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.

Johnson & Johnson