DePuy’s State of the Union

If there is a happy warrior in orthopedics, Mike Mahoney, head of Johnson & Johnson's DePuy franchise certainly qualifies for the title of happiest of the happy.

Mike MahoneyAnd why shouldn't he be elated? His DePuy franchise has been pulling J&J's wagon for the last few years as the medical giant's pharmaceutical sales have slowed while sales of medical and diagnostic devices have grown faster than the market.

That means Mahoney is taking market share from his competitors as devices have become J&J's largest business. Total sales of $23.6 billion last year from devices alone now account for about 38% of total J&J sales and 43% of total operating income.

DePuy sales for orthopedics were $5.4 billion in 2009 with 40% of sales coming from outside the U.S.

Bi-Annual Device Report

J&J does not break out specific product areas during their quarterly earnings conference calls with analysts, so the company conducts a bi-annual Medical Device and Diagnostics (MD&D) analyst meeting. At its most recent of these meetings, held on June 3, management provided an overview of the various business segments, expectations for market growth, upcoming product launches, and challenges and opportunities facing the business over the next four years.

Mahoney's boss, Alex Gorsky, worldwide chairman of Johnson & Johnson's Medical Devices & Diagnostics business, said the company plans to launch 80 new products from its devices unit through 2012 expanding into new markets including biosurgicals and electrophysiology.

The devices unit includes Cordis(which focuses on heart conditions), the spinal and orthopedics care franchise DePuy, Ethicon surgical products, contact lenses and other franchises.

Overall, according to the company's website, J&J  expects medical device sales to grow an average of 6% each year through 2014.

During the first quarter, J&J's revenue rose 4% to $15.63 billion, spurred on by a 4% boost from mostly favorable currency exchange rates. However, medical devices outperformed other units, with sales up 8% excluding rates.

DePuy Franchise

Mahoney bounded to the podium with expressions of "neat, " "excited" and "fantastic" when describing how the DePuy franchise performed over the past year, predicting that the franchise will continue to benefit from the tailwinds of demographics and emerging markets. Happy, but sober, Mahoney also noted headwinds of increasing pricing pressures, stronger government regulation and the FDA.

Regulations: “A Unique Opportunity”

But none of the J&J leaders were complaining. In fact, during a question and answer session with analysts, company leaders acknowledged that regulatory requirements will get more "demanding, especially as [innovation] moves up the technology ladder." They noted they anticipated greater demand for data and see the challenging regulatory environment as a "unique opportunity" for the company.

"The system of a surgeon inventor and engineer coming up with a 'cool' idea is something that probably isn't going to work anymore, " said Mahoney. More on that later.

Large Joints and Spine

First we'll take a look at Mahoney's outlook for hips, knees and spine as the company positions itself to seize additional market share.

Mahoney said the company expects to see mid- to high- single-digit growth rates over the next year. He's observed an uptick in procedures from 2009, a low point in the market, but the recovery is not at the same levels the company has seen historically.

"What's neat, " said Mahoney, "is that DePuy is typically number one, two or three in their markets."

DePuy company reportsSure enough, he noted the company’s 7.9% growth in hips last year was, "almost twice the market rate of growth, " while knees were up 4.9%, also above the market.

And spine? DePuy Spine has a "lock" on the number two position behind Medtronic.

Mahoney was particularly excited about DePuy's plans to launch 15 new products in 2010 and noted a specific strategy in spine and biologics to go after back pain, which he called a "terrific unmet need." In addition, DePuy will focus on cartilage regeneration and customized implants for growth in the knee category, while paying special attention to the elimination and reduction of infections in the area of hips.

Overall, Mahoney is determined to continue growth rates by investing in portfolio expansions and improving efficiencies for their customers. To achieve that goal, it means developing procedures and devices that reduce operating times, which in turn will allow surgeons and hospitals to increase the number of procedures without increasing infrastructure capacity.

Hips

Mahoney says the company expects to see a 5% compounded annual growth rate (CAGR) between now and 2014, with the total hip market reaching $8.1 billion by 2014.

DePuy is awaiting FDA approval for the Pinnacle Complete Acetabular Hip System. This is the first ceramic-on-metal hip bearing to be considered for approval by the FDA. Mahoney said the Pinnacle combines the durability and stability of metal with the enhanced wear characteristics of ceramic.

Mahoney was particularly ramped up about the Finsbury Orthopedics acquisition of the past year, which gives DePuy an entree into hip resurfacing, metal-on-metal and ceramic-on-ceramic hips. He noted Finsbury's large diameter DeltaMotion hip, which is currently only sold only in Europe, will have special indications for female patients.

Another acquisition, Gloster Europe, gives DePuy a presence in the area of decontamination technologies that help prevent hospital acquired infections. Also noted were the Corail and ReClaim hip revision systems.

Knees

Mahoney expects the knee market to grow by a 6% CAGR through 2014 reaching $9.6 billion.

New key knee products for DePuy include the Sigma high performance partial knee system (used in various combinations of medial, lateral, and patellofemoral), AOX poly inserts (an anti-oxidant infused highly crosslinked poly), and TruMatch patient specific instruments.

Sigma has more than one million units installed and over 20 years experience.

Spine

J&J expects the spine market to grow by a 7% CAGR through 2014 reaching $12.2 billion.

Mahoney outlined three strategies for the spine division. First, the company will focus on degenerative spinal care (one- and two-level fusions). Second, the company will concentrate on developing new products for complex spine surgeries such as scoliosis, and finally, offer new products for vertebral body augmentation for compression fractures in older patients.

In degenerative spinal care, novel products include: the Viper, a minimally invasive device for thoracic to lumbar spine surgery applicable in both simple and complex cases; the Cougar LS, J&J’s lateral approach—uses standard hospital neuro monitoring equipment, which management estimates will allow up to a 50% savings versus other lateral approaches; full launch is expected in the third quarter of 2010 in the U.S., and, the Expedium Spine System, a sophisticated deformity system boasts new favored angle screw facilities and a universal connector set (which enables seamless revision constructs).

DePuy spine sales were up 10.9% in 2009, although in 2010 Mahoney said the spine market stalled with more price pressure due to vertebroplasty and kyphoplasty procedures evolving to outpatient processes that demand lower prices.

Regulatory Strategy: “Design to Value”

As earlier mentioned, perhaps the most notable take away from the call with analysts was a singular comment about the good old days of the surgeon/engineer collaboration probably becoming an archaic model.

Gorsky and his device chiefs acknowledged that clinical trials will become more rigorous as the number of patients and duration of trials, as well as the construction of trials, change.

"We're seeing that in dialogue with the agency, " said Gorsky, as the company has been deeply engaged with the FDA in preparing for approval requests.

J&J’s “unique opportunity” rests on the company’s “Design to Value” strategy.

Gorsky said manufacturers will now have to look at all stakeholders. Companies will have to ask up front: Does the innovation bring value to the marketplace and manufacturing methods? What are the regulatory, clinical and commercial strategies? 

"The FDA is really working with us, " added Gorsky. 

By engaging the agency early and in greater detail than before, Gorsky believes the company enhances its chances of getting innovation through the regulatory process.

As the largest health care company in the world, J&J has more at stake than anyone else in seeing a smooth and predictable regulatory process. Will J&J be the canary in the coal mine in this new strategy with the FDA?

We’ll know the answer to this question when the company submits its 80 new submissions over the next couple years to the FDA. Everyone should be watching.

In an upcoming issue of OTW, we’ll take a closer look at J&J’s “Design to Value” strategy.