A Conversation with Johnson & Johnson CFO Joe Wolk

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Text, Wednesdays With Woodward (registered trademark) Webinar Series. Joan Woodward in a video window in the upper right corner.

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JOAN WOODWARD: Good afternoon. And thank you for joining us. I'm Joan Woodward and I'm honored to lead the Travelers Institute, which is the public policy division and thought leadership platform at Travelers. Welcome to Wednesdays with Woodward, a webinar series where we convene leading experts for conversations about some of today's biggest challenges, and there are many of them, as we all know.

So, before we get started, I'd like to share our disclaimer about today's session.

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Text, about Travelers Institute, registered trademark, Webinars. The Wednesdays With Woodward, registered trademark, educational webinar series is presented by the Travelers Institute, the public policy division of Travelers. This program is offered for informational and educational purposes only. You should consult with your financial, legal, insurance or other advisers about any practices suggested by this program. Please note that this session is being recorded and may be used as Travelers deems appropriate.

Slide, Wednesdays With Woodward, registered trademark, Webinar Series, A Conversation with Johnson & Johnson CFO Joe Wolk. Logos of co-hosting organizations, Metro Hartford Alliance and Travelers Institute, Travelers

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Today we're getting insights from a senior leader at Johnson & Johnson, a company that needs no introduction, a 135-year-old business and the largest healthcare company in the world. If you joined us last year, you know that we had the honor of hosting a Johnson & Johnson board member twice on this program. Dr. Mark McClellan, a former FDA commissioner for President Bush, helped us understand the state of the pandemic and the development of COVID vaccines. And we were thrilled to have him on this program.

Our conversation today is going to give us a different perspective, specifically how a company at the forefront of the global pandemic response is navigating evolving marketplace dynamics and balancing short-term and long-term thinking, critically important.

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Photos and text, Speakers, Joan Woodward, Executive Vice President, Public Policy, President, Travelers Institute; Travelers. Joe Wolk, Executive Vice President and Chief Financial Officer Johnson & Johnson

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Perhaps there's no better person positioned to give us this view than our guest today. Joe Wolk is the Executive Vice President and Chief Financial Officer at Johnson & Johnson. Joe plays an integral role in the overall management of the company, and specifically leading the development and execution of a global, long-term financial strategy.

Joe has served in a number of roles across J&J over the past 23 years, from Vice President of Investor Relations to Vice President of Finance for the medical devices global supply chain, something we talk a lot about these days, supply chain. It really gave him a broad perspective of the company's operations. He's also going to give us insights today as to how effectively he leads a team of 9,000 and communicates with shareholders among uncertainty in the world. So, Joe, thank you so much for joining us today. We're really thrilled to have you.

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Joan and Joe share the screen.

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JOE WOLK: Oh, thank you, Joan. It's such a pleasure to be here with everyone today. And certainly, thanks for your interest. I'd certainly be remiss if I didn't start by applauding your Travelers series, which clearly has been successful. But I think there's the valuable service that your business listeners get from this podcast, from these podcasts, it's particularly important when there's so much ambiguity in the world to hear different opinions, diverse thought and perspectives as to how people approach problems and ambiguity. I think that really adds a special element of importance.

JOAN WOODWARD: Well, thank you, Joe. We really appreciate that. And, as I said many times on this show, we had no idea if people will show up to these sessions. And I guess the old baseball adage, if you build it, they will come. And so, when we built it, and having guests like you really just elevates the level of thought leadership for our clients, customers, agents, and brokers. So again, thank you for being here.

So, before we dive into the business outlook or the pandemic, I really want to start our conversation today with you on a personal journey at J&J. So I've heard many times from our listeners on these webinars that these sessions are really valuable when they hear about leadership strategies, right, for their own businesses and how they might be able to implement those leadership strategies in their business.

So let's start with your career and your leadership style. So, 23 years, that's very impressive, and nearly four years now as CFO. Talk to us about the value of growing within a company for so long and what you think young people today--we know people are jumping jobs constantly and the Great Resignation we hear about. But what's the value of staying within the same company and growing with it?

JOE WOLK: Yes, and Joan, I think the way I'd have to start by answering that was first, I never thought when I joined the company 23 years ago that I'd be fortunate enough to represent the company in this way that I am today. But in some ways, I guess like many things in life, I think this role, maybe my time at Johnson & Johnson has found me. I have actually been linked to healthcare and the company well before I started even my grade school years, going back that far.

My mother was a nurse for 40 years right here down the street in New Brunswick, New Jersey from Johnson & Johnson's headquarters. So, she spent 40 years there and gave me a sense of just how important a component that can be, particularly when people are sick. You don't realize it. We all think we're invincible at different points of our life. But having good healthcare and people who are attentive to the needs when they're probably at their most vulnerable is particularly important.

But maybe to further amplify that, my dad actually spent 25 years at Johnson & Johnson, retired from the company. He started on the factory floors. And towards the end of his career, he had a job in the office. It was called a sales order clerk back in the day.

And I think what I took from him, as much as anything, was certainly the pride he took in working for Johnson & Johnson, but the quality of people that he worked with. Those weren't just colleagues or associates or coworkers. They, in many cases, became friends.

And so, growing up as a kid in Central Jersey back in those days, if you threw a rock in any direction, you were likely going to hit a Johnson & Johnson facility. And so, you would go to a little league game or you'd go to religious services on the weekend and you'd run into somebody that my dad worked with. And it just gave me a very good feeling about the company.

And when I left my previous employer, I was looking for that same sense of belonging, if you will. And little did I know, it would actually be Johnson & Johnson the way my dad had it. You know, right? I mean, it's very rarely, Joan, that I speak with anyone from a company that's been around longer than Johnson & Johnson. But Travelers has mastered that. I think you guys have been around since '64, 1864.

And while you have positions, like you mentioned in the opening, of supply chain, investor relations, medical devices, those provide great growth and great learning. But to me, what's been consistent, and I suspect will stay with me long after I retire, is really the quality of people at Johnson & Johnson and really the credo experience. And for those that aren't familiar with the credo at Johnson & Johnson, it was penned by Robert Wood Johnson more than 78 years ago.

I know Travelers has a very similar mission about taking care of customers, community, and each other. It's very much in that same spirit. It's four simple paragraphs. The first paragraph relates to our customers, our patients, the doctors and nurses, those people who rely on our products. The next is about employees. The third paragraph is about the communities and giving back. And then lastly, it's about shareholders.

And in my mind, there's a lot of conversation about corporate responsibility, ESG. And many, many times, I'm heard saying, we were ESG well before it became fashionable. And I think that's something that as I look today and think about how does that have relevance, working with high-quality people who challenge you, who are respectful, much like you probably see at Travelers, it means something. It adds to the content of the job that you have in front of you.

JOAN WOODWARD: You said so many things I'd like to comment on. And just in particular on ESG issues, we were doing it before it was cool, right? I mean, I know it was embedded in your culture. It's embedded in our culture.

And it's just a matter of making sure investors understand that this is not window dressing for us. We've been doing this a very, very long time. And it's embedded in our DNA. And I love the way you said we take care of our customers, communities, and each other. And that is our credo. So, thank you for that.

JOE WOLK: Well, it's funny you should say that, Joan, because one of the things that we've tried to illuminate here is the financials are really the result. It's kind of the scoreboard at the end of the game. If you do those other things well, it's not a matter of just saying, hey, we've done those. It's actually very, very good business. And if you do them well, you have the chance to lead your industry, your peer set.

JOAN WOODWARD: Completely agree. OK, so let's talk a little bit more about you personally. So how do you define your leadership style? You've built many teams and you've had a number of experiences integrating various teams through M&A, of course. We all have those challenges. So, what is it like to integrate teams versus building a team from scratch?

JOE WOLK: Yeah, I don't know that it's all that different. There's a different situation that you walk into, clearly. And what I'd say here, it's not really a revelation, but building future leadership and leadership talent is probably the most single important task that I consider in the roles that I've recently had.

Like everyone on this session today, we've all had the opportunity to learn from some really great managers, people you want to emulate. And you probably have one or two that maybe you don't want to emulate, but you can still learn from those as well. And I found that the most constant or consistent way to approach it is really about communication.

My dad used to say you have two ears and one mouth for a reason. And I think listening is part of that communication, because while you have a team and you have to set a path forward and a vision, particularly when times are uncertain, you have to listen to the individuals and what they're telling you, not simply you giving them feedback, but embracing the feedback as to how you may be able to get more out of yourself or how you might be able to inspire them for better levels of success, aspirational attainment. I do think that the dialogue being a two-way street is critically important.

There's also the, I'd say, an individual element to top leadership that I've observed in my career beyond the obvious traits of accountability, curiosity, results driven. And that's, I think, experiencing those situations where your success isn't guaranteed--Joan, in preparation for today's conversation, I did Google you. And I did come across a video clip where you encouraged people to take a risk on yourself. And I thought that was such poignant advice.

You explained where you had left government, what you knew real well for, correct me if I'm wrong, but about 12 years, and went into something completely foreign. It was really a great story that took courage on your part. And I likened it very much to some of the best assignments that I've had throughout my career, ones that I didn't plan out as I was charting my career, the ones that I woke up and looked in the mirror for those first couple of months and said, what am I doing here? Those are the ones that are most rewarding.

As you pointed out, you have to have an inner confidence when you approach a role like that. You're not going to know everything day one. And then you need balanced humility when somebody tells you, yeah, you could have done this a little bit better, right? But as that cycle of success continues to emerge, your confidence grows. And that enables you, I believe, to really handle anything that may come your way.

We recently had, I guess a regrettable loss in some respects, had somebody from my team leave, but to be a Fortune 500 CFO somewhere else. And the question she asked me is, well, what should I do? And how should I prepare for this?

And I'm like, this is one of these jobs where you prepare your whole life for the role, but you can't be perfectly prepared for it. It really requires drawing upon experiences and drawing parallels to new situations where you're in solution mode. You're in problem-solving mode, because teams really rally around that.

But one of the things that I think is critically important, to lead a team is something you need to experience individually. And that's really stretching, stretching yourself so that you have the acuity to stretch other people to know when they're ready for something that maybe is even beyond what they believe they can do, and then showing the confidence and the mentorship that goes along with that challenge to them.

JOAN WOODWARD: Well said. I don't know where to start. I'm completely blushing here that you googled me and found my video about taking risk on yourself. But it is true. And I want to ask you, because no one could have ever imagined this global pandemic, right? And one day you're sitting in your office as the CFO of a very successful healthcare company. It's mid-March.

And you realize after a few days, and certainly after a few weeks, this is a huge global, completely upended all of your plans, whatever financial plans you had, whatever strategic plans you had. How did you adapt your leadership style to lead your team through a pandemic?

JOE WOLK: Boy, that's a good question. The most important lesson, I think, that I took from it was doubling down on the concept of knowing who you are. So, let me take that in the context of Johnson & Johnson. There was uncertainty all over the place. People were pulling guidance, particularly in the healthcare market, where a large part of our business is medical devices, serving hospitals.

Hospitals were closing down in mid-March and saying the only thing we're going to treat is COVID. Forget about knee surgeries or back surgeries or very important procedures that actually need to go on. And so much credit to healthcare workers and hospital administrators throughout the pandemic to be able to adjust so that these important procedures that, as we all have really come to learn over the last 24 months, how important just baseline good health is. They've done a tremendous job.

So we walked into that situation. It was mid-March. We reported earnings mid-April. And we see left and right on a daily basis, our competitors are pulling out guidance. They're kind of saying that we don't know, we'll get back to you.

And that was clearly an option for us. And I can tell you at the time, Alex Gorsky, our CEO, and I, we were on the different side of that coin with each other for about a week and a half leading up to the earnings date. But we finally came to the conclusion, as the world's largest healthcare company, as at that point a company that had declared a vaccine candidate, if we showed up as who we are and shrugged our shoulders and said, well, damned if we know, we thought that was very unsettling for a lot of reasons.

So, we did provide guidance. And we did it in a way that was very transparent with the investor community and just saying, here's what we know and here's what we don't know. And we'll adjust as time goes on. The one thing in finance that I've come to learn, probably many, many years ago, is that the only thing I know about a forecast on a piece of paper is it's 100% precisely wrong. And so, this time was no different. It's just the degree of variability was a lot more than we cared for.

There were other examples of how we knew who we were, right? At the time, there was a lot of economic uncertainty for individual families. We were known, much like Travelers, as a dividend-paying company, and not just a dividend-paying company, but one that increases dividends annually.

We didn't waver from that in April. We paid our dividend. We increased it even a little bit more than the prior year. And certainly, that was, I think, fortifying or reassuring for our large institutional investors. But really, what went in my mind into that decision was that the retirement couple that had shares of J&J from long ago that were counting on that income. And how they were going to get through this uncertainty, I just thought we had a responsibility to them.

And then lastly, we invested for the long term. Johnson & Johnson has been around for 140 years, much like Travelers, because we don't manage quarter-to-quarter. We manage for the long term. And the best thing we could do is continue to innovate in the space of health care, where there's so many unmet needs. So, we actually increased our R&D investment during that year and actually the subsequent years to make sure that while this would be passing, we weren't putting at risk '24, '28, and 2030 down the road.

JOAN WOODWARD: Wow, it's really, really impressive, the decision making. As you say, you talk about what you know and what you don't know. And it's just fascinating to hear behind the scenes what you guys were thinking in March of 2020.

I going to shift gears a little bit. We want to talk about something that's really across the board--every single company, every single mom and pop small business, large agency broker, small teams--that's company culture. So, company culture to us at Travelers is we just think--I mean, we think everything about our culture.

And I want to hear about how you talk to your remote employees, people that are sitting at home like myself working. And a lot of people think they're working more while they're home. But how do you maintain that company culture--our CEO, Alan Schnitzer, calls it the pixie dust at Travelers--with working with your remote teams? What is your secret sauce there?

JOE WOLK: Yeah, to be honest and candid with you, Joan, I don't know that we figured it out quite yet. You heard in the opening question how much I valued, or my dad valued as well, seeing people on the weekend who become his friends that he works with. I do think there is something that lends itself to a culture that has the opportunity to interact in person.

I'm probably old school in this way, but it's really hard to read a room over Zoom. It just simply isn't the same. And I could think of countless times when I would walk through the cafeteria or walk through the hall and you'd start by saying, how was your weekend? What's new with your family?

And it would lead to a business conversation. And those business conversations, you tended to find out more about the business than any 20 PowerPoint slide deck that you might have been delivered in your email the night before. And so, I do think that communication is enhanced by the personal interaction.

But it's also, I think, the key with us gravitating towards remote policies. And we've instituted one here at J&J in terms of a flex policy, where you're going to have to communicate more. I don't know that because you can't read the room, and even if that's a one-on-one conversation, you might have to say things a few more times. You may have to get creative.

I know our communications team really gave me a stretch assignment by having me do TikTok videos to communicate financial results and things that were very, very much out of character, if you knew me, for me. But it created a human element, I think, to leadership, that people were able to see into somebody's home. And they saw the dog barking. Or the same struggles that people had, there was a, I think, a redeeming feature in the whole we have to work from home together.

Again, I think we've got to find that right balance. I don't know that any company has. Maybe Travelers has. I don't know, maybe I should ask you. But right now, I think we're still trying to find the right balance as to what works.

I also think being an innovation company, innovation is usually the result of iterative ideas being exchanged back and forth. That tends not to happen at the end of the Zoom call. Hey, let's just stick around and riff for 20 minutes. That doesn't happen. We all go to the next Zoom call. And I do believe something's lost there.

But we're trying to work through it, just like every other company, trying to find that right balance. As you've acknowledged, there is a culture to Travelers. There's one that's very, very similar at J&J, I suspect. And that's important to our overall success, both tangibly and intangibly.

JOAN WOODWARD: Well said. I completely agree. One more question for you on the people side of the business, and then we're going to get to the business and talk about your pandemic response and vaccine outlooks. So, in this world of remote and culture and uncertainty, how are you guys retaining and attracting talent? Because this is a huge issue for the insurance industry, attracting and retaining talent and motivating people to come into your company. So how have you done that throughout the pandemic or just generally?

JOE WOLK: Yeah, I think it may be different by generation. But I do suspect there's some constants. The first, which is--I think it's highlighted much more today with younger generations, but I think it's always been critically important, and that's does your company have a purpose that really resonates with the individual you're trying to attract or trying to retain? Is it in touch with the world? And that gets really hard to do these days. As we know, most things have been divided across, I'll say political alliances, whatever that may be.

But I also think, too, if I remember for years now, the reason people would leave the companies more than anything else is they weren't being supported by their manager. I think managers play such a key role. And that comes back to communications, that we'll take extra effort and extra reach out to understand what's going on in that individual's lives.

And that extra effort might not produce an immediate gratification, immediate return that we're used to and when we look at somebody's eye. But reaching out to hear what's on their mind, what they're struggling, listening to their ideas as well as their struggles, I think, is critically important, and then offering perspectives where you can, where you're credible. I, as somebody closer to the end of my career, probably is not going to have a very meaningful suggestion to somebody who is in their 20s with their second kid and they've got to worry about daycare.

It's a different situation. And appreciating that situation, that maybe I was there at one point in time, but I'm not there today. You can't assume you know exactly what they're going through. So again, it gets back to that idea of listening, hoping to understand, and then offering an opinion when you have one that's actually credible and well-founded.

JOAN WOODWARD: Again, very well said. And so, during the pandemic time, did J&J expand their staff? Were you able to hire more people? Obviously, you need a lot more hands on deck just going through this period, right?

JOE WOLK: Yeah, we were. I would say, we never laid off people due to the pandemic. We took great pride in that. It kind of goes back to the certainty and the financial wherewithal you built up over decades of time, almost akin to the dividend policy.

We probably increased our headcount over the last 18 months by close to 6,000 people. So, the business continued to go on. It continued to grow. Some of that it was aided by acquisitions. And we've got different things on the horizon that requires a lot of work. So, I don't see that necessarily going down any time soon.

JOAN WOODWARD: Great, that's wonderful. OK, now we're going to talk about the pandemic, vaccines, the outlook. The eyes of the world were on you, right, in March, April in 2020. At a high level, tell us what it's like developing a vaccine during the pandemic in record time, and then working with the government.

Obviously, we had Operation Warp Speed. And a lot of people don't watch every day how drugs get developed and go through the FDA approval process. But tell us, was it a different process, obviously, getting the Emergency Use Authorization, and then the government asking you to premanufacture and stockpile, right, hundreds of millions of doses before that approval even came out? So, what was going to happen if you didn't get approved? And what was all the vials sitting in a warehouse--tell us that whole process of working with the government through a pandemic, if you can. I know we only have a few minutes, but--

JOE WOLK: Well, listen, I think it's important--our goal at the outset of the pandemic was to contribute our scientific capabilities, certainly, and our resources as well. And everybody jumps immediately to the vaccine. But I think somewhat the essence of J&J is really before we even had a vaccine candidate, where within those first couple days that people had learned about the COVID-19 outbreak in China, we donated almost $4 million of personal protective equipment to healthcare workers, with additional suits and masks and goggles.

We were able to marshal our procurement organization. And for an organization that has $60 billion in resources deployed every year, we had some wherewithal to garner those quickly and then send them out voluntarily, donatable to hospitals around the world. We knew that while the pandemic was hopefully a point-in-time issue, that the long-term health of our overall business, whether it be pharmaceutical, medical device, or consumer, was really trying to get the pandemic behind us.

So, we also invested in nursing programs, which Johnson & Johnson has been a long sponsor of. And we did all those things before the vaccine became fashionable, or, I'd say, in the mainstream media as much as it has, whether it be Pfizer or Moderna or ourselves. Working with the government was, I would say, it had its challenges. But one thing I will say that was tremendously encouraging and something that I think we can take forward is working with the government and working with others in our industry, our competitors, if you will, to bring great science, data sharing, analytics to help address the problem.

The difficulties in government were simply because the government deals by a different business construct than what we do in private industry. It's not as if people were being obstinate or there was conflicts just because there was conflicts. It's really about those lines of communication.

The at-risk funding really wasn't much of a question. Even before the government got involved, I recall our great Chief Scientific Officer, Paul Stoffels, being a little bit concerned by the cost. And it was very easy, because Paul taught me during the Ebola crisis, J&J sometimes has responsibility that goes beyond that fourth paragraph for shareholders. And this was one of those times.

And so, we didn't think too much about it. I don't want to suggest we were careless with our funds, but we knew that the sooner the pandemic ended, the likelihood it was better for all of our businesses, as well as the global economy. That has to play better than what was going to be a couple hundred million dollars that was potentially at risk.

Emergency Use Authorization was done. I think people might infer that suggests there wasn't some degree of standards and diligence done. It was very much subject to safety standards and efficacy standards and things that are always important when you approve a drug candidate. So, nobody should leave this call thinking that corners were cut or lines--T's weren't crossed and I's weren't dotted along the way. We wanted to make sure that this was going to be safe and effective as well.

JOAN WOODWARD: Great. So, what actually does it mean that you provided the vaccine on a non-for-profit basis? So why would a for-profit company decide to do that in terms of the nonprofit side of the vaccine development?

JOE WOLK: So, Joan, you could be CFO of Johnson & Johnson, because I asked the same question when that was proposed. I was like whoa. Well, listen, again, here's what it meant to us, getting the pandemic behind us, and again, the global economy.

The one thing when you're in healthcare is just the overall cost of healthcare and access to great medicines. We wanted to take that variable and that rhetoric, quite frankly, out of the equation. We knew it was important that if we should develop an efficacious vaccine that people weren't going to get hung up on how much it was going to cost them. They would be encouraged by the science and the ability to bring the pandemic to an endemic state, which hopefully we're on the cusp of doing. It's hard to say.

There's people like a Mark McClellan, who are much more well-versed to answer that question for you. But we're all hopeful there's a light at the end of the tunnel. And that was really our focus. There's a lot of scrutiny around pharmaceutical pricing these days. And I believe we've got great medicines and very important disease states, like oncology and immunology and pulmonary hypertension.

It does no one any good if we've got the best products out there, but nobody can afford them. So, we've taken a very responsible approach to pricing across our entire portfolio. But that was really the genesis of why we thought coming out with not-for-profit was important, just to eliminate that as a concern for government authorities around the world, as well as patients who may be using our product.

JOAN WOODWARD: Talk a little bit more about pricing, because you have a broad approach to responsible pricing. You just told us that you invested, I think, $800 million in research during the pandemic beyond what you were going to already invest in. But the pendulum between investing in research and how long it takes to develop drugs versus the actual consumer pricing of it--and this, of course, as you know, is debated in Congress all the time. You hear lots of commercials on TV. So, give us your view of pricing and transparency.

JOE WOLK: Yeah. I'll get a little bit on a soapbox here. Unfortunately, the rhetoric grabs the headlines. And people look at list price. That is, quite frankly, the wrong thing to look at. I can tell you, we've had, in our pharmaceutical segment, 10 years of above-market growth.

Over the last six years, our price has actually been negative. So, we're offering more discounts and rebates to private insurers for healthcare middlemen, so to speak. And, unfortunately, that's not necessarily being passed on to the consumers.

We're very empathetic of that retirement couple that I mentioned earlier who relies on our dividend, that they're walking into a pharmacy, perhaps for a chronic med, on a monthly basis. And where they used to pay $10, maybe $15 in copay five or six years ago, are now paying $75 to $100 a month. We think that needs to be addressed. And we advocate for those types of reforms on Capitol Hill.

But again, it gets back to the principle. We need to make sure that the great medicines we have are affordable for individuals, as well as for healthcare systems. We tried to take it from a cost value perspective.

So, we look at what's out there maybe in the space we're competing in, making sure we've got the scientific integrity and data to support that this product is better. It leads to a better outcome for a patient, longer life, longer quality of life. And if we meet those standards, that's when we forge ahead and actually launch a product. If we're going to be a me too category, we're likely not to enter that market at Johnson & Johnson.

And then it's about the value of care. I think we look at products, in this case a drug product, a pill, or an injection, and say, well, look at the cost of that. But if you don't get that pill or product, the cost to the healthcare system could be 20, 30, 100 times that with hospital care or at-home care. There's a much broader cost that I don't know that anybody's done a great job in terms of reining that in and defining the economic model around good healthcare. But I do believe that therapeutics, procedures are instrumental in bringing down the overall cost of healthcare, irrespective of what we're doing with, let's say, list price or net price.

JOAN WOODWARD: Great. And how did you--you talked about the hospitals kind of shutting down or only treating COVID patients. And so those surgeries, the knee replacement, the using all the medical devices that were sitting on your shelves, and, all of a sudden, hospitals were not doing these procedures--so how did you pivot there? Obviously, you spent a lot of time in the medical device supply chain area as CFO there. Tell us about supply chain. And talk to us about how you view--are those procedures all coming back now or still there's a hesitancy on some of the maybe elective procedures still going on in the US?

JOE WOLK: Yeah, our forecasts and the guidance that we issued last week assumes they'll come back. I think what we're seeing now in hospital systems, and it's in the news a lot, is really the staffing shortages. So, these people who have done a tremendous job, like nurses and doctors and administrators, over the last 24 months quite frankly have hit fatigue levels. And we've heard reports, and we're in constant contact with these hospital administrators and have been during the pandemic.

And a lot of credit to Ashley McEvoy, Alex Gorsky, Joaquin Duato. During this time, we reached out to these leaders of these hospital systems. And while we certainly wanted to know, hey, how's business, that was secondary to how can we help? Right, what can we do?

And that's how we had some of the ideas for nursing program funding and PPE and the like. I do think if you look at just the demographics of our population, and this is pretty much around the world, we've got people are living longer. Getting a knee procedure at the age of late 70s is probably not something that even a patient might have invested in 20 years ago. Now they say, I have another 15, 20 years, and why not right? And you want to create that mobility, because that mobility will lead to even greater health for that individual.

So, I think there will be--there is a backlog that's been built. We're seeing that through some of our analytics around diagnostic procedures, that they still are growing relative to even 2019 levels. It's really the opportunity to perform those procedures.

With respect to inventory levels and things you suggested, we did scale back in terms of our manufacturing. Where we could responsibly close facilities we would, knowing that demand would be a little bit softer with the ability to ramp back up. We didn't have to do that for all that long, simply because the, again, the hospitals just did a great job going from COVID only to within a matter of weeks to saying no, everything else is important. It's important for their economic model, but it's also important for a good global health.

JOAN WOODWARD: Great. Great. All right, folks out there in the audience, we would love to take your questions. So please do put them in the Q&A feature at the bottom middle of your screen there. And I have a couple more, Joe, and then we'll get to some audience questions.

But I want you to talk about the phrase "the Freshness Index." So, I love this. You talk about it as a measure of J&J's success. Explain what it means to you and why it's important for a sustainable business.

JOE WOLK: Yeah, I think that's the key, right? It's a sustainable business. So, whether you're in healthcare or any other industry, you have to react to what the customer wants. You have to react to addressing unmet needs. We think about it in terms of illnesses. But it could be anywhere.

And the Freshness Index is very simply the amount of revenue that we garner in our total composition of revenue that has been launched in the last five years or so with a new product. And we think if that gravitates to being a quarter to a third of our portfolio, where we're constantly turning over, that could lead-- that should lead to a sustainable business. There will be points in time where that's lower or much higher. But we think that's a good cadence to be in.

And it also is a pretty good indication of what you mentioned earlier, Joan, with respect to the amount we invest in research and development. So, in 2021, you're right, in 2020 we invested almost $1 billion more, $800 million more in a period of uncertainty. That was important for employees to say, OK, these folks aren't going anywhere quickly.

In 2021, where you could argue there was still some uncertainty, although much less, we spent $2 billion more. So, we're up to a $15 billion research and development budget. I think a real good sign as to whether we're getting a return on that is the Freshness Index projections, as well as the expected net present value of that portfolio, because the investments we're making today, and you alluded to this earlier, it takes a long time to get, in most cases, a drug or a therapeutic or a medical device approved. It could take anywhere from 5 to 10 years.

And so, when we make these investments of $15 billion in 2021, it's likely that's benefiting the second half of this decade, which will be important for 2030 and beyond. So that's how we look at it. And so, you're going to have some risks because of the uncertainty with the duration of time until you experience a return. But it is, I think, a really good challenge and a novel way for folks to look at somewhat of a financial metric in a more qualitative fashion. Are we being innovative? Are we pushing the envelope where we've got a skill or an expertise to do so?

JOAN WOODWARD: OK, I'm going to take a couple of audience questions, because we have a number coming in. So, this one is from Bruno Sardinhia. And it's along the same lines of what you're talking about. So, let me read this question.

How does J&J measure success around innovation initiatives? So new product solutions, capabilities. Is it entirely based on financial metrics, ROI? Or are there other nonfinancial key results considered? And can you give us a couple of examples of that?

JOE WOLK: Yeah. Thanks for the question, Bruno. I do think a lot of it relates to ROI. Certainly, as a finance person, I'm going to advocate for that any time I can. We also look at the expected net present value of the entire portfolio. Is that investment that we've made over the last couple of years, is that generating increased projected value for the business going forward?

The other thing I would say we look at is, specifically in pharmaceuticals, is are we creating platforms for success? So sometimes you can address a specific disease state or disease specifically. But is there something in the genetic code or the cell or genes that could lead you to many more disease states? And being experts in platform and how diseases are cured and understanding the DNA, the physiology, the biology is really where our scientists, I think, have not only a core capability, but a competitive advantage with respect to those capabilities.

It's not going to get easier. I think it's actually going to get harder to compete, because data analytics and data science are allowing us to view these things at very rapid speeds, where we'll be able to be very selective in even who we put into clinical trials. That could lead to a condensing of the development timelines. We hope to see that. But that's one of the ways we look at measuring for success.

The other one is very simply, Bruno, we have an aspiration for the platforms that we're in. We want to be number one or number two in the markets in which we compete. That's, I think, emblematic of not only competitiveness, but also innovation. You're meeting the needs of those customers, no matter what segment they happen to be in.

JOAN WOODWARD: Wonderful. Great, we have a Innovation Council here at Travelers. And it has just grown exponentially. And we think about innovation not just for insurance products, but our legal team has innovation around how they do contracting now, our cafeteria team. We have these innovation jams where people stay up all night and we pretend we're in college and just working on teams to get that innovative juice flowing.

And we've had some really amazing results and new patents because of it. It's very exciting. I mean, insurance, as you know in healthcare, sometimes these industries aren't as exciting for young people to come to. They'd rather go to a high-tech startup than potentially working on a Fortune 30 company sometimes.

But there is innovation in-house. And I love the fact that you say that most of your products are because of innovation. And what would you say, every couple of years, you want to make sure a certain percent of your revenue is through innovation. So OK.

JOE WOLK: Actually, Joan, you make a great point. I was much too singularly focused in my answer, because there can be and there should be innovation in human resources, finance, legal. That's the one, and I know, Bruno, to get to your question, that's really hard to measure. I wish we could get a little bit more granular with that.

But it goes back to that leadership principle of curiosity, I think. If you can walk in every morning and say, how can I do things differently, or why am I doing this, and challenging the status quo, so much can happen and be unleashed by that. And it's something that we haven't perfected in the admin, non-product type of functions, but something that I hope we can.

JOAN WOODWARD: Yeah, and we have a motto, fail fast, right? Failure is OK here. But fail fast, learn from your mistakes, and move on. OK, another question coming in from Wilson Torres, how soon after the pandemic began did J&J see the need and/or opportunity to develop a vaccine?

JOE WOLK: I would say it was probably instantaneously. I was probably last to know in terms of just how smart Paul Stoffels and his team are. We have been in vaccines for close to a decade. We had success with rolling out an HIV vaccine. Ebola, when that was somewhat of a crisis about five to six years ago, we had a vaccine there.

So, we thought that platform, the adenovirus vector platform, was going to be applicable. We were very comfortable with the safety of the platform, given some of the other experiences we had. It was a matter of finding the right spike protein and the candidate to make sure that there was efficacy involved.

We shot for something a little bit different in terms of a one-shot, lower refrigeration than some of the competitors have. And we knew the whole time that it was going to take many, many companies, many government agencies to solve this, solve this pandemic. So, we didn't think we were going to be the be all, end all. We strived for that. But we knew it was going to take many, many collective efforts to make sure that we address the pandemic.

And while we can all sit here and certainly lament over 24 months, and we all want to get back to something much more familiar with what we knew, I think we'll look back at this as one of the great scientific advances possibly in history. And I think a lot has been learned in terms of going forward and how much we can promote and advance healthcare overall.

JOAN WOODWARD: OK, question coming in about corporate governance, right? We talked a little bit about ESG. Also, boards are very concerned about cybersecurity. We do a lot of cyber awareness at Travelers as well.

So, this question is coming in from Catherine Nelson. She wants to know; can you share the most thoughtful board comments and questions you have received during your tenure at J&J? So, tell us about your board and what they're worried about, what they're concerned about.

Clearly, there's lots of conversations going on at large companies now about stakeholder value, shareholder value. And what is your board worried about at the moment? I know they're worried about everything, of course. We're in a pandemic.

JOE WOLK: Yeah, well, Catherine, thanks for the question. Being an active employee, I have to answer that every board comment and question is thoughtful and insightful. But as far as what boards are worried about today, Joan, I think you hit the laundry list. And you appropriately described it as they're worried about everything.

And, actually, probably their job as board of directors is to be worried when there's nothing to be worried about, right? And so, cybersecurity clearly is something that is on top of mind for them. We have announced recently a separation of our consumer health products group. So that's something that they want to be very attentive to, making sure that we do it right and we set up both companies for success. I think the overall pace of innovation is something that they have as much interest as we do on the executive committee, to make sure that that Freshness Index is going in the right direction and not falling backwards.

Compliance, being a part of audit committee meetings, compliance is always at the forefront. If you think about cybersecurity and compliance, those are things that could really do a company a lot of harm in the area of reputation. And we know how hard it is to recover those reputational missteps. So, we want to make sure that we're doing everything we can to not only prevent situations like that, but know how to react when those situations may occur. I think a lot of times the reputation is either kept intact, or maybe even enhanced, if you as a company can handle it in a way that the public says that's reasonable, that was responsible, and it was very proactive.

JOAN WOODWARD: Great. OK, another question coming in, Charles Wallowitch-- are you optimistic that we will ever go back to a completely unrestricted world with regards to COVID protocols for the vaccinated and unvaccinated? Joe, are we ever going to get our lives back?

JOE WOLK: I think so. Charles, we certainly all hope so. What I think is it's going to come back to individuals. Matter of fact, I think that's a good thing, right? How people want to view wearing a mask or not, getting back to some individual choice when it makes sense is a really good thing. I think that opens up a lot of doors in terms of the creativity that we spoke of earlier.

But I have to remain optimistic for really everyone I know that we are going to get back to some sense of normalcy. It may be redefined for us a little bit on the edges. But going out, being active, doing the things that we do, being creative, having entrepreneurial spirit, that's something that I certainly look forward to. And I think we've taken a lot out of these last 24 months that we can learn and actually make us more effective when that day comes.

JOAN WOODWARD: Great. Another question coming in here from Deborah Freeland at Gallagher. Can you explain J&J's approach to supply chain risk mitigation? And are you worried about inflation?

JOE WOLK: Yes. Thanks for the question, Catherine. Yeah, so let me take the second question first. Worried about inflation, but not consumed by it.

So, I do think, as we discussed in our guidance last week, that we will see some impacts from higher commodity costs, some labor input costs, and overall just raw material availability. I think that's even the bigger issue, quite frankly. But I do believe I've seen enough data points to suggest those will likely subside in the second half of this year. You never know for sure, but all signs are pointing to a steady recovery in that regard.

In terms of supply chain risk mitigation, I think that's taken on a whole new plethora of what that means, right? Before it was just, hey, are you able to make your product in a very reliable, high-quality way? Today with some nationalism going on, there's countries that want you to produce goods only in their country.

And so we've got to be thoughtful about how we network our supply chain, our manufacturing facilities. There will be that right balance between contract manufacturers and those that we do in-house. I think as we think about it, those things that are high science protected maybe by patents, that type of technology, likely we want to keep that in-house.

For things that are maybe a little bit more routine, where you can take advantage of somebody else's scale, I think there's where we'll look to outsource when it's possible. So, it's a blend of both. But I do think it's a definition that's evolving and becoming much more expansive as to what you've got to put into that bucket of supply chain risk.

JOAN WOODWARD: OK. A couple of people have asked this question, so I can't name names. But how do you knock down all the misinformation about vaccines? And did you see this coming, where it has become just a political thing? Never before healthcare, at least the science of healthcare, has become political. But how do you keep your employees' morale up when people are talking about vaccines and misinformation?

JOE WOLK: Yeah, that gets back to two elements that we talked about earlier, Joan--communication, constant communication. So, we usually have good line of sight when a headline may come out. If not, we react shortly thereafter as to here's what we see. And we do it in a very transparent way.

We did, actually, a docuseries on the making of the vaccine. A well-known commentator, Lisa Ling, actually emceed it, for lack of a better word. We wanted people to know exactly what we were doing so that they can gain that level of comfort.

Did I foresee how this would end up and the different narratives that are taking place? I don't know that anybody could have. But whether you could have, or you couldn't have, I think we would have reacted very much the same way. We would have pursued our vaccine in a way that was transparent.

I know all the clinical data is available on microsites that you can get through J&J. And so, we've tried to be as open and as candid as we could be and really separate ourselves from the rhetoric that's out there. Whether it's true information or misinformation, let folks who maybe other people trust in terms of clinicians have a look at our data and make their own conclusions.

JOAN WOODWARD: Wonderful. I suggest that everyone should go watch the Lisa Ling documentary, because it really does provide an inside look in the development of the vaccine and the rollout. So, Joe, our time is up. I cannot thank you enough. This has been really, really just terribly interesting for our audience. We got a lot of good comments in the section, the Q&A section.

People just found it tremendously helpful to understand how J&J works, how you think, long-term strategy, and dealing with the shareholders, dealing with employees, dealing with all the government regulations that you do. And it's just, it's just so refreshing to hear how innovative a company of 140 years old is these days. So, I can't thank you enough. It's just really been a pleasure.

JOE WOLK: Joan, it's been my pleasure to be here with you and talk through some of these issues. I certainly enjoyed being with your audience and hope that they've gotten something out of it as well.

JOAN WOODWARD: Well, thank you, again. And we do want to talk about our upcoming programs just for a moment.

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Visit us: Travelers Institute dot org. Upcoming Webinars: February 16 - 60 Minutes in the Middle Market: Opportunities in a Changing Marketplace With Travelers' EVP and President, Middle Market, National Property and Business Insurance Field Scott Higgins. February 23 –“Who Gets What" - Setting Compensation After Tragedy With Preeminent Mediation Expert Ken R. Feinberg. March 2 - Power Up: Growth Opportunities in Renewable Energy With Arevon's EVP and Chief Operating Officer Justin Johnson and Traveler's Global Practice Leader for Renewable Energy Eileen Kauffman. March 16 - Global Hot Spots and Geopolitical Risks With Former Secretary of Defense Chuck Hagel

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So, on February 16th, we have 60 Minutes in the Middle Market with our own Travelers Scott Higgins. He's going to talk about the changing marketplace dynamics.

Then on February 23rd, I'm going to interview Ken Feinberg and talk about his book, Who Gets What-- Setting Compensation After Tragedy. As you all know, he was the Special Master for the 9/11 Victims Compensation Fund. Then on March 2nd, we're going to talk about alternative energy and growth opportunities in renewable energy with Eileen Kauffman and Arevon's Justin Johnson.

Then I'll be interviewing former Secretary of Defense Chuck Hagel, Global Hotspots and Geopolitical Risks. Please join me for that one. As we all know, there's a lot going on around the world. And he's going to take us around the world.

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Watch Replays: Travelers Institute dot org. Connect on LinkedIn: Joan Kois Woodward. Take Our Survey: Link in chat. hashtag WednesdayswithWoodward

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So, you can register for any of these programs at travelersinstitute.org and invite you to connect with me on LinkedIn. So please stay safe - my friends, you and your loved ones, and Joe, again, thank you so much for your time today. We really appreciate it.

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Travelers Institute, Travelers. Travelers Institute dot org.

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