A High-Potential Healthcare Investment

 
Featuring Lutts' Logic:

Death of an Heiress

The Story of Johnson & Johnson

A High-Potential Healthcare Investment

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Until last week, the name Casey Johnson meant nothing to me.  But last week Casey Johnson died, at age 30, and in doing that, she caught my attention.

Casey was a diabetic, and while that may have contributed to her early death, it appears that the main cause was living the high life.  Casey never had to work, and for that I pity her.

Casey's father is Robert Wood Johnson IV.  He owns the New York Jets, but he just lost a daughter, so he has my sympathy; the loss of a child is a terrible thing.

In any event, the news piqued my interest, so I followed the money to the root of the Johnson fortune, Casey's great-great-grandfather, who was one of the three brothers who founded Johnson & Johnson (JNJ).

Robert Wood Johnson the first was born in 1845, in Carbondale, Pennsylvania.  In 1861, when he was 16, he was apprenticed to his uncle James, who ran an apothecary in Poughkeepsie, New York.  Not by coincidence, this kept the boy out of the Civil War.

In 1864, he moved to New York City to work in the firm of Roushton & Aspinwall.  And a few years after that, as the Englishman Joseph Lister was making pioneering steps in the field of antiseptic surgery (Listerine was named for him), Robert Johnson teamed up with George J. Seabury to invent aseptic surgery equipment.  In 1874, they introduced a medicated adhesive plaster (the ancestor of the Band-Aid), recommended for weak backs, kidney troubles, sore throats, coughs, rheumatism, stiffness, sprains and pains of all kinds.  By 1878, the firm was bringing in the equivalent of $2.5 million per year in today's dollars.

Splitting the profits two ways was easy, but when Robert Johnson's younger brother James Wood Johnson joined in, distributing the profits became more complicated; Seabury valued James less than Robert did.  So in 1880, Robert sold his shares of the firm to Seabury, agreeing to stay out of the medical business for 10 years.

In the meantime, James Wood Johnson and a third brother, Edward Mead Johnson, started their own medical business, Johnson & Johnson, in New Brunswick, New Jersey.  But Johnson & Johnson struggled; cash was low.  George Seabury was also struggling to make his required payments to Robert Johnson.  So Seabury agreed to allow Johnson to re-enter the medical business in lieu of future payments.  And Robert joined his brothers at Johnson & Johnson, contributing needed cash and receiving in return half the shares of the company.

In 1887, Johnson met another New Brunswick pharmacist, Fred B. Kilmer.  Kilmer later joined Johnson & Johnson and was responsible for many of the firm's developments, including first aid kits and baby powder.

(In later years, Johnson & Johnson also introduced the first Band-Aid, dental floss, sanitary napkins for women, sterile sutures, the first U.S. birth control product (Ortho Gynol Gel), Haldol, Monistat Cream, the Proximate Linear Stapler, mass market contact lenses, the first coronary stent and much much more.)

The most influential Johnson in the firm's history was Robert's son, Robert Wood Johnson II.  When Robert the first died in 1910 (leaving his son $2,000,000), Robert II dropped out of Rutgers Preparatory School and began working full-time at the company.  He was president of Johnson & Johnson from 1932 to 1938, and chairman until 1963.

Today, Johnson & Johnson is still headquartered in New Brunswick, New Jersey.  It brings in some $64 billion a year, and revenues grow every year, as the company grows from both internal development and acquisitions.  The company employs roughly 118,000 people all over the world.  And it makes money every year.  In fact, even the big recession hasn't stopped the parade of ever-increasing earnings.  Plus, the company pays a dividend of 3.1%.

I think one reason for Johnson & Johnson's success today is the credo that Robert Wood Johnson II composed in 1943, just before the company went public.  Here it is.

"We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality.

"We must constantly strive to reduce our costs in order to maintain reasonable prices.  Customers' orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit.

"We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs.

"Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities.

"Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified.

"We must provide competent management, and their actions must be just and ethical.

"We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens - support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education.

"We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.

"Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for.

"New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return."

Sixty-seven years later, this credo still works.

Robert Wood Johnson II passed away in 1968, leaving the bulk of his $400,000,000 estate to the Robert Wood Johnson Foundation.  With over $10 billion in assets today, it's currently the largest U.S. foundation devoted exclusively to health and health care.  But he wasn't the last Johnson to run the company.  His son Robert Wood Johnson III served as president from 1961 to 1965, but there was a falling out, and his father, as chairman, fired him.

Since then, the company has been ably run by non-family members, and the wealth persists, enabling behavior both laudable and regrettable by Robert Wood Johnson's descendants.

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If you're a widow or an orphan, JNJ might be the right investment for you.  It's hard to imagine the juggernaut being pushed off its slow but steady upward course.

On the other hand, if you're looking for more rapid growth, you might want to look at another company in the health industry, a company that I recently labeled "The Next Pfizer,"  (Both companies fill your medicine cabinet, but Pfizer (PFE) is far more dependent on pharmaceuticals, and that's where the faster growth is today.

The company is Warner Chilcott (WCRX), and it was first recommended in Cabot Top Ten Report on August 31, when it was trading at 20.

More recently, I featured it as a selection in Cabot Stock of the Month Report, writing this:

"Back in 2000, a little Irish pharmaceutical company named Galen bought U.S. based Warner Chilcott (a division of Warner-Lambert) and proceeded to run a very profitable business, focusing on dermatology and women's health care (a third of the business is oral contraceptives).  Profit margins were high and cash built up.  So this year, management, buoyed by the success of their big acquisition, decided to do it again, and in August they acquired the prescription drug business of Procter & Gamble for $3.1 billion, effectively tripling the company's size.

"Medicines acquired in the deal include Ascol HD delayed release tablets for ulcerative colitis, Actonel for osteoporosis, and the co-promotion rights to Enable for the treatment of overactive bladders as well as 2,300 employees and manufacturing facilities in Puerto Rico and Germany.  (Procter & Gamble, meanwhile, by disposing of its pharmaceutical efforts, can focus on the consumer health business.)

"At the time, Warner Chilcott CEO Roger Boissoneault commented, "The acquisition of the P&G pharmaceutical brands and employee talent is a transformational, strategic move for us.  The acquisition transforms Warner Chilcott into a global pharmaceutical company, expands our presence in women's healthcare, establishes us in the urology market in advance of the anticipated launch of our erectile dysfunction treatments, and adds gastroenterology therapies to our product portfolio."

"What particularly impresses us--and makes us confident this acquisition will pay off big-time-is the firm's stellar growth record; the company's revenues have grown in each of the past 10 years.  Even through last year's global recession, both revenues and earnings kept on growing!"

Today, WCRX is trading near 28, having pulled back for a week.  The 25-day moving average is quite close, offering support, while the 50-day is down at 26.  Buying here is likely to work out fine in the long run, though risk-averse investors will want to wait for a deeper pullback.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

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Timothy Lutts can be found on Google Plus.

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