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Stanford GSB News

 

Pharmaceuticals Outshine Band-Aids for Johnson & Johnson

February 2007

STANFORD GRADUATE SCHOOL OF BUSINESS—In the 1980s during the poisoned Tylenol crisis, Johnson & Johnson put customers first, followed by the community and then shareholders, Chairman and Chief Executive Officer William Weldon told a Stanford Graduate School of Business audience February 26.

In 1982 seven people died in the Chicago area after using cyanide-laced Tylenol capsules. Johnson & Johnson, which manufactures the brand, ordered the recall of 264,000 bottles of the product and emerged with the reputation of the brand and the company intact. This type of long-term thinking has paid off repeatedly for investors, he said. The firm boasts more than $50 billion in annual sales and consistent growth throughout its history. A single $35 share purchased in 1944 is now worth more than $500,000.

While Johnson & Johnson is best known for Band-Aids and Baby Shampoo, its pharmaceutical and medical device segments are each bigger than its consumer products division. A key to the firm's future will be to work across these divisions, said Weldon who challenges the company's managers to fight cancer with sun block as well as oncology treatments. He expects innovations similar to the company's battery-driven skin patch developed by engineers and biologists to administer medicine in measured doses. Johnson & Johnson is also looking at patients' DNA during clinical trials in hopes of finding a genetic flag for how people respond to a given medicine.

Companies like Johnson & Johnson are sometimes accused of wanting to treat rather than cure diseases, a notion Weldon said he takes personally.

"Nothing would make our scientists happier than to find a cure for cancer," he said. "There will always be enough diseases around the world to deal with."

Johnson & Johnson acquired the consumer products arm of drug giant Pfizer for $16.6 billion in 2006, a departure from its pattern of buying young companies and growing them. Pfizer was a perfect fit, Weldon said, adding "iconic brands" such as Listerine, Visine, and Nicorette to the Johnson & Johnson portfolio, and increasing its leverage with retailers such as Wal-Mart. There was also a synergy because Pfizer had almost no presence in China, a nation where Johnson & Johnson is well established.

Weldon, who spoke as part of the student-sponsored View From the Top and Global speakers series, said he spends about 40 percent of his time working with people, mentoring future leaders, and getting to know them personally. The most promising young managers are put on career development plans to ensure breadth of experience. Decision-making power is decentralized when possible, which gives managers a chance to lead, make mistakes, and learn from them, Weldon said.

Mistakes are essential and inevitable, and the key to surviving them is resilience. This philosophy took Weldon from a sales rep in 1971 to the company's top executive in 2002.

"Each time I got knocked down I … got up and kept going," he said. "There's nothing wrong with admitting you're wrong."

Weldon has a reputation for setting ambitious, sometimes unattainable, goals. He believes it's a matter of pushing yourself and your employees, of testing the boundary between ambitious and unattainable.

"If you set a goal of 10 and reach 11, that's not really as good as setting a goal of 15 and reaching 14," he said.

That kind of attitude is essential in an environment where constant innovation is the key to survival. Johnson & Johnson spent $7 billion on research and development in 2006, the same year its patent ran out on Duragesic, a profitable pain-reliever patch. As a result, the firm's pharmaceutical business grew just 4 percent in 2006, well below its usual performance.

Even so, generic drugs are an "important business," Weldon said. As long as Johnson & Johnson can make a fair return on its investment in a given drug, the company should be on to the next innovation by the time a patent runs out.

"You have to continue to invest money and you have to continue to innovate and make great new products," he said. "If you can't do that you probably shouldn't be [in business]."

When asked for his thoughts on the U.S. health care system, he evoked his experience living in the United Kingdom, where everyone has health insurance. However, "not many of us would like to live in that program," he said. The key to successful health care is to make sure patients have access to the full range of products, because as soon as choices are limited, "innovation goes out of the system," Weldon said.

—Sarah Ruby