J&J Gains Orthopedic Heft With Synthes But Faces Challenges
27 April 2011 - 10:40PM
Dow Jones News
Johnson & Johnson's (JNJ) $21.3 billion purchase of Synthes
Inc. (SYST.VX) will vault J&J to the top of a $37 billion
orthopedics market that increasingly values scale--but hurdles
remain before the health-care giant will be able to reap the deal's
benefits.
The acquisition will put J&J near the top of all major
segments in the orthopedics market, which includes products for
trauma, the spine, and hips and knees. That scale could help
J&J deal with hospitals looking to purchase as much as possible
from a shortlist of vendors. It also could prompt rivals to explore
consolidation to get bigger.
"I wouldn't be surprised," J&J Chief Executive William C.
Weldon said in response to a question on whether the Synthes deal
may lead other medical-device firms to consider bulking up.
However, J&J's deal comes in a challenging environment that
threatens to limit the acquisition's potential upside. Hospitals
are working to control costs, putting pressure on device makers to
compete on price. Plus, merging orthopedics firms has proven tricky
in the past.
"History has shown that the integration of spine deals and ortho
deals in general have been difficult," Jefferies & Co. analyst
Raj Denhoy said. He sees J&J's growth assumptions for the
trauma and spine markets--two key areas where J&J is bulking
up--as aggressive.
The Synthes deal adds a company that grew sales nearly 9% to
$3.7 billion in 2010 to the slower-growing but much bigger $24.6
billion device franchise at J&J. That franchise already
includes DePuy, one of the largest orthopedic firms in a sector
where top competitors include Zimmer Holdings Inc. (ZMH) and
Stryker Corp. (SYK).
Big device companies are increasingly trying to leverage their
size and the breadth of product offerings as a competitive
advantage. This could be a way to get more hospital business in
exchange for price concessions, but it's also a way to increase
clout and potentially combat those price declines.
"I really don't expect this (deal) to offer any advantage to
hospitals at all," said Joe Volpe, supply chain vice president for
Wheaton Franciscan Services Inc., a nonprofit health system in the
Midwest. "It just reduces competition in the market place, it
doesn't increase it."
Synthes already is the largest player in the trauma market,
which has appeared less vulnerable than other orthopedics markets
plagued by economic pressure or more scrutiny from health insurers.
Combining it with J&J's existing trauma business has raised
some antitrust questions among analysts, although J&J thinks
the deal will increase competition and won't require any business
divestitures.
If competition rises, it might be in the spinal market rather
than in trauma. In that somewhat fragmented market--outside clear
heavyweight Medtronic Inc. (MDT)--Wells Fargo estimated Synthes and
DePuy each have roughly 11% share. But Synthes and DePuy have
different sales and compensation models that could complicate
integration efforts, and competing spinal firms could pick up sales
staff that get left aside.
Sales representatives and outside distributors can take their
longstanding relationships with doctors with them, and Volpe, the
hospital official, expects a post-deal "scramble" for surgeon
relationships.
JPMorgan analyst Michael Weinstein said in a research note that
"every meaningful deal in spine, even going back to the 1998
DePuy-Acromed merger, has resulted in substantial disruption due to
overlapping sales and distribution." Spine competitors also include
Zimmer, Stryker and smaller players such as NuVasive Inc. (NUVA)
and Alphatec Holdings Inc. (ATEC).
J&J, for its part, is taking a cautious integration
approach. "We're going to be very thoughtful and deliberate about
the way we go about combing in our spine units," Alex Gorsky, vice
chairman of the executive committee at J&J, said in an
interview. "We think that can be done with minimal disruption."
If J&J pulls that off, the big question will be whether
other companies also have to add heft to compete. Weldon said it's
tough to predict, and analyst Denhoy questioned whether J&J's
Synthes purchase is a one-off move that would be hard to replicate.
Susquehanna analyst David Turkaly expects consolidation among
smaller companies, but also sees Smith & Nephew (SNN) and
Zimmer as potential targets.
Among J&J's biggest competitors, Stryker declined comment
and Zimmer brushed off the idea it needs more size to compete.
"Irrespective of competitor activities, we expect Zimmer to
remain competitive across all of musculoskeletal markets we serve,"
the company said in an emailed comment. The company also noted its
"a comprehensive portfolio" in trauma.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728;
jon.kamp@dowjones.com
--Peter Loftus contributed to this article.
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