At J&J, New Boss, Same Strategy


While much of the pharmaceutical industry is sweating over patent expirations, a dearth of new drugs, and declining sales, Johnson & Johnson (JNJ) is sitting pretty. Just how pretty became apparent when it announced first-quarter earnings back on Apr. 16.

Johnson & Johnson posted sales of $8.7 billion and net earnings of $1.8 billion (59 cents a share), increases of 11.3% and 18.2%, respectively, over the same period a year ago. These results are far ahead of such rivals as Merck (MRK) and Bristol-Myers Squibb (BMY). Merck saw its sales climb only 7% in the quarter, while profits fell 1%. Bristol suffered declines of 9% in sales and 28% in profits.

Given the relatively comfortable spot J&J finds itself in, this is a good time for new CEO Bill Weldon, 53, to take the helm of the top-ranked company in the BusinessWeek 50. Weldon is two weeks into his new job, replacing 63-year-old Ralph Larsen, who took the company from $9 billion in sales in 1989 to $33 billion last year. Much of the growth has come through steady sales increases at J&J's pharmaceutical units. Its drug business now make up 45% of J&J sales, and Weldon says he has no plans to separate it from the company's other units -- medical devices and consumer-health products such as Johnson's Baby Oil and Band-Aids.

Weldon discussed with BusinessWeek Online reporter David Shook how J&J's three-pronged business structure has helped it avoid the problems that now plague the rest of the drug industry. The exec also stressed that he'll steer the same course that Larsen charted before his retirement. Following are edited excerpts of their conversation:

Q: J&J's stock, at $62, is up 19% from a year ago, while the Morgan Stanley Pharmaceutical Index has fallen 14%. How has J&J done so well in a market that has clearly been difficult for rival companies?

A: If you look at the pharmaceutical business in general, other companies have had patent expirations. Our [key] products, including Remicade [for arthritis] and Risperdal [antipsychotic medication], still have long patent lives ahead of them. Also, there's been a much higher emphasis on regulatory and compliance issues industrywide. We haven't had those issues [because the FDA hasn't had any concerns about J&J's drugs].

While my predecessor Ralph Larsen really helped change J&J into a science and technology company from what was primarily a consumer health-care business, we've found a sustainable platform for growth in broad-based health care that has essentially three legs: pharmaceuticals, consumer health, and medical devices and diagnostics. While we continue to be driven by the sci-tech side [which includes a sprawling biotech drug operation], these other pieces really set us apart in terms of helping us maintain a steadier stream of income.

And we have a very decentralized management structure. A good example of that is Centocor, a biotech company we bought in 1999. Centocor maintains its presence as a stand-alone company, even though we've seen some integration of skills and people with J&J.

Overall, pharmaceuticals have gone from roughly 20% of our total sales a decade ago to 45% today, while the medical-devices and diagnostics businesses have remained in the mid-30s, and the consumer-products unit has fallen as a percentage of sales -- though we're not deemphasizing that business in any way. Going forward, I suspect that the distribution will remain somewhat constant.

Q: Lately, you seem to have found synergies in the stent market [tiny, intricate surgical devices used to unclog arteries], despite the decentralized structure.

A: Yes. A good example of synergy is Cypher -- a drug-coated stent. Patients with stents often experience restenosis, the reclogging of arteries due to scarring from surgery. Now, we're able to put a drug product with a polymer [coating] on the stent, which allows the drug to be released slowly. This seems to greatly reduce or even eliminate the restenosis that we've seen in the past with stents. Cypher was approved in Europe a few weeks ago, and we're working diligently to have it approved in the U.S. in the first half of next year.

Q: With J&J's stock still flying high, is this a good time to be looking at mergers and acquisitions?

A: When we look at M&A activity, any time is the right time if we find the right opportunity at the right price. We have a list of criteria we use in evaluating any merger possibility, [including:] Will this deal accelerate growth in the short term, long term, or both? What does this company's technology and product pipeline look like? Does this deal enter us into new markets? Also, the culture and management play a role in these decisions. It's really a matter of a fit and how a potential deal is valued.

Q: The industry has griped that the U.S. Food & Drug Administration has been too cautious in reviewing drugs for marketing approval, or often asking for more data on a certain clinical trial at the last minute, or ultimately rejecting a drug even when the company believes its safety and efficacy data are sound (see BW, 5/20/02, "How Drugmakers Should Handle a Cautious FDA"). Do you have concerns about the way the FDA has been handling drug approvals?

A: I think probably the most important thing is for President Bush to appoint a commissioner, to get some leadership in that agency. Then, I think we'll have to work together to make sure we're bringing the safest, best products to market as possible.

Q: When will genomics [computer analysis of the vast human-gene database to glean clues about diseases and their treatment] really start to cut down on the time it takes for J&J to discover and bring a new drug to the market?

A: I think the challenge we all have is validating some of these new tools -- not just in genomics but in more sophisticated areas -- to ensure that they're delivering what we expect them to deliver.

We want to be able to identify early on a compound that affects the renal system, for example, then also be able to show through DNA chips and other technologies that we can isolate the effect this compound has on various organs.

Q: Will these technologies shave years off the discovery process?

A: I think more than that, they can improve the efficiency of the entire discovery process and help us to understand the safety profile of the products we're developing faster.


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