Earnings Call Transcript - JNJ Q1 2021

Operator, Operator

Good morning, and welcome to Johnson & Johnson's First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode until the question-and-answer session of the conference. This call is being recorded. I would now like to turn the conference call over to Johnson & Johnson. You may begin.

Chris DelOrefice, Vice President, Investor Relations

Good morning. This is Chris DelOrefice, Vice President of Investor Relations for Johnson & Johnson. Welcome to our company's review of business results for the first quarter and our updated financial outlook for 2021. Joining me on today's call is Joe Wolk, Executive Vice President, Chief Financial Officer. Also joining Joe and myself during the Q&A portion of the call will be Alex Gorsky, Chairman of the Board of Directors and Chief Executive Officer; Joaquin Duato, Vice Chairman of the Executive Committee; and Dr. Paul Stoffels, Vice Chairman of the Executive Committee and Chief Scientific Officer. A few logistics before we get into the details. This review is being made available via webcast, accessible through the Investor Relations section of the Johnson & Johnson website at investor.jnj.com, where you can also find additional materials, including today's presentation and associated schedules. Please note that today's presentation includes forward-looking statements. We encourage you to review the cautionary statement included in today's presentation, which identifies certain risks and factors that may cause the company's actual results to differ materially from those projected. In particular, there is uncertainty about the duration and contemplated impact of the COVID-19 pandemic. This means that the results could change at any time and the contemplated impact of COVID-19 on the company's business results and outlook is at best our estimate, based on the information available as of today's date. A further description of these risks, uncertainties and other factors can be found in our SEC filings including our 2020 Form 10-K. Reconciliations of the non-GAAP financial measures utilized for today's discussion to the most comparable GAAP measures are also available at investor.jnj.com. Several of the products and compounds discussed today are being developed in collaboration with strategic partners or license from other companies. This slide acknowledges those relationships. Moving to today's agenda, I will review first quarter sales and P&L results for the corporation and the three business segments. Joe will provide insights about our cash position, capital allocation deployment and we'll spend some time on 2021 qualitative commentary, and we'll outline our updated guidance for 2021. The remaining time will be available for your questions. We anticipate the webcast will last up to 75 minutes. Now let's move to the first quarter results. Worldwide sales were $22.3 billion for the first quarter of 2021, an increase of 7.9% versus the first quarter of 2020. Operational sales growth, which excludes the effect of currency translation, increased 5.5% as currency had a positive impact of 2.4 points. In the U.S., sales increased 3.9%. In regions outside the U.S., our reported growth was 12.2%. Operational sales growth outside the U.S. was 7.3% with currency positively impacting our reported outside-U.S. results by 4.9 points. Excluding the net impact of acquisitions and divestitures, adjusted operational sales growth was 6% worldwide, 3.9% in the U.S. and 8.2% outside the U.S. Turning now to earnings. For the quarter, net earnings were $6.2 billion and diluted earnings per share was $2.32 versus diluted earnings per share of $2.17 a year ago. Excluding after-tax intangible 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 was $2.59 representing increases of 12.5% and 12.6%, respectively compared to the first quarter of 2020. On an operational basis, adjusted diluted earnings per share increased 8.3%. I will now comment on business segment sales performance highlighting items that build upon the slide you have in front of you. Unless otherwise stated, percentages quoted represent the operational sales change in comparison to the first quarter of 2020 and therefore exclude the impact of currency translation. Beginning with Consumer Health, worldwide Consumer Health sales totaled $3.5 billion and declined 3.3% with declines in the U.S. of 7.4% and modest growth of 0.5% outside of the U.S. The Consumer Health results reflect negative comparisons due to prior year pantry loading and increased COVID-19 demand, particularly in over-the-counter medicines. Excluding the prior-year COVID-19 comparison, the Consumer Health segment grew low-single-digits in the quarter. Over-the-counter medicines declined 14.8%. Globally results were negatively impacted by the prior-year comparisons I previously mentioned, coupled with continued impacts of social distancing restrictions resulting in lower cough, cold and flu incidences. Partially offsetting declines were U.S. share gains, primarily in TYLENOL, ZYRTEC and PEPCID as well as strong performance of NICORETTE outside the U.S. The Skin Health/Beauty franchise grew by 2.8% driven by strong performance outside the U.S. for NEUTROGENA and AVEENO due to new product innovations and strength in e-commerce. Results were partially offset by U.S. COVID-19 related market contraction in makeup removal wipes. Consumers continue to focus on products related to personal health and hygiene, including oral care, which grew 4.5% from continued growth of LISTERINE mouthwash due to category growth and strong promotions partially offset by divestitures. Worldwide growth excluding divestitures was approximately 8%. Additionally, the Baby Care franchise grew by 9.5% as a result of strength in Johnson's outside the U.S., primarily in Latin America and Asia Pacific regions across all categories coupled with AVEENO baby growth in e-commerce globally. Moving on to our Pharmaceutical segment. Worldwide Pharmaceutical sales of $12.2 billion grew 7.1% with strength in both the U.S., increasing by 6.4% and outside the U.S. with sales increasing by 7.9%. Sales in the quarter included a small contribution in the U.S. from Janssen's COVID-19 vaccine, following its emergency use authorization in February. Our strong portfolio of products and commercial capabilities continues to enable us to deliver strong adjusted operational growth at above-market levels with seven key products realizing double-digit growth in the first quarter. Our immunology therapeutic area delivered global sales growth of 5.5%, driven by strong double-digit performance of STELARA and TREMFYA, offset by continued declines in REMICADE due to biosimilar competition. STELARA continued to show strength in all regions growing at 15.4%, driven by increased market growth and share gains. U.S. share increased roughly four points in Crohn's disease and nearly 10 points in ulcerative colitis. STELARA growth was partially offset by an unfavorable comparison to a prior period pricing adjustment in Q1 2020, and an unfavorable comparison to increased sales in Q1 2020 resulting from COVID-19 related longer scrip durations in the U.S. and Europe. TREMFYA grew 37.8% with strong double-digit growth in both the U.S. and outside the U.S. driven by share gains in psoriasis of 2.7 points in the U.S., continued global expansion into new markets and continued penetration into the psoriatic arthritis indication that was approved in 2020. Our oncology portfolio delivered another strong quarter with worldwide growth of 14.6%. DARZALEX continued its strong performance growing 42.2%, driven by share growth across all lines of therapy and increased penetration of the subcutaneous formulation in the U.S. and EU. DARZALEX continues to penetrate the frontline setting aided by recently approved line extensions that penetrate new patient populations, posting nearly three points of share growth in line one in the U.S. this quarter. ERLEADA continued its global momentum with growth of 79.7% in the quarter driven by market share and penetration gains, especially in the metastatic indication. IMBRUVICA grew 5.6% globally with increased volume growth driven by our market-leading share and increased persistency as patients extend the duration of therapy. However, this was partially offset by the market contraction due to temporary COVID-19 impacts on new patient starts. Growth was also negatively impacted by one-time items including the increased demand in Q1 of 2020 related to longer-term scrip durations in anticipation of pandemic-related restrictions and higher levels of clinical trial volume in the same quarter last year. Excluding the impact of these one-time events, global growth for IMBRUVICA would have been double-digits. In neuroscience, our paliperidone long-acting portfolio grew 6.9% driven by market and share growth due to increased new patient starts and strong persistency. Cardiovascular/metabolism/other declined 4.1% this quarter driven by continued biosimilar competition for PROCRIT and competitive pressures in INVOKANA which was partially offset by growth of 11.7% in XARELTO driven by continued demand and a one-time favorable prior period pricing adjustment in the current quarter which contributed over half of XARELTO's growth in the quarter. Lastly, our total pulmonary hypertension portfolio achieved strong growth of 13.7% with OPSUMIT growth of 13.5% and UPTRAVI growth of 20.9% both driven by market penetration and share gains. I'll now turn your attention to the medical devices segment. Worldwide medical devices sales were $6.6 billion growing 8%. Growth versus prior year was primarily driven by market recovery from procedures impacted by COVID-19 along with continued momentum driven by commercial initiatives and our recently launched new products that are further enhancing our competitiveness across several areas of the business. Additionally, selling days positively impacted worldwide growth by 190 basis points. We expect the full-year impact from selling days excluding the impact of the 53rd week in 2020 will be minimal. While recovery dynamics continue to vary across procedure type and geography, our results reflect continued momentum with nine of our 11 priority platforms delivering global growth in Q1 with six of these delivering double-digit worldwide growth. As you consider regional dynamics, Asia Pacific was the first region to be impacted by COVID-19 and experienced the most significant sales declines in the first quarter last year. Asia Pacific realized strong market recovery, primarily in China against this low sales base from the prior year. So that coupled with our commercial efforts to expand into Tier 2 and Tier 3 hospitals in China resulted in strong double-digit growth in this region. COVID-19 remains a dynamic variable in the U.S. However, the market has been resilient and continues to recover resulting in growth of 5.4% in the U.S. Sales declined in Europe and Latin America where there continues to be a higher level of COVID-19-related mobility restrictions and procedure deferrals. Looking at results for each of our platforms, Interventional solutions delivered another quarter of strong double-digit growth. Electrophysiology grew 25.7% in the quarter, primarily driven by recovery in the market coupled with the strength of our broad-based portfolio, focus on commercial execution and introduction of new products such as an update to our CARTO 3 System and the CARTO PRIME Mapping Module which further enhanced our market position globally. These new product introductions support improved mapping capabilities and reduced ablation times during atrial fibrillation procedures. Worldwide orthopedics grew 1.2% versus the prior year with continued COVID-19 impacts on procedure recovery. Worldwide trauma delivered growth of 9.5% reflecting market recovery and success of our newer product introductions that continue to support our market-leading position in trauma such as the most comprehensive Cannulated Compression Headless Screw system on the market and the RIA 2 system designed for long-bone grafts. Hips returned to worldwide growth this quarter increasing 3.2% driven by market recovery and our continued leadership position in the interior approach and demand for the ACTIS Stem aided by our other enabling technologies in hip navigation. Knees declined 9.9% globally, primarily due to slower market recovery in these more deferrable procedures in addition to some softness stemming from business mix dynamics. We are on track for the commercialization of our VELYS Robotic-Assisted Solution for total knee procedures in the U.S. We believe the combination of this launch along with our differentiated VELYS Digital Solutions and Attune platform including some cementless offerings will enhance our portfolio and support improved performance, as procedures continue to recover. Spine declined 0.6%, reflecting the continued impact of COVID-19 on this market coupled with some one-time stocking reductions in China resulting from the consolidation to a national distribution model, worth about 250 basis points globally. The decline was partially offset by the success of the recently launched products such as Symphony, Conduit and Fibergraft as well as partnerships which further enhance our offerings such as the X-Pac Expandable Cage. Advanced surgery grew 14.3% versus the prior year with double-digit growth globally in endocutters, biosurgery and energy, primarily from robust growth in Asia driven by market recovery and market share gains due to new product launches, globalization of our portfolio, including biosurgery, Surgiflo Plus Thrombin launch in Japan, and commercial investments to expand our coverage in China. In general surgery, wound closure grew 12% globally with growth of 6.6% in the U.S. and 15.7% outside the U.S. Results were driven by recovery in the markets as well as continued strength of our market-leading suture portfolio including the STRATAFIX barbed suture family. The U.S. contact lens growth of 7.2% reflects the strength of our commercial execution and our market-leading ACUVUE portfolio, including the recent launch of Acuvue Oasys multifocal lenses which were designed to provide clear vision at all distances. Channel inventory increases related to continued COVID-19 volatility and support of this new product launch contributed about 400 basis points to growth. Growth outside the U.S. of 0.9% reflects a slower market recovery in Japan and Europe. The global surgical vision grew 11.2% due to a combination of a recovery in both cataract and refractive procedures as well as the continued strength of recent product introductions, including Tecnis Toric II and early success of Tecnis Eyhance driving improved share momentum in both the U.S. and outside-U.S. markets. Now regarding our consolidated statement of earnings for the first quarter of 2021, please direct your attention to the box section of the schedule. You will see we provided our earnings adjusted to exclude intangible amortization expense and special items. As reported this morning our adjusted EPS of $2.59 reflects a reported increase of 12.6%, and an operational increase of 8.3%. I'd like to now highlight a few noteworthy items that have changed the mix of earnings compared to the same quarter last year. The cost of product sold improved versus 2020 as a percent to sales due to favorable product mix in the pharmaceutical business, and favorable volume and mix in the medical devices business. Additionally, in the first quarter of 2020, medical devices results included the establishment of COVID-19 inventory reserve which did not repeat in 2021. Selling, marketing and administrative margins improved due to leveraging the medical devices business, resulting from the recovery of sales from the prior year's negative COVID-19 impact. We continue to invest in research and development at competitive levels investing 14.2% of sales this quarter. This was higher than the first quarter of 2020 by 170 basis points, driven by portfolio progression in the pharmaceutical business. The other income and expense line showed net income of $882 million in the first quarter of 2021, compared to net income of $679 million in the first quarter of 2020, primarily due to higher acquisition, integration and divestiture related activity. However, as a reminder, we treat significant gains as a special item and these gains are therefore excluded from adjusted earnings. Regarding taxes in the quarter, our effective tax rate increased from 11% in the first quarter of 2020 to 16.6% in the first quarter of 2021. This increase is driven primarily by the impact of one-time items in 2020 that did not repeat. Excluding special items the effective tax rate was 16.5% versus 15% in the same period last year. I encourage you to review our 10-Q for further details on specific tax matters. Let's now look at adjusted income before tax by segment. In the first quarter of 2021, our adjusted income before tax for the enterprise as a percentage of sales increased from 35% to 37.1%. The following are the main drivers of change to the adjusted income before tax by segment. Medical devices margin improved by 640 basis points driven by inventory reserves recorded in 2020 associated with the impact of COVID-19, which did not repeat in the current quarter and overall expense leveraging in 2021 resulting from the medical devices sales recovery. Consumer health margins improved by 150 basis points, primarily driven by supply chain efficiencies including the benefit from our SKU rationalization program. Pharmaceutical margins improved by 30 basis points primarily driven by favorable product mix partially offset by increased investment in research and development. That concludes the sales and P&L highlights for Johnson & Johnson's first quarter. I'm now pleased to turn the call over to Joe Wolk.

Joe Wolk, Executive Vice President, Chief Financial Officer

Thank you, Chris. Good morning everyone and thanks for joining us today. When we spoke with you this time last year, we updated our full-year 2020 outlook with perhaps the highest level of uncertainty Johnson & Johnson had ever faced, much like every other company in every other industry. COVID-19 cases were on the rise, worldwide lockdowns were in effect and most were adapting to new ways of working while maintaining productivity. No one knew how long the pandemic would last and demand forecasts were ambiguous at best. However, what was crystal clear, what we did know was that the resilience of our business, the strength of our financial position and an unrelenting long-term focus to develop and deliver our lifesaving medicines and products to patients and customers around the globe would likely lead to a better future. We are stronger as a business than before the pandemic and our first-quarter 2021 results give us even more confidence in our ability to continue delivering compelling performance in the future. Let me begin with our cash position and capital allocation priorities. We ended the first quarter of 2021 with approximately $9 billion of net debt, consisting of approximately $25 billion of cash and marketable securities and approximately $34 billion of debt. While our capital allocation priorities remain intact, the past year has reinforced the importance of managing our business for the long-term through a disciplined approach and a focus on investments for innovation to further enhance our competitive positioning. In addition to disproportionately investing competitively in our R&D pipelines, we continue to evaluate and capitalize on acquisition opportunities when appropriate to create value over the long-term. Paying our dividend and increasing it annually remains a key priority. Earlier this morning, we announced that the Board of Directors approved an increase of the quarterly dividend for the 59th consecutive year by 5%. The dividend increase to $1.06 per share per quarter reflects our recent performance, strong financial position and confidence in the future of Johnson & Johnson. An indication that our capital deployment is fortifying the foundation for our future is in part illustrated on this next slide, which details pipeline developments that have occurred since our last call. I'll highlight a few starting with our pharmaceutical business. First, we received U.S. approval and a positive opinion from the CHMP in the EU for Ponvory in multiple sclerosis, our first EMEA approval this year. In addition, we completed our BLA filing for Cilta-Cel, a BCMA CAR-T for the treatment of multiple myeloma and we anticipate U.S. approval later this year. As you know, we are rigorous in focusing on differentiated transformational medical innovation. Despite showing proof of concept in initial phases of the study, we decided to discontinue the Phase 2 development of Tesnatilimab, an anti-NKG2D monoclonal antibody for Crohn's disease based on insufficient efficacy in the trial. Within our medical devices portfolio, the FDA granted approval for Tecnis Eyhance, a next-generation intraocular lens. This represents the first significant innovation in monofocal technology in over 20 years. Johnson & Johnson Vision also announced a collaboration with Menicon to deliver therapeutic contact lenses that manage the progression of myopia in children. We expect the commercialization of this product by the end of 2021 under the brand name Acuvue Ability, pending health authority approval. We are excited to accelerate our entry into this growing and important space for patients, while we continue to advance our myopia pipeline. As Chris commented earlier, we are pleased by the enterprise's first-quarter results. I'll now provide some insights into how we are thinking about the remainder of 2021. So, let's start simply with: we remain confident in our business. Our pharmaceutical segment is on track with our expectations and in 2021, we expect to deliver a 10th consecutive year of operational above-market growth. Importantly, this growth is volume-driven, not dependent on price. You may have noticed that we issued our fifth annual Janssen U.S. Transparency Report last week. While I'm admittedly biased, this is a very informative read and you'll not only see the average price for our products declined by nearly 6% in 2020, but how more than $29 billion of rebates and discounts were allocated. In consumer health, prior-year comparisons will be choppy by quarter throughout this year due to the COVID-19 pantry loading and demand surges experienced in 2020. However, we continue to expect to grow with the market for the year in those areas in which we compete, driven by our strong iconic brands that consumers rely on every day. We will also continue to focus on maintaining our enhanced margin profile, driven by our SKU rationalization and investment optimization programs. In medical devices, better execution, new innovative offerings, and market recovery led to growth in the first quarter. However, market variables such as patient willingness to seek care, insurance coverage, and unemployment rates along with the easing of mobility restrictions will influence the rate of recovery as we progress through the year. Despite those uncertain dynamics, we remain confident in the full-year outlook we had in January. Let me say a few words related to our COVID-19 vaccine. Our goal has always been to bring our scientific capabilities and resources to develop a safe, effective vaccine that would complement other measures to end the global pandemic. To ensure broad access, we announced early on that we would supply the vaccine on a not-for-profit basis during the crisis period. Given the not-for-profit commitment, as previously stated, we never anticipated COVID-19 vaccine revenue would have a significant upside impact to 2021 adjusted EPS, already projected to grow at 18%, or 1.8 times greater than sales growth. Paul will say a few words at the conclusion of my remarks on our COVID-19 vaccine. Regarding vaccine financials, please know that we commit to providing timely updates to actual results and guidance as warranted. Considering the qualitative factors I just referenced, here's what we expect for the full year 2021. Starting with sales, on an adjusted operational basis, we are increasing our guidance and tightening our range to reflect the ongoing confidence in the business to a range of growth to 8.7% to 9.9%. This adjusted operational sales growth is on a constant currency basis, consistent with how we manage our business performance. We are maintaining our estimate for the net impact of acquisitions and divestitures of approximately 50 basis points, resulting in operational sales of $89.3 billion to $90.3 billion, or 8.2% to 9.4%. While we don't offer predictions on currency movement, utilizing the Euro spot rate relative to the U.S. dollar as of last week at 1.19, results in a still favorable, but to a lesser degree currency impact of $1.3 billion, or a year-over-year increase of 150 basis points, resulting in estimated reported sales in the range of $90.6 billion to $91.6 billion, an increase of 9.7% to 10.9%, or 10.3% at that midpoint versus 2020. Regarding the balance of the P&L, we are maintaining the guidance we offered in January for all other items for which we routinely provide guidance. We are, however, comfortable tightening our range by raising the lower end resulting in increasing the midpoint of our adjusted operational EPS by $0.03. Therefore, our new adjusted earnings per share guidance range is $9.30 to $9.45 on a constant currency basis. While not predicting currency movement, but to provide some direction on the impact of currency fluctuations on our reported adjusted EPS, the estimated benefit is now $0.12 versus $0.15 for the full year. Accounting for that, we would be comfortable with your models reflecting reported adjusted EPS ranging from $9.42 to $9.57 or a midpoint of $9.50 to a range of 17.3% to 19.2%. We don't provide quarterly guidance, but do appreciate that you find value in us providing some qualitative considerations to keep in mind as you update your models. This slide looks rather similar to what we shared in January with the most noteworthy callout being the negative impact of COVID-19 experienced in the second quarter of 2020, particularly in medical devices. It is reasonable to infer that the second quarter of 2021 should have highly favorable comparisons in medical devices. Let me close our prepared remarks by acknowledging the Johnson & Johnson colleagues and all they have overcome, but more importantly accomplished over the last year. Driven by our credo their unrelenting dedication to continue meeting our commitments to all stakeholders has been inspiring. On behalf of the entire executive team to all 135,000 employees around the world, thank you. Paul, Chris and I are pleased to be joined by Alex and Joaquin to address your questions. But before we begin the Q&A, let me turn the call over to Paul.

Paul Stoffels, Vice Chairman of the Executive Committee and Chief Scientific Officer

Thank you, Joe and I'm pleased to provide an update on our COVID-19 vaccine and our efforts to address the ongoing pandemic, which today has taken the lives of more than three million people globally. From the very beginning, we have worked to develop and deliver a single-shot, easily transportable COVID-19 vaccine to help protect the health of people everywhere and reach communities in need globally. We are committed to equitable access and to bringing an affordable COVID-19 vaccine to the public on a not-for-profit basis for the emerging pandemic use. In the last quarter, we announced results from our multi-country Phase 3 ENSEMBLE study that demonstrate the vaccine was 85% effective in preventing severe disease across all regions studied and showed protection against COVID-19-related hospitalizations and deaths, beginning day 28 after vaccination. The vaccine has demonstrated protection across all countries studied and with multiple variants of the virus including the B.1.351 variant. Based on the robust data we submitted to health authorities, we received emergency use authorization from the U.S. Food and Drug Administration, a conditional marketing authorization from the European Medicines Agency and Emergency Use Listing from the World Health Organization. We began U.S. distribution in March with plans to begin shipping to Europe in April. In addition, given the threat of variants, we collaborated with the South African Medical Research Council on the Sisonke study, an open-label Phase 3b vaccine implementation study among 500,000 frontline healthcare workers in South Africa, where the B.1.351 variant has become dominant and where there is limited supportive care or wide availability of COVID vaccines. This variant now makes up more than 60% of cases across the African continent and has been detected in more than 60 countries globally. A single-shot vaccine with demonstrated protection against COVID-19-related hospitalization and death can be a critical tool for fighting the global pandemic, particularly with protection across countries with different variants. Last Tuesday, the U.S. Centers for Disease Control and Prevention Advisory Committee on Immunization Practices or ACIP reviewed the reports of an extremely rare disorder involving blood clots in combination with low platelets observed in a small number of individuals following vaccination with a Johnson & Johnson COVID-19 vaccine. Out of an abundance of caution, the CDC and FDA recommended a pause in the use of the vaccine in the U.S. ACIP will reconvene this Friday and we look forward to their review and the outcome of the meeting. Johnson & Johnson made the decision to proactively delay the rollout of the vaccine in Europe and paused vaccinations in all COVID-19 vaccine clinical trials, while we've updated guidance for investigators and participants. The safety and wellbeing of the people who use our product is our number one priority. We strongly support awareness of the signs and symptoms of this extremely rare event to ensure the correct diagnosis, appropriate treatment and expedited reporting by healthcare professionals. We continue to believe in the positive benefit-risk profile of our vaccine. And in view of the raging pandemic that continues to devastate communities around the world, we continue to collaborate with medical experts and global health authorities, including the CDC, FDA, EMA, the WHO and the South African Health Products Regulatory Authority, SAHPRA, to work toward continuing vaccination to end the global pandemic. We welcome the recent recommendation of SAHPRA to lift the pause in the investigator-led collaborative Sisonke study, provided that specific conditions are met. SAHPRA based this decision on a review of the available safety data from the Sisonke study as well as adverse event reports in the United States. We look forward to partnering with the South African Ministry of Health to resume vaccinations of healthcare workers in South Africa soon. We are looking forward to the outcome from today's meeting of the European Medicines Agency's Pharmacovigilance Risk Assessment Committee, the PRAC, and are looking forward to working with EMA to ensure appropriate awareness of this extremely rare event and guidance on diagnosis and treatment of this condition. Johnson & Johnson stands ready to resume shipment of its COVID-19 vaccine in Europe. In addition, we will work with member states to resume vaccinations in all Janssen COVID-19 vaccine clinical trials in Europe. We remain committed to supplying 200 million doses of our COVID-19 vaccine to the European Union plus Norway and Iceland. Moving on to manufacturing, the quality and safety of our COVID-19 vaccine is paramount. On April 3, we announced we would increase our oversight of drug substance manufacturing at the Emergent BioSolutions' Bayview facility. Since then, we have worked closely with the U.S. government and with the FDA, including during the ongoing FDA inspection at Emergent Bayview. We will work closely with Emergent and the FDA to address any inspection findings. Our goal remains ensuring all drug and drug substance for our COVID-19 vaccine meets high-quality standards and securing emergency use authorization for the drug substance manufactured at Emergent Bayview. We remain committed to delivering 100 million single-shot doses of our COVID-19 vaccine to the U.S. government and helping to bring an end to this global pandemic. In conclusion, I want to note that COVID-19 is the most severe global health challenge we have seen in our lifetimes. Johnson & Johnson is committed to help the world win the fight against COVID-19 and be even better prepared for possible future pandemics. Now I will turn it over to Chris to start the Q&A.

Chris DelOrefice, Vice President, Investor Relations

Great. Thank you, Paul. We will now move to a Q&A portion of the webcast. Rob, can you please provide instructions for those on the line wishing to ask a question?

Operator, Operator

Yes. Your first question comes from Chris Schott with JP Morgan. Please proceed with your question.

Chris Schott, Analyst, JP Morgan

Great. Thanks so much. And I appreciate all the color on the business dynamics here. I just have two questions centered around the vaccine. First, how do you see this clotting risk issue being addressed? Is this going to be just some sort of safety warning to physicians? Or do you think that's going to be a way to identify certain populations where this might not be an appropriate vaccine? And maybe tied to that, how are you thinking about addressing public safety perceptions, given what seems to be a very rare side effect if in fact it continues once vaccinations resume. If I could just slip another quick one on vaccines in there, just want to make sure I'm clear as well. On the guidance for 2021, are there vaccine sales beyond Q1 reflective of that guidance? Or given some of the uncertainty is that not being included in the updated guidance? Thanks so much.

Paul Stoffels, Vice Chairman of the Executive Committee and Chief Scientific Officer

Okay. Yes, let me take the first question. We are working very closely both with the FDA and CDC as well as with EMA and the PRAC on addressing your first question on risk and whether there will be guidance. We'll work closely if that comes out in the course of the week to implement that globally and to restore confidence in the vaccine. It's an extremely rare event. We hope by making people aware as well as putting clear diagnostic and therapeutic guidelines in place that we can restore confidence in our vaccine.

Joe Wolk, Executive Vice President, Chief Financial Officer

And Chris, with respect to financial guidance, there is nothing in our future outlook with respect to that at this point in time. So we will—when it's warranted—certainly provide updates. Right now we're just commenting to what was actually experienced in the first quarter. Thanks for your question.

Chris DelOrefice, Vice President, Investor Relations

Thanks, Chris. Appreciate the question. Rob, next question please.

Operator, Operator

Your next question comes from Larry Biegelsen with Wells Fargo. Please proceed with your question.

Larry Biegelsen, Analyst, Wells Fargo

Good morning. Thanks for taking the question. Joe, can you talk a little bit—medical device sales came in better than our expectations—can you talk a little bit about what you're seeing in the end markets with regard to the recovery? And can you also secondly talk about the quarterly EPS phasing. Why didn't you raise EPS guidance more despite the beat? Q1 EPS is usually about 24% to 25% of full-year EPS whereas the guidance implies Q1 EPS is about 27% using that midpoint. So why not raise the guidance more? Thanks for taking the questions guys.

Alex Gorsky, Chairman and Chief Executive Officer

Hey, Larry. Thank you very much for your questions. Why don't I go first and before I respond directly to your question, I just want to give a special shout-out to all of our frontline heroes, especially the 50,000 plus or minus associates of Johnson & Johnson who have been consistently going to work, putting on their masks on the shop floor and really enabling us to continue to serve patients and consumers around the world throughout this pandemic. Also a special recognition to the doctors, scientists and engineers who have not only been working diligently on our approach to COVID-19, but also to keep our ongoing innovation portfolio on track—we're very thankful to them. And last but not least, all of our associates who really worked in a very agile, flexible and dedicated way throughout this period. I think our results overall today demonstrate that in spite of a lot of variability and unpredictability, Johnson & Johnson remains a very consistent and in fact stronger performer today than we were even a year ago. If you look at our competitive position whether it's market share on all of our major $28 billion plus platforms, if you look at our pipeline progress and development, we clearly have continued to make progress in spite of a lot of other dynamics. So giving specifically to your question on the medical-device marketplace, what we would say is we're seeing continued improvement through the first quarter. If we look at the last couple of weeks of March in the United States, most of the major systems were somewhere in the range of 90% to 105% of their performance back in 2019. If we look across Europe, of course, there's a bit more variability. Markets in Italy, for example, have lagged given the outbreak of COVID-19. In the U.K., we're seeing other markets return more than the 90% to 100% range, although we have continued to see month-to-month and even week-to-week progression across those major markets. As was alluded to in the earlier comments, we would expect that to begin to change in a pretty significant way in the second quarter—not only as we see more vaccinations, but of course the year-on-year comparisons. And again, what I'd like to highlight is the strong performance across almost all of our medical device platforms. If you take a look at vision surgery up 11%, our EP business up 26%, our surgery business was well up in the double-digits across whether it was energy, biosurgery or endomechanics. Orthopedics, particularly large joints, we saw lags slightly, but we know that these are more elective procedures. We feel we remain competitive and we're quite excited about our VELYS launch as well as our fixed-bearing cementless options. So we remain confident and actually quite optimistic for our ongoing improved performance in our medical device sector, as we head through the remainder of the year. Joe, I'll hand it over to you for the question on EPS phasing.

Joe Wolk, Executive Vice President, Chief Financial Officer

Sure. Thanks Larry. Thanks for the question. And as usual you have all the numbers at the ready there. I think the real short story is that on 10% sales growth, we're going to grow earnings about 18%. Given the early nature of the year, we challenged our leadership teams and each of our segments and across our functions to see what we can invest today to benefit the future. So I'd much rather hold back $0.05 today in hopes of giving $0.10 or $0.15 next year or the year after. And that's really how we're looking at it. We have many great opportunities—and hopefully you noticed in our P&L the increase in R&D investment year-over-year by about $600 million. You saw the same trend last year for the full year. We're going to look to see those opportunities through. If some of those opportunities don't come to fruition, we'll certainly be happy to revise guidance upward later on this year. But right now, we thought that was the best course of action to solidify the long term.

Chris DelOrefice, Vice President, Investor Relations

Great. Thanks, Larry. Appreciate the questions. Rob, next question, please.

Operator, Operator

Your next question comes from Joanne Wuensch with Citi. Please proceed with your question.

Joanne Wuensch, Analyst, Citi

Good morning and thank you for taking the question. I want to focus on two areas. The first one is Vision Care. I'm trying to parse through how much of the delivery is easy comps, share loss and/or gain and just recovery in elective procedures? And then I want to put the second one on the table, which is it sounds like orthopedics, particularly, is lagging. Do you have a view on when that may recover? And just more broadly, is there a pattern to segment recovery that you anticipate throughout the year? Thank you.

Alex Gorsky, Chairman and Chief Executive Officer

Hey Joanne, thank you very much for your question. Look, in Vision Care overall, we think our performance was solid. We have seen the contact lens business and the surgery business be significantly impacted over the course of 2020. We have seen gradual improvement in the back end of last year and as we started the first part of this year. We think our Vision Care contact lens business is in very good shape. We think our share position is stable to increasing. And we think we've seen an improving position in our vision surgery business, part of that being comparisons, but also part of it due to new innovation launches that were mentioned earlier in Chris and Joe's comments. We believe that our lineup for new lenses—whether it's our anti-allergy lens or multifocal contact lenses—and the improvement that we're seeing in our surgery business will continue to bear out in stronger performance and share gains through the year. Regarding orthopedics, as noted in our comments, we saw very strong performance, for example, in our trauma business, growing in excess of 9%. We saw good rollout in our hip business at about 3.2%. As I mentioned, knees, which we think are perhaps the most elective of the procedures in terms of the ability to delay, we're lagging somewhat. But the indicators are that we would expect, based upon some of the surgical planning reports that we saw especially through the end of the first quarter, that performance for the second and third quarters should be on good trends. We expect that to improve as patients gain confidence to go back into the hospitals and we see systems work their way through backlogs and, of course, in our business being global, as we see Europe come more back online following vaccinations as we move through the second and third quarters. Thank you.

Chris DelOrefice, Vice President, Investor Relations

Thanks, Joanne. Appreciate the question. Rob, next question, please.

Operator, Operator

Your next question comes from Bob Hopkins with Bank of America. Please proceed with your question.

Bob Hopkins, Analyst, Bank of America

Okay. Thank you and good morning. Joe, I was wondering if you could comment on how your 2021 EPS guidance might look if you exclude the impact of COVID reserve release and the spending on the vaccine. I just wanted to kind of get a sense for EPS for the true underlying business. And then second topic—I'd love you to comment on the potential to shift to more of a for-profit model as we potentially exit the emergency phase. I realize it might be a little early to talk about that, but just wanted to get your latest thinking on the potential to shift post the emergency phase of this pandemic. Thank you very much.

Joe Wolk, Executive Vice President, Chief Financial Officer

Yes. Thanks for the questions, Bob. With respect to the impact of COVID-19 vaccine investing in the quarter, it was between $0.05 and $0.10 for the quarter. I'm not overly concerned about that because, as you heard from Paul, we are going through the rigor of the scientific reviews. It appears that there is a viable path forward that we'll find out about in the next couple of days. We're going to do all we can to make sure that that important solution to address the global pandemic gets back into the marketplace. So, we think we'll recover that, even in the not-for-profit model. With respect to pricing and dynamics, I think you're probably correct in your initial assessment that it's a bit early. But let me turn it over to Joaquin to give you some thoughts that we have on that topic.

Joaquin Duato, Vice Chairman of the Executive Committee

Thanks for the question. Our focus from the beginning in this pandemic was to be a partner in addressing this humanitarian crisis. In order to make sure that we facilitate access globally, we decided to go with a not-for-profit model. Our focus now remains to be able to be a participant in addressing this pandemic. Once this pandemic is over, there will be time to discuss different options. But today our focus is to address this pandemic and be an important partner in making an impact globally in stopping COVID-19.

Chris DelOrefice, Vice President, Investor Relations

Thanks, Bob. Appreciate the questions. Rob, next question please.

Operator, Operator

Your next question comes from Josh Jennings with Cowen. Please proceed with your question.

Josh Jennings, Analyst, Cowen

Hi. Good morning. Thanks for taking the questions. I had a follow-up to Bob's question just on the vaccine and how revenues and expenses flow through the P&L. Just wanted to sanity check the 100 million doses by mid-year in the U.S., 100 million more by the end of 2021, and 200 million doses in Europe. For instance, are those guaranteed contracts? And just in terms of the risk-sharing model and the not-for-profit model, I wanted to make sure that your downside is protected in terms of expenses already incurred and where those contracts sit?

Joe Wolk, Executive Vice President, Chief Financial Officer

Thanks for the follow-up Josh. As you can imagine, it is very fluid. But there's nothing in the guidance today that should give analysts or investors concern about any downside with respect to this. We're cautiously hopeful that there is a viable path forward. We'll learn a lot more in the next couple of days through the regulators. We'll let the process play out, but investors should feel very comfortable with our EPS guidance to protect against any downside that may be envisioned, although I don't see that as likely at this point.

Chris DelOrefice, Vice President, Investor Relations

Maybe just one add-on as it relates to Bob's question and Josh's question too. When you look at our underlying performance—pharma is a segment which was less impacted top-line, strong above market, and we continue to improve margins there as well. You did see margin improvement in consumer too. So while there are many impacts from COVID year-over-year, I think when you really look underneath the underlying results there's strength both on the top-line and bottom-line that's factored when you look at this year.

Joe Wolk, Executive Vice President, Chief Financial Officer

That's a good point, Chris. I think this is going to be a choppy year so we have to look selectively at year-on-year comps. If you look at what was a normal quarter back in the first quarter of 2019, across our respective businesses consumer is up about 8% this quarter versus Q1 2019 which suggests a strong underlying business. Pharmaceuticals is up about 17.5% and medical devices is approaching 4% on that same comparison. That 4% is a very strong result when you consider many delayed and paused elective procedures in the marketplace which simply didn't exist in the first quarter of 2019. Across all three parts of our business, the takeaway is the business is healthy and strong. Coupled with the elevated R&D investment, I would hope folks feel good about not just our performance today but our future performance on the horizon.

Chris DelOrefice, Vice President, Investor Relations

Great. Thank you. Thanks, Josh. Rob, next question please.

Operator, Operator

The next question comes from Louise Chen with Cantor Fitzgerald. Please proceed with your question.

Louise Chen, Analyst, Cantor Fitzgerald

Hi. Thanks for taking my questions. My first question was, do you have any thoughts on potential corporate tax increases in the U.S. as well as potential drug pricing reform? And then second question is on Cilta-Cel. I know you're expecting approval this year. Where do you expect it to fit into the treatment paradigm, if it is approved? Do you expect CAR-Ts to gain wider usage over time?

Joe Wolk, Executive Vice President, Chief Financial Officer

Great, Louise. Thanks for the questions. I will address tax reform as best I can. Obviously that's a fluid situation. With respect to tax reform, we've shared a lot of rhetoric about a race to a bottom. I don't know why folks would be anxious to have a race to the top in terms of rates either. I can give one example: when tax reform was passed in 2017 we committed to increasing our investment in the U.S. by 15% over the upcoming four years versus the preceding four years. We are on track to actually invest about 25% more in the U.S. over that four-year period—more than $30 billion. What does that mean in terms of the U.S. economy? It means more jobs. Johnson & Johnson employs 3,000 more people today than we did before the passage of the 2017 act. When you look at where the U.S. sits with respect to OECD countries, we're at the middle of the pack, maybe even skewing a little bit toward the bottom in terms of competitiveness. If we were to raise rates even to 25% and include state taxes, we become the highest-rated developed country in the world with respect to tax rates. So, I think it's something that needs fact-based dialogue to ensure we remain competitive and that the U.S. stays a source of innovation across all industries. We've seen many U.S.-based companies step up in addressing COVID-19 over the past year. Joaquin, let me turn it to you for the other items.

Joaquin Duato, Vice Chairman of the Executive Committee

Thank you. With regards to pricing reforms in the U.S., we continue to expect that there will be pressure to do something to reduce patient out-of-pocket costs. The industry could potentially be seen again as a pay-for in another budget reconciliation package for ACA reform or infrastructure legislation. We believe negotiations could be collaborative and that the overall value that innovation brings to society, as highlighted by our contributions in COVID-19, will be understood. The most important element in any price reform is that patients experience a reduction in out-of-pocket costs and Johnson & Johnson will be a constructive partner in that regard. We think patient cost setting should be based on the net price of medicines, and we continue to support that type of reform. Looking at our Pharmaceutical business, our portfolio and growth profile plays out well in this scenario. Our growth has been based on volume. Our net price declined in 2020 by 5.7%, and this is the fourth consecutive year that we have net price declines. We are able and ready to grow in that environment based on having a broad-based portfolio with 11 products of more than $1 billion, and an R&D-based model that allows us to have a differentiated pipeline. In 2020 we invested $9.6 billion in R&D, which is about two times what we invest in sales and marketing. So, we believe these negotiations could be collaborative and that Johnson & Johnson's Pharmaceutical business is especially well-positioned based on our ability to drive growth through volume and our diversified portfolio. Regarding our BCMA CAR-T that we filed in the first quarter of 2021, our initial indication will be for patients with multiple myeloma that have progressed on available established therapies. Over time, we see BCMA CAR-T, and our BCMA CAR-T specifically, progressing into earlier lines of therapy. You could see a moment in which young and fit patients may have BCMA CAR-T as a first-line therapy with the intent to build regimens that are curative. Paul?

Paul Stoffels, Vice Chairman of the Executive Committee and Chief Scientific Officer

From the beginning we selected BCMA CAR-T based on its double-binding which has yielded a superior profile with high overall response rates and very high MRD-negativity rates and lasting effect. We think this CAR-T is very strongly positioned in the market and hope to get approval in the second half of the year.

Louise Chen, Analyst, Cantor Fitzgerald

Great. Thank you, Paul.

Chris DelOrefice, Vice President, Investor Relations

Thanks, Louise. Appreciate the question. Rob, next question please?

Operator, Operator

The next question comes from Danielle Antalffy with SVB Leerink. Please proceed with your question.

Danielle Antalffy, Analyst, SVB Leerink

Hi, good morning, everyone. Thank you so much for taking the question. I have two questions. One is on the device business: I think Joe alluded to this when you were talking about growth comparisons to 2019. There was still a COVID impact in Q1. I'm trying to get a sense of how Q1 shaped up month-to-month. Did you see a strong recovery in March in the device side of things? And do you feel like the worst is behind us even regardless of how vaccinations continue to roll out and what variants might do? And then I have one vaccine follow-up.

Alex Gorsky, Chairman and Chief Executive Officer

Hey Danielle, thanks a lot for your question. We do expect to see improving trends in our medical device arena. If we take a look at the first quarter there was some irregularity just based on what we are seeing with the virus on a global basis in January versus February and March. Overall, it's clear to us that we're seeing improving trends. As Joe alluded earlier, we would expect improving trends given year-on-year comps plus what we're seeing underlying both in the United States and Europe in terms of procedure scheduling, confidence in returning to the hospitals and overall surgical volumes. We expect those to improve through the second and third quarter of this year.

Danielle Antalffy, Analyst, SVB Leerink

Okay. That's helpful. And then on the vaccine side of things, as it relates to manufacturing and what are the alternatives for the volumes that were supposed to be manufactured out of Emergent if, in a worst-case scenario, Emergent is prevented from producing for the next few months?

Alex Gorsky, Chairman and Chief Executive Officer

Thanks, Danielle. Look, as Paul said, our goal remains ensuring that all drug substance for our COVID-19 vaccine meets our high-quality standards and at the same time that we secure Emergency Use Authorization for the drug substance manufactured at the Emergent Bayview facility. As we continue our discussions with the FDA, it is premature to speculate on any potential impact that this may have on our timing of vaccine deliveries. We will work with the FDA and Emergent to address inspection findings. At this time it would be premature to speculate on any potential impact to our delivery timing.

Chris DelOrefice, Vice President, Investor Relations

Great. Thanks. To add a little color: we're looking at procedures closely—surgical procedures, imaging as well. Diagnostics is actually outpacing surgical procedures and accelerated through the quarter—it's almost in line with pre-pandemic levels. That's a positive sign, although the situation remains fluid. Many important procedures such as colorectal sequentially improved through the quarter and actually grew year-over-year. So we're seeing positive signs across and you saw that in our results—pockets of our businesses like advanced surgery grew over 14%. We're continuing to look at everything. The situation remains fluid, but there are definitely positive signs on trends. Thanks, Danielle. Rob, next question please.

Operator, Operator

Next question comes from Matt Miksic with Credit Suisse. Please proceed with your question.

Matt Miksic, Analyst, Credit Suisse

Thanks so much. I have one utilization-related question on procedure trends and then a follow-up on digital strategy. Device is up 8.8%, stronger than expected. The mix was a bit stronger on advanced surgery and knees are slower. Should we read this as a shift to higher-acuity procedures at least within your portfolio? And how should we see the recent rise in hospitalizations potentially affecting the trajectory of recovery for these procedures over the next months and quarters? Then a follow-up on digital.

Alex Gorsky, Chairman and Chief Executive Officer

Matt, overall, I wouldn't read too much into these recent results as a structural shift in our portfolio. We remain committed and optimistic about the underlying unmet need and demand across our surgical, orthopedics and vision care portfolios. There are some procedures that are more deferrable which may have a near-term impact on timing. Overall, looking at trends versus 2020 and 2019, we're seeing growth rates consistent with what we see for this market. We believe the market has the opportunity to grow about the mid-single-digit range long-term, and we've been explicit in our goal to grow at or faster than the markets where we compete. We're excited about launch opportunities: more than 21 major launches in our medical device business this year. We mentioned VELYS in knees and ATTUNE cementless fixed-bearing, which we think will offer competitive opportunities to generate additional growth. The QDOT MICRO is another add-on in EP growing already in excess of 20%. Across EndoMech and energy, we have nice add-on innovations and throughout our vision care portfolio. Longer-term, the significant opportunity we see in digital surgery remains a key strategic priority. We see a lot of opportunity across our medical device portfolio.

Matt Miksic, Analyst, Credit Suisse

That's great. To segue on your second point about digital: you've built out robotics and AI applications—Monarch in lung, Ottava in clinical validation, VELYS in knees. What white spaces remain and where else do you see investments within digital?

Alex Gorsky, Chairman and Chief Executive Officer

We believe we're in very early innings of digital. Penetration of digital surgery is about 10% in the U.S. and a couple percent globally. Given technology adoption trends, and our global footprint, we believe we'll be well positioned long-term. We're building this for decades, not just the next quarter. We're building a platform that can make a difference for patients in surgery, one that's differentiated and integrates robotics with digital components to improve outcomes. For example, our lung cancer initiative shows the unique nature of our diverse portfolio: Monarch can be used to diagnose lung nodules via bronchoscopy, and we're working on delivering oncolytic agents, viruses and immune agents locally. We aim to shift treatment paradigms by combining pharma and devices in new ways. There's much more work to be done, but early prospects are exciting and exemplify our position to combine clinical development, discovery, regulatory and commercial capabilities.

Chris DelOrefice, Vice President, Investor Relations

Great. Thanks, Matt. Appreciate the question. Rob, we'll take our last question now.

Operator, Operator

The next question comes from Terence Flynn with Goldman Sachs. Please proceed with your question.

Terence Flynn, Analyst, Goldman Sachs

Hi. Good morning. Thanks for taking the questions. Recently there's been some new post-marketing data reported for Xeljanz and the FDA pushed out PDUFA dates of several JAK inhibitors. You guys are developing a pan-JAK inhibitor for IBD. Would love your latest perspective on the risk-benefit profile in the category and next steps in your development program? And as a follow-up, just to confirm that you're on track to supply one billion doses of your COVID-19 vaccine this year. Thank you.

Paul Stoffels, Vice Chairman of the Executive Committee and Chief Scientific Officer

Thank you for the question on immunology. I'm not going to comment on the safety of oral JAK inhibitors broadly. What I can tell you is we have a very strong and robust pipeline in immunology driven by our existing assets: STELARA, TREMFYA and others. STELARA and TREMFYA had very strong quarters with close to 40% growth in TREMFYA and 15% in STELARA. In STELARA, we continue to grow share in GI in both Crohn's disease and ulcerative colitis. TREMFYA is the first and only IL-23 inhibitor with both psoriatic arthritis and psoriasis indications and it continues to gain share in both areas. Moving forward, we're excited about our possibilities in immunology with our oral agents. We have two in Phase 2: one is a pan-JAK oral that could be important—we'll have to see the data. Broadly in immunology, we're also excited about nipocalimab, our FcRn antibody for autoantibody-mediated diseases, which could create opportunities in rare diseases. For us, immunology remains a core area of growth and focus and we believe we are in a very strong position to continue to drive growth in the coming years and beyond 2025.

Joe Wolk, Executive Vice President, Chief Financial Officer

Maybe to add, Terence, on the strength of our pipeline: in pharmaceuticals we're looking at 10 new filings that could be new products or indications in 2021, 13 in 2022 and 26 in 2023. So R&D investment is paying off incrementally. With respect to supply, I want to be respectful of the regulatory process. We are remediating what we need to remediate. We think that will lend itself to a positive outcome and put us in a position to meet all of our contractual commitments as they stand today. But let's be respectful of the process and let that play out. We're doing everything we can and we should know more in the next couple of days. We have some of our best personnel onsite at Emergent benefiting from our expertise.

Chris DelOrefice, Vice President, Investor Relations

Great. Thank you, Terence. And thanks to everyone for your questions and continued interest in our company. Apologies to those we couldn't get to because of time, but don't hesitate to reach out to the investor relations team as needed. I'll now turn the call back to Alex just for some brief closing remarks.

Alex Gorsky, Chairman and Chief Executive Officer

Let me end where I began: first, by thanking all of you for your insightful questions and your ongoing support; and second, by thanking all of our associates at Johnson & Johnson—almost 140,000—who have been working around the clock, particularly over the last 15 months during this pandemic period. We appreciate your ongoing interest and your support and look forward to updating you at our next quarterly call. Thank you very much and have a great day.

Operator, Operator

Thank you. This concludes today’s Johnson & Johnson first quarter 2021 earnings conference call. You may now disconnect.