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Johnson & Johnson CFO Joseph J. Wolk joins Yahoo Finance Live to discuss Johnson & Johnson’s recent earnings, the effectiveness of its vaccine, and the importance of innovation.
JULIE HYMAN: Johnson & Johnson this morning out with earnings per share that beat estimates. Sales falling a little bit short, but the company also raised its forecast for 2022 profit. Let's bring in Joe Wolk. He's Johnson & Johnson Chief Financial Officer. Our Adam Shapiro is with us as well to participate in the conversation. Joe, I want to talk to you first about that forecast. Because when we look at the third quarter and the earnings per share beat there, I know some of it had to do with a little bit lower cost, some of it had to do with a lower tax rate. As you look ahead to that full-year raise, tell me some of the driving factors behind that.
JOSEPH WOLK: Sure, Julie. Nice to be with you here today, and just really to share the results of 136,000 associates across the globe that delivered stellar performance. There's so much ambiguity in the world, but the one thing that seems to remain constant is just our innovative pipeline and how that translates to quarterly results. As I look at the fourth quarter, we're very well positioned. If you think about some of the-- what have been classified as misses in the morning, with respect to our top line, it really was timing delays.
So half of it is in the area of COVID-19 vaccine, where shipments have been made, but it's really just revenue recognition and following correct accounting practices. As you've likely read, our full-year forecast of $2.5 billion still remains intact. That's what we provided in July, and we're doing that all at a not-for-profit basis. The other so-called miss, again, I would say, is in the camp of timing, and that it was elective procedures in medical devices.
But we still-- despite the Delta variant, some hospital labor shortages and constraints-- we were still able to approach 8% growth in the quarter versus last year. So the medical device recovery is very much intact. It's a matter of intensity now. And those procedures that did not get performed in the third quarter will simply come about in the fourth quarter or early next year. So providing a little nice tailwind there. And then from an operating margin standpoint, we were able to have the flexibility to raise our outlook for EPS. And that's in light of investing at R&D at actually a 23% clip better than what we invested in last year, and last year was a record year. So it's close to $2 billion through nine months of incremental R&D investment, which really bodes well for the second half of this decade.
ADAM SHAPIRO: Hey, Joe. Good to see you. I have two questions, one of which is going to get to the R&D issue. But I want to focus in on pharmaceuticals, because it was almost $13 billion in sales in the quarter. And I've always noticed US sales are higher than your international sales. And do your critics point to that fact as part of the evidence-- we're watching on Capitol Hill-- to try and lower pharmaceutical prices? What drives that US number? Is it volume, or is it the price that you're charging US consumers for pharma products?
JOSEPH WOLK: Now, Adam, that is strictly volume, and I think it's the way the US health care system is set up, where patients and physicians have choice to a much larger degree. Just to give you an idea just how important innovation is to our pipeline and why it's critical, in terms of our success equation, to have products and medicines that are much better than the current standard of care. In each of the last five years, Adam, we've experienced close to a 5% price decrease, yet we continue to deliver above-market growth in a pharmaceutical segment because of that innovation.
And that 5% is not the cumulative effect over the last five years. It's 5% each and every year. Now, we think there is a healthy debate to be had, in terms of health care costs, specifically around pharmaceuticals, but we think it really lands in the space of co-pay. We are advocates for a co-pay cap. If you think about what the industry has experienced over the last six years-- the average discount in rebate off of gross or list price six years ago was about 26%. Today, it's north of 50%, for the industry as well as Johnson & Johnson.
So the question really has to be, where is that additional discount and rebate going when we see patients going to the pharmacy counter on a monthly basis where they used to pay $10 or $15 in co-pay now paying $75 to $100 per month? So we would like to have that and engage in that discussion, presumably if it's based on facts.
ADAM SHAPIRO: Another issue-- and you brought up R&D, the billions that you're devoting to research and development. But Dr. Stoffels is going to retire-- your chief scientific officer-- at the end of December. I realize no one person makes up an entire unit, but he has been instrumental, for instance, in the development of the COVID vaccine. What kind of impact, if any, will it have going forward on the ability to create new pharmaceutical products and bring them to market?
JOSEPH WOLK: Yeah. Well, let's take a moment and just acknowledge the tremendous career and legacy Paul leaves behind. You know, you've appropriately noted the most recent accomplishment and leadership position that he held, with respect to the COVID-19 vaccine development, not just here at Johnson & Johnson but really on the global stage. But let's go back 25 years ago-- when we were looking for answers on HIV-- and Paul was a pioneer in that space. And then he continued to build out the portfolio.
I think the best testament to his legacy is just the fact that we are investing the level of R&D that we are putting in today's P&L, quite frankly, because that will pay off in years to come. Paul's assembled a great team of scientific leaders, therapeutic experts, and we continue to firmly believe that what he has started will evolve and grow in the future.
BRIAN SOZZI: Joseph, inflation continues to surprise a lot of large companies to the upside. How much in terms of price increases have you had to put into effect on consumer products, like Tylenol, Motrin, and even Aveeno?
JOSEPH WOLK: Yeah, Brian. At this point, as you'll see in our P&L, we have not experienced inflation in terms of the costs that we're recognizing in the third quarter. A lot of the product that we made was probably built or manufactured in the first quarter, or maybe even the fourth quarter of last year. We have experienced increased freight and distribution costs since the fourth quarter of last year, and we are monitoring, you know, inflation for some select commodities across our portfolio and how that may play out.
We have not done anything, I would say, extraordinary, with respect to price increases onto customers at this point. There may be a time and a place for that, we just haven't come to that conclusion quite yet. And we continue to monitor it as we run into 2022.
JULIE HYMAN: Hey, Joe, I want to ask about vaccine sales. $500 million in the quarter, which missed the average estimate. But you know, again, we talked about your overall sales at about $23 billion, so it's, on a relative basis, a pretty small amount overall. And I was reading some comments by you this morning that said, you know, it's always kind of amusing when your stock trades on vaccine news when it is really not a huge part of your portfolio. But how do you think about the vaccine, especially as we get this news about boosters, about maybe Dr. Fauci saying the J&J shot should have been two shots? How do you think about it, not just a snapshot of now but going forward as part of the J&J portfolio?
JOSEPH WOLK: Yes, Julie, thanks for raising that. I would say, I think about it purely in terms of upside. You heard me just in the last couple of questions respond with just how strong our business is, and it's that core portfolio of better than $90 billion of revenue across three platforms in health care that is really making a difference and is a certainty amidst ambiguous times. I would say, with the vaccine, we hope it becomes a commercial opportunity.
And while we can second guess and say, well, it should have been a two-shot, I would remind people that we've got 94% efficacy and the durability that we have-- and this is not to take anything away from the competition out there-- but the durability is best-in-class right now. A booster will only serve to extend that durability. Let's remember, too, how the World Health Organization defines, kind of, the gold standard when it comes to vaccines and ending pandemics. They prefer one shot that's efficacious and that's easily transportable.
The J&J vaccine met those requirements in each and every instance. So we feel good about the role we've played. And perhaps, Julie, the best way to conclude this particular topic would be just-- if you look in the developing world, where we've got about 50 million Johnson & Johnson vaccine doses that have been administered thus far, that's at least three times the amount of mRNA vaccines combined. So that role of one-shot is playing a crucial role in ending the pandemic globally.
ADAM SHAPIRO: And, Joe, as we start to wrap this up, the company successfully used a legal maneuver-- creating two companies, and then placing the baby powder issues and liabilities into this second company, which then was taken into bankruptcy. What do you say to the critics of these totally legal maneuvers? What do you say to the critics who would say, you can do that legally, but is it the right thing to do for, I think it's like 30,000-plus potential plaintiffs who seek recourse regarding talc?
JOSEPH WOLK: Yeah. So, you know, Adam, let me start by saying we are firm in our conviction that there's decades of science that prove that talc is safe. It is not harmful to people. There is an established process, that you noted was legal, that when companies are facing abusive-to-work practices, there's this opportunity to resolve claims in an efficient and equitable manner. So we initiated that process with our cosmetic talc claims, both current and future.
Now, we believe all the cases lack merit, and quite honestly, a number of judges and juries have come to that same conclusion. In fact, there's only been one case that's been fully adjudicated that's gone against us. That being said, we did establish a $2 billion fund-- qualified settlement fund-- to satisfy those claims should an independent bankruptcy court or its delegate deem that claims were valid. But ultimately, the bankruptcy court is going to decide this. I think the critics that are coming out now are really plaintiffs attorneys who are losing an opportunity to play in jackpot justice and take 30% to 40% of the claims that are quite frankly frivolous.
JULIE HYMAN: Well, we're going to keep watching that situation to see how you guys end up doing that financial structure of that entity. Joe, good to catch up with you. Johnson & Johnson Chief Financial Officer. And our Adam Shapiro, as well, participating in that.