While Johnson & Johnson is holding firm to measures it said could turn around its under-performing medical device division, some analyst have expressed doubt the company can achieve significant growth in the business. During a recent Goldman Sachs conference, Dominic Caruso, J&J's EVP and CFO was sharply questioned on how the company could significantly increase growth for its medical device business.

Back in January, Reuters reported that Artisan Partners, a major shareholder in J&J, urged several activists to pressure the company to consider major changes that include a potential split. Artisan asked Johnson & Johnson's management to consider separating its three divisions – consumer products, pharmaceuticals and medical devices – into standalone companies in hopes of unlocking up to $90 billion in enterprise value, according to the Reuters report.

Instead of splitting the company up, J&J has instead revealed a restructuring plan for its medical device segment. The restructuring is expected to result in a 4 percent to 6 percent global workforce reduction over the next two years. It should yield pre-tax annual cost savings of $800 million to $1 billion by the end of 2018, according to Damien Conover, an analyst at Morningstar Equity Research. This year the restructuring is expected to achieve a pre-tax annual cost savings of about $200 million. Conover said the "right-sizing" of J&J's device unit will allow it to run more efficiently as a leaner organization.


J&J's medical device sales slipped 2.4 percent to $6.1 billion in 1Q16. However, its device business actually saw a 3 percent increase in worldwide sales excluding the net impact of acquisitions and divestitures, on an operational basis. That underlying growth was driven by orthopedics, advanced surgery and electrophysiology, the company said.

During the Goldman Sach's investor's conference Caruso was asked how the company could accelerate growth in the device division.

Caruso said J&J is making strides in two of the four fastest growing areas it has identified in med-tech, which include endocutters and the electrophysiology space. He noted the company did not put enough focus into the other two growing areas, robotics and transcatheter valves replacement (TAVR).

"Our view there was that the current generation of robotics needed substantial improvement to eventually be a more intelligent robotic system of data gatherings, algorithms, machine learning, et cetera," he said. "So we made a conscious effort to sort of work on the next generation of robotic surgery. TAVR is an area that expanded faster than we had anticipated."

This could prove unfortunate for J&J because its rivals are continuing to secure market share in robotics and TAVR, leaving the company to quite possibly play catch up.

Earlier this week, Dublin-based Medtronic plc., reported its entry into the robotic surgery market. (See Medical Device Daily, June 8, 2016.) Sunnyvale, Calif.-based Intuitive Surgical Corp. has long enjoyed a monopoly in the robotic surgery sector, which accounts for about 2 percent of all general surgeries.

When it comes to transcatheter mitral valve repair (TMVR), Caruso noted that mitral valve space offered J&J tremendous opportunity. While TAVR is estimated to be a $3 billion market by 2019, analysts with Canaccord Genuity said the TMVR market could be three to four times the size of the TAVR opportunity. Caruso said J&J could look toward acquiring a company to make an impact in the TMVR market, but only if the "valuation was right."

Yet, just as it is in the case of the robotics market J&J could find itself far behind its rivals in acquiring a company in the TMVR space. Acquisition in the space kicked off nearly a year ago. Edwards Lifesciences Corp., a market share leader in TAVR procedures led the charge in the TMVR space, when it acquired Cardiaq Valve Technologies Inc. for $350 million in cash (See Medical Device Daily, July 13, 2015.) Abbott Laboratories continued the trend when it acquired mitral valve developer Tendyne for up to $250 million, with $225 million paid up front (See Medical Device Daily, July 31, 2015.) It also invested in and gained an option to purchase San Jose, Calif.-based Cephea Valve Technologies Inc., though financial details were undisclosed. Medtronic rounded out the flurry of TMVR acquisition of activity when it revealed its decision to purchase Twelve, a portfolio company of medical device incubator The Foundry, for up to $458 million (See Medical Device Daily, Aug. 26, 2015.)


Acquisitions could be a tricky for J&J going forward, because of its difficulty in integrating Synthes. J&J acquired the orthopedics device maker back in 2011 for $19.7 billion. But a 2012 warning letter from FDA to Synthes, taking issue with the company's management of complaints over its orthopedic surgery devices derailed integration efforts with J&J a bit.

"I do think that distraction on a major acquisition like Synthes and getting that behind us now, but that distraction, quality remediation – I don't know if you remember when we acquired Synthes, they had a warning letter by the FDA, so we dedicated quite a bit of resources to getting that stabilized," Caruso said.

Earlier this year, a report released at the 34th annual J.P. Morgan Healthcare conference cited J&J as one of several companies that could take part in larger acquisitions this year. (See Medical Device Daily, Jan. 12, 2016.)

Authors of the J.P.Morgan report said with $37 billion in cash and just $20 billion in debt the company could jump back on the M&A trail. But the authors noted the acquisitions would most likely be in the pharmaceutical space.

"We think J&J investors will benefit most from deals in biotech/pharmaceuticals, where the returns on the company's in-licensings and acquisitions have far exceeded those in devices and consumer products," authors of the report said.

When asked if the company was skittish about acquisitions, Caruso said no.

"I don't think it diminishes the appetite. It gives us some learnings though ..., it doesn't make us adverse to doing a large acquisition," Caruso said.

Shares of the company (NYSE:JNJ) were up $1.21, to close at $117.01 on Thursday.