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J&J: Reinventing How It Invents


These days, managers at Johnson & Johnson (JNJ) are willing to look in some unusual places for inspiration. Last year a small unit within J&J's Ethicon Endo-Surgery tools business was brainstorming about how to design a better surgical clip. A team of seven scientists and engineers fanned out to buy as many clips of any type as they could find. They grabbed a motley collection -- more than 100 of them -- from Wal-Mart Stores (WMT), Home Depot, and other local hardware and hobby shops. Those clips now hang on a big board in the group's warehouse-like research and development offices outside Cincinnati. "The idea was to free [the team] up," says Dr. Harlan Weisman, chief science and technology officer for J&J's device and diagnostic unit. "Let them be like kids and maybe they'll come up with a nifty solution."

The shopping spree is just one small example of how the 120-year-old company is trying to drive innovation in its growing, increasingly important medical device business. J&J executives are trying to replicate the fertile and fast-moving venture-capital world, creating internal startups that hunt for financing among other J&J units as they would if they were independent. J&J is also pushing for greater input from doctors and insurers to guarantee that it knows exactly what devices customers will want -- and what sort of data they will demand before using them. The company is even tinkering with its much-vaunted decentralized management structure, putting Weisman in his newly created position last fall as a way to bring greater focus to the task of identifying new markets. "It's not your father's Johnson & Johnson," Weisman asserts.

BREAKUP SPECULATION

There's a sense of urgency at the New Brunswick (N.J.) icon. With $16 billion in cash, J&J is on the prowl for sizable acquisitions. But after getting outbid for Guidant Corp. earlier this year, it knows all too well that potential targets won't come cheap. Without a shot in the arm in the form of new products, however, earnings growth is expected to make a major downshift. While earnings per share were up an average of 16.2% annually over the past five years, Morgan Stanley (MS) analyst Glenn Reicin expects an average of just 8.4% for each of the next five years. No surprise, then, that Wall Street has been backing away from the company's stock, which fell 13% in the past year, to $59 on Apr. 4. Once a premium stock, J&J is now occasionally the subject of breakup speculation.

The health-care giant's record of internal innovation simply hasn't kept pace with its increasingly massive size. The challenges are particularly worrisome in J&J's $19 billion devices and diagnostics business, which represents 38% of overall revenues. Last year that unit fueled the company's growth as its big drug operation slowed. And J&J Chairman and CEO William C. Weldon made it clear with his ill-fated Guidant bid that he was looking to shift the business mix away from pharmaceuticals, where the entire industry pipeline is weak, and toward devices.

That's why Weisman's new job is so critical. A rising star at J&J, Weisman, 53, came to the company in 1999 with the acquisition of biotech Centocor Inc. That deal, which brought J&J the blockbuster rheumatoid arthritis drug Remicade, was seen as a home run. After years on the pharmaceutical side, Weisman is now charged not only with identifying key new markets for J&J to go after in devices but also with spotting ways in which the drug and device businesses might collaborate to create new products.

Weisman's cross-functional appointment -- a device guy with a pharma past -- underscores a subtle cultural shift. J&J has long cultivated a decentralized organization, allowing more than 200 companies to operate almost as autonomous businesses. As useful as that is to a prolific acquirer, it may not be the ideal structure for spotting new markets. And while J&J managers have spoken often about the potential offered by combining devices and drugs in one product, the company's decentralization can also create barriers to that sort of synergy. Asking managers suddenly to change the basic way they operate and collaborate "to some extent is countercultural," says Michael L. Tushman, a professor of business administration at Harvard Business School.

"BUCKETFUL OF MONEY"

Part of Weisman's new responsibility is to coax that process along. He's charged with helping to spot opportunities in what he calls "white spaces," markets that any one of J&J's existing business units might miss. He will also try to foster cooperation among various J&J units as the worlds of devices, drugs, and diagnostics converge. J&J has some notable successes there, the most obvious being its $2.6 billion drug-coated Cypher stent. As more of those openings arise, Weisman will be central to getting the disparate groups working together.

Some notable failures make it clear why the innovation rethink is critical. J&J's Charite artificial spinal disk was a flop, as a lack of long-term safety data caused Medicare to resist covering it. Now, J&J is emphasizing projects that produce more cost-effective solutions to health-care problems, with more input from end users. For example, the Ethicon-Endo unit that is designing the new surgical clip grew out of discussions with physicians about the need to find ways to do less-invasive surgeries. In 2001 the business carved out a new, skunk-works-like unit made up not only of scientists and engineers but also of marketing and regulatory experts who understand what payers will want. The group moved into its own facility five miles down the road from the Ethicon-Endo business, and it was given what Nick Valeriani, J&J's worldwide chairman of cardiovascular devices and diagnostics, calls a "bucketful of money" to create new surgical tools.

J&J is trying to spark the creation of more of those startups. Two years ago the company began encouraging managers with ideas for cutting-edge new businesses to shop for funding within the company. Teams with a hot idea create a business plan and try to win financing from the company's big venture-capital arm, known as Johnson & Johnson Development Corp., and from one or more of J&J's existing businesses. JJDC has seeded outside startups for years, often taking stakes in companies J&J would later buy outright. Now the idea is to put some of that VC money to work within the company itself. Already, Weisman claims, the effort has yielded four new projects, including one researching adult stem cells.

While Wall Street is clearly worried about a slowdown in the device business, J&J executives argue the company has not stumbled. Weisman says the rethinking of J&J's new-product development reflects the shift in the world of medical devices to even more complex products, rather than evidence of any slipup on J&J's part. "I was not brought in to fix something that was broken," Weisman insists. It's true that J&J's R&D operation, with about 15,000 people worldwide, has enjoyed its fair share of breakthroughs. And J&J keeps that R&D machine well greased, having spent $6.3 billion on it last year.

But for a company with a $176 billion market cap, it's going to be tough to find new ventures that will move the needle. Shifting away from the traditional R&D approach toward a more integrated, cross-disciplinary approach to innovation is a start. J&J, one of the bluest of the blue chips, needs something to happen fairly soon to recharge growth and rejuvenate its sagging share price. J&J's problems are significant, but Weisman's business philosophy is pretty simple. "If it works," he says, "we'll keep doing it."

By Amy Barrett


We Almost Lost the Nasdaq
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