Inside Johnson & Johnson's Innovation Shop

A huge health-care company like Johnson & Johnson requires a steady stream of innovation, but that’s getting harder and harder to create. So the 125-year-old company is getting more aggressive at mining ideas from outside. It’s seeking out very early ventures that it once would have considered far too risky and seeding them with money or dishing out advice on how to nudge untested ideas out of the laboratory.

Its accelerator program for small and high-risk startups, known as RedScript Ventures, was launched in 2009 and was named for J&J’s red cursive logo. If J&J has invested in a startup or is considering buying it, RedScript tries to speed up its progress by consulting with the startup on anything from clinical trials to the economics of medical devices.

RedScript is the latest application of a decades-old philosophy at J&J, which has been making venture investments since the 1960s with an eye toward buying the companies down the road. J&J is today a conglomerate that spans 60 countries, with 250 companies that sell products from drugs to baby powder to joint replacements. “No matter what you do with R&D internally, the rest of the world is always doing more,” says Roy Davis, who keeps a close watch on RedScript as president of the company’s larger venture arm, Johnson & Johnson Development.

But while the outside world is testing lots of ideas, J&J believes those ideas might need its assistance if they are to come to fruition. Davis says RedScript is looking for cutting-edge work in regenerative medicine, which seeks ways to repair damaged tissues and organs, and neuromodulation, a fast-growing field that is developing devices to treat chronic pain and disorders of the nervous system, such as epilepsy. RedScript is also on the lookout for companies working on treatments for sleep apnea and diabetes. This year, two ventures nurtured by RedScript were integrated into companies owned by Johnson & Johnson, though the company won’t give specifics about what they do.

Besides looking outside, RedScript incubates in-house ventures, setting milestones for them and determining whether they are worthy of more funding.

Until RedScript was launched, J&J had invested in small and very young startups only occasionally, Davis says. What changed? J&J had $62 billion in sales in 2010, but keeping such huge numbers growing is becoming more challenging. Its revenue growth petered out in the last three years because J&J, like other pharmaceutical companies, is having a tough time finding new cures and solutions. “The low-hanging fruit has already been addressed,” says Linda Bannister, a health-care analyst at Edward Jones & Co. Tellingly, J&J has continued to fork out a lot of cash to buy other companies—$1.2 billion in 2008, $2.5 billion in 2009, and $1.3 billion last year—even as R&D spending has fallen, to $6.8 billion in 2010 from $7.6 billion in 2008. “If you’re a big company like J&J, you’re really agnostic how your innovation comes,” said Glenn Novarro, an analyst at RBC Capital Markets.

It’s hard to gauge just how much impact RedScript has had. Few Wall Street analysts have heard of it. Many venture capitalists can’t stop talking up their investments, but not Davis. He is coy about the startups and ideas that RedScript is bringing along, other than to say it has enough opportunities to meet its goal of giving J&J at least one new business that’s ready to be integrated into the company each year.

Some experts say J&J’s relationship to innovation is the right model for a large company. “It lets the marketplace do what it does best, which is have an explosion of different kinds of companies in various fields,” says Richard Foster, lead director of the board at Innosight, a consulting firm that has done work for J&J. “These companies will need major infusions of capital, or a global distribution chain. At that point, J&J says, ‘We are very effective in rolling innovations out—very quickly and cost efficiently.’”