DePuy Synthes Results Points to Recovery

If Biomet, Inc. is the canary in the coal mine for orthopedics, then DePuy Synthes Companies is the bellwether.

Results for the bellwether were good in the fourth quarter of 2012 as the company reported sales of $2.388 billion for the quarter. Excluding the impact of the Synthes acquisition in June, those revenues represented a 3.5% increase over the previous year. Reported sales were up 65.1% if Synthes was included.

Company executives told Wall Street analysts on January 22 that they have made significant strides in the integration of Synthes and solidifying their leadership position in orthopedics.

Interestingly, company executives practically swooned over Synthes, mentioning the company’s name frequently and in positive terms. DePuy was rarely mentioned.

Hips, Knees and Trauma Up, Spine Down

Operationally, hips were up 6%, driven by 7% growth in the U.S. due to strong results in primary stem platform sales, partially offset by continued pricing pressure. Hips outside the U.S. were up 4% operationally, driven by the growth of cemented stems, heads, and acetabular products.

Sales
($ in millions)

% Change* 

$2, 388

3.5%**

4.1%

6%

down 2.8%

1%

Knees increased 4.1% on an operational basis, with the U.S. up 7% driven by fixed bearing and revision platforms. Sales outside the U.S. were up 1% with growth in Asia and Latin America, partially offset by softer sales, primarily in Europe, due to competitive pressures.

Including the Synthes business, and excluding the divested DePuy trauma business, trauma grew approximately 1% on an operational basis, with the U.S. down 4% and sales outside the U.S. up 6% on an operational basis. U.S. growth was impacted by a supply disruption.

Including the Synthes business, spine was down 3% on an operational basis, with the U.S. down approximately 7%, impacted by continued softness in the market as well as the restructuring of the commercial sales organization. Outside the U.S., sales grew approximately 4% operationally.

Share Improvements

Alex Gorsky, the chairman and CEO of DePuySynthes’ parent company Johnson & Johnson, said he hasn’t seen all of the orthopedic companies report yet, but he was pleased with DePuySynthes’ sales results. “It’s a little too early for us to know if we’ve gained share or not. But certainly these results are impressive and our early indications are that we have done better in share in both hips and knees, especially in the U.S…If we look particularly in knees, we’re seeing the market come back a bit more than in hips right now.”

“You’re going to hear more about a new knee system that we’ll be launching through the course of 2013, ” promised Gorsky.

Resurgence and Reform

“We see a lot of reasons to believe in underlying growth…we are very pleased with some of the resurgence that we saw, for example, in the hip and knee categories, especially in the fourth quarter, ” said Gorsky.

If the device industry was looking for support in criticizing the new 2.3% device excise tax, they didn’t find it in comments from the company’s leaders.

For 2012, the company’s effective tax rate, excluding special items, was 21.2%. For 2013, the company expects that rate to be approximately 20%. The Johnson & Johnson CFO said this effective tax rate for 2013 includes the federal R&D tax credit renewed by Congress under the American Taxpayer Relief Act for both 2012 and 2013.

“It is important to note that the overall impact to Johnson & Johnson of the provisions of the Affordable Care Act in 2013 is estimated to be the equivalent of $1 billion of cost, or approximately $0.25 of earnings per share. While this is a significant cost, we remain committed to the principle of providing broader access to healthcare for all Americans, ” added Gorsky.

Piper Jaffray analyst Matt Miksic said he viewed the unexpectedly strong results in U.S. hips and knees as positive for orthopedic utilization as well as broader medical device utilization rates.