Johnson & Johnson has finally decided to let shareholders do their own portfolio diversification. The world’s largest healthcare company plans to split itself in two. It will spin out a consumer-health division — home to household staples like Band-Aid and Tylenol — most likely through a stock listing. That will leave behind a much larger pharmaceutical and medical-devices businesses.
The break-up of J&J was announced in the wake of dismantlement plans for two other legacy giants, Toshiba and GE. The unbundling of conglomerates has been under way for decades. But this week stands out for scale of the break-ups planned and the former loftiness of the corporate names involved.
At J&J the marketing and logistics needed for selling products like shampoos and painkillers have diverged from those required for developing and promoting blockbuster drugs.
The former, a slow-growth, low-margin but steady business, relies heavily on advertising spend and faces plenty of competition from other brands. In contrast pharmaceuticals, high-risk and capital intensive, enjoys high barriers to entry, plus huge potential pay-offs when a drug succeeds.
At J&J, less than a fifth of the $82.5bn in revenue last year came from the consumer health unit. Instead, pharma delivered over half of group sales thanks to blockbuster cancer treatments like Darzalex and Imbruvica.
A successful break-up would, on paper, unlock value. Using J&J’s forecast consumer division operating profits, from Visible Alpha, this unit could reasonably be worth over $45bn. The drugs business might be valued at some $330m on a similar basis. Add on $100bn or so for medical devices and you soon get to a figure over $500bn. That would be more than 15 per cent higher than the current enterprise value.
Splitting out the consumer unit will allow J&J to better focus on improving margins and sales for the business which suffered a wave of product recalls in recent years. J&J has resisted ripping off the Band-Aid for a long time. With the stock market recording new highs, now looks a good time.
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