♪ david: fresh out of west point, he led a platoon of 22 young soldiers. now, he leads 134,000 employees at a company worth over $350 billion -- johnson & johnson. ceo alex gorsky took the helm when the iconic image of j&j was a bit tarnished and made changes to get the company back on track while making the biggest acquisition in the company's history and managing the transition to obamacare. after donald trump was elected president, he sat beside him on his manufacturing counsel, helping to represent a growing health care industry that already accounts for over 17% of the u.s. economy, and he is the first to say his industry has to change.

we sat down with alex gorsky for an extended conversation. alex gorsky, chairman and ceo of johnson & johnson, welcome to "bloomberg big decisions." good to have you here. alex: david, it is great to be here. david: i want to take you back. right now, you run a big company, 134,000 employees. let's go back to 1982. fresh out of west point. you were a lieutenant, had a platoon, 22 young men. they were dependent upon you. and frankly, you were putting them, sometimes, in harm's way. how are you a different leader today than you were at 22? alex: well, hopefully, i have grown, matured a lot. look, what i would say is, starting in the military, you have so much to learn, much like you are when you are a ceo. i think a lesson i learned in the military early on is you have got to earn the right to lead and to be in command. while you may have a rank on your sleeve, that does not immediately bestow upon you the respect and credibility with your soldiers.

so going in very early on in my career, being able to listen to senior noncommissioned officers, being able to be trained by them, in many ways, is very similar to what i had to do at johnson & johnson. when i was at the academy, when i was in the army, it was about duty, honor, making sure that -- you know, we were there for a higher calling, really trying to do our best to protect our country. being able to work for johnson & johnson, with our credo where you have such an explicit commitment, a 75-year commitment around patients, consumers, employees, communities, and shareholders, there was a lot of alignment between those two organizations. david: so you came up through the ranks, i think it is fair to say, at johnson & johnson, but did leave for a time to go to novartis, and then came back. what was the experience of coming back? why did you leave? why do you come back? alex: i left for the same reason many people leave. i had a basic disconnect with the person i was working for at the time. look, there were things that, as i look back on it, i probably would have done differently. and i ended up going to work at

another very good company, one where i learned a lot, very different from johnson & johnson, but one that would definitely help make me a better leader. i always knew i had a strong attachment to johnson & johnson. after some conversations with people and realizing there might be a path back, i took it. i tell you what, i could not be happier. david: when you walked into the job, first day as ceo, did you have an agenda? had you figured this out? alex: for me, it started with having been in the company as long as i was, there was no doubt i had some ideas about what we should be doing, what we could do better. and to be clear, look, the company had an incredible track record of performance, and it, in fact, was making very good progress. so in some ways, the challenge was, how do you take this iconic company, with the reputation of my predecessors, with the kind of performance they had had, and how do you make that even better over time? what is started with was asked

first, we talked about the credo. second was taking some ideas. i think every leader when you come in, you have to listen and make sure you are understanding and engaging. i think you also have a point of view. david: did you get resistance? because one of the challenges for a leader in taking over a successful organization, one with successful reputation, is people say, why do we need change? we are doing just fine. sometimes it is easier to take over one that is failing, because you can make changes easily. alex: of course. i mean there were people that came in -- for example, one of the things we spent a lot of time early on, in talking about my transition, was an evolution from complete decentralization to one where we, frankly, needed to standardize and, in some cases even centralize, certain functions and certain practices. for example, our quality practices, things in our information technology where we had too many different systems. we were neither effective nor efficient. david: we talk about purpose, values -- that sounds great, and

it is wonderful when all those are aligned on one side. as a practical matter, when you are a leader like a ceo, sometimes they don't align that neatly. there are trade-offs that have to be made. they gets trickier. that gets trickier. that gets into the essence of how do you make decisions as a leader? let me give you an example. remicade. a very important and profitable for johnson & johnson. a little long in the tooth. maybe it is coming down a little bit. there are biosimilars out there, where people can have them and pay less money and get them, and yet johnson & johnson resists that. i'm not saying that is wrong, but how do you go through the process of deciding at what point should we be backing off some and letting the biosimilars go forward for the larger good? alex: yeah, well, look, i think that we always want to integrate values and principles into our decision-making. i can tell you it is a magic moment at johnson & johnson when we are making a decision, and somebody makes the comment, "this is a credo decision." because i think it does hit the pause button.

it does make everyone push back from the table little bit and give it closer consideration. now the other interesting and, i think, an important aspect of a credo is it is an "and-and" statement. it does not say take care of parents "or" patients "or" the employees "or" the community and the shareholders, it says "and." inherent to that is a conflict, but what it makes you do is balance those different priorities as you are going through that decision-making process. it makes you reach out and talk to other people, not feeling you will make that decision on your own. and when we do that, we have a much higher probability of getting it right. now as it relates to remicade, look, what i can tell you is that, today, remicade has been one of the most successful products for johnson & johnson. it is used in millions of patients. it was the first antibody. i think we did more than 42 clinical trials in the study. it has been used around the world and in a number of different conditions, and we know from our clinical trials that, over 70% of the time, patients are getting a good result. and what is important is that a

generic is different than a bio-similar. i will be the first one to say, david, generics are good for our industry. you might find that interesting for somebody in pharma to be making that statement, but without that release valve, there is no way that we can continue to provide a reward for long-term innovation in our industry. in the case of remicade, this is a biosimilar. it is not a generic. it is not the exact same product. we worked in this category for a long time. we think relatively minor differences in this protein can manifest themselves clinically with patients and have important differences. so, and we also know that, in addition to the clinical profile, that we are competing with customers as well, so we think remicade remains a really important treatment option for patients. i mean, would they want to be treated, if they are on stable therapy, perhaps already been challenged by switching from other therapies before? and again, we think it is an important option for patients and for physicians.

david: one last thing, and that is opioids. there was a time that johnson & johnson sold them -- no longer, you don't do opioids -- but as a societal issue at this point, at what point do opioids, with all the benefits they offer for pain relief, become thalidomides --and say, you know what, the damage to society overall is too great. we are going to have to find a different way to relieve pain? alex: it is an important issue and it is one, frankly, we will have to work together to solve. it is also to remember the treatment of pain is a very, very important component to overall care. so i think what is critical here is that we put together new rules, new regulations, new guidelines to ensure, ultimately, the patients are getting the treatment they need, but also that we are putting a construct in place to make sure that we limit the kind of abuse that is taking place and, unfortunately, leading to bad outcomes. ♪ david: president trump has been outspoken on this, including the state of the union address,

saying we have got to do something about drug prices. is he wrong? ♪ ♪

david: let's talk about health care in the united states. it is, what, 17% of gdp. it has been increasing as a percentage, not going down. a lot of people think we have a problem. we have to bend the cost curve. are they right, and what can be done? alex: well, absolutely. let's start with the fact of how important health care is. you mentioned almost 17% of the u.s. economy -- and by the way, it is very personal as well. it is going to touch all of us at some point in our lives, our parents, our children, our loved ones. so it will impact every one. that makes it very, very important. i think about health care now. there are a few dynamics in particular that are really challenging. one is this aging population we have. here in the united states, 15% is 65 and older. that number could go as high as 25% over the next 20 and 30 years.

and it is something that we are not only seeing here in the united states, but we are actually seeing it around the world. of course, what happens as you age is that you consume more health care. actually, more than five times the amount you do before your the age of 65. on top of that, we have an increasing middle-class around the world, in china, and other developing markets, too. after they provide for other basics, they are demanding greater access to health care. so all of that is putting a lot of pressure on the system. how do you keep high-quality, innovative health care that really makes a difference, frankly, at an affordable and sustainable price and in that kind of system? and so i think here in the united states, what the good news is is that we are taking action. and whether it was the affordable care act, we will likely see health care reform for the next 50 years, because it is that important, it is that complex, and we need to continue to make changes to the system. that being said, i think the first step that we have accomplished so far is that we

have gotten improved access for people to insurance. frankly, it was unacceptable to have 40 million or 45 million people in this country without access. now that we have got about 25 of those covered through the aca, i think that is good. of course, we have things like additional coverage for young adults, pre-existing conditions, some of those things were taken care of, so those were a lot of good first steps. but now comes the really hard work. and how are we going to make sure we are addressing some of the underlying cost drivers? how do we make this system move towards an outcome or an episode of care based approach for reimbursement? how do we improve some of the other quality measures, taking, again, a more holistic approach that does not lose focus on the patient? david: as an accomplished ceo, something has to give. you can't have everything. one of the things with the affordable care act -- as you say, it accomplished a lot in access -- when we were told everybody is going to have whatever health care they want, more people were going to have it, and it was going to cost less money, that does not add up. you will have to say no to

somebody someplace along the line. where should we be saying "no" to more people? alex: a couple of ways. i think, number one, we need to try to keeping people healthier in the first place. so we have to work on the demand side. and so, we know that so many things that affect us, cardiovascular disease, diabetes, even certain cancers, are significantly impacted by the way we live our lives. and so, if we don't smoke, if we make sure that we drink responsibly, if you watch your diet, if you stay mobile, if you keep moving, that can have a big impact right upfront on a certain condition. number two, we need to make sure that unnecessary care is eliminated. you know, how many diagnostics we do where there is not strong data and evidence to demonstrate that it is really needed, but it could be, in some ways, defensive medicine, or we have a billing system that encourages overutilization? number three, how do we really focus on the area? what other drivers of costs? what about end-of-life care? what about the disease states

that are particularly demanding on the system? and how do we form specialized care units around those to do a better job? i think those are some of the kinds of things we need to do. david: what about pharmaceuticals? it is not a big portion, overall, of health care costs, but it has been driving it up. it grows a lot faster than other costs. why do drugs cost so much? alex: well, it is complex, but what i would say is, overall, pharmaceutical products have been a major contributor to the fact that people have added 30 or 40 years onto lifespans. you know, whether it is cardiovascular disease, oncology, we are living longer, dying later, and we are finding more and more cures every day. and the greatest majority of those improvements can be attributed to pharmaceuticals. and what is important to keep in mind, if you look at overall health care expenditures, pharmaceuticals make up about 14%. and that has been very consistent over the last 20, 10, 5 years. if you look at the rate of increases of that, it has also been pretty consistent. so, and in fact, going forward,

it is an incredibly exciting time, because we are actually moving from just treatments and palliative care to actual cures. things like years to hepatitis c. the promise of even curing something, for example, like hiv. and so keeping that in mind, and not -- unfortunately because of our system today, sometimes the out-of-pocket portion of the payment is borne more and more by the patient. they feel more of that expense. but it is important to put it in perspective's relative to the overall benefit being provided in the overall health care service that is as well. david: president trump has been outspoken on this, including the state of the union address, saying we have got to do something about drug prices. is he wrong? alex: well, look, i can understand the frustration. and we need to do something about drug prices. but we need to do it in a way that, ultimately, does not restrict new innovation, does not restrict appropriate treatments being provided to patients, and, frankly, that also does not restrict

innovation. because if we don't continue to innovate, if we do not find the next breakthrough for alzheimer's disease, if we don't find better treatments and cures for things like type 2 diabetes, the cost of caring and, frankly, the impact on our country on productivity, let alone on families, is going to be dramatic. david: what, if anything, can, should the government do about this? and let's put aside regulation for a moment. alex: i think the first thing we need to do is simplify the system. we have a very complex system, with multiple layers of distributors and other intermediaries. and simplifying that system, i think, is very important, and frankly, some of that is in place based on the regulation that exists. number two, we need greater transparency. the more transparency -- in fact, at johnson & johnson, we issued a transparency report around pricing last year that talked about pricing policies, about the commitment we have going forward, and making sure, that is one of the wonderful things in the web-based world that we live in today, where you can see what are the different

prices available, making sure that we are taking that kind of approach as well is very important. david: what is your approach to the relationship between johnson & johnson and the federal government? let's talk about the federal government specifically. early on, after president trump was elected, he brought ceos in, it felt like every morning, there was some group of ceos meeting in the west wing. in fact, you were one. you were in the council. there was a lot of hope on the part of the business community this is going to be a different president who would work closely with the business community. did that work, in retrospect? alex: well, look, i think it is important for industry to be talking to the government. and i think having a relationship, understanding how important they are as a customer, as a stakeholder, it is critical. i've had the opportunity to work with many presidents in my role in different administrations, and it is only by sharing those ideas, developing an understanding, developing appropriate partnerships in other areas, that i think we can work collaboratively and solve some of these big issues we have been talking about during the interview here today.

and so, look, i would expect that to continue. you know, with this administration, there was a lot of outreach early on. there has been issues that we have had to manage along the way, but, in the end, it is going to be incumbent on all business leaders to try to engage in a positive way to bring about positive change. david: so what happened with the council? i actually was on the air when it sort of dissolved. i mean, we had ken frazier from merck sort of pull out, as i recall, and one or two others, and then actually i think the white house issued an announcement that it has gone away, and then we heard from you and two or three other ceos. it seemed to unravel. what happened, in retrospect? alex: there was a lot going on, and it starts with the fact that there was a realization that events had transpired at the time, frankly, that were unacceptable. i think at that point, there was broad alignment -- by the way, there were several councils actually taking place. there was a manufacturing council, a strategy council -- david: this was in the wake of charlottesville.

alex: this is in the wake of charlottesville. there was a sense that the best thing doing was to dissolve both of them and move forward independently. david: so does that mean you continue to talk with the president, with senior people? as you said, it is important for the government and large business to have some communication back and forth. alex: yes, we continue to have conversations with them. many different, whether it is cms, whether it is the fda, whether it is other regulatory agencies, of course. and for a company like johnson & johnson, given we are the largest health-care company, representing so many different interests, we think it is vital that we state engaged, again, in an appropriate way. david: and does the white house at least listen to advice? let's talk about trade for a second, very much in the news these days. are trade wars good for johnson & johnson? alex: no. we want a trade environment that is collaborative. we operate on a global stage. and making sure that we have reasonable trade guidelines in place -- and it does not mean we should not be revising and updating, particularly given the amount of time, for example, with nafta and other things, but let's make

sure we don't throw the baby out with the bathwater. that we build on some of the constructs, recognizing that these are important partners for us as part of an overall global economy. ♪ david: you have got a very big company here. do ever think about whether it should be broken up? ♪ ♪

david: we talked to you earlier about president trump and drug prices. let's talk about the government in a different way. some specific government policies that have no doubt affected johnson & johnson -- tax cuts. how good were they for johnson & johnson? alex: we think revision of the tax policy is absolutely critical, critical for us to remain competitive. when we think where our tax rate was at 35% versus what you are seeing around the globe at 21%. number one. number two, create an artificial artifact about how you would the point capital. it lead to things like inversions and other behavior that, frankly, i don't think was strategically or in the long-term financially smart. and so to address it, get on it, level the playing field, to make it so that we can be agnostic about where we deploy, i think, is going to encourage investment here and make us more competitive. david: so as ceo of johnson & johnson, how do you decide to deploy that increased cash? alex: we're going to see a couple point move in our favor. and we are actually redeploying that in research and development.

you know, at the end of the day, the most important thing we can do, david, is to innovate, to come up with that next treatment that is going to help patients, and we do that through research and development. last year, for example, we invested $10.5 billion in direct research and development. we deployed about another $35 billion through m&a, which much of that has to do with innovation and bringing new things alive. so having better flexibility, better ability to move that capital around now, i think, is not only good for johnson & johnson, but will also be good for the united states. david: does that include possible acquisitions? you also have a chinese one involving biotech that you made. are you looking for other deals like that to expand your scope? alex: we are constantly looking. in fact, about 50% of the time, we source our innovation externally. and look, we think that is healthy. we think that there are a lot of great ideas. science and technology is happening at a very fast pace. there is no way you can do 100% of that in-house. and so, by building connections, by having the expertise, by

constantly partnering with academic institutions and venture community, other companies, startups, being able to source that early, and then access the great clinical development, regulatory, commercial capabilities of a company like johnson & johnson, that's how you take a neutrogena, that's how you take a remicade, that's how you take a contact lens that literally may be a few million dollars and create billion dollar platforms, and touch billions more patients and consumers. david: johnson & johnson has a really great balance sheet. you have a lot of cash on your balance sheet. at what point do you need to deploy that cash, and can you constructively? alex: well, look, it is great having the kind of fortress balance sheet that we have. to think we have 55 consecutive years of dividend increases, 34 consecutive years of operational eps increases, and still have a aaa credit rating is a very important story, and frankly it is something that we think is evidence of the discipline and the thoughtful way we run the

business. you know, as we look forward, fundamentally, we don't think our strategy will change. we are always looking for new innovation, new technology. we were disciplined about the way that we do it. we use a dcf analysis and we look at the other trade-offs we might have at the particular time. we think that will stay consistent, but again, we no longer have some of the artificial constraints that we had before. david: at what point do you feel like it has to go back to the shareholders? alex: well, the beauty about johnson & johnson and the way we run our business is that we think -- first of all, we want to invest in our business for the long term. and that means things like research and development, that i mentioned earlier, at a very healthy rate that frankly exceeds our competition, making sure we are competitive. number two, it is about the dividend that our shareholders depend on. and we benchmark that, and we know that pensioners and other funds, they look at that very carefully as indicative of their confidence in the business over the long-term. number three, then we look at how do we deploy it through

business development and mergers and acquisitions, but again, we do that in a very disciplined way. and last but not least, if we have gone through all those, then we take a look at things like buybacks. and the beauty about j&j is we can do those things simultaneously for the reasons i mentioned earlier. david: you have got a very big company here. do ever think about whether it should be broken up? alex: look, we challenge ourselves every day. we challenge our business models, our fundamental strategy. we do believe that being a large, diverse health care company is in the best interest of our shareholders and our stakeholders for the long run. david: is it too early for you to have some sense of what you would like to leave behind when, i'm sure many years from now, you move on? alex: i think it is way too early. [laughter] look, i think the worst thing a ceo can do too early on is try to say what your legacy will be. i think it is important to basically roll up your sleeves, get in, and try to make a difference. but in the long run, i know that my scorecard, ultimately, my legacy, will be determined by how did i do in living up to the

values set forth in the credo. david: thank you so much. terrific. alex: it is great having you guys here. ♪

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