Johnson & Johnson (JNJ, Financial) is a very different company now compared to what it was 10 years ago. For starters, at one point Warren Buffett (Trades, Portfolio) was the fourth largest investor in the company, but that is no longer true. J&J has pushed hard into the pharmaceutical segment, while the medical devices segment did not perform well and consumer goods is just not attractive anymore. The company continues to say it is a well-diversified company, but in reality, it has diversified income streams with a major focus on future revenues from the pharmaceutical segment.
The State of J&J’s Medical Devices Business
In 2010, Johnson & Johnson had nearly 40% of its revenues coming from medical devices, closely followed by the pharma segment at 36%. Now the roles have been completely reversed, with nearly 45% coming from the pharma segment while medical devices account for 35% of its revenues.
J&J’s medical devices segment sells products used in orthopedic, surgery, cardiovascular, diabetes and vision care. This is pretty much a recession-resistant business because hospitals cannot function normally without them and demand will always be there. The pharma business is much the same, but there is a big difference. Drugs are dependent on who owns the patent, what conditions they treat, the performance of competing products and other volatile factors. Both medical devices and pharma products have longevity, but medical devices are not dependent on patent expirations and competition from generics.
The only thing the medical devices business needs is constant innovation to stay relevant. In a way, it is a safe and stable business line.
In 2015, J&J’s medical devices segment sales declined by 8.7%, from $27.522 billion in 2014 to $25.137 billion. Though the decline in diagnostics sales of nearly a billion dollars was a major factor, it is not hard to notice dips across all segments. The declines, which started in 2013, have continued well into the first half of the current fiscal, with the company reporting a segment drop of 0.8%.
Industry Performance
According to Department of Commerce findings, the total value of U.S. medical devices industry shipments grew by 1.5% to reach $43 billion. The United States, which is the world leader in medical devices production, is also the world’s biggest consumer, with a medical devices market valued at $140 billion in 2015.
The medical devices market is poised for solid growth over the next four years. Aging populations around the world coupled with extended life expectancy create a sustainable demand for medical devices. As populations grow old, the demand for home health care will also increase, further pushing up the demand for medical devices.
The key problem for J&J is that its medical devices unit’s sales declined while the overall market did reasonably well. There is ample opportunity in the global as well as domestic market, but because they have shifted their focus towards the pharma segment, they may not be able to fully take advantage of that opportunity. Either that, or they’re going for easy gains in pharma over digging in for a long and hard fight to the top of the medical devices segment.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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