Johnson & Johnson (JNJ, Financial), one of the world's largest health care companies, has been making waves in the industry with its diverse pharmaceutical pipeline, a mix of opportunities and challenges in its business segments and strategic acquisitions.
In this discussion, I will explore how Johnson & Johnson is progressing toward the intensification of shareholders' value.
The vital breakup
Johnson & Johnson plans to spin off its consumer health segment into a new standalone company called Kenvue by November 2023. The new company will own popular brands, including Tylenol and Listerine, and generated over $15 billion in revenue in 2022, about 16% of Johnson & Johnson's sales. The separation aims to increase attention and valuation multiples for Kenvue, leading to significant growth and better shareholder returns. In addition, the move will allow Johnson & Johnson to focus on specific priorities, driving growth in both companies and returning more capital to investors. However, unresolved liabilities from lawsuits related to allegedly cancer-causing talc in baby powder may hang over the stock.
Source: 2022 Earnings Presentation
Interestingly, the separation reflects how big corporations have been pressured to simplify their structures to increase focus, especially in health care. Rival GSK PLC (GSK, Financial) has also recently completed the spinoff of its consumer health business. The spinoff presents a reasonably safe investment opportunity, and the risks the businesses face after the separation are similar to those already faced by investors of the legacy stock.
Johnson & Johnson's pharmaceutical and medical equipment units, which produce cancer treatments and surgical tools, recorded nearly $80 billion in sales in 2022, way more significant than its consumer products revenue. As a result, Johnson & Johnson will continue to own at least 80.1% of the voting power of Kenvue's shares upon completion of the offering.
Overall, the separation will lead to potentially safer investments. Investors, however, may want to consider if they want to start a new position in Johnson & Johnson's stock before the separation. The combined dividends of both businesses at the time of the separation's completion are expected to be equal to those of Johnson & Johnson today. Still, payouts may increase at different rates after that, and dividend yields may differ considerably.
State of key drivers
Johnson & Johnson faces many opportunities and challenges across its different business segments. The company may see continued growth in its over-the-counter business in the Consumer Health segment due to demand for cough, cold and flu products. However, supply constraints may hinder growth in the skin health (beauty) and oral care businesses. In addition, the baby care business may face competition and market weakness in crucial areas like India.
In the pharmaceutical segment, Johnson & Johnson's Immunology business is likely to grow with the continued adoption of Stelara and Tremfya, but competition from biosimilars could impact Remicade. In addition, the Covid-19 vaccine is expected to drive growth in the Infectious Diseases business, but increased competition could affect sales of other product lines.
Market recovery and commercial initiatives could lead to growth in the MedTech segment, but competitive pressure and volume-based procurement may impact sales. The surgery business may see growth in advanced and general, but could face competition in the U.S. for endocutters and strong market demand for infection prevention products in biosurgery.
While the company may see growth in some areas, such as its over-the-counter and immunology business, competition, supply constraints and market weaknesses could hinder growth in other areas, including skin health, oral care and oncology.
Abiomed: A favorable fundamental
Johnson & Johnson's recent acquisition of Abiomed, a leading provider of circulatory and oxygenation support medical technology, is expected to accelerate revenue growth and be accretive to the company's adjusted earnings per share in 2024. With the acquisition, Johnson & Johnson's portfolio now includes 12 $1 billion-plus platforms, including Abiomed's range of innovative products.
The company says the acquisition aligns with its strategic priorities as it extends Johnson & Johnson's presence in the high-growth heart recovery market, with a total addressable market of over $35 billion in the U.S. Abiomed's pipeline of clinical and indication studies, combined with Johnson & Johnson's established presence in the market, positions the company to capture a substantial market share.
Source: Company presentation
Overall, Fierce Biotech noted the acquisition will positively impact Johnson & Johnson's financial performance and market valuation in the long term. With an extended portfolio of innovative medical technologies, the company will capture a larger share of the heart recovery market, resulting in increased revenue growth and earnings per share. The acquisition also provides Johnson & Johnson with a platform for continued innovation, leading to sustained growth in the future.
Promising pharmaceutical pipeline
Johnson & Johnson's pharmaceutical pipeline includes potential approvals and clinical data updates. The company has several drugs awaiting approval. Several planned submissions for potential approvals include niraparib for L1 prostate cancer, talquetamab for multiple myeloma and BALVERSA for urothelial cancer patients. In addition, the company has numerous Phase III trials underway, covering various symptoms and patient populations.
One of the drugs awaiting approval, niraparib, has already been approved in the EU for L1 prostate cancer patients. Talquetamab is another potential approval for relapsed and refractory multiple myeloma patients in the U.S. and Europe. ERLEADA seeks approval for tablet reduction, while aprocitentan is considered for difficult-to-treat hypertension patients.
According to Fierce Pharma, Johnson & JoJohnson's pharmaceutical pipeline is diverse and packed with potential approvals and clinical data updates across various indications and patient populations, including tumor-agnostic patients, non-muscle invasive bladder cancer, solid tumors, rheumatoid arthritis and hemolytic disease of the fetus and newborn.
A failed scheme to avoid cancer lawsuits
Johnson & Johnson has lost its attempt to use bankruptcy to escape more than 40,000 lawsuits linked to its talc-based baby powder products. The company had tried to offload liabilities to a spinoff called LTL Management and immediately put it into bankruptcy, but the court rejected the move. The so-called Texas two-step legal tactic aims to avoid facing lawsuits in other venues, but the court's decision makes it harder for corporations to use this tactic in future cases.
Fundamentally, it led to Johnson & Johnson facing stronger allegations that its baby powder was tainted with asbestos, hurting its position in ongoing lawsuits. The court's ruling means the company will have to defend itself against these claims, which increases its exposure to potential legal liabilities and may affect its financial performance and reputation in the long run. In addition, the ruling is expected to increase scrutiny from regulators and consumers, as well as make investors more cautious about investing in the company.
However, the impact on Johnson & Johnson's long-term financial performance and market valuations is uncertain. It depends on various factors, such as potential settlements and the company's ability to continue generating profits from its other products.
Conclusion
In conclusion, Johnson & Johnson is a diversified health care company with a strong pipeline of potential drug approvals and, with the recent acquisition of Abiomed, revenue growth in the long term.
The planned spinoff of its consumer health segment aims to increase focus and return more capital to investors. Overall, Johnson & Johnson's strategic moves position the company for sustained growth and long-term value creation. However, unresolved liabilities may pose risks for the stock.
