Johnson and Johnson have revolutionized the way people think about health care, and has easily become the pinnacle of success by doing so. Pioneers of the health care industry and overall human health and well being, Johnson and Johnson is guided by its “Our Credo” and founding principle that “doctors and nurses should use sterile sutures, dressings and bandages to treat peoples wounds” (Johnson and Johnson – Our History).
Most of Johnson and Johnson’s success can be attributed to its emphasis on decentralized management, which allows for greater focus as the company blankets 250 countries across the world (Johnson and Johnson – Strategic Planning). For the last 120 years, Johnson and Johnson have been on the forefront of innovation for each of its three divisions, but it must continue to develop and grow in order to maintain its position for the future. This report will investigate, assess, and put forth recommendations to ensure continued success for Johnson and Johnson.
In 2009, Johnson and Johnson experienced its first sales decline in over 76 years (JNJ 2009 Annual Report). The decline was due to a worldwide recession which caused 2009 sales ($61. 9B) to decrease 2. 9 percent from 2008 figures ($63. 7B). Of the three business segments which make up Johnson and Johnson, only the Medical Devices and Diagnostics segment reported an increase in sales from 2008. This segment increased its sales by 1. 9 percent from 2008’s figures to $23. 6B.
The Pharmaceuticals segment reported sales of $22. 5B (down 8. percent), while the Consumer Products segment reported sales of $15. 8B (down 1. 6 percent) (JNJ 2009 Annual Report). Only the Medical Devices and Diagnostics US sales showed any increase from 2008’s sales levels. Figure 1 below represents the three business segments displaying US and International 2009 sales figures. [pic] Figure 1. 2009 Sales Figures For Business Segments (US & Int’l) 2009 Quarterly Revenue In 2009, Johnson and Johnson showed flat revenue and cost expenses growth for the first three quarters, while the fourth quarter displayed increases in revenue and costs.
These same conditions provide an excellent opportunity to borrow money at a very attractive rate. This ability to leverage debt at low rates might provide Johnson and Johnson even further opportunities to be able to expand and increase its market presence through new product developments and/or acquisitions. 2006 – 2009 Financial Review The results of the worldwide recession have lead to Johnson and Johnson exhibiting flat revenue and expenses for the past three years. The increases between 2006 and 2007 in both categories were the result of acquiring Pfizer’s Consumer Healthcare division.
Most analysts are expecting ~4. 2 percent sales growth for 2010 (Yahoo). Figure 2 below shows the past four years of revenue, expenses, and income. Liquidity Ratios Johnson and Johnson has a current ratio of 1. 8X which is the same as the current ratio for the industry. The quick ratio is 1. 6X compared to the industry’s 1. 4X provides further evidence of the company’s liquidity.
This will provide needed working capital necessary to develop new products and finance potential acquisitions. (Ventureline) Johnson and Johnson’s receivables turnover ratio is currently 6. 4X and mirrors the current industry average. It is also higher that it’s three major competitors: Merck & Company, Novartis AG, and Pfizer, Inc. This high ratio indicates an efficient collection of credit sales, which minimizes the wait before funds are received and available for use. Inventory turnover is currently at 3. 6X and slightly better than the industry average of 3. 5X.
It is also nearly twice as high as its three major competitors. This provides a competitive advantage since there is not a high level of inventory that could be deemed obsolete due to new drug developments or decreased potency. In addition, capital is not tied up in maintaining inventories that do not provide any return. Debt Ratios The current times interest earned ratio for Johnson and Johnson is 25. 1X compared to the industry average of 4. 2X. This is an area of concern given the current low cost of borrowed capital. Earnings might be better utilized in R or acquisitions instead of paying off debt.
This concern is reinforced by the lower than average equity multiplier. The industry ratio of 2. 3X is higher than Johnson and Johnson’s 1. 9X which indicates a low degree of leverage. The debt to equity ratio is 0. 9X versus 1. 3X for the industry. This indicates a lower use of debt to finance its operations. While this is not necessarily a cause for concern, it could indicate a loss of earnings that could be generated if the company was more leveraged.
The return on equity ratio for Johnson and Johnson is 24. 20 percent compared o the industry average of 18. 10 percent. This indicates a better than average return on investment for its shareholders. This reduces the concerns expressed earlier that returns could be higher through additional leverage. The company is currently exceeding the industry average without excess debt so no operational modification seems necessary at this time. The return on assets ratio of 13. 00 percent versus the industry average of 8. 00 percent further confirms the efficiency of current operations without the need for additional leveraged debt. (Ventureline) Market Value Ratios
The current price to earnings ratio of 14. 5X versus industry average of 4. 5X indicates stockholders expect a higher return on their investment. This is validated by the return on equity ratios and the company’s ability to operate effectively without excessive debt. (Ventureline) Johnson & Johnson vs. Competitors Analysis Johnson and Johnson competes in many markets against hundreds of companies. For the three business segments, Johnson and Johnson benefits from healthy market share, easily recognized brand names, and strong emphasis on research and development.
As with any developing, or mature market, the increasing threats of global competition forces companies to become innovative with product development, marketing tactics, and synergizing divisions to become highly successful. Johnson and Johnson have many competitors, but with an overall company comparison only three companies will be compared to Johnson and Johnson in this report; Merck & Company (MRK), Novartis AG (NVS), and Pfizer, Inc. (PFE). Of the three companies listed, only Merck exhibited outstanding income returns during the 2009 fiscal year.
In 2009, International sales exceeded US based sales figures for the first time in the company’s history. International sales for 2009 were slightly over $31B, while US sales came in at slightly under $31B. US sales for the past three years have been decreasing, while sales in the Asian-Pacific/Africa region has be responsible for the increase in International sales. The European market has mirrored the US for the past four years in sales.
South American sales have basically been flat for the past three years. One area for continuing growth is the Asian-Pacific region. There is a global strategy that is well under way within Johnson and Johnson to increase market share in all three business segments. Figure 4 below shows the past four years of sales by geographical regions.
Based upon a July 2009 Fortune article, Johnson and Johnson is the world’s largest pharmaceutical company (Fortune, Appendix A). Johnson and Johnson is also the world’s largest medical devices and diagnostics company (JNJ) and a worldwide leader in consumer health products. Johnson and Johnson employ approximately 115,500 people in over 250 companies located in 57 countries.
Johnson and Johnson also has a “Long Term” approach to strategy implementation and employee development. Johnson and Johnson’s long term approach focuses on shareholder value, environmental concerns, employee development, and product safety. With the long term investment of its people, this leads into the fourth principle of People and Values. Johnson and Johnson considers its people and core values as its greatest asset.
Johnson and Johnson is a well established company rich in history, product development, and innovation. Since its founding in 1886 it has grown by focusing on its inner strengths. One of these strengths is established brand names. Band-Aid®, Listerine®, and Motrin® are just a few examples of the established brand name product offerings through Johnson and Johnson. An additional strength is its global presence. It operates in over 57 countries through 250 companies. Johnson and Johnson’s global presence enables the company several growth and acquisition opportunities, while supplying its products to broad range of customers. It also reduces the financial threat of operating in a specific area of the world.
Another strength example is its strong financial position. It currently has $15. 8 billion in cash on hand and reported worldwide sales of $61. 9 billion for 2009 (JNJ 2009 Annual Report). Johnson and Johnson has also received numerous awards for its environmental position. It has focused on how its products are packaged (recycled material), method of shipping (increased efficiency to reduce greenhouse gases), and local community input when dealing with the environment. Weaknesses Johnson and Johnson over the past few years has seen a shift from International Sales outperforming its Domestic Sales growth. For the past four years Johnson and Johnson has experienced flat domestic sales growth.
This could be attributed to a mature, saturated domestic market or a customer financial shift to generic consumption. Johnson and Johnson’s patent expirations are another weakness. Johnson and Johnson for 2009 lost an estimate $3 billion in sales from just two patent expirations; RISPERDAL® and TOPAMAX® (JNJ 2009 Annual Report). Over the past several years have seen the surging supply of generic consumable products (i. e. retail brands) and prescription drugs. Compounding this increase in generic consumption is the current economic conditions and purposed healthcare plan for all Americans. Taking these conditions into consideration, Johnson and Johnson must not assume that everyone knows about its products.
As it expands into different countries around the world, it must be conscious of local cultures/customs and how to market its products to suit those situations. Opportunities The worldwide demand for medical supplies, devices, and drugs provides Johnson and Johnson with unlimited sales and growth potential. Johnson and Johnson has the opportunity of increasing its domestic sales with the passage of the Healthcare Reform Act. With this passage, Johnson and Johnson has the opportunity of reaching over 30 million potential customers who were previously uninsured. To help take advantage of this opportunity Johnson and Johnson must increase its media awareness.
Social networking on Facebook and Twitter are just a couple of examples of how Johnson and Johnson could reach a larger, more diverse community all around the world. The more consumers see and hear about Johnson and Johnson the more likely they are to purchase Johnson and Johnson products; therefore, it must have its names continuously in the media. Finally, it must always be on the lookout for future acquisitions. These acquisitions provide the company with increase sales and revenue dollars to fuel the research and development of other products. The potential future sales for the diabetes market has unlimited opportunities. Threats The global economic crisis has had an unfavorable affect on Johnson and Johnson.
For the past 3 years, yearly sales figures have basically remained flat and during this time Johnson and Johnson had to restructure itself which resulted in the loss of several thousand, experienced workers. With the passage of the Healthcare Reform Act, Johnson and Johnson has announced that “government rebates under the health care overhaul would reduce its 2010 revenue up to $500 million and its profit by about $300 million, or 10 cents per share” (Yahoo). Johnson and Johnson is facing intense competition from many competitors, both domestic and international. Along with this intense competition is the increasing supply and demand for generic prescription drugs. As the demand for prescription drugs increases, so does the infringement of patent exclusivity in undeveloped countries.
To a company the size of Johnson and Johnson this could result in billions of lost sales revenue. Management Team and Employees As with any successful company, long-term employee development is very critical in today’s economic times. The management team members at Johnson and Johnson, on average, have over 20+ years experience with the company. A comprehensive team list can be found in Appendix C. Johnson and Johnson currently has approximately 115,500 employees in 57 countries through 250 companies. The company has received numerous awards recognizing it for its diversity, talent retention, strategy implementation and workplace conditions (JNJ – Programs and Activities).
Company sponsored programs include affinity groups, mentoring programs, and Diversity University. The affinity groups and mentoring programs promote community involvement and encourage employee development by matching new employees with experienced co-workers further promoting overall workforce development. Diversity University is an online resource that Johnson and Johnson provides to encourage its employees to embrace the vast cultural makeup of its workforce and to encourage openness to new ideas through education. Acceptance of a diverse workforce is essential to a company that operates in 57 countries. This diversity also fits in well with the decentralized management style.
The company as well as its employees strives to be good citizens in the communities and countries they live in. Charitable and ecological programs help to promote good corporate citizenship and has been responsible for the company winning many awards. Consumer Health Care Business Segment The Consumer Health Care business segment is led by Ms. Colleen A. Goggins. Ms. Goggins has held the title of Worldwide Chairman, Consumer Group since June 2001, and has been employed by Johnson and Johnson since 1981. The Consumer Health Care business segment focuses on providing products to the consumer.