J&J finally decides to dismantle its diversified business model

After decades of a diversified healthcare business model, Johnson & Johnson has announced it plans to split off its consumer health division from its pharma and medical device operations.

The move would create a new consumer health company within 18 to 24 months, according to J&J, which said it would unlock "significant value" whilst allowing the company to focus on its faster-growing prescriptionmedicine and medical device business.

It follows similar decisions by rivals including GlaxoSmithKline and Pfizer, which combined their consumer health units into a joint venture which is scheduled to be spun off next year. Germany's Merck KGaA meanwhile sold its consumer health division to Procter & Gamble in 2018.

The publicly-traded spinoff will be home to a plethora of well-recognised brands, including Band-Aid dressings, the Johnson's baby range, Listerine mouthwash and Tylenol painkillers that are expected to make sales of around $15 billion this year.

Four of J&J's consumer brands are $1 billion-plus products, with another 20 that make upwards of $150 million a year, said the company, which has not yet announced a name for the spin-off or its senior management.

The announcement is likely to be one of the last major strategic moves undertaken by J&J chief executive Alex Gorsky, who will hand over the reins to CEO-elect Joaquin Duato on 1 January. Gorsky said that the decision is the "best way to…drive profitable growth" for all J&J's business units.

It's a major change in direction for J&J, which for many years has held that its diversified structure has helped it weather periods of volatility in some markets, for example a downturn in 2019 and 2020 in its medical device business and the impact of patent expiries in pharma.

With consumer health splintering off, there is already speculation about a further breakup, with pharma and medical devices also diverging.

Gorsky said the split would allow each business to focus on execution and would also allow consumer health to be more nimble in some key areas, for example adapting to the changing purchasing channels and a shift to online that has been amplified by the pandemic.

Pharmaceuticals and medical devices brought in a combined $19.6 billion in revenue in the third quarter, with consumer health contributing $3.7 billion. Analysts suggested that the separated businesses would likely have a higher valuation independently than when part of the same company.

The new company will also be responsible for J&J's talcum powder business, which is still battling lawsuits from people who claim to have developed cancer after using the products.

The company has already spent almost $1 billion defending itself from those claims, and has unveiled a plan to shift the talc liabilities into a newly-created subsidiary, and placing that into bankruptcy proceedings – a move challenged by some plaintiffs.

J&J's management said on a conference call that the decision to separate the businesses was not related to the product liability litigation J&J faces. Along with talc, others are focusing on opioid painkillers, schizophrenia drug Risperdal (risperidone) and vaginal mesh implants.

J&J's announcement comes a few days after another top US conglomerate, GE, announced that it would break up into three businesses, including a healthcare unit that will be spun off in 2023.