We are pleased with the favorable decision taken by the Food and Drug Administration (FDA) panel regarding Johnson & Johnson’s (JNJ) hip replacement system. The panel, consisting of orthopedic experts, voted 5-0 in favor of the system named Pinnacle Complete implant system. Along with the recommendation, the panel has asked Johnson & Johnson to conduct a follow-up safety study for the next 10 years. We believe the panel’s decision should result in the FDA approving the device in due course.
According to the American Academy of Orthopedic surgeons, approximately 193,000 total hip replacements are performed in the U.S. every year. The Pinnacle device is meant for those patients who need a total replacement of the ball-and-socket hip joint. The device, manufactured by DePuy (a division of Johnson & Johnson’s medical devices segment), is an improvement over the older ones made entirely from metal as Pinnacle uses a ceramic-on-metal design. The new design is likely to increase the longevity of the product.
Results from Johnson & Johnson’s two studies comparing the Pinnacle system to the traditional one have been quite encouraging. After studying for two years, it was found that patients using Pinnacle reported much less wear and tear on their device than those with a traditional hip replacement. Negative side effects in both the cases were quite similar. Although, the FDA is yet to approve the device in the U.S., it is already available in 40 other countries.
The Medical Device & Diagnostics segment of Johnson & Johnson posted sales of $23.1 billion in 2008, up 6% for the year. For the second quarter of 2009, sales were $5.9 billion, down 3% from the year-ago period. The domestic U.S. market contributed more than 45% of revenues to this segment during the second quarter. We believe this segment should continue to be a significant contributor to Johnson & Johnson’s top-line and is expected to grow substantially faster than pharmaceuticals despite recent competition to the Cordis division’s (another medical devices division of Johnson & Johnson) products. We expect Medical Devices sales to grow at 5% through 2012. 

We have a Neutral recommendation on the stock.
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