DePuy Synthes Third Quarter Needs a Band-Aid

DePuy Synthes’ third quarter revenue of $2.181 billion declined 0.7% from last year’s third quarter. If you include the negative 7% impact of a strong dollar, reported revenue declined by a whopping 7%.

Knees did okay in the U.S., rising 2% due to strong sales of the Attune knee system. Worldwide, knee sales were flat. In hips, revenue climbed 3% in the U.S., driven by the company’s primary stem platform and sales worldwide, rose 2%. Overall, trauma was flat, but climbed 5% in the U.S. due to new products.

Pruden Explains

Gary Pruden, Johnson & Johnson’s new Worldwide Chairman Medical Devices (and parent of DePuy Synthes) said the company has seen mixed results in trauma’s performance. “This has been an important area of focus since acquisition. However we have seen a lower level of innovation though due to a number of factors including the significant remediation effort to bring some of these up to Johnson & Johnson quality standards and the overall integration efforts during the last few years.”

Going forward, he said the company will focus resources to deliver “new innovative products and target faster growing categories within the market such as elective foot and ankle. The recent success of our new Femoral Nail System TFN Advanced demonstrates receptivity in this category to new and meaningful innovation.”

Dismal Spine

Spine was dismal, dropping 6% worldwide, but staying flat in the U.S. The company attributed the weak spine results to “competitive challenges.” BMO Capital Market analyst Joanne Wuensch said it appears that continued JNJ/Synthes integration may benefit some of the smaller spine market competitors.

Company officials told analysts on October 13, 2015 that sales contributors to the U.S. growth were strong double-digit sales of Orthovisc and Monovisc.

Weakened China

The results outside the U.S. were negatively impacted by softer demand and a reduction in inventory levels, primarily in China, said the company.

In orthopedics, Pruden said the company is prioritizing its knees and trauma platforms. He expects the knee market to grow at 3.8% CAGR to around $9 billion over the next six years.

“We believe we’re well placed for growth with products and instruments from our Attune platform, ” said Pruden.

Betting on Scale

Sounding a little like recent comments from Medtronic plc to leverage a large scale of products and services to health systems, Pruden said the company was “implementing cross portfolio procedural development like the new OsteoView device, which leverages the harmonic technology from Ethicon to provide a soft tissue dissector, exclusively designed for spine procedures and to be sold by the DePuy Spine business.”

As an example, he cited a new relationship established with one of Germany’s largest private hospital networks where the company has a sole source contract for implants. “Here in the U.S., we signed a five-year contract with the globally ranked academic medical center at Johns Hopkins. We’re also executing an exclusive partnership with a large multinational hospital system to share risk and great value.”

Pocket Full of Cash

The company sounds like it’s shopping around. At the end of the quarter the company had approximately $17 billion of net cash, which consist of approximately $37 billion of cash and marketable securities and approximately $20 billion of debt.

“This is a higher level of cash than we typically hold and we are actively looking for the right opportunities to use that capital to create greater value for our shareholders, ” said company officials.

Spine players not named Medtronic, Stryker or Zimmer Biomet must be listening.