Johnson & Johnson (NYSE:JNJ) Reports 4Q:04 Results: We Examine DePuy's Charite
BY JOHN CHOPACK, JANUARY 31, 2005
JNJ reported revenues of $12.8 billion for the 4Q:04 which was a 13% increase over the 4Q:03. DePuy, JNJ's orthopedic division, reported revenues of $952 million for the 4Q:04. This was a 19% increase as reported and a 15% increase excluding currency. DePuy's revenues for 2004 totaled $3.4 billion which was a 14% increase as reported and a 10% increase excluding currency over 2003.
JNJ's 4Q:04 conference call was unlike the company's typical earnings conference call in which most analyst focus on the pharmaceutical segment and/or drug coated stents and refrain from asking questions regarding its orthopedic division. On Tuesday analysts were anxious to find out how well DePuy's recently FDA approved Charite artificial disk was penetrating the burgeoning spine market. The response was somewhat surprising.
The orthopedic community has spent more money on artificial disk business development than any other technology to date. The benefits of an artificial disk compared to fusion cages, plates, screws and/or rods seem clear. Why fuse vertebrae together to relieve pain when it can be accomplished with a device that maintains movement? Given that DePuy was the first to gain an FDA approval in October for such a device, analyst and industry specialists have been zeroed in on the Company expecting huge spinal growth rates driven by the Charite. This hasn't been the case.
JNJ reported that its spine revenues grew by 17% during the 4Q:04 which is solid but not any higher than its joint reconstruction revenues. Management indicated the Charite is not trending like they had anticipated and although patient demand is growing for the device, reimbursement challenges are hindering stronger revenue growth.
Charite is currently selling for approximately $10,000-11,000. This is almost 2.5x the price of a typical spine fusion cage ($4,500). While most industry and surgeons would agree that the potential benefits of an artificial disk far outweigh that of a fusion device, the Charite has not been proven over the long haul in the U.S. This factor alone presents the biggest challenge in gaining a decent reimbursement rate. Currently the Center for Medicare and Medicaid Services (CMS) reimbursement rate for the Charite is similar to that of a spine fusion cage. Until the CMS increases its rate, it is unlikely that private insurers will either.
One challenge lies in the FDA approved clinical data. The Charite trial showed equlivent efficacy compared to spinal fusion. While this was good enough to gain FDA approval, it is not helping to gain better reimbursement. Any insurer will wonder why they should pay 2.5x the price for a spinal disk than a fusion cage when they were proven to work equally as well. That being said, something must be done to make sure patients are receiving the best care they possible can get.
It may mean DePuy conducting a larger post-marketing study with tougher efficacy levels. Maybe the second, third or fourth company to come to market will recognize the challenges being faced by DePuy and re-design there respective trials to help combat the problem. Remember Medtronic and Synthes are right around the corner anticipating their FDA approvals shortly. It is unlikely that they will want to battle the same groups that DePuy is now.
