Johnson & Johnson (NYSE:JNJ) owes close to 65% of its value to its medical devices and diagnostics business, according to our estimates. If we delve deeper, we find that a little over 20% of the company’s value can be attributed to its surgical device business, which has otherwise seen strong revenue growth, except in the last year. Johnson & Johnson’s surgical devices division essentially includes endo-mechanical devices, access devices, energy-based devices, stapling systems, ligation devices and gastric banding systems. These devices are used in a wide range of specialty surgeries such as colorectal, bariatric, ENT, gynecology and urology, orthopedics, thoracic, breast, plastic, as well as a variety of general surgeries.
The division’s revenues have steadily increased over the past several years, amounting to $9.96 billion in 2012. This growth has primarily resulted from of healthy growth in the minimally invasive surgical devices market as well as the women’s health and hernia repair devices market. The outlook looks positive as well with Johnson & Johnson positioned well in multiple markets.
A Look At Global Surgical Devices Market
Currently Johnson & Johnson competes in only 35% of the global surgical devices market (including cardiovascular), which is estimated to be close to $100 billion.  This implies that the company has tapped $35 billion market and another $65 billion is still unexplored. If we exclude the cardiovascular group, which we break out as a separate segment, we find that Johnson & Johnson’s surgical devices business spans across roughly $25-30 billion market where it holds close to 30% market share.  The table below depicts multiple surgical areas, their market size and expected compounded annual growth rate for the next few years. 
|Surgical Area||CAGR (2011-2016)||Global Market Size (2011)|
|Wound Closure||2%||$3.6 Billion|
|Women’s Health||2%||$1.6 Billion|
The overall surgical devices market is expected to grow at a CAGR (compounded annual growth rate) of 3-5% over the next few years with emerging markets accounting for majority of the growth.  J&J already has market leading position in most of the sub-segments and is therefore well positioned to benefit from this growth.
What Will Help Johnson & Johnson Drive Its Surgical Device Sales?
Changing dynamics in women’s health market
The main conditions dealt with by women’s health professionals are osteoporosis, cancer, incontinence, infertility and menstrual complications. Increasingly, sub-specialties are arising, particularly in gynecology as urologists and oncologists move in the territory originally considered a gynecology specialty, and gynecologists move into urology and other surgery specialties. This should result in a larger addressable market for the company.
Minimally Invasive Surgery (MIS) Procedures Reduce Hospital-Acquired Infections
Nearly 40% of hospital acquired infections from hysterectomy, appendectomy and laparoscopic cholecystectomy procedures occur within 30 days of hospital discharge. However, the use of MIS has resulted in substantially lower odds of acquiring an infection. More specifically, there has been an 80% reduction in respiratory tract infections, a 69% reduction in bloodstream infections, a 59% reduction in wound infections and a 39% reduction in urinary tract infections. As a result, we expect higher demand for MIS surgical procedures, which will aid Johnson & Johnson’s surgical devices business’ revenue growth. The minimally invasive surgery sector is also expected to experience significant innovation. The manufacturers of MIS tools are focusing on increasing the application of these procedures within specialties or in new areas where such procedures have not yet been performed.
Johnson & Johnson’s Advanced Positioning In Multiple Surgery Markets
The global sterilization market opportunity is valued around $3.5-$4 billion. Given the global focus on reducing hospital acquired infections (HAIs), we believe the hospital sterilization market has solid room to grow, particularly as economic conditions become more favorable. Johnson & Johnson’s high-level disinfection products include the Evotech endoscope cleaner and reprocessor (ECR). The company also offers a line of disinfecting and detergent solutions sold under the Cidex name.
If we look at specific surgical groups, we find that Johnson & Johnson has a market leading position in endoscopy, wound closure, women’s health and mechanical. In addition to this, the company has maintained 2nd position in aesthetics, energy and ENT (ear/nose/throat) surgical groups. 
Our price estimate for Johnson & Johnson stands at $85, implying a slight discount to the market priceNotes: