What does the J&J split mean for the medical device industry?

Wall Street analysts say Johnson & Johnson’s recent decision to split the consumer health unit into its own company is likely to spur growth and increase operating margins for the remaining segments of pharmaceuticals and medical devices.

The health giant’s low-growth consumer health brands are a drag for pharmaceutical and device companies, analysts at SVB Leerink say. Consumer health has end market growth of around 3% to 4%, while pharmaceuticals and medical devices both see growth of around 5%.

Analysts added that the separation of the consumer group could also help increase margins, as the unit dilutes overall operating margins with consumer health being “in the teenage lineup compared to pharmaceuticals and devices. that offer maximum margins in the 20 and 30 “.

Stifel analysts agreed, writing in a Friday report that it “seems clear that in the absence of the slower-growing consumer activity, the new JNJ is expected to show continued revenue growth. higher”.

NOT A WORD announcement The company split into two on Friday, with the pharmaceutical and device units remaining under the J&J brand and the consumer health brands becoming an independent company. J&J expects the move to take place in 18 to 24 months, and costs are projected in the range of $ 500 million to $ 1 billion.

The company valued Combined sales of medical devices and pharmaceutical units are approximately $ 77 billion for 2021, with pharma accounting for 65% of the total and devices the remaining 15%. The medical device side is made up of orthopedics company DePuy Synthes, surgical tool maker Ethicon, and Johnson & Johnson Vision, among others.

The medical devices sector achieved sales of $ 20.2 billion thanks to the first three quarters of 2021, representing a growth of 23.4% over the same period in the 2020 pandemic. In 2019, the unit brought in $ 19.3 billion in the first nine months of the year.

Meanwhile, the pharmaceutical business posted third-quarter revenue of $ 37.8 billion, up 13.5% year-over-year.

Breakdown of J & J’s medical devices business up to the third quarter
Sales (H) Annual growth
Interventional solutions $ 2,952 37.1%
Orthopedics $ 6,433 15.4%
Surgery $ 7,299 25.8%
Vision $ 3,517 23.7%

SOURCE: Johnson & Johnson

Joaquin Duato, who will take over J&J when current CEO Alex Gorski is resigning in early 2022, said on Friday’s call with analysts and investors that the move will allow the pharmaceutical and medical device segments to focus more on specific markets and help spur higher-than-growth growth in the Marlet.

“We plan to achieve superior performance in all segments with a target of equal or better delivery to the market in the categories in which we compete,” said Duato, who currently heads the company’s executive committee.

Moody’s analysts wrote that while J&J’s size and product diversity has increased its rating in the past, “the consumer products industry is becoming less synergistic with J&J as a whole due to fewer opportunities to apply. scientific innovation and changing consumer preferences “.

Investors did not seem inspired by the news, as J&J stock has remained relatively stable since the announcement.

Throughout Friday’s call, executives continually said that one benefit of the split would be the ability of pharmaceutical and medical device groups to work and innovate together in the same treatment categories.

Duato highlighted lung cancer treatments, where the medical device industry can combine its Monarch surgical robotic system for bronchoscopic diagnosis and the company’s oncology treatments.

However, Wells Fargo analyst Larry Biegelsen rejected the idea of ​​collaboration, saying that “we really haven’t seen many successful examples of synergies between the two segments.” Biegelsen asked why J&J hadn’t just split into three separate companies.

Gorsky mentioned lung cancer as an area where units can work together, but the CEO spent more time breaking down similarities in operations rather than specific areas where segments will collaborate, such as similar regulatory pathways. , distribution channels, investments in clinical development and overlap in sales, marketing and contracting.

“These two companies share many more common themes compared to our mainstream business, and we think it makes strategic sense that these two companies continue to work together,” said Gorsky.

The J&J split follows two other key divisions in the medtech space. GE announced last Tuesday that the company would split into three, with GE Healthcare becoming a separate company in early 2023, and Zimmer Biomet announced in February that the company was turning its dental and spinal units into an independent company.

Similar to J&J and GE, Zimmer CEO Bryan Hanson said at the time of the announcement that the split allows the orthopedics company to focus more on specific markets, which will be the hip and hip spaces. knee. The Zimmer spin-off is expected to be final by mid-2022.

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