It's nearly impossible to get well without Johnson & Johnson (J&J). The diversified health care giant operates in three segments through more than 250 operating companies located in some 60 countries. Its Medical Devices and Diagnostics division offers surgical equipment, monitoring devices, orthopedic products, and contact lenses, among other things. J&J's Pharmaceuticals division makes drugs for an array of ailments, such as neurological conditions, blood disorders, autoimmune diseases, and pain. Top sellers are psoriasis drug Remicade and anemia medication Procrit. Its Consumer business makes over-the-counter drugs and products for baby, skin, and oral care, as well as first aid and women's health.
J&J prides itself on its decentralized operating structure, with the management teams of its myriad and far-flung operating units having wide latitude to make decisions. Each company belongs to one of J&J's three broad divisions: the Pharmaceuticals and Medical Devices segments each account for more than 35% of sales, while the Consumer businesses contribute about 25% of annual revenues. J&J's diversified business model also allows for some insulation against troubles in any one market. For instance, growth in the Medical Devices segment, coupled with lagging pharmaceutical sales, has caused the Medical Devices segment to pass Pharmaceuticals as the company's top revenue and profit earner in both 2009 and 2010.
In its ever-expanding Medical Devices and Diagnostics division, many operating companies -- including surgical supplies companies Ethicon and Ethicon Endo-Surgery, orthopedics device maker DePuy, vision care subsidiary Vistakon, and diagnostics unit Ortho-Clinical Diagnostics -- have experienced strong sales growth. The division also includes the LifeScan diabetes care unit, which includes the growing Animas insulin delivery offerings. However, Cordis, a maker of cardiology products such as the Cypher drug-coated stent, has experienced declining sales due to increased competition and safety concerns over blood clotting in the stent market. As competitive and regulatory approval conditions worsened, in 2011 J&J announced plans to exit the stent market.
Operating companies in the Pharmaceuticals division include Janssen Biotech(formerly Centocor Ortho Biotech), Janssen Pharmaceuticals, and Noramco. Along with Remicade (which treats Crohn's disease and rheumatoid arthritis in addition to psoriasis) and Procrit (sold internationally as Eprex), key drugs earning over $1 billion annually are schizophrenia medication Risperdal Consta, anti-infectives Levaquin (also known as Floxin), attention deficit drug Concerta, cancer treatment Velcade, and acid reflux therapy Aciphex (or Pariet).
J&J has confidence that its drug development pipeline will produce some additional winners. It aims to launch a number of new investigational compounds in areas including immunology, pain, cardiology, infectious disease, and neurology. In 2009 the company launched new products including Stelara for psoriasis, Simponi for rheumatoid arthritis, and Nucynta for pain. Invega Sustenna, a long-acting injectable version of schizophrenia medication Invega, was launched in 2010.
J&J's push for R&D growth is driven by the drug industry's biggest challenge: patent expiration. Global blockbusters Risperdal (schizophrenia) and Topamax (epilepsy) lost patent protection in 2008 and 2009, respectively, and thus face competition from cheaper generics. Sales of both products have dropped significantly, but the company still has market exclusivity for Risperdal Consta, a long-acting injectable version of Risperdal that is increasing its market penetration; Risperdal Consta received approval for the expanded application of bipolar disorder treatment in 2009. J&J also hopes that sales of its newer schizophrenia medications, Invega and Invega Sustenna, will eventually replace Risperdal. Fighting generic competition will be a continuing challenge as more products fall off patent; for instance, Concerta lost its patent protection in 2011.
Negative publicity over safety concerns has also inflicted wounds on certain J&J brands over the years, including anemia drug Procrit, which has been under fire for cardiovascular risks. Some of the company's birth control products have also faced scrutiny over potential risks. In response to these challenges, in 2011 the company consolidated several drug manufacturing units to increase operational efficiencies. It combined the Janssen mental health division (maker of Concerta and Risperdal), Ortho-McNeil (contraceptives), Ortho-McNeil Neurologics (maker of Topamax), and a number of other units into the Janssen Pharmaceuticals unit. It also formed an umbrella organization, known as the Janssen Pharmaceutical Companies, and rebranded some divisions under the Janssen name to unify the identities of the various pharmaceutical entities.
J&J's most recent troubles have come in the form of public and regulatory scrutiny over its manufacturing practices, beginning in 2010 when a widespread recall of consumer products including Tylanol and Motrin. These set off a series of manufacturing inquiries and management restructurings, as well as a number of additional recalls in the consumer, pharmaceutical, and device divisions. A recall of the DePuy ASR hip replacement products has led to some consumer lawsuits.
The series of recalls has hit sales within its Consumer segment the hardest, especially at the McNeil Consumer Healthcare division, which had to suspend production at one of its manufacturing plants. The division's offerings include consumer brands Benadryl, Listerine, Lubriderm, Neutrogena, Rolaids, Splenda, Sudafed, Tylenol, Zyrtec, and (of course) Johnson's. Overall, consumer product sales dropped from $15.8 billion in 2009 to $14.6 billion in 2010.
Despite its troubles, J&J has managed to maintain a healthy bottom line, in part by keeping its operations nimble through restructuring and cost-control programs through the years. For instance, in late 2009 the company announced a program to reduce annual expenses by $1.5 billion by the end of 2011; restructuring efforts include a 6% to 7% workforce reduction effort that aims to reduce management layers and simplify business structures. It is also working to cut costs in its manufacturing, sales and marketing, and administrative organizations, and it is offloading a few noncore businesses including its animal health and dermatology units. It will close two plants as part of the restructuring of its cardiovascular division. The reshuffling will allow J&J to focus its resources on core product development and commercialization efforts.
The restructuring efforts have not precluded expansion efforts in some areas of the business, however. In 2009, for example, J&J paid about $1.1 billion for Mentor Corporation, a maker of devices for aesthetic procedures that became an independent subsidiary within the Ethicon business. To further expand in the medical equipment industry, in early 2010 Ethicon acquired ear, nose, and throat (ENT) device maker Acclarent for $785 million. In addition, J&J strengthened its Centocor Ortho Biotech division in 2009 through the purchase of Cougar Biotechnology, an oncology research and development firm with a promising prostate cancer candidate, for about $1 billion.
Also in 2009 the company paid $885 million for an 18% stake in Irish drug maker Elan. J&J also gained control of Elan's portion of an Alzheimer's disease treatment partnership with Pfizer. J&J has incorporated the development program into a new company, Janssen Alzheimer Immunotherapy, of which Elan owns a nearly 50% equity interest in (though J&J has the option to acquire the stake from Elan later on). J&J will invest up to $500 million toward further development of the drugs in the program, including lead candidate bapineuzumab, a late-stage antibody (protein) therapy thought to slow the progression of Alzheimer's disease.
Later that year J&J broke into the growing flu vaccine development market by making a similar investment in Dutch biotech firm Crucell, buying an 18% stake for $443 million and forming a collaboration with Crucell to develop influenza therapies and vaccines based on Crucell's monoclonal antibody (MAb, or single-source protein) technology. Then, in 2011 J&J spent about $2.4 billion to purchase essentially the rest of Crucell (98.9%). The buy further expands J&J's vaccine segment, it also helps the company offset financial losses related to upcoming patent expirations.
It followed that buy up by agreeing to spend a whopping $21 billion to acquire orthopedic medical device maker Synthes. The purchase will expand the company's operations in the areas of trauma (bone screws and plates), spinal implants, tissue repair, and surgical power tools. Synthes will be combined into the DePuy subsidiary, which will then become the largest business within the medical and diagnostic segment of J&J. The combined operations will also become the top global orthopedics device manufacturer, which could potentially create some regulatory hurdles such as divestiture requirements.