BY AMY BARRETT I ots of executives at Johnson »Sr Johnson have stories about William C. Weldon's powers of persuasion. The onetime drug salesman who now leads the health-care giant is famed for his ability to convince, cajole, or sometimes just sweet-talk colleagues into seeing things his way. A couple of years ago, Dr. Per A. Peterson, the chief of phannaceutical research and development, was fed up with personnel headaches and told Weldon he was thbiking of leaving the company. The next morning. Peterson, who lives minutes from Weldon in central New Jersey, got a call from the boss at 5:30. in\iting him o\'er for breakfast. As Weldon tended to the skillet, the two men discussed Peterson's concerns. And then they talked some more: Their conversatiun lasted well into the afternoon. Eventually, Peterson agreed to stay, and within a week Weldon had made the c-hanges Peterson sought. "What else can you say to a guy who cooks you an omelette at six in the morning?" says Peterson with a laugh. "You say yes." Cover Story Weldon. 54, and one year into the job, will need those skills in spades as he guides ,ifij in the new century. The 117-year-old company is an astonishingly complex enterprise, made up of 204 different businesses organized into three divisions: diiigs, medical devices and diagnostics, and consumer products. Much of the company's gi'owtli in recent years has come from pharmaceuticals; they accounted for almost hall" of .i&j's sales and 61'7i. of its op- erating profits last year. With revenue of $86 billion. J&.J is one of the lai-gest health-care companies in the U.S. That allows it to take biggei' risks: When a sui'gical device business lost some $500 million between 1992 and 1995, .i&J hardly felt it. Consumers know Johnson & Johnson for its Band-Aids and baby powder. But competitors know the company as a fierce rival that boasts a rare combination of scientific expertise and marketing savvy. It regularly develops or acquires innovative products and then sells them more aggj-essively than almost anyone around. Even if a hospital might prefer to purchase its sui'gical tools from one company and its sutures from another, it could likely end up buying both from Ji&J because J&J offei-s favorable prices to hospitals that buy the whole package. J&J can also trade on its "heritage," as Weldon calls it, when it comes to ¡jei-suading doctore to try its new drugs and devices. Or when it comes to persuading consumers; When J&J launched anemia drug Procrit in 1991, few expected it to make much of a difference to the company's performance. Not only did .i&J spend millions to educate physicians about the condition, it also ran a series of ads on television—an unusual move considering that the drug is marketed specifically to treat anemia in chemotherapy patients. But it worked: Procrit is now J&j's best-selling drug. The company Weldon inherited ft-om his predecessor, Ralph S. Larsen. has been one of the most consistent, most successfLiI health-cai'e companies for years. Others around it are suffering as patents for imjjortant drugs expire with little of real consequence to replace them. Tliat's expected in ixn industry so dependent on the unpredictable pace of scientific innovation. But not at .]&.}. The company is famed for delivering at least 10% earnings growth year in and year out going back neai-ly two decades. In the fii'st quarter, it reported a 13% rise. Its stock price, meanwhile, has increased from less than $3, split- William Weldon has taken over 60 BusinessWeek / May 5, 2003 adjusted, in the mid-1980s to almost 20 times that now. Over the past two years, as the Standard & Poor's 500-stock index has fallen 28.1%, J&J stock has increased 19.4%. And in 2002. J&J earned S6.8 billion (excluding special charges), compared with $5.9 billion the previous year. Maintaining that record could be Weltlon's biggest challenge; Just to keep up. he must in essence create a new $4 billion business every year. But .l&j's crucial drug business is finally succumbing to the pressures slowing down the rest oí the industry Pi-ocrit sales were nearly flat in tlie ñi-st quarter because of a new rival, news that sent the stock down 3% in one day. And like its peers, J&J doesn't have much coming out of its labs now. Meanwhile, its new drugcoated «tent has been held up at the Food & Drug Administration. Approval still seems liighly likely. But if the device does not get the O. K, it would be a huge blow to J&J. one of the best-run What makes matters worse for Weldon is that the other component of J&J'S growth—acquisitions—could become mt)re problematic, too. Over the past decade, .i&j has bought 52 businesses for $30 billion; 10% to 15% of its top-line growth each year comes from such investments. But to buy something that really affects overall performance is a different proposition for a $;íí) billion company than it is for a $10 billion company. "You get to a point where finding acquisitions that fit the mold and make a contribution becomes increasingly difficult." w^arns uns Warburg analyst David Lothson. "This puts pressure on the sustainability of this strategy, and ultimately it could break down." J&j's success has hinged on its unique culture and stiuctui-e. But for the company to thrive in the futm-e. that system has to change. Eiich of its fer-fiung units operates pretty much as an independent enterprise. Businesses set their own strategies; they have theij- own finance and human resources departments, for example. Wlnle this degree of decentralization makes for relatively high overhead costs, no chief executive, Weldon included, has thought that too high a price to pay. Johnson & Johnson has been able to turn itself into a powerhouse precisely because the businesses it buys, and the ones it starts, ai-e given near-total autonomy. That independence fosters an entrepreneurial attitude that has kept .i&J intensely competitive as others around it have faltered. Now, though, the various enterjirises at .)&.] can no longer operate in near isolation. Weldon believes, as do must others in the industry, that some of the most imjxjrtant breakthroughs in 21st century medicine will come from the ability to apply scientific ad- companies around. KEEP UP THE GROWTH? BusinessWeek / May 5, 2003 61 vanees m one disciplme to another. The treatment of many diseases is becoming vastly moi-e sophisticated: Sutures are coated with di-ugs to prevent infections; tests based on genomic research could determine who win respond to a certain cancer drug; defibrillatoi-s may be linked to computers that alert doctors when patients have abnormal heait rhythms. IT'S NOT REALLY ABOUT BABY PHARMACEUTICALS The most profitable and fastestgrowing of J&J's businesses, but expected to siow considerably as increases. The company wants to use drugdelivery technology to come up with new formulations of existing products. The company should be perfectly positioned to profit from this shift towai'd combining drugs, devices, and diagnostics, claims Weldon, since few companies will be able to match its reach and strength in those three basic areas. "There is a convergence that will allow us to do things we haven't done before," he says. Indeed, .]&,} has top-notch products in each of those categories. It has been boosting its reseai-ch and development budget by more than 10% annually for the past few years, which puts it among the top spenders, and now employs 9,300 scientists in 40 labs around the world. SHARE OF 0PERATIH6 PROFITS 60.9% DEVICES & DIAGNOSTICS Its drug-coated stent could be a multibiilion-dollar blockbuster. But with the FDA approval process dragging on, J&J .„.„,„„.,« could also face a _SHARE OF SALES competing , product before yearend. The diagnostic group hopes to develop SHARE OF gene-based tests OPERATING PROFII linked to AA A promising new fll| treatments. £.ll.£. 71 J *> athlete that he was just a sprint away from ruining his knee altogether when hefinallygave up playing basketball. It's not easy for him to keep a respectable distance from his managers now. "It's like a barroom brawl [where] you are outside looking in when you want to be in the middle of it," he says. Weldon became famous for setting neai'-impossible goals for his people and holding them to it. "There was rarely an By combining diagnostics, devices, and But JáíJ can cash in only if its fiercely independent businesses can work together. In effect, Weldon wants J&J to be one of the few companies to make good on that often-promised, rarely delivered idea of synergy. To do so. he has to decide if he's willing to put .i&i's famed autonomy at risk. For now, Weldon is creating new systems to foster better communication and more frequent collaboration Cover Story among J&J'S disparate operations. Alre-ady J&.! has been inching toward this moj-e cohesive approach: Its new drug-coated stent, which could revolutionize the field of cardiology, giTW out of a discussion in the midli)90s between a drug researcher and one in J&J'S stent business. Now Weldon has to promote this kind of cooperation throughout the company without quashing the entrepreneurial sphit that has made J&J what it is today. Cultivating those alliances "would be challenging in any organization, but particularly in an organization that has been so successful because of its decentralizeij culture," says Jerry Cacciotti, managing director at consulting firm Strategic Decisions Group. Weldon, like every other leader in the company's history, worked his way up thi'ough the ranks. Among other things, it made Mm a true believer in the J&J system. Whatever he hopes to achieve, he doesn't expect to undermine that. In many ways, Weldon personifies the Johnson & Johnson ethos. Though he was one of the first .i&J executives to go casual in the U)9()s and sometimes schedules business lunches at his favorite bui-ger joint in Manhattan, Weldon is compulsively comi^etitive. As he says, "it's no fun to be second." One of Ms fij-st bosses recalls how Weldon badgered him to release sales figures early because Weldon was desperate to know if he had won a company competition. Weldon is such an intense 62 BusinessWeek / May 5, 2003 empty suit around Bill," says one former J&Jer. "If you weren't pulling youi' weight, you were gone." In the 1990s, when Weldon ran a business that sold sui-gical tools, executives back at headquarters in New Brunswick, N.J., used to systematically upgrade the re\iews he gave his employees. With that in mind, consider what Weldon is willing to do so BORN Nov. 26, 1948, Brooklyn. EDUCATION BS, biology. Quinnipiac University, 1971, CURRENT POSITION Chairman and chief executive, Johnson & Johnson, since April, 2002. that his changes don't CONSUMER threaten J&J'S ecosys- tem: restrain himself. Although he talks incessantly about synergy and convergence, the steps he's actually taking to make sure his units cross-fertilize are measured ones. He isn't pushing specific deals on his managers. For example, industry sources say J&J has held on-and-off talks with Guidant Corp.. which makes implantable defibrillators. That field of cardiovascular medicine is a growing market that's versions of drugs 4 A A perfectly suited for that lose their 1 "I D n/ some of these emergpatents I ¿.9% ing combination therapies. But Weldon isn't leading the way in those talks. And he's delegating crucial decisions about how to si^end K&D dollars. It's the least profitable and slowest-growing of J&J'S businesses, but with widely known products such as Johnson's Baby Shampoo and Band-Aids, the operation cloaks the company in an image of SHARE OF SALES decency that indirectly benefits every i J&J sales rep. A key opportunity; SHARE OF over-the-counter OPERATING PROFITS Weldon is subtly turning up the heat on cooperation between his difierent units, however. .i&J experts in various diseases have been meeting quarterly for the past five years to share information. Weklon and James T. Lenehan, vice-chairman and president of J&J, are now setting up two groups, fo- was posting solid growth thanks to popular products such as the anemia drug Procrit and the anti-psychotic medication Risperdal. But the drug R&D operation was sputtering after several potential treatments had failed in late-stage testing. Weldon's solution was to create a new committee comprised of K&D executives and senior managers from the sales and mai'keting operations to decide which projects to green-light. Previously, those decisions were made largely by scientists in the company's two major ií&ü operations; tliere was no such thing as setting common priorities. Weldon also created a new post to oversee R&D and gave the job to Petei-son. "Some jJeopie may have thought Bill curtailed their freedom," says Peterson. "But we've improved the decision-making to eliminate compounds that just won't make it." Although most of the changes Wetdon instituted in the pharmaceutical business won't yield real results for years, there is some evidence that this new collaboration is working. Shortly after taking charge of the drug unit, Weldon visited J&j's research facility in La Jolla, Calif., to learn about the company's genomic studies. Researchers were focused on building a massive database using gene patterns that correlate to a certain disease or to someone's likely response to a particular drug. When they told Weldon how useful the database could be for J&.)'s diagnostic business, he in turn urged Lenehan, who oversees the unit, to send his people out. Now, Peterson says, the diagnostics team is developing a test that the drug R&D folks could use to predict which patients will benefit from an experimental cancer therapy. If the test works, it could significantly cut j&.i's di-ug-de\'el()pment coats. Even the company's fabled ci)nsumer brands are starting to take on a scientific edge. Its new liquid Band-Aid is based on a material used in a wound-closing product sold by one of drugs, Weldon hopes to gain an edge on the competition cused on two diseases (they won't say which), that will work together more formally. After six months, each group will report on potential strategies and projects. Tb undei-stand Weldon's vision for the new j&i, it's useful to look at how he reshaped the phannaceutical operation when he took it over in 1998. At the time, .i&.i's drug business CAREER PATH Joined J&J as a sales representative right out of college. Made his mark as head of J&J's new Ethicon EndoSurgery business in 1992: eventually it became the dominant player in the field. Took over the drug operation in 1998, and made important changes to J&J's highly decentralized system. EARLY AMBITION At first, he figured he'd be rich if his J&J salary hit $10,000 a year. Compensation in 2002: $2.3 million salary and bonus, plus options and other incentive-based compensation worth $11.4 million. SPORTS HABIT At the last minute, he insisted plans for a new J&J facility be altered to include a basketball court. .j&j's hospital-supply businesses. And a few years ago, J&J tumed its prescription antifungal treatment, Nizoral, into a dandruff shampoo. Indeed, these kinds of products are one reason operating margbis for the consumer business have increased from 13.8% in 2000 to 18.7% in 2002. But perhaps the most promising result of this approach is .i&.i's drug-coated stent, called Cypher. A few BLUE-COLLAR years after that first ROOTS meeting between reBoth Weldon's searchers, J&J created parents were teams from the drug union workers in business and the deNew York City— vice operation to colhis father was a laborate on manufactuiing the stent, which Broadway stageprops open arteries afhand and his ter angiopiasty. "If we mother was a didn't have all this [excostume pertisel," Weldon says, seamstress for "we'd probably still be the theater and negotiating with [outballet. side] companies to put this together." And to FAMILY show that he is letting Married to his managers mind their high school own businesses, Welsweetheart, don says that he only Barbara, for 33 gets briefed about the years. They have stent's progress evei*y two grown month (though he does children, a son invite Robert W. and a daughter. Croce, the division BusinessWeek / May 5. 2003 63 WHAT SYNERGY COULD LOOK LIKE AT J&J IMPROVED DRUGS J&J'S pharmaceutical operation is working with the company's drug-delivery operation. Alza, to come up with a new formulation of the epilepsy drug Topamax. The drug has been shown to also promote weight loss, and this would make it a more tolerable obesity treatment. NEW MEDICAL TESTS A new diagnostic unit is working with data generated by drug researchers; they could, for example, develop a gene-based test to identify patients most likely to respond to experimental cancer treatments. head, to dinner for more casual updates). "They are the experts who know the marketplace, know the hospitals, and lmow the cardiologists," Weldon says of the Cypher team. "I have the utmost confidence in them." With that empowerment, though, comes the clear expectation that J&j's experts will go after their markets with the same tenacity Weldon displayed in his climb to the top. Before heading up the drug division. Weldon made hi^^ reputation at .\&.i in the early 'ÜOs as head of a new unit, Ethicon EndoSurgery Inc. Ethicon Endo was supposed to establish itself in the emerging field of endoscopie surgery, JÜJ did what only a company of its resources can: It poured hundreds of millions into building a full line of tools for surgeons. And Weldon did what he does best; He went after the leading company, before the week was out. David P. Holveck, former company group chairman of Centocor who now runs J&j's venture-capital aim. says of Weldon; "He is a man of few words. But his body language was very clear; In this game there are two strikes. In 2001, we were expected to get it right." They did. Not everybody appreciated Weldon's demands. None would speak for attribution, but several fonner executives at Ethicon Endo say Weldon alienated those he felt weren't part of the team. "He is an intimidator and a dominator," says one former executive who claims Weldon turned on him after he opposed an acquisition. Weldon hasn't really ever taken much for granted. His father was a stagehand on Broadway for several years. While his mother, a seamstress, worked on costumes < BAND-AID BRAND for the ballet and theater, Weldon LIQUID BANDAGE would watch the shows from backCLOSES UP A CUT stage. She handled Marilyn Monroe's wardrobe the night the actress sang Happy Bitihday to President John F. Kennedy in 1962, and she retired last year at the age of SO. "My parents were very hardworking, union people," Weldon says. "It's a tough life." When Weldon was in elementary school, the family moved to Ridgewood. N.J.. which former classmates describe as a wealthy and somewhat socially competitive town. There, Weldon grew up in one of the less prosperous neighborhoods. He was an indiflerent student but a determined athlete who played on both the basketball and football teams. Weldon put himself through Quinnipiac Univei-sity in Hamden, Conn., by working as a mover in Newark, N.J., on weekCUTTING-EDGE CONSUMER PRODUCTS In 2002, J&J rolled out the new Band-Aid Brand Liquid Bandage, a liquid coating that is applied to cuts on hard-tocover areas like fingers and knuckles. The product is based on a material used in a wound-closing product sold by J&J's hospitalproducts company, Ethicon. Most of J&J's drugs are under assault United States Sui-gical Corp., as if it were a mortal threat. Weldon spent much of his time on the I'oad, traveling the counti-y from his base in Cincinnati to meet with surgeons and hospital executives. Once he canceled a flight home from San Diego after hearing that a potential customer was wavering. He went back the following morning to nail down the deal. Weldon often set more ambitious goals than headquarters did. Nick Valeriani, who was then vice-president of sales and marketing, recalls: "We'd have a great year and Bill would say, 'Nice job. Why couldn't it have been 25% higher?'" By 1996, J&J surpassed U. S. Surgical, which was later bought by Tyco International Ltd. That's not to say that Weldon doesn't understand the power of positive reinforcement. TVice he wheedled higher bonuses for his managers out of New Brunswick. Another time at Ethicon Endo, he closed up shop for a day of rest after a paiticularly haiTied couple of months. He nevei- told anyone at headquai'ters. And no one in New Bmnswick ever said a word about it. "Hell, you are the goddamn boss," he says. "Sometimes it is better to beg forgiveness than to ask permission." And for those executives who fell short, Weldon made it clear he didn't like to be disappointed. When a new J&.I drug business, Centocor Inc., failed to meet the aggressive sales goals it set for 20(X). Weldon was at the offices in Malvem, Pa., Cover Story 66 BusinessWeek / May 5, 2003 ends and holidays. He says he got serious about his studies after he mairied his high school sw^eetheart. Barbara Deai'bom, midway thi-ough college. Shortly after gratluating with a major in biologj'. Weldon had his one and only interview at J&J. Howard Klick, who hired him as a sales rep at the McNeil Pharmaceutical unit, recalls asking him for a sales pitch on a pen. Weldon took the j3en apart, then gave Klick the hard sell. "He was hungry," Klick says. "He had fire in the belly." He'll need that drive if he's to maintain J&J's growth trajectory. At this point, most of J&i's important drugs are under assault ñ-om competitors. Growth of the company's biggestselling product, the $4.3 billion Procrit franchise, has stalled in the face of Aranesp, a drug from archrival Amgen Inc. And side-effect problems have plagued the European version, called Eprex. As a result, Procrit, which grew at a 20*%plus rate over the past few years, may actually post a 2% decline in worldwide sales in 2003, according to J.P. Morgan Securities analyst Michael Weinstein. Meanwhile, J&J's $1.3 billion rheumatoid arthritis drug Remicade faces competing products from Amgen and Abbott Laboratories. Weldon downplays the threat. He argues that Remicade has tremendous potential because it can be used to treat other conditions, including Crohn's disease, and that Procrit will continue to dominate the anemia market. And J&J does have 56 drugs in late-stage testing (though only eight are truly new). With J&J's blockbusters slowing, Weldon may expect his successor at the drug unit to do something dramatic. That's what he did two years ago when he completed the company's biggest acquisition ever: buying dnig-delivery player Alza Corp. for $13.2 billion to shore up the business. There are supposed synergies here too, he says. Alza's technology could help .i&J devise safer and more effective formulations of existing drugs. Among them: a new sustained-release version of the epilepsy drug Tbpamax that could be used to treat obesity. But buying growth is likely to be more of a challenge for JÄ.I these days. For one thing, nearly every pharmaceutical operation around is looking to make deals. And there are relatively few companies with products that are far enough along and impoitant enough to make a real difference to J&J. Of course, the drug business' problems now fall to its new boss, Christine A. Poon, whom Weldon helped recruit from Cover Story Bristol-Myers Squibb Co. But Weldon still jumps in every now and then. One weekend earlier this year, several senior executives were hammering out detaÜs on the $2.4 billion acquisition of Scios Inc., a biotech company that has a drug for congestive heart failure. They called Weldon at home to ask for his input on une point. Weldon decided to go to the office to give his answer. And he stayed until well after midnight. Weldon says he wanted to make an appearance because it was Poon's first major acquisition. "I wanted to be there, if nothing else, to give her some moral support," he says. But you know he got a thrill from being back in the thick of things. As Weldon leads the company into a new era, he'll have to be careful not to cross the line between supporting his executives and encroaching on their territory. Their autonomy has been central to Johnson & Johnson's success. To refine the J&.I way, Weldon will have to be among the most disciplined and restrained of executives. Keeping a company on top can be just as hard as getting it there. • THE RACE TO KEEP ARTERIES GLEAR-AND RIVALS AT BAY T here are a lot of 'iis" when it comes to Johnson & Johnson's new drug-coated stent, called Cypher. The biggest question is timing: The stent could be a billion-dollar product this year if the Food & Drug Administration appi'oves it in time to give J&J a head start against rivals. A stent is used to prop open arteries after angioplasty; the new device is coated with a drug that prevents those arteries from reclogging. The agency has held off giving its O. K. over a number of issues, including the shelf life of the stent. A short shelf life could hinder J&J's ability to meet initial market demand, since it wouldn't be able to sell all the stents it has manufactui'ed already. The fom})any says it has addressed all FDA concerns. body, is more flexible and easier to use. Then there's the risk of a backlash against the cost of J&J'S new stent. In 1994, when J&J introduced the first widely used one, the company irked cariHologists with the stent's steep price: $1,600. Nor had J&J gotten additional Medicare reimbursement for hospitals. To make matters worse, it took the company three years to de- velop a meaningful improvement on the original. The result is that J&J lost its dominance in a cnicial market it helped to create. Robert W. Croce, company group chaiiTnan for Cordis, the unit developing the stent, says J&J has successfully lobbied for increased Medicare reimbursement in aflvance this time (good thing, since the stent might go for as much as $:3,0()fl) and plans to roll out a new and better version every 15 months. But Brue Chandler, executive vice-president at St. Joseph's Health System in Atlanta, says he has already heard Cordis sales representatives mention the possibility of discounts on other company products to helji offset the price of the stent. "I find that objectionable, because it doesn't go to the core issue of introducing a product at a [reasonable] price," says Chandler. He adds: "They've already begun alienating A catheter, with a balloon at the tip, is threaded into the- purchasing market." the patient through the femoral artery in the groin .i&.i's C'roce say.s the until it reaches the clogged artery. The balloon is company will work with expanded, opens the artery, and is removed. hospitals to deal with A catheter, now with a stent at the end with a balloon their concerns about the • inside, is inserted. When it reaches the artery, the stent's cost. And it won't balloon is inflated, propping open the stent. The catheter do so by offering selective discounts on other and balloon are removed, leaving the stent in place. products. Still, if .)M isn't Over time, the drug sirolimus, which is coated onto careful, histor>' could rethe stent, is released into the blood vessel wall. It peat itself. HOW CYPHER WORKS Even if the stent hits the market soon, as J&J has said, rivals won't be far behind. Boston Scientific Corp. is developing a stent coated with a different drug that it could launch by year's end. And if the two devices are equally effective, doctors may not favor J&i's version. That's because analysts say Boston Scientific's metal stent itself, as well as the system for inserting it into the 68 BusinessWeek / May 5, 2003 f acts to block the creation of excessive amounts of scar tissue that could reclog the artery. By Am.y Barrett in New Bnmswick, N.J. 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