Johnson & Johnson
Johnson & Johnson announced plans to spin-off its less profitable Consumer products division and focus on its pharmaceutical business, which is a highly profitable industry giant.
The plans, which appears to have taken the market by surprise, will split the company into two separate focused entities. Each company will have its own management team, and independent capital structure which should create value for shareholders. This should result in the sum of the parts being valued at more than the combined entity.
The J&J pharma and medical devices operations are showing strong profit growth, whilst the consumer division has underperformed in terms of bottom-line contributions to the groups’ results.
Peers such as Pfizer, Merk and Glaxo- SmithKline have already spun-off their consumer healthcare operations which require different management skills. Under highly competitive global market conditions, this segment is subject to high volumes and relatively low margins (compared to that of the pharma business).
Strong brands in the consumer operations, such as Tylenol, Listerine, Neutrogena and Band-Aid, are a positive factor with each product generating in excess of $1bn sales. This division is expected to grow by at least 5% per anum. It has had numerous lawsuits alleging its baby powder, and other talc products, contained asbestos which caused ovarian cancer in woman. J&J have denied the allegations but put the business into bankruptcy and is no longer a drag on their profits.
The pharma operations, focused on cancer treatments, vaccines and medical equipment are estimated to have sales of around $80 bn and are the major drivers of J&J earnings.
The company is expected to complete the separation of the two companies in 18 to 24 months, with the pharmaceutical-medical unit retaining the J&J name. That unit plans a major rollout of 14 new drugs by 2025, with potential sales of $4 bn for each new drug.
Details of the deal are sketchy at this point in time. Johnson & Johnson, as it now stands, has consistently delivered profit growth and is a high-quality business. We have been invested in J&J for a number of years, and with the potential value unlock as a result of corporate action we will remain shareholders.
