DePuy Synthes Cuts Hip Pricing in Third Quarter

Johnson & Johnson’s DePuy Synthes’ orthopedic sales increased 2.7% to $2.344 billion during the third quarter of 2014. Currency cut revenues by 0.2%.

Hip Prices Cut

The company cut hip prices by 5% during the quarter but still logged a 4% increase in hip sales. Knee sales jumped 6% and trauma sales rose 3%. Only spine sales showed a decline, dropping 1%. Chief Financial Officer Dominic Caruso told analysts on an October 14 conference call that the company cut hip prices as it attempted to renew contracts with hospitals and other customers.

Sales growth, according to the company, was driven by trauma, sports medicine, knees and hips. Trauma’s increase was due to market growth and new product launches, while the launch of Monovisc, coupled with the continued strong growth for Orthovisc drove results for sports medicine.

Hip sales were driven by strong volume growth, partially offset by continued pricing pressure. Primary stem platform sales were major contributors to the results. The company attributed the increase in knee sales to the launch of Attune, partially offset by pricing pressure across the regions.

Caruso told analysts the industry has now seen two consecutive quarters of positive momentum in hospital utilization rates, which is in line with recently published analysts’ reports noting the strength. “We continued to remain confident that as economies recover and as healthcare reform continues to gain momentum here in the U.S. and abroad, utilization rates are going to increase.”

A New Seasonality

Analysts asked Caruso what the company expected to see on the U.S side in terms of hip and knee volumes after a soft first half of the year.

“We did see increased volume in the third quarter, ” said Caruso. He said this was consistent with what the company expected in that the second half of the year would be stronger than the first half of the year. He added that the company experienced 70% of its hip and knee growth in the fourth quarter.

“So obviously, we’ve now seen a new seasonality that’s very clear in the hip and knee market. And we’ve seen an uptick in the third quarter or in the back half of the year as we expected, we would see.”

Market Growth and Pricing

Louise Mehrotra, vice president of J&J investor relations added that their best estimate of U.S market growth for the third quarter was that hips grew about 3%. “We grew slightly faster and knees about 4%, which we also grew slightly faster. But that’s again, just a big estimate because we’re the first or second [to report].”

Hip pricing in the U.S., said Mehrotra, was minus 5%. For knees, pricing was negative 2.2%, a little better than the second quarter. “Mix coming in about 1.5% positive so negative minus 0.6 on the quarter price and mix together and that’s better than the second quarter.”

Spine pricing was down 5%, more negative versus the second quarter. Mix is up a positive of 1%. Pricing on trauma was roughly 2% positive.

“Surgery Is the Place to Be”

Caruso told analysts that the company made the determination some time ago that it was going to focus on surgery, general surgery, and specialty surgery, and orthopedics and have less of a focus on cardiovascular. J&J got out of the drug-eluting stent business as it saw it becoming a commoditized business.

“Within the overall approach to medical devices, we still believe surgery is the place to be. We’re obviously very happy with our market position there. We made a big bet as you know in orthopedics and we’re continuing to see the benefits of that combination with Synthes.”

“I think our competitors have basically followed suit in terms of these combinations in orthopedics as you know, and there is also combinations along with a current large player in cardiology now acquiring a major player in surgery, again confirming our approach that in fact surgery is the place that we’re going to see sustainable growth going forward.”

Synthes Integration

Asked when special charges for integrating Synthes will stop, Caruso said the company has been “very careful” to integrate this business in a way that wouldn’t be disruptive to customers. “There are a number of sites that we have to consolidate. These are two very large businesses as you can imagine. So these integration activities are winding down and we should see less of the special charges going forward. And I would say that we’re very close to actually completing the full integration of Synthes.”

Lower Extremities and Robotics

Addressing question about whether or not the company needs to add robotics to its portfolio, Caruso said, “I don’t think we need a robotics platform of our own to effectively compete in the future. We are in fact utilized in the robotic platform that exists today with our product, but I’ll view it as a critical enabler of growth for us in particular.”

He offered that the only place the company sees some weakness in their offerings is in the extremities portion of trauma. “So, lower foot and ankle kind of trauma products, that market seem to be growing more rapidly than the overall market and we have some new innovations coming to market, but not yet there. So we are not yet participated in that growth, but we will be going forward.”