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U.S. SURGICAL RESPONDING TO ETHICON PRICE CUTS

This article was originally published in The Gray Sheet

Executive Summary

U.S. SURGICAL RESPONDING TO ETHICON PRICE CUTS "with selective matching of discounts and a much better product line," U.S. Surgical Chairman, President and CEO Leon Hirsch told analysts at the 1993 Piper Jaffray conference held June 15-17 in Minneapolis, Minnesota. In his June 15 presentation, Hirsch characterized Ethicon's pricing strategy for staples and laparoscopic supplies as "aggressive," saying that the Johnson & Johnson subsidiary "has come into...hospital[s] and offered a discount" of 20% off the U.S. Surgical price. Hirsch predicted that the effect of Ethicon's recent marketing tactics will be temporary. "This isn't, at the moment, a market share problem," Hirsch said; "this is an interruption problem." The U.S. Surgical exec said that despite the discount, Ethicon is not permanently luring away U.S. Surgical clients: "We had eight major accounts totalling $4.5 mil. kick Ethicon out in the last two weeks." Hirsch elaborated on Ethicon's pricing strategy in response to investor questions regarding U.S. Surgical's predictions of second quarter financial performance. On June 11, the firm announced that it expects to report a loss for the quarter on sales that will fall below last year's second quarter. Hirsch said that the reduced results are due to Ethicon price cutting as well as the firm's switch of a "substantial portion" of its hospital business to just-in-time distribution. U.S. Surgical had announced in April that its accelerated move to the JIT distribution system would result in second quarter sales being "flat or slightly down" and earnings being "sharply down" ("The Gray Sheet" April 12, I&W-8). Hirsch explained that April sales and earnings projections also were based on incorrect estimates of hospital inventories. Because "everybody assumed hospital inventory levels were lower than they were," product reorders are not being placed as soon as the firm expected. "If we assume [the hospitals] had 45 days inventory, that means they should have been reordering from the distributor in 45 days," Hirsch explained. It appears, however, "that many of these hospitals had a lot more than 45 days inventory" and orders are not at anticipated levels. U.S. Surgical hopes to shore up its competitive position in part through product development. Hirsch discussed the firm's April rollout of nine new products, among them an automated subcutaneous skin stapler. The device places "tiny absorbable pins rapidly and precisely and securely just under the skin." Hirsch said use of the stapler provides "the patient the best cosmetic closure possible in just minutes." Although nonautomated subcutaneous skin closure with absorbable sutures also leaves "nothing on the surface of the skin," Hirsch noted "it is very time-consuming and takes a lot of special training to perform." Other products introduced in April include TA II staplers for open surgery and the Versitek for open hernia repair. Hirsch also commented that U.S. Surgical is "bullish" on its suture business, saying that it is "pretty much right on target . . . possibly a little ahead." U.S. Surgical has placed its sutures in approximately 500 hospitals and foresees increasing that number to between 800 and 1,000 "by the end of the year." The firm plans to introduce "more state-of-the-art sutures" aimed at "high margin" specialty areas such as "cardiovascular and ophthalmic and plastic surgery."

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