Medical Device Daily
The drug-eluting stent (DES) market has been under considerable pressure of late — enough to impact one of the giant players in the healthcare/med-tech industry.
Johnson & Johnson (J&J; New Brunswick, New Jersey) yesterday said that it plans to reduce its global workforce by 3% to 4%, or up to 4,820 jobs, in a restructuring that it hopes will generate about $1.3 billion to $1.6 billion in savings for 2008.
The plan will impact primarily two of J&J's business segments, its Cordis (Miami Lakes, Florida) unit — maker of the Cypher drug-eluting stent (DES), the first such product approved for commercialization in the U.S. — and its pharmaceuticals unit.
J&J said that Cordis will move to a more "integrated" business model to address the market changes under way with DES technology and better serve its patients' cardiovascular needs, while reducing costs.
"In drug-eluting stents we have seen significant compression in the market due to shifts in the medical community's approach to cardiovascular disease," William Weldon, J&J CEO and chairman, told financial analysts during a Tuesday morning conference call. "We remain committed to the drug-eluting stent market, and we have new products in development across our cardiovascular franchises that will address the unmet needs of the patients, doctors and nurses in this area. We believe a more integrated approach to this market will better serve our customers."
Apparently attempting to allay investor fears, Weldon emphasized that J&J is still very optimistic about the DES market, one that has been hit by concerns about DES safety and expects to see hotter competition with the expected approval of second-generation DES devices over the next two years.
"We still see the drug-eluting stent market as a huge opportunity," Weldon said. "We think that, as we all know, there have been some issues that are there, but we think this will, in time, resolve itself and we continue to invest in the Conor stent, for example, and other stents. So we think that we'll be better focused on the overall customer need in the whole cardiovascular area, but by no means do we mean to diminish or lower the expectations we have going forward in the drug-eluting stent market."
Besides lagging sales of the Cypher DES, the company was hurt in May by a failed clinical trial of the CoStar, made by Conor MedSystems (Menlo Park, California), a company J&J acquired for $1.8 billion in February (Medical Device Daily , Feb. 5, 2007). The pivotal CObalt Chromium STent with Antiproliferative for Restenosis (COSTAR II) trial for the CoStar DES failed to meet its primary endpoint of non-inferiority to the Taxus Express 2 stent from Boston Scientific's (Natick, Massachusetts) with respect to major adverse cardiac events in patients with multi-vessel or single-vessel disease and Conor halted further trials of CoStar (MDD, May 8, 2007).
Weldon said that three of the four cardiovascular businesses within Cordis are doing well, as are the other six companies in the device and diagnostics segment.
"Our medical devices and diagnostics businesses present us with exciting opportunities in seven different franchises. Each one of these businesses has staked out a leadership position in an important area of healthcare, and with the exception only of our drug eluting stent business Cordis, is showing substantial growth quarter-by-quarter We continue investing in innovative products throughout these businesses to drive performance."
The other business affected by J&J's restructuring initiative is its pharmaceuticals segment, which Weldon said faces significant patent expirations over the next few years. J&J said the pharmaceuticals will reduce its cost base by consolidating operations, while continuing to invest in recently launched products and its late-stage pipeline of new products. The company plans to file applications for seven to 10 new compounds between 2008 and 2010, J&J said.
The company also guaranteed investment in its growing businesses as well as promising technologies and product opportunities to strengthen its position in the fastest growing segments of healthcare.
"Throughout our history, we have always taken a thoughtful, disciplined approach to address the challenges we face," Weldon said. "These actions we are taking to improve our cost structure will enable us to continue investing for future growth and profitability."
The company said it expects to take associated pre-tax, restructuring charges in the range of $550 million to $750 million in the second half of the year. It confirmed previous earnings guidance for full-year 2007, which excludes such charges, of between $4.02 and $4.07 a share. J&J also said it intends to maintain investments in its research and development to strengthen its portfolio and ensure leadership positions in high-growth areas of healthcare.
Job cuts will make up only one part of the expected savings, according to the company.
"This type of impact is difficult, but necessary, and we will look at ways to minimize the number of employees who are affected by these actions through the use of attrition and hiring freezes in certain areas of the business," Dominic Caruso, VP of finance and CFO for J&J, told analysts during the conference call.
J&J said it will accelerate steps to standardize and streamline certain aspects of its functions such as human resources, finance and information technology, while better leveraging its scale more in areas such as procurement to benefit its operating companies.
"Our goal in implementing these actions is to build on the strength of our business, cont investing in new tech and product opportunities while reducing our cost structure and become better position for continued profitable growth in the years ahead," Caruso said.
Bear Stearns med-tech analyst Rick Wise wrote in a research note that J&J investors will take the report as good news rather than bad, by providing "comfort that [J&J] management is intensely focused on driving EPS growth acceleration in 2008 and 2009 — and ultimately pushing reported growth above current Street projections despite the DES and pharma challenges ahead."
Caruso noted that the savings and charges do not include any impact from the company's previously reported integration plans associated with the $16.6 billion acquisition of Pfizer's (New York) Consumer Healthcare business (Medical Device Daily , Dec. 22, 2006). This initiative continues to be on target for $500 million to $600 million in synergies by 2009, he said.
The more than 250 J&J operating companies employ nearly 120,500 people in 57 countries.