Healthcare conglomerate Johnson & Johnson (NYSE:JNJ) is about as steady as they come for investors. Its more than 250 subsidiaries and three primary operating segments -- consumer health products, medical devices, and pharmaceuticals -- each come together to form one perfect puzzle for J&J, which has allowed the company to increase its dividend for 54 straight years.
However, an oft-overlooked key to success at Johnson & Johnson is the company's cohesive management team. Little change at the top (J&J has had just nine CEOs since it was founded 121 years ago) means the company's growth strategy and the vision of leadership is executed to a "T." Current CEO Alex Gorsky has done a fine job of navigating the waters at J&J since taking over the reins on April 26, 2012. J&J's share price has risen by 91% with Gorsky at the helm.
Gorsky is also no stranger to transparency. Gorsky's presentation at the "Super Bowl" of healthcare conferences, the J.P. Morgan Healthcare Conference held in January, is often given in more of a fireside-chat context. In addition, Gorsky and his team recently released information on its drug-pricing practices, which showed a 3.5% net hike in drug prices during 2016, including the discounts and rebates that were passed along to insurers and/or consumers. Gorsky's transparency is an underappreciated reason J&J is such a success.
Johnson & Johnson's CEO is a critic of Trump's healthcare proposals
But Gorsky's transparency is a two-way street. Whereas he's often divvying out praise to J&J's various operating segments, Gorsky isn't afraid to criticize regulators when he sees a potential problem.
Earlier this week, Gorsky spoke with CNBC from the China Development forum in Beijing, and he was quite critical of the new healthcare legislation working its way through Washington -- namely, the American Health Care Act (AHCA).
"Whether you take the new plan [AHCA], the old plan [Obamacare], we are going to have to make changes," said Gorsky. He further added, "The challenges are that we still have a lot of other issues to take care of how we are going to make sure that we continue to make some of the important improvements to healthcare, from a quality, from an affordability, and from a sustainability point of view."
This concern may stem from the initial proposal in the AHCA that called for substantial reforms to Medicaid, the program designed to provide health insurance to low-income individuals and families. The AHCA would end the Medicaid expansion that 31 states took advantage of under Obamacare by the beginning of 2020, and it would divvy out Medicaid funds to states on a per-capita basis. The expected result is millions of low-income Americans losing access to covered medical care.
And that wasn't the end of Gorsky's criticisms of the Trump administration. In particular, Gorsky implied that President Trump could be completely missing the point when it comes to drug-price reforms.
"Healthcare or pharmaceuticals only represent about 10% to 15% of overall healthcare spend," said Gorsky. He further added that it's "much broader than just a pharmaceutical issue." This statement stems from Trump's desire to add drug-price reform legislation to the AHCA that would require a type of bidding process for drugs in order to bring their price down. Gorsky's implication is that keeping as many people insured as possible should be the administration's top focus, not drug price reform.
Why targeting drugmakers could backfire
To some consumers and investors, Gorsky's point might seem like greed at its finest. Let's face it -- quite a few drug companies have been caught with their hand in the cookie jar recently.
For instance, Valeant Pharmaceuticals (NYSE:BHC) came under fire following its February 2015 purchase of cardiovascular drugs Nitropress and Isuprel from Marathon Pharmaceuticals. Almost immediately after the acquisition, Valeant hiked the list price of both mature drugs by 525% and 212%, respectively, in spite of no formulation or manufacturing changes to either drug. Valeant's now-former CEO, J. Michael Pearson, admitted Valeant's pricing "mistakes" in front of a Senate committee last year.
Similar pricing faux pas have occurred at the aforementioned Marathon Pharmaceuticals, as well as with Mylan and its anaphylaxis injection EpiPen.
Then again, Gorsky could be making a valid point that drugmakers need reasonable pricing power to fuel their research and expansion into emerging markets. Creating a bidding process and/or significantly driving down drug prices could wind up backfiring for the Trump administration.
For example, when drug developers like Johnson & Johnson price a drug, they do so with the expectation that they'll recoup the costs it took to develop that drug. But, a drugmaker isn't just looking to cover its costs for a single approved drug. It's aiming to cover its expense for the dozens, hundreds, or thousands of discovery-stage, lab-based, preclinical, or clinical studies that didn't make it to pharmacy shelves. Reducing drug prices could discourage pharmaceutical innovation, especially when it comes to orphan-disease indications.
Another potential problem is what drug-price curbs might do to drugmakers' desires to operate in emerging market countries. It's no secret that juicy drug margins in the U.S. help to subsidize often unprofitable ventures in underdeveloped and emerging parts of the world. If those margins shrink considerably, then drugmakers could be less inclined to offer potentially life-saving medicines at a loss in emerging-market countries.
In other words, there are a number of inherent advantages that domestic drugmakers enjoy that could make altering the current pricing environment difficult. Likewise, Republican lawmakers typically favor free-market enterprise, meaning added intervention from the federal government may not be something they'll be inclined to support.
Trump seems inclined to continue pushing for drug-price reforms, but don't be surprised if the industry, or his own party, pushes back.
Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson and Johnson and Valeant Pharmaceuticals. It also recommends Mylan. The Motley Fool has a disclosure policy.