By Jon Kamp
Of DOW JONES NEWSWIRES
Johnson & Johnson's (JNJ) latest cost-cutting moves signal more time in the recovery ward for a medical-devices sector burdened by shrunken hospital budgets, a slowdown in elective procedure rates and pressure on device prices.
The health-care conglomerate said Tuesday that it plans to lay off as many as 8,200 workers worldwide as part of a plan to save up to $1.7 billion in 2011. While J&J said cuts are spread across the company, they were prompted in part by expectations for more economic pressure that has hurt device-industry sales all year.
The economy may be back in growth mode, but J&J's top executives explained Tuesday that pressure on devices and consumer products won't alleviate until the employment picture also improves, and that's expected to take a while.
Elective surgery rates, hospital spending on capital equipment and spending on consumer products are all closely tied to U.S. unemployment, noted William Weldon, J&J's chief executive.
"And until we get unemployment under control, and people feel safe and comfortable where they are, I don't think they are going to be going forward and spending again" in some areas where they were previously spending, he told analysts on a conference call.
J&J has the world's largest medical-devices business, and its devices and diagnostics unit recently eclipsed drugs to become the company's largest. Citigroup analyst Matthew Dodds called J&J's job-cuts announcement "a bit sobering" for the broader devices sector because it indicates persistent economic concerns and rising pressure on device prices.
"While JNJ appears to have the scale to prepare for this reality, it does suggest risk to many of the other companies in the med tech space, in our view," Dodds said in a note to investors.
Shares of J&J slipped 0.8% to $59.03 following Tuesday's announcement. Shares of other big device companies, including Medtronic Inc. (MDT), Boston Scientific Corp. (BSX), St. Jude Medical Inc. (STJ) and Stryker Corp. (SYK), also traded lower.
Unlike a big J&J cost-cutting plan announced in 2007--ahead of rising generic competition for key drugs and a downturn in sales of heart stents--the new cuts come as some of these pressures abate. But the external, economic headwinds have not gone away, Weldon explained.
Until there is relief in unemployment numbers, he said he expects to see continued economic pressure in the U.S. and abroad.
Unemployment often means lost health insurance, which in turn can put elective surgery plans on hold; prospective patients worried about long breaks from work can also put off surgery. These effects have slowed growth in replacement hip and knee sales for companies such as J&J's DePuy unit, Stryker and Zimmer Holdings Inc. (ZMH). Third-quarter reports suggested modest market improvements, although the sector isn't expected to rapidly return to old form.
Hospitals are also suffering due to fewer insured patients and less elective surgery, among other factors, and are trying to pass their pain to device companies by fighting for cheaper prices. They're also buying less pricey equipment.
J&J's concerns about economic pressure could have implications for "the rest of our sector as they suggest that the recovery in the healthcare space may be a slow process," said Derrick Sung, a Bernstein Research devices analyst.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com