Good morning, and welcome to Johnson & Johnson's Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference call over to Johnson & Johnson. You may begin.

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 second quarter of 2020. I hope everyone is healthy and continues to remain safe during these times. Joining me on the call today to address Johnson & Johnson's response to the global coronavirus pandemic, along with our second quarter results, are Dr. Paul Stoffels, Vice Chairman of the Executive Committee and Chief Scientific Officer; and Joe Wolk, Executive Vice President, Chief Financial Officer. During the Q&A portion of the call, Alex Gorsky, Chairman of the Board of Directors and Chief Executive Officer; and Joaquin Duato, Vice Chairman of Executive Committee, will also join Paul, Joe and myself. 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 factors that may cause the company's actual results to differ materially from those projected. In particular, there is significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. This means the results could change at any time and the contemplated impact of COVID-19 on the company's business results and outlook is the best estimate based on the information available as of today's date. Our SEC filings, including our 2019 Form 10-K and subsequent Form 10-Qs, along with 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…

Thank you, Chris, and good morning, everyone. I'm pleased to provide an update on our vaccine program, particularly our progress on the development of a COVID-19 vaccine. As you know, we announced our lead COVID-19 vaccine candidate on March 30. And since then, we have made significant progress. We have seen strong preclinical data so far, which were published in the Journal of Science in May. These data validated the preclinical vaccine challenge model and showed that prototype DNA vaccines were able to create strong immunity. Based on these data and interactions with regulatory authorities, we were able to accelerate the clinical development program of our COVID-19 vaccine candidate. Since then, we have initiated a study of a final Ad26 vaccine candidate in nonhuman primate challenge model. These results will be published in a major scientific journal in the coming weeks. Based on this total package of results, we are very comfortable moving forward with Phase I/IIa studies later this month. This represents an acceleration of our time line from our original date of September to the end of July. These studies will establish both the safety and immunogenicity of our vaccine candidate as well as evaluate the single dose and the booster dose regimen. The trials will be conducted in more than 1,000 healthy adults aged 18 to 55 years as well as adult aged 65 years and older. Our study sites are located in the U.S. and Belgium. We are also planning for a Phase II study in the Netherlands, Spain and Germany and plan to conduct a Phase I study in Japan. We anticipate the initiation of the trial on July 22 in Belgium and the following week in the U.S. We are also in discussions with the National Institute of Health with the objective to start…

Thank you, Paul, not only for that encouraging update, but to you and your team for leading the rapid and responsible advancement of our COVID-19 vaccine candidate. It is one of many actions that illustrate how Johnson & Johnson is deploying our range of capabilities to tackle the COVID-19 pandemic as we aspire to do across health care for patients and consumers who count on us each and every day. Good morning, everyone, and thank you for joining us today. I hope you and those close to you continue to be safe and healthy. While the second quarter was strong relative to expectations, the main message my colleagues and I want you to take away from today's call is that the long-term fundamentals of Johnson & Johnson's business remains strong and our expectations of where the business is heading have not changed. An indicator of that strength is our balance sheet, so let me briefly touch upon our cash position and capital allocation thoughts before getting into guidance commentary. We ended the quarter in a net debt position of $11 billion, made up of cash and cash equivalents of $19 billion and debt of $30 billion. We did issue commercial paper in the quarter for additional liquidity at favorable interest rates commensurate with our financial strength. Our long-term capital allocation strategy remains intact. We'll continue to prioritize investing in innovation, returning capital to shareholders by paying dividends and increasing them annually, as we have done for 58 years, and then capitalizing on strategic acquisition opportunities that fortify our existing portfolio while simultaneously compensating shareholders for the risks we bear on their behalf. Earlier, Chris provided specific commentary related to COVID-19 impacts that our business experienced in the second quarter. I will now provide some industry context regarding the COVID-19 pandemic…

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

[Operator Instructions]. Your first question comes from Chris Schott with JPMorgan.

Just two for me. Can you maybe first talk about -- I think you addressed the potential for a second wave, but any early read in terms of what you're seeing in some of the regions in the U.S. that are seeing a rapid increase in COVID cases? Are those still -- states still seeing a recovery in procedure volumes? Or are you starting to see some slowdown in volumes in some of those regions? And then my second question was on the Vision business and just elaborate on some of the trends and how you're thinking about recovery there. It seems like that's one of the segments of the market that might be seeing a bit of a lagging recovery versus some of your other device businesses. I'm just interested in how you're thinking about that franchise over the coming quarters.

Chris, this is Alex. Can you hear me okay on the audio?

Yes.

Okay. Chris, first of all, thank you very much for the question. And look, before I start off answering directly to your question, I just want to continue to acknowledge the great work of our colleagues across Johnson & Johnson, as we just shared with you in the second quarter. And while we're going to be reviewing a lot of statistics and a lot of facts and a lot of figures on the call today, I also think it's always important to acknowledge the direct impact that COVID-19 has had on patients, it's had on family and friends for all of us in some way. And also, I'd be remiss if I didn't do a shout out for the frontline health care workers, the doctors, the surgeons, the nurses, the assistants who have been showing up for the last 5 months dealing with just an unprecedented pandemic, learning real-time and adjusting as necessary, literally working 24/7. And finally, our own J&J workers, nearly 1/3 of our workforce who have continued to show up to ensure that we could have supply of our products as well as continue the important research and the development, not only on our vaccine, but on so many other therapeutics, devices and consumer products for patients and consumers around the world. So Chris, as I have reached out and been able to connect with CEOs of hospital systems across the United States, but also more broadly with other administrators around the world, as we've taken a look at the data, clearly, we believe that the virus' spread has accelerated, particularly in the South, Southeast, the Southwest and Far West. What we're -- what they are seeing in the hospital right now is clearly a resurgence over the previous rates. Similar to Joe's earlier comments, the general…

Chris, this is Joe. Maybe just to pick up with respect to your questions around Vision Care specifically. So contact lenses was down a little bit over 30% in the quarter. Clearly the impact of COVID-19 as there's just simply less new wearers entering the category due to a shutdown of optical stores, but also lower consumption for existing wearers as people adopt shelter-in-place measures and stay at home. The e-commerce channel, which primarily serves existing wearers, was also down when you compare it to the second quarter of last year. But we are seeing an improved performance. So if you look at June, contact lenses was down almost 25% versus the prior year. So you're seeing that same quarterly improvement throughout -- the monthly improvement throughout the quarter with respect to contact lenses. In terms of Vision Surgical, I would say that's probably one of the most deferrable procedures out there. And so as we start to see elective procedures become more prevalent, we would expect that to return as well.

Yes. Chris, I would just add on Vision Care. I think when you think of our contact lens business going forward, we've had consistent strong performance there with at- or above-market performance levels the past 4 years and have had a very strong cadence of innovation 2019, Transition Light Intelligent Technology; 2020, we're excited about our ACUVUE Theravision, first anti-allergy contact lens. And then did receive FDA breakthrough device designation on our myopia control lens. So it's a franchise that we feel very strong about going into the future.

Your next question is from David Lewis with Morgan Stanley.

Maybe one for Paul on the vaccines and a quick commentary on recovery for Joe. Paul, just to start off on vaccines for a second here, just two quick ones. Our sense is the FDA wanted hundreds of exposures before allowing Phase II trials. So I guess, what's your confidence you're going to have the data needed to start those Phase III trials later this year? And then a lot of investors are focused on sort of humoral versus cellular immunity. I just wonder if you could talk to the durability of neutralizing antibodies and whether we should expect the CD8 response. And frankly, does that matter, in your view? And then a quick recovery comment for Joe.

Well first, from experience, to start the clinical trial, we have developed a vaccine platform over the last 6, 7 years. And we have now more than 80,000 people who have been vaccinated by our platform. And that is in RSV, in Zika, in HIV and Ebola. And that gives very good comfort that we have a safe platform. In addition to that, we have been able, in RSV and Zika, to use a high dose, at 110-11, for those who know what it means, is that is the highest dose you can administer, but with almost no fever. So we will be able to administer a very high single dose, which will be enabled in our Zika and in our RSV, will elicit a very strong neutralizing antibody response as well as a cellular immunity response with one single dose. Whether we need to boost for durability, we have learned that in Ebola, we have learned that in others, that maybe yes, but not immediately. We are going to test a boost dose as we start, but we think more that we will have to boost 1 year or 2 years after the single high dose. So we're going to learn fast. And with a single-dose Phase I study, we should be able to start mid-September with the experience we have, and that's in full discussion with the regulatory authorities around the world.

David, your second point?

Are you there? On your question on recovery? Operator? Rob, are you there...

Yes, I'm here.

Let's move on to the next question. We can always come back to David if need be.

Sure. Your next question comes from Larry Biegelsen with Wells Fargo.

I'll ask one recovery and one vaccine question as well. Just on the recovery, thanks so much for the data, Alex. Just when you talk at the end of June, 85% to 95% of pre-COVID levels and the spike in cases in the South, are you seeing other parts of the world offset that? And so in other words, you're still seeing improvements in trends through mid-July? And then second, for Paul. When are we going to see the initial human clinical data? And you didn't mention when you expect availability of the vaccine. I think your prior comments were maybe early 2021. Are you still going to seek EUA approval based on the Phase I/II trial? Or do you think you'll need the Phase III data for approval?

Sure, Larry. Let me respond to the first, and then I'll ask Paul obviously to cover the second. Look, the data that we're citing, we're trying to provide the most up-to-date information we had, which basically goes with the data through the latter part of June, I think for the first couple of days in July. And if we look across the world, we see basically most of the -- majority of countries up over 85%. And what I mean by that is if we're tracking their weekly recovery rate and we compare that to pre-COVID period and we adjust for that over a several-week period, those numbers are in the, I would say, north of 80% to 85% range. The one outlier to that is the U.K. The U.K. is still below 50%. And again, we're clearly developing the ability to track this, not only on a country and a region basis, but the United States on a -- literally on state, a county and city and individual hospital bases. And again, there are differences at each one of those levels. But at an overall country level, if we take about the top 12 markets around the world, what I'd say is the overwhelming majority of them are north of 85%, with the outlier being the U.K.

Larry, I think on that one, China is a good example where we continue to see very good progress and momentum, with double-digit growth in recent times here in Q2.

On your vaccine question, Larry, first, I want to also add to it that neutralizing antibodies and T-cell immunity is important here for -- not just for the response, but also for durability. Our initial data on the Phase I will be available second half of September, which they will be -- become the basis for a Phase III study. And that will start mid to end September, that's the goal. With a large number of people included and a simple design with a single dose, we could have data before the year-end, or at the latest, early next year. And availability of a vaccine will be starting early next year. We'll have some dosages before the year-end which will be used for clinical trials and maybe for other reasons, but the larger quantity will start first quarter of next year. And then in the year, we will deliver up to 1 billion dosage of our vaccine. And all of that is in place. We have the manufacturing sites. We have the filling sites. We have everything what's needed to deliver that 1 billion vaccines and more next year.

The next question is from the line of Kristen Stewart with Barclays.

Thanks for all you guys are doing to fight COVID. I just had a question on -- following up just on the robotics platform. I was wondering if you could just provide a little bit more detail. It sounded to me that you were redesigning, if I heard you right, the program to integrate the two systems. Could you just provide a little bit more details on that, and just the timing? I just want to make sure I understood the comments in the prepared remarks.

Sure, Kristen, this is Alex. First of all, I just want to restate our excitement about the overall digital space. And when we look at the potential of this market currently being less than 5% penetrated. And understandably, that's indicative of some markets in the United States at well over 50% for certain procedures. But on a global basis, we think there's just tremendous growth opportunity. Two, if you just look at the acceleration of technology that we're also seeing, and clearly, that's been the driving force behind our investment, both in Auris, but also our partnership with Verb and Verily. And as we brought those different capabilities, those different technologies together, I think it's actually reinforced the potential and the possibilities that we see in surgery for the future. And I also think it's important to note that we continue to see really good uptake with our Monarch system. We're going to expand the system with multiple specialty applications, with endourology next in line for U.S. approval for the treatment of kidney stones. And that market in itself is about twice the size of where we are today. We're making good progress even with -- as our teams deal with the COVID-19 situation on the General Surgery robotic platforms, and that's for both Verb and Auris. We think that it clearly enhances not only the capabilities, but our value proposition and our ability long term to really create and launch a differentiated platform. As Joe, I believe, Chris may have alluded to earlier in their points, we continue to have ongoing conversations with regulatory authorities around the world. We will not be following a 510(k) regulatory pathway for the U.S. And after analyzing time to market compared to the overall value proposition, look, our goal is to initiate first-in-human studies with our robotic solution in the second half of 2022. And again, we think there is significant potential. We continue to be impressed by the technology advancements we're seeing with both the Verb and Verily and the Auris combination. Our teams are making very good progress as we speak. And we'll be providing more information as well on our digital, and we'll be providing you some further updates regarding a more focused digital review in the coming months. So stay tuned. But I think we're as excited as ever about the possibility and the potential in this market.

Next question is coming from Matt Miksic with Crédit Suisse.

So just one clarification on the recovery side, if I could emphasize this one topic, but it sounds like the fourth quarter expectations came down as you're describing a little bit just on the backlog not being as strong, given the strength and recovery that we saw in June. And are your assumptions for the back half and for Q3, Q4 based on sort of the trends exiting June? And Alex, as you point out, we need to watch carefully over the next several weeks. Is that sort of the setup for the back half? And then maybe, if that does -- if we pause here at all in the next month or 2, is it fair to say that, I guess, are we looking at making up those -- does the backlog go back up and this sort of brings up Q4, Q1? Is that the right sort of way to think about the flow of procedures? And I have one follow-up for Paul in vaccines.

So Matt, this is Joe. Thanks for the question. You're thinking about it appropriately. So we took down the fourth quarter simply because that pent-up demand or that backlog that we thought would occur from a deferment of procedures in Q2 and Q3 when we issued guidance in April is, quite frankly, not occurring. That's a good thing for certainly patients, but for the health care system, that there's not some unintended consequences with the deferral of very, very important procedures. The model going forward is based on the best information we had coming out of June. So yes, it would reflect that. And I think that's probably a fair assumption or premise to say that if we had a slowdown here as cases rise in select areas, that, that slowdown would probably be compensated with an improvement to the outlook for Q4, possibly Q1, depending on how long elective procedures are not permitted. Again, I do want to emphasize that collectively as a society, as a health care system at large, we're much better prepared. And when there are isolation measures that are put in place, it's much more selective than maybe the universal approach we were looking at back at the end of March or early April. So I think it would be less of an impact, but I don't think it's unfair to think that, that impact, if negative, would come back in a positive way at some point later in the future.

Matt, this is Alex. I think one other factor that we're going to have to watch closely is also what's happening more broadly with the economy, unemployment and insurance rates and coverage as we head into Q4. And I think, again, the next few weeks and the next couple of months will be very important in determining that, but that's another factor that we're watching. Of course, that's not the case outside the United States. It's over -- about 50% of our business in the U.S., so that's another figure that we're going have to watch closely.

And then the follow-up -- that's super helpful color -- and on -- for Paul on vaccines. Just it sounds like the immunogenicity is on track as you're moving into first-in-human studies. I guess it may be too early to answer this question, but any color or thoughts at this point on what level of protection this antibody creation can give us at this point? Or what do we know? And what do you expect to learn maybe over the next several months in terms of actual protection?

Well, in nonhuman primates and in animal models, you can get to a high level of protection. So we -- it's difficult to extrapolate to humans. But typically, we have a good correlation between animal models in all of our experiments with RSV, HIV, Ebola and Zika. So we should expect significantly above 50%. Well, the barrier is for the FDA, I think you should expect 70%, 80%, in that range at least, and that is also the statistics which will go into the studies. So let's hope we reach that because that could create herd immunity and we could hopefully get a stop -- put a stop to the disease. So let's hope for a very good neutralizing antibody level protecting people at a very high level.

Next question is from Bob Hopkins with Bank of America.

I'll just ask one as a follow-up on the guidance, and thank you for providing that. So just on the fourth quarter guidance for devices, it sounds like the reduction from previous commentary is really just a function, as you said, of better trends in deferred procedures here in Q2 and Q3. I'm curious, does that Q4 guidance that you provided of minus 15% to zero, does that assume a slowdown from current trends due to the spread of COVID in the U.S. over the last couple of weeks? Or are you assuming that your kind of current trends continue? Just want to get a sense for whether you assume, in that 0 to 15%, that things get worse as we go forward or not?

Yes. So Bob, I would say that it probably looks at trends the way they were occurring more at the end of June. That's the best data -- official data that we had. So we rely on certainly the IHME model, but also studies that are being done and analytics from UCLA, MIT and various other sources. As Alex mentioned, the outreach that he's had personally, that Ashley has had personally, and other medical device leaders in our company, to the customers themselves to understand what's going on in the ground is probably the most insightful qualitative analysis we put into our modeling, and that's been extremely helpful. So I would say it's largely based on the trends that we saw at the end of June. And again, I do want to caution folks that while we are seeing a rise in cases, it is in very select communities, in very select states. So again, it's not that same universal approach. And to the size of the business in Medical Devices, it would have a relatively minor impact, in our thinking, should one of those areas slow down versus what the dynamic was at the end of March and early April.

Your next question is from Louise Chen with Cantor Fitzgerald.

So, my first question is just on this new-to-brand prescription pickup. How much of an improvement have you seen? Are there any metrics that you can provide here? And how will it unfold throughout the rest of the year in your mind? And then second question is, how should we think about how much of your increase in your 2020 financial guidance was already captured or incorporated into the second quarter '20 beat?

Joaquin, maybe you want to answer the new to brand?

Yes. Thank you. Let me take the new-to-brand data. Overall, what we have seen in both prescriptions and new-to-brand is that they are still below pre-COVID levels, about 9% in overall prescriptions and about 30% in new-to-brand. And I'm talking about market now in general. But what we are seeing is at -- during the quarter, a constant improvement. So, the trends are still improving, and we are seeing particularly positive trends in oncology, where diagnostics visits and IV drug administrations have already returned to the pre-pandemic levels.

Thanks, Joaquin. And Louise, with respect to your question about how much has already been captured with the second quarter results. I think if you just look purely at the numbers, a lot of the guidance uptake was dependent upon, at least for top line, on the results of the second quarter, specifically in Medical Devices. From our April guidance, we kind of knocked out the worst-case scenario, if you will. And we also saw a little bit of improvement with currency translation as well. With respect to earnings in the bottom line. As you know, I think coming into the call, at least as of Monday's data, it suggests that we beat by roughly $0.20 per share on the bottom line. We've taken our guidance up operationally $0.10 as we're going to continue to look and challenge our teams for good, solid investments for the balance of this year that fortify 2021 and beyond. And that's kind of how we're thinking of this going forward.

Yes. I would also add that, with respect to our own brands, what we are seeing both in immunology and oncology is that we continue to gain share both in total TRxs and in new-to-brand. For example, when you look at STELARA in Crohn's colonic disease, where year-over-year share gain has been 6.8 points. And when you look at our actual share in overall Crohn's disease is 16%, and our new-to-brand share is 17.7%. So, when you look at our share trends both in immunology and in oncology, in total TRxs and in new-to-brand share, in both cases, we see share gains.

We have time for one more question. Rob, could you introduce the next question, please?

Sure, sure. Your next question comes from Terence Flynn with Goldman Sachs.

I appreciate the early insights on 2021. But just I might have missed it, but any thoughts on how we should think about margins maybe relative -- I know this year is kind of an outlier, but relative to prior years? And then would welcome your latest perspective on any impact you're seeing with respect to payer mix from elevated unemployment and how this might impact 2021. I know, Alex, you touched on this a little bit, but maybe anything you're seeing at this point and how you're thinking about that right now?

So Terence, I'll answer in terms of operating margin first before turning it over to Joaquin for some of the payer mix. In terms of margins, you -- this right -- that' you're absolutely right. This is a year that's a little bit abnormal, to say the least. So we would expect margin improvement off of this year. I would point to a number of initiatives that we had already in place that should continue to yield better margins, specifically in our consumer unit, where we did have a SKU rationalization program which should be fully executed by the end of this year. That will help improve margins. And then some broader supply chain initiatives that we had with respect to our partnership with Jabil largely in our Medical Device unit. So, we would anticipate that there would be margin improvement. We're still going to look to prioritize investment in R&D. I think it was a very strong sign for the company that our level of R&D investment in the second quarter of this year was actually slightly higher than what it was last year. Despite the work-from-home dynamic, we continued to progress our pipeline across all three of our businesses.

So regarding our payer mix. Just for background, our payer mix now, it's about 50% commercial and about 40% -- 43% Medicare and Medicaid: Medicare being 37%, Medicaid 6%. So a very well-diversified payer mix. At this point, we have not seen any major changes in our payer mix yet. So we have not seen those changes. Depending, as Alex referred before, on the economic recovery and the resulting unemployment rate, we could expect, in the second half of the year, an increase in Medicaid, health exchanges and also uninsured numbers, which will also create affordability problems. But again, at this point, we have not seen changes in our payer mix yet.

Great. Thanks, Joaquin. Appreciate it. Terence, thank you. And as always, thanks to everyone for your questions and your continued interest. If we weren't able to get to your question at this time, obviously, please reach out to the Investor Relations team. And then I'll just turn it over to Alex now just for a final comment.

Well, thank you, Chris. And look, let me end where we started and thank all of you for your ongoing support, and also thank all of our colleagues at Johnson & Johnson who've been working around the clock over the past several quarters to ensure that we can continue to serve all of our credo stakeholders, the patients, the doctors, the surgeons, mothers and fathers that depend on us, that are ensuring that our employees have got a safe environment, the communities where we serve, and ultimately to you, our shareholders. Hopefully, you also agree that the transparency and the strength of our results in the second quarter reinforce, I think, the core philosophy of Johnson & Johnson, and that in -- whether it be in good times or in challenging times like these, that our strategy, our business model and our value system will ensure that we're able to navigate through in a way that's best for everyone. So, thank you. We'll -- we're committed to keeping you updated on the progress that we're making in our various programs and as we get more information. And thank you very much, everyone. Stay healthy and stay safe. Bye for now.

Thank you. This concludes today's Johnson Johnson's Second Quarter 2020 Earnings Conference Call. You may now disconnect.