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New J&J chief still struggling with scandals

Published on 18/07/12 at 02:18pm
Alex Gorsky image
J&J chief executive Alex Gorsky

Johnson & Johnson has just released its Q2 figures showing sales fell back in the second quarter, a 3.5% growth in revenues wiped out by unfavourable currency exchange rates.

Worse was the slashing of profits, which were down to $1.4 billion after the firm set aside $2.2 billion for a variety of costs. This includes a downgrading (write down) of the value of vaccine division Crucell’s pipeline, plus $600 million in costs set aside to deal with allegations of illegal marketing of the antipsychotic Risperdal.

The company is being pursued by the US Justice Department for alleged illegal marketing of drugs including Risperdal, plus alleged bribes paid to pharmacy business Omnicare, and is setting aside funds in anticipation of multi-million dollar fines.

The firm had hoped to make a fresh start with a new chief executive, Alex Gorsky, who took the helm in April, replacing William Weldon. The former chief executive had become closely associated with the scandal over a string of OTC product recalled because of quality and safety issues.

But the Risperdal charges are making it impossible for Gorsky to begin a new chapter just yet - especially as he has himself been named by the US Justice Department as likely to have known about the alleged Omnicare bribes. In April, the government legal team demanded Gorsky be made to testify about his knowledge of the case, but some observers anticipate that an out-of-court settlement may instead soon be agreed.

Gorsky is, however, already trying to restore the company’s image, by returning to the strong ethical vision set out decades ago. Robert Wood Johnson, son of one of the company’s founders, wrote ‘Our Credo,’ in 1943, intended to guide the corporation’s behaviour and practices.

Harking back to the credo, Gorsky said: “Our commitment, a legacy of our founders and a very real motivating force among our 128,000 employees, is embodied in our credo which speaks to our first responsibility to the doctors, nurses, patients, the mothers and fathers and all who use our products. I am resolute in my determination to keep our credo as the foundation of Johnson & Johnson.”

If the US Department of Justice decide to persist with their legal case, and Gorsky is forced to testify on the Omnicare case, these words could eventually sound very hollow; the DoJ team says in its legal submission that Gorsky’s direct involvement in the case means it should be permitted to ‘depose’ him from his position.

Breaking up is hard to do

Meanwhile, some investors are calling for a major change in direction for the company.  Johnson & Johnson is remarkable among major companies in the pharma sector for being a conglomerate of diverse business, encompassing prescription medicines, OTC and consumer products and medical devices.

In May, analysts at Goldman Sachs said they believed that breaking up the business to create several standalone units was the right way forward for profitability and growth. 

Recent examples of this trend include Abbott, which is splitting its pharma and medical devices divisions, and Pfizer, which has sold off its Nutrition business and will follow suit with its Animal Health division.

However, the indications are that Gorsky believes that further acquisitions are the way ahead for the firm. The firm has just spent $19.7 billion on acquiring orthopaedics firm Synthes, creating one of the world’s leading businesses in the growing field.

The company did decide to withdraw from the stent market a year ago, but simply closed down its division rather than finding a new buyer.

The firm will be able to rely on its pharma business to continue growth. This is thanks to a promising portfolio of newly launched pharma products. Prostate cancer treatment Zytiga, schizophrenia drug Invega, hep C treatment Incivo, psoriasis drug Stelara and oral anticoagulant Xarelto are all strong contenders in their fields.

Whether Gorsky can shake off the taint of the Risperdal charges and restore the company’s reputation while also reinvigorating the business however, is yet to be seen.

Andrew McConaghie

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