JNJ | Q1 2016

Geoff Meacham: Welcome to the morning session of the third day of the Barclays Global Healthcare Conference. My name is Geoff Meacham, I am the Senior Biopharma Analyst here at Barclays. And I have Paul Choi from my team as well here on the stage. So welcome to the J&J fireside chat. So to might left is Dominic Caruso, CFO. To his left is Ashley McEvoy, who is J&J’s Group Chairman for Diabetes and Vision Care and then Louise Mehrotra from the IR team. So we are going to start off with the Safe Harbor and then do some quick prepared remarks and get right into some questions.

Louise Mehrotra: Thank you. I want to remind you that some of the statements made today are or maybe considered forward-looking statements as defined by the federal securities laws that are by their nature subject to risk and uncertainty. Johnson & Johnson 2015 10-K and subsequent filing, which can be found on the J&J Web site identify certain factors that could cause the results to differ materially from those projected in any forward-looking statements made today. Johnson & Johnson does not undertake to update any forward-looking statements as a result of new information or future events or developments. In addition today we may refer to certain non-GAAP financial measures, which have not be considered replacements for GAAP financial measures. Tables reconciling those non-GAAP measures to the most comparable GAAP measures are available in the Investor Relations section of the Johnson & Johnson Web site. Dominic?

Dominic Caruso: Thank you, Louise. Good morning, everyone. Nice to meeting with you today or afternoon already, no, it is morning. I think you know us well, so I will not take too much time on prepared remarks. But just a few things I’d like to point out. I thought that we ended 2015 in strong manner where we posted results that were at the high-end of our guidance for the year and that we gave earlier in 2015 and that’s momentum continued and we were confident in our 2016 guidance, in fact is above analyst expectations for earnings for 2016. I think you know us, as I said you know us well, but in general characterization from an investor perspective that I would give you is, we have a performance driven strategy, but we expect that our businesses will grow at a rate that’s greater than the markets in which they compete our earnings should be exceeding rate of growth in sales. And then we can, we will supplement, as we have done for many, many years, our growth through strategic and smart acquisitions, our partnerships, all of that coupled with a very healthy dividend where we’re now in our 53rd consecutive year of increasing our dividend. All of that we think makes for a significant value proposition for investment in Johnson & Johnson. Each of the businesses are strong, Pharma remains a key driver of our growth and profitability and we expect it will continue to do that in the future. Our medical device business had quite frankly underperformed in the market for a couple of years, we just announced the restructuring of that business and we think that business is on the right path to accelerate growth with innovation and also some costs reduction. Our consumer business is healthy, products back on the shelves from the time we had some issues in our OTC business. And then at the intersection of consumer and medical devices is a group of businesses that we refer to as consumer medical devices, which are our vision care and diabetes businesses and I’m pleased to turn it over to Ashley McEvoy, who run that business very successfully for us at Johnson & Johnson. Ashley?

Ashley McEvoy: Thank you, Dominic. Good morning, it’s a pleasure to be here and really to talk about our consumer medical device businesses. So we view these as growth opportunities for Johnson & Johnson. We like to say that they actually thing that they’re going with a grain of healthcare and why is that? They’re medical devices sold as prescriptions in many places around the world that consumers buy. So the power of brand really matters because of healthcare professionals actively engaged in their care. Given the chronic nature of their need states, consumers are also actively engaged and really exceeds to the value some iconic equities to create value. I think J&J is uniquely suited to best meet the needs of healthcare professionals and consumers in these spaces. So let me talk about vision and diabetes, we’re fortunate to enjoy leadership positions in both of these spaces behind iconic brands. And our business strategies and our businesses are experiencing momentum, clearly with innovation being one key driver. I’ll start with the vision care business. I am pleased to see vision outperform the market in the second half of ’15 and grow 8% globally, it grew 17% in the United States and has been growing market share consecutively for the past five months. We launched four new innovations in 2015. 1 Day OASYS, which as HydraLuxe Technology, really works with your tear film for superior comfort. We launched that in United States. We actually pull that launch for a full year in advance, we’re now rolling that out globally, we’ve seen very nice adoption, about 4.5% share in month four in the U.S. rolling that out globally around the world, nice uptick with eye care professionals as well as consumer. We also launched a daily disposable launch Moist for presbyopia in the United States last year as well as we started to roll that out globally. It's gotten, again nice uptick, it's about a 9% share globally, ahead of some competitive launch curves of late. And then I'll turn my attention to diabetes. So really what we've been focusing on the diabetes debate segment is reengineering the business for sustained competitiveness. It really started with simplifying the portfolio, we went from 15 meter platforms down to 3 for feistier platforms number two, moving the portfolio to the most competitive platform. Our one touch Vario Blood Glucose meter was the fastest growing blood glucose meter last year around the world, and our Animas pumps with the DexCom's G4 sensor grew 30% last year. Both of those assets grew market share in 2015, importantly we really realigned the business for the emerging market place, it’s quarter million dollars of cost out of the system in two years. Our sharpening strategies in emerging markets and really ensuring that Johnson & Johnson is a partner of choice for key strategic co-lab relations, the faster both the endocrinologists as well as people with diabetes. So I guess I would warp with saying we've been focusing on improving our competitiveness, we are fortunate to enjoy leadership positions and we really think J&J is uniquely poised to meet both the needs of the doctor as well as the consumer.

Dominic Caruso: Thanks Ash.

Q - Geoff Meacham: This is just, we're on the topic of the vision here in business, so Vistakon has had some good couple of quarters of good organic growth. How do you see this in the context of the overall franchise and what would you view as kind of a longer term growth rate here, what are some of the innovations or strategies used in place that kind of accelerate.

Ashley McEvoy: I think that we look at the category it's grown around 5%, we do expect to deliver above category performance in 2016. What we're really focused on is driving category growth. And a lot of our innovation has been geared towards bringing new contact lens considerers to the wearers and to drive the category and as well as keep people in the category. So I mentioned the new technology for people with presbyopia number one reason for fall out in the contact lens area is you get dry eye or you get presbyopia at the age of 40, a lot of the contact lens technologies has not been good enough to meet this the standard of what spectacles are doing but a lot of folks like peripheral vision and that's really where contact lenses can offer some nice value.

Geoff Meacham: Then Dominic you mentioned earlier just about following the restructure of the medical device business maybe what are some of the priorities when you look at kind of product cycles and things like that that you know again could returns more normalized way.

Dominic Caruso: Sure Geoff. Similar to each of our businesses in pharma and consumer there's always areas of specific focus, that the business will disproportionately invest in both commercially and with innovation. So for medical devices there's actually six particular areas that we're very excited about. Endo cutters and there we see very good growth, our energy instrumentation, also good growth, our investment in robotic surgery with our partnership with Google, also knee technologies and particular in tube-knee [ph] has done very well, we think there is an additional innovation in knees. Trauma there continues to be good innovation and areas of growth in trauma and finally electrophysiology business has been fantastic for us and will continue to be that way. So they are the six areas within medical devices that we were disproportionately investing in and I think we'll drive most of the growth.

Geoff Meacham: And let's switch gears to the pharma segment and we just talked about this earlier this morning. When you look at the lot of the innovations across some of the small and midcap biotechs, it’s evident that the valuations have come in a little bit, how do you sort of frame you know kind of a bolt-on versus you know organic investment to try to drive pharma new growth particularly in light of this tech. the urgency for this tech [ph].

Dominic Caruso: Well I think we've been very successful in pharma with the mix of licensing and collaboration and selective acquisitions in key areas where we either entered or bolstered a particular technology so I just hark it back to Cougar Biotechnology acquisition is where we got Tida [ph] from adjusted values. An accusation in RSV. Our strategy in pharma has largely been not transformational M&A with large scale integrations but rather specific areas of therapeutic focus in the five therapeutic categories either by licensing and partnering or by acquisition. So I think you'll continue to see us do that. Valuations in biotech were very high, they've come down where all these patients you know we want the right asset, at the right time, at the right price whether the current valuations, whether the current management teams would agree that the current valuations are the right valuations that's another matter, so we'll have to wait and see whether people have settled in on where the valuations are and we’re okay waiting for that settlement to occur because we're in constant contact with many of these companies, we have good relationships with many of them and doing a deal at the right time, at the right price is actually the most important thing we think to focus on.

Paul Choi: And while on the topic of transactions, restructuring, there has been some dialogue recently on the potential for a consumer spin-out. I wanted to get your sense, Dominic kind of where -- is there anything that’s changed fundamentally in the consumer segment that you would think would make it more attractive? Historically it has been an integral part of J&J? How do you view this kind of going forward?

Dominic Caruso: Well, you’re right Geoff, it has been an integral part of Johnson & Johnson for many years and where healthcare is evolving to we think it is going to be even more important to have consumer insights into consumer business that complements our medical device and pharma business. And that is especially true in emerging markets where leading with the consumer business is a great advantage that we have. Broadly speaking, we are a healthcare company, we are not a pharma company or medical device company or consumer company, so we looked at opportunities across healthcare wherever they may be. And so we want to remain in those three segments of the business. It’s a business that’s improved dramatically since the issues that we had with the over-the-counter medications. Those have been resolved with the FDA. The plants are back up and running, the products are back on the shelves and what we see is continued market share gains as those products return to the market and we also see improvement in margins as that business now has recovered. And now we will be focused more on margin improvement. So I think it’s an important element of our mix of businesses and will contribute Johnson & Johnson going forward.

Paul Choi: So just switching gears to diabetes, actually when you look at the different classes, clearly for SGLT2s, Lilly had some good data for EMPA-REG. I wanted to get a sense though, when you look at INVOKANA, when you look at some points of differentiation from the CANVAS study, what do you think more broadly is a good tipping point when you think about how SGLT2s fit in the broader perspective.

Dominic Caruso: So let me take that and then, Ashley or Louise, please add if you -- if I miss something. I think the SGLT2 category now has been accepted by the medical profession as an important advancement in the care of type 2 diabetics. In rSGLT2, INVOKANA has done remarkably well as the number one prescribed, SGLT2 has doubled in sales last year and as you know the EMPA-REG data showed a cardiovascular benefit. Our scientists believe that there is really no differentiating characteristic between Jardiance and INVOKANA and to say that isn’t a class effect, and in fact recent guidelines were just published which provided guidance to the physician community that it is likely that SGLT2 as a class have a cardiovascular benefit. We are studying that particular cardiovascular benefit in a trial called CANVAS, which won’t read out, Louise until?

Louise Mehrotra: 2017.

Dominic Caruso: Until 2017 and so we’ll eventually hopefully have the data to be able to promote it for cardiovascular benefit as well. But it’s clearly been recognized by the physician community as an important new, treatment option for type 2 diabetic patients and clearly recognized as a class that very likely has a cardiovascular benefit.

Paul Choi: And then for Ashley. With respect to the diagnostic side of the diabetes testing business and the pump business. Can you maybe comment on how you see the testing side potentially driving incremental pump usage? And what are the synergies and relationships between the more consumer-facing side that people are familiar with or patients are familiar with the testing strips and monitor and how that could drive the Animas and pump business in general?

Ashley McEvoy: I think it’s a good point Paul and Dominic mentioned really the value of the enterprise. So this is something that my team lives [ph] daily in diabetes and in eye health. So with diabetes, we are familiar with all of the growing incidence, unfortunately the people with diabetes [technical difficulty]. If you look at all of the interventions and the new states that are needed along the care continuum, we are fortunate J&J to be able to best serve each of those needs. So whether be it a pre-diabetes space, where you are doing a lot of education on health and wellness, we have a well-established health and wellness business that really understands behavior modification and how to really have relevance at the right moment with the consumer to get some good behavior modification or whether that be at the point of diagnoses when they are handed their first blood glucose meter with OneTouch or they are, in fact, put on their first oral medication like in INVOKANA, to the point where they may be reliant on insulin and have to wear insulin and they’re looking for discrete, accurate, on-demand, flawless delivery. We know compliance with insulin can be difficult at mealtime and we know that mealtime is no longer three times a day, but really every three hours. So we really expect to have a solution for patients within the next year in that regard. And then comp where they’re relying on 24/7 insulin therapy, they want to have accurate, they want to have a great user interface and they want to have a really smart algorithm if you will. So for us what we've heard from doctors is, thank you for your thought leadership on the whole care continuum. Thank you for being a single point of contact. As we mentioned a little bit about INVOKANA and OneTouch really selling jointly to endocrinologists charging fees. And most importantly for patients and for people who want to live a better life, having a partner throughout that care continuum.

Geoff Meacham: Dominic we just finished a chat with Avi, who noted that when you look in the T&F [ph] space, the legacy players you guys, Amgen and Avi, have had you know vast majority of share of the class despite a lot of new entrants, but I think you know when you look forward just a few years biosimilar are going to be a reality here and with the FDA’s recent panel meeting which is suggesting an extrapolation for emphysema, we're heading in that direction. So how do you view kind of the threat of biosimilar, what are some of the strategies in place to retain patients and kind of from a longer term perspective you know in the context of the organic growth for REMICADE what do you view as kind of a growth rate?

Dominic Caruso: So I think, biosimilar obviously are going to be a reality in the marketplace you know first and foremost we want to defend our patent and we’ll continue to do that. So we believe they should come to market when our patent expires which is September 2018 in the U.S. I think the FDA panel recommendation that there should be extrapolation of various indications based on one indication to all other indications is an interesting development. I hope that everyone does not confuse that with interchangeability because there are no guidelines for chain switching and interchangeability of product to another. So the physician community I think will --although there will be extrapolated indications perhaps for the biosimilar when it comes to the market. I think physicians understand that there are no guidance -- guide lines for interchangeability and quite frankly about 70% of the patients on REMICADE or a well-tolerated drug find it extremely efficacious so the potential to even switch them seems like not something a physician might want to do. There's 30% of the patients that are either not treated well currently or are new to the category, of course that might be where that biosimilar could make an inroad. I think we also have strategies in place with contracting because we've been in the market for a while, we have a broad array of immunology products that we have contracted with the payer community and then we have a follow on set of compounds in Cirrucumet and Consucumate, all in the immunology space. So I think it's not necessarily about the growth rate of REMICADE versus the growth rate of our pharma business and we believe that with the strength of the pipeline, strength of the line expansions of the current indication and the strength of the still growing inline products that we have today, that business will continue to grow at above market rates till 2019, was what we previously discussed, despite the early entry perhaps of a biosimilar.

Paul Choi: So continuing with the pharma business, one of the controversies that potential emerged recently is with respect to the Xarelto and some of the data that's been challenged. Could you maybe comment on how you see that and the completeness of it and how you see it, the Xarelto franchise potential performing over the longer term?

Dominic Caruso: Sure well Xarelto as you know has been a very good addition to the regimen you know for anticoagulation especially in the area where you know Warfarin has quite the market leading position but has significant downside impact. It’s done extremely well, it's been studied now in roughly 91,000 patients and it's been prescribed for well over a million patients. The data that you're referring to Paul had to do with a particular diagnostic test that was used to measure the effect of Warfarin and that diagnostic test was later recalled because of some flaw and the presumption that that potentially could have clouded the results of Warfarin in comparison to Xarelto in the trial. We have since done our own analysis of that, the European Medical Agency did a review of that, the results were published in the New England Journal of Medicine and all the data indicates that, that despite that potential flaw, that the cost benefit ratio of Xarelto over Warfarin is still very, very favorable and it doesn't change. And we haven't heard from the physician community any concern about this. In the real world experience since the time of that trial, it’s just so compelling.

Paul Choi: So really does seem to be a non-issue here?

Dominic Caruso: I think so.

Geoff Meacham: And I guess we'll run at the topic of this class, what do you think, Dominic, is the tipping point to capture more share from Warfarin as a lot of these novel anticoagulants are launching? There is more physician experience, but Warfarin still has, on a volume basis, some pretty substantial share?

Dominic Caruso: Yes, I think the continued building of clinical evidence over long periods of time and we continue to study Warfarin in multiple -- I mean sorry, Xarelto in multiple indications. And over time, physicians become more and more comfortable with the breadth of the clinical data with respect to Xarelto. So I think that’s going to be true with any entrenched pharmaceutical agent in the market like Warfarin and any category that you really need a breadth of clinical data with constant commitment and study to it. And, Louise, correct me if I am wrong, we have four or five, five additional clinical --?

Louise Mehrotra: Four in phase 3 and one in phase 2.

Dominic Caruso: Yeah, four in phase 3 and one in Phase 2 clinical trials ongoing right now to expand the indication of Xarelto.

Geoff Meacham: With that, let’s wrap up. And thank you very much. See you in the break out.

Dominic Caruso: See you in the break out. Thank you.