Is it possible 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.
While the US and Europe represent the company's largest markets (accounting for 45% and 25% of sales, respectively), the firm has been working to expand its presence in markets in Asia (especially China) and other regions that are emerging as high-growth opportunities.
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 35% to 40% of sales, while the Consumer division contributes 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 sales in the Pharmaceuticals segment, caused Medical Devices to pass Pharmaceuticals as the company's top revenue and profit earner in 2009, and it has continued as the largest segment through fiscal 2012.
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, has experienced declining sales due to increased competition and safety concerns over blood clotting in the cardiovascular stent market, leading J&J to exit the stent manufacturing market in 2011.
Operating companies in the Pharmaceuticals division include Janssen Biotech (formerly Centocor Ortho Biotech), Janssen Pharmaceuticals, and Noramco. Remicade is the company's top earner, bringing in more than $5 billion in annual sales; in addition to psoriasis, the drug treats Crohn's disease, rheumatoid arthritis, and ulcerative colitis. In addition, key drugs earning over $1 billion annually are Procrit (sold internationally as Eprex), schizophrenia medication Risperdal Consta, cancer treatment Velcade, attention deficit drug Concerta, and AIDS therapy Prezista.
Through its selective expansion efforts and cost-control programs, J&J has managed to maintain a healthy bottom line over the years despite challenges including patent losses on key pharmaceuticals. The company returned to revenue growth in 2011, increasing sales by about 6% to some $65 billion. Revenues rose again in 2012 by 3% to some $67 billion. Its net income levels dropped from $13.3 billion to about $9.7 billion in 2011, (largely due to restructuring, recall, acquisition, and product litigation expenses), but J&J experienced 12% profit growth in 2012 to some $10.9 billion.
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 Tylenol 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. The product recalls 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. Overall, consumer product sales dropped from $15.8 billion in 2009 to $14.6 billion in 2010. The division reversed the trajectory in 2011, however, bringing sales back up a bit to some $14.9 billion mainly through increased sales in international markets.
Outside of the troubled Cordis business, the units of the Medical Devices division have been vigilantly working to sustain growth by developing and launching new product offerings in recent years. For instance in 2011 Ethicon released new Physiomesh and Securestrap surgical offerings. J&J spends some $1.8 billion annually on R&D efforts within the Medical Devices segment.
J&J spends another $5 billion on its Pharmaceuticals segment's R&D pipeline in an effort to fight off the drug industry's biggest challenge: patent expiration. The company aims to launch a number of new drugs to replace former bestsellers in areas including immunology, pain, cardiology, infectious disease, and neurology. In 2011 the company received FDA approval for Xarelto, an anti-coagulant developed with Bayer, as well as HIV drug Edurant and Zytiga for prostate cancer. J&J also works to add new indications for existing drugs; for instance Remicade gained approval for use in ulcerative colitis patients in 2011. Fighting generic competition will be a continuing challenge as more products fall off patent; for instance, top sellers Concerta and Levaquin (an anti-infective also known as Floxin) lost their patent protection in 2011.
In response to patent protection losses, as well as other competitive and product safety challenges, in 2011 the company consolidated several drug manufacturing units under the Janssen Pharmaceuticals unit to increase operational efficiencies. J&J has kept its operations nimble through other cost-control programs through the years. It reduced annual expenses by $1.5 billion between 2009 and the end of 2011 through a restructuring program that workforce reductions, streamlining of sales and administrative organizations, and the divestiture of a few noncore businesses including its animal health and dermatology units. In addition, it closed two plants as part of the restructuring of its cardiovascular division. The reshuffling allows J&J to focus its resources on core product development and commercialization efforts.
Mergers & Acquisitions
J&J's restructuring efforts have not precluded expansion efforts in some areas of the business. The company has made a number of acquisitions both large and small. In 2011 J&J completed a $2.4 billion tender offer to take full control of vaccine maker Crucell through a share tender offer; it already owned an 18% stake in the firm. It raised its stake to 98.9% through the tender offer, and the remaining Crucell shares were gathered up through a buyout offer that concluded in March 2012. The purchase gives J&J full access to Crucell's existing vaccines and its promising influenza drug pipeline, which is based on its monoclonal antibody (MAb, or single-source protein) technology.
Following that purchase, J&J acquired orthopedic medical device maker Synthes for a whopping $20 billion in mid-2012. The purchase expanded the company's operations in the areas of trauma (bone screws and plates), spinal implants, tissue repair, and surgical power tools. J&J is integrating Synthes into its DePuy subsidiary to form the DePuy Synthes Companies of Johnson & Johnson organization. The new entity is not only the largest business within J&J's medical and diagnostic segment, it is also the top global orthopedics device manufacturer.
Like other drug and device makers, the company's emerging market strategy led to expansion in China in 2012 through the purchase of private surgical supply company Guangzhou Bioseal Biotechnology (Bioseal). Bioseal manufactures a fibrin sealant derived from porcine plasma (pig's blood) used to control bleeding during surgery. The acquisition complements the Ethicon biosurgery product portfolio available in China. J&J also established a device and diagnostic research center in China in 2011.