Even after the split, Johnson & Johnson will be the largest healthcare company in the world.
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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.
The split will create one of the world’s larger consumer healthcare companies, while the stay-behind company will still be the largest healthcare company in the world. The news comes two months before a planned CEO transition, when longtime Johnson & Johnson executive Joaquin Duato is set to succeed Alex Gorsky in the top post.
Shareholders are now left with a question: Will the two companies on their own be worth more than the conglomerate is today? The markets’ initial take was that they would, and shares of Johnson & Johnson (JNJ) were up 1.5% early Friday.
Enthusiasm seemed to be waning as the morning wore on, however. The stock opened at $167.43 on Friday, up 2.7% from the previous close, but quickly fell to $165.55.
Recent history gives reason for caution. Other big pharma firms that have made similar moves in recent years have struggled to bring investors along for the ride.
(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
(GSK), a period in which the S&P 500 rose 25.9%.
is planning on spinning off that joint venture next year; its American Depository Receipt is trailing the market over the past 12 months, climbing 14.5% as the S&P 500 has risen 31.5%.
Johnson & Johnson currently trades at 16 times earnings expected over the next 12 months, a midrange valuation for a pharmaceutical firm, but cheap for a consumer health company. The consumer health giant
Procter & Gamble (PG), by contrast, trades at 24 times earnings, while
L’Oréal (OR.France) trades at 44 times earnings.
In an interview, Johnson & Johnson’s chief financial officer, Joe Wolk, said that the consumer division’s value likely was not fully reflected in the company’s current share price. .
“That’s probably not reflected, because of the size of the business, that consumer represents within J&J today,” Wolk told Barron’s. “We do believe that the strategic merit of this decision makes complete sense, but we also think we’re unlocking value for shareholders.”
The consumer health division, which the company expects 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 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.
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.
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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.
Wolk, the CFO, said that the decision to split had been driven by a shift in the dynamics of the consumer health market. 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 10 years ago when nine out of 10 dermatologists or nine out of 10 dentists was really the marketing claim,” Wolk said. “You compare that with the success criteria for medical devices and pharmaceuticals, where it’s a patient and physician discussion looking for better health outcomes.”
Wolk said that the trend had accelerated during the pandemic.
On an investor call Friday morning, Wolk distanced the split from a separate maneuver the company has undertaken in an attempt to settle its liabilities in consumer lawsuits brought over products containing talc. Johnson & Johnson recently spun off an entity that holds its talc liabilities, and put the entity into Chapter 11 bankruptcy. The matter is currently being considered by a bankruptcy court in North Carolina.
“Today’s announcement is separate and distinct from the talc liability and bankruptcy proceedings,” Wolk said. “We will let the bankruptcy court determine the appropriate adjudication of those liabilities.”
Johnson & Johnson would be the third company with plans to break up that were revealed this week. General Electric (GE) said it would break itself up into three parts, while
—Ben Levisohn contributed to this article.
Write to Josh Nathan-Kazis at [email protected]