabilities and access to fast growing markets and divesting assets that either aren't aligned to our future focus or where the market expectations and our competitive positioning have changed dramatically, such as the case with drug-eluting stents.
  • (GUIDANCE) Now turning to earnings, we suggest that you consider full-year 2012 EPS estimates excluding the impact of special items of between $5.18 and $5.28 per share on an operational basis or a growth rate of between 3.5% and 5.5% on a constant currency basis.
  • While we are not predicting the impact of currency movements, to give you an idea of the potential impact on EPS, if currency exchange rates for all of 2012 were to remain where they were as of the end of last week then our reported EPS excluding special items would be negatively impacted by approximately $0.13 cents per share due to exchange rate fluctuations. We therefore suggest you model our reported EPS excluding special items in the range between $5.05 and $5.15 per share and at this early stage in the year we would be comfortable with your models reflecting the midpoint of that range.
  • So in summary let me add a few final comments for you to consider as you update your models. The midpoint of our operational or constant currency guidance of $68 billion in sales growing at around 4.5% and $5.23 of earnings per share excluding special items growing at a similar rate appears to be consistent with most of the analysts' models.
  • (Q&A) Dominic, just to clarify, on that other income guidance, you commented before that the quarterly run rate of other income all other things being equal to pluses and minuses that occur is going to be about a hundred million dollars a quarter, so about $400 million a year. I think you commented on that on one of the Earnings Calls earlier in 2011. You're guiding to a billion dollars of other income, so it looks like you're assuming some gains in 2011. Can you just give us the visibility into what gains you're assuming will occur in 2012 so we can model this correctly? (A) Right. Just to clarify, we think that the underlying run rate in that account approximates 500 to 600 million. It's with the income and some other gains, so think about 5 to 600. And we expect early this year as we continue to adjust our portfolio and redeploy investments that we'll have a divestiture that we record early in 2011 resulting in this now increased to a level of between 900 and a billion dollars. I can't comment on the specific divestiture we're referring to, but we expect to complete it early in 2012.
  • Okay. Bill, let me ask you to - about two pipeline areas. A big driver in 2012 is going to be INCIVO Telaprevir for the company. The landscape for it has changed a lot in the last six to 12 months. Obviously there's a lot of competition for assets right now. Can you just talk about given how important that's going to become to the company as a revenue contributor in 2012 and 2013, how you're viewing the competitive positioning of JNJ going forward in that area, because it becomes an important area for you. And then the second one I'd like you to comment on is on Bapi. We're going to get the readout on two of the North American trials in 2012. You mentioned in your slides potential filings in 2012 and 2013. Is that your expectation? And how are you positioning - how do you want us to think about the potential to the Bapi data in 2012 and 2013? Should we assume that this is going to file in 2012, 2013, on the data that you're going to generate? (A) The Bapi one I'll answer first, Mike. We expect that we'll have the data analyzed and will be filing obviously on a positive outcome by the end of the year would be our expectation on Bapi. So and then when you go to INCIVO and the hepatitis C, that's answer where there's a whole lot of interest in various areas. There's the pharma set acquisitions that is taking place and others. We feel really good about where we are with INCIVO. We feel very good about 435, which will be a complementary product, and we feel that we'll be able to get out there and work in the hepatitis C area with those compounds. And then the other ones that are there, they're still very early in development. They're going into 2B right now, and we're going to wait and see what exactly happens there. But we think that we're very well positioned for the hepatitis C for the two compounds we have.

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