Johnson & Johnson to spin out consumer health business in new publicly traded company

J&J
Johnson & Johnson's decision to hive off its consumer health products follows the lead of companies such as Merck, Pfizer, Sanofi and GlaxoSmithKline. (Raysonho/CC0)

Continuing a trend, especially among the largest firms in the pharmaceutical industry, Johnson & Johnson will form a new publicly traded company to handle its consumer health business, it announced Friday.

This is a particularly significant step for J&J, which has become readily associated with signature products such as Neutrogena, Aveeno, Tylenol, Listerine, Band-Aid and Johnson & Johnson’s Baby Powder. Those brands will fuel the new company along with popular allergy medicine Zyrtec.

The separation will take 18 to 24 months, J&J said.

The move mirrors similar initiatives by companies such as Merck, Sanofi, Pfizer and GlaxoSmithKline, which separated their consumer health products to focus on the highly profitable pharmaceutical business.

RELATED: Will pharma's exodus from consumer health continue into 2019? It sure looks that way

Joaquin Duato, announced recently as the successor to departing CEO Alex Gorsky, will continue to lead J&J after the separation. Leadership for the new company will be determined later, J&J said.

“Our board and executive team have regularly evaluated Johnson & Johnson’s portfolio of business over the years, asking whether a broad-based approach best meets the needs of our stakeholders," Gorsky said in an investor call today (Nov. 12). "And while this approach has historically served us well, addressing the complexity of today’s global healthcare and consumer environments now demands unprecedented innovation, focus and agility."  

Even after the separation of its consumer health unit—expected by the company to generate $15 billion in revenue this year—J&J will remain a powerhouse as it expects its pharma and medical device units to make $77 billion in 2021.

"We'll remain the world's largest healthcare company, and we'll be highly diversified," said Duato, who added that the new structure would give both units "advantages operationally" that would help "accelerate growth on both sides."

As for the timing of the move, Gorsky said that the pandemic created more urgency for the company to split as people became more concerned with personal health and wellness.

"We felt this was the right time to recognize the differences between the consumer-facing business versus that in our medical device and pharmaceuticals," Gorsky said. "These have evolved as fundamentally different businesses. If you look at the rate and pace of innovation, the level of science and technology involved in pharmaceutical and medical devices, if you look at the investment required in clinical development plans, if you look at the regulatory pathways ... these two businesses share many more common themes versus our consumer business."

The move will allow J&J to concentrate on developing treatments for oncology and immunology and advance new efforts in cell and gene therapy. Additionally, the company said it expects its medical devices business to “accelerate its momentum across orthopedics, interventional solutions, surgery and vision.”   

"This business will have four billion-dollar brands, more than 20 brands over $150 million, so it's a very diverse portfolio," Gorsky said of the new spinout. "We think this business is really positioned well. This is from a position of strength." 

Gorsky added that J&J's approach to mergers and acquisitions would remain consistent. He said that the company's current pipeline shows a balanced approach, with equal parts external and internal sourcing.

"We definitely tend to have an appetite for smaller tuck-in acquisitions versus large acquisitions. We would expect that to continue," Gorsky said. "There's a lot of emerging areas of science that we'll continue to watch closely and ultimately source that kind of innovation in value-creating ways." 

Goldman Sachs and J.P. Morgan will assist J&J in the transition. The planned organizational design will be complete by the end of 2022. Employees assigned to the new company will participate in their current pay, benefits and retirement programs through the end of 2022, J&J said.

The industry trend of major companies separating their consumer health units picked up steam in 2018 when several made moves. The same year, however, J&J doubled down on remaining intact. 

Instead of selling off, it agreed to pay 230 billion Japanese yen ($2.0 billion) to acquire the remaining share of Japanese cosmetics and skincare specialist Ci:z. The move gave J&J popular medical cosmetic products Dr.Ci: Labo, Labo Labo and Genomer and additional heft in Japan and other Asian markets. Moreover, instead of distancing consumer from pharma, in June J&J put the two units under one leader, former pharma chief Duato.