ONG BEFORE the invention of stakeholder capitalism, a core principle—that the interests of customers, employees and society should be as high or higher than those of shareholders—was carved into the plaster at Johnson & Johnson’s head office in New Brunswick, NJ. “Our Credo” as J&J calls its mission statement, dates back to 1943, when it was penned by Robert Wood Johnson II, a former boss of the pharmaceutical firm.
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J&J says the Credo has helped construct a corporation built to last. Worth $420bn, it is the world’s biggest drugs firm by value. It is one of only two companies in America with a triple-A credit rating (the other is Microsoft). Of its $82.6bn of sales last year, pharmaceuticals accounted for 55%, medical devices 28% and consumer health 17%. It produces everything from blockbuster cancer drugs to band-aids and baby powder.
Some argue that for all its pieties, J&J has let down both society and shareholders. In recent years it has faced multiple lawsuits against products ranging from prescription opioids to talcum powder to Risperdal, an antipsychotic medicine. It denies all wrongdoing, but the succession of controversies has tarnished its image and loaded it with legal liabilities.
Moreover, since 2012 J&J’s total returns to shareholders have lagged behind the S&P pharmaceutical benchmark by about a third. Investors say the legal maelstrom is partly to blame. Another factor is lopsided performance. Buoyancy at J&J’s pharmaceuticals business, where sales rose by 8% last year, is overlooked because of low single-digit growth and, at times, declines in the medical devices and consumer-health divisions.
Now J&J is taking steps—radical by its own standards—to reform on both counts. Alex Gorsky, its outgoing chief executive and soon-to-be executive chairman, is trying to draw a line under the legal troubles. He is also overhauling the firm’s structure. His methods have not yet had the desired effect. But they could restore the firm’s standing with investors and society.
The first sign of progress has been in the legal realm. In August 2019 an Oklahoma court ruled that J&J’s promotional campaigns downplayed the risks of opioids and meant the firm bore a wide responsibility for the deadly epidemic. It was ordered to pay $465m. But on November 9th the state’s Supreme Court overturned the ruling, saying it was based on a wrong interpretation of public-nuisance law. The previous week, a California court threw out a similar case against J&J and other defendants.
Such wins for J&J coincide with what Carl Tobias of the University of Richmond School of Law, calls a new legal approach. The firm has a history of litigating cases “to the bitter end”, he says. Lately, he points out, it has shown more willingness to settle. This summer it finalised an opioid settlement of up to $5bn with numerous American states, cities and counties which it hopes will lay the claims against it to rest. In October it said it had set aside $800m to settle most of its Risperdal cases.
The company is still walking a legal tightrope when it comes to claims related to talcum powder. In October it deployed what is known disparagingly as the “Texas two step”, a manoeuvre in which it set out to ring-fence liabilities on 30,000 or more talc-related litigation claims by creating a Texan subsidiary, LTL Management, that promptly filed for Chapter 11 bankruptcy in North Carolina. It went down poorly. The North Carolina judge shunted the bankruptcy case to New Jersey, where many of the talc claims are filed. Some Congressional Democrats accused the firm of trying to manipulate bankruptcy law to deny claimants their day in court. J&J argues that it has established a $2bn trust attached to LTL to help cover talc-related liabilities under Chapter 11. Investors hope it could mark the beginning of the end of the saga.
Mr Gorsky’s second sweeping change is structural. J&J said in November that over the course of 18-24 months it would split into two firms, one focused on consumer health, the other combining pharmaceuticals and medical devices. The consumer-health business badly needs a nip and tuck. It is no longer enough to boast that nine out of ten dermatologists recommend a skin product. Shoppers require Kim Kardashian-style razzmatazz. J&J hopes the consumer-health business will fare better with more focus. The break-up will also crystallise value lost in the conglomerate structure. It is a path trodden by GSK, a British drugs firm, which is spinning off its consumer-health joint venture with Pfizer. But a lot remains unknown about the split. Investors greeted it with a shrug.
What shareholders are excited about is the pharma business. They take seriously J&J’s pledge to ramp up annual drugs sales from $45.6bn last year to $50bn by 2023 and $60bn by 2025. It reckons it can outstrip average growth in the drugs market even though one of its best selling medicines will lose patent protection. It promises new treatments, such as cell and gene therapies. Its oncology pipeline is strong. It will not be all smooth sailing, however. The pharma firm will still be tied to the sluggish medical-devices business. And if the talc-related bankruptcy man oeuvre fails, liabilities could fall onto the pharma business.
Time for a booster jab
These are exciting times in life sciences. Pfizer is adding a fortune to sales thanks to its covid-19 breakthroughs. Eli Lilly is attracting investors because of an experimental Alzheimer’s drug. Against such competition, J&J urgently needs to move beyond the legal controversies weighing upon it and its share price.
The biggest question is whether the company can become more dynamic overall. Partly owing to its mission statement, J&J carries a lot of history on its back. It makes decisions cautiously. Mr Gorsky has taken years to recommend a break-up, though investors have wanted one since he took over in 2012. Listening properly to shareholders would have meant earlier, possibly preventive, ingestion of the correct medicine.
Read more from Schumpeter, our columnist on global business:
Decoupling is the last thing on business leaders’ minds (Nov 27th 2021)
Walmart gets its bite back (Nov 20th 2021)
The supermajors have an LNG problem (Nov 6th 2021)
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This article appeared in the Business section of the print edition under the headline “No more tears”