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You Should Stop Hating on J&J's Device Business

Johnson & Johnson's medical device business has seen lackluster growth hampered by a combination of pricing pressure, healthcare reform, and changes in how healthcare is being delivered. But the situation is going to change. Here's why. 

Arundhati Parmar

Johnson & Johnson has been working behind the scenes to turn around its massive $25 billion-a-year medical device business.

The efforts appear to be paying off.

After it held its annual analyst day Wednesday, many analysts now believe that the company's device business will grow greater than the overall medtech market growth of 4-6%.

JNJ Medical Device Sales
Source: Johnson & Johnson Analyst Day Presentation, May 2016

Before delving into how it will achieve the above-market growth, it's worthwhile to understand the device business segments and how they performed last year.

The Hospital Medical Devices business has a pipeline of products that are set to be filed by 2018. The pipeline cumulatively has the potential to generate more than $6 billion in sales, according to a presentation by Gary Pruden, who leads the hospital medical device business at Johnson & Johnson.

The Consumer Medical Device which includes products for diabetes care and vision care is also set to perform well. In vision care, the sales potential for the current pipeline of products to be filed by 2018 is $1.5 billion. In diabetes care, Johnson & Johnson is developing an automated insulin delivery system that uses algorithms to predict insulin levels and adjust delivery of insulin accordingly.

But it's not just through product innovation that the company is planning to turn around its device business. It's also instituted operational changes to address the fact that the hospital customer is increasingly consolidated and employs a majority of physicians in the U.S.

"While the Medical Device businesses used to be decentralized and managed autonomously, they are now realigned under one Medical Device Management with three global franchises (Ethicon Surgical, Biosense Webster Cardiovascular, and DePuy Synthes Orthopaedics), a single R&D unit, and a single supply chain unit," wrote Joanne Wuensch, an analyst with BMO Capital Markets, in a note after analysts heard from Johnson & Johnson's management team in New Jersey.

Wuensch added that "The purpose is to have customers talk with 'one empowered person' about all their product needs, becoming the ultimate bundling package."

Before this change, the company had 16 business units, 15 management boards, and a non-integrated supply chain.

Back to the product side, overall the med device business is expected to launch 35 products or extensions by 2017 and another 35 in 2018 and future years, she noted.

Aside from Wuensch, other analysts appeared to be impressed by management's hopes for the future. Danielle Antalffy, who described J&J's devices story as "compelling" feels more confident about the company's prospects.

"With a broad product pipeline supplementing improving execution and a seeming recover in end user market volumes, we believe [J&J] is well positioned to accelerate its device business growth to in line with or better than our currently projected 5% [compound annual growth rate] over the 2015-2020 timeframe," Antalffy wrote in a research note Wednesday.

Here's how Glenn Novarro, an analyst with RBC Capital Markets, reacted to the presentation, according to his research note.

"We walked away convinced that despite recent headwinds, [J&J] remains a competitive global player given its scale, breadth of product offering, and focus on growing in key geographic markets."

But the best line about the new, reinvigorated company-- a household name around the world came from Wuensch at BMO Capital Markets.

"This is not your grandma's J&J."

Learn more about cutting-edge medical devices at MD&M East, June 14-15, 2016 in New York City.

Arundhati Parmar is a senior editor at UBM.

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