Dive Brief:

• Johnson & Johnson's medical device business grew sales in the fourth quarter and for all of 2021 despite having to manage through an omicron variant surge in the final weeks of the year. However, ongoing pressure from the pandemic, largely due to omicron, slowed recovery for the medtech giant last quarter and will continue in 2022.
• CFO Joseph Wolk told investors during a Tuesday earnings call that procedure volatility from COVID-19 and hospital staffing shortages will remain a challenge through the first half of the year, especially as omicron is driving cases back up. "The first couple weeks in January — and probably limiting this to a week, maybe two — saw a little bit of a bleed over from what we experienced in December around surgical procedures," Wolk said. "But I do think that's going to improve with each passing month and with each passing quarter as the year goes on."
• While growing by nearly 11% last year — although, compared to a pandemic-hit 2020 — J&J's orthopaedics segment struggled again last quarter, dropping by nearly 2%. J.P. Morgan analysts wrote that orthopaedics accounted for the majority of the device unit's $116 million miss of estimates in the quarter, with "significant shortfalls" in both knee and spine, sports and other procedures largely due to the pandemic. Misses in hip and trauma procedures also dragged J&J's fourth quarter.

Dive Insight:

As the omicron variant took off in December, questions swirled as to how it would impact procedure-dependent medtechs that were trying to work back from the delta surge. Intuitive Surgical, which reported earnings last week, gave a glimpse at what the latest variant's impact would look like, cautioning that procedure volumes would in fact be down in the first quarter.

The news seemed to scare off investors as Intuitive's stock price dropped following the Thursday earnings call.

J&J CEO Joaquin Duato, who was speaking on his first earnings call in the role, said that there are already signs of the omicron surge peaking, which may result in a more normalized environment for procedures.

"It is very difficult to predict when omicron is going to peak. But we are beginning, already, to see cases decreasing in areas where the surge began, like for example in the U.K., and some regions in the U.S. [are] already nearing peak," Duato said.

But there is still overall uncertainty for the entire sector this year as there remains a threat of possible future variants and the hospital staffing shortage is a longer-term issue that will not be solved by the pandemic easing.

J&J's medical device business brought in roughly $6.9 billion in the fourth quarter, representing year-over-year growth of approximately 4% compared to 2020 and 2019. For the full year, medical devices brought in $27 billion of sales, growth of 18% compared to the prior year but in line with 2019 results.

Much like the third quarter, the device business had a stronger recovery in international markets than in the U.S. The orthopaedic segment's international growth of 1.5% was offset by a 3.5% loss in the U.S last quarter. More specifically in the segment, growth of 4.6% in international markets for knees was offset by a drop of 4.2% in the U.S. Trauma had similar offsets, while spine, sports and other was down 11.4% in the U.S., compared with 2% growth internationally.

The interventional solutions unit was one of J&J's strongest performers in the quarter, seeing double-digit growth in both the U.S. and international markets.

One key marker for future procedure volumes is diagnostic visits. Wolk said that while there was some slowdown in diagnostic visits in the latter portion of the quarter, volumes were trending up and positive relative to 2019 levels. The CFO said a recovery in diagnostic visits potentially sets up a backlog for the medtech to work through this year.

Medtechs have touted backlogs as future revenue boosts throughout the pandemic; however, the procedures are still vulnerable to being canceled or deferred due to rising COVID-19 cases or staffing problems.

When questioned about future M&A strategies for the medical device business, Duato said that the company is going to be "more aggressive on the acquisition side." Duato said that the company will be open to all deals but did emphasize that tuck-ins will be more of the focus going forward.

"As I said before, we don't have an artificial ceiling as far as deal size," the CEO said. "It has to be something that has to be workable financially and in terms of value-creating for shareholders. Typically, larger deals are harder to make, both financially and operationally."