Johnson and Johnson Analysis

Table of Content

Johnson and Johnson is a well-known leader in the health care sector, having transformed the way we view medical care and achieving remarkable feats. The company places great importance on individual well-being and is recognized as an innovator in this domain. Their “Our Credo” acts as their guiding philosophy, highlighting the significance of healthcare providers utilizing sterile sutures, dressings, and bandages for wound management (Johnson and Johnson – Our History).

Johnson and Johnson has achieved success by prioritizing decentralized management, allowing for effective operations in 250 countries globally (Johnson and Johnson – Strategic Planning). Over its 120-year existence, the company has consistently led in innovation across all three divisions. However, to maintain its future position, Johnson and Johnson must continue to evolve and expand. This report aims to comprehensively analyze, evaluate, and provide recommendations to ensure the continued success of Johnson and Johnson.

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In 2009, Johnson and Johnson faced a sales decline for the first time in more than 76 years (JNJ 2009 Annual Report). This decrease was due to a worldwide recession, resulting in a sales drop of 2.9 percent from $63.7B in 2008 to $61.9B. Among the company’s three business segments, only the Medical Devices and Diagnostics segment experienced an increase in sales during that year. Specifically, this segment achieved a growth of 1.9 percent compared to the previous year, reaching $23.6B.

According to the 2009 Annual Report of JNJ, the Pharmaceuticals segment had sales of $22.5B, indicating an 8.8% decrease. The Consumer Products segment had sales of $15.8B, indicating a 1.6% decrease. Only the Medical Devices and Diagnostics US sales showed growth compared to the previous year.

Figure 1 below displays the sales figures for all three business segments in both the US and international markets in 2009.


Figure 1: 2009 Sales Figures For Business Segments (US & Int’l)

In terms of quarterly revenue, Johnson and Johnson experienced steady growth during the first three quarters of 2009 in both revenue and costs. However, there was an increase in both revenue and costs during the fourth quarter.

These conditions present an ideal chance to borrow money at an extremely appealing rate. Leveraging debt at low rates can potentially allow Johnson and Johnson to expand and enhance its market presence through new product developments and acquisitions. From 2006 to 2009, the financial review shows that Johnson and Johnson experienced stagnant revenue and expenses due to the global recession. The increases in both categories between 2006 and 2007 were a direct result of acquiring Pfizer’s Consumer Healthcare division.

Yahoo predicts a 4.2 percent rise in sales for 2010. Figure 2 shows the revenue, expenses, and income over the last four years. Johnson and Johnson’s current ratio is 1.8X, which matches the industry’s current ratio. Moreover, their quick ratio is 1.6X, exceeding the industry’s 1.4X and ensuring liquidity.

This will provide the necessary working capital to develop new products and finance potential acquisitions. (Ventureline) Johnson and Johnson’s receivables turnover ratio is currently 6.4X, which is the same as the current industry average. It is also higher than its three major competitors: Merck & Company, Novartis AG, and Pfizer, Inc. This high ratio indicates the efficient collection of credit sales, minimizing the wait for funds to be received and available for use. Inventory turnover is currently 3.6X, slightly better than the industry average of 3.5X.

Johnson and Johnson holds a competitive advantage over its three main rivals due to its significantly higher inventory levels. This serves as a safeguard against potential issues related to new drug developments, such as obsolescence or decreased potency. Moreover, this advantage enables the company to allocate capital elsewhere instead of tying it up in inventories that do not generate any return.

A matter of concern for Johnson and Johnson is its current times interest earned ratio, which is 25.1X. This figure surpasses the industry average of 4.2X by a significant margin. Considering the current low cost of borrowed capital, it might prove more advantageous for the company to utilize earnings in research and development or acquisitions rather than focusing on debt repayment.

Concern may arise from Johnson and Johnson’s lower than average equity multiplier of 1.9X, compared to the industry ratio of 2.3X, indicating a low degree of leverage. Furthermore, their debt to equity ratio of 0.9X is lower than the industry’s ratio of 1.3X, suggesting that Johnson and Johnson relies less on debt for financing operations. While not necessarily worrisome, this could mean potential earnings are being missed out on by not utilizing increased leverage.

The return on equity ratio for Johnson and Johnson is 24.20 percent, surpassing the industry average of 18.10 percent, demonstrating a higher-than-average return on investment for shareholders and alleviating concerns about the necessity of additional leverage to enhance returns.

Furthermore, Johnson and Johnson’s return on assets ratio is 13.00 percent in contrast to the industry average of 8.00 percent, further validating the effectiveness of current operations without the requirement for increased leveraged debt. (Ventureline) Market Value Ratios

The current price to earnings ratio of 14.5X versus the industry average of 4.5X suggests that stockholders anticipate a higher return on their investment, which is supported by the company’s return on equity ratios and its successful operations without excessive debt, according to Ventureline. Johnson & Johnson competes with numerous companies in various markets. Across its three business segments, the company benefits from a significant market share, well-known brand names, and a strong focus on research and development.

In the competitive market, companies like Johnson and Johnson must be innovative in product development, marketing tactics, and division synergy to achieve high success. Johnson and Johnson faces competition from several companies, but this report focuses on comparing Johnson and Johnson with three specific competitors: Merck & Company (MRK), Novartis AG (NVS), and Pfizer, Inc. (PFE). Out of these three companies, only Merck showed exceptional income returns in the fiscal year of 2009.

In 2009, international sales exceeded US sales for the first time, amounting to over $31B compared to just under $31B in the United States. During the past three years, US sales have declined while international sales have been boosted by the Asian-Pacific/Africa region. Conversely, European market sales have mirrored those of the US market for the past four years.

Johnson and Johnson is adopting a global strategy to increase its market share in all of its three business segments. Despite stagnant sales in South America over the past three years, there is potential for growth in the Asian-Pacific region. Figure 4 provides an overview of sales distribution across various geographic regions over the past four years.

According to a Fortune article from July 2009, Johnson and Johnson is the biggest pharmaceutical company globally (Fortune, Appendix A). Additionally, Johnson and Johnson holds the title for being the largest company in medical devices and diagnostics (JNJ) while also leading in consumer health products on a global scale. Johnson and Johnson has a workforce of approximately 115,500 individuals spread across 250 companies in 57 different countries.

Johnson and Johnson has a long-term perspective when it comes to strategy implementation and employee development. They prioritize shareholder value, environmental concerns, employee growth, and product safety. The company invests in its people as they believe employees and core values are their most valuable asset. This aligns with their commitment to the fourth principle of People and Values.

Johnson and Johnson, founded in 1886, is a well-established company known for its rich history, strong product development, and focus on innovation. Its portfolio includes renowned brand names like Band-Aid®, Listerine®, and Motrin®. With operations spanning over 57 countries through 250 companies, Johnson and Johnson has a global presence that presents numerous growth opportunities and allows it to cater to diverse customers while minimizing financial risks associated with specific regions.

Johnson and Johnson’s financial position is robust, with $15.8 billion in cash on hand and reported global sales of $61.9 billion for 2009 (JNJ 2009 Annual Report). Furthermore, the company has been recognized with numerous accolades for its environmental initiatives, including a focus on sustainable packaging and shipping methods and incorporating local community feedback into environmental decisions. Nevertheless, Johnson and Johnson has experienced a decline in domestic sales growth in recent years, while international sales have exceeded expectations.

Johnson and Johnson may be facing challenges in the domestic market due to maturity and saturation, as well as a shift in customer preferences towards generic products. The company has also been affected by the expiration of patents, resulting in a loss of approximately $3 billion in sales in 2009 from the expiration of patents for RISPERDAL® and TOPAMAX® (JNJ 2009 Annual Report). In recent years, there has been an increase in the availability of generic retail brands and prescription drugs. This rise in generic consumption has been compounded by the current economic conditions and proposed healthcare plan for all Americans. Given these circumstances, Johnson and Johnson cannot assume that everyone is aware of its products.

Johnson and Johnson should take into account the local cultures and customs as it expands its presence in different countries to ensure successful marketing of its products. The company has immense potential for sales and growth thanks to the worldwide demand for medical supplies, devices, and drugs. Moreover, with the implementation of the Healthcare Reform Act, Johnson and Johnson can expand its domestic sales by targeting over 30 million individuals who were previously without insurance coverage. To make the most of this opportunity, Johnson and Johnson must improve its media visibility.

Facebook and Twitter play a vital role in expanding Johnson and Johnson’s global community, as they increase the chances of people purchasing its products through various media channels. Thus, it is essential for the company to maintain a consistent media presence. Furthermore, acquiring other companies not only enhances sales and revenue but also provides resources for research and development in creating new products. The diabetes market holds significant potential for sales growth; however, the ongoing global economic crisis has adversely affected the company.

Johnson and Johnson has faced stagnant yearly sales for the past 3 years, resulting in a restructuring process that led to the loss of experienced employees. The implementation of the Healthcare Reform Act is expected to decrease revenue and profit for the company due to government rebates. Yahoo reports that this reduction could reach $500 million in revenue and about $300 million in profit, which equals 10 cents per share. Currently, Johnson and Johnson is encountering fierce competition from domestic and international rivals.

In addition to these challenges, there is a growing demand for generic prescription drugs, leading to an increase in patent exclusivity infringement cases in undeveloped countries.

The size of Johnson and Johnson could lead to massive loss in sales revenue for the company. In today’s economic climate, long-term employee development is extremely important, and this applies to Johnson and Johnson as well. The management team at Johnson and Johnson possesses an average of 20+ years of experience with the company. A detailed list of the team members can be found in Appendix C. Currently, Johnson and Johnson has approximately 115,500 employees spread across 57 countries and 250 companies. The company has been honored with numerous awards for its diversity, talent retention, strategy implementation, and workplace conditions (JNJ – Programs and Activities).

Johnson and Johnson offers several company-sponsored programs to promote community involvement, employee development, and acceptance of its diverse workforce. These programs include affinity groups, mentoring programs, and Diversity University. Affinity groups and mentoring programs match new employees with experienced co-workers to foster overall workforce development. Diversity University is an online resource that encourages employees to embrace the cultural diversity within the company and promotes openness to new ideas through education. Given its operations in 57 countries, Johnson and Johnson recognizes the importance of accepting and embracing a diverse workforce, which aligns with its decentralized management style.

The company and its employees aspire to be responsible citizens in their communities and countries. They achieve this through charitable and ecological initiatives, which have earned the company numerous awards. The Consumer Health Care business segment, headed by Ms. Colleen A. Goggins, is responsible for providing consumer products. Ms. Goggins has been the Worldwide Chairman of the Consumer Group since June 2001 and has been employed by Johnson and Johnson since 1981.

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