Johnson & Johnson announced in November that it plans to spin off its consumer business into a new public company by November 2023.
Wall Street was not surprised by the news.
“The analyst community has been talking about the J&J split for years,” said Jared Holtz, Oppenheimer’s health strategist. “The timing situation is critical only because people were very curious or intrigued as to why now.”
Johnson & Johnson is the largest pharmaceutical company in the United States by market capitalization. It was ranked 36th in the 2021 Fortune 500 largest corporations in the United States in terms of total revenue. The company has shown dividend growth for nearly 60 years and has consistently outperformed the S&P 500 for the past 25 years.
“The market is saying that companies need to focus on their core competencies and allow us to diversify,” said Louise Chen, managing director of Cantor Fitzgerald. “We have already seen several examples of large pharmaceuticals spinning off non-core assets.”
So far, investor reaction to the spin-off has been moderate, with shares rallying only marginally on the November news.
“There are some risks to this execution due to the spin-off of the consumer business,” Chen said. “I think that investors are not yet fully convinced of the potential earnings of both companies.”
There are other potential barriers to the split. The company has faced numerous legal challenges over the past few years, many of which are ongoing and may result in as-yet unknown fines and payments.
Watch the video above to find out why Johnson & Johnson is splitting up and what risks can arise.