DePuySynthes Hip on Knees in 4Q

Good news in knees, continued Synthes integration challenges in spine and an improving orthopedic market dominated Johnson & Johnson Alex Gorsky’s fourth quarter conference call with analysts on January 21, 2014.

J&J’s DePuySynthes orthopedic unit reported a 4.2% rise in revenue for the fourth quarter of 2013, excluding currency. The company said strong growth for knees and hips drove results, partially offset by slower sales in spine.

Excluding currency, knees led the way with an 8% increase, which was attributed to the launch of the Attune fixed bearing knee system. Hips were up 5% and trauma rose 7%, with sales impacted by a nail recall. A 2% decline in spine was attributed to pricing pressure, a soft market and “disruption in the commercial sales organization” as the company continued to struggle with integrating Synthes.

Spine Salesforce Turnover

Gorsky, J&J’s chairman and CEO, said integrating Synthes has been the company’s number one priority, adding, “We’ve made good progress on that.”

“And we clearly acknowledge we still have some more work to do, but I’ve been very encouraged, particularly as of late, to see some of the steps we’re doing in things like cross-selling initiatives that we had envisioned from the onset, as we see these things starting to take hold, as well as revenue and cost savings synergies that are going to make this business extremely competitive going forward.”

He added that in looking at the overall integration of DePuySynthes, spine was clearly going to be the challenge. “And we did see higher sales force turnover, frankly, than we would have liked to see.”

“I think Michel [Orsinger] and Gary Fischetti and his team have done a nice job of addressing many of those concerns. I think our performance in Q4, while still not where we want it to be, is showing some improving trends, in fact outside the U.S we’re actually positive. And also, with some of the complementary nature of some of the underlying technology that we have in the other orthopedic segments, that scientifically, commercially, contractually, it will be an important piece of our business. And we’re confident that we’ll get that back to a growth rate that may not be reflective of the growth rate that you saw several years ago, that we saw several years ago in spine, and nonetheless is a healthy and sustainable one for the business.”

Attuned to Knees

But Gorsky much preferred to talk about knees.

Gorsky said the ability to readily develop and launch new products is ultimately what drives the business, noting that in the last two years alone, DePuySynthes has invested approximately $3.5 billion in research and development to advance the ortho portfolio. “And it’s brought some strong, dynamic products to the market over that time span, including things like the Attune knee system, which now we have over 23, 000 implanted worldwide. It’s off to a very successful start.”

To better serve customers in knee replacement procedures, Gorsky focused on two company initiatives.

First, Care for Today Orthopedic Solutions focuses on improving continuity of care and recovery through patient education and empowerment, as well as by providing post-surgery support both in the hospital as well as at home.

Second, True Match, according to Gorsky, brings a new level of personalized total knee replacement surgery to the OR, “based on the proven philosophy of mechanical alignment with customized patient instruments and systems that are designed to really aid in knee implant positioning and to increase the efficiency of the procedure as well.”

Gorsky’s Optimism and Cash

He was also upbeat about the orthopedic recovery citing some early signs of improvements. “Overall, we believe that as economies recover, healthcare reform starts taking hold here in the U.S. and abroad, utilization rates are going to increase, and we remain very confident in the long term prospects for this market.”

Utilization data is still somewhat mixed overall. But he said if one looks at the hospital data, patient procedures, surgical procedures, outpatient procedures and lab tests, they remained essentially flat through the end of the year. “We saw physician visits up slightly, and of course we saw improvements in hips, knees, and trauma in the fourth quarter.”

While not exactly a throw away-line, the company noted it generated significant free cash flow of $13.8 billion for the year. No wonder Gorsky is optimistic.