Johnson & Johnson (NYSE: JNJ) announced the restructuring of its medical devices business on January 19, 2016. Its 8K filing noted pre-tax restructuring charges of $2.0 billion to $2.4 billion, expected to be incurred this year, as well as a Q4:15 charge of approximately $600 million.
About 4% to 6% of the division’s global workforce will get walking papers over the next two years, resulting in a $500 million charge for severance. On a more upbeat note, JNJ expects to see annualized pre-tax cost savings of $800 million to $1.0 billion.
This move comes as the market for medical devices has slowed, particularly in the United States. As one of many cost-cutting measures, U.S. hospitals and health systems have sharply curtailed their employed surgeons’ autonomy to use a preferred brand of implant or device.
Even with the two-year suspension of the medical device exise tax, which was part of Congress’s budget package signed into law last December, the going could be rough for medical device companies in the near future.
Mergers and acquisitions in the sector eked out a 2% increase in 2015, with 113 deals now on record. Spending plummetted, however, down 55% to $38.9 billion. It says something (not great) when the year’s largest deal, at $13.3 billion, was for Sirona Deal Systems (NASDAQ: SIRO), acquired by Dentsply International (NASDAQ: XRAY). The second largest was St. Jude Medical‘s (NYSE: STJ) deal for Thoratec Corp. (NASDAQ: THOR) for $3.4 billion. Nothing on the order of Medtronic Inc.‘s $42.9 billion takeover of Covidien plc (NYSE: COV) in 2014. Those days are over, at least for now.