J&J Plans Breakup Into Drug and Consumer Companies; Shares Rise

(Bloomberg) — Johnson & Johnson shares rose after the maker of cancer treatments, mouthwash and Tylenol said it will break itself up into two public companies, one focused on drugs and medical devices, and the other on consumer products.

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The health-care giant will split off its consumer division in 18 to 24 months, the company said in a statement. The unit has been beset by lawsuits involving products such as baby-powder, which has been linked to ovarian cancers in some users. J&J shares gained 2.7% in trading before U.S. markets opened.

J&J’s pharmaceutical arm has long been its strongest performer. The drug unit generated 55% of the company’s sales in 2020, with another 28% coming from the medical device unit, and 17% from the consumer arm. Altogether in 2020, J&J made $83 billion in revenue, and analysts estimate $94 billion in 2021 sales.

The company is still weighing options for the structure of the split, Chief Financial Officer Joseph Wolk said in an interview.

“We’re still I’d say in the early stages,” Wolk said. “We’re looking at either a spin option or an IPO split option, and we’re going to take a little more time to see what the market indicates to us is the best path forward.”

The company didn’t outline financial terms of the proposed move in detail, though it said the transaction would be tax-free and that it expected to continue to pay dividends at least at current levels. Investors could potentially receive new shares of the consumer health company, or might trade J&J shares for those of the new health company, Wolk said.

J&J has gained just 3.6% this year through Thursday’s close. Meanwhile, rival Pfizer Inc. has risen 36%, while Eli Lilly & Co. has surged 55% and Merck & Co. 7.7%

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J&J’s decision comes just days after General Electric Co. said it would break itself into three pieces. While conglomerates made up of many disparate businesses were once numerous, many of the old giants that once dominated the global business landscape have broken up into smaller entities that executives say can be nimbler in responding to rapidly shifting economic trends and consumer preferences.

Other pharma giants are sharpening their focus on profitable core drug-development efforts. GlaxoSmithKline Plc plans to spin off its consumer business, a joint venture in which Pfizer holds a minority stake. Novartis AG is unwinding its shareholding in Swiss rival Roche Holding AG, a move that could yield cash for deals, and has announced a strategic review of the Sandoz generic-drug unit. Novartis also previously sold a stake in Glaxo’s consumer-health business, which owns brands like Sensodyne toothpaste and Advil painkillers.

Though J&J’s consumer unit brings in the smallest piece of the revenue pie, it’s got immense brand recognition. The division boasts over-the-counter medications such as Tylenol, Motrin and Zyrtec, as well as household name brands like Band-Aid, Listerine, Neutrogena, Neosporin, Aveeno, Clean & Clear and Rogaine.

While the company said the decision wasn’t spurred by potential liabilities from numerous lawsuits alleging its baby powder caused ovarian cancer, the transaction could help it get out from under that dark cloud, especially if it’s unsuccessful at hiving off the liabilities in a bankruptcy court maneuver. J&J faces as much as $7.5 billion in potential settlement losses from the suits, according to Bloomberg Intelligence analyst Holly Froum.

Wolk said claims had “absolutely zero” impact on the decision to split.

The pandemic showed how the market for consumer products has changed, Wolk said. “If you think about how folks purchase consumer-health products today, it’s often dictated by a celebrity influencer who has a social media campaign that used a product that worked really well for them,” he said. The new consumer health company will lean into that strategy, Wolk said.

Leadership Overhaul

J&J isn’t interested in splitting off the pharmaceutical powerhouse from its medical-device unit, which benefits from the scale and customer connections of a larger-sized company, Wolk said.

The split won’t interfere with potential deal-making, Wolk said.

“I don’t see this disrupting the M&A process,” Wolk said. “If anything, it could accelerate it.”

J&J, a behemoth that employs more than 136,000 people globally, will soon undergo a leadership overhaul. The company recently announced that Chief Executive Officer Alex Gorsky will be replaced by longtime veteran Joaquin Duato.

On Friday, the companies announced that Duato will serve as chief executive officer of the unit that will be focused on pharmaceuticals and medical devices. J&J has not yet named a replacement for Chief Scientific Officer Paul Stoffels, who also recently announced he would step down.

The new consumer health company, which has yet to be named, does not yet have leadership in place.

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