PHARMACEUTICAL INDUSTRY

Table of Contents

Industry Profile
               Industry Size
               Industry Segmentation by Products
               Industry Segmentation by Distribution
               Industry Concentration
Current Environment
               Drugmakers maintain strong growth
               Pull factors: Demographics
               Pull factors: Opportunities Abroad
               Push factors: Direct Consumer Advertising
               Push factors: Legal environment
               Push-Pull Mechanism: Product life cycles, prices, costs
               Relationship Pharmaceuticals - Healthcare
Industry Living Space
               Demand
               Life cycle of products
               Life Force of Business: Research and Development
               Prohibitive Barriers to Entry
               Liability issues
               Global consolidation
               Diversification
From Industry to Company
The Upjohn Company
               Historical Overview
               Products
               Overseas Market
               Merger with Pharmacia
Johnson & Johnson
               Brife History
               Globalization
               Regulatory Compliance
               New Drugs Boost profits
References:


 

Industry Profile

Industry Size

Total worldwide sales of pharmaceutical products were about $291 trillion for 1997. Geographically, the world marker was divided as is shown at the Figure.

Figure. World Pharmaceutical market

Total sales of U.S. pharmaceutical companies reached about $105.9 trillion in 1997, up 7.0% from the 1996 level. About 62% of the 1997 total represents sales to domestic customers, with 38% of foreign sales.

Industry Segmentation by Products

Pharmaceutical sales include: Ethical drugs account for about 60% of total industry sales, with OTC products representing the balance.

The ethical sector can be further segmented into:

Generics are less-expensive equivalents of brand-name prescribed drugs, and may be produced and sold once the original drug's patent protection expires.

Industry Segmentation by Distribution

Three-quarters of industry sales consist of pharmaceuticals used in outpatient settings, with the balance administered in hospitals, nursing homes, and other inpatient facilities. About 70% of prescribed drugs is distributed through wholesalers to hospitals, health maintenance organizations (HMOs), and retail pharmacies. The remaining 30% is sold directly by manufacturers to physicians, hospitals, retailers, and others.

Industry Concentration

The industry is somewhat concentrated. The 10 1argest players accounted for about one-third of worldwide sales of ethical drugs in 1996. Generic drug industry, in contrast, is fairly fragmented. More than 50 U.S. companies are in this business, including more than a dozen generic divisions of large branded pharmaceutical companies.

Figure. Market  Shares of Leading Pharmaceutical Companies


 
Top of Page


Current Environment

Drugmakers Maintain Strong Growth

The U.S. pharmaceuticall industry is expected to maintain above-average earnings growth through the end ot the decade. Industry profit growth in 1998 should approximate the 14%-15% annual gain indicated for 1997.

Key global pull factors fueling this growth include:

Key global push factors of growth are presented by: These positive fundamentals should more than offset the negative effects of:

Pull factors: Demographics

Rapid expansion is projected for the elderly segment of the population-a group characterized by heavy use of prescription drugs. World Health Organization (WHO) forecasts the global over-65 population to rise from 380 million in 1997 to more than 690 million by the year 2025. Unfortunately that does not mean they will he free of health problems, providing fertile markets for new prescription drugs.

Pull factors: Opportunities Abroad

Increasing standards of living in Latin America, Asia, Africa, and Eastern Europe also drive growth for the pharmaceutical industry. One of their first priorities of emerging nations is to improve healthcare, increasing demand for pharmaceuticals. Among the others, Russia and China are the major emerging pharmaceutical markets.

Being relatively small compared to the U.S. and major European nations, Russian pharmaceutical market expanded at a compound annual rate of more than 30% over the past three years. With more than one billion people, China is another major emerging market. The size of the market in 1996 was about 56.1 trillion, of which U.S. drugmakers accounted for 14%. Leading U.S. drugmakers expanding their presence both in Russia and China include Merck, Bristol-Myers Squibb, Johnson & Johnson, Eli Lilly, and Schering-Plough.

Push factors: Direct Consumer Advertising

Direct-to-consumer (DTC) advertising has become a major marketing force in the U.S. pharmaceutical industry and a key driver of its growth. Drugs are now heavily promoted in mass media. Expenditures on advertising for prescribed drugs double in each of the past three years, reaching $600 million in 1996. The acceleration in DTC spending is the fact that prescription drug advertising is highly effective. DTC advertising has enhanced competition in the pharmaceutical marketplace and contributed to lower prices.

In August 1997, Food and Drug Administration (FDA) has changed rules governing the broadcast of ads. New rules permit drugmakers to promote the benefits of their products directly. While ads must still contain drug's health risks, drugmakers are no longer required to spell out all drug's side effects. The ads, however, must include an 800 telephone number or a Web site for consumers to learn more about adverse side effects.

Push factors: Legal environment

Figure. Mean Approval Time for New Drugs

In November 1997, President Clinton signed into law sweeping new legislation aimed at streamlining and speeding up the FDA's approval processes for new prescribed drugs, reducing the approval time from 30 to 15 months. The new law also allows seriously ill patients easier access to experimental compounds.

Push-Pull Mechanism: Product life cycles, prices, costs.

Now U.S. pharmaceutical industry appears on the verge of a major new drug cycle, with a number of products recently introduced or soon to be launched. Today's healthcare environment is cost-sensitive, and the relative value of new drugs has increased. Drugmakers are now less eager to develop new drugs that are similar to existing products (the so-called "me too" drugs), but intensifying their efforts on the creation of compounds that permit relative pricing freedom.

Consumer pharmaceutical pricing continues to remain in line with overall inflation, despite above-average increases in selected lines. Consumer prices for prescribed pharmaceuticals increase an annual rate of 2.3%, whereas average prices for branded products rise 3.4% year to year.

Relationship Pharmaceuticals - Healthcare

Managed Care Growth

The shape of the pharmaceutical marketplace transforms rapidly due to growth of managed care in the U.S. healthcare system. The latter becomes more and more popular because of its ability to provide medical products and services in a cost-effective manner. Managed care's share of the retail pharmaceutical market, which was less than 30% at the start of this decade, is expected to reach 90% by the end of it. The managed care providers discount purchases of pharmaceuticals and medical products, as well as physician and hospital services, insisting on the use of low-cost generic drugs whenever possible.

Medicare and Medicaid

Managed care is also moving aggressively into Medicare and Medicaid markers. Medicare is the principal healthcare financing program for Americans 65 years of age and older. But the program doesn't provide reimbursement for outpatient prescribed drugs. Enrolling into managed care plans, medicare beneficiaries are typically given free or low-cost prescription coverage. Growth of medicare/managed care population increases drug utilization. Medicare/managed care enrollment has more than doubled over the past four years.
 
Medicaid managed care plans are also poised for ongoing growth. Enrollment in Medicaid managed care plans almost tripled from the start of 1993 through 1996.

Pharmaceutical Benefit Management Firms

Figure.  Manufactures' Sales by Class of Customer
Pharmaceutical benefit management (PBM) firms are intermediaries between pharmaceutical manufacturers and large drug purchasers. PBMs managed about 35% of all retail prescriptions written in 1996. They use automated mail order processing to fill customer needs. There were a number of mergers between pharmaceutical companies and PBMs as a tactics to defend profits.

Top of page


Industry Living Space

Demand

The demand for medicine is tied to the health of the populace, which is relatively constant over the years. Drug pricing is also relatively inelastic, due to the absence of alternate therapies for the most prescribed drugs.

Life cycle of products

The product cycle of nearly all prescribed drugs is fairly stable. After the average 10- to 15-year period of discovery, development, testing, and FDA review, a branded ethical drug has about a 10 years of commercial life.

Discovery

New drugs are discovered in scientific laboratories. The process is long and laborious, with the vast majority of attempts unsuccessful.

Bringing the drug to market

Before a drug can he brought to market, it must undergo years of testing and receive government approval from the FDA. It takes several years of sales buildup in major markets in the U.S. and abroad before a drug reaches its full commercial potential. At that point, new competition of drugs similar in action may enter the market.

Going generic

Drug's patent expires, typically after eight years on the market. Generic competition usually appears immediately after it, and prices begin to fall. Branded prescription drugs typically have about 10 years before generic competition erodes their profitability.

Going OTC

Companies sometimes switch a patent-expired product from prescription-only status to over-the-counter (OTC) status to broaden its market and extend its economic life. Competition in the market of OTC products is more straightforward. Margins on products switched to OTC status are lower than those on the prescription products they replace, but popular consumer medications can have almost infinite shelf lives.

Life Force of Business: Research and Development

Strengths

Figure. R&D Expenditures in Pharmaceutical Industry

The drug industry is one of the most research-oriented sectors of the U.S. economy. Over the past two decades, the industry's R&D expenditures have risen sharply, both in dollar terms and as a percentage of total sales. Its R&D expenditures are equal more than 21% of total industry revenues in 1997, compared with l5.9% in 1990 and l l.7% in 1980. In contrast, the average U.S. manufacturing firm spends less than 4% of sales on R&D.
 
Figure R&D Expenditures as a Percent of Sales for US Industrial Sectors

Weaknesses

Drug manufacturing is also a high-risk business; only one in 5,000 compounds discovered ever reaches the pharmacist's shelf. Fewer than a third of marketed drugs actually achieving enough commercial success to cover their R&D investment.

Opportunities

When a drugmaker launches a new compound that achieves widespread acceptance in the marketplace, the economic rewards can be very high. This is the primary reason for the industry's profit margins.

Threats: FDA approval

The FDA requires manufacturers to perform extensive testing to prove that products are safe and effective before it will sanction commercial sale. All animal and human tests, which often last for years at the cost of many millions of dollars, are conducted by the manufacturer.

The cycle for the development of a new drug is as follows:

The clinical testing period on humans usually consists of three phases: Fugure.  Compound Success Rates by Stages of Development
 

Out of 20 drugs entering clinical testing, average 13 successfully complete phase I. Of those about nine finish phase II, but only one likely pass trough the phase III. Only one of 20 will ultimately approved for marketing.

Prohibitive Barriers to Entry

Figure. Cost of Developing a New Drug
 


Substantial economic, regulatory, legal barriers stand on the way of new competitors. Development of a new drug takes from 10 to 15 years and costs more than $500 million. Manufactures of new drugs are protected by the patents on new drugs. However, effective patent protection is only 8-10 years given the the length of time to bring a product to market.

Liability issues.

Due to adverse side effects of medication, lawsuits are inevitable for drug manufactures. Product liability and insurance coverage are increasingly important issues of the industry.

Global consolidation

Fugure.  Increasing Frequency of Alliances

Worldwide consolidation in  the pharmaceutical industry is continuing over the next few years. Mergers are often prompted by product concerns. Pharmaceutical companies are pooling their resources to compete more effectively. Mergers offer significant cost savings and advantages in manufacturing, marketing, and research and development. Combined entities also deal better with managed care customers, providing them with broader and more comprehensive lists of drug products.

Diversification

Services

Growing influence of managed care buyers' forced drugmakers and PBMs to develop new strategies, such as "disease management." Under this concept, pharmaceutical companies focus research and development (R&D) and marketing efforts on specific ailments; they then offer a comprehensive treatment package including preventive care, diagnosis and screening, and therapeutic drugs.
 
Generic drugs

Fugure.  Generics' Share of US Drug Market

Generic drugs are forecast to form nearly two thirds of all prescriptions written by the end of the decade, up from 42% in 1996 and 22% in 1985. Patent expirations of branded drugs influence the generic drug market. Generic competition begins immediately after expiration of a patent, discounting the price from 60% to 90%. To protect their profits, some branded drugmakers have moved into the generic business. Another profit-saving strategy is to convert branded products from ethical to OTC status.

Top of Page


From Industry to Company

 
Pharmaceutical companies: key elements of success.

A Portfolio of Products.

Marketing Competitive Strengths:

Prescripted drugs

Non-prescribed drugs Partnerships or Strategic Alliances.
 
International operations.

Diversification

Top of Page
 


The Upjohn Company

Historical Overview

     The Upjohn Company was found in 1886 by Dr. William-Erastus Upjohn in Kalamazoo Michigan, U.S.A.  Dr. William Upjohn's discovery of a pill that was friable inside a person's stomach initiated such a demand from doctors in the area that he soon found out he could not keep the supply from solely rudimental production.  He installed a small plant which by 1912 manufactured enough pills to earn a million dollars in sales.  Major discoveries of the time like the anti-malarial "Quinine", still used today, helped the process.  The Upjohn Company, though, did not become world famous until after the World War II with the discovery of "Medrol", a steroid that had fewer the side effects than others.

Products

    Today, the Upjohn Company, with a reputation for high quality products, has become one of the major pharmaceutical marketing firms in the United States and abroad.  Its firm-specific advantage in brand name pharmaceutical products has led many foreign companies to ask Upjohn Company has developed competitive advantage based on its own high quality best-selling products such as the contraceptive "Deo-Provera", the antibiotic "Lincocin", and the hair growth product "Rogaine".  Upjohn has also acquired licenses that later became top-selling products like "Motrin" and Ansaid", both anti-inflammatory pharmaceutical licensed from the Boots Company, England, and "Orinase" and "Micronase" anti-diabetics, licensed from the Hoechst GmbH, Germany.

Overseas Market
 
    The Upjohn Company began its first operations abroad at the beginning of the century when its New York branch received an order from a Egyptian pharmacist asking for "Quinine" and Upjohn's line of pills.  In 1935 Canada became the first foreign country to ever install an Up-john branch.  In 1957 the Upjohn Company decided to transfer its exporting operations from the New York and San Francisco branches to its headquarters in Kalamazoo and the international division was established.  The Upjohn Company had paid little attention to Europe until this time, although an exception was the attempt of sending nuns to sell the candy format laxative "phenolax" door-to-door throughout England, Carlisle (1987).  It was not until the late1950's that Upjohn had an organized strategy for the European market.  Thus, it was late to enter Europe in contrast to its competitors whose internationalization process was already at the manufacturing stage, with some(Merck, Pfizer and Parke/Davis) already making as much as 30 percent of their profits in the European market.  Thus, in retrospect, Upjohn's entry inside European markets was as a "late starter".

     As it became increasingly difficult to enter the European market, Upjohn's management made an important strategic decision.  It would undertake strategic alliances as a means of entry and diffusion in European markets.  Strategic alliances are defined to include sales offices and marketing agreements with local distributors and joint ventures with local, host-country, manufacturing firms.  Upjohn's name recognition among doctors in Europe helped to obtain patents, fast medicine approvals and acceptable prices from local governments.  Another important factor that led Upjohn's management to believe this strategy would work was the competitive advantage that Upjohn was obtaining in the marketing field in the United States, which foreign partners could see as a fine opportunity for their own products.  In 1953 the first of these European strategic alliances was created with the Boots Drug Company of England.  The same strategy was used in every other country in Europe.

     During the 1960's and 1970's Upjohn began manufacturing in itself in seven European countries, and between the 0970's and 1980's nine other countries were added to the list.    In some countries Upjohn helps its licensee contractors to better promote Upjohn products with sales offices or branches.
 
 Merger with Pharmacia
 
 The internationalization process of Upjohn Company is consistent with both the theory of internalization and the theory of internationalization.  On 20 August 1995, a merger was announced between the Upjohn Company and Pharmacia AB, a Swedish pharmaceutical company.  The new company, merged on a fifty-fifty basis, is to be calied Pharmacia and Upjohn, effective November 1995.  Upjohn and Pharmacia are approximately the same size and together will become the ninth largest pharmaceutical company in the world. With Upjohn weak in Europe and Pharmacia weak in the US, the tie-up is a good fit.  It gives Upjohn access to new European markets and Pharmacia a line into the US. Both companies had wide ranges of products which they could cut back on.  The new company will have a combined workforce of 34,500 employees and a combined stock market capitalization of around U.S. $3 billion.  This merger reflects the changing international strategic environment which calls for a smaller number of global firms in major industrial sectors.

     The group has combined sales of $6.8 billion working from 1994 figures.  This places it at number nine in the world pharmaceutical company rankings, in the top five in Europe, in the top 15 in North America and in the top 20 Japan.  P&U set out to achieve sales growth of 10-15% in its first year but it now acknowledges that is more likely to e 5-10%.  This is partly because it will launch fewer new products than hoped.

     Sales are mainly generated by prescription pharmaceuticals (78%), followed by over-the-counter medicines (6%), animal health (5%), biotechnology supply (5%), diagnostics (3%) fine chemicals(3%).
 P&U has strong market positions worth more than $500M/a in sales in six therapeutic areas:  cancer, metabolic diseases/growth hormones, critical care, diseases of the central nervous system, infectious diseases and reproductive health.  Two other areas, nutrition and ophthalmology, generate sales of more than $250M/a.

     Meanwhile , Upjohn was suffering falling sales while undergoing restructuring.  Its four biggest-selling pharmaceutical products—Xanax, Halcion, Micronase and Ansaid for arthritis—all lost US patent protection in1993-94.  The result was a $400M dent in sales.  Upjohn decided to cut costs in sales, marketing and R&D, and create a generics subsidiary to push OTC equivalents of its drugs.  It also established a disease management company to provide health care services.
 Both companies lacked a sufficiently healthy pipeline of new products to counter-balance their struggling older drugs.  Together they can pool their resources but P&U still cannot boast a big-mane drug.  P&U is struggling with too many therapeutic areas.  It would really like to be an oncology company.  At the moment, this only accounts for 20-30% of sales.  It is the main focus of research but there are few new products as yet.

Top of Page


Johnson & Johnson

    The pharmaceutical industry is undergoing a period of deep-seated revolutionary change as the new millennium approaches. The imperatives of competition and of developing new products to treat diseases which did not exist at the turn of the century is driving a wave of mega-acquistions throughout the industry. The structure of the industry is also changing as pharmaceutical companies merge with chemical companies and assume an increasingly globalized and integrated character.

    Johnson & Johnson, with approximately 91,400 employees, is the world's most comprehensive and broadly-based manufacturer of health care products, as well as a provider of related services, for the consumer, pharmaceutical and professional markets. Johnson & Johnson has more than 180 operating companies in 51 countries around the world, selling products in more than 175 countries. How could Johnson & Johnson compete in this industry and survive?

The Fast Survives, The Slow Got Eaten
    New concepts expanding the living space

Brief History

    The development of the first ready-made, ready-to-use surgical dressings by Johnson & Johnson in the mid-1880s marked not only the birth of a company, but also the first practical application of the theory of antiseptic wound treatment. A new product, based on a new surgical concept, led to a dramatic reduction in the threat of infection and disease, which claimed an appalling number of postoperative victims.

    The story begins with the discoveries of Sir Joseph Lister, a noted English surgeon, who identified airborne germs as a source of infection in the operating room. He called them, with grim aptness, the "invisible assassins." Medical science was beginning to understand, however imperfectly, the need for greater care in protecting the wound area. Yet, this concept of myriad living organisms, unseen and deadly, remained beyond the grasp of many surgeons in the 19th century who were doubtful or even contemptuous of Lister's work.

    One man who did not question his theory of antisepsis was Robert Wood Johnson, who heard Lister speak in 1876. For years afterward Robert Wood Johnson nurtured the idea of a practical application of Lister's teachings. What he had in mind was a new type of surgical dressing, ready-made, sterile, wrapped and sealed in individual packages and suitable for instant use without the risk of contamination.

    Prior to Lister's discoveries, the postoperative mortality rate was as high as 90 percent in some hospitals. Surgeons could not bring themselves to believe they were contaminating their own patients by operating ungloved with unsterile instruments.

    Lister's methods required complex and cumbersome equipment suited only to the largest hospitals, of which there were few. A solution or a spray of carbolic acid bathed the operating room and the patient in a foggy mist. Still, it was a major advance over accepted procedures: unclean cotton, collected from sweepings on the floors of textile mills, was used for surgical dressings; surgeons operated in street clothes and wore a blood-spattered frock coat like a badge of honor.

    Robert Wood Johnson concluded there ought to be a better way. Mr. Johnson joined with his two brothers, James Wood and Edward Mead Johnson, who had formed a partnership in 1885. Operations began in New Brunswick, N.J., in 1886 with 14 employees on the fourth floor of a small building that once was a wallpaper factory. In 1887 the Company was incorporated as Johnson & Johnson. With few hospitals in the United States in 1887 large enough to use Lister's methods of antisepsis, Johnson & Johnson entered the surgical dressings industry.

    The first products were improved medicinal plasters containing medical compounds mixed in an adhesive. Then a revolutionary surgical dressing was quickly developed and placed on the market. Recognizing the critical need for improved antiseptic surgical procedures, the Company designed a soft, absorbent cotton and gauze dressing that could be mass produced and shipped in quantity to hospitals and every crossroads physician and druggist.

    Johnson & Johnson also extensively promoted antiseptic surgical procedures. In 1888 the Company published a book, Modern Methods of Antiseptic Wound Treatment, which for many years remained the standard text on antiseptic practices.

    By 1890 Johnson & Johnson was treating cotton and gauze dressings by dry heat in an attempt to produce not only an antiseptic product but a sterile one. In 1891 a acteriological laboratory was established and, early in the following year, the Company successfully met the requirements for a sterile product through a continuous method of handling dressings so they were kept under aseptic conditions and subject to repeated sterilization during production.

    The new sterilization processes, first by dry heat and then by steam and pressure, were the genesis of the Company's slogan: "The Most Trusted Name in Surgical Dressings." In 1897 the Company developed another major contribution to surgery, an improved sterilizing technique for catgut sutures.

    Among the dedicated people instrumental in these developments was Fred B. Kilmer, the Company's scientific director for 45 years beginning in 1888 and father of Joyce Kilmer, the poet-hero of World War I. A prolific and highly respected writer on scientific and medical subjects, Kilmer influenced the profession's attitude through articles in Johnson & Johnson magazines, which included Red Cross Notes and The Red Cross Messenger.

    In cooperation with several leading American surgeons, Johnson & Johnson in 1899 developed and introduced the zinc oxide type of adhesive plaster. Because of its greater strength and quick-sticking quality, this type of plaster became an important adjunct of surgery; it meant relief to patients because irritation to delicate skin was avoided.

    International growth, initiated in 1919 with the establishment of an affiliate in Canada, began in earnest in 1923 with an around-the-world trip by the two sons of Robert Wood Johnson. The young men, Robert Wood Johnson, who carried his father's name and J. Seward Johnson, returned from their worldwide tour with the conviction that the Company must establish a strong international position. The following year, in
1924, Johnson & Johnson created its first overseas affiliate, Johnson & Johnson Ltd., in Great Britain.

     Also during the 1920s the Company stepped up its program of product diversification,
introducing in 1921 one of the best-known and most widely used of all Johnson & Johnson products ­ BAND-AID® Brand Adhesive Bandages ­ and a number of other new products, including JOHNSON'S® Baby Cream. Robert Wood Johnson, who later became known as General Johnson after his service as a brigadier general in World War II, took over direction of the Company in 1932. He brought a vigorous new approach and philosophy of business to the organization. Under his leadership, a firm policy of decentralization was initiated, giving to the ever-growing number of divisions and affiliates both the autonomy and the opportunity to chart their own futures.

    General Johnson wrote a Credo that codified the Company's socially responsible approach to conducting business. The Credo states that the Company's first responsibility is to the people who use its products and services; the second responsibility is to its employees; the third to the community and environment; and the fourth to the stockholders. General Johnson and his successors in managing the business have believed that if the Credo's first three responsibilities are met, the stockholders will be well served.

    As individual portions of the Company's business grew, they were characteristically organized as individual divisions or subsidiaries. For example, the manufacture of disposable surgical packs and gowns evolved into Surgikos, Inc. (now called Johnson & Johnson Medical, Inc.), which specializes in products for hospital asepsis. The sanitary napkin line led to the formation of the Modess Division, forerunner of today's Personal Products Company. Ortho, which began with one birth control product in the 1930s, became the Ortho Pharmaceutical Corporation.

    As new technologies emerged, the Company responded with new organizations. One of these, Ortho Biotech, formed in 1990, is the first biotechnology company developed and operated as a subsidiary of a major health care manufacturer. The Company also acquired established businesses that augmented its development in the health care field. In 1959 McNeil Laboratories, Inc., a producer of prescription pharmaceuticals, was acquired. In 1977, McNeil became two companies: McNeil Pharmaceutical and McNeil Consumer Products Company, best known for its TYLENOL® Brand of pain-relieving products. In 1993, Ortho-McNeil Pharmaceutical was formed, retaining the business units McNeil Pharmaceutical and Ortho Pharmaceutical.

    The 1994 acquisition of Clinical Diagnostics from Kodak (now called Johnson & Johnson Clinical Diagnostics) expanded Johnson & Johnson's existing diagnostic businesses, which include Ortho Diagnostic Systems, Inc., LifeScan and Advanced Care Products. Clinical Diagnostics products are sold to laboratories and used to diagnose diabetes, asthma, liver conditions, and strep A, among others.

    Johnson & Johnson's skin care business was expanded with the 1993 acquisition of RoC, S.A., of France and the addition in 1994 of Neutrogena Corporation, two manufacturers of high quality skin and hair care products.

    Johnson & Johnson also has kept pace with changing needs in a competitive marketplace. In 1989 the Company's consumer businesses, with the exception of sanitary protection products, were consolidated to form Johnson & Johnson Consumer Products, Inc. In the same year, Surgikos, Inc., and Johnson & Johnson Patient Care, Inc., were combined to form Johnson & Johnson Medical, Inc.

    In late 1993 Johnson & Johnson Advanced Behavioral Technologies, Inc., was formed to help the Company become the world leader in prevention and behavior science application. In 1994, Codman and Shurtleff and Johnson & Johnson Orthopedics combined to form Johnson & Johnson Professional, Inc.

    The emergence of a new managed care market led to the 1994 formation of Johnson & Johnson Health Care Systems Inc. The organization, which includes the former Johnson & Johnson Hospital Services and Johnson & Johnson Advanced Behavioral Technologies, handles contracting and account management with managed care organizations, health maintenance organizations, large hospitals, physician networks, government and employers.

Globalization

    International growth has been accomplished both through the creation of new companies and the acquisition of existing ones. In 1961, the Company purchased Janssen Pharmaceutica in Belgium. Janssen grew to become one of the most innovative pharmaceutical companies in the world. In 1974 Johnson & Johnson acquired Dr. Carl Hahn Company in Germany, manufacturer of sanitary protection products for women, and in 1986 the Penaten Group, Germany's leading baby toiletries company.

    Elsewhere, international affiliates of Johnson & Johnson were created in more than 50 countries. For example, companies were begun in Australia in 1931, Sweden in 1956, Japan in 1961, Greece in 1973, Korea in 1981 and Egypt in 1985.

    The Company is expanding into new markets in the People's Republic of China and Eastern Europe. In 1985, Janssen Pharmaceutica entered the Chinese market in what was then the largest pharmaceutical joint venture in that nation's history. In 1990 Johnson & Johnson Shanghai Limited, a joint venture producing BAND-AID® Brand Adhesive Bandages, was opened in China, followed the next year by Johnson & Johnson China Ltd. As part of the Company's continuing interest in joint venture opportunities, Johnson & Johnson opened an administrative office in Moscow in 1990. The same year also saw the establishment of the Company's first offices in Hungary, Poland and the former Yugoslavia, and in the Czech Republic the following year.

    Today Johnson & Johnson has become a worldwide family of more than 180 companies, marketing health care products in more than 175 countries.

    The Company's approximately 91,400 employees are engaged in producing products that serve a broad segment of medical needs. They range from baby care, first aid and hospital products to prescription pharmaceuticals, diagnostics and products relating to family planning, dermatology and feminine hygiene.

Regulatory Compliance

    During 1995, 169 non-compliance events were reported by 32 Johnson & Johnson companies worldwide. Almost all of these events were "permit excursions," involving releases of regulated pollutants over their permissible limits to local wastewater treatment facilities. Such events, which were violations of our own wastewater permits, were reported voluntarily to the relevant regulatory authorities.
 
    Johnson & Johnson is investing the capital necessary to prevent recurrence of these events. Their broader goal remains "zero" non-compliance events — and Johnson & Johnson has adopted a proactive prevention stance involving an annual review of all permits and regulatory requirements by our facilities.

    Starting January 1, 1996, any accidental release or regulatory non-compliance event must be reported to the Corporate Worldwide Environmental Affairs office within 72 hours of occurrence. The report briefly describes the event, its causes and corrective action. Worldwide Environmental Affairs is to provide consultation to the site personnel, and: 1) collaboratively and proactively work to address the issues, and minimize the potential for recurrence; 2) assist in developing a proactive posture to prevent potential incidents; 3) exchange information on common technologies and methodologies; and 4) centralize tracking and monitoring of such events. Based on these efforts and year-to-date reporting, a decrease to approximately 145 events is projected for 1996.

    As is the case with virtually all of U.S. industry, Johnson & Johnson companies have in the past sent industrial waste to disposal facilities that, in some cases, are now being remediated under the federal "Superfund" law. Their companies are actively participating in the Superfund process at approximately 17 such sites throughout the United States and Puerto Rico, and are bearing their share of the remediation costs. In most cases, the sums their are being called upon to contribute are quite minimal.

New Drugs Boost Profits- New concepts are the keys

    Buoyed by new products, Johnson & Johnson continued its strong financial performance by reporting that revenue and earnings rose substantially. The New Brunswick health care company attributed the increases to several of its newest products, including such prescription drugs as Risperdal, which is used to treat schizophrenia, and Propulsid, a gastrointestinal medicine.

    This bodes well for many drug companies, because new products command premium prices from managed-care companies and hospitals. Consequently, Wall Street looks for sustained quarterly gains over the near term.

    In fact, rising prices for drugs and medical devices, another area in which Johnson & Johnson is a significant player, are among the factors contributing to a projected 4 percent rise in health costs this year, according to a survey by Foster Higgins, benefits consultants. "New CONCEPTS are the key," said Hemant Shah, an independent analyst who follows the drug industry. "But even more important is the way (Johnson & Johnson) adapts the concepts and manages its business. The growth was pretty good across the board."

    Indeed, the company's domestic pharmaceutical sales rose 20 percent, to $877 million, while international drug sales increased 10 percent, to $924 million. Sales of medical devices were up 15 percent, to $2.1 billion. At the same time, sales of consumer products jumped 10 percent, to $1.6 billion. This category includes such popular items as Tylenol and Pepcid AC, a new over-the-counter medication for fighting antacid.

    In coming days, several drug makers will report earnings. According to Zack's, which compiles Wall Street estimates, Schering-Plough Corp. is expected to post earnings of 77 cents, while analysts look for 60 cents from Warner-Lambert Corp. American Home Products Corp. is expected to report 78 cents and Merck & Co. is anticipated to post 85 cents. Wall Street looks for $1.41 from Bristol-Myers Squibb Co.

Top of Page


References:

  1. Indianapolis Business Journal, "Guidant ready to battle J & J in stent market; competition likely to lower prices", June 23, 1997 v18 n14 p41
  2. Knight-Ridder/Tribune Business News, "In takeover times, fear can be swept away by new opportunity" Oct 29, 1997 p10
  3. Chemical Marketing Reporter, "Pharmaceuticals in the new millennium" Oct 21, 1996 v250 p80
  4. PC Week, "Building a new IT organizational chart of Johnson & Johnson" August 4, 1997 v14 n33
Top of Page