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Product / Company Performance

DePuy Synthes Reports 3Q18 Revenue, -4.2% vs. 3Q17 -

DePuy Synthes’ 3Q18 orthopaedic performance remained challenged with revenue of US $2,111.3MM, -4.2% vs. 3Q17. Despite lack of growth, leadership reaffirmed its focus on underperforming segments like spine and knee in 2019.

Some Positives Amid Market Pressure

DePuy Synthes faced a challenging third quarter, but was able to incrementally improve underperforming segments such as knee and spine. Leadership called out knees as stabilizing in North America and expects that trend to continue. Price pressure, in particular, impacted the company’s entire orthopaedic portfolio. For the quarter, U.S. pure price was -6% in spine, -3.5% in hips, -2.5% in knees and -2% in trauma.

In the joint reconstruction segment, DePuy Synthes took share in hips, per leadership, by leveraging their position in the anterior approach while seeing continued strong demand for the ACTIS total hip system, which entered global limited launch in 1Q18. The knee segment improved after a challenging year in which it faced competitive pressure from Stryker’s MAKO, which was compounded by customer perceptions about ATTUNE’s de-bonding issues. Knee improvement was driven primarily by strong uptake of the ATTUNE Revision system. Also, the impact of knee implant price cuts in India was constrained to 2017 as regulators there declined to enforce further reductions for a year.

Strong sales of the TFNA Femoral Nail offset reductions in DePuy Synthes’ trauma revenue. Leadership stated that trauma faces a deceleration of the global market, while analysts noted that the company is likely losing share to smaller competitors in foot and ankle. Improvements in spine were driven by newer products like the CONCORDE interbody system and VIPER PRIME system for minimally invasive surgery. The acquisition of spinal implant manufacturer Emerging Implant Technologies (EIT) and launch of SENTIO nerve monitoring technology should aid in the continued turnaround of the spine segment.

ORTHOWORLD estimates 3Q18 and year-to-date segment sales ($MM) and growth on an as-reported basis, as follows.

  3Q18  3Q17  $ Change  % Change 
 Joint Reconstruction $787.7  $793.0  -$5.3  -0.7% 
   Knees $347.9  $351.3  -$3.4  -1.0% 
   Hips $336.9  $336.3  $0.6  0.2% 
   Extremities $102.9  $105.5  -$2.5  -2.4% 
 Spine $340.0  $377.6  -$37.6  -10.0% 
 Trauma $625.7  $637.8  -$12.0  -1.9% 
 Arthroscopy $155.7  $173.0  -$17.3  -10.0% 
 Orthobiologics  $92.0   $101.8   -$9.8   -9.6% 
 Other (CMF) $110.2  $120.9  -$10.7  -8.8% 
Total  $2,111.3  $2,204.0  -$92.7  -4.2% 

 

  YTD18  YTD17  $ Change  % Change 
 Joint Reconstruction $2,523.1  $2,530.0  -$6.9  -0.3% 
   Knees $1,130.5  $1,153.6  -$23.1  -2.0% 
   Hips $1,073.5  $1,055.8  $17.7  1.7% 
   Extremities $319.2  $320.7  -$1.5  -0.5% 
 Spine $1,059.5  $1,170.2  -$110.7  -9.5% 
 Trauma $1,933.7  $1,877.5  $56.2  3.0% 
 Arthroscopy $495.7  $518.1  -$22.4  -4.3% 
 Orthobiologics $297.2  $319.6  -$22.4  -7.0% 
 Other (CMF) $313.2  $356.6  -$43.4  -12.2% 
Total  $6,622.4  $6,771.9  -$149.6  -2.2% 

 

3Q18 Revenue by Geographic Region

A strong global economy contributed to healthy growth in ex-US geographies, especially emerging markets like Brazil, Russia, and China. Despite occasional volatility, leadership is bullish on the outlook for emerging markets and believes that these markets will continue to grow at twice the rate of their global business.

ORTHOWORLD estimates 3Q18 orthopaedic sales and growth in these geographic regions, as follows.

 Region Revenue ($MM)  % of Total  
 US  $1,284.3  60.8% 
 Ex-US $827.0  39.2% 
   EMEA $372.2  17.6% 
   Asia Pacific $289.5  13.7% 
   Rest of World $165.4  7.8% 
Total  $2,111.3   

 

Three-Year Plan for Above Market Growth

DePuy Synthes is continuing to execute on its plan to stabilize segments like knee in 2018, achieve market growth in 2019 and exceed market growth in 2020. Leadership’s strategy to achieve this growth is through the acceleration of innovation, according to Ashley McEvoy, Executive Vice President and Worldwide Chairman of Medical Devices. Within the knee segment, for example, this includes the continued rollout of the ATTUNE Revision system, launch of a cementless program in 2019 and the Orthotaxy digital surgery offering in 2020.

In our research, analysts said that a large-scale, transformative acquisition may be necessary to turn around certain chronically underperforming Medical Device franchises. While leadership acknowledges that they look at all scale of deals, they haven’t modeled any specific large acquisitions. The company continues to prioritize value and strategic fit for future purchases. Joe Wolk, Executive Vice President and CFO, highlighted the $1 billion invested in 30 tuck-in deals over the last year in Medical Devices alone. Of those, just two were orthopaedic-specific: Orthotaxy in 1Q17 and EIT in 3Q18.

DePuy Synthes will likely need significant contributions from new products and recent acquisitions to stabilize the knee and spine segments in 4Q18. Our estimates show projected 2018 revenue of $8,829.5MM, -1.5% vs. 2017. Since 1Q18, the company has reclassified certain prior year revenues in Spine & Other to conform to the current year’s product disclosure; therefore, we anticipate that they will do so in 4Q18 and have modeled that into our projections.

 

Net Earnings

Please note that the supplementary data below is representative of Johnson & Johnson overall, not just DePuy Synthes.

 3Q18 Amount ($MM)  % of Sales 
 Sales $20,348.0  100.0% 
 Cost of Goods -$6,589.0  32.4% 
 R & D -$3,634.0  17.9% 
 Administrative -$5,543.0  27.2% 
 Other -$648.0  3.2% 
Net Earnings  $3,934.0  19.3% 

 

 YTD18 Amount ($MM)  % of Sales 
 Sales $61,187.0  100.0% 
 Cost of Goods -$20,130.0  32.9% 
 R & D -$8,677.0  14.2% 
 Administrative -$16,549.0  27.0% 
 Other -$3,576.0  5.8% 
Net Earnings  $12,255.0  20.0% 

 

Sources: DePuy Synthes Companies of Johnson & Johnson; ORTHOWORLD estimates
Mike Evers is ORTHOWORLD’s Market Analyst. He can be reached by email.

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