Johnson & Johnson's (JNJ 0.03%) medical device business includes products that address everything from heart disease to hip replacement, and it accounts for about one-third of the company's total sales. In the first quarter, demand for various products were mixed, with strength in cardiovascular being somewhat offset by weakness in diabetes.
In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by Todd Campbell to discuss which medical devices were winners and losers last quarter, and how the company's acquisition strategy is shaping the segment.
A full transcript follows the video.
This video was recorded on April 19, 2017.
Todd Campbell: Investors have to realize the consumer products are not going to be a huge source of revenue or earnings growth. It's just a steady business. Maybe there's more of an opportunity in their medical device unit, for example.
Kristine Harjes: Sure. Let's talk about that one. This one is 35% of total revenue, so, starting to be a little bit more important on a cash basis to this company.
Campbell: $6.3 billion in sales for the quarter, up 3% roughly year over year. You back out deals, and sales globally were up 1.7%, so, faster, a little bit better than consumer, larger percentage of the total overall pie. They have a lot of different businesses, part of the 250, that are operating under the medical-device umbrella. They have exposure to cardiovascular, diabetes, orthopedics. But not all of those businesses performed equally. You had some winners like cardiovascular, and you had some losers like diabetes.
Harjes: Right. This is a business segment that is very much managed by adding on small acquisitions and getting rid of low performers. It's definitely a very componentized part of the company. They had a couple of interesting acquisitions in the first quarter. For example, they bought the medical-optics subsection of [Abbott Labs], which closed on Feb. 27. This was called Abbott Medical Optics. That rounded out their eye-health offering, particularly within the surgery category of vision care. That vision-care segment was actually up the most of any segment within medical devices, and it now counts for about 13% of medical devices.
Another acquisition -- I'll call out two more. The first one was Megadyne Medical Products, and the other one was Torax Medical. Basically, the way that I view this business here is that they're going to keep buying different products and companies that are profitable and can boost the places in which they already have a little bit of a footprint. When you look at Johnson & Johnson's size, they have so much distribution power, they have so many relationships with different providers of medical devices, that they're really able to take these smaller companies and leverage them and make them more valuable than they would have been as stand-alones.
Campbell: I think you make a very good point, Kristine, in that the way they're managing this company is very opportunistically. They're looking at it and saying, "Where have we delivered the growth in these particular areas, and can we sell those and take that money and buy something else that's bolt on, and kick-start growth and improve profitability that way?" They have, for example, some really good demand in cardiovascular thanks to some of their products that are used to treat atrial fibrillation. Treating a-fib through catheterization, that's basically what they're doing. It's complicated, but what they're doing is, if you have an irregular heartbeat, they'll put a catheter in to fix the part of the heart muscle that's setting off the wrong electrical signal. Anyway, more procedures are being done, and that's helping the cardiovascular side of the world.
They do have some question marks. The orthopedic part of their business is the biggest part of their medical-device sales. Hips, knees, spine. And there's been some pricing pressure there. It's a highly competitive market. It's tied a little bit to the whims and whispers of what's going on with the economy, because it does require a lot of out-of-pocket spending. So, that business has some question marks. Also, there's some question marks associated with the diabetes franchise, where they make things like insulin pumps. They actually said in January that they're thinking of looking at strategic options for that business. Perhaps, by the end of the year, they make a decision about what to do with i; either they partner it or sell it off, or whatever. So, there are some changes that are going to be going on over the course of the year, some things to watch within this basket. But again, an important part, and it is growing.
Harjes: If you look at overall trends, macro level, medical devices in general, you can probably expect they're going to do pretty well. As people get older, they live longer, they're going to need more of this type of surgery, for example, that this segment would address.
Campbell: Yeah, larger patient pool plays into pretty much all of Johnson & Johnson's product lines. You're talking about a 50-year megacycle. Longer living, larger global population, definitely plays into procedure volume, and that should be a net benefit or tailwind for the company.