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CNBC EXCLUSIVE: Johnson & Johnson CEO Alex Gorsky Speaks With CNBC’S Meg Tirrell

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Covering the J.P. Morgan Healthcare Conference in San Francisco, CNBC provided this exclusive transcript of a conversation with Johnson & Johnson CEO Alex Gorsky who discussed healthcare, new technologies, breakthroughs, cures, consumer satisfaction, prescription pricing and Amazon.

David Faber: All right, let’s get over to health care now. Day two of the annual J.P. Morgan healthcare conference in San Francisco. Our own Meg Tirrell is there, and she has a very – I’m going to say very special guest, Meg. Take it away.

Meg Tirrell: He is very special, David, thanks so much. Joining us is Alex Gorsky, the CEO and Chairman of Johnson & Johnson. Thank for being here Alex.

Alex Gorsky: Hey, good morning meg. It’s great to be here with you.

Tirrell: One of the big themes of the conference always is M & A, is deals, and of course, with the tax overhaul just passed, you guys have $16 billion in overseas cash, what do you plan to do with that? Analysts are indicating maybe pay down debt is job number one, but are you going to be re-investing that, are you going to be hiring, are you going to investing in research?

Gorsky: Well, Meg, first of all, it’s great to be at this conference. I mean this is about ten years in a row I have been out here. And what a way to start the year, because you come out here and you hear, it’s really all – not necessarily all about deals but it’s about innovation, it’s about new technology, and all the reporting out of the previous interviews you have done, you have heard about things like Immuno oncology, breakthroughs, cures we couldn’t have even imagined, you know, 10, 20 years ago.

These things are actually happening in our industry so it’s a great time to be here. Look, at Johnson & Johnson, we’re always looking for great new therapies. We try to be agnostic about whether we source it internally or externally.


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And I must admit over the past several years right here at this conference, we’ve been able to meet new partners, see new technologies and see new early science that we’ve ultimately been able to bring to the market and make a big difference for patients. As it relates to the tax, we’re very pleased to see the tax reform went through.

I think the fact we now have a competitive tax rate, that we have a construct in place to repatriate earnings and cash from overseas is going to give us much more flexibility, make us much more competitive. In terms of how will it fundamentally affect our overall M & A strategy, I don’t think it really will. Because really that starts with science, the right deal, the right company, the right culture being able to integrate it in, but it certainly gives us more flexibility and is going to make us more competitive in the long run.

Consumer Core

Tirrell: Well, your pharma business of course is your largest unit. You also have a well-known consumer set of brands, but that one operationally not doing as well. Down about 15% i believe in the third quarter. Are you thinking about bolstering that through M & A at all? Pfizer is talking about options for its consumer business.

Gorsky: Look we’re excited about all of our segments. And you know, our consumer segment, that’s really been a core, iconic brand for Johnson & Johnson, whether it’s baby, whether it’s Neutrogena, Aveeno, Tylenol, we’ve got some great franchises. And while they did perform down slightly, they were actually about flat in the third quarter and through the early part of the year. What we’ve seen is really a secular shift throughout the large consumer brands overall.

Now, we remain very confident in that franchise. If you look at the underlying growth in areas like beauty, like OTC, it still remains strong. We certainly have got to do things about modernizing some of our brands around baby, moving even faster to the e-channel, but overall we’re very confident. And again, here, too, we did an acquisition just a couple years ago, vogue, a really good innovative hair care company, and what we’re doing now is we’re actually taking the way they innovate in a fast way, where they’re collecting online immediately with consumers and we’re building that into some of our other brands in the consumer area. So you know, M & A it’s always going to be an important part of our strategy.


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Amazon and Consumer Satisfaction

Tirrell: Well, thinking about e-commerce, a big question in 2017 in health care was the presence of Amazon. And of course, you may have partnerships and existing relationships with them in your consumer business. What’s your expectation for their potential move into the pharmacy supply chain?

Gorsky: What I would say about Amazon is we have a very good partnership with them on the consumer side. And we’re talking to them, we sell through many of the big chains we work with. We also sell directly. But what I would encourage almost anybody, whether it be in pharma, med device, OTC, we should all be acting like amazon’s getting into our business. Because frankly, we have to create a crisis. We have to make sure we’re always competitive, we’re always thinking about how can we be more effective, how can we be more efficient. And so we’re thinking that way across all of our different businesses.

Tirrell: Would you welcome Amazon in are you talking with them about their role?

Gorsky: Well, if it leads to better customer satisfaction, if it leads to greater transparency, for example, around pricing, if it leads to ultimately better outcomes for patients, of course, we welcome them in.

Tirrell: Any conversations happening?

Gorsky: Well I won’t go down that road right now, but look, I think having healthy competition can be a positive thing. But you know, we’ve always have to keep the patient, the consumer in mind.

Finacials, Immigration, International Investments

Tirrell: Well I want to ask you more broadly about the political environment right now. And a big debate going on outside this conference is the immigration debate and what’s going on with DACA and D.R.E.A.M.ERS. Some of my colleagues this morning interviewed a J & J employee who is a D.R.E.A.M.ER and she’s worried about being expelled from the country. She says she’s talked with you about Johnson & Johnson’s position on DACA. How important is that for Johnson & Johnson?

Gorsky: Well look, it’s very important. And it’s important at a personal level. As the grandson of immigrants myself, it’s something that has been a very important part of our country. And making sure that we’ve got comprehensive immigration reform that takes into consideration, you know, how can we help these people you know, gain the right – their appropriate rights in the United States?

How can we make sure they can be drivers of the economy? That’s what this is all about.  So it’s certainly our hope. We’ve made a stand on DACA. It’s our hope we can, again, get more comprehensive reform through. And we wanted to help our employees, like the one you talked to this morning. In fact, we think it’s good for all of industry when that gets done.

Tirrell: David, you have a question?

Faber: Yeah, thank you, Meg. Alex, back to capital allocations specific to tax reform itself. Meg had mentioned, of course, the money you have overseas. But in a larger sense, not just that $16 billion or so, but as well the lower tax rate. Do you see yourself increasing your returns to shareholders? Do you see yourself in any way changing your capital allocation as a result of both the access to that overseas cash and the lower rate here in the U.S.?

Gorsky: Well, David, what I would say overall, I think the fact that you know, we see this tax reform, that we’re going to be more competitive, ultimately, is going to be great for shareholders. Now for us, our capital allocation strategy starts with investing in our business. Things like R&D, making sure that we’re competitive in the sales and marketing standpoint, and frankly that’s why we have seen the great treasure trove of launches we have been able to do in the last several years and the kind of growth we’ve been able to produce at Johnson & Johnson.

After that, it’s very important around our dividend, our shareholders depend on us for that. After that, after that, we then take a look at value creating M & A. Usually about 50% of the innovation at Johnson & Johnson we’ve acquired through inorganic or m & a activities. And last but not least, you know, we look at a share buyback.

And the good part particularly about Johnson & Johnson with our strong financial position is we can do those things simultaneously. It’s not necessarily an either/or in a linear fashion. We can do all those things. That’s why frankly we’ve such a strong track record over the last 55, 25, or 5 years.

Faber: Without a doubt. But I guess what I hear you saying though Alex is nothing really has changed. In other words, you’ve always had extraordinary access to capital given your credit rating in particular. And what I’m hearing you say is yeah, we still have the same priorities and nothing has changed as a result of tax reform when it comes to the priorities or how we go about deciding on them.

Gorsky: No, David, what I would say, this is going to give us much more flexibility. You know, under the previous system, a lot of the large U.S. companies, you know, because so much of our sales, over 50% were outside of the united states, it put us in a position basically where you were using your U.S. cash to pay dividends and therefore having to take on more debt.

Where with— under this construct, we’re no longer going to have really that false construct in place so I think it gives us greater flexibility, it allows us to more efficiently use capital, and whether that’s through our own investments, through capital or M & A, ultimately, I think that’s going to be a very positive move in returns for shareholders.

Research, Breakthroughs, Cures

Tirrell: Well, also I want to bring it back to what’s in the clinic for you guys and what’s driving the drug pipeline. At the end of the last year, you did a deal in this very exciting new area of cancer treatment called car-t, where you’re taking a patient’s own immune cells out of their body to fight cancer. That program is under FDA sort of approval, review process in china right now, if I understand correctly.

Gorsky: Yes.

Tirrell: How big of a driver for your business is this going to be, and what would you say about the pricing paradigms we’ve already seen for these one-time treatments in the U.S?

Gorsky: well meg, we’re really excited about it for a number of reasons. One is, of course, we – I think, our team led by people like Paul Stoffels, Joaquin Duato, Bill Hait, Peter Lebowitz has done an incredible job in our oncology franchise. I mean over the last five years, whether you look at Zytiga®, Darzalex®, Imbruvica®, the difference that we made for patients, as well as the several multi-billion dollar franchises that we have been able to build is pretty remarkable. Now with this deal in particular, first of all, it gets us into the cell-based therapy the DCMA Car-T approach which we’re really excited about, and we could start seeing cures in multiple myeloma. And unfortunately, we probably all know somebody who has been affected by multiple myeloma. To see this possible in a short period of time is pretty remarkable. Number two, it also gives us a great partnership in china, you know, where we’re seeing an emerging biotech industry, you know, come to life.

So the fact that we were able to work together on this, the early data is incredibly encouraging. We think it’s actually differentiated from some of the other compounds. We’re excited about it for patients and for our business. Now as it relates to pricing, look, I think the good news is when we have multiple approaches, probably similar to what you saw with Hepatitis C, at first we have a big breakthrough therapy, we see tremendous improvements and efficacy rates. Then as you get more competition, price goes down, it becomes more economical, and I think that’s what you know, the promise will be here. I think that clearly, there’s big returns for patients and I think there will be big returns for companies. But it will also be a competitive environment.

Tirrell: Well Alex, we’ll leave it there for now. Thank you so much.

Gorsky: Thank you Meg. Have a great conference.     

About CNBC:

With CNBC in the U.S., CNBC in Asia Pacific, CNBC in Europe, Middle East and Africa, and CNBC World, CNBC is the recognized world leader in business news and provides real-time financial market coverage and business information to more than 409 million homes worldwide, including more than 91 million households in the United States and Canada. CNBC also provides daily business updates to 400 million households across China. The network's 15 live hours a day of business programming in North America (weekdays from 4:00 a.m. - 7:00 p.m. ET) is produced at CNBC's global headquarters in Englewood Cliffs, N.J., and includes reports from CNBC News bureaus worldwide. CNBC at night features a mix of new reality programming, CNBC's highly successful series produced exclusively for CNBC and a number of distinctive in-house documentaries.

CNBC also has a vast portfolio of digital products which deliver real-time financial market news and information across a variety of platforms including: CNBC.com; CNBC PRO, the premium, integrated desktop/mobile service that provides live access to CNBC programming, exclusive video content and global market data and analysis; a suite of CNBC mobile products including the CNBC Apps for iOS, Android and Windows devices; and additional products such as the CNBC App for the Apple Watch and Apple TV.

 

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