by Darnell Brown
Medical technology is one of the fastest-moving industries in the world, and it is not surprising that competition within it is fierce. However, Johnson & Johnson (JNJ) has the added pressure of also being involved in the personal hygiene and cosmetics markets, which are seeing constant developments as products quickly become outdated and unfashionable, before being replaced by products featuring new ingredients or delivery methods. As Johnson & Johnson has its fingers in so many pies, so to speak, it faces pressure from a number of different markets and consumer groups - and, of course, a huge number of investors and shareholders. So, how is Johnson & Johnson dealing with this pressure? And how does the future look for the company and its shareholders?
Johnson & Johnson is a huge international company, and surprisingly, as growth has remained consistent, price-to-earnings ratios have flared a little from 14.9 to 18.2. Meanwhile, since this time last year, Abbott Laboratories (ABT) has remained consistent in the ratio range of 18.1 and 19.4, with current levels at the upper end of this range. So, what is Johnson & Johnson doing that a number of its competitors are failing to do? And, in a highly competitive market, will Johnson & Johnson continue to grow, or will it sink under the pressure?
A major factor in Johnson & Johnson's continuation of success has been its effective and efficient management, which has been demonstrated recently with the appointment of a new CEO. Bill Weldon left his position in April, and Alex Gorsky was quickly nominated and appointed by the board, with swift decisions meaning that the future direction of Johnson & Johnson has not been left hanging in the balance. Instead, both customers and shareholders have been assured of security in the management of the company, which is vital in keeping confidence levels high. Despite this though, some analysts think that the best way for Johnson & Johnson to remain profitable is to split into three divisions, following in the footsteps of Abbott Laboratories' recent decision.
Not only is Johnson & Johnson's management ensuring security for investors and employees, it is also making moves to expand the already titanic reach of the company. Owing to a growing orthopedic sector, the corporation made a swift decision to offer a $21.3 billion takeover bid for Swiss company Synthes, which officially went through last Thursday - the biggest in Johnson & Johnson's history. Many people may criticize Johnson & Johnson's decision to spend so much money on expansion when it is already one of the largest companies in the industry, but as far as I'm concerned, the management must have a very clear idea of how they're expecting to benefit from this takeover: after all, $21.3 billion is an unimaginable sum of money, and is not to be taken lightly even by a giant such as Johnson & Johnson.
Johnson & Johnson are also spending large amounts of money in order to promote their image and presence within the industry, which is a cause that more people seem to agree on. Johnson & Johnson were the official sponsors of the CleanMed 2012 conference, both within the United States and on the international stage of Europe. The CleanMed conference is attended only by market and industry leaders, and for Johnson & Johnson to be the event's sponsor is not only a huge undertaking, but also provides the company with a huge platform for networking and further expansion (and as I outlined earlier, its expansion in Switzerland demonstrates that a larger presence worldwide is highly probable).
However, unfortunately for Johnson & Johnson, not all of its recent endeavors have had such positive consequences. Johnson & Johnson's drug Risperdal will cost the company heavy settlements after it was found that risks surrounding the use of the drug were not properly expressed or publicized. Johnson & Johnson has been criticized, and rightly so, for attempting to hide or mitigate the side-effects of the drug, which could be life-threatening in some cases. Of course, this will affect both Johnson & Johnson's public image and its capacity for capital investment in further development. At present, according to local press, lawyers on both sides are still negotiating the final settlement, with some predictions that it could be beyond $2 billion.
Publicity is also favoring other companies at present. GlaxoSmithKline (GSK) is celebrating after its drug, Votrient, was given full approval by the FDA - the first pharmaceutical product given the nod in decades as a recognized drug to counter cancer.
Johnson & Johnson also have a lot hanging in the balance right now, as recent reports state that the vice-chairman of Johnson & Johnson, Sherilyn McCoy, has been made chief executive of the struggling Avon (AVP) products company. If the scope and experience of Johnson & Johnson is anything to go by, Avon has made a wise move in appointing McCoy, but as this happened so recently, we have yet to see any results - positive or negative. McCoy's appointment is risky for both Avon and Johnson & Johnson, but only time will tell whether or not this risk pays off.
Overall, Johnson & Johnson has recently made a number of long-term decisions, and as a result it is yet unknown which, if any, of these decisions will benefit the company. Now is quite an uncertain time for the company, with a new CEO about to take charge, a potential European expansion worth billions of dollars, and links with cosmetics company Avon. However, I would suggest that Johnson & Johnson is currently so large and successful because past risks have paid off, and that the company can only benefit from its current risks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
