For a few weeks I have been mulling a "How To Fix Johnson & Johnson" column, but events at this healthcare giant have already taken my number one item off the list. Johnson & Johnson (JNJ) announced Tuesday evening that CEO Bill Weldon will be stepping down in April and handing the reins to Alex Gorsky. While this move is more of a transition than a revolution, it may well be the turning point in this underperforming giant's fortunes.
A Not-So-Fond Farewell
Perhaps the stock market is not always the most impartial assessor of management skill or quality, but it is an inescapable fact that JNJ's stock lagged the market since Weldon became CEO in 2002. What investors may not appreciate, though, is that while JNJ's stock was fairly stagnant over that time (up around 10%), the stock outperformed those of Medtronic (MDT) and Abbott Labs (ABT). That said, returns on equity have been trending down and did fall below 20% during his time as CEO.
I have been a vocal critic of Weldon for a couple of years now, but I will give credit where due. Weldon was not at all shy about committing shareholder capital to acquisitions. Deals for companies like Tibotec, Pfizer's (PFE) consumer health business, and Cougar already look like good moves, and though it's too soon to tell on Micrus and Synthes, the logic was sound. Sure, there were some questionable deals along the way (including Animas and Conor), but when you swing the bat often, you will strike out.
Where I do believe Weldon deserves criticism is in how he oversaw the day-to-day operations of JNJ. Under his tenure, JNJ was not an especially good innovator or product developer, depending more and more on deals to bring in growth products that its own labs couldn't deliver.
Along the way, many once-competitive business units were allowed to struggle, founder, and lose share and momentum to rivals (especially in devices and diagnostics). Companies like Therasense (since acquired by Abbott) (ABT), Kyphon (since acquired by Medtronic) (MDT), and Immucor (since acquired by private equity) all developed products and businesses in areas where JNJ should have been more dominant and attentive.
Last and not least have been the embarrassing and costly manufacturing and quality control issues. This has been a lingering issue for the company, highlighted by the announcement last week that the entire U.S. supply of infant Tylenol was going to be recalled. While it is not as though Weldon was running the machinery or personally contaminating the products, the fact remains that the company did not deal with this problem quickly or decisively and it was allowed to become a major issue. If part of the CEO job description is that of executive fireman, Weldon did fail in this responsibility.
In With The New
JNJ looks to have made a sound decision in elevating Alex Gorsky to CEO. Gorsky started at JNJ as a sales rep and then left for a four-year tenure in the mid-2000s to be the head of North American pharmaceuticals for Novartis (NVS). Since returning to JNJ, he was in charge of JNJ's device and diagnostics businesses.
Gorksy got the job over Sheri McCoy, a long-time JNJ veteran who has been overseeing the pharmaceuticals and consumer products businesses. It's impossible to know if the ongoing problems with quality control in consumer health had any impact on the decision; both Gorksy and McCoy were sharing responsibilities for addressing the quality control issues, and it should be noted that JNJ's drug business has been a source of strength recently.
Time will tell if JNJ can retain McCoy; she is certainly an asset to the company, but if she has ambitions to run a major healthcare company, she will need to go elsewhere. In the meantime, JNJ's board may have been influenced by rumors that rival orthopedics company Stryker (SYK) was considering Gorksy for its now-vacant CEO position. What's more, with the major acquisition of Synthes about to close, JNJ arguably needed a CEO with strong familiarity with the device business.
What Now?
The trouble with assessing CEO transitions is that only a small group of people really ever know how decisions are made and implemented in a large organization. Is Gorksy to blame for the recent stagnation in the device and diagnostics business, or was he impaired by decisions made by Weldon? Certainly JNJ's device business has not dramatically underperformed its rivals in orthopedics or surgery, so it would seem that he is no worse than average.
Gorsky will certainly need to get to work quickly when his tenure begins in April. Failure to properly integrate Synthes cannot be an option, nor can the company afford missteps in addressing its product quality issues or launching promising new pharmaceuticals. Longer term, though, JNJ not only needs to foster stronger overseas growth (especially in emerging markets), but also better internal productivity from its large investments in R&D. Ultimately these issues will likely define Gorksy's time as CEO.
The Bottom Line
While the switch from Weldon to Gorsky is welcome and arguably overdue, investors should not expect dramatic changes from this giant company. As has been the case in the CEO transitions at Medtronic, the changes will be more about evolution and prioritization than revolution. That said, JNJ shares are not too expensive to consider here, and investors who had been sitting on the fence waiting for signs of change or progress may at last have the big move they needed to see.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
