Motley Fool healthcare contributor Todd Campbell and healthcare analyst Kristine Harjes discuss Johnson & Johnson's (JNJ -1.10%) decision to restructure its multi-billion dollar medical device business. What is the company planning for the division, and could this move the needle for investors? Find out in this installment of Industry Focus: Healthcare.
A full transcript follows the video.
This podcast was recorded on Jan. 27, 2016.
Kristine Harjes: In more recent news, even before they announced earnings, there was some talk of a medical device unit restructuring, and this came out ... actually, on my birthday, on January 19th. Not too long ago. This is, again, one of the pretty important three units that Johnson & Johnson has. And there's going to be a huge shake-up within it.
Todd Campbell: If you adjust out all of the items ... currency drag, and all the other impacts that weighed down on results last year on a reported basis, medical devices still lost ground. It was the one segment that didn't do very well. That's concerning, obviously, to some, because you look at it, and there's 10,000 seniors turning 65 every day, and those seniors are going to require more hip replacements, more knee replacements, more joint surgeries. A lot of different device sales will be tied to the aging of America.
So, the company is recognizing that, and they're doing a number of different things. They're restructuring in order to come up with some cost savings, they're also doing something that's kind of interesting. They're trying to work more closely between their different segments. For example, to tie in pharmaceuticals more with medical devices. So, they're working in concert with one another to develop next-generation products, rather than working as independent.
Harjes: Which sounds like a good idea. Build those synergies and whatnot. Along with the restructuring of this whole unit, there's going to be a lot of cost-cutting. Apparently 4-6% of the workforce is going to be cut. I was actually talking to my mom on the phone last night, and she's not a huge investing follower, she listens to the podcast every once in a while, but she mentioned this to me. She was like, "Oh, what are you talking about tomorrow on the show?" I was like, "Oh, we're going to cover Johnson & Johnson earnings." And she was like, "Oh man, they're cutting 3,000 jobs!" I was like, "How did you know that?" But it's because Johnson & Johnson's a New Jersey company, that's where I'm from, that's where she lives. So, that's a big deal for a lot of people right there. You look at it from a personal standpoint, that's not good ... But from Johnson & Johnson's perspective, and from the perspective of an investor, it's supposed to save $800 million to $1 billion over the next two years.
Campbell: Yeah, and that's important, because Johnson & Johnson is forecasting that their growth over the course of the next five years is going to be greater than industry growth. So, healthcare industry is expected to grow 3-5%, they want to grow organically more than that, and they want to grow their EPS more than they're growing their organic growth. Obviously, if you want to do that, you're going to have to cut some of the costs, and make those divisions more profitable. Obviously, this is one of the ways they're doing it. Of course, that creates a whole another problem, because it means more money flowing onto their balance sheet, a balance sheet that's already pretty bloated.