Johnson & Johnson, one of the world’s largest healthcare companies, announced in November 2022 that it plans to separate its consumer health division into a new publicly traded company. This move to split into two companies has raised questions about the reasons behind the decision and what it will mean for the future of Johnson & Johnson.
What is Johnson & Johnson planning to do?
Johnson & Johnson plans to spin off its consumer health division into a separate, publicly traded company. The consumer health business includes over-the-counter medicines like Tylenol, Band-Aid bandages, and Neutrogena skin products. It accounted for nearly 17% of Johnson & Johnson’s sales in 2021.
The remaining Johnson & Johnson business will include its pharmaceutical and medical device units. It will retain brands like the cancer treatment Darzalex and surgical tools. The pharmaceutical and medical device units made up the bulk of Johnson & Johnson’s revenue last year.
Why is Johnson & Johnson splitting into two companies?
According to Johnson & Johnson, the rationale for the split is to enable each company to better focus on meeting the needs of their patients and consumers. The two health businesses are seen as distinct, with different growth trajectories and capital needs.
The pharmaceutical division focuses on developing new drugs and treatments, often requiring major R&D investments over long timelines. Meanwhile, the consumer division operates on faster product cycles and depends on marketing spending to build brand recognition. Separating them is expected to optimize growth strategies.
Growth opportunities
As separate companies, each will be in a better position to pursue targeted opportunities for growth and partnerships within their markets.
Regulatory pressures
Keeping the consumer and pharmaceutical units under one roof has led to increased scrutiny from regulators concerned about quality control issues. Separating them may relieve some of this pressure.
Litigation risks
The pharmaceutical division has faced numerous lawsuits, including over the opioid crisis and contamination of baby powder products. The split could shield the consumer division from these legal risks.
How will the breakup process work?
Johnson & Johnson expects the split to take 12-18 months to complete. It still needs final approval from the company’s Board of Directors. But here are the broad steps involved if approved:
- Johnson & Johnson will create the new consumer health company as a subsidiary within its structure.
- The subsidiary will be separated through a pro-rata spin-off to Johnson & Johnson shareholders. For every share owned in Johnson & Johnson, shareholders will receive a share in the new company.
- The two companies will operate as independent, publicly traded entities.
- Each company’s management team and board will be appointed.
- Support functions like finance, HR, IT will be separated.
What will happen to Johnson & Johnson after the split?
After the separation, Johnson & Johnson will remain focused on pharmaceuticals and medical devices. Some key points about how the post-split Johnson & Johnson will be structured:
- The company will retain its New Jersey headquarters.
- Joaquin Duato will remain CEO of the pharmaceutical/medical device company.
- It will have around $77 billion in expected annual revenue after separation.
- The company is likely to increase investments in drug development and new medical technologies.
- Most of its well-known brands like Tylenol will move to the new consumer company.
What products and brands will the new consumer company include?
The new publicly traded consumer health company will include Johnson & Johnson’s portfolio of over-the-counter medications, skin care, wound care, and baby products. Some major brands moving over:
Product Segment | Major Brands |
---|---|
Medicines and oral care | Tylenol, Zarbee’s, Benadryl, Listerine |
Skin and hair care | Neutrogena, Aveeno, Clean & Clear |
Wound care and topicals | BandAid, Neosporin, Cortaid |
Baby care | Johnson’s Baby, Desitin, Cotton Swabs |
The new company is expected to have around $15 billion in annual revenue. It will be the global market leader in over-the-counter health products.
What does this mean for Johnson & Johnson’s customers and consumers?
For now, Johnson & Johnson states that there will be no changes to how its products are ordered, distributed, or supported. Over time, the split may enable each company to deliver better and more tailored products and services.
Customers buying Johnson & Johnson’s pharmaceuticals and medical devices are likely to benefit from increased investments in new innovations. At the same time, consumers of brands like Neutrogena and Tylenol may see more focus on these product lines as standalone brands unencumbered by the pharmaceutical business.
What does this mean for Johnson & Johnson’s employees?
Johnson & Johnson stated that the split is not expected to impact its approximately 140,000 employees worldwide. The majority will remain with their current businesses after the separation.
However, employees in corporate global support functions will need to align with either the new consumer health company or the pharmaceutical/medical device business. Johnson & Johnson plans to implement an employee selection process allowing those interested to choose their desired company.
How might the split impact Johnson & Johnson’s stock price?
Wall Street reacted positively to the split announcement, with Johnson & Johnson’s shares rising around 3% after the news. Investors tend to favor spin-offs that “unlock value” by allowing distinct businesses to thrive separately.
In the near term, the split is not expected to significantly impact Johnson & Johnson’s stock price. But over time, shareholders could benefit from faster growth and strategic focus in each of the two companies.
However, there are also risks. The smaller size of each company and duplication of overhead costs could negatively impact profits. Only time will tell how the split ultimately affects Johnson & Johnson’s valuation.
Conclusion
Johnson & Johnson’s impending split into a consumer health company and a pharmaceuticals/medical device company is a defining moment in the 135-year history of the healthcare giant. While its renowned brands like Band-Aid and Tylenol will live on, the two new companies will each be leaner and more specialized in their markets.
The breakup is expected to be completed within 18 months pending final approval. While risks exist, the split is generally seen as a strategic move to accelerate growth and innovation in Johnson & Johnson’s distinct healthcare businesses. Investors and consumers will be watching closely to see how the iconic brand evolves as two separate companies focused on improving health and wellbeing.