Health Care

Lilly maintains focus on its pharmaceuticals: Drugmaker has no plans to replicate J&J's diversity

January 10, 2005

Johnson & Johnson loves to profit from a balanced product line, and it has competitor Eli Lilly and Co. to thank-in a roundabout way-for its latest bit of leverage.

New Jersey-based J&J plans to expand its medical device business by buying Guidant Corp., which Lilly created and then spun off in the early 1990s.

J&J leaders think the proposed, $25.4 billion deal will create better balance among a line of businesses that has been led by pharmaceuticals, which made up nearly two-thirds of J&J's 2001 operating profit.

Seems like a smart move. Product blowups and bad press spawned by high drug prices pummeled the pharmaceutical industry in 2004. Lilly watched its stock price fall nearly 20 percent last year and announced plans to cut roughly 1,000 jobs.

However, no one at Lilly's Indianapolis headquarters is planning to widen the drugmaker's focus once again. Analysts also see few good reasons to do that, despite the glut of bad drug news.

The deal for Guidant will make J&J the No. 2 company in pacemakers and implantable defibrillators, and also boost its stent business, according to a report from JP Morgan analyst Michael Weinstein.

J&J does business in three main areas: pharmaceuticals; consumer products, which includes Band Aids; and medical devices and diagnostics. Company leaders point to this diversity as one of the reasons J&J has recorded 19 consecutive years of double-digit earnings growth.

Company Chairman and CEO William C. Weldon called J&J "the broadestbased health care company in the world" during a December conference call.

"We've said that a good portion of our strength and historical performance comes from that breadth," he said.

That method of growing isn't for everyone, however. Once upon a time, Lilly also sought business diversity. Then Randall Tobias became the company's chairman and CEO.

Human pharmaceuticals have been the main focus since Col. Eli Lilly started his business in 1876, but the drugmaker has dabbled in other areas as well.

Lilly once owned the Elizabeth Arden cosmetics company and produced crop science products in a joint venture with Dow Chemical Co.

The drugmaker also started building a medical devices and diagnostics division in 1977, Tobias wrote in his 2003 book "Put the Moose on the Table."

Company leaders thought the business would help Lilly make money during pharmaceutical "dry periods," wrote Tobias, who served as chairman and CEO from 1993 to 1998.

Lilly eventually left cosmetics and crop sciences, and the company determined medical devices and diagnostics created no shareholder value within Lilly. In 1994, the company spun off Guidant, which went public.

Tobias wrote that company leaders wanted to narrow Lilly's focus to pharmaceuticals. He noted that, for most companies, "spreading the focus too broadly is often detrimental to the success in any of the company's businesses."

Lilly still stands behind that notion.

"First and foremost, we're committed to pharmaceutical innovation as the strategic driver for our company," Lilly spokesman Phil Belt said, noting that this approach has yielded one of the most productive pipelines in pharmaceuticals.

Indeed, the company has launched more than a dozen new products or new uses for existing products over the past two years.

"We're not distracted, our resources are not diluted, we're 100 percent committed to developing innovative medicines," Belt said.

Lilly executives are fully aware that pharmaceuticals is a high-risk business, Belt said. They also believe the way to address that risk is "to be very, very good and very, very focused on our therapeutic areas of strength, if you will."

Belt's reasoning finds support among the Wall Street analysts who cover his company. Tony Butler, for one, sees no need for Lilly to broaden its focus.

J&J has always maintained its threepronged approach to business, said Butler, an analyst who covers Lilly for New York-based Lehman Brothers.

J&J, much larger than Lilly, is not known for pharmaceutical innovation, he added. Lilly, on the other hand, has "done a very good job producing new drugs.

"It's arguable that they've probably done the best job of any company in the pharmaceutical industry," he said.

Several pharmaceutical companies stripped other businesses from their portfolio to narrow their focus in the 1990s, said Herman Saftlas, a New York-based analyst who covers Lilly for Standard and Poor's.

"I believe it may be too late for [Lilly] to turn back the clock, so to speak," he said.

Pharmaceutical and medical device markets differ too greatly for a company like Lilly to start fresh in a new line. Management and corporate culture aren't set up to handle separate lines of business like they may have been years ago.

"For them to venture into that market would involve a major risk," Saftlas said.
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