72 Business The Economist December 4th 2021
No moretears
L
ong beforethe invention of stakeholder capitalism, a core
principle—that the interests of customers, employees and
society should be as high or higher than those of shareholders—
was carved into the plaster at Johnson & Johnson’s head office in
New Brunswick, nj. “Our Credo” as j&jcalls its mission statement,
dates back to 1943, when it was penned by Robert Wood Johnson II,
a former boss of the pharmaceutical firm.
j&jsays the Credo has helped construct a corporation built to
last. Worth $420bn, it is the world’s biggest drugs firm by value. It
is one of only two companies in America with a tripleacredit rat
ing (the other is Microsoft). Of its $82.6bn of sales last year, phar
maceuticals accounted for 55%, medical devices 28% and con
sumer health 17%. It produces everything from blockbuster cancer
drugs to bandaids and baby powder.
Some argue that for all its pieties, j&jhas let down both society
and shareholders. In recent years it has faced multiple lawsuits
against products ranging from prescription opioids to talcum
powder to Risperdal, an antipsychotic medicine. It denies all
wrongdoing, but the succession of controversies has tarnished its
image and loaded it with legal liabilities.
Moreover, since 2012 j&j’s total returns to shareholders have
lagged behind the s&ppharmaceutical benchmark by about a
third. Investors say the legal maelstrom is partly to blame. Anoth
er factor is lopsided performance. Buoyancy at j&j’s pharmaceuti
cals business, where sales rose by 8% last year, is overlooked be
cause of low singledigit growth and, at times, declines in the
medical devices and consumerhealth divisions.
Now j&jis taking steps—radical by its own standards—to re
form on both counts. Alex Gorsky, its outgoing chief executive and
soontobe executive chairman, is trying to draw a line under the
legal troubles. He is also overhauling the firm’s structure. His
methods have not yet had the desired effect. But they could restore
the firm’s standing with investors and society.
The first sign of progress has been in the legal realm. In August
2019 an Oklahoma court ruled that j&j’s promotional campaigns
downplayed the risks of opioids and meant the firm bore a wide
responsibility for the deadly epidemic. It was ordered to pay
$465m. But on November 9th the state’s Supreme Court overturned the ruling, saying it was based on a wrong interpretation of
publicnuisance law. The previous week, a California court threw
out a similar case against j&jand other defendants.
Such wins for j&jcoincide with what Carl Tobias of the Univer
sity of Richmond School of Law, calls a new legal approach. The
firm has a history of litigating cases “to the bitter end”, he says.
Lately, he points out, it has shown more willingness to settle. This
summer it finalised an opioid settlement of up to $5bn with nu
merous American states, cities and counties which it hopes will
lay the claims against it to rest. In October it said it had set aside
$800m to settle most of its Risperdal cases.
The company is still walking a legal tightrope when it comes to
claims related to talcum powder. In October it deployed what is
known disparagingly as the “Texas two step”, a manoeuvre in
which it set out to ringfence liabilities on 30,000 or more talcre
lated litigation claims by creating a Texan subsidiary, ltlManage
ment, that promptly filed for Chapter 11 bankruptcy in North Caro
lina. It went down poorly. The North Carolina judge shunted the
bankruptcy case to New Jersey, where many of the talc claims are
filed. Some Congressional Democrats accused the firm of trying to
manipulate bankruptcy law to deny claimants their day in court.
j&jargues that it has established a $2bn trust attached to ltlto
help cover talcrelated liabilities under Chapter 11. Investors hope
it could mark the beginning of the end of the saga.
Mr Gorsky’s second sweeping change is structural. j&jsaid in
November that over the course of 1824 months it would split into
two firms, one focused on consumer health, the other combining
pharmaceuticals and medical devices. The consumerhealth busi
ness badly needs a nip and tuck. It is no longer enough to boast
that nine out of ten dermatologists recommend a skin product.
Shoppers require Kim Kardashianstyle razzmatazz. j&jhopes the
consumerhealth business will fare better with more focus. The
breakup will also crystallise value lost in the conglomerate struc
ture. It is a path trodden by gsk, a British drugs firm, which is spin
ning off its consumerhealth joint venture with Pfizer. But a lot re
mains unknown about the split. Investors greeted it with a shrug.
What shareholders are excited about is the pharma business.
They take seriously j&j’s pledge to ramp up annual drugs sales
from $45.6bn last year to $50bn by 2023 and $60bn by 2025. It reck
ons it can outstrip average growth in the drugs market even
though one of its best selling medicines will lose patent protec
tion. It promises new treatments, such as cell and gene therapies.
Its oncology pipeline is strong. It will not be all smooth sailing,
however. The pharma firm will still be tied to the sluggish medi
caldevices business. And if the talcrelated bankruptcy man
oeuvre fails, liabilities could fall onto the pharma business. Time for a booster jab
These are exciting times in life sciences. Pfizer is adding a fortune
to sales thanks to its covid19 breakthroughs. Eli Lilly is attracting
investors because of an experimental Alzheimer’s drug. Against
such competition, j&jurgently needs to move beyond the legal
controversies weighing upon it and its share price.
The biggest question is whether the company can become
more dynamic overall. Partly owing to its mission statement, j&j
carries a lot of history on its back. It makes decisions cautiously.
Mr Gorsky has taken years to recommend a breakup, though in
vestors have wanted one since he tookoverin 2012. Listening
properly to shareholders would have meantearlier, possibly pre
ventive, ingestion of the correct medicine.nSchumpeter
Can Johnson & Johnson put the taint of scandal behind it?