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Should J&J break up? Get ready for a new round of debate

July 23, 2015
Life sciences

Johnson & Johnson has heard the advice before: Split up and reap the benefits. This time, it’s CNBC’s Jim Cramer making the call, and he figures the sum of J&J’s parts would be 50% bigger than the whole is now. And he thinks an activist investor might step in and give J&J a push in that direction. The activist investor angle is just Cramer’s opinion–“I don’t care how big JNJ is, this one’s ripe for the prodding,” he says. The three-way divorce idea, however, has been percolating for some time. The latest round of pressure came in mid-2012, in the wake of Pfizer’s move into sale-and-spinoff mode. Goldman Sachs analyst Jami Rubin, who pressed Pfizer toward a split, told investors that then-new CEO Alex Gorsky should give a thought to breaking up. Gorsky said no dice. Rubin downgraded the stock. Since then, J&J’s pharma business has ratcheted up the growth with new products, its devices business snapped up Synthes and suffered under recalls of its hip products, and its consumer unit has struggled its way back to store shelves after a series of disastrous recalls at the beginning of the decade. Now, as Rubin pointed out during last week’s earnings call, J&J’s devices business is still lagging–and dragging down the rest of the company. And as Cramer points out in his Tuesday split-up manifesto, the company needs to “stop the bleeding” in devices, while at the same time growing consumer sales and keeping pharma on its growth track. Essentially, Cramer’s argument is that the three divisions have disparate sets of customers, disparate manufacturing, and disparate distribution channels. If each division were on its own, then each could focus better. But as Pfizer repeatedly notes when asked whether it will translate its internal reorg into innovative and established businesses into a Big Split, it’s all about value for shareholders. If they’d be more valuable apart, then so be it. Cramer totted up his estimates to predict that J&J’s consumer business, which brought in $3.5 billion for Q2, would be worth $10 per share. Devices, at $6.4 billion in Q2 sales, could be worth $63 per share. And the fast-growing prescription drug business–which CNBC calls “a beautiful jewel of a pharmaceutical company buried in there”–would top both at $78 per share. Grand total, $151 per share. That’s half again as much as J&J’s Monday close of $100. While J&J has given no signs of moving toward a three-way split, Gorsky said earlier this year that he’s looking for ways to focus in on areas where the company is No. 1 or No. 2–or sees a clear path to getting there. The company last year hived off its Ortho Clinical Diagnostics arm for $4 billion, for instance. But he’s more likely to aim for “reinventing” J&J’s approach to a business rather than “exiting” it completely, as Novartis did when it handed over its consumer business to a GlaxoSmithKline-controlled joint venture. By Tracy Staton Source: Fierce Pharma

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