Medical technology company J&J fails to meet growth expectations

Johnson & Johnson executives told investors Wednesday that the medical device business failed to meet expectations for organic sales growth in the second quarter due to competitive pressures on some businesses and ongoing challenges in China.

Chief Financial Officer Joe Wolk said on an earnings call that the medical technology group missed the company’s forecast of 5% to 7% annual sales growth for 2022-2027, which is the upper end of the growth range for its markets and was a target set by J&J in December.

“We started the year thinking that 2024 would be at the upper end of that range… We now expect growth closer to 6% for 2024,” Wolk said. During the quarter, Medical technology sales increased by 2.2% on an annual basis, reaching $7.96 billion.

CEO Joaquin Duato and Tim Schmid, global president of the MedTech division, tried to calm investor concerns by expressing confidence in the company’s ability to turn around the device business.

“We expect growth in the medical technology sector to accelerate in the second half of the year,” Duato said. “Our confidence in the business outlook remains unchanged.”

Executives have repeatedly criticized the vision business, whose sales fell 1.7% year over year to $1.29 billion in the quarter. J&J’s surgical business also saw sales decline from a year earlier.

Recent acquisitions demonstrate the company’s strength

J&J’s cardiovascular group was a bright spot among MedTech results. The company has expanded the unit with multiple acquisitions since late 2022, including spending $16.6 billion for Abiomed And $13.1 billion for Shockwave Medical.

Those deals are starting to show signs of strength for the cardio division. Abiomed’s sales rose 14.5% year over year to $379 million in the quarter, the fastest growth rate in the segment. Meanwhile, Shockwave has already added $77 million in sales, despite J&J closing its acquisition in late May.

Schmid touted the addition of Shockwave as a driver for a strong second half, saying the acquisition will ultimately be the “13th company with sales over $1 billion per year.”

China in trouble

Economic pressures from China were discussed throughout the call, as J&J is still navigating the country’s anti-corruption campaign and volume-based sourcing (VBP), which Schmid described as a “government-driven cost-containment effort.” Schmid reaffirmed J&J’s commitment to the market and framed both challenges as short-term pressures that would ultimately benefit the company.

Stifel analysts wrote in a note to investors that J&J’s performance is a less clear indicator of future results at other medical technology companies because of the company’s competitive challenges and loss of market share.

“We still suspect that any company with exposure to China could come under increased scrutiny and concern this morning,” the analysts wrote. “And as we head into the typically quieter, slower third quarter, these uncertainties about (J&J’s) performance could heighten investor concerns.”

JP Morgan analysts said the VBP challenge was specific to J&J, writing that the company has one of the highest exposures to the China market in the industry, and “we do not expect as significant, if any, headwinds from China VBP from others.”

They added that while some may view the results as negative across the medtech sector, it is still “premature to extrapolate to the rest of the group; we believe companies like Boston, (Stryker), Zimmer and Cooper could potentially benefit.”