Q2 2022 Johnson & Johnson Earnings Call

Speaker 2: All participants will be in a listenly mode until the question and answer session of the conference. This call is being recorded. If anyone has any objections, you may disconnect at this time. If you experience technical difficulties during the conference, you may press star zero to reach an operator. I would now like to turn the conference call over to Johnson & Johnson, you may begin.

Speaker 3: 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. Your 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 a subject to certain risks and uncertainties that may cause the company's actual results to different

Speaker 3: the products and compounds discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide can acknowledge those relationships.

Speaker 4: Good morning, everyone. This is Joaquin Duato, Chief Executive Officer of Johnson & Johnson. Thanks for joining us today. I am accompanied by Joe Wach 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.

Speaker 4: During my first six 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 healthcare solutions to patients and customers.

Speaker 4: both today and long into the future. And they further validated that the three 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.

Speaker 4: 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%.

Speaker 4: In the second quarter, we saw evidence of this plant coming to fruition with the launch of Carbicti in April , and in May, we received conditional marketing authorization in Europe . In addition, Talketamab 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.

Speaker 4: our long-term goals and to deliver transformational medicines that help improve and save lives.

Speaker 4: 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.

Speaker 4: We expect this improvement to continue enabled by our innovative pipeline as well as the potential for expansion into higher growth market segments.

Speaker 4: Currently, 11 Mettech platforms each deliver over $1 billion in revenue annually. And based on the most recent results, we are gaining or holding shares in nearly all of this.

Speaker 4: 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.

Speaker 4: Third, we are separating our consumer health business to create two market leading standalone companies. This separation can be a significant opportunity for value creation. The two new global entities will be well positioned to thrive in their respective markets and drive greater strategic and financial success.

Speaker 4: We are making excellent progress and remain on track to complete the separation in 2023.

Speaker 4: In the second quarter, we announced the Global Leadership Team for the new Consumer Health Organization led by Tibo Mongon, a CEO , Designate, and Paul Rue, a CFO Designate. Having worked with both Tibo and Paul for many years, and confident we have selected the right leadership team to lead the new Consumer Health Company in its next chapter.

Speaker 4: 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.

Speaker 4: With enhanced operational focus, the New Johnson & Johnson would be poised to bring integrated, comprehensive DC-centric technology and innovative solutions to enhance patient care. To enhance patient care.

Speaker 4: 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.

Speaker 4: With this 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. Join us, we share details reflecting our market adjusted. We are very pleased to have delivered solid sales and EPS growth of 8% and 8.5% respectively.

Speaker 4: which have been foundational to success for over the past 135 years. I look forward to addressing your question soon, but for now, I will turn the call over to Jessica Moore to discuss those details. Yes? 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.

Speaker 5: and P&L results for the Corporation in the three segments.

Speaker 5: 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.

Speaker 5: Now let's move to second quarter results.

Speaker 5: Worldwide sales were $24 billion for the second quarter of 2022, an increase of 3% versus the second quarter of 2021.

Speaker 5: Operational sales growth, which excludes the effect of translational currency, increased 8% as currency had a negative impact of five points. Operational currency had a negative impact of five points.

Speaker 5: In the US, sales increased 2.3%.

Speaker 5: and regions outside the US are reported growth with 3.8%.

Speaker 5: Operational sales growth outside the US was 13.9%, with currency negatively impacting our reported OUS results by 10.1 points.

Speaker 5: excluding the net impact of acquisitions and divestitures adjusted operational sales growth with 8.1% worldwide, 2.4% in the US and 14.2% outside the US.

Speaker 5: Turning now to earnings.

Speaker 5: 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.

Speaker 5: Excluding after-tax and tangible 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 with $2.59. Representing increases of 4.3% and 4.4% respectively, compared to the second quarter of 2021.

Speaker 5: On an operational basis, adjusted deluded earnings per share increased 10.9%.

Speaker 5: I will now comment on business segment sales performance highlights.

Speaker 5: 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.

Speaker 5: As 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. Thank you for watching.

Speaker 5: Worldwide consumer health sales of $3.8 billion decreased 1.3 percent with the decline of 3.6 percent in the U.S. and growth of.6 percent outside the U.S. Friday.

Speaker 5: Operational sales growth, which excludes the effect of translational currency, increased 2.3%, as currency had a negative impact of 3.6 points. Operational sales growth growth, increased 2.3%, as currency had a negative impact of 3.6 points.

Speaker 5: 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 US due to a strong cold cost-implused season and digestive health category recovery. This growth was partially offset by a weaker allergy season and supply constraints in the US, although these have improved from prior quarters.

Speaker 5: Furthermore, the Consumer Health Business was negatively impacted by regional COVID-19 mobility restrictions, mainly affecting the skin health beauty franchise.

Speaker 5: Moving on to our pharmaceutical segment.

Speaker 5: Worldwide pharmaceutical sale of $13.3 billion increased 6.7% with growth of 4.2% in the US and 9.8% outside of the US.

Speaker 5: Operational sales growth, which excludes the effect of translational currency, increased 12.3% as currency had a negative impact of 5.6 points.

Speaker 5: Excluding the impact of acquisitions and investitures, worldwide growth was 24%. 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.

Speaker 5: 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 five assets with double-digit growth in the quarter.

Speaker 5: Growth was due to strength from Darzalex, Stelara, Erleada, and Tremphia, along with our Pallyperidone long-acting portfolio, which was partially offset by biosimilar competition for Remicade along with a decrease in Ambrovica sales.

Speaker 5: Darzel X and Arleeda continue to drive strong operational sales growth, with increases of 46.1% and 56.9% respectively.

Speaker 5: The VARIA 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.

Speaker 5: 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.

Speaker 5: TranFaya grew 29.7%, driven by market growth and share gains in psoriasis and psoriatic arthritis.

Speaker 5: This represents 2.3 points and 3.2 points of share gain, respectively, in the U.S.

Speaker 5: Results in the quarter were impacted by an unfavorable prior period adjustment of approximately 750 basis points in unfavorable patient mix.

Speaker 5: In Bruvica operational sales declined 7.2% worldwide due to increased competition, particularly in the US.

Speaker 5: In Bruba, Cometains its market leadership position worldwide and continues to drive operational growth outside of the U.S despite ongoing competitive pressures.

Speaker 5: 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.

Speaker 5: 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.

Speaker 5: Operational sales growth, which excludes the effect of translational currency, increased 3.4% as currency had a negative impact of 4.5 points.

Speaker 5: excluding the impact of acquisitions and divestitures worldwide growth was 3.4%.

Speaker 5: 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.

Speaker 5: Drivers for growth across the MedTech business include procedure recovery, focused commercial strategies, and differentiated new products driving enhanced or sustained market share positions, and nearly all of our 11 priority platforms, each generating over $1 billion in annual sales. $2 million in total total of 1000-65 million earned Fall in downward??il? $1.60 per bid eight? $3.60 in total $3.02 over $1 billion in annual sales. you

Speaker 5: 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.

Speaker 5: 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.

Speaker 5: Cost the products sold, deloveraged by 50 basis points, primarily driven by increased supply network related costs with the COVID-19 vaccine, and inflation partially offset by favorable mix. And inflation partially offset by favorable mix.

Speaker 5: We continue to invest strategically in research and development at competitive levels, investing 15.4% of sales this quarter. We continue to invest in research and development at competitive levels, and we continue to invest in research and development at competitive levels. We continue to invest in research and development at competitive levels,

Speaker 5: The $3.7 billion invested was a 9.1% increase versus the prior year, primarily due to portfolio progression in pharmaceutical and medtech.

Speaker 5: 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.

Speaker 5: 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.

Speaker 5: 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 10Q filing for additional details on specific tax matters. Let's checkit wash our bills on???????? weather.

Speaker 5: 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.

Speaker 5: 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. Our pharmaceutical margin improved from 39.4%.

Speaker 5: 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.

Speaker 5: 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. This concludes the sales and earnings portion of the Johnson & Johnson second quarter results. I'm now pleased to turn the call over to Joe Wach. Joe? Thank you, Jess. As Joaquin and Jess commented …

Speaker 6: Our results remain solid across our three segments in the second quarter and through the first half of 2022, particularly in light of macroeconomic headwinds, such as inflation, select countries experiencing continuing impact from COVID-19, and geopolitical matters.

Speaker 6: Our sustainable, resilient business continues to deliver on the robust operational guidance that we set forth at the beginning of the year, while advancing breakthrough innovation and fostering patient access to make a positive impact across many areas of healthcare.

Speaker 6: As previously discussed, we did build in a healthy assumption to account for inflation in our January guidance, planning for increased cost in labor, energy, and transportation.

Speaker 6: We noted in April and are doing so again today that these pressures will continue to impact margins in the third and fourth quarters and into 2023. As such, we continue to pursue mitigation efforts, including cost improvement initiatives, strategic price increases, and contract negotiations with external supply partners.

Speaker 6: As for segment performance and key events in the quarter in Medtech, you may recall that performance in Q2 2021 was the strongest of the year for most of the Medtech Pearson, including Johnson and Johnson, making this second quarter our toughest comp.

Speaker 6: on a sequential, operational basis and in line with our expectations, we did see an acceleration in sales even considering the regional COVID-19 related mobility restrictions this quarter.

Speaker 6: As Joaquin noted, we are focused on continuing the strong cadence of innovation in this business, which includes launches such as the next generation Echelon 3000 Stapler, a digitally enabled device demonstrating improved patient outcomes based on clinical evidence. It also includes the Emboguard Balloon Guide Catheter designed to optimize the removal of blood clots and reduce procedure time in the treatment of ischemic stroke.

Speaker 6: In pharmaceuticals, we continue to advance our pipeline and delivered operational sales growth of 8.6%, excluding the COVID-19 vaccine in the second quarter.

Speaker 6: Notably above what we delivered in the first quarter of this year.

Speaker 6: We continue to outpace the market.

Speaker 6: During the second quarter, we recorded our first sales in the US of Carvicti, a CAR-T therapy for the treatment of multiple myeloma developed together with legend biotech and received the European Commission approval in May.

Speaker 6: We also presented new data across our broad oncology portfolio at the American Society of Clinical Oncology.

Speaker 6: and the European Hematology Association in June .

Speaker 6: If you haven't done so already, I encourage you to listen to the FireSide chat with Peter Lee Woods, or Global R&D Head of Oncology about this promising new data which can be found on our website.

Speaker 6: A quick update on our COVID-19 vaccine, for which we suspended sales guidance last quarter.

Speaker 6: Recognizing the global progress on vaccine development and distribution against COVID-19 and the amount of existing global supply, we are modifying our COVID-19 vaccine research programs and manufacturing capacity to levels that meet all customer contractual commitments.

Speaker 6: This will result in incremental costs for the year, which will be reflected as a special item.

Speaker 6: We are proud of the role our vaccine continues to play in the fight against COVID-19.

Speaker 6: In our consumer health business, similar to MedTech, Q2 of 2021 was last year's strongest quarter with 10% adjusted operational sales growth.

Speaker 6: We remain focused on our 2022 performance objectives of delivering above market growth in our over-the-counter medicines business, while overcoming industry-wide supply constraints and inflationary pressures that are primarily impacting our skin health business.

Speaker 6: We continue to be excited about the creation of the new Consumer Health Company. Great work is being done by our teams to affect this complex transaction. Okay.

Speaker 6: We look forward to sharing the new consumer health companies name and branding, as well as the headquarters location in the months ahead. Similarly, we look forward to sharing transaction options and further financial details at hearing to regulatory policies later in 2022.

Speaker 6: Finally, I would like to offer my congratulations to Tibo, Paul, and the rest of the leadership team regarding their recent appointments.

Speaker 6: Turning now to cash and capital allocation.

Speaker 6: We generate a free cash flow of approximately $8 billion in the first half of the year. As at the end of the second quarter, we have approximately $32.6 billion of cash to marketable securities and approximately $32.6 billion of debt for a net neutral cash position.

Speaker 6: Our capital allocation priorities remain unchanged. Investing in innovation that delivers meaningful products to address unmet needs continues to be our top priority.

Speaker 6: In the first half of the year, we increased R&D investment by approximately 9% compared to the first half of 2021.

Speaker 6: The dividend priority Joaquin referenced translated to us distributing six billion dollars to shareholders so far this year.

Speaker 6: We also continue to vigorously evaluate acquisition opportunities that would enhance the current portfolio, build upon our capabilities and enable us to play in higher growth markets while yielding solid financial returns.

Speaker 6: Moving to full year 2022 guidance and key considerations. The major takeaway is we are maintaining the midpoints of our guidance for adjusted operational sales growth of 7% at $97.8 billion and adjusted operational earnings per share of $10.70, or 9.2% growth for the full year.

Speaker 6: Given our confidence in delivering full-year guidance, based on what we know today, we are tightening the adjusted earnings per share range from $10.65 to $10.75 on a constant currency basis. the

Speaker 6: Regarding the remainder of the P&L, there are a few updates.

Speaker 6: Due to the prolonged impact of inflationary pressures, we are updating our operating margins to be flat versus 2021.

Speaker 6: Regarding interest expense based on our year-to-date experience, we have reduced the expense to a neutral position. Again, giving year-to-date trends, we are increasing and tightening our other income estimate to be a range of $1.4 billion to $1.5 billion to reflect the favorable impact of employee benefit-related items.

Speaker 6: That may appear light given the current run rate, but we have some one-time items such as real estate sales and Johnson & Johnson Development Corp Games, which we don't expect to repeat in the second half of this year.

Speaker 6: Finally, we are lowering our effective tax rate estimate, which is reflective of current law, to a range of 15.0% to 15.5% based on our year-to-date progression. Based on our year-to-date progression. Based on our year-to-date progression.

Speaker 6: As we always do, let me give you a sense of the impact currency may have on potential full year reported results, specifically the strengthening US dollar.

Speaker 6: utilizing the Euro Spot Rate relative to the US dollar as the last week at 1.0, there is an incremental unfavorable currency impact of 1.5 billion dollars on reported sales and an unfavorable 20 cent impact for the estimated reported adjusted earnings per share versus the projection utilized in April's guidance. The full year unfavorable impact is now projected to be $4 billion on reported sales the default day of stocks to kind of demonstrate in punk you

Speaker 6: and 65 cents unreported adjusted earnings per share. As this chart illustrates, it's not just that the euro and US dollar have reached parity, something we haven't seen in nearly two decades. It's also the rapid pace at which the fluctuations are occurring, a dynamic only experienced a few times over that same period. In addition, both much too early to comment on 2023, we do think it is helpful to point out what the currency impact may be if current assumptions for our estimate holds.

Speaker 6: Of the current 65 cents unfavorable impact I just referenced, about 30 to 35 cents will carry over into 2023's EPS. Certainly there's a long way to go before we finalize next year's outlook, but wanted to give you a sense of how to think about the foreign currency impact.

Speaker 6: Back to the current year. In terms of 2022 quarterly phasing considerations for your models, we continue to estimate that the back half will improve over the first half with a slight bias for higher growth in Q4 over Q3. With a slight bias for higher growth in Q4 over Q3.

Speaker 6: In consumer health, we have seen quarter over quarter reduction in supply disruptions that we anticipate will continue. We also expect to see the benefit of recent strategic price increases in the back half of the year.

Speaker 6: Finally, the fourth quarter of 2021 had lower growth than the third quarter, resulting in easier comparison.

Speaker 6: For Medtech, we expect the second half to be stronger than the first half, driven by market recovery from continued enhancement of our competitive position through commercial execution and uptake from our recently launched products. We expect the fourth quarter 2022 to be slightly stronger than the third quarter. COVID-19 continues to be a dynamic situation regionally and we continue to monitor any related impacts.

Speaker 6: For pharmaceuticals, we anticipate delivering another year of above-market adjusted operational sales growth in our base business, which sales modestly accelerating through the end of the year. 2<|tl|><|translate|> accelerating through the end of the year.

Speaker 6: To close out the prepared remarks, Johnson and Johnson has continued to pose solid results as our teams navigate a challenging external environment. Our financial performance reinforces our confidence in our ability to grow and deliver near and long-term value. That is only possible because of our employees around the world who we'd like to thank for remaining focused on delivering our innovative healthcare solutions and results for all of our cradle stakeholders. Thank you for all of our cradle stakeholders.

Speaker 6: Joaquin, Jess and I will now turn the discussion to the Q&A portion of the call. Kevin, can you please provide instructions for those participants on the call wishing to ask a question?

Speaker 2: Certainly ladies and gentlemen, if you'd like to ask a question at this time, please press star then one on your telephone keypad. If you'd like to withdraw your question, press star then two. Please let me your questions to one question only. One moment please, Bully Poll for questions.

Speaker 2: Our first question is coming from Terence Flynn to Morgan's family. And it's now live. And it's now live.

Speaker 7: Great. Thanks for taking the question. Maybe a two-part on the Myeloma franchise. Obviously another very strong quarter for Darzalex. Just wondering where conversion of SubQ stands in the US and Europe . And then the second part relates to if you can share any metrics on the early Carvicti launch. Joe, I know you called that out, but just any insight there and then progress on increasing the supply of that product. Thank you.

Speaker 4: Thank you so thank you for the question and let me start giving you a perspective on our myeloma franchise which is one of the ideas of strength for our pharmaceutical business. On one hand we continue to have a great progression with that selects with 47% growth in this quarter and just will update you in the exact numbers of the conversion from subcute to from IV to subcute. What are the exact numbers?

Speaker 4: Yeah, in the US we're about 85% in Europe , we're around 80%. Okay, so it continues to move in the right direction, given the enhanced convenience and ease of use for the patient that our subcue formulation offers. So that's Alex is doing very well and we feel very confident about the continuous progression of that, Alex. On the other hand, we are also proud of the commercial launch of Carbicti in the US following FDA approval and also the recent approval of Carbicti in EME.

Speaker 4: incurable disease to a chronic disease and potentially when they occur by sequencing and combining these treatments. So great idea of strength for the pharmaceutical business of Johnson & Johnson. And it's an area that connects on how we are executing in our pipeline and progressing and what we discuss in our November R&D day where we portray our pharmaceutical pipeline as one of the important drivers of us being able to achieve a $60 billion number in 2025. So it happens.

Speaker 8: not. I'm sure people would love to hear about input costs and inflation, you know, COVID trends around the world, especially China and lastly, hospital labor shortages. Thanks so much for taking the questions.

Speaker 6: Sure, thanks for the question, Larry. And again, another nice job with the currency reporting. The macro headwinds, I would say, I would classify it as kind of two categories. The first is really around supply constraints, some of what we come into at the end of last year that kind of persisted into the first part of this year. I would say that was primarily in our consumer franchise, where product supply and availability, in force, if you...

Speaker 6: on the shelf in the second half of this year. And then there's the input cost themselves. As you probably noticed, we did have higher cost of goods in the quarter relative to last year. For about 50 basis points, that's really across the board. So some of the raw materials that go into our product are certainly at a higher cost due to the limited availability. There is some higher wage pressures as you've noted. I would say that's less within the world of Johnson Johnson.

Speaker 6: building today, some of that gets relieved to the P&L early next year. But we think we were able to manage it, as you saw in our results, able to slightly beat. And we're being much more selective in terms of our resource deployment. We've raised the bar on our selectivity of where we invest, but we're very proud of the fact that we were able to increase what we believe our future depends upon, and that's innovation by a 9% increase in R&D. Thank you.

Speaker 2: Thank you. Our next question is from Chris Schott from JP Morgan. Your line is now live.

Speaker 8: Great, thanks so much. I'm kind of the latest thoughts on business development for both Pharma and Medtech. I guess specifically, you're seeing additional opportunities in the Pharma business with biotech valuations now having been depressed for just three or four quarters. And then on the Medtech business, I know this is a priority walking. Can you just talk about the landscape you're seeing as the company continues to engage on potential opportunities there? And then there's just a final one to be following up on the last comment.

Speaker 8: For operating margins, I know they're flat this year due to inflation. Can we think about the company resuming operating margin expansion in 2023 or do some of these inflationary pressures you're seeing still need to annualize and it's not as clear of what the directional trend for 23 will be at this point. Thanks so much.

Speaker 4: Thank you, Chris, and let me start with the M&A question first, and then Joe will address the operating margin questions. M&A has always been an important component of Johnson & Johnson innovation. As I was talking in the past five years, we executed about 40 acquisitions and major licensing agreements investing over $16 billion. And specifically in our pharmaceutical business, about half of our innovation is coming.

Speaker 4: into higher-world markets and delivering a fair financial return. So as we look at the opportunities today in the market, we are not opportunistic about it and we are still looking always at the fundamentals of these companies. And obviously there are different opportunities in the market that are interesting and can complement our existing franchises or build into adjacencies. When it comes to Metec, the focus continues to be on the market.

Speaker 4: in the technology, oncology, neuroscience, PUNURA, air-dia hypertension, and also cardiovascular and metabolic. So we are agnostic as you know, at the source of innovation, and we use multiple modalities to onboard innovation from acquisitions to equity investments, to strategic collaborations. So down the road, we continue to see, in many, as an important source of building our pipeline, and also fortifying our current portfolio, and we are now in a position that...

Speaker 6: look for inefficiencies and either let that fall of the bottom line or preferably put that into R&D. So as we close out the second half of the year, I'd like to see how our pipeline is progressing. If some of that's accelerated, that's going to be reason for additional investment. I do think these inflationary pressures will be here to stay. I don't see a lot of decreases on the near term horizon. I'd also ask you not to lose sight of the fact that we are separating out our

Speaker 6: second half of 2023.

Speaker 2: Thank you. Next question today is coming from Joanne Wench from Citi. Why is that live?

Speaker 9: Good morning and thanks for taking the question. Two parts. The first part, I want to just spend some time on a hospital volumes. What you're seeing in terms of elective surgeries throughout the summer, and then into the back half of the year. I'll toss the second question on that too. You talked about targeted price increases. How do you think about the target, and how well are they being accepted? I'm thinking not just in across the board, but.

Speaker 6: that's been in entertainment, dining out, when it comes to healthcare, better health, looking better, products like Ovena, Nutrigena, Tylenol, Listerine, they seem to do really well and consumers will prioritize those, specifically to MedTech, as you probably appreciate. A lot of our portfolio is really governed by contracts that are already in place with hospital systems, so it's difficult, unless there is certain inflationary clause.

Speaker 4: just over 1% sequential operational growth, Q2, the SUSQ1. So that is in the middle of the market headwinds due to mobility restrictions, inflation and supply challenges. So a very resilient performance of our G&J Medtech business. The fundamental of our business remain strong and competitive. We continue to see market share position.

Speaker 4: in a pre-COVID level through the quarter. So that was the positive side. On the other hand, we saw the impact of regional mobility restrictions in ACA Pacific. Moving forward, we estimate that we will have continuous improvement in the second half of the year due to a continued market recovery and also our own competitive momentum. Well, at the same time, we're gonna continue to monitor the COVID-19 dynamics and mobility restrictions in ACA Pacific.

Speaker 2: Thank you. Our next question is coming from Louise Chen from Cantor Pistarold, to the very light of that life.

Speaker 10: Hi, thanks for taking my question here. So I wanted to ask you about Mildexian and factor 11A inhibitors and what you see the market opportunity to be. Also, what data will you be presenting at ESC this year? And then can you give any color on indications? You'll be pursuing in your phase three studies. Thank you.

Speaker 4: Thank you for the question. And Milbexian, it's an important component of our pipeline as a matter of fact, when we met with you in November , Milbexian was one of the five medicines that we estimated were going to continue. Pick sales of about $5 billion that was together with a Cardicti, Milbexian, Nipokalimab, and Ivantama plus LaCertini Van Auer, Taris platforms. So those were the five medicines that were going to contribute to contribute more than $5 billion.

Speaker 4: the potential to expand into areas in which today oral anticoagulants are reduced due to bleeding concerns. So we see a very significant market opportunity for milvexian as an improvement of this category versus the factor Xa. So there are two phase studies that are assessing the potential of milvexian to reduce the risk of cardiovascular events. One is the one of total knee replacement.

Speaker 4: in 2022, specifically, I think it's at the end of August in a European cardiology meeting, and at that point we shall see. But for us, if the data comes out obviously, Milbexian could have a very significant market opportunity that would have with us an extended grant today.

Speaker 2: Thank you. Your next question is coming from Josh Jennings from Cowen. Your line is now live.

Speaker 11: Hi, good morning. Thanks for taking the questions. I had just two on the medical devices franchise. And the first is just on the volume recovery. I think as we listen to hospital executives and ensures talk about the volume recovery, we consistently hear about this, you know, not getting back to pre-pandemic levels, even as we sit in the first half of 2022. So I just want to do kind of sanity check.

Speaker 11: and Josie and Joaquin, if there's any kind of metrics you can give us in terms of where Jan J's volumes sit relative to 2019 well, I know that's not the most appropriate comp here as we've for a couple of years out from 2019, but wanted to just get your views on where the disconnect is in terms of the revenue growth that we're seeing from your businesses off of 2019 versus volume growth and why we're hearing some of this.

Speaker 11: the commentary that went not back to pre-pandemic volumes yet. And then the second question, I guess this for Joaquin, is just thinking about your strategy and for to accelerate momentum in the Medtech business. You had a nice start to 2022, but wanted to kind of get a better understanding of, I guess the plan and the roadmap in terms of the number of quarters years that you envision.

Speaker 6: the first part being around volume recovery. To your point and something that we struggle with internally, it's really still clunky when it comes to comparative analysis versus prior periods. So we do look back at 2019. I can tell you our operational sales growth for MedTech over the first six months is about 10% overall. I would say half of that is maybe two-thirds. Is it really attributable to just the great job that Ashley and her team have been doing with launching new?

Speaker 6: in China, that impacted growth and procedures were down roughly 25 percent with a little bit improvement towards the last month from what we saw in April and May. So we continue to look at that as well, but I would say the improvement in MedTech has really come from the stated goals that you heard a couple years ago from Ashley and team, and that's a better cadence of innovation. I think we had 10 new products launched in the first half of this year, roughly the same amount as relied upon in the second half.

Speaker 4: our new product introduction and our pipeline progression. So in the first half of the year, I just commented that our growth was a competitive growth of 6%. It's also underlined by our growth in the first quarter of 8.6%. We'll see how the rest of the sector performs in this quarter, but our growth in the first half of the year was a competitive growth of 6%. So in that sense, my view is that we are already getting competitive growth.

Speaker 4: rates in Medtech with 6% in the first half of the year. The growth rate in the concordor has to be also put into perspective in the fact that the comparison with the second quarter of 2021 is a difficult one. Medtech grew 59% in the second quarter of 2021 and also there was some impact of the mobility restrictions in Asia Pacific. So we are improving our commercial execution and improving our pipeline.

Speaker 4: which are going to open a new market for us in kidney stones. We have now enrolled the first patient in our electrophysiology post field ablation study, which is going to give us another innovation in our very successful electrophysiology business, which is launched our new stapler HLON-3000, which is a digitally enabled device that comes also with significant evidence on how it improves patient.

Speaker 4: our commercial priorities and at the same time continue the good cadence of new product innovation that that is going to take us to competitive growth as demonstrated by our six percent growth in the first half of the year.

Speaker 2: Thank you. Our next question is coming from Chris Shibutani from Goldman Sachs. Your line is now live.

Speaker 12: Good morning and thank you. A two-part question on the U.S. immunology market, in general, and Trempfaya specifically. Across the category, what's your view on the outlook for how the balance of the year will progress in the immunology category based upon, you know, what you're seeing in terms of patient volume trends year-to-date? And then specifically on Trempfaya, the performance and outlook there, you highlight some share gains in both psoriasis and psoriatic arthritis. Where are these gains coming from? Can you help us understand competitive dynamics versus other biologics?

Speaker 4: Thank you, thank you, great question Chris. Overall, we see a recovery in the immunology market with new patient levels already exceeding pre-COVID levels. So we are optimistic about the recovery, specifically utilizing the metric of new patients. So that's progressing well for the immunology market. When it comes to ultra-enfaya, it continues to deliver strong growth worldwide with netri-sales growing in the quarter.

the market share leader. It was three points in psoriatic arthritis. It's difficult to tell you where this is coming from. I mean, we are assuming that this is going to be coming from older therapies that are there in the market and that's where it's coming from. But clearly, Trempfalia is doing really well both in psoriasis and psoriatic arthritis. Psoriatic arthritis is the market leading in you to brand share.

We are also pleased with the fact that we have published recently first and best in class five year durability data and also that we have been able to be the only IL-2 and E3 therapy to demonstrate inhibition of structural damage in PSA. So we are very positive about the trajectory of Tremphalia, which is a reflection of the strength of our immunology franchise. And with the future of Tremphalia, which I think is important for you to consider, we are

testing glass data and we are very pleased with that. And also if you look at our pipeline, we are also continuing to progress into phase two with our own oral IL-23, so very strong future of Tremphaia, one of the key products in our growth moving forward, very strong future for our franchise in immunology.

Thank you, Chris. Kevin, we have time for one last question. Thank our final question today is coming from David Rissinger from SVB Securities. David Rissinger is now live.

Yes, thanks very much. So congrats on the results and the updates. My question is about proposed drug pricing legislation, which is concerning given its potential impact on innovation and the state of New Jersey where you're headquartered.

So could you please comment on how the legislation would negatively impact incentives to pursue transformational new medicines for seniors and what J&J is doing to educate senators in New Jersey and beyond. Thank you.

Thank you for the question and a great question. First, it's difficult for us to comment on the content of the legislation or the feasibility of that legislation passing. There's been a lot of ups and downs there, and while we are very closely following the dynamics, the situation is still fluid, so it's difficult for us to comment on the actual legislation or in the feasibility. Now, if we believe that the legislation is going to be based on the language that...

in R&D in 2021. So as a company that invests heavily in R&D, we can tell you that the type of legislation that was proposed by the Senate Finance Committee with Medicare price setting will have a chilling effect in innovation that will be translated in less new medicines for patients. Again, from perspective since 2000, the pharmaceutical industry has introduced about 1000 new medicines. The impact that this will have may affect advances that we have in multiple areas that are still needed.

discussions to address what we believe is the major issue, which is patient affordability and patient access specifically in Part B. So we think that that's something that the industry has to address with the relevant stakeholders. We are very willing to sit at the table and shoulder the consequences of being able to address the patient affordability issue. Now, I always need to remember to you that in a price-constrained environment, Johnson and Johnson performs relatively better than most of our peers and competitors based on a number of factors.

Johnson & Johnson really it's a good place based on its diversification and our ability to drive growth through volume.

Wonderful. Thank you, David, and thanks to everyone for your questions and your continued interest in our company. We apologize to those that we couldn't get to because of time, but don't hesitate to reach out to the investor relations team with any remaining questions that you may have. I will now turn the call back to Joaquin for some brief closing remarks. Thank you everybody for participating in the call. Again, very pleased with the solid results achieved by our teams here. Today, it shows the quality and the market leadership of our franchises and the great execution of our company.

our recent ESG investor update, which highlighted progress against our 2025 Health for Humanity goals. I encourage all of you to listen to the webcast we play on our website if you didn't have a chance to do it already. We look forward to connecting with all of you again and keeping you updated on our continuous progress on future EMLINX goals. Thank you very much.

Thank you, that does include our webcast and teleconference. Say you may disconnect your line after this time and have a wonderful day. We thank you for your participation today.