J&J's new fixer turns consumer division back into a profit center

Sandra Peterson

For years Johnson & Johnson's ($JNJ) consumer unit was an embarrassment to CEO Alex Gorsky. Instead of being able to point to its contribution to quarterly results, he found himself explaining recalls of key products like Tylenol and the unit's drag on earnings. But a turnaround is at hand, with the unit turning in 2.4% growth in sales in Q2, driven by a 9% increase in over-the-counter drugs.

During an earnings call with analysts Tuesday, Gorsky was able to tell them that "we're pleased with the progress of the business and executing the strategy we outlined last summer," according to a transcript of the call from Seeking Alpha. He said he expected greater growth now that the unit is focused on 11 mega brands that include Tylenol. In fact, analgesic sales in the U.S. were up 25% on market share gains as it returned products like Tylenol and Motrin to retailers' shelves.

The improved results come 20 months after Gorsky brought Sandra Peterson over from Bayer to fix the deeply troubled McNeil Consumer Healthcare division. The year before she arrived, McNeil had signed a consent decree with the FDA after it had to recall and destroy tens of millions of consumer products. At that point, the recalls and lost market share had reportedly cost the company $1.6 billion and it still faced investing more than $100 million to retool a plant in Fort Washington, PA.

The reversal of fortunes at McNeil has been orchestrated, Peterson told Bloomberg, by focusing on the most valuable products, jettisoning some brands that were not, and bringing more accountability to the unit. She has promoted or hired new people and put in place new systems for quality assurance and communication, Bloomberg reports.

That includes a global quality program that uses consistent metrics to "track and monitor" every consumer product worldwide. She has gone to lunch rooms and manufacturing plant floors to ask workers what was needed. "The people inside the company, generally two-to-three levels down, they know best what's wrong and how to fix it," Peterson told Bloomberg. "It's just that their voices aren't being heard."

What she heard in some discussions was that J&J's collaborative process was making decision-making too slow. So she saw that there was a "directly responsible individual" for every project, a tactic she knew is used at Apple ($AAPL), one of the iconic consumer brands these days.

Peterson told Bloomberg the unit has made "huge progress" but also acknowledged more needs to be accomplished to meet growing expectations from investors.  

Jeff Jonas, a portfolio manager at Gabelli Funds, tells the news service that "Investors have been giving them a bit of a honeymoon." He estimates the unit could be providing $500 million, maybe more, to the company's annual operating profit, and he figures investors will soon be looking for it to return to the "cash cow" status it enjoyed before getting caught in a quagmire of quality issues.

- here's the Seeking Alpha transcript
- read more from Bloomberg