JNJ’s Business Review Day Highlights Company Priorities and Restructuring

Johnson & Johnson/JNJ’s business review day on May 18 filled some gaps in my understanding of the restructuring picture, but some holes remain. Here’s what I learned, and what we don’t know yet.

First, a quick rewind. In January 2016, JNJ announced restructuring actions intended to affect the Medical Devices unit, wherein DePuy Synthes resides. The actions are intended to yield annualized, pre-tax cost savings of $0.8BB to $1.0BB by end of 2018. JNJ expects the overall healthcare market to grow at 3% to 5% over the next five years, and seeks to grow its own sales ahead of the market, at 4% to 6% over the next five years.

Take one step back for a bigger picture. JNJ’s Medical Devices segment includes Consumer Medical (vision and diabetes care) and Hospital Medical Devices. The latter comprises Surgery (Ethicon), Cardiovascular & Specialty (Biosense Webster) and Orthopaedics (DePuy Synthes). 

Now one step closer. For 2015, Medical Devices achieved $25.1 billion in sales. Of that, Hospital Medical achieved $20.6 billion. Of that, orthopaedics represented $9.2 billion. Orthopaedics for 2015 held ~37% of Medical Devices and ~45% of Hospital Medical Devices, for JNJ.

Back to the present. Early in the review day, Sandi Peterson, Executive Vice President, Group Worldwide Chairman, explained how JNJ is an enterprise entity that can offer broad services to customers. This is the foundation for how they will win—using size and scale to serve hospitals and patients. Pieces of the strategy include use of technology to reduce development cycles, employ advanced analytics to get real-time views on data (which can be echoed company-wide), and harness capabilities like 3D printing. (They just announced a new partnership with HP.)

JNJ intends to use technology to innovate—we were reminded over and over during the day that innovation is so beyond products, now; it extends to new ways to collect and manage data that ultimately help entities satisfy customers’ needs to manage episodes of care, support improved outcomes, satisfy CMS requirements.

Against that backdrop, we came to the Medical Device group review.

This part of the organization has moved from a fractured, decentralized structure with multiple business units into just three global franchises, one R&D group and one integrated supply chain. Why? Because global customers seek a relationship with two or three companies and a single point of contact, not this fragmented approach from 16 business units. 

Here is what restructuring in action looks like. JNJ has and will:

• Accelerate the pace of innovation. For instance: bringing in acquisitions like Coherex, NeuWave and BioMedical Enterprises/BME (the latter applies to ortho).
• Streamline operations and reduce complexity for customers. (Right now, Hospital Medical represents 60% of all of JNJ’s SKUs. Those advanced analytics—mentioned earlier—can help rationalize that volume and reduce DePuy instrumentation costs.)
• Strengthen go-to-market models. Back to the idea of one point of contact for customers. 
• Prioritize key platforms and geographies and exit non-strategic businesses. 

Even before the restructuring announcement, in October 2015, leadership had identified knees and trauma among its “priority” platforms and hip as part of a “core” (growth-sustaining) platform, to receive primary attention from investments. These points were reiterated in the review. (Spine and shoulder are seated in the “base” platform—more on spine later.)

More than 85% of the company’s anticipated growth, we have learned, will derive from its priority and core platforms, which aside from knees, trauma and hips, also contain (for priority) endocutters, energy, electrophysiology and robotics and (in core) biosurgicals, sterilization/disinfection and wound closure. (Aside from spine and shoulder, base also contains mechanical, neuro, breast aesthetics and CMF.)

Recall that innovation isn’t just a new product, but also new ways to get products into customers’ hands. Presently, 25% of JNJ’s U.S. surgical and orthopaedics customers are in multi-product-line (cross-portfolio) contract agreements. These agreements perform, they say, almost two times better than single-product contract agreements. JNJ sees this 25% growing to 40% of these customers in the undefined “near future,” as hospitals desire more procedural solutions and partners. On that last point, an alliance with Value Stream Partners (announced in 1Q16) was taken on to help customers implement bundled payment programs for hip and knee replacement.

Further, leadership reinforced its global reach and investments geographically to strengthen the company’s position, for instance in emerging markets, like China. Particularly, market-appropriate approaches were called out, like products tailored to specific needs of patients and surgeons—for instance, the Corail hip system, with a shorter neck to suit smaller anatomies.

Finally, we were presented with the product pipeline, showing what’s in development to support growth in knees and trauma (priority platform), hips (core) and even shoulder and spine (base) for 2016 to 2018. I’ll share the ones that leadership highlighted and others that caught my eye. 

Priority platform: KNEE
ATTUNE Fixed Bearing Revision system and SOLO instruments by end of 2017; by 2018, expecting to add line extensions to ATTUNE primary, revision and instrumentation. (ATTUNE revision U.S. filing was submitted in 2016; EU is anticipated by year-end.)

Priority platform: TRAUMA
Elective Foot procedure devices from BME acquisition, by end of 2018. Expecting to file in 2016 for a U.S. HammerCuff product.
TFN-ADVANCED roll-out and extensions by end of 2017, with next-gen extensions in 2018. This nailing system launched in 1Q15 and is now consistently included in the company’s growth drivers. 

Core platform: HIP
ACTIS Hip Stem for an anterior approach; the design focuses on bone preservation to improve stability. Limited U.S. and EU launch is slated for 2016. (A next-gen hip is noted to come in 2018.)

Base platform: SPINE and SHOULDER
Of the 25 orthopaedic-focused products in the pipeline chart out through 2018, seven pertain to spine, including one I hadn’t heard of before: the Kick 2D Navigation system. (More on spine later.)
The GLOBAL ICON stemless shoulder shows up close to the end of 2017, which appears to be an ex-U.S. launch.

While not identified among priority, core or base, we also get arthroscopy/soft tissue repair products in the pipeline: visualization systems, the MONOVISC hip indication.

While JNJ’s Verb surgical robotics initiative does not appear to pertain to the orthopaedic segment, 3D printing does for sure. The company already collaborates with Tissue Regeneration Systems on a bio-resorbable 3D-printed bone graft cage, and offers TRUMATCH personalized cutting guides for total knee replacement. They’re refining a 3D-printed tri-flange acetabular hip system for severe revision cases, which could support a greater than 50% reduction in time from diagnosis to treatment. 

JNJ also invests externally to access portfolio-expanding technologies—these relationships include Tissue Regeneration Systems and CartiHeal, developer of the Agili-C cartilage regeneration product.

What holes remain? As I see it, more insight on the business exits. Where will the headcount cuts happen? And exactly what to expect in spine. I promised to return to spine. I’m nearly there.

Recall that when the restructuring was announced in January 2016 and FAQs were published, one question posed was, Will you be exiting businesses as part of this restructuring program?, shortly followed by, What is the expected reduction to overall headcount as a result of this restructuring program?

The responses, back then:
While JNJ is not presently providing details on potential business exits, leadership had noted a “company-wide premise that we should be number one or number two in the categories where we’re committed or have a clear path forward to getting there or the business must be complementary to another existing business. If we have businesses that don’t meet these requirements, we’re committed to considering strategic options for them.” Expected potential sales impact was described as minimal. On the headcount: A reduction of 4% to 6% of the global Medical Devices segment headcount was expected, translating to ~2,400 to 3,600 positions out of ~60,000.

Leadership stuck to its guns in the review day, not giving more detail on exits other than to say they had “cleaned up [their] portfolio quite a bit.” Cordis and Ortho Clinical Diagnostics were both divested prior to the January announcement, so we did have that information already…I am left feeling that the exits themselves are not complete yet. We still don’t know whether this will affect DePuy.

When pressed about the clean-up and move-forward, leadership acknowledged the challenges in spine. Gary Pruden, Executive Vice President, Worldwide Chairman, Medical Devices and Ciro Roemer, Company Group Chairman, DePuy Synthes both pointed out steps taken: a new leadership team is in place and has been challenged to reinvent the business. Spine is important to cross-selling efforts in other businesses, like Surgical. And, as noted by Martin Fitchet, M.D., Global Head, R&D, Medical Devices, strength in scale will be of extreme value for the spine segment as regulatory challenges ex-U.S. just grow and grow. JNJ’s scale should lend needed muscle to gain regulatory wins. 

A slide included in the final presentations, but not addressed in the live review, mentioned an intention to close key portfolio gaps in spine with targeted M&A. 

As summed up by Mr. Pruden: “WE ARE GONNA IMPROVE THAT BUSINESS.”

I will stay tuned.

Julie Vetalice is Editorial Assistant at ORTHOWORLD. She can be reached by email.