Most investors recognize Johnson & Johnson as a consumer health care products company, since that segment -- which produces Tylenol, Band-Aids, Listerine, and Neutrogena -- is the most visible of its three businesses. However, J&J's consumer health care segment is actually smaller than its other two business divisions: pharmaceuticals and medical devices and diagnostics.
In this article, I will discuss the growth trajectory of J&J's medical devices and diagnostics business, its largest unit, which accounted for 41% of the company's 2012 revenue. The segment is a very diversified one, as seen in the following chart.
Source: Company website.
Analyzing the medical devices and diagnostics business
The medical devices business is currently J&J's second fastest growing business segment. Let's take a look at how it fared compared to the pharmaceuticals and consumer health care segment's last quarter.
Percentage of Total Revenue
Medical Devices & Diagnostics
Sources: J&J quarterly earnings report, author's calculations
J&J medical devices' major source of growth is its orthopedic business, which it gained through the acquisition of Synthes last year. That acquisition boosted the orthopedics segment's quarterly revenue by 46.5% year over year to $2.4 billion. J&J's electrophysiology business, disposable contact lenses, and specialty surgery products were also major contributors to its top line.
Comparing the growth of J&J's medical devices division to industry peers
To put the growth of J&J's medical devices segment into perspective, we should compare its quarterly sales growth to three of its competitors -- Boston Scientific , Medtronic , and Stryker -- to understand just how big the segment is and how fast it is growing relative to the industry.
J&J Medical Devices
Source: Quarterly earnings reports.
J&J's medical devices segment has the enviable ability to keep growing despite its massive size. Over the past decade, J&J's critics have claimed that the company uses its dominant market position to bundle different products together at steep discounts to monopolize the market. Although the company has disputed these accusations, the company received a minor fine last month in China for violating anti-monopoly laws.
All four companies, however, have outperformed the S&P 500 over the past 12 months.
However, each company's price growth is being fueled by a variety of different factors, which also deserve a closer look.
Medical devices and surgical equipment face major headwinds
Boston Scientific -- a major manufacturer of medical supplies, neuromodulation, endoscopy, and cardiology products -- reported negative sales growth last quarter and is currently unprofitable. It blamed its troubles on a decline in surgical procedures in developed markets, European austerity measures, and a weakened U.S. economy, which forced insurers and hospitals to pursue steeper discounts. However, Boston Scientific also rolled out products slower than its rivals, which resulted in missed opportunities to gain market share.
Despite those troubles, the stock is still up nearly 100% over the past 12 months on hopes that the company's new heart valve, which is undergoing clinical trials, will be approved and help it return to profitability next year.
Meanwhile, Medtronic has a diverse portfolio of cardiovascular, spinal treatment, neuromodulation, diabetes, and surgical products. Medtronic faces the same problems as Boston Scientific -- challenging economic conditions and a competitive, lower-margin environment. Those factors caused it to miss Wall Street sales estimates last quarter.
However, Medtronic's purchase of Cardiocom last month, which increases its ability to remotely monitor its pacemakers and other devices, could give it a long-term competitive edge as demand for "smart" medical devices increases.
Orthopedic products remain in high demand
On the other hand, Stryker, best known for its orthopedic implants, has performed remarkably well.
Its stock has climbed 26% over the past 12 months, despite recalls of its spinal and hip implants. The company has also expanded into China with its purchase of Trauson Holdings, which produces lower-priced implants to complement Stryker's more expensive namesake products.
The fact that Stryker's top-line growth is outpacing Boston Scientific and Medtronic indicates that demand for orthopedic products, which is also the heart of J&J's medical devices business, is higher than other medical equipment categories.
The Foolish takeaway
Investors should watch the growth of J&J's medical devices business just as closely as its troubled consumer health segment, which I analyzed in a previous article. It is a main pillar of sales growth, and one of the reasons why J&J confidently raised its full-year guidance last quarter.
With a much higher forward dividend yield (2.9%) than its peers in the medical device industry and robust growth in two of its three primary business segments, J&J could still be an attractive long-term investment at current prices.
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The article A Closer Look at Johnson & Johnson's Medical Devices Business originally appeared on Fool.com.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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