J&J's Brighter Shade of Green

The pharmaceutical giant J&J's has had enviable success an alternative-energy leaderand boosted profits, too

Johnson & Johnson (JNJ) formally turned green three years ago. Convinced that global warming had become a reality, the pharmaceutical and medical-products maker pledged that by 2010 it would reduce its emissions of carbon dioxide and other greenhouse gases by 7% from 1990's level, regardless of how fast the company itself grew.

The environmental embrace has been a rare success for J&J, which has been struggling to come up with new drugs and lost out to Boston Scientific (BSX) in a takeover battle for cardiac-implant outfit Guidant. J&J not only has hit its target five years early—by yearend 2005, it already had reduced its CO2 tonnage by 11%—but the company has become an alternative-energy leader, generating power from everything from landfill methane to acres of solar panels to oil-rich poppy seeds. By being smart about its enviro-investments, J&J has boosted profits as well.


  Like other Big Pharma companies, J&J is not an energy hog. Nevertheless, it logged the greatest percentage decrease of greenhouse-gas emissions of any company in 2004, according to a study by Innovest Strategic Value Advisors, which helps steer pension funds and other institutional investors to environmental overachievers. And based on preliminary data, J&J was No. 1 again within the pharmaceutical industry in2005 and perhaps altogether, says Veronique Menou, an Innovest analyst in Richmond Hill, Ontario.

The reductions are even more impressive when increases in J&J's other numbers are taken into account. In 1990, the New Brunswick (N.J.) company had $11.23 billion in sales and roughly 80,000 employees. Since then, its revenue has jumped 4½ times, to $50.51 billion in 2005, while its head count totals 115,600 today. "They seem to be really committed to addressing this issue," Menou says.

J&J decided to take on global warming in 2003, in part for public-relations reasons. "We're a health-care company and we feel a responsibility not to contribute to climate change or pollution that would negatively impact the health of people in the world," says Dennis Canavan, J&J's executive director of worldwide energy management.


  While J&J relies on tried-and-true efforts like energy efficiency to cut down on carbon dioxide emissions—installing lights that consume less electricity, say, or buying fleets of cars that get higher mileage—it's also been quick to invest in alternative energy. Indeed, J&J now gets 15% of its power from renewable sources. It even has four sites in Europe—one each in France and Italy and two in Belgium—that get 100% of their electricity from renewable sources such as wind.

"It's a win all around," Canavan declares. "When we reduce our energy use, we also reduce our operating costs. We benefit, and the environment benefits. This is just a good synergistic approach."

One of J&J's more far-fetched projects is in Mountain View, Calif., where it has a research-and-development complex. The company just flipped the switch on the last of three 1-megawatt generators that burn methane emitted from a garbage dump 1.5 miles away. Previously, the waste gas was simply burned off in a flare. Now, the methane supplies 75% of the site's electricity, plus hot water and steam for heat and use in the facility's labs.


  The project cost J&J some $7.5 million, including the installation of a pipeline, while the State of California spent $3 million. But the company also locked in gas supplies at a constant price over 20 years. As a result, J&J figured it would earn a 16% rate of return on its investment. But since electricity prices already have climbed, Canavan says the return will come to at least 20%. "Everybody's very happy with it," he adds. "The project has a positive payback, and that's true of virtually all of our capital projects."

That's no accident. In 2004, J&J management set aside $100 million for green projects over three years so they wouldn't have to compete with more typical capital investments. But management also required that these CO2-reducing efforts produce a rate of return of 15% or more over their lifetime, the hurdle for any other capital project. So far, 40 environmental projects have been approved, and Canavan says the returns have averaged 17%.

Johnson & Johnson's solar installations have made it No. 2 in photovoltaic capacity in the U.S. At the company's consumer-products facility in Skillman, N.J., J&J recently installed three acres of solar panels that provide 500 kilowatts of power, or about enough for 500 homes. The 2,520 panels, planted on what had been open land, are an advance from yesterday's technology in that they swivel to track the sun's arc across the sky to get the most energy, like a field of sunflowers.


  In late 2005, the company also activated a roof-mounted array at its surgical-device facility in Somerville, N.J. Another solar system—1,320 panels covering the one-acre roof of a parking garage at J&J's headquarters—started generating power in April.

With tax credits from the state, J&J initially calculated that its photovoltaic projects would yield rates of return of from 11% to 13%. Says Canavan: "We have accepted a lower rate of return because we think solar is such a promising technology and something we need to invest in and develop." But he says that because electricity prices are rising, these projects should earn 15%, too, over their 20-year lifespan.

In Tasmania, Australia, meanwhile, J&J has a farm that grows poppies, among other crops, for active ingredients in drugs. It used to landfill the seeds as waste. Now it sells 5,000 tons of poppy seed a year to a local steam-generator that burns them as fuel, since the seeds have a high oil content. That creates carbon dioxide, of course. But it also means less need for carbon fuels like coal or oil, which contribute more to global warming since they're nonrenewable.

"We think reducing greenhouse gas emissions is really important, and we also think it's good business," says Canavan. And with energy prices at record highs, J&J will undoubtedly get more bang for its buck. "A lot of projects that were on the fence all of a sudden are viable," he adds. A little positive news for a company that has had its share of troubles lately doesn't hurt, either.

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