Will JNJ Rise From the Ashes?

Johnson & Johnson (NYSE:JNJ) is a muscle car. The question is, can new CEO Alex Gorsky turn the keys and get the engine humming again? If so, this double-barreled company (and its stock that’s gone nowhere since 2005) could once again burn up the highway for investors.

But that’s a big “if.”

A Whole Slew of Problems

No need to mince words here — J&J is in a pretty good mess right now for a handful of reasons, all of which are putting the kibosh on earnings.

For starters, the company discontinued a key hip replacement product after the FDA failed to approve it for U.S. use — a decision that followed complaints about it in the European market, where it had been approved.

More recently, manufacturing at Johnson & Johnson’s McNeil Consumer Healthcare facility was suspended after a lengthening list of product recalls finally forced the action. The McNeil plant makes Tylenol and Motrin, which are clearly pieces of the product pie J&J can’t afford to have off the shelf. Now there’s a Doxil drug shortage, and it looks like the company delayed reporting problems with some of its insulin pumps.

And that’s hardly the whole list. It all begs the question: What the heck is going on with this former American health care icon? Perhaps a more important question to ask is: Why would anyone want to own this tainted name now?

I have answers to both.

Not Your Typical CEO

Whether incoming CEO Alex Gorsky is the right man for the job is irrelevant — he’s got the job now. Gorsky certainly has his work cut out for him when he starts April 26, though. Then again, he’s got some great experience to bring to the task.

Gorsky started as a sales rep for J&J-owned Janssen Pharmaceuticals, and by 2003 he had worked his way into the president’s role. He’s also the former head of the J&J’s medical device and diagnostic group, and he has served as the chairman of Johnson & Johnson’s pharmaceuticals business in Europe, the Middle East and Africa. In other words, he’s got as much experience as anyone needs to take on the job. That’s not the most interesting thing about Alex Gorsky, however.

No, what’s more than a little unusual about Gorsky (compared to most other American CEOs) is that he’s also a retired U.S. Army Ranger — one of the military’s elite soldiers.

It’s a training and background that is said to show in the way Gorsky conducts himself every day. More directly, the buzz is he’s a “get it done no matter how you have to do it” kind of guy.

Most investors should love it, assuming Gorsky will indeed “get it done.” And they also should like the fact that he’s got a salesman’s experience as well as a salesman’s mentality; revenue cures a lot of ills.

All well and good, though there’s a bit of a problem with this mind-set. In the military, there’s not a call for public disclosure of how you’ve completed the mission, or what the end result was. And in sales, representatives don’t face legal or liability issues; they simply market the product. Point being, if Gorsky really is going to revive this previously great brand name, it’s going to take more than a military-like, sales-based approach. It’s going to take a ton of finesse and humility to get back in investors’ — as well as the FDA’s — good graces. And so far, that’s a reality Gorsky hasn’t seemed to embrace.

Still …

All that being said, given J&J’s current situation, the company might be better off right now with a drill sergeant at the helm rather than a scientist.

To be blunt, the bulk of Johnson & Johnson’s current earnings problems ultimately boil down to sloppy oversight. Someone should have caught the labeling problems with its Children’s Motrin before the label was printed. Someone should have known that complaints about its insulin pumps couldn’t be hidden forever. Someone should have known a lack of a quality control plan at the McNeil facility was a ticking time bomb.

None are forgivable, though all are fixable. It’s just a matter of accountability, and that’s a corporate culture a military mind is very, very good at fostering. Realistically, Grosky could have those internal control problems solved within a year.

At that point, Johnson and Johnson could be an investment-worthy fighting machine again.

See, while the company dropped several balls leading to a stunning 30 recalls since 2009, the things that made Johnson & Johnson great at one time never really went away. A big chunk of that greatness was the fact that J&J is the combination of some great consumer and OTC products (like Listerine, Band-Aid and even the troubled Tylenol brand) as well as pharmaceuticals (such as Remicade, Concerta, and Levaquin) on top of an impressive medical device and diagnostic arm (which many investors might be surprised to learn is actually the company’s biggest revenue generator).

Bottom Line

It ultimately remains to be seen if Gorsky is an innovator and leader when it comes to developing new drugs, or understanding which drugs or companies Johnson & Johnson needs to acquire. But that’s not the immediate concern.

Right now, the company is losing hundreds of millions of dollars per year on the missing sales of products that are currently off the market. And the company has been fined billions of dollars for botching its oversight. All of those problems seem to be on the table, though, meaning things have gotten as bad as they can get — for the company as well as the stock. From here, it’s likely a one-to-three-year turnaround story for all three divisions, with Gorsky poised to lead the charge. Thing is, the market likes good companies, but it loves turnaround stories.

In other words, JNJ actually has little downside left to give, but more long-term upside than it might seem with just a quick glance.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2012/04/will-johnson-johnson-jnj-rise-from-the-ashes/.

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