(Bloomberg) — Joaquin Duato is surrounded by relics of the past. Behind him are 19th century baby soaps, 100-year-old Band-Aids, and other timeworn products that made Johnson & Johnson into a household name. But the new chief executive officer isn’t interested in artifacts. If he doesn’t abandon tradition for innovation, “we will be left behind,” he says. “That’s my number one concern.”
On the edge of Johnson & Johnson’s New Brunswick, New Jersey campus, Duato is giving his first sit-down interview from within the company’s oldest building, which once produced energy for its factories. Now it’s a museum parading J&J’s 136-year heritage. There is no bigger or better known health-care conglomerate in the world. Yet Duato plotted to rid it of its consumer-products legacy.
Few know that Duato, who took over in January, was an architect behind the breakup of the company. After completing a spinout of its consumer-health unit next year, J&J will be left to focus on its more profitable drug and device businesses. The three-decade company veteran has staked his legacy on bringing the two units closer together than ever before.
Wall Street has shown enthusiasm — shares are up 11% since the split announcement, while the broader health industry has been flat. But some question why he’s not splintering it further. J&J’s medicines are responsible for more than half its overall revenue, and are expected to bring $60 billion in annual sales by 2025, even as two of its best-selling drugs face generic competition. Investors contend that devices, which currently bring in about half as much revenue, distract from the real money-maker. They’d like to see J&J follow in the steps of industry peers, including Pfizer Inc., Eli Lilly & Co., and GlaxoSmithKline Plc, which have all rid themselves of product portfolios that created drags on the balance sheet.
“Investors were hoping for a full, three-way split,” says Atlantic Equities analyst Steve Chesney.
Duato, however, is making a different wager. He says health care is changing so rapidly that drugs and devices soon won’t exist without each other. In a world where Big Tech and biotech dominate innovation, J&J must double-down on developing medical technologies of the future.
He describes training a robot to travel to once-unreachable parts of the lungs, where it would conduct a biopsy and, if cancer is identified, provide on-the-spot treatment. He lists all the ways staplers and scopes could be equipped with image-recognition capabilities, and explains how AI is being used to screen billions of compounds for new medicines. He plans to deploy some of the company’s $30 billion in free cash on deals that could help digitize patient treatment. And although J&J’s Covid-19 vaccine wasn’t part of the RNA revolution that propelled his competitors’ shots, he says the company can still become a leader in that field, as well as in other emerging genetic technologies.
The 60-year-old Spaniard’s career in health care was almost predestined. Duato spent his childhood between the prescription-filled shelves of his grandmother’s pharmacy in Valencia, and watching drug-sales reps make pitches to his grandfather, a pediatrician, who practiced from home. His mother was a nurse. After business school, Duato failed to make it past a first-round interview with J&J, but after a few years at a competitor, landed a job with the company in 1989. Now, he’s spent more than half his life jumping jobs at the conglomerate. He’s best-known for having revived J&J’s pharmaceutical business in the mid 2000s, when its top money-makers were decimated by incoming generics. “The R&D pipeline really hadn’t matured,” says Jennifer Taubert, the now-head of pharma. “He developed the strategy that catapulted us into a new wave of growth.”
Still, when J&J’s flashy chief executive, Alex Gorsky, said last year that he’d step down for personal reasons, even insiders didn’t expect Duato, who was but a year younger and vice chairman of the executive committee, to take his place. J&J had never chosen a CEO born outside the U.S. And Duato, now a dual-citizen, had kept a lower public-profile than other executives who appear frequently at medical conferences and on quarterly earnings calls.
Morningstar Inc. analyst Damien Conover said he’d expected Taubert or Ashley McEvoy, the head of the device unit, to be the likely heir and believes Duato will be a transitional figure.
Duato spent recent years working to reset the consumer unit’s strategy as he once did pharma. Though he saw an opportunity for “a standalone, pure-play company” prior to the pandemic, Duato’s pitch became more potent amid Covid as consumers stuck at home increasingly engaged with brands peddled online by Instagram influencers. The board’s lead independent director Anne Mulcahy describes his role in hatching the spinoff plan as “instrumental.”
Mounting legal liabilities related to cancer-causing asbestos found in J&J’s iconic baby powder are also lurking. If powder is part of a standalone company, “lawyers won’t be able to turn to the deep pockets,” notes Conover, the analyst. J&J has already sought to fence off liability by seeking Chapter 11 protection for a division of the consumer unit. The spinoff likely insures that if the bankruptcy case gets thrown out on appeal, the parent’s shares will still be protected.
In the interview, Duato doesn’t want to talk about legal challenges or consumer products. He focuses on his pitch: How technology can bridge the gap between drugs and devices and usher the fusty business into the future.
Duato is the only major health industry CEO who has served as chief information officer. Already a speaker of English, Spanish and Italian, he used that brief stint to learn a different language altogether. He’s eager to form partnerships with Big Tech—Apple, Amazon, Microsoft—and biotechnology companies on the frontier of patient care. And one of his first moves as CEO was to bring Enterprise Chief Information Officer Jim Swanson and two science leaders, Mathai Mammen and Bill Hait, onto the executive committee.
“It’s not like Joaquin is going to be writing Python code anytime soon,” Swanson says. “But he’s amplified technology and embedded it in the leadership team.” The new CEO has rebranded the device unit “MedTech,” underscoring that J&J won’t just be focused on physical tools, but digital ones—like using virtual reality to train surgeons.
Many are skeptical. “Will J&J be the Google of healthcare?” asks Chesney of Atlantic Equities. “No.” Chesney says Duato’s reputation could ride on whether or not he’s able to revitalize devices, which brings less than 30% of the company’s overarching revenue, and have it perform at a level that better complements its pharmaceutical unit.
Duato’s also bullish on more complex biological targets. Long gone are the days when drugmakers push easy-to-produce pills; now, Duato says the field is focused on complicated cell and gene therapies, which work by altering genetic information in the body to treat or even cure diseases. He’s interested in RNA therapies, which use the same underlying technology employed by the Pfizer and Moderna Inc. coronavirus vaccines. “We are still at the beginning of what RNA could be,” Duato says. “There is enough room for us to be leaders in RNA in the future.”
In the years to come, Duato’s lofty promises will be put to the test. But already, J&J insiders say there’s been a cultural shift. Duato has rejected the image of an iconic American behemoth. In its place, he paints a picture of a nimble, global, tech-enabled company.
“The world is changing and Johnson & Johnson has to evolve, too,” he says. Then he exits the museum.
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