J&J's New Baby
As other divisions stumble, consumer products--bolstered by a $16.6 billion addition-- provide a security blanket
It's not a personal thing, but J. Neal Matheson spends a lot of time obsessing about bad breath. Matheson is chief technology officer for Johnson & Johnson's (JNJ ) consumer health unit, home to such iconic brands as Johnson's Baby, Band-Aid, and, most recently, Listerine. J&J nabbed the world's No. 1 mouthwash a year ago when it bought Pfizer's (PFE ) consumer health unit for $16.6 billion--its biggest acquisition ever. With Listerine in its portfolio, along with other Pfizer brands such as decongestant Sudafed, Bengay, and Rolaids, J&J's consumer business is, without doubt, the freshest-smelling division in an otherwise troubled company.
The consumer teams from Pfizer and J&J are scientific soulmates, says Matheson. Their shared mission: to keep their storied brands up to date by constantly tweaking the ingredients, redesigning the packaging, and finding whole new uses for the contents. At J&J's consumer research headquarters in Skillman, N.J., Matheson whips out a paper showing how Pfizer won the right to pitch Listerine as much more than a breath freshener simply by running some inexpensive clinical trials. "Halitosis, plaque, gingivitis...kills germs between teeth, kills germs at the gumline," he reads from a list of Listerine's advertising claims, excitement rising in his voice. "It's beautiful." Annual retail sales of Listerine, age 112, have jumped 61% in the last five years, to $877 million, according to market research firm Euromonitor International.
Gingivitis is hardly the first thing that comes to mind when most investors think of J&J. They're more likely to remember the litany of woes that have hit the company recently. J&J's pharmaceutical division has suffered a series of stumbles, made worse by a dearth of innovative products. As a result, its stock is down 3% so far this year, while the Dow Jones industrial average is up 10%. Meanwhile, J&J's medical device unit has failed to come up with a strategy to expand into high-end heart products. In January, 2006, J&J's effort to buy Guidant Corp., a maker of cardiac devices, ended in disappointment when J&J CEO William Weldon declined to match Boston Scientific Corp.'s (BSX ) $27 billion bid.
The sting of defeat didn't last long, though. Just three weeks later, Pfizer suddenly put its consumer unit on the block, and Weldon sprang into action. "We opted out of Guidant because we couldn't bring value to shareholders at the price that was being pinned to it," he says with a shrug. "The consumer health-care group at Pfizer brought tremendous value."
Weldon can be excused for feeling smug about the way these two deals turned out. Granted, nobody expects the new, expanded consumer business to be able to match the profit potential of expensive, life-sustaining heart devices. Nevertheless, J&J recently announced first-quarter sales of $15 billion, up 16% from the previous-year period. And profits, excluding special charges, jumped 14%, to $3.4 billion. The Pfizer deal provided a mighty lift, pushing J&J's consumer revenues that quarter up 48%, to $3.5 billion. J&J is now telling Wall Street that the Pfizer merger will allow it to squeeze $500 million per year out of its cost structure and that the company will break even on the transaction in 2009--a year earlier than expected. Meanwhile, Boston Scientific is struggling to turn Guidant around and has lost 20% of its value in the past year.
A JOURNEY INTO J&J'S CONSUMER PRODUCTS division shows how a subtle power shift inside the health-care giant has brought much-needed stability. It also lifts the curtain on a mysterious alchemy J&J uses to spin cash out of relatively simple innovations in product design, packaging, and marketing. J&J's total revenues are on track to rise at least 12% this year, to about $60 billion. Consumer products make up 24% of the total, compared with 18% prior to the Pfizer deal. J&J has already staked out its turf in America's medicine cabinet, but now it seems poised to crowd out Procter & Gamble Co. (PG ) J&J produced 400 new products last year, and the acquisition pushed it to the top of 22 consumer categories. Some of its oldest family members are charting double-digit sales increases, including what J&J playfully calls "the pink line"--the baby potions that come in pink bottles. For Weldon, such brands are annuities. "If you invest in them and you bring technology and innovation to them," he says, "they just keep paying back."
The command center for J&J's consumer operation is on the sprawling Skillman campus, which appears, seemingly out of nowhere, off a remote two-lane road dotted with farmhouses. In the center of the town, population 5,000, convenience stores are loaded with the latest versions of Tylenol, Reach toothbrushes, and other products being developed just down the road.
Matheson, a scientist with a background in skin care, came to J&J from P&G in 1994 with a mandate to transform a scattered and somewhat disorganized research group into a launchpad for products consumers would rush to purchase. Back then, the unit was bringing in just $4.8 billion a year in sales, and growth was languishing below 1% a year. To gain a foothold in the skin-care market, J&J bought pimple-potion purveyor Clean & Clear and RoC, a French maker of anti-wrinkle creams, followed by soapmakers Neutrogena and Aveeno.
J&J has a long tradition of preserving the independence of operations it acquires. But that created problems. There were scientists all over the world--from Skillman to Paris, home of RoC--who weren't always in sync with each other or with the people who could turn their discoveries into products. "There were gazillions of ideas," recalls Matheson, a young-looking 60-year-old whose voice sometimes dwindles to a whisper when he wants to emphasize a point. "The question was: How would we get those ideas to market?"
Matheson put together small teams of up to a dozen scientists and charged each with tackling a cosmetic challenge. There's an acne team, which does nothing but think up ways to help teens zap zits, and a pigmentation team that dreams up products to help even out skin tone. Each group gathers input from marketing and development folks, who help define target audiences and rush products to drugstore shelves. And Matheson encourages the teams to partner with small, forward-thinking companies--a departure from how things were done at his old stomping grounds. "Procter has huge teams that do everything inside," Matheson says. "We're much more outward-looking." (A spokesman for P&G notes that 40% of its products now include input from the outside, up from less than 10% in 2001.)
J&J'S new system has helped erase wrinkles on aging brands, such as Neutrogena. For decades, that name evoked little more than amber, transparent soap, but under Matheson, the brand is expanding in unexpected directions. Most recently, Neutrogena has created an at-home version of something called microdermabrasian--a skin-smoothing procedure that can cost up to $200 at health spas. At the same time, J&J's "suncare" team--including scientists from Skillman, Los Angeles, France, and Brazil--cooked up a three-ingredient cocktail called Helioplex that promises to offer broader and longer-lasting protection than standard sunscreens, so beachgoers don't have to keep slathering themselves. Last year, J&J put Helioplex in several products, including Neutrogena's sunscreens and anti-aging lotions. Neutrogena, which J&J bought in 1994, has grown 56% in the last five years. It now has worldwide sales of $1.6 billion.
The Pfizer scientists J&J brought on board have mastered a formula for printing money from minor breakthroughs. In 2001, Pfizer introduced Listerine PocketPaks, a unique formulation of fast-dissolving breath strips that sparked a $100 million-a-year industry. The melt-in-your-mouth film has become a new drug delivery platform for such brands as Pfizer's Sudafed. And, says Matheson, J&J is considering expanding it to other over-the-counter drugs.
The beauty of innovations like PocketPaks is that they don't cost a fortune to pull off. And even just adding a claim--saying, for example, that Listerine can prevent gingivitis--enables a company to drive demand for the product, much as adding a new use to the label of a drug can widen the pool of patients who take it. But there's one important difference: The U.S. Food & Drug Administration is much more lenient with consumer products, as long as they contain already approved ingredients. In fact, when companies run trials to prove claims on balms and cosmetics, it's usually not because the FDA requires them, but rather because they need the studies to support advertising messages and gain street cred with physicians, who then recommend the products to patients. A skin-care study might cost $5,000, Matheson estimates. An over-the-counter drug trial would be a little more, perhaps $50,000. Developing a new formulation, such as PocketPaks or Helioplex, could run up a tab of $10 million. Still, that's pocket change compared with the $1 billion it costs on average to develop a new prescription drug.
J&J's New Baby
As other divisions stumble, consumer products--bolstered by a $16.6 billion addition-- provide a security blanket
It's not a personal thing, but J. Neal Matheson spends a lot of time obsessing about bad breath. Matheson is chief technology officer for Johnson & Johnson's (JNJ ) consumer health unit, home to such iconic brands as Johnson's Baby, Band-Aid, and, most recently, Listerine. J&J nabbed the world's No. 1 mouthwash a year ago when it bought Pfizer's (PFE ) consumer health unit for $16.6 billion--its biggest acquisition ever. With Listerine in its portfolio, along with other Pfizer brands such as decongestant Sudafed, Bengay, and Rolaids, J&J's consumer business is, without doubt, the freshest-smelling division in an otherwise troubled company.
The consumer teams from Pfizer and J&J are scientific soulmates, says Matheson. Their shared mission: to keep their storied brands up to date by constantly tweaking the ingredients, redesigning the packaging, and finding whole new uses for the contents. At J&J's consumer research headquarters in Skillman, N.J., Matheson whips out a paper showing how Pfizer won the right to pitch Listerine as much more than a breath freshener simply by running some inexpensive clinical trials. "Halitosis, plaque, gingivitis...kills germs between teeth, kills germs at the gumline," he reads from a list of Listerine's advertising claims, excitement rising in his voice. "It's beautiful." Annual retail sales of Listerine, age 112, have jumped 61% in the last five years, to $877 million, according to market research firm Euromonitor International.
Gingivitis is hardly the first thing that comes to mind when most investors think of J&J. They're more likely to remember the litany of woes that have hit the company recently. J&J's pharmaceutical division has suffered a series of stumbles, made worse by a dearth of innovative products. As a result, its stock is down 3% so far this year, while the Dow Jones industrial average is up 10%. Meanwhile, J&J's medical device unit has failed to come up with a strategy to expand into high-end heart products. In January, 2006, J&J's effort to buy Guidant Corp., a maker of cardiac devices, ended in disappointment when J&J CEO William Weldon declined to match Boston Scientific Corp.'s (BSX ) $27 billion bid.
The sting of defeat didn't last long, though. Just three weeks later, Pfizer suddenly put its consumer unit on the block, and Weldon sprang into action. "We opted out of Guidant because we couldn't bring value to shareholders at the price that was being pinned to it," he says with a shrug. "The consumer health-care group at Pfizer brought tremendous value."
Weldon can be excused for feeling smug about the way these two deals turned out. Granted, nobody expects the new, expanded consumer business to be able to match the profit potential of expensive, life-sustaining heart devices. Nevertheless, J&J recently announced first-quarter sales of $15 billion, up 16% from the previous-year period. And profits, excluding special charges, jumped 14%, to $3.4 billion. The Pfizer deal provided a mighty lift, pushing J&J's consumer revenues that quarter up 48%, to $3.5 billion. J&J is now telling Wall Street that the Pfizer merger will allow it to squeeze $500 million per year out of its cost structure and that the company will break even on the transaction in 2009--a year earlier than expected. Meanwhile, Boston Scientific is struggling to turn Guidant around and has lost 20% of its value in the past year.
A JOURNEY INTO J&J'S CONSUMER PRODUCTS division shows how a subtle power shift inside the health-care giant has brought much-needed stability. It also lifts the curtain on a mysterious alchemy J&J uses to spin cash out of relatively simple innovations in product design, packaging, and marketing. J&J's total revenues are on track to rise at least 12% this year, to about $60 billion. Consumer products make up 24% of the total, compared with 18% prior to the Pfizer deal. J&J has already staked out its turf in America's medicine cabinet, but now it seems poised to crowd out Procter & Gamble Co. (PG ) J&J produced 400 new products last year, and the acquisition pushed it to the top of 22 consumer categories. Some of its oldest family members are charting double-digit sales increases, including what J&J playfully calls "the pink line"--the baby potions that come in pink bottles. For Weldon, such brands are annuities. "If you invest in them and you bring technology and innovation to them," he says, "they just keep paying back."
The command center for J&J's consumer operation is on the sprawling Skillman campus, which appears, seemingly out of nowhere, off a remote two-lane road dotted with farmhouses. In the center of the town, population 5,000, convenience stores are loaded with the latest versions of Tylenol, Reach toothbrushes, and other products being developed just down the road.
Matheson, a scientist with a background in skin care, came to J&J from P&G in 1994 with a mandate to transform a scattered and somewhat disorganized research group into a launchpad for products consumers would rush to purchase. Back then, the unit was bringing in just $4.8 billion a year in sales, and growth was languishing below 1% a year. To gain a foothold in the skin-care market, J&J bought pimple-potion purveyor Clean & Clear and RoC, a French maker of anti-wrinkle creams, followed by soapmakers Neutrogena and Aveeno.
J&J has a long tradition of preserving the independence of operations it acquires. But that created problems. There were scientists all over the world--from Skillman to Paris, home of RoC--who weren't always in sync with each other or with the people who could turn their discoveries into products. "There were gazillions of ideas," recalls Matheson, a young-looking 60-year-old whose voice sometimes dwindles to a whisper when he wants to emphasize a point. "The question was: How would we get those ideas to market?"
Matheson put together small teams of up to a dozen scientists and charged each with tackling a cosmetic challenge. There's an acne team, which does nothing but think up ways to help teens zap zits, and a pigmentation team that dreams up products to help even out skin tone. Each group gathers input from marketing and development folks, who help define target audiences and rush products to drugstore shelves. And Matheson encourages the teams to partner with small, forward-thinking companies--a departure from how things were done at his old stomping grounds. "Procter has huge teams that do everything inside," Matheson says. "We're much more outward-looking." (A spokesman for P&G notes that 40% of its products now include input from the outside, up from less than 10% in 2001.)
J&J'S new system has helped erase wrinkles on aging brands, such as Neutrogena. For decades, that name evoked little more than amber, transparent soap, but under Matheson, the brand is expanding in unexpected directions. Most recently, Neutrogena has created an at-home version of something called microdermabrasian--a skin-smoothing procedure that can cost up to $200 at health spas. At the same time, J&J's "suncare" team--including scientists from Skillman, Los Angeles, France, and Brazil--cooked up a three-ingredient cocktail called Helioplex that promises to offer broader and longer-lasting protection than standard sunscreens, so beachgoers don't have to keep slathering themselves. Last year, J&J put Helioplex in several products, including Neutrogena's sunscreens and anti-aging lotions. Neutrogena, which J&J bought in 1994, has grown 56% in the last five years. It now has worldwide sales of $1.6 billion.
The Pfizer scientists J&J brought on board have mastered a formula for printing money from minor breakthroughs. In 2001, Pfizer introduced Listerine PocketPaks, a unique formulation of fast-dissolving breath strips that sparked a $100 million-a-year industry. The melt-in-your-mouth film has become a new drug delivery platform for such brands as Pfizer's Sudafed. And, says Matheson, J&J is considering expanding it to other over-the-counter drugs.
The beauty of innovations like PocketPaks is that they don't cost a fortune to pull off. And even just adding a claim--saying, for example, that Listerine can prevent gingivitis--enables a company to drive demand for the product, much as adding a new use to the label of a drug can widen the pool of patients who take it. But there's one important difference: The U.S. Food & Drug Administration is much more lenient with consumer products, as long as they contain already approved ingredients. In fact, when companies run trials to prove claims on balms and cosmetics, it's usually not because the FDA requires them, but rather because they need the studies to support advertising messages and gain street cred with physicians, who then recommend the products to patients. A skin-care study might cost $5,000, Matheson estimates. An over-the-counter drug trial would be a little more, perhaps $50,000. Developing a new formulation, such as PocketPaks or Helioplex, could run up a tab of $10 million. Still, that's pocket change compared with the $1 billion it costs on average to develop a new prescription drug.
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