Healthcare innovation — a vague term used to describe efforts to develop new therapies, technologies and ways of doing business — is sometimes difficult for companies to prioritize amid challenging economic headwinds. 

Johnson & Johnson, one of the world’s largest healthcare businesses, is often heralded as an innovative company. In fact, J&J is usually an annual inclusion on “most innovative companies” lists, such as the one released by Fast Company each year. So how will the company maintain its strong reputation for innovation amid changing economic conditions? The answer comes down to hefty investments in research and development — both internally and externally — J&J CEO Joaquin Duato said on Friday during a virtual panel held by Boston Consulting Group.

Investing in R&D is the most important thing a company can do to prioritize innovation, Duato said. This is easier for him to say than it might be for other CEOs, as J&J has plenty of capital to allocate to R&D. The company’s net income for the quarter ending September 30 was $4.5 billion, which represents a 21.57% year-over-year increase.

“When we think about resource allocation, we prioritize investment in R&D. It’s been one of our first priorities when we allocate capital and investments over the past 10 years. Just to give you a number, we have invested about $100 billion in internal R&D. But at the same time, we have to also be aware that not all the innovation occurs in Johnson & Johnson. So we have invested about $76 billion in M&A, which is also helping us bring in innovation into the company,” Duato said.

In Duato’s view, J&J has a different organizational model for R&D than most pharmaceutical companies. Most companies have separate discovery and development groups, but J&J’s R&D teams are set up end-to-end and organized by therapeutic areas, such as cardiology, immunology and mental health. 

As for J&J’s innovation strategy in the medical technology space, Duato said the company tries not to be too dogmatic and tailors its approach depending on the situation. For example, J&J recently acquired a company called Abiomed, which produces solutions for heart recovery.

“So when we acquire a company like that, which is already an end-to-end unit, we operate that unit as an integrated, independent unit to be able to maintain the things that have made that unit special,” Duato said. “On the other hand, in new areas like robotic surgery, what we do — acknowledging that this is a new area for us — is separate a dedicated end-to-end team with cross-functional experts, so as to be able to make sure that we have the right focus and specialization.”

About half of J&J’s innovation comes from external sources, Duato declared. He credits this to the company’s strong infrastructure for identifying, nurturing and onboarding promising ideas at various stages of development. 

The first part of that infrastructure is J&J’s innovation centers. These are located in “the major hubs around the world,” Duato pointed out — San Francisco, Boston, Oxford, Cambridge and Shanghai. J&J places scientific scouts in these innovation centers so they can witness the activity and create relationships early, with the eventual goal of onboarding new companies into J&J, he said.

Another key part of J&J’s infrastructure for external innovation is its network of incubators, called JLabs. These labs currently host more than 500 companies, Duato said.

“That again gives us more integration in the innovation ecosystem in different areas. And it’s a way for us to be able to develop relationships that we may use in the future,” he explained.

The final part of the infrastructure is the J&J Development Corporation, the company’s venture investment fund. 

Through the fund, J&J has been able to establish collaborations with scientists early on their development processes, Duato said. An example of this is J&J’s investment in and acquisition of Biosense Webster, which focuses on diagnosing and treating atrial fibrillation.

“We acquired Biosense Webster in 1997 through an initial investment of our Johnson & Johnson Development Corporation, and we have worked with Biosense Webster from 1987 to today. That’s more than 20 years of work, and now it’s a $4 billion company within our med tech business that we have created. That is a major, major source of growth in domestic business,” Duato declared.

He pointed out that the Biosense Webster example speaks to something important — the fact that innovation requires persistence and patience. Companies need to let go of the notion that advancements in healthcare take just two or three years, Duato said.

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