An entry sign to the Johnson & Johnson campus shows their logo in Irvine, California
Mark Ralston/AFP via Getty Images
Johnson & Johnson announced plans on Friday to separate its consumer health division from the rest of the company, spelling the end of the last great pharmaceutical conglomerate.
Johnson & Johnson (ticker: JNJ) shares were up on the news, which comes two months before a planned CEO transition, in which longtime Johnson & Johnson executive Joaquin Duato is slated to succeed Alex Gorsky in the top post.
The stay-behind company, which will include both Johnson & Johnson’s pharmaceutical division and its medical devices division, will still be the largest healthcare company in the world, Johnson & Johnson said. The company currently has a market value of $432.5 billion.
more to read
The announcement ends a years-long debate, during which time Johnson & Johnson has become an anachronism among its big pharma peers, which have shed their consumer products divisions one after the other. Johnson & Johnson will not separate its medical device and pharmaceutical businesses, leaving behind what will still be the biggest of the big pharma giants.
The immediate reaction to the news was positive early Friday, as shares rose 2.9% in premarket trading. Other big pharma firms that have made similar moves in recent years, however, have struggled to bring investors along for the ride. Pfizer
(ticker: PFE) shares fell 8.1% in the year after it announced in December 2019 it would combine its consumer health division into a joint venture controlled by GlaxoSmithKline
(GSK), a period in which the S&P 500 rose 25.9%.
GlaxoSmithKline is planning on spinning off that joint venture next year; its American Depository Receipt is lagging the market over the past 12 months, climbing 14.5% as the S&P 500 has risen 31.5%.
“I look at the position of strength from which these businesses are operating right now, I would think the market could see that very clearly,” said Johnson & Johnson’s chief financial officer, Joe Wolk, in an interview with Barron’s early Friday.
Wolk noted that consumer health stocks generally trade at a premium to pharmaceutical stocks, suggesting that Johnson & Johnson’s consumer health division could be valued more highly by investors as a standalone entity than currently is within the larger firm. “That’s probably not reflected, because of the size of the business, that consumer represents within J&J today,” Wolk said. “We do believe that the strategic merit of this decision makes complete sense, but we also think we’re unlocking value for shareholders.”
Johnson & Johnson said that the split will take 18 to 24 months. The consumer health division, which the company said is expected to generate $15 billion in revenue this year, will become a new publicly traded company, selling big-name brands home health brands like Band-Aid, Tylenol, and Listerine.
The pharmaceutical and medical devices divisions, which the company expects to generate revenue of $77 billion this year, will stay behind, selling a range of treatments and devices, from balloons used in sinus procedures to bladder cancer therapies. Johnson & Johnson has chosen not to split those two business segments.
Wolk said that the decision to split had been driven by a shift in the dynamics of the consumer health market by which sales have become less connected to doctors’ endorsements, and more reliant on celebrity endorsements, similar to other consumer goods.
“The consumer business was much more influenced by that personal connection, that celebrity influencer who had a social media campaign that used the product that worked for them making that connection with the individual purchaser, much more than it was five or ten years ago when nine out of ten dermatologists or nine out of ten dentists was really the marketing claim,” Wolk said. “You compare that with the success criteria for medical devices and pharmaceuticals, where its a patient and physician discussion looking for better health outcomes.”
Wolk said that the trend had accelerated during the pandemic.
Johnson & Johnson hasn’t finalized the details of the separation. Wolk said the consumer health company might be spun off, or could be introduced to the public markets through an initial public offering. The executive leadership of the new company has not yet been named.
In an email to investors early Friday, Oppenheimer trading desk analyst Jared Holz wrote that the spinoff would make valuing the company easier for investors. “In simplistic terms, we believe the removal of Consumer is prudent for no other reason than it simplifies legacy JNJ and allows analysts to focus on the remaining innovative segments,” he wrote.
Holz also said that investors had ignored the consumer unit, and that its performance is generally “buried” within the larger company.
Johnson & Johnson would be the third company with plans to break up that were revealed this week. General Electric (GE) said it will break itself up into three parts, while Toshiba has said it plans to split up as well.
–Ben Levisohn contributed to this article.
Write to Josh Nathan-Kazis at [email protected]
