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  • Johnson & Johnson is the biggest pharmaceutical company in the US

  • based on its market cap. It was named number 36 on the 2021

  • Fortune 500 list of the largest United States corporations by

  • total revenue. Johnson and Johnson has experienced dividend

  • growth for nearly 60 years and has consistently outperformed

  • the S&P 500 over the past 25 years.

  • The analyst community has been talking about splitting up J&J

  • for years - as long as I've known the company.

  • Johnson & Johnson announcing that is going to be splitting

  • into two publicly traded companies.

  • The pharma and medical device company, which will be called

  • Johnson and Johnson, and then the Tylenol, Listerine, Band-Aid

  • company.

  • They're now separating the consumer business away from

  • pharmaceutical and the medical device division. And I think

  • that's going to create significant shareholder value.

  • But some investors question why J&J would choose to break up

  • now. The company is embroiled in a series of lawsuits regarding

  • its talcum powder, as well as its role in the opioid crisis.

  • J&J also took a hit when the CDC recommended Americans receive

  • one of the mRNA Covid vaccines from either Pfizer or Moderna,

  • rather than J&J due to "the risk of serious adverse events."

  • The timing situation is critical, just because people

  • have been very intrigued as to why now

  • Johnson & Johnson is one of the most influential companies in

  • the pharmaceutical industry. It's really seen as a bellwether

  • for the space.

  • Why is the largest pharmaceutical company in the US

  • breaking itself up and what does it mean for investors?

  • Johnson & Johnson is made up of three unique business segments:

  • Consumer, medical devices - which is also called Med Tech -

  • and pharmaceuticals.

  • The consumer business sells everything from Tylenol to

  • Neutrogena. The pharmaceutical and medical device side of the

  • company develops vaccines, like its single dose Covid vaccine

  • cancer treatments, joint replacement materials and other

  • biomedical technology.

  • Separation right now makes a lot of sense. You're going to have

  • two companies with good financial strength and cash

  • flows in order to pursue the objectives that they need to to

  • have normal growth for the foreseeable future.

  • Analysts say the split allows J&J to bring in a management

  • team to specifically focus on the consumer division, while

  • also giving that segment new branding and marketing

  • The strategy of running these consumer businesses is very,

  • very dissimilar to a medical device or a pharmaceutical

  • business. There's a lot more direct to consumer, obviously,

  • the sales and marketing effort, the social media effort is very

  • pronounced in consumer, it's much less so for the other

  • businesses. So allowing a management team just to focus on

  • what has to be done in order to resume growth or drive better

  • revenue growth over the next couple of years, I think is very

  • smart on their part.

  • Our pharma and our medical device business tends to be much

  • more of a business to business relationship in the way that we

  • work through other intermediaries, you know,

  • compared to the consumer business. And most importantly,

  • where we see things going into the future, we feel it now is

  • the right time to make this kind of a move. And again,

  • ultimately, it's going to allow us to reach more patients, more

  • consumers have more innovation, and execute in a much more

  • focused way.

  • It's a somewhat common practice for companies with diverse

  • segments to break apart. Pfizer, Eli Lilly and Merck all

  • reorganize their business structures within the last five

  • years by spinning off segments into separate companies.

  • What the market is saying is that companies should focus on

  • their core competencies and let us diversify. We've already seen

  • several examples of large pharma separating out non core assets.

  • I think they finally came to terms with the fact that they

  • weren't really seeing value in the share price from having that

  • consumer business.

  • When you're a conglomerate, you never get credit for the various

  • different pieces. And quite frankly, you probably shouldn't,

  • because some other parts of the company are not investing the

  • way they should. They're not focus the way they should. And

  • so when you separate out various different businesses, we now as

  • analysts and portfolio managers can appreciate what the each of

  • the businesses are. And they do over time, there have been

  • studies that have been done, both Remain Co. and New Co. can

  • outperform because they are on their own.

  • So far, investors reaction to the divide has been mild with

  • the stock only moving modestly higher on the news. The stock

  • went on to underperform the week following the announcement.

  • The market hasn't really reacted to the news. There are some

  • risks to this execution from separating out the consumer

  • business. And I think investors aren't fully convinced yet of

  • the standalone earnings potential of both companies. So

  • from a consumer perspective, I think people wonder how the

  • consumer business can compete with companies such as Procter &

  • Gamble, and some of these larger, more established players

  • in the space.

  • J&J's business move may also help attract a different type of

  • investor.

  • You're going to get people that are consumer staples and

  • consumer oriented. You'll get them focused on the consumer

  • piece. And of course, you're now more of a pure play healthcare.

  • And so you'll get more health care analysts.

  • You finally get a situation in J&J, where the balance of the

  • business is not impacted by what's going on, good or bad,

  • with the consumer business. But unfortunately, there's been more

  • bad than good for J&J over the past call it five to 10 years,

  • probably.

  • Johnson & Johnson coming out with the statement saying that

  • due to a product review resulting from the Covid-19

  • pandemic, they have decided to cut about 100 different products

  • from their assessment, including all of their talc based

  • Johnson's Baby products.

  • Let's not forget that the talc litigation is with consumer

  • product right and the talc litigation has been horrendous.

  • Johnson & Johnson has experienced a number of legal

  • battles and liability issues regarding all three segments of

  • its business. In July 2021, Johnson & Johnson reached a

  • settlement that requires the company to pay $5 billion over

  • the next nine years due to its involvement in the opioid

  • crisis. But it's the legal challenges on the consumer side

  • of the company that has grabbed the most media attention.

  • More than 20,000 lawsuits have been filed alleging Johnson &

  • Johnson's baby powder resulted in mesothelioma and ovarian

  • cancer. These legal challenges have been ongoing for years,

  • with a slew of headlines coming out about juries awarding

  • plaintiffs millions of dollars Johnson and Johnson discontinued

  • selling its talc-based baby powder in the US and Canada in

  • May 2020 as demand for the product fell.

  • In June 2020. The courts ordered j&j to pay a $2.1 billion fine

  • in the Baby Powder cancer case. There may be more settlements

  • and fines to come as the lawsuits make their way through

  • the courts state by state.

  • I think one of the main reasons that this stock trades where it

  • does which is discount to the market overall. It's the

  • unknown. Once we get the resolution, I honestly think

  • it's going to be kind of almost liberating. Okay, we got it, we

  • figured it out. Whatever the dollar amount is, now we can

  • move it along and focus again on the pharma business and the med

  • tech business.

  • These may seem like big numbers. But to put it in perspective,

  • J&J reported a profit of more than $15 billion in 2019, and

  • $14.7 billion in 2020. The company reported $19.9 billion

  • in free cash flow in 2019. And that number went up to $20. 2

  • billion in 2020.

  • I don't think the legal issues will be an impediment to the

  • company's growth going forward. I do think there's some headline

  • risk to it. We often get questions as to if that's the

  • reason J&J is separating out its consumer business. And I don't

  • think that's the case. I think they separated out the consumer

  • business because the business model has changed and the

  • synergies that they used to have with pharma med device are now

  • different.

  • Johnson & Johnson declined CNBC requests for comment on its

  • decision to separate as well as the on-going litigation. The

  • company told The Wall Street Journal in November 2021 that

  • the lawsuits alleging the use of Johnson's baby powder cause

  • cancer didn't play a role in the decision to break up the

  • company.

  • In October 2021, J&J put the talcum claims into a separate

  • company, which filed for bankruptcy protection. That

  • means it's going to be considered a separate entity

  • from the consumer business.

  • What they're trying to do is increase the attention on what's

  • actually happening with the business at the remaining J&J,

  • having a liability shell absorb the pain related to talc and the

  • painkiller situation, and then the consumer business hang on to

  • the rest.

  • So it is something that we have seen other companies do before I

  • think that J&J will be able to prevail and basically having an

  • efficient way to deal with all these liabilities and then

  • remove it, I think, from the headline risk.

  • If they can create these liability shells in order to not

  • protect the company so much, but just to limit the effect it's

  • having, I don't think investors care as long as they're the