2Q DePuy Synthes Report Card

Orthopedic sales of $2.39 billion at Johnson & Johnson’s (J&J) DePuy Synthes unit were up 48.9% for the second quarter. Excluding the impact of last year’s Synthes, Inc. acquisition, operational sales were up approximately 3%.

Operationally, hip sales were up 4%, knees were up 2%, spine was down 2% and trauma was up 4%.

According to company officials, strong hip sales were driven by primary stent platform sales. Knee sales were driven by the Attune fixed bearing knee as well as revision platforms. Declining spine sales were attributed to softness in the market, as well as “attrition of the commercial sales organization” as the Synthes business is integrated.

Synthes Integration

Alex Gorsky, the J&J’s chairman and CEO told analysts on July 16 that he and his colleagues are really pleased with the way the integration is going. “Taking on a company the size of Synthes with a reputation that scale [and] its capabilities is no small undertaking. Bringing those together the way that our teams have, I think, they are really to be commended for it. We have got a multi-phased program in place to bring it together commercially, the entire research and development organization as well as all the supporting functional areas…While we still have work to do in certain areas of the integration, we are making good progress.”

Gorsky said he was encouraged by what the company is seeing in orthopedics, particularly in hips and knees and trauma over the past quarter.

Spine Transitional Issues

Addressing the decline in spine sales, Gorsky said he thinks the company is commensurate with the spine market being down 2%. “In the U.S., we have seen the performance when we were down about 7% versus the market that was down about 3%. We were clearly impacted by some transitional issues with our sales force during that period. We’ve put a comprehensive plan in place, where we think that we project that will do much better going forward.”

He added that more important when looking at the offerings the company’s representatives have across the minimally invasive segment, degenerative, spine, a number of other areas combined with the rest of the portfolio, they are going to be in a very good position in that marketplace. “So, we remain very optimistic, pleased with the performance around the integration.”

Lawsuit Against Former Reps

On that same day as the conference call with analysts, the company filed a $3 million lawsuit against two former sales reps and their new employer in a Virginia federal court. The company claims the two former reps have shared trade secrets and undermined the company’s ability to compete in eastern Virginia’s spinal device market after they resigned their DePuy positions and joined Sky Surgical Inc.

Utilization Rates Remain Flat

J&J CFO Dominic Caruso told analysts that while there were some indicators of general economic improvement during the quarter, the healthcare market data in terms of utilization is still relatively flat over the prior year, with just a modest sequential improvement over the first quarter utilization data.

He also noted $560 million in special costs during the quarter for litigation expenses related to the DePuy ASR hip program cost. And, as expected, continued costs associated with the global integration of Synthes.

Piper Jaffray analyst Matt Miksic said the results and commentary thus far from Biomet, Inc., J&J and Stryker Corporation indicate that second quarter orthopedic growth is tracking to either be in-line or slightly better than his previous estimates.