On Friday, Healthcare company Johnson & Johnson made the announcement of its plans to divide its business of consumer products from its pharmaceutical and medical device operations, which will consequently create two publicly traded companies. The announcement sent shares higher in premarket trading.
Household Products Unit to Be Separated From Pharmaceutical and Medical Device Operations
The split will sheer off its unit of household products, manufacturer of Band-Aid bandages, Neutrogena skincare products, Aveeno and Listerine, from its riskier yet faster-growing part that is involved in making and selling of prescription drugs and medical devices, along with its Covid-19 vaccine.
In a statement CEO Alex Gorsky said “Following a comprehensive review, the board and management team believe that the planned separation of the consumer health business is the best way to accelerate our efforts to serve patients, consumers, and healthcare professionals, create opportunities for our talented global team, drive profitable growth, and – most importantly – improve healthcare outcomes for people around the world.”
The company stated that it expects to complete the transaction within 18 to 24 months. The pharmaceutical and medical device part, which involves advanced technologies such as robotics and artificial intelligence, would hold the title Johnson & Johnson and keep the incoming CEO of J&J, Joaquin Duato, at its helm.
The company hasn’t come across a name as of now for the new, publicly-traded consumer business as confirmed by Gorsky.
He stated that the decision of splitting up the company had been talked over by its board for “some time” since it would result in bringing the “tremendous opportunity” for stakeholders.
Gorsky said on “Squawk Box” that “Our goal is really to create two global leaders – a pharmaceutical and medical device business that has great potential today … and of course, the consumer business that’s got iconic brands.”
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Duato to Take Over the Role Next Year
As planned earlier, Duato is entering the position in January next year. The company said that it is expected that those divisions will result in generating nearly $77 billion in revenue whereas it has been further forecasted that the consumer products section would make the sale of nearly $15 billion in products this year.
It has not been decided yet whether the consumer products company will also take up litigation arising from cases over the argument that its Johnson’s Baby Powder leads to cancer, the accusations have been denied by the company powerfully.
The consumer section alone has four brands that help in generating yearly sales of more than $1 billion, Gorsky said. By splitting it, the company can give “even more agility” and “a better opportunity for capital allocation,” he claimed.
Effect of Announcement Upon Shares
After the company made the announcement, shares of J&J rose by more than 3% in premarket trading.
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The company was already undergoing a significant change as a result of Gorsky’s exit as CEO. Though the company said that he will continue to be an executive chairman of the new J&J.
Further, the company confirmed that it has decided to maintain its total dividend “at least at the same level” after the change. As of now, J&J offers a dividend payout of nearly 2.6%.
The announcement came out just days after General Electric confirmed its plans to divide into three different publicly traded companies, separating its medical and energy division from its aviation division.