Good morning, and welcome to Johnson and Johnson's First Quarter 2015 Earnings Conference Call. All participants will be able to listen only until the question and answer session of the conference. This call is being recorded. If anyone has any objections, you may disconnect at this time. If you experience technical difficulties during the conference, I would now like to turn the conference over to Johnson and Johnson.
You may begin. Good morning
and welcome. I'm Louise Marotta, Vice President of Investor Relations for Johnson and Johnson and it is my pleasure this morning to review our business results for the Q1 of 2015. Joining me on the call today is Dominic Caruso, Vice President, Finance and Chief Financial 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 and Johnson website at investor.
Jandj.com. I'll begin by briefly reviewing Q1 for the corporation and for our 3 business segments. Then Dominic will provide some additional commentary on the business, review the income statement and provide guidance for 2015. We will then open the call to your questions. We expect the call to last approximately 1 hour.
Included with the press release that was issued earlier this morning is the schedule of sales for key products and or businesses to facilitate updating your models. These schedules are available on the Johnson and Johnson website as is the press release. Please note, we will be using a presentation to complement today's commentary. The presentation is also available on our website. Before we begin, let me remind you that some of the statements made during this review are or may be considered forward looking statements.
The 10 ks for the fiscal year 2014 and the company's subsequent filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made today. The company does not undertake to update any forward looking statements as a result of new information or future events or developments. Our SEC filings including the 10 ks are available through the company and on our website. During the review, non GAAP financial measures are used to provide information pertinent to ongoing business performance. These non GAAP financial measures should not be considered replacements for and should be read together with GAAP results.
Tables reconciling these measures to the most comparable GAAP measures are available in the schedules accompanying the press release and on the Investor Relations section of the Johnson and Johnson website. Please note our 2015 sales schedules break out sales for both IMBRUVICA and IMVOCANA in vokimet. To assist in updating your models, we have also provided the quarterly splits for 2014 for those products on the sales schedule by product. Now I would like to review our results for the Q1 of 2015. Worldwide sales to customers were $17,400,000,000 for the first quarter of 2015, down 4.1% versus the Q1 of 2014.
On an operational basis, sales were up 3.1% and currency had a negative impact of 7.2%. In the U. S, sales were up 5.9%. In regions outside the U. S, our operational growth was 0 point 8%, while the effective currency exchange rates negatively impacted our reported results by 13.2%.
On an operational basis,
the Western Hemisphere excluding the U.
S. Grew by 9.9%, while Europe grew S. And Japan was negatively
impacted
by was impacted by divestitures, the most significant one being Ortho Clinical Diagnostics. Excluding the net impact of acquisitions and divestitures, underlying operational growth was 5.7% worldwide, 9.1% in the U. S. And 3% outside the U. S.
Turning now to earnings. Net earnings were $4,300,000,000 and earnings per share were $1.53 versus 1.64 dollars a year ago. As referenced in the table reconciling non GAAP measures, 2015 Q1 net earnings were adjusted to exclude amortization expense of $226,000,000 and a net gain of $128,000,000 for after tax special items. Dominic will discuss special items in his remarks. Excluding amortization expense and special items for both periods, adjusted net earnings for the current quarter were $4,400,000,000 and diluted earnings per share were 1 point 5 2014.
Currency translation significantly impacted net earnings. On an operational basis, adjusted net earnings grew 3.7%. Turning now to business segment highlights. Please note percentages quoted represent operational sales change in comparison to the Q1 of 2014 unless otherwise stated and therefore exclude the currency translation impact. I'll begin with the Consumer segment.
Worldwide Consumer segment sales of 3.4 $1,000,000,000 increased 3.4 percent with U. S. Sales up 3.8%, while outside the U. S. Sales grew 3.1%.
Excluding the net impact of acquisitions and divestitures, underlying operational growth was 4.7% worldwide, 5.1% in the U. S. And 4 0.5% outside the U. S. Growth was driven by OTC Worldwide, Skin Care as well as Oral Care and Women's Health outside the U.
S. OTC sales growth was driven by analgesics, upper respiratory products outside the U. S. As well as new products and relaunches in digestive health, anti smoking aids and Rogaine. In the U.
S, adult anagenesis market share was approximately 12%, up from approximately 11% a year ago, while U. S. Pediatric share was nearly 43%, up from nearly 38% a year ago. In skincare, seasonal inventory build and strong market growth drove results for Neutrogena and Abeno. New product launches and successful marketing campaigns drove the results for Listerine in oral care and women's health products outside the U.
S. Moving now to Pharmaceutical segment. Worldwide sales $7,700,000,000 increased 10.2 percent with U. S. Sales up 16.9% and sales outside the U.
S. Up 3.7% driven by both strong sales of new products as well as core growth products. New competitors in hepatitis C significantly impacted sales this quarter. Excluding sales of our hepatitis C products, ALICIO and INSEVO, underlying pharmaceutical growth worldwide U. S.
And outside the U. S. Was approximately 13%, 24% and 3% respectively. U. S.
Results included a positive adjustment for gross to net including managed Medicaid rebates. Significant contributors to growth were immunology products, STELARA and SYMPAY, SYMPAY ARIA as well as IMBOCAMET, Xarelto, IMBRUVICA, ZYTIGA, CONCERTA and INVEGA, SUSTENNA OR ZEPLION. The results for immunology were driven by strong double digit market growth complemented by increased market share for STELARA and combined SYMPANIE SYMPONY ARIA. Regarding REMICADE export and international sales, as a reminder, the company made certain supply chain changes resulting in sales to distributors previously recorded as U. S.
Export sales being recorded as international sales. Combined international and export sales for REMICADE in the Q1 of 2015 were down approximately 2%. Strong growth in Canada was offset by lower sales to our distributors reflecting the weakening of the euro and the loss of exclusivity in Europe partially offset by an inventory build. In BOKANA, Inbocamet sales were up nearly 40% on a sequential basis. In the U.
S, Inbocana Inbocamet achieved 4.9% TRx within the defined market of type 2 diabetes excluding insulin and metformin, up from 4.2% in the Q4 of 2014. TRx with endocrinologists grew to 11.8% for the quarter and 4.3% in primary care, up 1.5% and 0 point 7% respectively on a sequential basis. INVOKANA, INVOKAMET remains the category leader in new to brand share with endocrinologists at nearly 18% at the end of the quarter. Xarelto sales were up 38% and total prescription share or TRx for the quarter in the U. S.
Anticoagulant market grew to 15%, up over 3 points from a year ago. TRx in primary care reached 12% and in cardiology 23.8%, up on a sequential basis. XARALTO is broadly reimbursed with over 90% of commercial and Medicare Part D patients covered at the lowest co pay for a branded product. Strong patient uptake with new indications, approvals and demonstrated efficacy drove results for IMBRUVICA both in the U. S.
And outside the U. S, primarily Europe with launches in Germany, France and the U. K. Strong growth of the combined metastatic castrate resistant prostate cancer or mCRPC market at 12.5% drove the results for ZYTIGA in the U. S.
ZYTIGA share was approximately 30.3% of that market, down approximately 1.2 points on a sequential basis due to increased competition. During the quarter, the FDA approved a label update for ZYTIGA plus prednisone, noting significantly prolonged median overall survival compared to placebo plus prednisone in chemo naive men with mCRPC. Continued strong market uptake and additional country launches drove the strong result outside the U. S. ZYTIGA is approved in more than 95 countries.
Concerta growth was primarily due to a therapeutic equivalence reclassification of generic competitors. INVEGA SUSTENNA or ZEPFION achieved strong results in all regions due primarily to increased market share. I'll now review the Medical Devices segment results. Worldwide Medical Devices segment sales of $6,300,000,000 decreased 4.6%. U.
S. Sales declined 6.1%, while sales outside the U. S. Declined 3.3%. Ortho Clinical Diagnostics was divested mid year 2014.
Excluding the net impact of acquisitions and divestitures, underlying operational growth was 1.3% worldwide with the U. S. Up 1.1% and growth of 1.5% outside the U. S. Growth was driven by Orthopedics, Cardiovascular Care, Surgical Care and Diabetes Care, partially offset by lower sales in Vision Care.
Competitive pricing dynamics and buying patterns negatively impacted growth for Vision Care. Orthopedics sales growth was driven by Orthovisk and MONOVISC in Sports Medicine as well as trauma, hips and knees partially offset by competitive and pricing challenges in the U. S. In spine. Trauma growth of 3 percent worldwide was driven by 7% growth outside the U.
S. Due to strong volume growth including a tender. Hips growth of 3% worldwide was driven by strong volume growth, partially offset by continued pricing pressure. Primary stem platform sales were a major contributor to the results. Knees worldwide increased 1% with the U.
S. Up 2% due to strong sales of Etune, partially offset by pricing pressure. Outside the U. S, knees were down 1% with growth in Asia Pacific and Latin America offset by lower sales in Europe. Slowing elective procedure volume primarily in the U.
K. Contributed to the soft sales in Europe. Cardiovascular growth was driven by a 12% worldwide increase in our electrophysiology business due to strong sales of the ThermaCool Smart Touch Catheter. Surgical Care growth was driven by strong suture growth and the success of new products in the Echelon Flex family, partially offset by lower sales in women's health. Results for diabetes care were driven by Animas' strong double digit growth with the successful launch of Vybe in the U.
S. And expanded pediatric indications outside the U. S. That concludes the segment highlights for Johnson and Johnson's Q1 of 2015. It is now my pleasure to turn the call over to Dominic Caruso.
Dominic?
Thanks, Louise, and good morning, everyone. We're very pleased with our strong start to 2015, and I believe we're well positioned for continued growth in this dynamic healthcare environment. At Johnson and Johnson, we continue to make very good progress on our near term priorities as well as our long term growth drivers, which we discussed during our January call. I'll take the next few minutes to highlight some key developments we've made to advance our business as well as some key points regarding our results for the quarter, then I'll provide some updates to our guidance for you to consider in refining your models for 2015. During the quarter, we had several key developments across our business.
We received new approvals for IMBRUVICA, Periscopix and Velcade in our pharmaceutical business and also added a new anti thrombin antibody to our early stage development pipeline through the acquisition of Exo-one Limited, which we announced last month. We also continued expanding our efforts to combat major global public health challenges through collaborations with government organizations and others in the industry to search for new solutions to stem the threats posed by dementia and Ebola. A much more in-depth review of the outstanding work our pharmaceutical business is doing will be provided at our upcoming Pharmaceutical Business Review meeting on May 20, which will take place in New Brunswick, New Jersey. In Medical Devices, in line with our priority to accelerate growth through innovation, we announced in March a definitive agreement to collaborate with Google Life Sciences to advance development of a surgical robotics program, which we see as an important step in our commitment to advancing surgical care around the world. Finally, we continued making disciplined decisions regarding the management of our enterprise portfolio and completed our divestiture of the U.
S. Licensing rights for Nucynta in April. We announced the binding offer from Cardinal Health to acquire which we expect to close in the latter part of the year. Please now turn to the consolidated statement of earnings. We are very pleased with the strong start to the year as reflected in our Q1 results.
While overall sales results were impacted by currency headwinds, our operational sales growth was 3.1% and our operational sales growth excluding the impact of acquisitions and divestitures was a strong 5.7%. Competition in the hepatitis C market negatively impacted that growth by a full percentage point. You may recall that the same analysis for 2014 resulted in underlying operational growth of 5%. So we're very pleased to see our underlying operational growth accelerating and very healthy. Now if you will please direct your attention to the box section of the schedule, you will see we have provided our earnings adjusted to exclude intangible amortization expense and special items.
In the quarter, our adjusted earnings per share of $1.56 exceeded the mean of the analyst estimates as published by first call. The decline in adjusted EPS of 4.3% versus the prior year was entirely due to the negative impact of movements in currency rates in the translation of our results, particularly the weakening of the euro compared to prior year. This resulted in a negative impact to EPS in the quarter of approximately 0 point a constant currency basis was $1.69 or up 3.7% over the prior year. This is slightly higher than sales growth rate of 3.1%. As referenced in the table of non GAAP measures, the 2015 Q1 net earnings were adjusted to exclude intangible asset amortization expense and special items, which consisted primarily of the following: intangible asset amortization expense was approximately $200,000,000 net litigation gains were approximately 2 $50,000,000 and we had an increase in the accrual for the DEPU ASR HIP program of approximately 100 $1,000,000 Now let's take a few moments to talk about the other items on the statement of earnings.
Cost of goods sold increased 30 basis points. This is mostly due to currency impacts. Selling, marketing and administrative expenses were 27 point 9% of sales or 70 basis points lower as compared to the Q1 of 2014 due to good cost management. Investment in research and development as a percent of sales was 10.9% and it was higher than the prior year as we continue to make important investments for the future. Overall, our pre tax operating margin when excluding special items and intangible amortization expense was 32 point 6% or 50 basis points lower than the prior year, primarily due to such R and D investments.
Interest expense net of interest income was similar to last year. And other income and expense was a net gain of $348,000,000 in the quarter compared to a net charge of $86,000,000 in the same period last year. Excluding special items that are reflected in this line item, other excluding special items that are reflected in this
line item, other income and expense was
a net gain of $91,000,000 compared
to a net gain of $50,000,000 in the prior year period. Now excluding special items, the effective tax rate was 21.5% compared to 20.8% in the same period last year. This effective of tax rate is higher than our previous guidance as it does not yet reflect the benefit of the R and D tax credit as that legislation has not yet been passed. Now I will provide some guidance for you to consider as you refine your models for 2015. At the end of the quarter, we had approximately $12,000,000,000 of net cash, which consists of approximately $31,000,000,000 of cash and marketable securities and approximately $19,000,000,000 of debt.
I'm also pleased to report that we have made significant progress and nearly completed our share repurchase program, which will offset the ongoing impact of the Ortho Clinical Diagnostic divestiture we did last year. For purposes of your models and assuming no major acquisitions or other major uses of cash, I suggest you consider modeling net interest expense between $450,000,000 $550,000,000 This is unchanged from our prior guidance. Regarding other income and expense, as a reminder, this is the account where we record royalty income
as well as gains and
losses arising from arising from such items as litigation, investments by our Development Corporation, divestitures, asset sales and write offs. We would be comfortable with your models for 2015 reflecting net other income and expense excluding special items as a gain ranging from a gain ranging from approximately $2,000,000,000 to $2,100,000,000 which includes the gain from the divestiture of our U. S. Rights to the Nucynta pain medicine, which we announced closed in the early 2nd quarter. And we've updated our guidance now to reflect the anticipated gain on the pending divestiture of the Cordis business.
As we noted in January, we expect to use the increase in other income to compensate for the anticipated decrease in income for ALICIO in 2015 as compared to 2014, while continuing to invest in our core business and opportunities for future growth. We firmly believe that continued portfolio decisions are an important process and enable us to focus on the highest growth opportunities. With the anticipated Cordis gain, we will be able to mitigate some of the impact of strong foreign currency headwinds this year. The increase in guidance for other income and expense will flow directly through to increase operational earnings versus our prior guidance. And now a word on taxes.
Our guidance for 2015 anticipates that the R and D tax credit will be renewed by Congress, although that has not happened. We therefore would be comfortable with your models reflecting an effective tax rate for 2015, excluding special items of approximately 21% to 22%. This is higher than our previous guidance reflecting changes in the mix of our earnings. If the R and D tax credit is not approved, it would negatively impact the tax rate by approximately 0.5% for 2015. Now turning to sales and earnings.
Our sales and earnings guidance for 2015 takes into account several assumptions and key is that there will not be biosimilar competition in 2015. We also do not anticipate generic competition this year for Risperdal Constant or INVEGA SYSTENNA, but we are expecting a generic entrant for INVEGA in 2015. As expected, we have seen additional biosimilar competition for REMICADE in Europe following the patent expiration in many countries in February. As we've done for several years, our guidance will be based first on a constant currency basis reflecting our results from operations. This is the way we manage our business and we believe this provides a good understanding of the underlying performance of our business.
We will also provide an estimate of sales and EPS results for 2015 with the impact that current exchange rates could have on the translation of those results. Consistent with our previous guidance, we would be comfortable with your models reflecting an operational sales increase on a constant currency basis of between 1% 2% for the year. This would result in sales for 2015 on a constant currency basis of approximately $75,000,000,000 to $76,000,000,000 Additionally, by way of comparison to how we described our sales results in 2014, our operational sales growth for 15, excluding the impact of all acquisitions and divestitures as well as the impact of hepatitis C would be approximately 6 14, which we noted earlier. As of week, the euro was lower by approximately 17% as compared to 2014 average levels and the dollar has strengthened recently versus virtually all major currencies. And though we are not predicting the impact of currency movements, to give you an idea of the potential impact on sales, if currency exchange rates were to remain where they were as of last week for the balance of the year, our sales growth rate would decrease by nearly 7%, reflecting the weakening of the euro and other major currencies against the U.
S. Dollar. Now turning to earnings. A significant factor impacting our earnings guidance for 2015 is the impact of currency movements on transactions, which although hedged is still somewhat negative incrementally versus the prior year. We expect transaction currency impacts to be negative to our gross profit by approximately 60 basis points to 70 basis points in 2015 as compared to 2014.
Consistent with the reporting when providing our adjusted earnings guidance and actual results. Accordingly, we would be comfortable with adjusted EPS guidance in a range between 6.64 dollars to $6.79 per share on a constant currency basis, reflecting an operational constant currency growth rate of 4% to 6%. This is higher than our previous guidance by $0.10 per share, reflecting some operational improvements and the higher other income and expense I noted earlier, partially offset by a higher tax rate. Again, we are not impacting the impact of currency movements. But to give you an idea of the potential impact on EPS, if currency exchange rates for all of 2015 were to remain where they were as of last week, then our reported earnings per share would be negatively impacted by approximately $0.60 per share, which is a higher negative impact of approximately $0.18 per share than we provided in our January guidance.
Therefore, our reported adjusted EPS range will range from $6.04 to $6.19 per share, primarily due to the increased headwind of currency on EPS partially offset by our improved operating performance of approximately $0.10 per share. At this stage in the year, we would be comfortable with your models reflecting the midpoint of this range. So in summary, as you update your models for the guidance that I just provided, I would like to make a few key points. Although operational sales growth is expected to range between 1% 2%, we are pleased to note that when excluding the impact of acquisitions and divestitures and the impact of Hepatitis C products, our operational sales growth at the midpoint of our guidance is approximately 6% for the full year 2015 as compared to 5% for all of 2014. We expect that the higher level of other income in our guidance for 2015 will mitigate the lower level of income from ALICIO in 2015 as compared to 2014 and allow for continued investment in the business, particularly in research and development.
As we continue to build our pipeline and now with the inclusion of the gain from the Cordis divestiture, we are able to offset some currency headwinds to earnings as well. With regard to earnings on a constant currency basis, our guidance on an operational EPS growth is strong and in the range between 4% 6%. 6%. In closing, we're very pleased with our strong results for the Q1 of the year and we're pleased with what we see for the full year, namely strong underlying sales growth, solid operational earnings per share and the benefits of decisive portfolio actions enabling us to fund investments in future growth opportunities and also help us mitigate some of the currency headwinds. Now I'd like to turn things back to Louise for the Q and A portion of the meeting.
Louise?
Thank you, Dominic. And Andrea, could you please provide the instructions for the Q and A session?
Your first question comes from Mike Weinstein with JPMorgan.
Good morning, Mike.
Hi, Mike. Good morning.
Thanks guys for taking the question.
So, Dominic, the first question
I think you're probably going to have is the FX headwind obviously has gotten worse over the course of the last few months and you reflected that in the guidance. You're helping manage through 2015 with the gains from Nucynta and Cordis, but that won't help you for 20 16. So we're a long ways away from there, but obviously the question is, can you grow earnings in 2016 after the gains you'll be taking in 2015 assuming the dollar holds
at least? Dollar holds and
there isn't further currency headwinds. Yes, we did purposely offset some of the Alisio income we saw in 2014 with now this benefit from the divestitures that we talked about and are very transparent about in 2015. I would say with a business of our size, dollars 70,000,000 to $75,000,000,000 in sales, we actively manage our portfolio and we would expect that we would continue to do so. And as we talked about before, look at the businesses that we expect to not be in and make the right portfolio choices and take decisive actions and that will further enable us to refocus our resources in the right areas. So I think although I can't predict the level of other income we would have in 2016, I wouldn't expect it to drop off so dramatically.
And secondly, as I mentioned, our sales growth is accelerating. Our business is being managed well by all of our business leaders around the world. So I would expect continued sales growth and increased profitability from those sales as we move forward. So more to come and we'll obviously keep you posted throughout the year.
Okay. Let me ask you 2 kind of balance sheet capital allocation questions. And 1, you and I discussed this a few weeks ago on our call, but I know a lot of you had questions on the back of the press reports on Pharmacyclics and AbbVie's acquisition there and J and J's potential involvement. So I won't ask you to comment on J and J's involvement. But can you talk about the company's thinking about larger M and A, particularly in the pharmaceutical space, but really across the portfolio, the appetite for larger M and A at this point?
And then second, it could be interesting just in your comment on the back of the GE activity on Friday, as you're aware, GE is part of its move to slim down to being more of a pure industrial company to offset some net dilution announced that they were going to repatriate $36,000,000,000 in cash that was sitting on outside the U. S. To fund the stock buyback. That doesn't help your discussions with Washington about getting a holiday or more meaningfully change in the tax laws to allow you guys to access that tax. So with GE being this very high profile, then U.
S. Multinational repatriating all this cash, does it change your
let me start with the first half, which was about, I think, the appetite for large acquisitions, and I won't comment on rumors or speculation about our involvement in the Pharmacyclics. I think just as to take a step back, our capital allocation policy remains the same. And we have for a long time emphasized dividends as the first use of our capital, and we believe that's the most enduring return to shareholders, and we've demonstrated that over now 52 consecutive years of increase in the dividend. And then if it was up to me and others in our business, we'd invest all the remaining free cash flow in value creating acquisitions, whether they were large or small. I think the key point here is, is the transaction value creating regardless of its size.
So our appetite doesn't really change in terms of whether or not an acquisition is large or small. Our view of acquisitions as being value creating has to do with the disciplined approach we take to evaluate an acquisition. And whether it's large or small, we're not going to overpay for an asset. Typically, large acquisitions are difficult to generate value from because they're either overvalued by the market or significant premiums required or the asset is already substantially mature enough where you can't add much to it. But I would not necessarily read into any of our discussions or actions as being necessarily adverse or favorable towards any size particular size of transaction.
It is true that over long periods of time, the majority of our transactions have been below $1,000,000,000 actually. But we've done, as you know, with the Synthes transaction, important strategic moves that are $20,000,000,000 range. So hopefully that provides you some insight there. On the repatriation question, we're still firm believers that the ultimate conclusion here is a much more competitive corporate tax system in the U. S.
I can't speak for what GE did, but it does not alter our view that it's currently uneconomical to repatriate those earnings at such a high corporate tax burden. And we'd much see our government move in the direction of lowering that tax burden for corporations, getting that cash back to the U. S. And invested more appropriately without the burden of this extra tax fight. But can't comment on why or whether we would do something similar as to what GE did.
Thanks, Tom. That's very helpful.
Thank you. Next question, please.
Your next question comes from Vamil Divain with Credit Suisse.
Yes. Thanks so much for taking the questions. Just a couple on the pharma side here. 1, you mentioned specifically around guidance and how you're thinking about 2015 with PROCRIT and other products. Just any thoughts on biosimilar REMICADE in the U.
S? And is that in any way factored into your thinking for the rest of this year? And then on the oncology side, one area we are a lot of focus on from a lot of companies is immuno oncology. And I'm wondering if you could share any thoughts, I know you have your pharma business for you today coming up in a little bit here, but any thoughts you could share ahead of that as we kind of get ready for some of these big oncology meetings, you're focused on getting more involved on the immuno oncology side? Thanks.
Sure, Vamil. Well, our guidance for 20 15 does not assume any biosimilar competition in the U. S. We remain confident in the strength of our patents and obviously are pursuing all available avenues to protect our intellectual property. But we're not expecting biosimilar competition in 2015 in the guidance that I provided.
In terms of oncology and immuno oncology in particular, our teams have done very, very good work here in the next generation of immuno oncology. And I think it's best to save any further comments to the experts and you'll hear from them and see them in action on May 20. I encourage you all to hear what they have to say. I think you'll find it very exciting.
Okay. Thank you. Next question, please.
Your next question comes from Larry Biegelsen with Wells Fargo. Larry?
Good morning. Thanks for taking the question. I hope you can hear me okay. I'm on a cell phone. Yes, we can Larry.
Great. Let me start off. First, it was good to see the acceleration in the consumer segment. I think it was about 4.7 percent organic growth. Dominik, can you talk about how sustainable that is?
Sure, Larry. Well, thanks for pointing it out. We're very pleased with the consumer businesses progress over the last several years actually. And now we're seeing that progress result in higher sales levels for a couple of reasons. I think overall, the market is healthier in consumer spending is what we see.
We also have made important innovation really in skincare and we see skin care doing really well, and we continue to invest behind it. And then finally, we've made great progress in the OTC business in terms of resolving and remediating the issues around But now that allows us to more freely ship product from those plants. We can do so on a consistent basis. And we're happy to see that once those products hit the shelves, they go quickly. We're happy to see that we're able to replenish the shelves on a more consistent basis.
So we believe consumers off to a great start in 2015 and we're expecting more continued positive results from the business going
forward. Thanks, Dominic. On the Q4 call, you said you expected consumer and devices to both accelerate in 2015. And as you noted, we saw consumer accelerated in the Q1, but we didn't see devices accelerate. So do you still expect devices to accelerate in 2015?
And if so, what drives that? Thanks for taking the questions.
Yes. Thanks, Larry. Thanks for the question. Well, let's take a minute to just put the medical device results for the quarter in perspective, of course, negatively impacted by divestitures and as we said, about 1.3% growth without that. But underlying that, there's a few issues there that I think is important to point out.
One is we exited the women's health business recently. We also have seen these the negative impact of the price reset in the Vision Care business. So that's a drag, quite frankly, year over year and also the continued headwinds that we faced in our diabetes business as to pricing. When you exclude those factors and you sort of normalize for what's really happening in the underlying business, it's growing at approximately 3% or about equal to the market. Now going forward, the Medical Device business, as we described last year in the Medical Device Day, has a number of new product launches, 30 new products that we're expecting to launch by 20 16.
Some of them have already begun to launch. So we're very optimistic about the fact that the medical device business will return to growth, especially once we lap some of these comparisons and also we see the benefits of the new products that we're launching. So we're very excited about Guggenberger
with Goldman Sachs. Good morning, Jamie.
Good morning. Couple of questions for you, Dominic. Just back on the REMICADE biosimilar potential, can you just update us on what's happening with the patent? Because the last we saw, the U. S.
PTO issued on your September 2018 composition of matter patent. And just if you can remind us what the appeals process looks like? Could CELTRIAN launch at risk since you lost the patent, the composition matter? I just how does that work? And then more importantly, do you have other long dated patents around REMICADE that you can assert using the 351 pathway?
And then my second question relates to utilization. I think in the last quarter or 2, you talked about 2 straight quarters of improved U. S. Utilization. Are you seeing that continue into the Q1?
And then last question and apologies for the nitpickiness of this, but I'm just trying to understand my math. You had talked about an $0.14 but you talked about $0.10 combined with which was a combination of the one time gain plus operational benefits. So just curious what am I missing? Thanks very much.
Okay, okay, Jamie. Thanks for the question. So let me start with
There are too many, but I have to get them all in.
That's okay. Well, you got them all in. I'll try my best to answer them all, and we'll take them in the same order. So the REMICADE biosimilar patent situation is what you asked about. So let me just give you a perspective on that.
Yes, it's true that the U. S. Patent Office has issued what is referred to as a final rejection. But under in the U. S.
Patent Office, the word final is not exactly what a layman or I would consider as final. So there are a number of steps that can still occur after that final rejection. And in fact, one of those steps includes our response to that final rejection, which we filed just yesterday. Then that filing then is reviewed by the patent office, and we would expect to hear back from them in the next 30 to 60 days. And depending on that response, we then have another avenue of appeal, which if the current position of the patent offices remains the same, we have another appeal process, which could take another 12 months or so to prosecute with the patent office.
And then after that, even if there is an adverse ruling after that, there's another decision to the Court of Appeals in the Federal Circuit Court that we could appeal for, which would take another 12 to 18 months. So first of all, as I said earlier, we're very confident in the strength of our patents and we intend to pursue all the available avenues for appeal and we're doing so including our response just yesterday to what was previously described by you as the final, but it's not final as I've just described. On whether CELTRION will launch at risk, it's a question for them. I really can't comment on what they might do. And then in terms of utilization, we have seen an uptick in utilization in this Q1, a continued trend of, although slight increases, but nonetheless positive increases in overall hospital admissions, surgical procedures, doctor visits, etcetera.
So that's encouraging. We continue to see now trends of now 3 consecutive quarters of positive trends in health care utilization. And then finally, on your math as you were trying to do, and let me try to help everyone on that because I think it would be a common question. So we talked about the increase in other income and expense. Because of the tax rates applied to those particular items in that line item, let's call that roughly about $0.12 of earnings and minus sorry, let's call that about $0.12 of earnings on a pretax basis.
The tax rate going up is primarily due to the fact that those items have a higher U. S. Tax burden. So our tax rate went up as a result, let's call that $0.07 negative. So now you're up $0.05 And we said we increased our operational earnings by $0.10 So that $0.05 I just described and another $0.05 just due to continued good management and overall progress we're making in the business overall for the $0.10 that I just described earlier.
So hopefully that's helpful.
Yes. Thank you very much. Thank you, Dheeraj. Next question please.
Glenn Novarro with RBC Capital Markets.
Good morning, Glenn.
Good morning, guys. Wanted to start with a question on Spine. Louise, in your prepared remarks, you talked about, I believe it was in the U. S. Competition and pricing challenge for the negative U.
S. Spine number in the quarter. Can you talk to us about what the challenges you're facing? Is it from the smaller players taking share? And can you describe to us the pricing pressure and how that compared to the to the Q4?
Then I had a follow-up on robotics.
Okay. So going forward, because we have some movement between price and mix when a new product goes up annualizes itself, I'm going to start giving people only price and mix on the U. S. Price changes, okay? So in the Q1, we had a 5% decline, price and mix in the U.
S. In spine and that compared to about 4% in the Q4 of 2014. And regarding the competitive, there's new products coming out with our competition.
And as Dominic mentioned, we have a number of new products coming throughout the year. And just as a follow-up, the pricing got a little worse for you guys here in the Q1. Do you have any commentary why that may have happened? Is it just more about your mix and your new product cadence?
It's a lot to do with the mix, Glenn, yes.
I think generally, Glenn, price has been negative in this marketplace in Orthopaedics now for several quarters and we're just seeing that trend continue and we just saw it recently as well. Yes.
Okay. And just on the competition side, like I said, if you look at 2 thirds of the market, it's you and Medtronic. So is the pressure really coming from that other third, some of the younger upstart companies?
I'm just going to take a look at the share data and then Just
a follow-up on your robotics commentary. So you recently announced a collaboration with Google. Can you talk about the timing of when you may have a robot that could enter the market? Is this 2 or 3 years out, longer or shorter? Any commentary on the time frame would be helpful.
Yes, sure, Glenn. Well, so one thing I would say, this is a continuation of what we discussed at the MD and D Business Review Day a year ago. So we had mentioned that we were working on our own robotics program internally. We've now obviously partnered with Google to gain their expertise in technology in visualization and in robotics. And I think that's going to provide us some acceleration to the plans we were already anticipating.
We're already in the market for robotics in terms of particular, I would say several years for us to come to market with the new type of robotic surgery that we think will dramatically revolutionize. It's there and I'd say it's a couple of years away.
Okay. Glenn, I just checked it is the smaller players that appear to be taking share.
Okay.
Next question please. Thanks, Dominic.
Your next question comes from David Lewis with Morgan Stanley. Good morning, David.
Good morning. Just Dominic, one quick niche for you and then a couple of pharmaceutical questions as well. Traditionally, we see a step up in gross margins, Dominic, into the Q1 from the 4th quarter. We didn't see that in this particular quarter. Was there anything driving that in particular?
Yes. David, I mentioned in my prepared remarks that the main issue with gross margin this quarter versus last year and also versus the Q4, I should have said, has to do with currency impacts. So it's just even though we hedge most of our manufacturing foreign currency commitments, they do roll over from year to year and quarter to quarter. So this particular quarter, I could sort of reflect on it and say it's essentially all currency impacts.
Okay, very helpful. And then two quick questions on pharma. The first is on REMICADE outside the U. S. There was a little bit of softness.
It wasn't clear from the prepared remarks whether that reflected inventory issues or some stocking element or increasing competition? And then secondarily, in Emokana, a very strong number. There are 2 elements I wanted to get your views on. The first is, it does appear in some of the data, IMOQUANA is beginning to accelerate its share relative to certain specific competitors. And the second question was just given these increasing concerns on DPV4 drug class, could we see a positive class effect?
Are you expecting one for the SGL-2s? Thank you.
Yes. Well, with REMICADE OUS, as Louise mentioned, we saw these are shipments that we make to our partner Merck for their territories outside the U. S. And as you know, many of those territories, we have seen the loss of exclusivity. So buyer swimmers have entered those markets.
So the primary reason is basically lower shipments to our partner as they plan for the balance of the year. Anything else you could add to that, Louise?
Yes. So if you recall, about a year ago, we made some changes to our supply chain, which caused the some of the export sales that recorded in the U. S. To be actually recorded in the international. So you really have to add those 2 together to get a clear picture of what's going on there.
If you take a look at them together, it's down about 2%. Euro and also market pressures because of the biosimilars and they did have an inventory build with our distributors. So there's a number of confounding factors that are going on there. So you need to take a look at it in total.
And then with Invokana, we're very pleased obviously with the performance of Invokana and with Invokamet in particular because as you know many patients take these SGLT2s in combination with metformin. So that product is doing well. Whether or not this is a class effect for SGLT2s, I think we have a particular benefit and strong SGLT2. And the benefit that we have here is, of course, the lower HbA1c levels, lower weight gain, etcetera. So the product is getting very, very good acceptance and it's now exceeding all the other SGLT2s that have recently come to the market by significant margins and gaining market share despite increased competition?
Yes. So our commercial payers, we have about 75% coverage at Tier 2. And the Part D, we have about 85 percent coverage at a Tier 2, which is the lowest tier for our brand. And so we're doing very, very well in the reimbursement front, and we're gaining share in all the categories. The Endo share sequentially, it's 11.8% in the Q1, and that's up from 10.3%, so nice growth there.
And even more impressive is the primary care going from 3.6% to 4.3%. And primary care is about 60% of that market. So it's really impressive results.
Great. Thank you very much.
You're welcome.
Next question please.
Thank you. Your next question comes from Rick Wise. Let me start
off, Dominic, with Surgical Care and Specialty Surgery specifically. Both businesses have been pretty flat for a few quarters here. It's not so surprising maybe in Surgical Care, but Specialty Surgery. Can you you're saying volumes are picking up and yet we're not seeing it here. Is this lagging or it's going to accelerate?
Is it competitive issues? Just give us some more color if you could. Thank you.
Okay. So within the specialty surgery area, we have a number of businesses put in there.
So if you but if you take
a look at the core businesses of Biologics and Energy, Biologics is up 7% worldwide, Energy is up 4% worldwide. And if you look at the OUS for Biologics, it's up 11% and OUS is up 5%. So this is so a clearance in there, which is causing some depression of the numbers. Mentor is in there as well. Mentor is doing well.
So but if you really take a look at the 2 cores, they're doing very well.
Yes. I think that's well said, Luis. Biosurgicals, in particular, is doing very, very well. And energy is with the launch of new products is gaining momentum. I think we'll see it in future quarters, quite frankly, as these products have just recently launched.
But there is some noise in the other segments. But the overall core business is doing very well, Rick.
Okay. Turning to diabetes, you highlighted that Adamis had strong double digit growth. Is this all live and moving past the negative price cuts? And just maybe talk if you could give a little more color again on Vybe, the rollout where you are and you've highlighted the 3 day wearable patch as a possibility. Where does that stand?
Thanks. Sure. Well,
Rick, it is primarily due to the VIBE business. So VIBE was launched OUS last year and continue to pick up a lot of volume, did extremely well OUS and was just launched in the U. S. Recently. And we're seeing some very, very good uptick on Vybe.
And we're very, very pleased by that new insulin pump that's doing very, very well, taking share and growing. And with the what we saw happening, OUS certainly bodes well for the uptick of that product in the U. S. In terms of the wearable patch pump, that's probably a couple of years out still. Obviously, we need to scale up manufacturing, complete some additional work on that.
A few of us were just there recently visiting our diabetes business, and all plans are in shape there. They're moving forward with all the manufacturing that needs to be done. So we're very excited that will come to market, but it's probably by not before 2016, I would
say. Are you shifting customers or is this taking competitive share?
Yes. And from what we saw, the data we saw shows us that we are taking competitive share from the major player in the marketplace. No, the very strong
growth rates we had, we would have to be taking share. Next question please.
Thank you. Your next question comes from Josh Ginnings with Cowen and Company. Good morning, Josh.
Hi, good morning. Thanks so much for taking the question. Just wanted to start, Dominic, if you would, just on the strategy behind the Cordis divestiture. It seemed like it was an underperforming unit, but just throughout last year, some of your commentary and Alex's commentary seemed that you were looking to get bigger in cardiology, not smaller. Can you give us just a little bit more color on that acquisition?
And also, is your outlook for the cardiology spaces and your comfort level of having a relatively standalone Biosense Webster division?
Yes. Well, it's a great question, Josh. We've been very consistent with our approach to divestitures. And Alex has said many times, if we're not neither number 1 or number 2 in the market or we don't see a pathway being number 1 or number 2 in the market through technology and the appropriate amount of investment or, for example, if it's not otherwise complementary to our business, then it should be a a candidate for divestiture. So as you pointed out, we obviously did not divest the Biosense Webster piece of the Cordis business.
That's very, very promising business. It's doing extremely well, new innovations coming to market, etcetera. So we're pleased with being in the cardiovascular business. It generally has become, from our vantage point, a commodity business. And it will be in our view better managed in the hands of others.
And I think Cardinal is going to do just a great job with that business.
Okay. Thanks for that. And then just a follow-up on operating margin in the quarter. Only 50 basis point hit year over year despite the lease year headwind in FX. Can you help us think about sort of apples to apples ex HTV in terms of the operating margin performance?
And then how we should think about operating margins year over year 2015 over 2014? Thanks a lot.
Yes. Well, the Q1, there was some impact for Alistio, But obviously, Alistio grew throughout 2014. So we'll see that operating margin decline more pronounced in future quarters, obviously, and that's all in our guidance. The guidance we provided shows that if I mean, we didn't give you a specific operating margin, but you work through the P and L as you update your models, you'll see that the pretax operating profit margin is probably going to go down about 150 basis points and that's primarily 120 basis points due to the Alisio net Alisio, because remember, we invested some of those gains last year. And that, of course, is what I referred to earlier that we're offsetting with the decisions that we've made about the portfolio.
We think these are the right decisions to make at the right time. They also come at a time when we can offset this decline in operating profit margin. Hopefully, that's clear now, Josh.
Thanks so much. Yes.
Thank you. And we'll take one more question.
Thank you. Your next question comes
from the
line of
Jason Werwick
with Raymond James. Good morning, Jason.
Good morning. Thanks for taking the questions. Just a couple quick ones. On consumer, in terms of the consent decree, 3rd party has blessed the facilities, you're now waiting for the FDA. When it's officially lifted, can you give us an idea as to the potential impact on the business, if any, and specifically as it relates to margins, which still look like they're down in the low double digits?
Sure, Jason. Well, it is true that we've completed our work and we have an outside party that sort of verifies what we completed and prepares their report and then the FDA has to come in and certify. But even after the FDA certifies, remember that we still will operate under the consent decree for a 5 year period. That's what the law requires. Now during that 5 year period, we'll continue to make improvements, etcetera.
But and I would say generally speaking, the consumer business has done a very nice job mapping out the fact that gross margins and overall margins in that business should improve over time, while at the same time we're investing behind the products that we're launching. So I would say we'll see continued improvements in margins. I wouldn't view them as dramatic in the short term, but continued steady progress and improvements in that business, which we're very pleased with. Thank you very much.
So some final comments from Dominic. Okay.
Thanks, everyone, and thanks, Louise. So as I noted earlier, we're very pleased with our strong start to 2015. And I would just like to take a moment and recognize and thank all of our associates around the world for their extraordinary achievements and dedication to the success of Johnson and Johnson. And thank you all for your time this morning. I look forward to updating you on our progress throughout the year.
And finally, just a reminder that we will be conducting a review for the investment community of our pharmaceutical business on May 20 in New Brunswick, and I look forward to seeing you all there. So have a great day. Thank you.
Thank you. This concludes today's Johnson and Johnson's Q1 2015 earnings conference call. You may now
disconnect.