J&J’s disruption is not limited to financial engineering

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Reuters
Reuters

LONDON (Reuters Breakingviews) – Alex Gorsky is giving investors a parting gift. The outgoing Johnson & Johnson chief is separating the part of the healthcare conglomerate that makes baby shampoo from the part that produces cancer treatments and medical devices. This is an easy valuation gain, as investors are giving nearly double the multiple to consumer-driven earnings as they do for the pharmaceutical industry. Beyond that, it’s a way to give both companies a breath of fresh air and a currency to do business with.

Pharmaceutical giants are refocusing on what they do best. GlaxoSmithKline separates the unit that manufactures Advil painkillers from its pharmaceutical arm. Pfizer has done something similar twice. The potential for J&J to do the same was dismissed by investors: Friday’s announcement https://www.jnj.com/johnson-johnson-announces-plans-to-accelerate-innovation-serve-patients-and- consumers-and-unlock-value by intent to separate health business from consumers led to an increase in share of only 3%.

Yet the financial logic is unequivocal. J&J’s shampoo arm is expected to generate about $15 billion in revenue over the next 12 months, while the rest is expected to generate more than $82 billion, according to Refinitiv estimates. Let’s assume a 20% margin for consumer goods and a 35% margin for the rest, roughly what she’s earned recently, and that’s over $2 billion and $30 billion after tax, respectively. . On the 24 multiple of Procter & Gamble’s earnings and the 14 times that Merck and Zimmer Biomet are reporting, the whole of J&J is worth $470 billion, about 10% more than its current value.

A separate life also unlocks other potential benefits. In the past, drugmakers defended heavyweight conglomerates, arguing that they needed cash-generating consumer operations to fund research and development. The success of Pfizer and AstraZeneca 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 and AbbVie. The combined market capitalization has quintupled since the separation in 2011, outperforming the S&P 500 index.

A potential hangover is the talc dispute. J&J’s recent split of the unit and associated liabilities may have shielded the company from further damage, but the courts could decide otherwise.

Assuming these problems can be ironed out, there is room for mergers and acquisitions. GSK’s consumer business could be an attractive merger candidate. P&G, which makes diapers, can also see the benefits of selling baby products. The pharmaceutical industry would also be free to recruit smaller players and try to supply more blockbuster drugs. It is a break with more than a financial logic.

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BACKGROUND NEWS

– Johnson & Johnson said Nov. 12 that it plans to split into two companies, separating its consumer health division, which sells bandages and baby powder, from the large pharmaceutical unit that makes drugs and cancer vaccines.

– The company will spin off its consumer healthcare business into a new publicly traded company and aims to complete the planned split in 18 to 24 months, it said in a statement.

(Column by Aimee Donnellan in London and Robert Cyran in New York. Editing by Rob Cox and Oliver Taslic)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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