Goldman's Rubin grills J&J on its efforts toward a medical device biz turnaround

Dominic Caruso

Johnson & Johnson ($JNJ) is working to turn around its device business, but long-standing breakup advocate Jami Rubin of Goldman Sachs ($GS) isn't quite convinced. At her firm's recent conference, she took the company's EVP and CFO, Dominic Caruso, to task over its ability to effectively improve revenue growth at its medical device and consumer businesses, which are lagging its pharmaceutical performance.

Earlier this year, J&J investor Artisan Partners publicly renewed the call for a breakup of the conglomerate, which Rubin suggested as far back as 2012. The conglomerate has opted instead so far to conduct a massive restructuring of its medical devices group and to aim to refocus on innovation.

Caruso tried to make the case for growth in medical devices--reiterating the four fast-growing, substantial areas it sees in this business: transcatheter valves, robotics, Endocutters and electrophysiology.

But while J&J is involved in the last three it isn't yet in transcatheter heart valves. Rubin pushed Caruso to outline how the conglomerate plans to stake out a serious position there.

"Mitral valve is an important new area of expansion in transcatheter valves. There is acquisitions of technology and our own expertise in catheter development, et cetera, and then there is, of course, we can acquire to get into that business, but we would only do that at the right valuation," he responded.

There were already several major mitral valve deals last year from major device players including Medtronic ($MDT), Abbott ($ABT), Boston Scientific ($BSX) and Edwards Lifesciences ($EW). So, J&J may have missed the bandwagon a bit there, making it tough to find reasonable valuation--particularly now that it has publicly announced its interest in gaining a foothold in the segment.

Ultimately, J&J sees its device and consumer businesses as a bit of a hedge on the very cyclical pharma business.

"That's true what you just said about the medical device business underperforming and consumer underperforming," Caruso told Rubin. "The couple of things that we feel confident of: One is structurally both those businesses have been repositioned to now over perform. So, we're confident that that'll be the case. To over perform at a time when perhaps Pharma's growth maybe more challenged for the reasons you just mentioned, more competitive launches."

Caruso also underscored J&J's view, one that's shared by other med tech giants including Medtronic and Royal Philips ($PHG), that size and reach will increasingly be crucial in the medical device business, as U.S. hospitals are pushed, if a bit unevenly, to value-based standards.

"It's an evolution of the healthcare system basically the hospital systems in the U.S. that are really the governor on the speed at which the benefits of scale will be realized," he observed. "And there are many hospitals in the U.S. quite ready for a comprehensive offering, a risk sharing arrangement, an outcomes-based pricing model and there are many that are nowhere near that."

Caruso continued: "So, I think the benefits of scale will eventually manifest themselves. It's pretty obvious that's where healthcare is going and needs to go, but I think the pace at which is not really dictated by just us, it's dictated by the way the hospital systems. Now, the more the hospital systems are quite frankly at risk for reimbursement, the more we will see acceleration of that."

- here is the June 8 transcript