DRIP PORTFOLIO
J&J in B2B
And how e-business could create upside for many

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By Jeff Fischer (TMF Jeff)
March 31, 2000

Johnson & Johnson (NYSE: JNJ) announced this week that it will create a business-to-business e-commerce exchange with four other healthcare giants: GE Medical Systems, a division of General Electric (NYSE: GE), Abbott Laboratories (NYSE: ABT), Medtronic (NYSE: MDT), and Baxter International (NYSE: BAX).

These five leaders are forming a new company in Chicago that will create a global healthcare exchange focused on the buying and selling of medical equipment, supplies, devices, and healthcare products in general. All five of the companies will own equity in the new venture.

This news is similar to the news that the Big Three automakers in Mo' Town and the aerospace industry leaders, too, are forming their own online commerce exchange sites. J&J's new healthcare exchange, like these others, will be operated as a company separate from its founders, with separate management. J&J and its four partners are funding the site and then they will "stock" it.

Unlike the new auto and aerospace sites, however, these healthcare partners will not sell shares of their new site to the public. Why not? Partly because the partners will not charge a fee for transactions on the site, so the business model isn't ideal for new shareholders. The site's operations will be funded by the participating members, instead, with the suggested benefit being increased sales for the partners at lower cost. How? The site will reduce the cost to research product and clinical information and it will make ordering equipment easier over the Internet. The five companies creating the site sell about 70% of the equipment and supplies bought by hospitals in the United States, and they conduct business with a monstrous 90% of all hospitals around the world. Hospitals are the site's target customers.

The new healthcare exchange (we don't know what it will be called) is expected to open for business by the third quarter of this year. It will focus on the domestic market first, but it should begin to address international markets in 2001.

Johnson & Johnson has already been "pioneering" in its use of the Internet, and this week's news proves that good ol' J&J is not reluctant to take bold new steps in a brave new world. Considering the "bigger picture," this news along with the recent auto and aerospace news has some investors concerned about outside e-commerce companies that are trying to create business exchanges. These companies are essentially "middlepeople," and if the companies conducting trade can efficiently cut this "middle" out of the process and save money, they will. Logically, it seems that many large companies are finding ways to use the Internet on their own or with same-industry business partners.

It logically follows that the more businesses use the Internet for commerce, the more those businesses will begin to become "e-businesses" regarding all of their internal operations, too. Oracle Corp. (Nasdaq: ORCL) has saved over $1 billion in the past year alone by shifting many of its operations into an "e-business" format, rather than continuing to use an old-world "paper office" format. With those types of cost-savings possible, it is reasonable to believe that almost all large companies will one day be "e-businesses," with almost all operations electronically controlled, monitored, and recorded.

As we've seen with Oracle's stock, large cost reductions create earnings surprises and potential upside in stock prices. I believe that many more companies will begin to benefit and many will offer upside earnings surprises to investors as they become primarily e-businesses. (Fool Research sells a research report on Oracle, which is where I learned about its dealings.)

Returning to our discussion about the new exchange being created by Johnson & Johnson and its partners, the creation of such a partnership puts young companies that offer exchanges, such as Ventro (Nasdaq: VNTR) and Neoforma.com (Nasdaq: NEOF), at greater risk of losing future business in their healthcare and science-related markets. In fact, overall, the recent development of large businesses creating their own exchanges has created some pain for several business-to-business e-commerce stocks, namely the e-commerce hosts.

B2B e-commerce technology providers haven't been impacted in quite the same way (although all stocks on Nasdaq have generally been falling, of course). For example, Ariba (Nasdaq: ARBA) and i2 Technologies (Nasdaq: ITWO) will provide the technology platform for the new healthcare exchange being created by J&J and others, so they actually benefit from this development. IBM (NYSE: IBM) does as well. These three companies formed an alliance with the five healthcare exchange founders.

In summary, we're very glad that J&J continues to be innovative, not only in the healthcare industry but in the world of technology, too. We will be watching from behind our computer monitors, cheering for J&J as it enters its third century on top of its game.

Our Next Investment: J&J
Unrelated to the B2B news, we will send our next $100 to J&J again. Last week's Propulsid news sunk J&J's stock, giving us a chance to buy more shares cheaper. Will the stock still go lower from here? Maybe. We don't guess. Either way, we're happy to send money at $70 when a week ago the stock was $80. We'll send our $100 tomorrow, Saturday.

But wait! What's with that $24.47 in cash that the Drip Port is holding? (See the numbers below.) This cash has been there forever! Why not invest it?

Indeed. What HAVE we been thinkin'? Any cash is important cash. A mere dollar invested today could one day launch a whole ship! Meanwhile, we've let our $24.47 in cash get lazy, simply lazy. We're sending most of it, $24.46, to J&J, too. So, tomorrow we will send $124.46 to J&J. We will keep one penny in our cash account, for good luck.

Visit us on the discussion boards linked below to discuss anything you wish. Fool on!

--Jeff Fischer, TMF Jeff on the boards.

Drip Portfolio

3/31/00 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP-3/8$30.75
INTCINTEL CORP15/16$131.94
JNJJOHNSON & JOHNSON-1/2$70.25
MELMELLON FINANCIAL CORP5/16$29.75

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip 2.19% -4.25% 9.00% 15.28% 49.77% 16.28%
S&P 500 .72% -1.89% 9.67% 2.00% 59.63% 19.08%
S&P 500(DA) .72% -1.89% 9.67% 2.00% 62.25% 19.81%
S&P 500(DCA) n/a n/a n/a n/a 32.01% 10.93%
NASDAQ 2.58% -7.86% -2.64% 12.37% 191.34% 49.09%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9722.9859INTC45.653$131.94189.00%
11/14/9713.323JNJ79.310$70.25-11.42%
11/5/9831.5773MEL34.290$29.75-13.24%
4/13/988.269CPB54.401$30.75-43.48%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9722.9859INTC$1,049.37$3,032.70$1,983.33
11/14/9713.323JNJ$1,056.65$935.94($120.70)
11/5/9831.5773MEL$1,082.79$939.42($143.37)
4/13/988.269CPB$449.84$254.27($195.57)
  Cash: $24.47  
  Total: $5,186.81  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.