J&J Tries to Buy Itself a Pipeline

It's snapping up biotechs, spearheading innovative alliances, and reshuffling R&D

McCoy is filling the shopping cart as J&J-developed blockbusters go off-patent Bill Cramer/Wonderful Machine

By Arlene Weintraub

A year ago, when Sheri S. McCoy was picked to lead Johnson & Johnson's (JNJ) pharmaceutical division, she knew it would be the biggest challenge she had faced in 27 years at the company. J&J was losing patent protection on two giant products: treatments for epilepsy and schizophrenia. It didn't have a single product on the near horizon that could make up for the $7 billion in annual sales that would disappear when the two drugs went generic.

So McCoy, like many pharmaceutical managers, poured her energies into acquisitions, partnerships, and novel research collaborations, hoping to gain faster access to promising new markets. In July, J&J devoured Cougar Biotechnology for close to $1 billion. In early September it spent $885 million for an 18% stake in Elan Pharmaceuticals (ELN). And J&J will pay $441 million for 18% of Crucell (CRXL), a Dutch biotech company that's developing vaccines—a new product line for the 123-year-old J&J. This last purchase was announced on Sept. 28, the same day rival Abbott Labs (ABT) bought the drug and vaccine unit of Belgium's Solvay (SVYSY) for $6.6 billion. Deals like these are unusual for J&J, but CEO William C. Weldon says McCoy has his full support. "We try to do our best with our internal research," he told BusinessWeek, "but we recognize we need to look at other opportunities."

McCoy's mandate isn't confined to mergers and acquisitions. She is responsible for all aspects of drug development, from spotting potential hit molecules to devising marketing tactics. Laying out a strategy is challenging now, with the recession dampening pharmaceutical sales and debates over health-care reform raising questions about how drug companies will be reimbursed. In the first half of 2009, sales of J&J's prescription drugs dropped 12% from the same period a year ago, to $11.3 billion. Revenues also fell in J&J's consumer and medical-device units as customers kept their wallets shut. And J&J has had some regulatory setbacks: The Food & Drug Administration has issued a slew of requests for more data on drugs the company has submitted for review.

Strange Bedfellows

One of McCoy's most controversial moves is the deal with Irish drugmaker Elan. She and her team were interested in a promising treatment for Alzheimer's disease in Elan's pipeline, but Elan already had a research partnership with Wyeth (WYE), which is being acquired by Pfizer (PFE). The deal thus plunges the normally conservative J&J into an unusual three-way research alliance. In the past, Weldon says, rivalry might have scuttled the partnership plan, but not anymore. "The cost of bringing products to market and the risk associated with them is so much greater in today's environment," he explains. Success may depend on "the ability to partner."

J&J initially agreed to invest $1 billion in Elan, but on Sept. 14 it had to renegotiate the price and restructure the deal to avoid violating Elan's contract with another partner. Even at the lower valuation, however, it's a risky bet, especially considering that Elan's lead drug has had mixed results in clinical trials. Investors were concerned that "the implied value was on the high side," says Sara C. Michelmore, an analyst for Cowen & Co, which does not have an investment banking relationship with J&J. "But gosh, it's about portfolio management." J&J needs some high-risk, high-reward products in its pipeline, she says.

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