Alex Gorsky, Chairman and CEO
Dominic J. Caruso, Exec. VP and CFO
Ashley McEvoy, Company Group Chairman, Consumer Medical Devices
Gary J. Pruden, Exec. VP, Worldwide Chairman, Medical Devices
Sandra E. Peterson, Exec. VP, Group Worldwide Chairman
Kathryn E. Wengel, VP, Johnson and Johnson Supply Chain
Michael H. Ullmann, Exec. VP, General Counsel
Ronald A. Kapusta, Corporate Controller, Chief Accounting Officer
NO. OF EMPLOYEES: 126,400
GLOBAL HEADQUARTERS: New Brunswick, N.J.
“In the long history of humankind (and animal kind, too) those who learned to collaborate and improvise most effectively have prevailed.”
— Charles Darwin
Great innovation is seldom hatched in isolation.
That Eureka! moment—long exemplified through lightbulbs and thought bubbles—is just as fictional as the iconic symbols themselves. Consider for a moment the classic yarns of solitary genius forever etched in American folklore: A young Steve Jobs inventing the home computer in his parents’ Silicon Valley garage; Alexander Graham Bell shouting for his assistant upon creating the telephone; Thomas Edison perfecting the lightbulb in a deserted laboratory; and Isaac Singer working interminably to patent the sewing machine.
All transformative inventions. All born independently in a spontaneous moment of creative brilliance.
Jobs certainly had a hand in transforming the computer industry, but his role has been considerably romanticized over the years. The first Apple computer, actually, was neither the product of rudimentary garage work nor Jobs’ engineering savvy but rather the ingenuity of Apple Inc. co-founder Steve Wozniak. A self-proclaimed geek, Wozniak built the machine—duly named the Apple-1—after work hours in his northern California apartment and his tiny Hewlett-Packard cubicle (he designed calculators for the company in the early 1970s).
“Actually, there was no design nor construction of this computer in any garage,” he told Gizmodo in a comment section of a 2014 post about the Apple-1. “The designs were passed out freely with no copyright notice so that others could build a useful computer at low cost. Others even had hand-built versions of this computer before Steve Jobs even knew it existed...Steve Jobs did do the business end of getting the thing productized, but at first, it was just to be a PC board alone, with no parts on it...The Apple-1 wasn’t designed to be a computer as much as modifying my hand-built terminal (Arpanet days) to be a computer. Jobs did all the business, getting parts, getting sales, getting publicity, from his bedroom. The manufacturing was done in Santa Clara at the same place the PC boards were made. The garage had a bench but it was only really needed part of a day each week to check out the boards and make sure they worked.”
So much for the legend. Jobs’ true role in digitizing the planet was not one of inventor but of visionary. Like most gifted leaders, he recognized good ideas and successfully refined them, creating life-changing technology in the process. He accomplished this not only with the Apple-1, but with the Macintosh as well. Jobs’ stroke of genius for the Macintosh occurred not in a secluded garage or private bedroom but during his now-infamous 1979 visit to Xerox PARC, the R&D arm of Xerox Corporation, where engineers had built a computer featuring a graphical user interface, bitmapping, and a “mouse” (in truth, PARC couldn’t legitimately take credit for the mouse concept, as it technically improved upon a 1963 invention by a Stanford Research Institute computer scientist).
Jobs experienced similar “a-ha” epiphanies in developing the iPod (based on primitive portable digital music players of the mid- to late 1990s, which he contended “truly sucked”), the iPhone (a vast improvement from the first class of smartphones), and the iPad (the brainchild of a Microsoft engineer who was married to a Jobs family friend and invited the Apple executive to his 50th birthday party). He was, as author Walter Isaacson asserts in his 2011 biography, “Steve Jobs,” a master “tweaker.”
“In the eulogies that followed Jobs’s death...he was repeatedly referred to as a large-scale visionary and inventor,” New Yorker writer Malcolm Gladwell noted in a November 2011 review of Isaacson’s book. “But Isaacson’s biography suggests that he was much more of a tweaker. Jobs’s sensibility was editorial, not inventive. His gift lay in taking what was in front of him—the tablet with stylus—and ruthlessly refining it. Jobs was someone who took other people’s ideas and changed them. He was a tweaker to the last, endlessly refining the same territory he had claimed as a young man.”
History is replete with such resourceful refinement. Some of the most renowned inventions, in fact, have been fostered through collaborative “tweaks” rather than solo creativity (namely, the spinning mule, telephone, sewing machine, and lightbulb, among others). The magic of innovation, it seems, is best conjured in groups.
Buoyed by recent research, companies are increasingly embracing the concept of collective creativity, harnessing innovation from their employees as well as from outsiders such as suppliers or competitors. Procter & Gamble was an early proponent of the idea: Seventeen years ago, the consumer goods manufacturer first took a collaborative approach to innovation by splitting new idea development evenly between its own laboratories and outside sources. One of the most successful descendants of the program was the Swiffer, a handheld dusting solution developed by Unicharm Corporation, a Japanese manufacturer of disposable hygiene products, household cleaning goods, and diapers (both for infants and adults). Rather than develop a rival product, P&G purchased the rights to Unicharm’s duster outside of Japan and collected $100 million in sales within the first four months of the Swiffer’s market release.
“...innovation and collaboration are not mutually exclusive; they feed and build upon each other. It’s not an ‘either-or.’ Innovation happens through collaboration,” Forbes contributor Kate Vitasek wrote in 2015. “Today’s business models are more dependent than ever on complex, cross-company collaboration for business innovation. The future will likely be won by those who don’t wait for lightbulb moments from a single genius, but rather develop highly collaborative win-win relationships that leverage the collective power of many.”
Johnson & Johnson is aiming to become one of those prospective champions as it battles for market share and relevancy in an industry fraught with change. Fundamental shifts in reimbursement, consumer empowerment, healthcare delivery models, digital engagement, and the competitive landscape are blurring the lines between medtech, health IT, and therapeutics. Moreover, the switch from volume- to value-based care has created a clear demand for real-world metrics and service-driven solutions, prompting medtech firms to revamp their traditional business models.
JNJ, of course, is no stranger to business model revision, having overhauled its corporate template countless times over its 131-year history to adapt to an evolving environment. In 2016, for example, the global healthcare conglomerate streamlined its consumer and medical devices operations in an effort to centralize hospital product services and create bundled packages for customers. JNJ realigned its formerly decentralized and autonomously managed Medical Devices business under one Medical Device Management unit with three global franchises (Ethicon Surgical, Biosense Webster Cardiovascular, and DePuy Synthes Orthopaedics), a single research and development segment, and one supply chain unit.
ANALYST INSIGHTS: While having an enviable global sales and marketing organization, J&J's Medical Devices franchise has struggled to get new products to market as rapidly as its competition. There's been disruption and some innovative thinking in the development groups, manufacturing, and among supply chain partners. While J&J and Alphabet's Verb Surgical robotic devices capture headlines, Medical Devices will have to consistently deliver product in a timely manner if it wishes to defend its market position. Recent signs are positive but Medical Device managers know that J&J corporate is under pressure to consider the sale of the unit if growth can't be accelerated. Gary Pruden's departure indicates results must come soon.
—Tony Freeman, President, AS Freeman Advisors LLC
The realignment is just one of the strategies JNJ is implementing to revitalize its underwhelming Medical Devices business, which reported flat sales of $25.1 billion last year. Weak product demand, volatile exchange rates, and dwindling international revenue exacerbated the devices unit’s 2016 woes, though the performance represented a significant improvement from the 8.7 percent sales slide recorded in 2015.
“Our near-term priority in Medical Devices is to accelerate growth through innovation, portfolio management, and new business models,” JNJ Chairman and CEO Alex Gorsky told shareholders in the company’s 2016 annual report. “Our company’s structure allows us to interconnect our breadth and depth to drive innovation, and to take advantage of growth opportunities wherever they may be. Our Medical Devices business refocused and accelerated our pace of innovation and developed novel commercial models to meet the evolving needs of today’s heathcare system.”
One of those “novel” business models was CareAdvantage, a program developed in response to a U.S. government effort to encourage greater value-based purchasing. Marketed as a branded assortment of value-based service offerings and risk-sharing opportunities for hospitals, the initiative gives healthcare institutions the opportunity to work with JNJ as both a supplier and value-based care provider on ways to improve care in surgical, cardiovascular, and orthopedic applications. The CareAdvantage program is designed to mobilize the service capabilities of JNJ’s businesses under a coordinated, branded framework and make it easier for hospital systems to engage with the company as a strategic partner.
“As healthcare continues to change, health systems and their suppliers must work in close alignment to find ways to meet the opportunities and challenges of value-based care,” Tim Schmid, JNJ Medical Device Companies chief strategic officer, said when CareAdvantage debuted. “CareAdvantage begins by listening to and understanding individual health system needs, leading to a customized plan of action to help deliver value at every point along the care pathway.”
JNJ’s value dispatch system, however, was not solely dependent upon business model innovation in 2016. The company also embraced the tried-and-true methods of M&A and collaboration, with the latter strategy employed to amplify its market presence in 3D printing, diabetes care, medical device and clinical trial development, and European biotechnology.
JNJ opened its first non-North American biotech incubator (JLINX) last summer in Beerse, Belgium, in conjunction with life sciences investment firm Bioqube Ventures. JLINX provides scientists and early-stage entrepreneurs with access to venture capital, R&D expertise, and updated facilities, generally targeting companies from the preclinical stage through early phase 1. The initiative, according to Bioqube bigwigs, is designed to bridge the funding gap between university-based research and clinical product development.
JNJ stayed a bit closer to home (2,769 miles to be exact) with its Texas Medical Center (TMC) alliance. Through its innovation arm, Johnson & Johnson Innovation LLC (JJI), the company announced plans last fall to expand its TMC role to include a Center for Device Innovation, which is tasked with fostering accelerated medical device development via partnerships and potential acquisitions of small-scale startups. It is located next to another JNJ project—JLABS at TMC—as well as the medical center’s two life sciences startup incubators, TMCx and TMCx+.
JJI further endeared itself to the TMC community by expanding partnerships among other member institutions, including the Baylor College of Medicine (medical device development through open innovation); the Houston Methodist Research Institute (translational research activities for human clinical trials); the Texas Heart Institute (surgical device research); and the TMC Clinical Trials Institute (accelerated medical device clinical trials).
The 3D printing alliances JNJ forged last year with HP and Carbon 3D had a dual purpose, serving as both a springboard for future growth and a major step forward in the company’s ambitious intentions for the technology. Ultimately, JNJ plans to use 3D printing in combination with other scientific advancements to overhaul the production process and supply chain for orthopedic, eye health, and consumer products. One of the firm’s more interesting concepts in development is a 3D-printed, sunlight-enabled personalized contact lens for treating presbyopia (farsightedness). R&D executives claim the lens would contain sensors and microprocessors to customize vision and fit for the wearer.
JNJ’s other leap of faith landed the company in the mushrooming diabetes monitoring and treatment space, where enterprises like San Diego, Calif.-based Dexcom Inc. have steadily gained market share. The increased competition is prompting outsiders such as Google’s Verily Life Sciences, Apple, and newcomers like Glooko, Sano, and Semma Therapeutics to team up with existing players to develop new products.
JNJ’s rookie draft pick was digital health firm WellDoc. The Baltimore, Md.-based company agreed to integrate its BlueStar product, a U.S. Food and Drug Administration (FDA)-cleared digital therapeutic for adults with Type 2 diabetes, with LifeScan’s OneTouch Verio Flex Bluetooth Smart blood glucose monitoring system and OneTouch Reveal mobile app. The pairing seeks to leverage LifeScan’s blood glucose monitoring system and mobile app with the data analytics and patient engagement of WellDoc’s reimbursable mobile prescription therapy to create a real-time, personalized approach to Type 2 diabetes management.
ANALYST INSIGHTS: The future of Medical Devices continues to be a hot topic at J&J. Do they spin it off? Do they invest and acquire? Newly appointed Hospital Medical Devices Leader Sandi Peterson has bold decisions to make in the coming year.
—Dave Sheppard, Co-Founder and Principal, MedWorld Advisors
JNJ received FDA approval for the OneTouch Verio-BlueStar integration in December 2016—far too late to impact JNJ’s struggling Diabetes business, which experienced a 7.2 percent sales slide (to $1.79 billion) last year due to price declines and competitive pressures. The dismal showing has prompted company executives to explore strategic options—“operating partnerships, joint ventures or strategic alliances, an outright sale, or other alternatives either separately or together”—for the businesses that include Animas, LifeScan, and Calibra Medical, the latter having been acquired in 2012.
“...it’s always a difficult decision and when you look at your portfolio and as I frequently describe, it is a little bit like your children, you love all of them,” Gorsky said earlier this year during an earnings conference call with analysts. “...just from time to time we are trying to make decisions that we think ultimately are in the best long-term interest of our customers...”
And shareholders, obviously.
While a divestiture may ultimately be in JNJ’s best interest, it is unlikely to single handedly reverse the Medical Devices business’s faltering fiscal fortunes. Only one of its five segments reported solid sales growth in 2016 and two remained flat, expanding less than 1 percent each. Still, the pecuniary hemorrhaging slowed considerably from the previous year, as only three product franchises extended their slump. The turnaround, albeit slight, is a testament to the company’s new growth strategy of swapping out low-yielding fruit for a more profitable crop.
JNJ’s exchange rate intensified considerably last year as the multinational firm sought out high-growth targets in the fast-growing extremities, neurovascular, surgical oncology, and eye health sectors. Perhaps its most savvy move was the $4.3 billion deal for Abbott Medical Optics, the eye care unit of rival healthcare conglomerate Abbott Laboratories. The unit’s ophthalmic portfolio—covering cataract surgery, laser refractive surgery, and consumer eye health (lens solution, eye drops, etc.)—is a good match for JNJ’s Acuvue contact lens business and will help the company establish a foothold in the thriving cataract surgery market.
“Eye health is one of the largest, fastest-growing, and most underserved segments in healthcare today,” Ashley McEnvoy, company group chairman at JNJ’s vision care unit, said upon disclosing the September transaction. “With the acquisition of Abbott Medical Optics’ surgical ophthalmic portfolio, coupled with our contact lens business, we will become a more broad-based leader in vision care. Importantly, with this acquisition, we will enter cataract surgery—one of the most commonly performed surgeries and the number one cause of preventable blindness.”
Similarly, JNJ purchased admission to the surgical oncology market with Ethicon’s acquisition of Madison, Wis.-based startup NeuWave Medical, whose soft tissue microwave ablation technology is used in more than half of America’s top cancer centers. NeuWave’s microwave ablation delivers focused heat to eliminate body lesions. Antennas, or probes, are placed directly into lesions and emit microwave energy from their tips to rapidly oscillate water molecules within the lesion. This causes friction and heat, thereby destroying the lesion while protecting non-targeted tissue.
Codman Neuro bolstered JNJ’s presence in the neurovascular market with its late-year deal for Pulsar Vascular Inc., a Los Gatos, Calif., company founded in 2005 that created a product for treating brain aneurysms. The firm’s proprietary device, the PulseRider, is a minimally invasive, self-expanding nitinol implant used to bridge the neck of cerebral aneurysms during treatment of unruptured wide-neck intracranial aneurysms originating on or near a bifurcation. A patented “saddle” shape stent leaves minimal metal in the parent artery, enabling easy access to the aneurysm for coiling while maintaining support. Codman Neuro was previously the exclusive distributor of the device in Europe, where it was awarded CE mark approval in 2013. Pulsar Vascular has completed a U.S. investigational device exemption clinical trial and is awaiting humanitarian device exemption approval.
“We’ve been divesting slower-growth areas or areas that we think are better off in someone else’s hands and investing in higher-growth areas and new technologies,” JNJ executive vice president and chief financial officer Dominic Caruso told analysts during a spring 2017 conference call.
One of those new technologies is nitinol, a shape memory alloy comprised of equal parts nickel and titanium. Under certain (high) temperatures, the material can become stronger, more flexible, and change shape, making it ideal for musculoskeletal applications. San Antonio, Texas-based BioMedical Enterprises Inc. (BME) has claimed market leadership in this field, having used the metal to manufacture implants for treating various foot, ankle, hand, and wrist conditions, including bunions and hammertoes.
BME’s supremacy in the nitinol implant market most likely convinced DePuy Synthes Companies to align itself with the startup. The larger entity, after all, considers itself an extremities sector leader, and has been actively broadening its orthopedic portfolio of late. Last March, for instance, DePuy negotiated a deal with Israeli investment firm Rainbow Medical Ltd. to co-develop a minimally invasive implant for treating spinal degenerative disc disease, and in November 2015, the company introduced a new joint replacement offering to meet growing demand in outpatient reconstructive surgeries.
BioMedical Enterprises tucked itself under DePuy’s corporate umbrella in May 2016. “BME’s technology is an excellent complement to our portfolio of solutions that spans all of orthopaedics,” Ciro Römer, company group chairman at DePuy Synthes, said in announcing the acquisition. “The BME portfolio will be integrated into our trauma platform, where we will be able to expand the availability of these solutions, increase the pace of innovation in this area, and reach more patients around the world.”
Incorporating BME’s nitinol products into DePuy’s trauma portfolio proved fiscally prudent, as trauma product revenue rose 1.6 percent to $2.57 billion last year. That increase, along with modest gains in artificial hips and knees, lifted overall Orthopaedics sales 0.8 percent ($72 million) to $9.33 billion in the year ended Dec. 31, 2016. Notable growth drivers included the TFN-Advanced Proximal Femoral Nailing System, DePuy’s primary hip stem platform, and the Attune knee system, which boasts a clinically proven 98.61 percent survivorship at three years. Large-joint sales, by and large, kept the Orthopaedics business in the black in 2016: Hip and knee proceeds climbed 2.2 percent and 1.9 percent, respectively, to $1.36 billion and $1.52 billion. The gains helped offset another poor showing from the languishing spinal franchise, where sales were off 0.7 percent, though the loss slowed dramatically from the previous year’s 5.5 percent revenue slide.
Spinal and Orthopaedics sales followed the same general blueprint set by the convalescing medical devices business. Many product franchises, in fact, took their cue from the parental unit, reporting losses that were significantly smaller declines from 2015.
The general surgery franchise, for example, stemmed the bleeding by 7.1 percent last year. Revenue fell 2.7 percent to $4.36 billion, succumbing to lower demand for women’s health and urology products as well as pricing pressures. Nevertheless, the decrease was a marked change from 2015, when sales dwindled 9.8 percent.
Specialty surgery proceeds slipped 2.9 percent to $1.41 billion (a 0.4 percent “improvement” from 2015) due to lower Acclarent and advanced sterilization product sales outside the United States, divestitures, and competitive pressures in the device reprocessing/remanufacturing sector. Advanced surgical revenue, on the other hand, jumped 7.4 percent to $3.51 billion on strong demand, better market penetration, and new product launches in the endocutter, energy, and biosurgical fields. The NeuWave Medical purchase also boosted advanced surgical sales.
The progress in each surgical franchise helped raise total Surgery proceeds 0.9 percent last year to $9.29 billion.
JNJ’s Vision Care segment took the medical devices growth formula to the extreme, bouncing back from a 7.5 percent loss in 2015 to expand revenue 6.8 percent to $2.78 billion in 2016. The company attributed the hike solely to new product launches.
The opposite occurred within the Cardiovascular segment. The sales gap widened from 7.8 percent in 2015 to 9.2 percent last year (falling from $2.03 billion to $1.85 billion), thanks mostly to the lingering impact of JNJ’s divestiture of its Cordis business to Cardinal Health nearly two years ago. The sale “more than offset” strong operational growth in the company’s electrophysiology business, market growth, and new product launches.