Is Johnson & Johnson's Orthopedics Business on Safe Footing?


When it comes to health care companies, there's no bigger name than the largest firm in the business: Johnson & Johnson .

What doesn't J&J produce? From pharmaceuticals to consumer care goods to medical devices, this major medical player has it all. That can make it tough on investors trying to understand this highly diversified company, however: With so many parts, what do you need to keep an eye on? To get a grip on this colossus of the health care sector, let's take a look at Johnson & Johnson's orthopedics business, its largest medical device segment by sales.

Changing the game with Synthes
Johnson & Johnson's huge acquisition of Synthes last year for nearly $20 billion set the stage for this company's orthopedics might. The combined power of Synthes and fellow J&J subsidiary DePuy fueled J&J's segment revenue to nearly $7.8 billion in 2012 alone, a sum that made up more than 11% of total company revenue. The Synthes acquisition alone made up most of J&J's medical device revenue growth last year; however, the company still posted 4% year-over-year growth between 2010 and 2011, back before adding Synthes to its roster. Don't expect to see double-digit sales growth every year, but this is a strong division that should keep growing revenue on the back of its breadth and size.

The orthopedics segment's size gives J&J plenty of flexibility. It's only 12% smaller by sales than rival Stryker , one of J&J's top competitors in areas such as hip devices. The company's DePuy-Synthes orthopedics subsidiary offers much more than just hip devices, of course: It sells products in every field from spine and trauma to neuroscience and sports medicine. That kind of diversity fits right in line with J&J's overall scale and ensures that the orthopedics business won't be hurt too badly by any adverse events.

That's especially important considering Johnson & Johnson's recent trouble with orthopedics-related recalls. DePuy first recalled more than 90,000 hip implants in 2010 over a high failure rate. Legal costs have grown over that fiasco, but further recalls over DePuy's Pinnacle metal-on-metal implants and the recent recall of J&J's Adept implant has kept the pressure on the company's image. While Johnson & Johnson will be able to weather the legal costs of these head-shaking incidents without too much concern, opportunistic competitors like Stryker have a chance to cut into J&J's dominance.

Still, orthopedics is an industry that will help out all successful companies in the field over the long term. The rising rates of obesity in advanced economies such as the U.S. will support demand for products such as hip implants in the future. The aging of many first-world societies will also push demand as consumers need help for tiring joints, and J&J is primed to capitalize on these demographic trends despite its recall battles.

Johnson & Johnson could also use obesity as a way to tap into emerging markets. Obesity rates in areas such as India and the Middle East have exploded in recent years. J&J already has one foot in the door: The company produces the majority of its medical device revenue abroad; using that international experience to fuel sales of hip implants or other orthopedics devices in fast-growing economies would ensure serious future growth. How much is at stake? The Millennium Research Group projects the trauma and reconstructive joint implant markets in Brazil, India, and China to grow to $4.5 billion or more by 2017.

Johnson & Johnson's best orthopedics move could be to acquire a local company in one of these nations to solidify its foothold and familiarize itself with the market. Stryker bought out Chinese spinal and trauma firm Trauson earlier this year as a route into the world's second-largest economy; a similar move from J&J would ensure its competitiveness.

Orthopedics will continue to fuel J&J's medical device sales in the future. Between aging, diabetes, and obesity, the need for reconstructive implants and other orthopedics products is growing at a rapid rate. Johnson & Johnson's size and experience will pay off in the future despite its ongoing battle with recalls. Its acquisition of Synthes has already propelled it to the top of the field; now it's time for Johnson & Johnson to solidify tomorrow's dominance.

Is bigger really better?
Involved in everything from baby powder to biotech, Johnson & Johnson's critics are convinced that the company is spread way too thin. If you want to know if J&J is nothing but a bloated corporate whale -- or a well-diversified giant that's perfect for your portfolio -- check out The Fool's new premium report outlining the Johnson & Johnson story in terms that any investor can understand. Claim your copy by clicking here now.

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