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Health Care

Johnson & Johnson to Overhaul Pharma, Cut 7,000 Jobs

The recession has slammed Johnson & Johnson (JNJ), the world's largest health-care company. So, CEO William Weldon on Nov. 3 announced an overhaul that will result in layoffs of 6% to 7% of J&J's 117,000 employees, or more than 7,000 people. "We've gone through the headwinds that a lot of companies are about to run into," Weldon said in call with analysts, referring to patent expirations on major products over the past year. "But the economic headwinds are still ahead of everybody." As consumers pull back spending on everything from branded over-the-counter drugs to elective surgeries, J&J is feeling the pain across all its businesses. On Oct. 13, J&J announced that overall third-quarter sales dropped 5% year-over-year, to $15 billion. Net income was flat, at $3.3 billion. But sales in the pharmaceutical unit fell 14%, largely because of patent losses on two huge products: Risperdal, to treat psychiatric disorders, and Topamax, for epilepsy. Together those two drugs accounted for $7 billion in annual revenues. "If you go back and look at the last five or six recessions—and we've done that—health care is somewhat recession-proof," Weldon said during an interview with BusinessWeek in September. "I think this is different. This is the most difficult environment in my lifetime." Weldon insists the cuts are not just about saving money on salaries and benefits, but also aimed at making the lumbering conglomerate more efficient. J&J is hoping to reduce the layers of management that can sometimes get in the way of product development. "We're streamlining the business so we can make faster, easier decisions," Weldon told analysts. Pharmaceutical Division's New StructureThe process of identifying inefficiencies in the company's pharmaceutical division actually began earlier this year, when J&J veteran Sheri McCoy was appointed to lead that unit. One of McCoy's major initiatives has been to set up five units defined by therapeutic focus: neurology, infectious disease, immunology, oncology, and cardiovascular and metabolic disease. Previously, J&J separated research and development by function—basic research, clinical, regulatory, and so forth. McCoy believes the new structure will not only help get products to market faster, but it will also unleash entrepreneurial energy that has been lacking at J&J for the past several years. Each therapeutic unit, in essence, will operate like its own little company. J&J is also looking at streamlining its sales organization—a process that may involve replacing salespeople with technology. Some products, such as drugs that are sold to primary-care physicians, might not need to be marketed by high-priced sales reps. Instead the company can direct the doctors to interactive Web sites and other informational resources. J&J might be better served, McCoy says, by using sales reps to call on specialists, who prescribe complicated products that really require one-on-one explanations. "In the past, we would be going and detailing products to primary-care physicians," McCoy said in September. "Now we're taking sales forces out, and the way we interact with those physicians is directly through the Web site." The company's thought process is not unlike similar moves being made all across the pharmaceutical industry. Pfizer (PFE) has spent the last two years cutting out layers of management in R&D, refocusing its efforts on key therapeutic areas, and downsizing to try to become more efficient.The challenge will be that much greater as it absorbs its recent acquisition of Wyeth. Market PressureMcCoy believes the changes being made at J&J are necessary at a time when all drug companies are under pressure to develop more innovative products that offer cost-effective means for treating unmet medical needs—diseases for which there are few therapeutic options, such as cancer and Alzheimer's. "Like all of the industry we're looking at the new commercial model and asking, 'How do we go to market differently?' " McCoy says. J&J expects the cuts will save the company more than $1.4 billion a year, starting in 2011. It will take a $1.3 billion charge in the fourth quarter of this year for the restructuring. Executives tried to assure analysts they wouldn't need to change their earnings guidance, so investors reacted calmly: J&J's stock was down less than 1%, to 59, in early trading. Executives told analysts they expect to meet the company's earnings range for the year, which is $4.54 to $4.59 per share, minus special items.
Weintraub is a Bloomberg Businessweek contributor.

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