J&J to spin off consumer arm, focus on medical unit

NEW YORK • Johnson & Johnson (J&J) plans to spin off its consumer health division that sells Listerine and Baby Powder to concentrate on pharmaceuticals and medical devices in the biggest shake-up in the US company's 135-year history.

The move by the world's largest health products company follows similar announcements by conglomerates Toshiba and General Electric, underscoring how big, diversified corporations are under pressure to simplify their structures to increase focus.

This has particularly been the case in healthcare, where the slow and steady business of selling products such as shampoos and moisturisers has increasingly diverged from the high-risk, high-reward work of developing and marketing blockbuster drugs.

"We think these have evolved as fundamentally different businesses," J&J chief executive Alex Gorsky said.

Rival public consumer companies tend to be valued more richly by investors than the J&J consumer unit, said chief financial officer Joseph Wolk. "That, quite frankly, was getting lost within Johnson & Johnson. Similarly, I think - in terms of pharmaceuticals and medical devices - that prevented the spotlight from being shone on those businesses."

The company said it was aiming to complete the separation in 18 to 24 months at a cost of US$500 million (S$676 million) to US$1 billion. J&J shares, part of the Dow Jones Industrial Average, were up 1.5 per cent. The pharmaceutical and medical devices unit will retain the J&J name and the company expects a tax-free spin-off.

J&J's Band-Aids, baby shampoo and cough remedies have long been the face of the company. But its pharmaceutical and medical equipment business, which makes cancer treatments, vaccines and surgical tools, is on track for nearly US$80 billion in sales this year, far ahead of the US$15 billion its consumer products are expected to bring in.

The higher growth outlook comes despite disappointing sales of J&J's Covid-19 vaccine following a string of production setbacks and fierce competition from rivals Pfizer and Moderna.

J&J is following plans by rivals GlaxoSmithKline and Pfizer to spin off their joint consumer health business next year, while German drugmaker Merck also sold its consumer health division to Procter & Gamble in 2018.

"The firm's timing is surprising, as we don't see any major catalyst for the move. However, if the consumer division no longer holds the deep pockets of the combined company, the risk of future consumer product litigation - such as the large talc settlement - may decrease," said Morningstar analyst Damien Conover.

J&J's consumer division has faced nearly 40,000 lawsuits alleging its Baby Powder and other talc products contained asbestos, later linked to mesothelioma and ovarian cancer in women using it for personal hygiene, which the company denies.

Amount Johnson & Johnson's pharmaceutical and medical equipment business - which makes cancer treatments, vaccines and surgical tools - is expected to bring in in sales this year.

What its consumer products, such as Listerine and Baby Powder, are expected to bring in.

Last month, it created a separate subsidiary to hold the talc liabilities, which then filed for bankruptcy protection.

J&J said its break-up decision had nothing to do with the talc litigation or the bankruptcy move.

A 2018 Reuters investigation found J&J knew for decades that asbestos, a known carcinogen, lurked in its Baby Powder and other cosmetic talc products.

The company stopped selling Baby Powder in the United States and Canada in May last year, in part due to what it called "misinformation" and "unfounded allegations" about the talc-based product.

J&J maintains its consumer talc products are safe and confirmed through thousands of tests to be asbestos-free. Its medical device and pharmaceuticals business also has faced tens of thousands of lawsuits over some products.

Mr Wolk said it was "not a wild assumption" to expect the spin-off would add debt on the new consumer products company in order to generate cash for J&J, but that both companies would have strong financial profiles, including a strong investment-grade credit rating for the consumer business.

REUTERS