1. Johnson & Johnson
$24.6 Billion ($61.6B total)
KEY EXECUTIVES:
William Weldon, Chairman & CEO
Dominic J. Caruso, VP, Finance & CFO
Alex Gorsky, Worldwide Chairman,Medical Devices & Diagnostics Group
NO. OF EMPLOYEES: 114,000 (total)
GLOBAL HEADQUARTERS: New Brunswick, N.J.
It’s no shock that the company atop this year’s report, yet again, is Johnson & Johnson. Despite the company’s volume and breadth of product offerings, however, the 2010 fiscal year was a mixed bag for the healthcare giant. Sluggish sales and a number of high-profile recalls made it a tough year. Though J&J as a whole reported a slight overall sales drop, the firm’s Medical Device and Diagnostics (MD&D) segment—the largest of its three business sectors—continued to deliver gains—despite headline-making recalls for its orthopedic subsidiary.
Worldwide sales for the fiscal year (ended Dec. 31) were $61.6 billion, a decrease of 0.5 percent versus 2009. Operational sales declined 1.3 percent and the positive impact of currency was 0.8 percent. Domestic sales slid nearly 5 percent, while international sales increased 3.6 percent, reflecting operational growth of 1.9 percent and a positive currency impact of 1.7 percent. Net earnings and diluted earnings per share for the full-year 2010 were $13.3 billion and $4.78, respectively. Net earnings included an after-tax gain of $55 million representing the net impact of litigation settlements, product liability expense and costs associated with the DePuy ASR hip recall.
“Although 2010 was a challenging year, the business continued to deliver earnings growth, while investing in the future and emerging a stronger organization,” Bill Weldon, chairman and CEO wrote to shareholders. “While we will continue to see near-term pressures on the business for 2011, we remain committed to investing in innovative products, a robust pipeline and talented people who will sustain our growth and increase our market leadership in one of the most important and rewarding industries in the world.”
For fiscal 2010, medical device and diagnostics sales were $24.6 billion, an increase of 4.4 percent compared with the prior year with an operational increase of 3.4 percent and a positive impact from currency of 1 percent. Domestic sales increased 3.6 percent and international sales rose 5 percent, which reflected an operational increase of 3 percent and a positive currency impact of 2 percent. Primary contributors to sales growth included Ethicon’s surgical care products ($4.5 billion in sales, a 9.2 percent gain compared with fiscal 2009); Ethicon Endo-Surgery’s minimally invasive and advanced sterilization products ($4.8 billion in 2010, 5.9 percent growth); DePuy’s orthopedic joint reconstruction and sports medicine businesses ($5.6 billion, up 4 percent); and Ortho-Clinical Diagnostics products ($2.1 billion, up 4.6 percent). Overall growth was offset by lower sales in the Cordis stent franchise, reflecting continued market and competitive pressures in the drug-eluting stent market (sales dropped nearly 5 percent for the year; more on Cordis follows).
As noted above, the recall of DePuy’s ASR hip system came during a time when the company had more than its share of recalls across all of its product categories. A cover story in Businessweek magazine in April of this year asked if “the family company,” as the firm touts itself, could still be trusted after 15 months of 50-plus product recalls (including contact lenses; popular over-the-counter drug brands such as Tylenol, Motrin, Benadryl and Rolaids; surgical sutures due to compromised sterile packaging; cracks in prefilled syringes; and more). The recalls even drew scrutiny from Capitol Hill, where two hearings were held, calling J&J executives and members of the U.S. Food and Drug Administration (FDA) to testify about manufacturing and quality issues. Following a hearing in October, Weldon told lawmakers that the company plans to invest $100 million across the company to improve facilities, equipment and operations around the world.
DePuy Orthopaedics voluntarily recalled the ASR XL Acetabular System and DePuy ASR Hip Resurfacing System. Data from the National Joint Registry of England and Wales showed a five-year revision rate of approximately 12 percent for the ASR Hip Resurfacing System and approximately 13 percent for the ASR XL Acetabular System. Later studies from the United Kingdom showed even higher rates of revision. As of the beginning of this year, J&J faced more than 600 lawsuits in state and federal courts by patients who had the hip implants.
The ASR resurfacing System was introduced in 2003 and is only approved for use outside the United States.The ASR acetabular device was launched in 2004 and has been available worldwide. DePuy officials claim the decision had been made in2009 to discontinue the ASR System as a result of declining demand and the intention to focus on the development of next generation hip replacement and resurfacing technologies.
There has been ongoing controversy about metal-on-metal orthopedic implants. Earlier this year, the FDA launched a webpage detailing some of the issues surrounding metal-on-metal implants, and agency officials said they are taking a close look at all-metal hips, which have faced sales pressure amid concerns about metal particles wearing off and causing medical problems. As a consequence of the sliding action of joint replacement devices, wear particles form in the joint space. Implant, design and materials selection can limit the concentration and size of the particles that develop during the expected life cycle of the implant, but essentially it is unavoidable. It is the presence of the wear particles, at certain concentrations and specific size ranges, that largely contributes to osteolysis (bone cell death) through various cell responses in the body. The formation of wear debris has created considerable concern about the long-term longevity of implants. People react to metal particles differently, and it’s not currently possible to predict who will have a reaction, what it will entail or when it could happen, according to the FDA. The problem with more frequent revisionary surgery is that every procedure has risks, and every additional surgery involving the hip joint exponentially increases the chances of serious complications like blood clots, bone loss, nerve damage or infection.
In part due to the fallout from the recall, David Floyd, president of DePuy Orthopaedics, announced his resignation in March 2011, a post he held since 2007.
The year wasn’t all bad news, of course. The company made a number of notable acquisitions and divestitures.
J&J’s Ethicon division kicked off fiscal 2010 by completing its $785 million purchase of Acclarent, a privately held medical technology company that develops devices for the ear, nose and throat market. Ethicon’s product lines include wound closure, general surgery, wound management, women's health and urology and aesthetic medicine devices. In March, private equity-backed Devicor Medical Products Inc. purchased J&J’s Ethicon Endo-Surgery breast care business, which sells products designed to help doctors diagnose breast cancer at early stages. Terms were not disclosed.
“As we continually prioritize strategic investments that are aligned with our future growth platforms, we determined that the breast care products are outside of this scope, and decided to explore the potential sale of the business,” said Karen Licitra, chairman of Ethicon Endo-Surgery, which develops medical devices for minimally invasive and open surgical procedures.
In September J&J completed the purchase of Micrus Endovascular Corporation, a manufacturer of minimally invasive devices to address hemorrhagic and ischemic stroke. The value of the deal was approximately $480 million. The deal was announced in July. After the buyout, Micrus Endovascular became part of Codman & Shurtleff Inc., the neurovascular device business of the DePuy family of companies within Johnson & Johnson. The Codman neurovascular portfolio includes bare platinum coils, vascular reconstruction devices and access devices.
According to the National Stroke Association, stroke is the third most common cause of death and the leading cause of serious, long-term adult disability in the United States. Each year, approximately 795,000 people in the United States experience a stroke. The majority of victims (87 percent) have an ischemic stroke, which occurs when arteries are blocked by blood clots or other deposits or narrowed due to atherosclerosis. Others experience a hemorrhagic stroke, which occurs when a brain aneurysm bursts.
The cost of stroke is estimated at $73 billion annually in the United States.
Fiscal 2010 also saw the end of protracted patent disputes, the largest of which was J&J’s Cordis division settlement of two ongoing legal battles with Boston Scientific Corp. Under the terms of the agreement, Cordis received $1.7 billion from Boston Scientific. The disputes involved several coronary stent products including Cordis’s Cypher stent and Boston Scientific’s Liberte, Taxus Liberte and Taxus Express stents. The company’s Ethicon Endo-Surgery Inc., also reached an agreement with Suros Surgical Systems Inc., a division of Hologic Inc. The disputes involved patents relating to the Ethicon Endo-Surgery Mammotome Breast Biopsy System, and the Hologic ATEC and EVIVA biopsy devices. An agreement called for Hologic to pay Ethicon Endo-Surgery $12.5 million. In addition, Ethicon Endo-Surgery and Hologic entered a cross-licensing agreement, whereby Hologic will pay ongoing royalties on the sales of ATEC and EVIVA hand pieces, and Ethicon Endo-Surgery will pay ongoing royalties on the sales of the Mammotome. The Mammatome product line was sold, along with Ethicon’s breast care division, to Devicor.
At an investor meeting in June, Alex Gorsky, worldwide chairman of Johnson & Johnson’s Medical Devices & Diagnostics segment, projected solid long-term growth prospects for the company’s device-based product lines.
“Our MD&D businesses compete in a number of large, well-established and under-penetrated markets like joint replacement, contact lenses and sutures—markets where we can grow through the introduction of more advanced products and continued geographic expansion,” he said. “At the same time, we are expanding into other high-growth markets such as biosurgicals, energy, electrophysiology and other surgical specialties. We are using our own pipeline, as well as licensing agreements and select acquisitions, to bring us new capabilities.”
Johnson & Johnson's MD&D received more than a dozen regulatory approvals for medical devices and, according to Gorsky, plans to make approximately 80 significant submissions across its seven franchises through 2012. The company’s device units also expanded their global manufacturing and training footprint to support emerging market growth. DePuy continued to increase capacity at its manufacturing facility in Suzhou, China. Early in 2010, J&J also opened a medical training center in Sao Paulo, Brazil, and expects to train 4,000 doctors and nurses in the region each year.
Though J&J’s Cordis division also had a busy 2010, corporate brass decided to close up its stent-making shop this year to focus on other cardiovascular devices, a move that will result in a $500 million to $600 million second-quarter 2011 restructuring charge.
“Due to evolving market dynamics in the drug-eluting stent business, we see greater opportunities to benefit patients and grow our business in other areas of the cardiovascular device market," said Seth Fischer, company group chair and worldwide chairman of Cordis. The company will end its development of the Nevo sirolimus-eluting coronary stent and will stop the manufacture of Cypher and Cypher Select Plus sirolimus-eluting coronary stents by the year end. Cordis also will stop developing a new stent model, called Nevo, that J&J picked up with the $1.3 billion acquisition of Conor Medsystems LLC in 2007.
Cordis will close its Cashel, Ireland, and San German, Puerto Rico, manufacturing facilities and consolidate its research and development teams in Fremont, Calif., resulting in the elimination of 900 to 1,000 positions.
The Biosense Webster business will continue to focus on the electrophysiology market while Cordis expands its productportfolio for endovascular and cardiology procedures. These businesses generated 2010 sales of $1.9 billion.
Analysts have noted that Boston Scientific would be the rival to reap the most benefit from the move to discontinue the stent business. Some estimates say Boston Scientific could gain $175 million in sales in 2012 and 2013. Boston Scientific has battled J&J—along with other stent competitors Abbott Laboratories and Medtronic Inc.—since the 1990s when the wire-mesh tubes were the popular treatment option for patients with clogged arteries. However, medical consensus has changed as studies indicated many patients would do just as well by taking medicines to prevent heart attack or stroke and skipping the expensive, although minimally invasive, procedure to insert a stent.