DePuy Synthes: Moving From Storm to Norm

The echoes of the integration storm at DePuy Synthes were still evident in the mid-2015 sales and earnings report BUT it also clear that the company has begun to settle in and settle down into a period of routine business operations.

From Storm to Norm

Merging two large, global organizations into the largest orthopedic company the in the world is a monumental effort. By definition it is disruptive. By definition people will be let go, projects will end, new assignments will be off-base. While integration may we well planned, it can feel a bit like a mash-up. And by definition – there will be surprises (the most recent one that comes to mind is the Orsinger resignation from a few weeks ago).

To get to a stage where DePuy Synthes can start to perform again – it needs to settle in and settle down. It needs to get to normal.

With this quarter’s report, DePuy Synthes appears to be there (although spine and trauma need more work).

Second quarter sales of $2.33 billion were up 0.9% from the same quarter in 2014. Because the company sells so many products overseas, currency translation dropped reported revenue down to minus 5.6%.

Operational sales change (before currency effects) for knee, hip, trauma and spine products were +4%, +2%, -1% and -1%, respectively.

From Norm to Perform

Johnson & Johnson (DePuy Synthes’ parent) CEO Alex Gorsky told analysts on July 14, 2015, that while the spine and trauma businesses have lagged market growth to date, he is “absolutely committed to turning them around. We have new products launching this year that will help us do just that.”

For example, he cited the recent launch of the transfemoral nail in trauma which he thinks will be an “important addition to the bags of the portfolio of that part of the business. In the U.S., we were encouraged by the performance that we saw in knees and hips at 5% and 4% growth, respectively, for the quarter.”

“Accelerating Growth”

He also said “accelerating growth” will happen due to a productive research and development program. More than half of 30 major FDA filings previously announced have already been filed and their partnership with Google to revolutionize the operating room and the future with robotic surgical tools will help surgeons with precision, reduce patient trauma and reduce costs.

Pricing and Utilization

Gorsky also addressed the issue of device pricing and utilization. He said ongoing consolidation among health systems and within the insurance industry is continuing to create pressure on pricing. He said he’s been encouraged by data showing that healthcare utilization trends in the U.S. have continued to improve for the fourth consecutive quarter with growth in both hospital admissions and hospital surgical procedures. “We remain optimistic about increased global healthcare utilization as well.”

New Leadership at DePuy Synthes

While not mentioning former President Michel Orsinger by name or the disruptive integration with Synthes, Gorsky noted the recently integrated J&J’s global orthopedics and global surgery businesses under Gary Pruden, “will enable us to have a much more holistic approach to the way we do business.” Pruden was promised to analysts for the third quarter call in October to describe his new approach to partnering with hospitals to improve outcomes.

But analysts wanted to know more and prodded Gorsky to talk about the Synthes acquisition.

“Look, overall, we absolutely believe it was the right move to bring Synthes in and create the largest and most diversified orthopaedics company. When we reflect back, there had been changes that had taken place in the market. One is, just the market growth across all these segments. If you remember back in 2008, 2009, 2010, we saw high single-digit growth really for hips, knees, trauma, as well as spine. That has changed significantly. We’re now seeing that in the 3% to 4% range. I am pleased with the performance overall that we’ve seen through the integration.”

He added that there are always a lot of moving pieces when two big organizations merge. “If you take a look at the overall disruption and the way that we’ve been able to manage it, I think the team has done a very good job. Now we’re really focused on what do we do to ensure that we’re best positioned for the future. Frankly, we’re doing it at a time when a lot of our competitors are just getting ready to go through a significant amount of integration and transition.”

Analysts Forecast

While the second quarter’s operational growth was a nearly flat at just a 0.9% rate of year-over-year growth, most analysts are forecasting faster sales growth rates for the second half of this year. Now that DePuy Synthes’ organization appears to be settling in and settling down, the base is in place to move from the storm of integration to the norm of day-to-day customer service to performing with better value propositions for patients, doctors and hospitals.