J&J third-quarter report reflects good, bad and ugly of changing health-care landscape

The shifting landscape of American health care - for good or bad, depending on your opinion, status, employer, and particular changes - was evident Tuesday when one of the Philadelphia region's larger private employers, Johnson & Johnson, reported financial results for the third quarter of 2013.

The health-care giant had increased sales and profits, but also greatly increased the money set aside to pay pending legal bills, and warned of possible layoffs in a local division because people are postponing elective surgery to repair knees, hips, and backs.

J&J's sales of $17.6 billion and profits of $3 billion for the quarter ending Sept. 30 were higher than the same period of 2012. The figures were boosted by the introduction of patent-protected and profitable prescription drugs. The company's stock, $89.92 at Tuesday's close, has risen more than $20 in the last 12 months. That helps many people, including those who don't know that the stock is in their pension or 401(k) plan. Like drugmakers Pfizer and Merck, J&J is among the 30 companies used to calculate the Dow Jones Industrial Average.

However, J&J also added $872 million to its multibillion-dollar stash to pay pending litigation, after adding just $89 million in the third quarter of 2012. The court cases include thousands of lawsuits alleging that medicine killed or injured children, and that vaginal mesh implants hurt women physically, emotionally, and financially. Some of the cases are in Philadelphia and New Jersey courts.

The Justice Department and J&J might be closer to a settlement over allegations of inappropriate sales practices related to several drugs, including efforts to have doctors promote and prescribe the antipsychotic drug Risperdal for use in children and the elderly. The settlement could exceed $2 billion.

Alex Gorsky became CEO in 2012 (with $11.5 million in compensation) in part because he led J&J's efforts in 2010-11 in the $19.7 billion acquisition of medical-device maker Synthes, whose U.S. headquarters was in West Chester.

Synthes CEO Hansjorg Wyss became a billionaire by wooing orthopedists, who for years picked the replacement joints, plates, nails, screws, and power tools used in surgery to repair bones without caring about costs, because they didn't pay them. But in 2010, Securities and Exchange Commission documents show, Wyss and his advisers feared that Synthes' future revenue would be hurt as patients, employers, insurers, and governments sought to curtail health-care spending. So Wyss held an auction and J&J was the last one with its hand up.

However, with all but the richest Americans hurt by the economy and reports of varying success with replacement joints, fewer people are undergoing elective surgery. The Affordable Care Act is intended to begin to control costs, which has pushed many hospital executives to take from doctors the choice about medical devices.

Michel Orsinger got a big check as a top Synthes executive and now guides J&J's device division, DePuySynthes. Orsinger said Tuesday he now spends lots of time trying to convince hospital CEOs the value of J&J's devices, and generic competition is now a factor.

Orsinger also said J&J is still struggling to integrate the spine divisions of DePuy and Synthes, which had different products, pay packages, and distribution. The Synthes' spine division's illegal clinical trial of bone cement from 1999 through 2004 ended after three patients died on operating tables and four executives (but not Wyss) were sent to federal prison in 2011.

All of that might mean layoffs, though no specifics were offered Tuesday.

"Given the realities of the marketplace," J&J chief financial officer Dominic Caruso said in the conference call with financial analysts, "we will look at what an appropriate level of cost structure should be if the lower level of market growth remains for extended periods of time."