Most CEOs presenting at the J.P. Morgan Healthcare Conference talk primarily about what their companies have done recently and what's new with their pipelines. But most CEOs don't run the world's largest healthcare company, as Johnson & Johnson (NYSE: JNJ) CEO Alex Gorsky does.
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Gorsky sat down at the J.P. Morgan conference on Monday for what was billed as a "fireside chat," discussing a range of topics. Here are five things you need to know from what he said.
J&J CEO Alex Gorsky. Image source: Johnson & Johnson.
1. The future of healthcare
Gorsky said that he's "excited" about the future of healthcare. In particular, he cited the unprecedented innovation that's going on in the industry right now, stating that "never has my plate been so full with new opportunities." He credited this wave of innovation to the billions of dollars invested in research, including, especially, gaining a deeper understanding of the human genome.
Consumers will play an increasingly important role in the future, according to Gorsky. In particular, consumers' access to information about their healthcare options could change how healthcare services are obtained.
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2. Opportunities for the pharmaceuticals segment
Gorsky said that looking for new opportunities is "one of the most important jobs we have." He noted that J&J has a "bottom-up process" for evaluating new product opportunities that "can be chaotic."
Johnson & Johnson's team looks at several factors when considering a new opportunity. Gorsky said that the company always starts with patient need. It then takes a look at the financial impact, especially focusing on whether or not J&J can create value. Finally, the company looks at whether it can win -- defined as being No. 1 or No. 2 in a particular area.
While J&J intends to focus on the five therapeutic areas where it currently operates (immunology, cardiovascular and metabolic disease, infectious diseases, vaccines, and neuroscience and oncology), Gorsky said that he doesn't want "to be dogmatic" about it. If a great opportunity arises in a different area, J&J won't necessarily turn away.
3. Drug pricing
When asked about the role of pricing in the pharmaceutical industry, Gorsky insisted that he "doesn't think it's a pharmaceutical pricing issue" but instead "a healthcare pricing challenge." Although he didn't specifically address current controversies over drug pricing, he said that the industry "has a responsibility to be responsible actors."
Gorsky noted that healthcare pricing in general is responding to major changes in demand. Demographic trends, particularly the aging population, are driving demand higher over the next few decades. This significantly increased demand for healthcare services is putting a lot of pressure on the healthcare system, so pharmaceutical companies must innovate more effectively to show their value. Gorsky said that the days of drugmakers being rewarded for incremental innovation are over.
J&J makes sure to invest more into research and development than it receives in price increases. That's important when discussing price increases, in Gorsky's view. He said that around 70% of the company's sales growth stems from new product launches or increased volume, with the rest coming from increased prices.
4. Potential political changes
Two major changes could be on the way with a new president and new Congress in Washington, both holding the potential to greatly impact the pharmaceutical industry: Obamacare could be repealed, and U.S. corporate tax policies could be reformed.
Gorsky didn't seem too concerned about the prospects of Obamacare being repealed. He noted that while initial expectations were that the healthcare-reform legislation would drive higher hospital volumes, Johnson & Johnson hasn't seen any significant increase in hospital volume.
He was cautiously optimistic about the prospects for corporate tax reform, but warned that J&J's effective tax rate could actually increase marginally. However, he said that any lowering of rates would help make the company more competitive. Gorsky is especially interested in seeing what changes are made to encourage companies to repatriate cash -- and perhaps earnings as well.
5. Lower-growth J&J segments
It's no secret that Johnson & Johnson's pharmaceutical business is driving the company's growth. Gorsky was asked about his view of the two segments with lower growth: medical devices and consumer.
Gorsky acknowledged that the medical-device business had experienced significant changes that curtailed its growth. However, he said that J&J views this as "an opportunity to rethink the way we want to operate." He added that the medical devices segment has refocused its portfolio, and he thinks the segment is now positioned for a rate of growth at, or higher than, the overall market growth rate for the industry.
As for J&J's consumer segment, Gorsky said that the group "has done an outstanding job." He thinks that the business segment is positioned well for future growth.
Johnson & Johnson will continue to be a microcosm of the entire healthcare system. The company's scope extends across much of the healthcare industry, from consumer products to medical devices to prescription drugs.
If there is a single takeaway from Alex Gorsky's comments for investors, I'd say it's that Johnson & Johnson has the capability to adapt to change -- whatever that change might be. Regardless of what's going on economically, politically, or scientifically, J&J has the resources and the background to adapt. That should give J&J shareholders reason to sleep peacefully.
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