by Jessica Shambora

We keep hearing how the economy is improving, but with U.S. unemployment at 9.8% and rising, the job market gives us nothing but anxiety. Today Johnson & Johnson (JNJ) added to the pain by announcing layoffs of 6-7% of its workforce. That’s about 7,000 employees.

While J&J faces lots of industry-specific challenges–patent expirations, increasingly complex regulation, healthcare reform–the news is stunning. Particularly because J&J is known for its legendary credo that puts employees above communities and shareholders–second only to customers in terms of management’s priorities.

CEO Bill Weldon talked with me at length about this–the eminence of J&J’s employees–in interviews that I did with him last Spring. He told me that he says to his employees: “I guarantee we will fight for every one of you that works in this corporation. Does that mean we can always protect every job? Absolutely not. What it does mean is we’re going to do the best we possibly can to ensure we take care of the people that have made the company what it is and fight the battles every day.’”

Assuming that Weldon and J&J’s board haven’t abandoned the company’s age-old credo, might today’s layoffs be a sign that J&J’s fortunes have turned dramatically worse than Weldon anticipated?

“Investors have been asking all day, ‘Is there something worse environmentally than we understand–or than what J&J has relayed to all of us?’” says analyst Rick Wise, who follows the healthcare industry for Leerink Swan. J&J stock closed at $58.93, down nearly 2% for the day.

Wise, who rates the stock “neutral,” says that some investors view the cuts as a desperate grasp for profit growth. But he believes that as a traditionally conservative industry leader, J&J is simply trying to get ahead of the curve in responding to challenges.

“Would J&J have been in trouble today if they hadn’t done it [announced layoffs]? Hard for me to believe,” says Wise. The layoffs, he adds, give the company more freedom and flexibility to invest in areas that management has talked about, like treatments for Alzheimer’s.

J&J’s harsh action leaves many questions unanswered. To me, the two most compelling are: Is this another example of prescient management at the much-admired 123-year-old company? Or are the changes in the world so severe as to force a 123-year-old company to let go of its precious credo to take care of its employees?

For more on J&J’s legendary culture, read a piece I co-wrote with Geoff Colvin earlier this year, “J&J: Secrets of Success” and check out my interview with J&J CEO Bill Weldon below.

By Jessica Shambora

We struck a nerve yesterday. Our post about a study on consumer perceptions and use of generic drugs ignited a firestorm of comments.

That firestorm came from all directions. Some readers attacked Big Pharma. Others blasted the generic manufacturers. Some commenters hit both.

Dan from Hiram, Maine said, ”After drug companies obscenely cranked up drug prices over the past 5 years, a generic drug at 30-50% price reduction is still vastly overpriced.”

Jeff from Mystic, Connecticut wrote: “Just remember that generic drug makers spend more on lawyers than anything else. They are parasites.”

Tim from Houston, Texas basically defended the major drug companies: “Remove enough of Big Pharma’s revenue stream, and someday in the distant future, there might not be any new drugs to copy.”

But here’s how we really stirred up controversy yesterday: By claiming that generics are identical to brand-name drugs.

Frank from Oregon wrote: “The web is full of stories about people suffering major health problems after switching to generics…They contain the same active chemical. That does not mean the work the same way.”

Ryan from San Diego, California told me to “do my homework…the FDA allows for a 20%-25% Variance in bioavailablity.”

Well, today we went back to Jackie Kosecoff, CEO of Prescription Solutions, the in-house Prescription Benefits Manager (PBM) for UnitedHealth Group (UNH), whose visit sparked yesterday’s Postcard on this very subject. She responds to the debate: “Generics are identical–or bioequivalent–to a brand-name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use. ”

The FDA website echoes Kosecoff’s statement: “A generic drug is the same as a brand-name drug in dosage, safety, strength, quality, the way it works, the way it is taken and the way it should be used. FDA requires generic drugs have the same high quality, strength, purity and stability as brand-name drugs.”

So, in fact, we did our homework (and Ryan, re your point about the variance in bioavailability, this is commonly misunderstood. According to 2004 letter from Dr. Steven Galson, then director of the Center for Drug Evaluation and Research at the FDA and now U.S. Surgeon General, that -20/+25%, “actually represents the acceptable bounds on the 90% confidence intervals around the ratio of the mean result for each of the two products.” He also writes that the average difference in absorption was 3.3% for 127 bioequivalence studies of generic drugs approved in 1997. And a study published in JAMA in December, 2008 found “no evidence of superiority of brand-name drugs to generic drugs.”)

I’m more convinced than ever that confusion about generics — the very point of yesterday’s Postcard — isn’t going away.

By Jessica Shambora

Health care reform is front and center — and an insanely complicated issue. When someone talks about simple solutions, it’s time to listen. So we were all ears when Jacqueline Kosecoff, CEO of Prescription Solutions, came by Fortune last week and sat down with us to talk about generic drugs.

Up in New York City after a day on Capitol Hill, Kosecoff was eager to talk about how her UnitedHealth Group (UNH) unit, which is a Prescription Benefits Manager (PBM) accounting for $13 billion of UnitedHealth’s $81 billion in revenue, can save the system millions of dollars. Her claim is based on a new study, released by Prescription Solutions this week, that shows a big void in consumer understanding about generics — what they are and what savings they bring.

You may already know that generics are identical to brand-name drugs, but the study found that nearly one-third of Americans either don’t know or don’t believe that. Among people who do not take generics, only 58% say it’s because there isn’t a generic alternative available. Moreover, two-thirds of survey respondents don’t realize that brand-name drugs typically cost 50-70% more than generics.

Says Kosecoff: “Many Americans erroneously believe that the most expensive drug is always the most effective drug.”

Generics have already saved the health-care system $734 billion over the past decade, according to market researcher IMS Health. Koseocoff says that a 1% uptick in generic use equates to 1.7% savings for payers, such as employers. And consumers enrolled in its drug plans typically save $20-60 per prescription by switching.

This is why Kosecoff is pushing generics hard: She talks about a “triple win” for consumers, for payers, and for Prescriptions Solutions. If  her unit delivers more value, it’s likely to get more volume and make more money. And it’s all about value these days. The study also showed stretched consumers have been cutting back on prescriptions: 27% of survey respondents said that they delayed filling, didn’t fill or didn’t take a drug in order to save money.

As the generic market grows, the biggest loser is Big pharma, whose brand-name drugs inevitably lose share. Through 2013, $134 billion in branded drugs are at risk from generic competition in eight key drug markets, according to IMS Health. Popular drugs like Pfizer’s (PFE) Lipitor, GlaxoSmithKline’s (GSK) Valtrex, and Boehringer Ingelheim’s Flomax are among the drugs with patents set to expire fairly soon.

As Kosecoff works to spur that generics market — and cut costs for Prescription Solutions’ customers — she’s pushing another item on her agenda: cheaper alternatives for biologics. These drugs, such as Amgen’s (AMGN) arthritis drug Enbrel and Abbott’s (ABBT) Humira, also for arthritis and for Crohn’s Disease, are the fastest-growing area of pharmaceuticals — a market expected to hit $90 billion this year, up from $40 billion in 2005. But generics don’t exist for biologics, which are made from living organisms rather than the small molecules of conventional pharma.

Kosecoff wants to change that. And she’s calling for Congress to help make it happen. ”A regulatory approval pathway for follow-on version of thes biologic drugs must be created,” she says.

(To read an update on the debate this Postcard ignited, click here.)

Another Fortune Most Powerful Woman — a longtime member of our annual Power 50 list — is leaving the corporate world. Susan Desmond-Hellmann, who was Genentech’s (DNA) president of product development, is heading to the University of California San Francisco as chancellor.

Desmond-Hellmann’s departure from business’s upper echelons (She ranked No. 13 on Fortune’s 2008 Power 50 list) adds to the trend of top women execs leaving corporations and deciding not to jump back in. Among the departed: former Procter & Gamble (PG) president Susan Arnold, former Pepsi-Cola North America (PEP) CEO Dawn Hudson, former Yahoo (YHOO) president Sue Decker, and the trio who once were the most renowned women on Wall Street: Sallie Krawcheck of Citigroup (C), Zoe Cruz of Morgan Stanley (MS), and Erin Callan of Lehman Brothers, whose recent leave from her new employer, Credit Suisse Group, is looking like it may be permanent.

All these onetime stars are on the sidelines except Hudson, who recently joined Parthenon Group, a Boston-based strategic advisory, as vice chairman — a three-day-a-week commitment to rachet down her stress level, Hudson says.

This decision by Desmond-Hellmann, 51, isn’t so surprising given Genentech’s fate: in March, Swiss drug giant Roche won a year-long battle to acquire the 44% of the biotech company that it didn’t already own for a whopping $46.8 billion. Chief executive Art Levinson, a Desmond-Hellmann fan who promoted her from clinical scientist to chief medical officer to EVP to president, lost the CEO title and remains chairman. Questions abound regarding whether Roche will be able to retain Genentech’s entrepreneurial culture. That culture has helped Genentech become not only the best company in biotech but also one of Fortune’s Best Companies to Work For.

A onetime practicing oncologist who never imagined she’d climb the corporate ladder, Desmond-Hellmann is returning to her roots. She started her career at UCSF and, she says, “my heart has never left it.” She can’t talk at length about her move until the California Board of Regents approves her appointment. Stay tuned to Postcards next week to hear more from Desmond-Hellmann.

Meantime, have a great weekend!

by Jessica Shambora

For this year’s Fortune 500 issue, senior writer Geoff Colvin and I had the chance to look inside one of the list’s most enduring performers: Johnson & Johnson (JNJ). The New Brunswick, N.J.-based health care giant is notoriously media shy, but in the midst of the economic doom and gloom, the company decided it was time to tell its 123-year story of success. What a story that is. (CEO Bill Weldon helps tell it, too, in a video here)

For starters, here are some financial stats that point to J&J’s strength and stability:

-Last year, J&J’s sales rose 6%, and it jumped six places in the 500 ranking, to No. 29 (amidst 12 solid months of economic decline in the U.S).

-J&J’s profit increased 22% last year even as the 500’s profits dropped 85%. That made J&J the sixth most profitable company in America and the fifth most valuable, ahead of Procter & Gamble (PG), Berkshire Hathaway (BRKB), Chevron (CVX), IBM (IBM), General Electric (GE) and many other great performers.

-J&J still holds its triple-A credit rating solidly — one of only four non-financial companies (with Exxon, Microsoft, and ADP) in that dwindling club.

-J&J stock beat the market last year, falling 8% vs. the S&P’s drop of more than 30%.

The list goes on (you can find more stats in the story). Financial discipline is key to J&J’s success, but it’s only one of five principles that Geoff and I outline in our piece. The others are: focus on the future; let the experts run the business; have a purpose beyond profits; and diversify within a single industry.

This last lesson — diversify within a single industry — was particularly fascinating to study, so I wanted to offer further detail that didn’t make it into the story. After all, this strategy helps explain how J&J grew from a maker of surgical dressings, back when the company was founded in 1886, to a broadly based health care company with three business groups, each large enough to be an industry leader on its own.

Consumer Products includes the items everyone knows, and more of them than most people realize – Johnson’s Baby Shampoo, Tylenol, Neutrogena skin care products and Listerine mouthwash (acquired when J&J bought Pfizer’s consumer business in 2006). The Medical Devices and Diagnostics group supplies operating rooms and doctors’ offices with products including sutures, blood tests and artificial joints. The Pharmaceuticals business sells prescription drugs that include Concerta for attention deficit disorder, Remicade for arthritis, Prezista for HIV/AIDS, and others.

The classic argument for a diversified approach is it reduces risk – as one industry gets hit, another may rise – and that rationale has panned out at J&J, where the percentage of revenue contributed by each business varies from year to year.

Another explanation has to do with convergence of technology across businesses. One of the earliest examples of this kind of innovation at J&J was the drug-eluting stent, a breakthrough for cardiovascular disease, which resulted from a meeting in the 1990’s between engineers from the devices group and scientists from the pharma group.

CEO Weldon also tells the story of some scientists who had hit a wall with the product they were developing. They put their problem up on an internal company site, and that same day they heard from a scientist in another business in a different location. He responded with the answer; it had been the focus of his PhD work.

“We have all this expertise in-house so we can pull on it rather than having to go out and find somebody,” says Weldon.

Last November J&J acquired Omrix biopharmaceuticals and is now exploring the use of the company’s biologic drugs in tandem with J&J’s surgical dressings to help control soft tissue bleeding. Cross-pollination can also benefit consumer products. The company applied scientific advances in sunscreen technology from its research labs to its Neutrogena and Aveeno lines, for example.

A third benefit of J&J’s diverse portfolio of health care businesses is the opportunity to follow customers through their lifetimes and across the company’s portfolio. In J&J’s world, our lives are a journey from Baby Powder to Efferdent.

Similarly, focusing on the patient rather than on any single product is the mission of J&J’s recently formed comprehensive care group. If J&J knows you have diabetes, it can show you the virtues of a OneTouch glucose monitor from the device and diagnostics group, and of Splenda sweetener from consumer products, and of health management software from a recently acquired company called HealthMedia.

In these times, when many companies are struggling for growth and trying to squeeze more value out of existing businesses, they would be wise to follow J&J’s lead: Look for opportunities across a single broadly defined industry.

What other companies have had success with this approach? Please let me know your thoughts and ideas.

“I’m one of these who believes you have so much gray matter in your head. And if you take all your gray matter and you worry about what you can’t control, you’re wasting an awful lot of good gray matter, right?”

–Johnson & Johnson (JNJ) CEO Bill Weldon, in a recent interview with Fortune. The New Jersey-based maker of Band-Aids, knee replacements, and prescription drugs–and a bellwether for the health-care industry–announced mixed first-quarter results today. While quarterly earnings of $1.26 per share exceeded the Street’s  expectations, revenue of $15 billion was down 7.2% from a year ago and fell short of estimates.

Pharma revenues took a hit from an expired patent on anti-psychotic drug Risperdal. So Weldon said that he told employees to focus on what J&J can control: “Let’s worry about the products we have, and let’s go out and make sure we are getting those out to the people who can use our products.” –Jessica Shambora

by Patricia Sellers

Procter & Gamble (PG) lost its president today: Susan Arnold, a 29-year veteran who drove the company’s high-margin beauty business to $20 billion in sales and went on to oversee all of P&G’s brands, stepped down one day after her 55th birthday.

“My dad retired at 62,” Arnold said, phoning this afternoon on her way to a Walt Disney (DIS) board meeting. “Then he got really sick. You know what? I wanted to get out when I was really healthy.”

Such high-level departures are always suspect—particularly these days as everyone is on a short leash. But this exit by Arnold, No. 7 on Fortune’s 2008 Most Powerful Women list, really seems to be motivated by a personal decision. For years, she’s told friends and colleagues that she would probably leave Procter at age 55. That talk, of course, spoiled her chances of succeeding CEO A.G. Lafley, who has told me that he views her as courageous and unusually innovative. Lafley, who turns 62 this June, is expected to retire before age 65. As we at Fortune have been saying for a while, Lafley’s successor will likely be Bob McDonald, P&G’s chief operating officer.

Arnold, who is on the board of McDonald’s (MCD) as well as Disney, has been a prime target of recruiters. Now she’ll be in their sights more than ever. Though she’s likely to duck their calls, at least for a while. “I’m going to take some time to decompress,” she says, adding that she’s looking forward to spending more time with her two kids, 16 and 13. Arnold, who is gay, raises the children with her domestic partner. And though she won’t talk about the challenge of being a gay leader in corporate America, it clearly has affected her thinking about her career. Will she eventually go for another corporate position? She insists she’s not sure. “I’m flexible,” she says.

So goes another powerful woman, adding to the so-called “leaky pipeline” problem in the corporate world. To which Arnold remarks, “Sorry about that!” In Fortune’s Most Powerful Women issue in 2007, I featured six women “One Step Away” from the CEO position. Besides Arnold, what’s happened to the rest of them? Morgan Stanley (MS) co-president Zoe Cruz got fired by CEO John Mack late that year and hasn’t landed a new job yet. Bank of America (BAC) chief Risk officer Amy Brinkley is struggling to shore her company as well as her own legacy. Avon president Liz Smith is on track to succeed CEO Andrea Jung when she retires.

Meanwhile, Schering-Plough (SGP) EVP Carrie Cox, who heads the global pharmaceutical business, woke up this morning to find her company in a $41 billion merger deal with Merck. Only one powerful women in that “One Step Away” class has moved into a top post: Ellen Kullman, now CEO of DuPont.

Fortune’s No. 1 Most Powerful Woman, PepsiCo (PEP) Chairman and CEO Indra Nooyi, delivered disappointing quarterly earnings this morning and said that the company will close up to six plants and cut 3,300 jobs. PepsiCo stock is down 9% to $56 in midday trading.

Meanwhile, another Most Powerful Woman–a newcomer to the 2008 rankings released two weeks ago–is on a roll. Johnson & Johnson’s (JNJ) Sheri McCoy, No. 44 on our MPWomen list, just got promoted from worldwide chairman of the $12 billion surgical care unit to head of the company’s $25 billion pharmaceutical business. Turns out, J&J’s better-than-expected third-quarter earnings, announced this morning, were powered in part by surgical care’s healthy performance. Growth in medical devices, including surgical care, and consumer products drove J&J’s quarterly profits up 30% to 3.3 billion on revenues of $15.9 billion.

I haven’t met McCoy, but when I saw her speak a few months ago, I was struck that she projects the demeanor of a real leader: smart, self-possessed and charismatic. And while J&J has elevated several women to top positions–vice chairman Christine Poon, who is soon to retire, and Colleen Goggins, who is worldwide chairman of the consumer group and No. 24 on our MPWomen list–McCoy stands apart. A chemical engineer by training, she started at J&J in R&D and moved swiftly up through marketing and general management. More than that, in a company that projects a family-friendly image to consumers but where the top women execs historically have been about toughness and drive, McCoy, 49, is renowned for a warm and caring style. One person who used to work for her is Mari Baker, the CEO of Navigenics, a personal-genetics startup in Silicon Valley: “She keeps pictures of her family in her office and was always quite open about needing to get to her sons’ football games,” says Baker about McCoy, who has three sons. “She set a great example for the women on her team.”

Keep an eye on McCoy. If she delivers good growth in pharmaceuticals, she’s clearly a contender to succeed Bill Weldon as J&J’s CEO. The other likely candidates, I hear, are Nick Valeriani, a 30-year J&J veteran who now heads strategy and growth, and Don Casey, a 23-year vet who chairs J&J’s comprehensive care group. With McCoy, who has worked at J&J for 26 years, there’s a combined 79 years of J&J experience among these CEO contenders. That level of company loyalty–what a rarity!

P.S. Yes, I’m back from two weeks away in California, and so is my “Pattie” sign-off. Tell me if you think the signature is silly–or more importantly, should I should keep it? It’s up to you! Thanks!

Did you see the news this week that the two major personal DNA analysis companies, 23andMe and Navigenics, got licensed in California? What a brouhaha it’s been–regulators issuing cease-and-desist letters, apparently aiming to protect consumers from sham operators in this nascent industry.

I just visited 23andMe’s Linda Avey, who founded the company with Anne Wojcicki. Wojcicki happens to be the wife of Sergey Brin, the co-founder of Google (GOOG), and Google is an investor in the company. All these folks, including Avey, are relieved about the California decision, but they’re still vying to get approval from New York state regulators.

It’s fascinating that so many of the leaders in this space happen to be women. Besides Wojcicki and Avey, there’s Mari Baker, the CEO of Navigenics, whom I’m seeing this afternoon. Also Ryan Phelan, the founder and CEO of DNA Direct, is up in San Francisco. This is more than coincidence, at least Avey believes so. “Woem tend to own the well-being in the family,” she says. “We give birth to the kids. That’s what we do. And women have such a wealth of information that they carry around in their heads.”

I’ve talked with quite a few high-level health experts about this controversial business. Sue Hellmann, the co-president of Genentech (DNA), has told me that in an era of consumer power and the Internet, personalized medicine via DNA analysis is inevitable. Genentech is another investor in 23andMe. I also saw Marissa Mayer, the vice president of search products and user experience at Google, yesterday. One of her big projects right now is Google Health, an effort to organize the world’s health information. No question, we’ll be seeing a revolution in health care in the next few years.

“I worry when people ask, ‘How many stock options am I going to get?’ We hire people who want to cure diseases.”

–Art Levinson, chairman and CEO of Genentech (DNA), said this during Genentech’s investor day in New York City this past March. Yesterday Levinson raised Genentech’s earnings forecast, and the stock is up substantially in a down market.