Johnson & Johnson (JNJ) Undergoing Leadership Transition, But Major Strategy Shift Unlikely
4:21 pm Friday, August 20th, 2021
In an unexpected move, Johnson & Johnson (NYSE:JNJ) revealed a major shake-up last night, announcing that Joaquin Duato will replace Alex Gorsky as CEO, effective January 3, 2022. Investors are taking the news in stride, though, with the stock currently showing modest gains. Gorsky, who will serve as Executive Chairman, has stated that he is transitioning out of the CEO role due to family health reasons.
While JNJ performed well under Gorsky’s leadership, as reflected in the stock’s ~175% gain during his tenure, there’s good reason for investors to be optimistic about this transition.
For instance, Duato already has a considerable and successful track record at JNJ. Currently the head of JNJ’s pharmaceutical and consumer health segments, Duato has spent over three decades at JNJ. Given his extensive history at JNJ, he has built and established vital relationships both within and outside the company. Furthermore, his experience in the pharmaceutical industry fits into JNJ’s strategy to expand that part of the business, which has been quite successful with him at the helm.
Rewinding to JNJ’s 2Q21 report from July 21, the pharmaceutical segment was a standout performer with revenue climbing by 14% to $12.6 bln, accounting for 54% of total sales. In particular, JNJ’s oncology portfolio has blossomed under Duato as Q2 sales in that category jumped by 27% to $3.5 bln.
Importantly, Duato has also been involved with some substantial acquisitions, including JNJ’s blockbuster $30 bln purchase of Actelion in 2017. When the company announced that acquisition, Duato commented, “Through this transaction, Janssen [JNJ’s pharmaceutical arm] will establish a sixth therapeutic area that will be a growth engine for us as our combined team builds on the market-leading position of Actelion’s therapies.” That new therapeutic area is pulmonary arterial hypertension, an indication that drove $3.1 bln in revenue in FY20, up 20% yr/yr.
While Duato has proven his mettle and the transition should be relatively seamless, he inherits a company that’s seen its reputation take some major hits.
JNJ’s litigation issues are well-documented and include troubling allegations that the company’s talcum-based baby powder contains asbestos. JNJ was recently fined $2.1 bln in asbestos-related damages, but other baby powder lawsuits still remain. Additionally, in late July, Reuters reported that JNJ and drug distributors reached a $26 bln settlement with over 40 states regarding its role in the opioid epidemic.
Beyond JNJ’s legal issues, the company’s rollout of its COVID-19 shot has not been smooth, to say the least. Recall that JNJ’s production partner, Emergent BioSolutions (EBS), botched the manufacturing process as a main ingredient was ruined because it didn’t meet quality standards. After that situation was revolved, the CDC temporarily paused inoculations due to “rare blood clotting events”. A couple months later, the FDA announced a new warning, stating that there’s increased risk of Guillain-Barré syndrome during the 42 days following the shot.
The main takeaway is that Duato won’t be working with a clean slate, but the business overall is in good shape, largely thanks to his role in creating a global pharmaceutical powerhouse. Considering his extensive history at JNJ, we also don’t expect Duato to rock the boat much in terms of overall strategy.
