At the start of 2016, Johnson & Johnson (J&J) undertook a massive restructuring aimed at turning around its medical device business. The New Brunswick, N.J., conglomerate has been gradually swapping in high-growth device businesses and ushering out low-growth ones, a disciplined, rational effort that seems to be starting to pay off.

During the first quarter, J&J's medical device sales grew by 3 percent to $6.3 billion; that's a marked improvement over the first quarter in 2016 when they shrank by 2.4 percent to $6.1 billion.

"Medical devices are about on par now with next year, but I do think that it will be at or very close to the market growth rates for the industry overall," summed up J&J Executive Vice President and CFO Dominic Caruso on the company's first quarter earnings call.

IN WITH THE NEW

New products derived from acquisitions are key to building that growth, he underscored. Caruso said new products will accelerate the company's growth for the remainder of the year by 1.5 to 2 points, citing in particular the recent med-tech acquisition Neuravi Ltd. It's J&J's second recent acquisition that's focused on stroke, including the December purchase of Pulsar Vascular Inc.

J&J completed the acquisition of Neuravi, which focuses on neurointerventional therapy, in April.

Neuravi offers the Embotrap Revascularization Platform to treat ischemic stroke treatment via clot retrieval, while Pulsar brought its Pulserider minimally invasive cerebral aneurysm device to the table.

"We've been divesting slower growth areas or areas that we think are better off in someone else's hands and investing in higher growth areas and new technologies," said Caruso. "This particular ischemic stroke treatment from Neuravi is already on the market in Europe and expected to be approved this year in the U.S., and it provides for faster blood flow and more accurate retrieval of the clot within the neurovascular system. So we're very excited about it."

He continued, "By the way, our entire medical device business has largely been grown by these smaller tuck-in, bolt-on acquisitions with technologies that advance the standard of care and with our scale in distribution, we're able to do much better with that asset in our hands than in the hands of the previous owner."

RETHINKING NEURO, DIABETES

Interestingly, J&J seems to be otherwise largely wiping its neurosurgery slate clean with a more than $1 billion proposed divestiture of its Codman Neurosurgery Business to Integra Lifesciences Holdings Corp. that's slated to close during the fourth quarter. Both the Neuravi and Pulsar were announced via the Codman business, but were officially acquired as part of J&J's broader Depuy business.

Alongside Codman, J&J's diabetes device business may be the next target for sale. The business continues to be a major drag on growth and the conglomerate continues to evaluate strategic options for it, including partnerships and divestiture.

Last quarter, J&J also acquired electrosurgical tools company Megadyne Medical Products Inc. and gastroesophageal reflux device player Torax Medical Inc. And, most notably, completed a $4.3 billion purchase of Abbott Medical Optics (AMO), which is focused on ophthalmic surgery.

"With respect to the AMO acquisition, it's going really, really well. I mean it just obviously was integrated in February ... Coupled with the Acuvue brand, which obviously has great recognition, the innovation that we already know about and know how to do well both in manufacturing and lens technology, I think this is going to be a fantastic acquisition for us," Caruso said.

He continued, "It's off to a great start and, quite frankly, before we acquired them in the quarter, they were doing really well with new product launches growing at a rate that was double the rate that they were growing at last year's first quarter. So we're very pleased," effused Caruso. The one month sales for AMO were $124 million.

TOP PERFORMERS

Device performance was driven last quarter at J&J by the electrophysiology products in the Cardiovascular business, Acuvue contact lenses in Vision Care and endocutters in Advanced Surgery.

Electrophysiology grew 17 percent worldwide during the first quarter over the same period a year earlier, boosted by double-digit increases in demand for atrial fibrillation procedures both within and outside the U.S. Strong adoption of newer products and advanced catheters helped to propel the business to its 29th quarter out of 30 of double-digit growth.

The contact lens business was up about 5 percent, driven by new products including Oasys 1-Day products globally and variants of the Define lens outside the U.S. Endocutters grew sales by about 10 percent last quarter. Energy sales growth was 6.9 percent last quarter, boosted by the Megadyne acquisition.

Orthopedics sales shrank by 0.07 percent due to pricing pressures, while specialty surgery also shrank and hospital medical devices saw only 2 percent growth.

J&J upped its 2017 guidance due to its recently proposed $30 billion acquisition of drugmaker Actelion. It raised its operational sales growth expectation for the year to between 5.8 percent and 6.8 percent for the year from a prior range of 4 percent to 5 percent. It also bumped up its sales guidance range to $76.1 billion to $76.8 billion from the $74.8 billion to $75.5 billion it had estimated in January.

Despite the increased guidance, Wall Street sent shares down by 3 percent the day it reported earnings. For the first quarter, J&J beat consensus EPS estimates by $0.06 at $1.83, but missed revenue expectations of $17.77 billion by $206 million. Its shares are still up about 7 percent in 2017.

Caruso remained persuasive in describing the company's aggressive, ongoing acquisition/divestiture strategy to reboot medical device sales growth.

"We're very disciplined about it. They have to be strategic, they have to return a weighted average IRR (internal rate of return) that's higher than our weighted average cost of capital," he said.

He cautioned, "It takes time to improve a business that's so widespread and diverse as our medical device business, but we're making good progress. And I would just reiterate that we expect it to have nearly a billion dollars of cost improvements in that business achieved by 2018, and we're well on our way of doing that."