J & J’s rupture goes beyond financial engineering


The offices of the Johnson & Johnson Company are shown in Irvine, California, USA, October 14, 2020. REUTERS / Mike Blake

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LONDON, Nov. 12 (Reuters Breakingviews) – Alex Gorsky is giving investors a farewell gift. The outgoing Johnson & Johnson (JNJ.N) chief is parting ways with the healthcare conglomerate that makes baby shampoo from one that produces cancer treatments and medical devices. This is an easy valuation gain, as investors allocate nearly double the multiple to consumer-derived profits as they do for the pharmaceutical industry. Beyond that, it’s a way to give both companies a new lease of life and a currency to close deals.

The pharmaceutical giants are refocusing on what they do best. GlaxoSmithKline (GSK.L) separates the unit that manufactures Advil pain relievers from its pharmaceutical business. Pfizer (PFE.N) has done something similar twice. J & J’s potential to follow suit was ruled out by investors: Friday announcement leads to a simple increase in shares of 3%.

Yet the financial logic is undeniable. J & J’s shampoo arm is expected to generate around $ 15 billion in revenue over the next 12 months, while the rest are expected to have over $ 82 billion, according to Refinitiv estimates. Assume a 20% margin for consumer goods and a 35% margin for the rest, roughly what she earned recently, and that’s over $ 2 billion and $ 30 billion after tax respectively. . Of the 24 earnings multiple of Procter & Gamble (PG.N) and the 14 times Merck (MRK.N) and Zimmer Biomet (ZBH.N) report, the whole of J&J is worth $ 470 billion, or roughly. 10% more than its current level. value.

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A separate life also unlocks other potential benefits. In the past, drugmakers have defended bulky conglomerates by arguing that they need cash-generating consumer transactions to fund research and development. The success of Pfizer and AstraZeneca (AZN.L) demystifies this logic.

Developing cancer vaccines and treatments is a very different skill than marketing baby lotion. This can lead to long term profits and valuation gains. Consider the split of Abbott Laboratories (ABT.N) and AbbVie (ABBV.N). The combined market capitalization has quintupled since separation in 2011, outperforming the S&P 500 Index.

One potential hangover is the talcum powder dispute. J&J’s recent split in the unit and associated liabilities may have protected the company from further harm, but the courts may decide otherwise.

Assuming these issues can be resolved, there is a possibility of mergers and acquisitions. GSK’s consumer business could be an attractive candidate for a merger. P&G, which makes diapers, can also see the benefits of selling baby products. The pharmaceutical company would also be free to recruit smaller players and try to deliver more successful drugs. This is a break with more than just financial logic.

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– Johnson & Johnson on November 12 announced plans to split into two companies, separating its consumer health division, which sells bandages and baby powder, from the large pharmaceutical unit which makes anti-cancer drugs. cancer and vaccines.

– The company will separate its consumer health business into a new publicly traded company and aims to complete the planned separation in 18 to 24 months, she said in a statement.

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Chronicle of Aimee Donnellan in London and Robert Cyran in New York. Editing by Rob Cox and Oliver Taslic

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