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News comes less than two years after device business restructures

By Stacy Lawrence

Staff Writer

Medical device sales growth beat out that for pharmaceuticals in the latest quarter from Johnson & Johnson. That comes scarcely a year and a half after the conglomerate announced a restructuring of its devices business in the face of non-existent growth. Key to the boost has been acquisitions, which drove much of this quarter's gains.

During the second quarter, medical device sales added 4.9 percent to $6.7 billion over the same quarter a year ago – after accounting for a negative 1 percent currency impact. The first full quarter of the acquisition of Abbott Medical Optics (AMO) accounted for 5.1 percent of the 5.9 percent operational sales growth.

Pharma, by contrast, had a 0.2 percent decrease in sales to $8.6 billion, based on an operational increase of 1 percent and negative currency impact of 1.2 percent. Even excluding the impact of acquisitions and divestitures, medical device sales grew by 1.1 percent while pharma added only 0.5 percent on an operational basis.

J&J chairman and CEO Alex Gorsky was upbeat, highlighting areas of promise including the bounce from AMO. The New Brunswick, N.J.-based company completed that $4.3 billion acquisition from Abbott in February.

But he also didn't hesitate to note where the business needs to continue to improve.

"In our broader hospital medical device group, we think we can continue to show good performance, and we mentioned earlier EP [electrophysiology] was up around 14 percent," he noted on a July 18 earnings call. "The launch of the Smarttouch catheter continues to go very well. Our vision care business in particular showed really strong growth and again even with the transition, the acquisition with AMO you're seeing over 7.5 percent growth in our contact lens business."

Electrophysiology, vision care, biosurgery, wound closure and hip products were all cited as top areas of medical device growth for J&J. But the company remains focused on continuing to add in new external technology, as well as weeding out or bolstering what's not working.

"We are continuing to actively manage our portfolio, focusing on transitioning our business in higher growth areas with large unmet needs as you've seen through many of our recent acquisitions and strategic partnerships across our medical device portfolio, including our surgical vision care business, interventional spine, Megadyne and Energy, Torax Medical and general surgery and Neuravi in the neurovascular category," said Gorsky.

Do better

Pointed out for scrutiny within medical devices were spine, ear, nose and throat (ENT) and aesthetics products businesses. Gorsky cited these as areas "where we know we still need to do better."

In spine sales, pricing pressure across major orthopedics categories was cited as a factor, alongside portfolio gaps. But Gorsky noted that he's more optimistic for that category in the back half of the year, due to upcoming additional Viper Spine System line extensions and a new expandable cage.

Wells Fargo Analyst Larry Biegelsen sees J&J's current flagging spine business as good news for pure-play spine companies including Nuvasive Inc., Globus Medical Inc. and K2M Group Holdings.

But he fretted that slowing growth for J&J in reconstructive hip and knee surgical implants could presage a softer market more broadly. "We think J&J's recon results suggest some potential weakness in the overall recon market, but we will know more about the market growth in Q2 when ZBH [Zimmer Biomet], SYK [Styker Corp.] and SNN [Smith & Nephew plc]."

In aesthetics, not a typical J&J focus as noted by one analyst on the call, Gorsky noted some improvement in recent years but called for the business to do even better, without offering any specifics. And in ENT he cited a tough competitive environment, that he expects will be offset by upcoming efforts.

The environment in "ENT has been one, frankly, of competitiveness, but our team has done a nice job of addressing that. We're in the midst of some launches as we speak and so we'll be watching that obviously closely in the back half of this year and as we head into early '18," Gorsky said.

Continued optimism

Overall in the medical device group, there are more than 12 launches slated for the second half, which J&J anticipates could continue to ramp up growth. And emerging markets remain a particular strength, where sales grew by more than 10 percent in the medical device group as compared to 4 percent overall growth. That's despite some competitive issues in China.

J&J executives were optimistic enough on the whole to boost 2017 sales guidance a bit to $76.1 billion from $75.8 billion. In addition, the company raised its 2017 EPS guidance to a range of $7.12 to $7.22, from the prior

Wall Street embraced the earnings news, sending shares up almost 2 percent on the day of the announcement. Given the enormous bulk of the company, that added $6 billion to J&J's market cap to bring it to about $362 billion.

Stifel Analyst Rick Wise remains convinced of the long-term prospects for the device group. "In medical devices, we believe ongoing portfolio management, as well as external capital deployment into higher growth segment could bolster the franchise's trajectory," he said in a note on the second quarter earnings results.

That's just the latest bit of optimism for J&J, which is up more than 16 percent this year. That outpaces an index of major drug makers, which has gained about 14 percent.

Joseph Wolk, VP of investor relations at J&J, summed up on the medical device business that, in addition to the upcoming device launches as well as the ongoing restructuring, "You compound that with some of the acquisitions that we've done, really in each of our major platforms over the last 12 months and project that going forward. Things like AMO, things like the expandable cage in spine, Megadyne that I mentioned earlier, we think that also provides us a very solid opportunity for growth going forward."

Published  July 20, 2017

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