Johnson & Johnson — 2009 Comprehensive Study Notes

Page 1 – Corporate Overview, Product Scope & Recent Moves

• Brand Image vs. Reality
  • Public associates J&J with infants & the fresh scent of baby powder, yet operations span far wider.
  • Headquarters: New Brunswick, New Jersey.
  • Global reach: $147$ facilities in $>50$ countries.
  • Total revenue $2008$: $\$63.7\,\text{billion}$.

• Breadth of Portfolio
  • Hospital, retail & family‐oriented offerings.
  • Iconic consumer brands: K.Y., LifeScan, Band-Aid, Tylenol, Listerine, Zyrtec, Acuvue, Ortho contraceptives.
  • Robust medical-device & diagnostics suite.

• Pharmaceutical Focus Areas
  • Cardiovascular, reproductive health, HIV pipeline, oncology.

• Strategic Equity & M&A (mid-$2009$)
  • Purchased $18.4\%$ stake in Irish biotech Elan Corp. for Alzheimer’s market access (est. $\$3\,\text{billion}$).
  – Target molecule: Bapineuzumab (late-stage).
  – U.S. Alzheimer’s patients >4.5 million.
  – If disease-modifying, analysts value drug at $\$25\,\text{billion}$ annual sales.
  • Acquired Cougar Biotechnology for $\$894\,\text{million}$ cash
  – Price $\$43$ / share ( $16\%$ premium ).
  – Asset: late-stage prostate-cancer therapy.

• Financial Pulse (Q2 $2009$)
  • Net income $\$3.21\,\text{billion}$.
  • Sales $\$15.24\,\text{billion}$.
  • Remicade (rheumatoid arthritis): sales $\$1.1\,\text{billion}$, up $24\%$.

• Historical Milestones
  • $1886$: Founded by Robert, James & Edward Johnson – sterile dressings & medical plaster.
  • $1887$: Incorporated.
  • Late $1800$s: Baby powder launched.
  • $1921$: Band-Aid invented by employee Earle Dickson for home self-application.
  • $1924$: First foreign subsidiary (U.K.) – dawn of J&J’s MNC trajectory.

Page 2 – WWII Impact, Corporate Philosophy & Governance

• World War II Contributions
  • Leadership under Robert Johnson II.
  • Permacel division creates duct tape; critical for munitions protection — now ubiquitous.
  • Millions of Band-Aids shipped in combat kits, cementing brand equity.

• Corporate Credo (written $1943$)
  • Defines obligations to doctors, patients, customers, employees.

• Going Public: IPO in $1944$.

• Household Brand Status
  • Tylenol, Acuvue, LifeScan, Neutrogena, Band-Aid now genericised terms.

• Vision Statement
  “To maximize the global power of diversity and inclusion to drive superior business results and sustainable competitive advantage.”

• Mission Execution Pillars
  $\bullet$ Workplace: Credo-based, inclusive culture fostering innovation.
  $\bullet$ Workforce: Highly skilled, demographically reflective talent.
  $\bullet$ Marketplace: Targeted opportunities across diverse segments.
  $\bullet$ External Stakeholders: Partnerships with professional, patient & civic groups.

• Sustainability Ethos (6th annual report, issued $23\,\text{July}\,2009$)
  • Citizenship viewed as intrinsic, not an add-on (CEO William C. Weldon).

• Exhibit 1 – Executive Slate
  • Chairman/CEO: William Weldon.
  • Vice Chairs: Christine Poon (Medicines/Nutritionals), Robert Darretta (CFO).
  • Additional Worldwide Chairs: Nicholas Valeriani (Cardiovascular Devices & Diagnostics), Joseph Scodari (Pharma), Colleen Goggins (Consumer & Personal Care), Michael Dormer (Medical Devices).
  • VP Diversity: JoAnn Heffernan Heisen.
  • Notable subsidiary lead: Mari Baker – BabyCenter.

Page 3 – Credo Details, Marketing Architecture & Flagship Brands

• Expanded Mission / Credo Hierarchy

  1. Primary responsibility to doctors, nurses, patients & end-users → uncompromising quality, cost control, prompt service, fair supplier profits.
  2. Employees → dignity, merit recognition, job security, fair compensation, safe workplaces, suggestion freedom, EO for advancement.
  3. Communities/world → good citizenship, taxes, civic improvements, environmental stewardship.
  4. Stockholders → sound profit, innovation, R&D investment, reserves, “fair return.”

• Brand-Specific Marketing Nuances
  • Highly heterogeneous mix calls for bespoke strategies per SKU.
  • Shift toward digital/outdoor; reduction in prescription-drug mass advertising.

• LifeScan
  • HQ: Milpitas, California.
  • One Touch Ultra blood-glucose meters: domestic user base $98\%$.
  • Value propositions: minimal pain, alternate-site testing, $5$-second readout, meal flags, $7/14/30$-day averages.

• Tylenol Lineage
  • Acquired via McNeil Laboratories ($1959$).
  • OTC switch in $1960$.
  • Portfolio: $16$ variants (Children’s to Tylenol PM).
  • Digital emphasis: contextual ads on Yahoo, Google, MSN; reduction in print spend.
  • Tylenol.com positioned as knowledge hub, not hard-sell channel.

Page 4 – Digital Strategy, R&D Backbone & Segment Architecture

• Online Presence Philosophy
  • Corporate sites used for education & image control rather than pure advertising.

• R&D Expenditures
  • $2008$ spend: $\$7.6\,\text{billion}$ (slight YOY decline).
  • Covers new products, improvements, tech support, regulatory compliance.
  • Decline credited to improved pharma R&D efficiency.

• Three Operating Segments

  1. Consumer Products
  2. Medical Devices & Diagnostics
  3. Pharmaceuticals

• Exhibit 3 – $2008$ Category Performance (select highlights)
  • Skin Care $\$3.4\,\text{billion}$ (↑ $11.0\%$).
  • Baby Care $\$2.2\,\text{billion}$ (↑ $12.0\%$).
  • OTC Drugs/Vitamins $\$5.9\,\text{billion}$.
  • Medical Devices & Diagnostics total $\$23.1\,\text{billion}$ (↑ $6.4\%$).
  • Pharmaceuticals total $\$24.6\,\text{billion}$ (↓ $1.2\%$) – notable Remicade $\$3.7\,\text{billion}$.

Page 5 – Geographic Footprint

• Exhibit 4 maps facilities by sector (Consumer, Pharma, Medical Devices & Diagnostics) worldwide; filtering tool shows $103$ entity listings spanning corporate & giving programs.

Page 6 – Deep-Dive into Segment Financials & Profit Drivers (2008)

1. Consumer Products
   • Sales: $\$16.0\,\text{billion}$ (↑ $10.8\%$: $8.3\%$ operational, $2.5\%$ currency).
   • Operating profit: $\$2.674\,\text{billion}$ (↑ $17.4\%$); margin $16.7\%$.
   • Levers: Pfizer Consumer Healthcare integration cost synergies + containment initiatives.

2. Pharmaceuticals
   • Sales: $\$24.9\,\text{billion}$ (↓ $1.2\%$ overall; ↓ $3.1\%$ operational; +$1.9\%$ FX).
   • U.S. sales $\$14.9\,\text{billion}$ (↓ $4.9\%$).
   • International $\$9.7\,\text{billion}$ (↑ $5.1\%$).
   • Operating profit $\$7.605\,\text{billion}$ (↑ $31.0\%$).

3. Medical Devices & Diagnostics
   • Sales: $\$23.1\,\text{billion}$ (↑ $6.4\%$; $3.5\%$ operational, $2.9\%$ FX).
   • U.S. $\$10.5\,\text{billion}$ (↑ $1.0\%$).
   • International $\$12.6\,\text{billion}$ (↑ $11.3\%$).
   • Operating profit: $\$7.223\,\text{billion}$ (↑ $49.1\%$; margin $31.2\%$).
   • Drivers: $\$429\,\text{million}$ litigation-settlement gain, favorable mix, mfg efficiencies, R&D down $\$633\,\text{million}$ YOY.

• Competitive Landscape
  Exhibit 5 lists major rivals across biotech, generics & diversified HC (Amgen, Teva, GSK, Sandoz, etc.).

Page 7 – Competitor Profiles (Abbott Labs & Merck)

• Abbott Laboratories
  • Segments: Pharmaceuticals, Diagnostics, Nutritionals, Vascular.
  • $2008$ revenue $\$29,525.5\,\text{million}$; net income $\$4,880.7\,\text{million}$.
  • Owns $50\%$ of TAP JV (Lupron, Prevacid).

• Merck & Co.
  • Notable assets: Gardasil (first anti-cancer vaccine), diabetes drugs, eye & cardiovascular portfolio (Cozaar/Hyzaar).
  • Acquired Insmed for $\$130\,\text{million}$ to access follow-on biologics.
  • $2008$ revenue $\$23,850.3\,\text{million}$; net income $\$7,808.4\,\text{million}$.

Page 8 – Quantitative Rival Comparison & Additional Competitors

• Exhibit 6 – Market Metrics Snapshot (early $2009$)

  Metric	J&J	Eli Lilly	Novartis	Procter & Gamble
  Market Cap	$\$166.23\,\text{B}$	$\$37.92\,\text{B}$	$\$104.84\,\text{B}$	$\$154.29\,\text{B}$
  Employees	$118,700$	$40,500$	$99,000$	$135,000$
  Quarterly Rev Growth	$-7.4\%$	$2.8\%$	$-2.3\%$	$-10.6\%$
  Revenue	$\$61.37\,\text{B}$	$\$20.76\,\text{B}$	$\$42.05\,\text{B}$	$\$79.03\,\text{B}$
  Gross Margin	$70.92\%$	$81.53\%$	$73.15\%$	$50.78\%$
  EBITDA	$\$18.97\,\text{B}$	$\$7.48\,\text{B}$	$\$11.19\,\text{B}$	$\$19.20\,\text{B}$
  Operating Margin	$26.29\%$	$30.37\%$	$21.44\%$	$20.40\%$
  EPS	$4.551$	$-1.481$	$3.34$	$4.260$

• Novartis Highlights
  • >60 Rx products; approval leader since $2000$ (e.g., Ritalin).
  • Also top player in generics via Sandoz – dual leadership unique.
  • Animal Health division (companion + farm).
  • $2008$ revenue $\$38,947\,\text{million}$; net $\$11,946\,\text{million}$.

• Pfizer
  • Dual segments: Pharmaceuticals & Animal Health; ancillary business lines (capsules, contract mfg, bulk APIs).
  • $2008$ revenue $\$48,296\,\text{million}$; net $\$8,104\,\text{million}$.

• Procter & Gamble (P&G)
  • Family of brands: Tide, Charmin, Crest, Pampers, CoverGirl, IAMS, Vicks, plus Rx (Actonel, Didronel).
  • Sustainability strides $2008$: energy ↓ $6\%$, CO₂ ↓ $6\%$, water ↓ $7\%$.
  • Reached $60\,\text{million}$ children via “Live, Learn & Thrive.”
  • $2008$ revenue $\$83,503\,\text{million}$; net $\$12,075\,\text{million}$.

Page 9 – Industry Headwinds, Patent Cliffs & Near-Term Outlook

• Margin Protection Strategies: cost-cuts, productivity programs, periodic price hikes.

• Macro Challenges
  • Global healthcare reforms → pricing pressure.
  • FX volatility due to economic uncertainty.

• Job-Cut Wave (early $2009$)
  • Pfizer eliminated $19,500$ roles; AstraZeneca $15,000$.

• R&D Financial Stress
  • Costs rising eight-fold per year; investor trepidation.

• Consumer Behavior Shifts
  • Delayed procedures, Rx rationing, fewer doctor visits, loss of coverage amid downturn.

• Patent Expiration (“Cliffs”)
  • ANDA challenges targeting flagship molecules pre-expiry.
  • By $2012$ multiple blockbuster patents lapse (e.g., Pfizer’s Lipitor – $\$12\,\text{billion}$ or $25\%$ of sales).
  • Threat = revenue erosion for originators; opportunity for generics.

• Q2 $2009$ Performance Snapshot
  • Company-wide sales $\$15.2\,\text{billion}$ (↓ $7.4\%$ YOY).
  • Net earnings $\$3.2\,\text{billion}$; EPS $\$1.15$.

  Segment specifics:

  1. Consumer: $\$3.9\,\text{billion}$ (↓ $4.5\%$).
     • Domestic ↑ $0.8\%$; International ↓ $8.4\%$ (operational ↑ $4.7\%$; FX ↓ $13.1\%$).
     • Growth engines: Listerine, Neutrogena, Aveeno; acquisition of Vania Expansion SNC.
  2. Pharmaceuticals: $\$5.5\,\text{billion}$ (↓ $13.3\%$).
     • Domestic ↓ $16.4\%$; International ↓ $8.7\%$ (operational ↓ $8.5\%$; FX ↓ $4.8\%$).
     • Bright spots: Remicade, Prezista, Velcade, Concerta; acquisitions Cougar & Elan.
  3. Medical Devices & Diagnostics: $\$5.9\,\text{billion}$ (↓ $3.1\%$).
     • Domestic ↑ $1.9\%$; International ↓ $7.2\%$ (operational ↑ $3.7\%$; FX ↓ $10.9\%$).

Page 10 – Income Statement Trend (Exhibit 7, $2006{-}2008$)

Page 11 – Balance Sheet Evolution (Exhibit 8, $2006{-}2008$)

Assets

• Total Current Assets: $\$34,377\,\text{M}$ ( $2008$ ) vs $\$29,945\,\text{M}$ ( $2007$ ) vs $\$22,975\,\text{M}$ ( $2006$ ).
• Property, Plant & Equip (net): $\$14,365\,\text{M}$ ( $2008$ ).
• Intangibles (net): $\$13,976\,\text{M}$.
• Goodwill (net): $\$13,719\,\text{M}$.
• Total Assets: $\$84,912\,\text{M}$ ( $2008$ ) → growth from $\$70,556\,\text{M}$ ( $2006$ ).

Liabilities

• Current Liabilities $2008$: $\$20,852\,\text{M}$.
• Long-Term Debt: $\$8,120\,\text{M}$ (up markedly from $\$2,014\,\text{M}$ in $2006$).
• Total Liabilities: $\$42,401\,\text{M}$.

Shareholders’ Equity

• Common Stock (par $\$1$): $3,120\,\text{M}$ shares issued.
• Retained Earnings: $\$63,379\,\text{M}$.
• Treasury Stock: $-\$19,033\,\text{M}$.
• Total Equity: $\$42,511\,\text{M}$ (slight dip vs $2007$).
• Total Liabilities & Equity tie to $\$84,912\,\text{M}$.

Ethical, Philosophical & Practical Takeaways

• Stakeholder Priority Chain codified since $1943$ remains operational touchstone.
• Sustained diversity & inclusion framed as competitive advantage, not checkbox.
• Environmental stewardship integrated into strategy (annual sustainability reporting cycle).
• R&D vs Cost Pressure Paradox: necessity to innovate collides with escalating expense & patent cliffs.
• Acquisition Strategy: focused on late-stage biotech assets (risk-adjusted value capture) & consumer adjacencies (e.g., Vania) to offset patent expirations.

Connections & Broader Relevance

• J&J’s multi-segment diversification echoes strategy of peers like P&G, buffering sector-specific shocks.
• Patent cliff dynamics mirror broader pharmaceutical turmoil, underscoring importance of biologics, biosimilars & M&A for pipeline rejuvenation.
• Digital marketing pivot aligns with consumer shift to online health information sources.
• Cost synergies from Pfizer Consumer buyout illustrate post-merger integration best practices.