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2001 BW 50



Q&A With Johnson & Johnson's Ralph S. Larsen
The chairman and CEO tells how his company became No. 1 on this year's BW50 list and what's in the pipeline

Health-care giant Johnson & Johnson (JNJ ), with $33 billion in sales, topped the BusinessWeek 50 list this year. The company's strong performance was in large part due to the strength of its pharmaceutical business, which sells blockbusters such as the $3.4 billion anemia drug Procrit. These days, investors are most excited about a new product coming out of J&J's medical-device operation, a drug-coated "stent." Stents are used to prop arteries open after angioplasty. But often the area around the stent can become clogged again. Drug-coated stents appear to reduce that risk.

J&J Chairman and CEO Ralph S. Larsen recently spoke with BusinessWeek's Amy Barrett, who covers the pharmaceutical industry from Philadelphia, about J&J's hot streak and the company's prospects. Edited excerpts from their conversation follow:

Q: J&J has been a successful acquirer in recent years. What makes those deals work?
A: Remicade [a treatment for rheumatoid arthritis], which came to us from Centocor [which J&J bought in 1999], has been a big hit. Centocor was cash-starved and did not have the resources to make the most of its products. When it became part of Johnson & Johnson, it had access to our financial resources and our people.

They were able to do better with Remicade than they did on their own. We gave them more of everything: sales, marketing, financial support. We gave them a lot of running room. You can see that in many of our acquisitions.

Q: To what do you attribute J&J's recent success?
A: I'm not sure many people understand how this business has been transformed over the last 10 years. Back in 1991, our consumer business was 37% of the total, medical devices was 33%, and pharmaceuticals was 30%. In 2001, consumer was down to 21%, medical devices were 34%, and pharmaceuticals were 45%.

That was a deliberate move to shift the company into science-based businesses. What they offer is more consistent and enduring financial performance.

Q: What is the outlook for your new-product pipeline in the next few years?
A: It is good. Not as good as we'd like it to be, but a lot better than it used to be. We have 29 new chemical entities in early development, vs. just 5 or 6 five years ago. The science has become so precise and measurable that it is increasingly difficult to come up with products that you can prove beyond a shadow of a doubt are both safe and effective.

Information technology and biotechnology have given us more accurate measurement tools so we can detect side effects [problems in new drug candidates] earlier. That raises the bar.

Q: Analysts are very excited about the potential of drug-coated stents. How excited are you?
A: By every measure we can see, we have a significant lead [in this area]. We pioneered this because we are in both devices and pharmaceuticals. That is one of the great examples of why it's important to be in both technologies. It's tremendously important to be broadly based.... We want to be in all the growth areas of medicine.

Q: Your consumer business is much slower-growing in terms of revenue than your drug and device businesses. Would you consider selling that?
A: From a profitability standpoint, it has been the fastest-growing business. We see the consumer business as a good single-digit grower at the top line with good margins. It is an anchor. It is very predictable and throws off cash. And it is the flagship for the Johnson & Johnson name. It's what gives us this reputation as a caring company. So it is very important in terms of maintaining the character of the company.

Q: Has J&J done so well because your business, health care, is largely recession-resistant?
A: I think it is more resistant than autos or steel. But when we saw this [slowdown] coming, we took a series of actions to make sure we didn't get caught in the storm. We saw this recession coming three years ago. It was obvious the booming economic cycle couldn't continue.

We tightened our belts. We focused on cash flow. We reduced expenses where we could. We accelerated efficiency improvements. We were much more careful on our spending and put more emphasis on cash flow. In a large company like ours, when you put out the word that cash flow is important, [people] do things differently.

MARCH 3, 2002

Edited by Beth Belton

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