Should Johnson & Johnson ($JNJ) join the Big Pharma split-up club? One of its major shareholders thinks so, and it's pressing activist investors to join the cause.
Artisan Partners has a short list of suggestions for the healthcare conglomerate, including a three-way split. The firm also urges J&J execs to consider revamping the board, rejigging executive pay and opening up its finances to greater scrutiny.
Right now, J&J is trading at a "significant conglomerate discount," the firm said in a presentation posted online Thursday morning--a $90 billion discount, it figures. The company's already well-defined units would be better off as standalone businesses--consumer products, medical devices and pharmaceuticals.
It's not an original idea; CNBC's Jim Cramer suggested last year that an activist investor might step up and fight for a split. He figured that J&J would be worth 50% more in three pieces than the whole was at the time. "I don't care how big JNJ is, this one's ripe for the prodding," Cramer said.
And Cramer's advice followed pressure from at least one big-name analyst. In mid-2012, as Pfizer ($PFE) was moving into split-up mode, Goldman Sachs' Jami Rubin told investors that J&J chief Alex Gorsky, then fairly new in the job, should consider a three-way breakup. One of her points: The medical devices division was underperforming and dragging down the rest of the company.
Of course, that hasn't changed much; the unit has fallen on such hard times that J&J now says it will restructure the business and lay off 3,000 people.
Artisan has similar arguments. The firm said J&J has significantly underperformed its head-to-head peers in each of its three businesses, and its conglomerate structure drags down its stock compared with those rivals. Even its top-performing business--prescription drugs--isn't on par with Big Pharma.
Why? "[I]nadequate execution and poor operating performance on a number of fronts," Artisan says. Its capital investments--including M&A spending--haven't delivered big enough returns. Also, J&J's executive pay plans are flawed--Artisan says Gorsky is overpaid compared to other, better-performing biopharma CEOS--partly because its financial reports aren't as transparent as they should be.
The firm urged J&J to consider bringing new blood onto its board, saying that there's a "notable lack" of actual industry experience there.
Last year at the J.P. Morgan Healthcare Conference, Gorsky seemed to hint that J&J was open to hiving off some of its weaker parts. "We think it's important to be very thoughtful about where we're going to participate and where we're not going to participate," he told presentation watchers in San Francisco. "If we're not a No. 1 or No. 2 in a particular area, if we don't see a path to achieving leadership, … then that's maybe better served in someone else's hands."
Still, J&J has long defended its conglomerate structure, almost as sacred at the company as its oft-quoted credo. During Tuesday's earnings call with analysts, Gorsky said the company's "broad-based structure" has helped "deliver strong, consistent and sustainable financial performance."
But that's exactly what the split-up fans dispute. And the diversified structure is falling out of favor across Big Pharma, as companies spin off, sell or swap their lesser-performing units to focus on their strengths.
Pfizer's long-anticipated divorce, which would split its established products business off from its "innovative core" of newer brands and pipeline drugs, is the leading example, though still uncertain, not to mention a couple of years off. But a long list of current deals fits this mold, from Novartis ($NVS) and GlaxoSmithKline's ($GSK) oncology-for-vaccines swap last year, to Merck & Co.'s ($MRK) consumer health sale to Bayer, to Sanofi's ($SNY) in-the-works trade with Boehringer Ingelheim, which would strengthen the French drugmaker's consumer business and send its animal health unit to Boehringer.Neil Woodford
Then there's GSK, which is under its own pressure from U.K. investors to break up into several pieces. Top fund manager Neil Woodford has said GSK operates like four different publicly traded companies under one roof, an approach that all but guarantees poor management and hampers the growth in each of them.
Artisan figures that a three-way split at J&J would create up to $90 billion in new value, about one-third of the company's current market cap of $282 billion. That 30% or so increase isn't as much as Cramer calculated. But it might be enough to get some activist investors excited.
- read Artisan's prescription for J&J
Special Reports: Top 15 pharma companies by 2014 revenue - J&J | Top 20 highest-paid biopharma CEOs - Alex Gorsky, J&J
Editor's note: This story was updated with details from Artisan's investor presentation.