J&J CEO: On Track With Restructuring, Very Disciplined In M&A

By Jof Enriquez,
Follow me on Twitter @jofenriq

Johnson & Johnson CEO Alex Gorsky says that J&J is on track and reaping gains from the restructuring of its medical device business, six months after it announced accelerated innovation to keep up with market changes. Senior leadership also will continue to be very disciplined in evaluating M&A deals, in spite of the company's deep pockets.

In January, J&J announced that it will streamline its workforce and certain offerings in the orthopedics, surgery, and cardiovascular segments in order to increase investments in innovation and to drive growth. Device sales had fallen 2.9 percent overall at the time of the announcement.

Fast forward six months, and the restructuring activities are beginning to help revive J&J's device business. Worldwide device sales grew 0.8 percent in the second quarter to $6.4 billion, according to a press release. Excluding the net impact of acquisitions and divestitures, on an operational basis, worldwide sales rose 3.9 percent, domestic sales increased 1.9 percent, and international sales grew 5.8 percent. Overall sales increased 3.9 percent to $18.5 billion during the second quarter.

J&J says growth was driven by endocutters, energy and biosurgical products in the Advanced Surgery business; electrophysiology products in the Cardiovascular business; joint reconstruction and U.S. trauma products in the Orthopaedics business; and ACUVUE contact lenses in the Vision Care business.

"We're gaining momentum and accelerating growth through our unique and broad-based approach to innovation. Our performance this quarter was roughly in-line with market growth, and we're pleased with the progress here, but far from satisfied," J&J CEO Alex Gorsky said during a conference call. He said he is confident about achieving above-market growth globally, which the company projects to be 3 percent to 5 percent annually over the next five years.

Gorsky added, "If we look at the restructuring, I think overall that team is on track. They're doing actions to strengthen their go-to-market model to accelerate their pace of innovation. They're prioritizing some additional platforms and geographies and all while streamlining some operations but really keeping very high quality standards. We think they're on track with a plan that they articulated earlier in the year and we're confident that as they move through this, they will be not only a stronger but a more innovative and a more efficient business."

He said that the company also is on schedule to net approximately $800 million to $1 billion in annual savings related to restructuring efforts by the end of 2018, with some savings reinvested into the device business to speed product innovation. This will be complemented by "innovation in terms of our commercial offerings and contracting," such as growing more profitable multi-product line agreements for the U.S. orthopedic and surgery business from the current 25 percent to 40 percent, said Gorksy, who mentioned that hospital admissions were up 3 percent, and surgical procedures grew 3.5 percent overall.

Also by 2018, the company plans to launch over 20 new products in both the clinical and consumer product segments with total sales potential of $8 billion, which will drive overall growth between 4 and 6 percent per year by 2020, according to an MDO article.

Gorksy said in the call that industry consolidation will continue, but believes that J&J is "well-positioned," particularly with regard its surgical and orthopedic offerings. He touted solid growth in both knees and hips, which grew 4.5 percent and 5.5 percent, respectively. He was pleased with the performance of J&J's cardiovascular business, particularly the electrophysiology business, Biosense Webster, which grew 18.5 percent in the second quarter. But he acknowledges that "other areas in cardiovascular ranging from valves to structural heart to others could definitely be opportunities," and the company will observe how the technology and market evolve.

J&J will continue an interested-yet-cautious approach in evaluating M&A opportunities.

Gorsky in January highlighted J&J’s acquisition of atrial fibrillation device-maker Coherex Medical and its surgical robotics joint venture with Verily as the type of deals that J&J will likely make. Gorksy in the recent conference call mentioned the acquisition of BioMedical Enterprises, which filled a key portfolio gap in elective foot and ankle surgery.

"And as we said for some time, whenever we're looking at inorganic growth opportunities, we look at tuck-ins, we look at mid-size deals," Gorsky told analysts. "But we're going to be very disciplined. We're going to be very decisive about how we do it, and ultimately try to better serve patients and consumers."

J&J has $39 billion in cash and marketable securities on hand for M&A, but the company can afford to be patient, according to Bloomberg.

"Although we're actively involved in considering them, valuations come into play, and willingness of the other party to do an acquisition at certain valuations come into play," said J&J CFO Dominic J. Caruso during the call. "So that's regardless of how much money we have available to spend. So we don't really look at that as the main driver of how we're going to do acquisitions. We look at what value we're going to create for shareholders by doing the acquisition at the right value, so we can improve returns for our shareholders."