Consumer products spin-off allows J&J to focus on pharmaceuticals

Johnson & Johnson (J&J) plans to spin off its consumer health division that sells Listerine and Baby Powder to focus on pharmaceuticals and medical devices in the biggest shake-up in the US company’s 135-year history.

The move by the world’s largest health products company follows similar announcements by conglomerates Toshiba, as well as J&J rivals, and underscores how big, diversified corporations are under pressure to simplify their structures to increase focus.

This has particularly been the case in healthcare, where the slow-and-steady business of selling products such as shampoos and moisturisers has diverged from the high-risk, high-reward work of developing and marketing blockbuster drugs.

“We think these have evolved as fundamentally different businesses,” J&J CEO Alex Gorsky said.

Rival public consumer companies tend to be valued more richly by investors than the J&J consumer unit, CFO Joseph Wolk said.

“That, quite frankly, was getting lost within Johnson & Johnson,” Wolk said. “Similarly, I think — in terms of pharmaceuticals and medical devices — that prevented the spotlight from being shone on those businesses.”

The company said it was aiming to complete the separation in 18 to 24 months at a cost of $500m to $1bn. J&J shares, part of the Dow Jones industrial average, were up 1.5%. The pharmaceutical and medical devices unit will retain the J&J name and the company expects a tax-free spin-off.

Some analysts argued for investor caution.

“Historically, when the market becomes fully valued, we see a great number of spins being announced as companies look for alternate ways of creating more shareholder value,” said Jim Osman, founder of research firm Edge Consulting Group. “It’s something worth noting for the investor.”

J&J’s Band-Aids baby shampoo and cough remedies have long been the face of the company.

But its pharmaceutical and medical equipment business, which makes cancer treatments, vaccines and surgical tools, is on track for nearly $80bn in sales this year, far ahead of the $15bn its consumer products are expected to bring in.

The higher growth outlook comes despite disappointing sales of J&J’s Covid-19 vaccine after a string of production setbacks and fierce competition from rivals Pfizer and Moderna.

Money for deals?

J&J is following rivals. GlaxoSmithKline and Pfizer plan to spin off their joint consumer health business next year, and German drugmaker Merck sold its consumer health division to Procter & Gamble in 2018. Sanofi has also planned to spin off its consumer business.

“The firm’s timing is surprising, as we don’t see any major catalyst for the move. However, if the consumer division no longer holds the deep pockets of the combined company, the risk of future consumer product litigation — such as the large talc settlement — may decrease,” Morningstar analyst Damien Conover said in a research note.

J&J’s consumer division has faced nearly 40,000 lawsuits alleging its Baby Powder and other talc products contained asbestos later linked to mesothelioma and caused ovarian cancer in women using it for personal hygiene, which the company denies.

In October, it created a separate subsidiary to hold the talc liabilities, which then filed for bankruptcy protection.

J&J on Friday said its break-up decision had nothing to do with the talc litigation or the bankruptcy manoeuvre.

A 2018 Reuters investigation found J&J knew for decades that asbestos, a known carcinogen, lurked in its Baby Powder and other cosmetic talc products.

The company stopped selling Baby Powder in the US and Canada in May 2020, in part due to what it called “misinformation” and “unfounded allegations” about the talc-based product. J&J maintains its consumer talc products are safe and confirmed through thousands of tests to be asbestos-free.

J&J’s medical device and pharmaceuticals business also has faced tens of thousands of lawsuits for products including DePuy and Pinnacle implants, surgical mesh products and Xarelto blood thinner.

The spin-off may allow the remaining J&J to be more acquisitive, said Jeff Jonas, asset manager at Gamco Investors.

Wolk said it was “not a wild assumption” to expect it would add debt on the new consumer products company to generate some cash for J&J, but that both companies would have strong financial profiles, including a strong investment-grade credit rating for the consumer business. 

Reuters