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Dow 30 Profile: Johnson & Johnson
A Humble Start
In the 19th Century, Robert Wood Johnson (RWJ) decided to go into business with George J. Seabury under the name Seabury & Johnson. Both men were inspired by surgeon and antiseptic advocate Sir Joseph Lister’s discoveries, so they worked on developing aseptic surgery equipment. By 1878, the company was very profitable, making about $10,000 a month. However, the men could not agree on how to distribute the income, so, in 1880, RWJ sold his shares to Mr. Seabury. As part of the agreement, RWJ agreed to stay out of the medical supply business for ten years.
Meanwhile, RWJ’s two brothers, James Wood Johnson and Edward Mead Johnson, had started a business called Johnson & Johnson (JNJ – Free JNJ Stock Report). The firm was struggling to stay afloat, however. Fortunately for the brothers, Mr. Seabury was having increasing difficulty making the monthly payments to RWJ that had been agreed upon when the Seabury & Johnson partnership dissolved. Consequently, Mr. Seabury decided to let RWJ reenter the medical supply industry, so long as he was no longer required to make the monthly payments. RWJ agreed, and joined his brothers’ firm in 1885, providing the capital needed for a fresh start—and Johnson & Johnson (J&J) was born.
J&J produced its first products in 1886, and incorporated in 1887. Soon thereafter in 1888, it published “Modern Methods of Antiseptic Wound Treatment,” which quickly became one of the standard teaching texts for antiseptic surgery. The book helped spread the practice of sterile surgery in the U.S. and around the world, and helped bring notoriety to the J&J brand. That same year, the company pioneered the first-aid kit. The kits were initially designed to help railroad workers, but were soon produced commercially to address the medical needs of travelers. In addition, the kits were adorned with the Red Cross symbol, which has since become one of, if not the most, recognizable emblems.
The Importance of Diversification
With Robert Wood Johnson at the helm, J&J quickly grew thanks to its diversification strategy. Indeed, in the 1890s, the company launched maternity kits to make childbirth safer from mothers and babies. JOHNSON’S baby powder hit the market soon after, and would eventually spawn J&J’s heritage Baby business. The company also manufactured the first mass-produced sanitary protection products for women; and it was the first to mass produce dental floss, originally made from leftover suture silk, to make good dental hygiene more accessible and affordable.
Robert Wood Johnson died in 1910, passing the torch to his brother James Wood Johnson (JWJ). JWJ would follow in his brother’s footsteps during his tenure (1910-1932), and continue diversifying the company’s offerings. Indeed, in 1921, J&J invented the BAND-AID brand of adhesive bandages, the first commercial dressings for small wounds that consumers can apply themselves. In 1931, the company pioneered the idea of family planning, and introduced ORTHO-GYNOL, the first prescription contraceptive gel. JWJ would take it a step further than RWJ, though, after he realized the vast potential in overseas markets. In 1924, J&J opened up shop in the United Kingdom. After success there, the company decided to expand into Mexico, South Africa, and Australia in the early 1930s.
Thirty More Years of Evolution
General Robert Wood Johnson II, the son of RWJ, took control of the company in 1932 and was elected Chairman of the Board in 1944. He would remain at that post until 1962. It was under his leadership that J&J would be transformed in a global decentralized family of companies. The first step was taken in 1937, when Ortho Research Laboratories (later Ortho Pharmaceutical) was established to focus on developing and manufacturing women’s health products. A separate subsidiary for surgical products (surgical sutures and other wound-closure devices) was set up during World War II, and it would eventually be incorporated as Ethicon, J&J’s heritage suture business, in 1949.
Perhaps two of the most defining moments in the company’s history took place in 1959, when it acquired McNeil Laboratories in the U.S. and Cilag Chemie AG in Europe, giving J&J a significant presence in the growing field of pharmaceutical medicines. McNeil’s flagship product, TYLENOL elixir for children, was the first prescription aspirin-free pain reliever. TYLENOL would eventually become available without a prescription, and would go on to become one of the most-recognizable and most-used pain relievers in the world. J&J bought Belgium-based Janssen Pharmaceutica NV in 1961. These subsidiaries would later be combined with the aforementioned Ortho Pharmaceutical to become the Ortho-McNeil-Janssen group under the J&J umbrella.
All the while, the company remained busy researching new products, expanding into new markets, and developing on the corporate front. In 1954, JOHNSON'S baby shampoo with the NO-MORE-TEARS formula entered the market as the first mild and soap-free shampoo. In the late 1930s, J&J expanded into South America (Brazil and Argentina), and launched its first company in India in 1957. Finally, in 1944 the discoverer of the human rH factor, Dr. Philip Levine, joined Ortho Pharmaceutical, which would eventually spawn J&J’s leading global diagnostics business. That same year, Johnson & Johnson went public, with a listing on the New York Stock Exchange.
The Next 50 Years
In the late 1960s and early 1970s, the company’s subsidiaries would launch new treatments for schizophrenia, family planning, and personal care. In the late 1970s, J&J built its state-of-the-art headquarters in New Brunswick, New Jersey. In the 1980s, the company entered new areas of healthcare, including vision, mechanical wound closure, and diabetes management. The vision care group would introduce ACUVUE contact lenses, the first disposable contact lenses that can be worn up to a week, thrown away, and then replaced with a fresh pair. Later 1-Day ACUVUE contact lenses would become the first daily disposable contact lens. J&J also opened up shop in China and Egypt during the 1980s. In the 1990s, J&J would aggressively spend to acquire Neutrogena Corporation, Eastman Kodak Company’s diagnostic business, Cordis Corporation, and Centocor Biotech. The company also continued its strategy of expanding globally, especially in Russia and other eastern European countries. The 1990s would also see J&J pioneer the technique of minimally invasive surgery and revolutionize cardiology with the PALMAZ-SCHATZ coronary stent. The Cordis subsidiary would later introduce the first drug-eluting stent, which helps prevent arteries from reclogging. In 2002, William C. Weldon became the just the sixth Chairman of the Board, and only the eighth person to lead J&J. Mr. Weldon would turn the company’s attention toward finding new treatments for HIV/AIDS and other infectious diseases. During his tenure, the company has also bought Pfizer’s consumer healthcare group, which brought in brands like LISTERINE, BENGAY, and BENADRYL among others.
A Segment-By-Segment Breakdown
Today, J&J is set up as a holding company, and its more than 250 subsidiaries employ approximately 117,000 persons. It aggressively engages in research, development, manufacturing, and selling across almost every aspect of healthcare, and conducts business in virtually all countries of the world. International revenues outstrip domestic sales, though this is a relatively recent development. J&J’s operating subsidiaries are organized into three business segments: Consumer, Pharmaceutical, and Medical Devices & Diagnostics.
The Consumer segment is J&J’s smallest in terms of sales, but best-known in terms of product lines. It houses a broad array of offerings used in the baby care, skin care, oral care, wound care, and women’s healthcare fields, as well as nutritional and over-the-counter pharmaceutical products, and wellness and prevention platforms. Major brands include the JOHNSON’S baby line, AVEENO, CLEAN & CLEAR, NEUTROGENA, LUBRIDERM, LISTERINE, REACH, BAND-AID, Neosporin, CAREFREE, STAYFREE, SPLENDA, TYLENOL, SUDAFED, ZYRTEC, MOTRIN IB, and PEPCID AC.
The Pharmaceutical business, J&J’s second largest in terms of revenues, includes products in the following areas: anti-infective, antipsychotic, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, and virology. For the most part, these products are distributed directly to retailers, wholesalers, and healthcare professionals for prescription use.
The Medical Devices & Diagnostics group, J&J’s largest in terms of sales, includes a wide range of products distributed to wholesalers, hospitals, and retailers, used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories, and clinics.
Growth and Diversification for the Next 125 Years
Management has stated that J&J will continue plowing back more than 10% of sales into research & development year in and year out. The company already has a very promising pipeline of potential products and drugs, and we think J&J will continue working aggressively to develop even more promising offerings. The company also has about $19.8 billion (as of September 30, 2012) in cash and investments at its disposal to use on things like international expansion and acquisitions. Indeed, in mid-June, the company closed on the acquisition of Synthes, a premier global manufacturer of orthopedic devices, for $21.3 billion, in a bid to become the leader in the $6-billion-a-year market for devices that treat trauma victims. The company purchased Corimmun GmbH, a privately held drug development company in Germany, for an undisclosed upfront payment and a contingent future clinical milestone payment. More acquisitions are likely forthcoming.
This equity should appeal to a wide range of investors, though we view the blue chip as an ideal buy-and-hold candidate. Thanks to the likelihood of ongoing dividend hikes, the yield ought to stay north of 3% for the foreseeable future, giving this issue a solid income component. In addition, the stock has a below market Beta coefficient and excellent balance sheet, which should appeal to conservative investors. Finally, the potential product pipeline, the possibility of more acquisitions, and likelihood of further international expansion gives this blue chip excellent long-term growth prospects.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.