J&J sets out to split the world's largest healthcare conglomerate, hiving off the consumer division

Friday, November 12, 2021

Source: Endpoints News

J&J is joining the movement in pharma to double down on risky but high-growth drugs and devices while hiving off huge consumer divisions. CEO Alex Gorsky says that sometime in the next 18 to 24 months they’ll be splitting the company into 2 different operations, dividing the largest conglomerate in healthcare.

Just as Merck and Pfizer and GlaxoSmithKline before, which followed similar strategies, the move will put a beacon on the R&D side of the business, where new drug development — and the high margins they can deliver — will be critical to the new company’s success.

In a Friday morning analyst call, J&J vice chairman Joaquin Duato said about 65% of the slimmer company will focus on the pharmaceutical business, while the remaining 35% will center around its medical device operations. Duato highlighted the particular “synergies” between these two enterprises, saying J&J could pair precision oncology medicines with companion robotics to better treat patients.

“The new Johnson & Johnson will remain the world’s largest, most diverse healthcare company and will continue to lead in global R&D and innovation,” Duato proclaimed on the call.

Though details were scant on which specific drugs the new J&J would look to capitalize, Duato teased more info would come out at the company’s Pharma Day next week. The lack of clarity prompted questions from analysts, however, about the true promise of such synergies between pharmaceuticals and devices.

A Wells Fargo analyst kicked off the Q&A session asking about exactly that topic, calling out the company for underdelivering on promises of “synergies” in the past. The analyst bluntly asked Duato, Gorsky and CFO Joseph Wolk “why things will be different this time,” to which Gorsky responded, in part:

In this particular case, we’ve seen significant evolution in these markets particularly on the consumer side … [such as] the shift to e-commerce. As we observe that, and I must say I think it was accelerated significantly by Covid-19, why we’re seeing greater interest in personal care and taking care of families, we felt this was the right time to recognize the differences between our consumer facing business and that of devices and pharmaceuticals.

Wolk, like Duato, also noted the upcoming Pharma Day and claimed any fears about “mid-decade expirations” of patents or IP for current pharma products would be “allayed” at the event.

Meanwhile, the new company doesn’t yet have a name, but will become the home for essentially all of J&J’s biggest name brand products. That includes OTC drugs like Tylenol, Zyrtec and Motrin; skin health and beauty products such as Neutrogena; and essential health and specialty brands like Band-Aid, Johnson’s Baby and feminine care products.

J&J is just the latest major pharma conglomerate to siphon off parts of its business into new companies. GSK has been plotting a move for months in an attempt to helm off activist investors, Merck recently launched Organon for its women’s health and legacy businesses and Sanofi spun out its API manufacturing capabilities into its own organization.

That’s not to mention Pfizer’s joint spinoff with GSK in 2019 for their consumer business as well. Novartis, too, is considering a similar move in selling its Sandoz unit.

The split should also help contain the lingering woes around J&J’s Baby Powder controversy as lawsuits mount over allegations that it causes cancer. J&J last month spun out its talc liabilities into its own firm that immediately filed for Chapter 11 bankruptcy, a move used by some companies facing opioid litigation that critics derisively refer to as a “Texas Two-Step” maneuver.

For the record, though, Gorsky told the Wall Street Journal that the claims did not drive this decision. J&J has also faced a steady round of recalls that can now be reserved to the team that will be designated to lead an independent consumer group.

Even after trimming the huge consumer division, the new J&J is expected to have sales near $80 billion a year going into the split. And it will be rid of a consumer operation known for tighter margins and slower growth.

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