Johnson & Johnson executives told investors Wednesday that the medical device business failed to meet internal sales growth expectations in the second quarter because of competitive pressures dragging on certain groups and persistent challenges in China.
CFO Joe Wolk said on an earnings call that the medtech group did not achieve a target within the company’s sales forecast of 5%-7% annual growth for 2022 through 2027, which represents the upper growth range of its markets and was a goal set by J&J in December.
“We came into the year thinking 2024 would be in the upper end of that range … We now expect growth closer to 6% for 2024,” Wolk said. In the quarter, overall medtech sales grew by 2.2% year over year on a reported basis to $7.96 billion.
CEO Joaquin Duato and Tim Schmid, worldwide chairman for medtech, attempted to ease investors' concerns by proclaiming their confidence in the company’s ability to turn the device unit around.
“We expect medtech growth to accelerate in the second half of the year,” Duato said. “Our confidence in the business outlook remains unchanged.”
Executives called out the vision business group multiple times, as sales declined in the quarter by 1.7% year over year to $1.29 billion. J&J’s surgery business also had a sales decline compared to the prior year.
Recent acquisitions show strength
J&J’s cardiovascular group was a bright spot among the medtech results. The company has built up the unit with multiple acquisitions since late 2022, including spending $16.6 billion for Abiomed and $13.1 billion for Shockwave Medical.
Those transactions are beginning to show signs of strength for the cardio unit. Abiomed’s sales grew year over year by 14.5% to $379 million in the quarter, the highest growth rate among the segment. Meanwhile, Shockwave has already added $77 million in sales, despite J&J closing the acquisition in late May.
Schmid touted the addition of Shockwave as a driver for a strong second half, saying that the acquisition will ultimately be the “13th business with sales in excess of $1 billion annually.”
China struggles
Economic pressures from China came up throughout the call as J&J is still navigating the country’s anti-corruption campaign and volume based procurement (VBP), which Schmid described as a “government-driven cost containment effort.” Schmid reaffirmed J&J’s commitment to the market and framed both challenges as short-term pressures that would eventually benefit the company.
Stifel analysts wrote in a note to investors that J&J’s performance is a less clear predictor for upcoming results from other medtech firms because of the company’s competitive challenges and share loss.
“Still, we imagine any company with China exposure may be, this morning, subjected to incremental scrutiny and concern,” the analysts wrote. “And as we head into the typically softer/seasonally-slower 3Q period, these [J&J] performance uncertainties may add to investor anxieties.”
J.P. Morgan analysts said the VBP challenge was J&J-specific, writing that the company has one of the highest exposures to China’s market in the industry, and “we don’t expect as significant, if any, headwind from China VBP from others.”
They added that while some may view the results as negative across the medtech industry, it’s still “premature to extrapolate to the rest of the group; we think companies like Boston, [Stryker], Zimmer, and Cooper could potentially stand to benefit.”
