J&J CEO Alex Gorsky On Splitting Into Two Public Companies

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Following is the unofficial transcript of a CNBC interview with Johnson & Johnson (NYSE:JNJ) Chairman and CEO Alex Gorsky on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Friday, November 12th.  Following is a link to video on CNBC.com:

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J&J CEO Gorsky Breaks Down Plan To Split Into Two Public Companies

BECKY QUICK:  Let’s dig a little deeper into this top story of the morning, Johnson & Johnson announcing that it is going to be splitting into two publicly traded companies. Joining us right now first on “Squawk Box” is J&J’s Chairman and CEO Alex Gorsky. And Alex, thank you for being here today on this big news. The company goes all the way back to 1886 so this is a huge piece of news. Why now?

ALEX GORSKY: Well, happy Friday, Becky. And look, before I answer your question directly, I know it's the day after, I just want to acknowledge Veterans Day and all those men and women in the military, the first responders, the firefighters, the policemen who make that kind of a sacrifice every day and their families so that we can actually do these kind of things. But look, this is a historic day for Johnson & Johnson. This is something that our board has deliberated about for some time and we really believe that by separating our consumer business into a separate publicly traded company, is in the best long-term interest of all of our stakeholders. Look our, we realize this is a very unique time. If you just think of the changing dynamics and innovation in technology, in markets and channels. And our goal is really to create two global leaders, a pharmaceutical and medical device business that has great potential today, but very strong pipelines for the future. And of course, the consumer business that's got iconic brands and we think we’ll be well positioned to even have better focus on their strategy around their execution, around their ability to allocate capital, and ultimately to accelerate growth and to touch more consumers around the world. So, we're excited and again, we think this represents a tremendous opportunity for all of our stakeholders.

QUICK: Alex, you mentioned Veterans Day and thanking everyone who served. We should thank you as well. I know you went to West Point and were a captain, was it you were a captain in the army before you kind of moved into your corporate career. So, thank you for your service as well. When did this discussion start? How did it come about? When did you start thinking about this?

GORSKY: Well, Becky, we think this is a big, we think this is a bold move. And it's one that has been a topic of discussion on our board of directors for some time. You know, it's important for iconic companies like Johnson & Johnson that in spite of the fact that we have been around for more than 135 years to constantly challenge our strategy. And, and we've been having those discussions on a, on a routine basis for over the past decade. But clearly over the past several years, when you just look at some of the underlying trends, the again this acceleration in innovation, particularly in our pharmaceutical segment, our medical device segment, when you take a look at these changing channels, and, and really where our pharma and our medical device business tends to be much more of a business to business relationship in the way that we work through other intermediaries, you know, compared to the consumer business and most importantly, where we see things going into the future. We feel it now is the right time to make this kind of a move and again, ultimately, it's going to allow us to reach more patients, more consumers, have more innovation, and execute in a much more focused way.

QUICK: How will the split work? I know that you are transitioning to Executive Chairman come beginning of the year. I take it you'll be staying with the pharmaceutical and medical device company?

GORSKY: Yes, well as you can understand and appreciate something like this is going to take some time. We're predicting it's going to take about 18 to 24 months. I'm going to be staying as the CEO through the end of this year, and I'm very proud to be handing off to Joaquin Duato as of January 3, but I'll be remaining as Executive Chairman. There's still a lot of details that need to be worked out on the exact timing, but the good news Beck is look, we've got a really deep bench of leaders here at Johnson & Johnson and we think both these businesses are going to be well positioned. Joaquin will continue to be the CEO for the Johnson & Johnson our pharmaceutical business, our medical device business. And we know we'll have the right leadership in place in our consumer business going forward as well.

QUICK: This is one of the greatest brand names of all time. It's incredibly well known. Which of the two companies is going to keep Johnson & Johnson or do you brand both of them with Johnson & Johnson and run the risk of a little consumer confusion as there is with HP and HP, HPC?

GORSKY: Well, our pharmaceutical business and medical business. I'm sorry, our pharmaceutical business our medical device business will be Johnson & Johnson. The name of the new company is yet to be known but, you know, you're absolutely right Becky. The consumer business as a standalone publicly traded company, think about it for a moment, it has more than four brands that are over a billion dollars in sales. We have more than 20 brands that are more than $150 million in sales and these are really iconic brands. Tylenol, Aveeno, Neutrogena, Listerine, Motrin, Benadryl, and we have a very strong pipeline. And again, we think by doing this, it’s going to provide them with even more agility, better opportunity for capital allocation, likely a way to even better configure their corporate versus the, the company structures, you know, and ultimately accelerate growth and to reach more consumers.

QUICK: Is the plan definitely to spin it off as a separate company or the board is still considering that too?

GORSKY: Well, look, we're looking at all options, but our intent is to spin this off as a publicly traded company. Yes.

QUICK: And I take it the liabilities for the talcum powder cases that have come would go with the consumer business?

GORSKY: Well, look, this is really about the future. We've been very clear in all of our filings regarding the legal issues that you just mentioned. But this is about creating growth for the future in Johnson & Johnson and the new consumer company.

QUICK: Alex, just back to when these conversations started. You said the board's been considering it for a while. This is going back more than a year? Can you give us any kind of insight as to when these conversations really started picking up and taking a serious turn?

GORSKY: Look, Becky, as you would expect every year when we go through our strategic planning process with the board, we have fundamental discussions where we try to take a look at where are the markets going in which we compete, what, how are our products doing, what is our pipeline look for the future? And we've consistently addressed this fundamental issue about the future of Johnson & Johnson in our portfolio but clearly over the last several years as we've seen some of these dynamics that I mentioned earlier evolve at an even faster rate, that became a catalyst. I think that the pandemic and COVID-19 particularly as, you know, we've seen on the pharmaceutical side, the development and the regulatory processes, you know, shift quite significantly and the opportunity that that could create, again for both our device and pharmaceutical business, but also the very nature of, you know, consumer demands, how they shop, how they’re thinking about the products that they actually want that also, we really played into this overall decision.

QUICK: You know that people will look at the pharmaceuticals right now and maybe say that pipeline is strong there, but it is a riskier business. It goes through fluctuations of ups and downs. How do you make sure that it stays in a position where you have a lot in the pipeline?

GORSKY: What's really important I believe in the pharmaceutical business Becky and something that we've demonstrated is to take a long-term approach to the way that you manage it. And what I'm very proud of in our group is that if you look over the last decade, whether we had patent expiries, whether we had, you know, launches of major competitors, we've been able to maintain an above market growth rate throughout that period. And it's because of our long-term focus, our willingness to invest both internally and externally in innovation, in bringing new really innovative products to the market, and also just the way that we're executing every day. And so, in spite of often multibillion dollar shifts due to those kinds of issues, we've been able to, you know, maintain consistent above market growth rates. And if we look at our pipeline going forward, we have, you know, more than 10 filings or approvals expected over the next several years, each over a billion dollars, more than 50-line extensions, 10 of which represent about a half a billion dollar opportunities. We remain very confident in our ability to do that as well.

QUICK: Alex, Mike pointed out how both pharmaceuticals and consumer staples have underperformed the S&P. Has that been a frustration to you? And why do you think that is?

GORSKY: Well, look, I think it is something that will work itself out in the long run is I look at it, the pharmaceutical industry more broadly, let alone our company and I look at the promise of some of these new technologies, be it cell-based therapies, be it gene therapies. I don't think I've ever in my 35-year career seen a more promising time and seen a greater opportunity for acceleration. And while yes, there are going to be risks about pricing and access in other issues, I clearly think that those are things that can be managed and, and worked with in more of an evolutionary way. And, and so again, I'm we're very optimistic about a pharmaceutical business, about a medical device business and we also believe our consumer business is very well positioned.

QUICK: And is it safe to assume that if this is going to take 18 to 24 months to work out that you will stick around as Executive Chairman to oversee that process?

GORKSY: Well look, as mentioned in our announcement, I plan on being here as the Executive Chair. We want to make sure there's a smooth transition. I'm incredibly proud of the selection with Joaquin. We've got a strong management team. And Becky the other thing that's really important is we are doing this from a position of strength. You know, if you look at our last quarterly results, for example, all three of our businesses are growing at or above their market rates. Our market shares are showing strong positioning, our pipelines are stronger than they've ever been. So again, we think this is the right time. We recognize again that this is a historic move. But when we think about the long-term for patients and consumers and for Johnson & Johnson and our consumer business, you know, we're confident that this this will be positive for all of our stakeholders.

QUICK: Alex, we were just talking with Dr. Scott Gottlieb, the former head of the FDA about Kaiser Permanente and what he sees just in terms of patients coming back, patients who sat out for a year and half not doing some of the surgeries that they could have done because of COVID or maybe they couldn't do it because hospitals weren't doing them. He was talking about how that business is really coming back as people have morbidities that they really have to get in and address. I take it you've seen the same with the medical device business.

GORSKY: Absolutely Becky. Look another, another unfortunate downside of COVID-19, not only was the patients who have been impacted by the virus itself, but about all those delayed visits to the physician, all those delays and being diagnosed for example with cancer. And we all know that the later that we're able to treat these things, it increases the potential for an even worse outcome. And so, we do think that there's significant pent-up demand. And again, I want to give a shout out to all the doctors, the nurses, the physicians, the hospital systems, the way they've been managing it. But we do anticipate that that pent-up demand will be working its way back through the system. We're seeing signs of that as we speak, particularly here in the United States, but also in Europe and other places around the world. And again, we think that represents a significant opportunity, not only as we head into 2022 but in years beyond as well.

QUICK: And finally, everyone's talking about inflation right now. I'm sure that impacts just about every one of your divisions in the business but maybe consumer products is the one that people will be watching most closely, organic growth there last year of about 4%. What will inflation mean in terms of compression on the margins and how do you handle that?

GORSKY: Well, look, we're watching it closely. And I'm really proud of the job that our consumer team, our supply chain has been able to do over the last 12 to 18 months and managing above and beyond inflation just consider the volatility that we saw through 2021 itself and, you know, significant swings across the different product lines. Nonetheless, we were still able to meet that demand. We're absolutely committed to making sure that we maintain an appropriate pricing structure. We're working hard with, you know, our channel partners to, to do that. But we are, we are starting to see some stresses and strains in the systems with some under, underlying supply products but we're managing that closely. And again, we're hopeful that we'll be able to maintain the strong performance, like you just mentioned, we're seeing mid-single digit growth in our consumer business, but also significant improvement in the profitability of our consumer segment as well. And, and we expect that to continue going forward.

QUICK: Alex, we want to thank you for being with us on this busy morning. A huge announcement. We appreciate your time. It's really good to see you.

GORSKY: Well, hey Becky, if I can just one final shout out for our employees. The 136,000 committed employees of Johnson & Johnson especially those in our consumer group. Without their hard work, their commitment, their support, this would never be possible. So, a huge thanks to all of them and, and thank you, you know, for spending this time this morning.

QUICK: 136,000 employees. How many will go to the pharmaceutical and medical devices, how many will be in the consumer business afterwards?

GORSKY: Slightly over 20,000—

QUICK: For consumer?

GORSKY: Exactly of our consumer group on a global basis.

QUICK: Alex, again, thanks for being with us this morning. We will continue to look into this. We hope to hear from you again soon. Alex Gorsky is the CEO of Johnson & Johnson.

GORSKY: Thank you, Becky.