(FORTUNE Magazine) – If the stars had lined up a little differently, Bill Weldon might have been a family doctor. Unable to afford medical school after college in 1971, he joined Johnson & Johnson's pharmaceuticals business and spent 31 years working his way up, mostly in sales and marketing. At age 53, the new CEO has a winning bedside manner--a key trait for the head of a company that has a 116-year tradition of doing right by customers, employees, and investors, and that regularly gets ranked on FORTUNE's Most Admired Companies and Best Companies to Work For lists. That affability represents Weldon's Dr. Jekyll side.

His Mr. Hyde side has a fearsome competitive drive. It mirrors the Johnson & Johnson that fewer people know, the company that in the past decade has outgrown the Band-Aids and baby shampoo that make it a household name, gobbled up scores of smaller companies, and muscled aside competitors to become a ferocious, $33-billion-a-year drug and medical-devices powerhouse. Weldon spearheaded two of J&J's biggest acquisitions, including its $12.3 billion purchase last year of Alza, a specialist in drug delivery systems.

"J&J is a team of nice guys until you get on the football field with them, and then they hit really hard," says author Jim Collins, who studied J&J for his bestseller Built to Last. Weldon doesn't see any paradox there. As he puts it, "Our values are the ante you need to play in the game. To stay in the game, you need results."

It's that attitude, as much as anything, that has made J&J the surprise standout of the drug industry. In recent months, one by one, other industry giants have faltered. Merck, Eli Lilly, and Schering-Plough have seen their margins squeezed as patents expire on mainstay drugs. Marketing and pipeline problems at Bristol-Myers Squibb have driven its stock price down nearly 40% in recent weeks. Pfizer looks healthy still but faces the same issues: expiring patents, generic competition, a drying pipeline. Congressional leaders and Medicare officials are talking about limiting what drugmakers can charge. Analysts say this year could be the worst for drug industry earnings in a decade.

Yet J&J, which depends on drugs for 60% of its operating profits, is still on one of the longest winning streaks in American business. It has forecast 16% earnings growth in 2002--double-digit growth for the 18th year in a row. This year it boosted its dividend--now 82 cents a share--for the 40th year straight. The company produces such a river of free cash flow--$7 billion last year--that analysts jokingly call it an ATM. Advance notices for a new drug-coated stent, which keeps arteries open after angioplasty, have been overwhelmingly positive. No wonder investors have pushed up J&J stock some 24% in the past 12 months. It recently traded at $60 a share; its forward P/E ratio is 27, about a 20% premium to the industry's average and a 32% premium to the S&P 500's.

What makes J&J so different? The answer may lie in the company's Jekyll-and-Hyde culture, which is the essence of a certain kind of salesmanship--smile, and squeeze very hard. Most drug giants are rooted in science and regard themselves as on a mission to cure humanity's ills. J&J is rooted in baby powder--and the brutal realities of retail competition. Sure, it takes pride in the breakthroughs produced in its laboratories. But it also has the sense to go out and buy expertise when it senses a market. It has shrewdly used acquisitions--about 50 in the past decade alone--to bring in blockbuster drugs like Remicade, used for treating rheumatoid arthritis and Crohn's disease. And it has invested $100 million, for instance, in inventor Dean Kamen's gyroscopically stabilized wheelchair (at left). But J&J doesn't owe its superlative record purely to nice guys doing good works.

The story they love to tell about Bill Weldon comes from the time he went to war with U.S. Surgical. Ten years ago he took over as president of Ethicon Endo/Surgery, a J&J unit that sells instruments for minimally invasive procedures. Ethicon was only a minor player, with 9% of the $150 million market, when word got back to J&J that U.S. Surgical, the market leader, was calling J&J a "dinosaur." Then-CEO Ralph Larsen angrily ordered an attack. Weldon went to work recruiting engineers, strengthening the sales force, talking to doctors about new products, and creating an accredited educational institute where physicians could be trained in the use of J&J's devices. "In the early years we lost lots and lots of money," Weldon says. But J&J grabbed 50% of the market by 1996, and today it dominates the business.

A lot of rivals will be seeing that kind of competitive intensity now that Weldon is CEO. Larsen, his predecessor, shook up J&J in the mid-1990s, busting silos, improving cooperation among units, and motivating people. He gave hundreds of speeches around the company to get employees focused on the same goals and talked about what he calls J&J's "unique ability to deal with complexity and ambiguity." The streamlining and evangelizing had a dramatic effect: J&J's sales grew from $10 billion to $33 billion during his 13-year reign, and its market cap soared from $16 billion in 1989 to $192 billion when he stepped down in April.

Despite that performance, within J&J culture the CEO isn't treated like a superstar. Weldon says the company is so decentralized that he has to act more as a facilitator than as a boss. "God forbid that I should dictate to somebody who knows the business better than I do," he says. "My voice counts the same as everybody else's--everybody knows that." This is true as far as it goes, but sometimes a boss's whisper is even scarier than a tantrum. Says David Holveck, chairman of Centocor, which J&J acquired in 1999 when Weldon was head of J&J's pharmaceuticals division: "The first year out of the blocks we were a little shaky and didn't deliver the numbers. Bill listened to our explanation--there's always an explanation--and then said, 'You guys had a good year but not what you wanted. It is not what I wanted either. Let's think about it.'" Holveck got the message, and Centocor made its numbers the following year.

Today's J&J still runs more like an old-fashioned conglomerate than a matrixed 21st-century organization. Weldon presides over a vast decentralized empire and shares his responsibilities with an 11-member executive committee and a strong No. 2, vice chairman and president James Lenehan, who also took office in April. The corporate office negotiates financial targets with the heads of the separate business units and lets them figure out the best way to meet them. J&J executives concede that there is frequently friction with headquarters but say it is a reasonable price to pay for the entrepreneurism the system encourages.

The game is getting tougher--and certainly nastier. Take J&J's feud with Amgen over an anti-anemia drug called Procrit in the U.S. and Eprex overseas. Amgen developed the drug and licensed it to J&J, and it has become the biggest seller in J&J's medicine chest, expected to generate sales of $3.4 billion this year. Since 1995, however, Amgen has been complaining that J&J violated the license agreement by selling the drug into the dialysis market that Amgen had reserved for itself. The case is before an arbitrator.

Meanwhile, Amgen has gone into competition with J&J by launching a second generation of the drug, called Aranesp. J&J is fighting back ferociously. At a recent meeting with securities analysts, Christine Poon, chair of J&J's pharmaceuticals group, attacked Aranesp for being less effective than Procrit, having a slower response time, and costing more: $13,646 for a course of treatment vs. $9,355 for Procrit. If Amgen raises the dosage of Aranesp to produce better results, she added, "the cost to the health-care system will be exorbitant." Poon's attack infuriated Amgen. When contacted by FORTUNE, George Morrow, Amgen's executive director for worldwide sales and marking, replied, "This is sad. In head-to-head comparisons the two products are very comparable in efficacy and price. Misrepresenting scientific data is unconscionable, and the blatant cherry-picking of data by J&J is wrong. Our focus is on satisfying patients, not slinging mud." J&J defends its data as responsible.

As for any drug company CEO, Weldon's most pressing concern is to keep the new blockbusters coming as patents on existing drugs run out. J&J is in good shape compared with its competitors: Patents on J&J's biggest revenue producers don't begin expiring until 2005, and some stay in force until 2015.

J&J has been ramping up R&D spending in recent years to boost its labs' output; this year spending should go up fully 11%, to more than $4 billion. Weldon suggested naming research boss Dr. Per Peterson to the executive committee to raise the profile of R&D. Peterson told investors in April that with 41 drug candidates in preclinical trials, J&J has "never had a stronger early-stage pipeline." Analysts agree. "The pipeline has improved in the past couple of years, both internally and via acquisition," says Jan Wald of A.G. Edwards.

Perhaps its most exciting compound in the labs is ET-743, a substance produced by the sea squirt, a tiny marine animal that looks like a rubbery blob. Working with partners in the U.S. and Japan, J&J researchers have determined that ET-743 has a unique mechanism that slows the growth of some cancer tumors that aren't responsive to conventional anticancer agents. Early indications are that ET-743 can halt the spread of these cancers after six months and double the survival rate of patients. J&J thinks the sea squirt can serve as the basis for a whole family of cancer-fighting drugs, and has begun testing ET-743 for treatment of ovarian and breast cancer.

Still, early-stage compounds require years of high-cost clinical trials, and most fail. So J&J is pressing to find lucrative new uses for its existing drugs. Pharmaceuticals companies all do this, but as a major manufacturer of medical devices, J&J may have a crucial edge: the use of new delivery methods to create applications. It is developing a unique electronic skin patch that forces drugs through the skin with a weak electrical current. Patients taking painkillers will be able to dose themselves by pushing a button, while a programmable feature in the unit prevents overdoses.

Weldon also has a potent weapon that gives him flexibility in drug marketing: J&J's $7-billion-a-year consumer products division. For instance, when J&J licensed a medication called Concerta for treating attention deficit hyperactivity disorder, it decided to market the drug through its McNeil division, best known for over-the-counter products like Motrin and Tylenol. Reason: It wanted to use McNeil's relationships with pediatricians to find new customers for Concerta. The arrangement worked so well that J&J continued it after it bought Concerta's maker, Alza, last year. It expects sales of the drug, which reached $69 million under Alza, to increase steadily.

Although it prefers to discover drugs on its own so that it can capture the innovator's premium, J&J has never been shy about buying or licensing somebody else's medication. Of its six current blockbusters--drugs that generate more than $1 billion a year in sales--J&J developed just two by itself. The others were licensed, created with partners, or acquired through purchase.

Weldon sees J&J's acquisitiveness and its immunity to the not-invented-here syndrome as sources of strength. With its strong balance sheet, high stock price, and AAA credit rating, J&J has enormous buying power, and it is standard practice at J&J to count on acquisitions for 10% or more of annual growth. J&J benchmarks itself against serial acquirers like General Electric and Cisco Systems in developing a template for target companies. Weldon can recite by heart the eight characteristics that J&J looks for. Besides obvious ones like management quality, growth prospects, and new-product pipeline, two stand out: technology platforms and corporate culture. Rather than buy a single drug or device, J&J goes after technologies or proprietary substances that can produce a multitude of products. And it looks for companies that revere customers, employees, and shareholders just the way that it does. "We've looked at organizations that weren't the right fit with our culture," says Weldon. "It is one of those walk-away points."

J&J has a squad of specialists, representing areas like business development and sales and marketing, who spend all their time looking for pharmaceuticals deals. (Other teams prospect in consumer products and medical devices and diagnostics.) There is no shortage of potential targets. Bob O'Neil, who heads the unit, figures there are some 100 drug companies in North America and Europe and another 400 companies that specialize in biopharmaceuticals. J&J likes to be opportunistic. Two years ago it gobbled up Centocor, which specializes in the fast-growing field of monoclonal antibody research, when one of Centocor's drugs flopped in testing and the company was under pressure to build profits.

Since J&J buys growth, not synergies or economies of scale, it doesn't try to combine operations or cut many costs. Indeed, J&J used to leave companies almost completely alone after buying them. That caused trouble in the mid-1990s, when newly acquired units began vying for customers, distributors, and suppliers that were already working with other parts of J&J. Part of the problem, J&J discovered, was that the CEOs of the acquired companies weren't necessarily as skilled at integration as they were at managing. So in that management-by-whispering way, J&J instituted a process to teach them. "Putting businesses together is different than running a business," says Bill Quinn, the West Point-trained Harvard MBA who runs J&J's integration program. "The CEO of the company being acquired needs help."

When J&J acquired DePuy, a maker of artificial joints, for $3.7 billion it was more like DePuy acquiring J&J. J&J's existing orthopedic business was integrated into DePuy, and DePuy managers got more of the leadership jobs. Quinn spent a year onsite coaching executives from both sides on how to get along, and frequently ran interference for DePuy at corporate headquarters. "There were perceived cultural differences," says Quinn. "DePuy was seen as very cost-conscious and having a huge bias for action, and perceptions can cause fear." Quinn found himself returning to DePuy 11 times after the deal closed to help the new team avoid cultural landmines. "There's too much at stake to just let it happen," he adds.

Taking over a business at the top of its game is arguably Weldon's toughest challenge--just ask Sam Palmisano at IBM or Jeff Immelt at General Electric, new CEOs who since their arrival have seen their companies suddenly lose billions in market cap. Weldon's predecessor served investors royally: $10,000 invested in J&J when Larsen became CEO 13 years ago would be worth some $136,800 today. That means investors who want to buy J&J stock now must pay a rich price--too rich, say analysts like David J. Lothson of UBS Warburg and A.G. Edwards' Jan Wald, who rate J&J a hold because it is fully valued. "As a company J&J is doing terrific," says Lothson. "As a stock we think its current valuation captures the positive outlook." Yet students of cash flow, like accounting guru Robert Howell, visiting professor at Tuck Business School, still think it's a buy. Whoever's right, this much is certain: For a new CEO facing an uncertain political and economic environment, billions in cash can cure a lot of ills.