By ROBERT CYRAN JUNE 2, 2016 @rob_cyran The New York Times
Johnson & Johnson weighs heavy. The bulging health care conglomerate is swallowing the hair-care company Vogue International for $3.3 billion in defiance of calls to break up. Johnson & Johnson’s $312 billion market value makes it a hard target for activists. Yet its size has created ailments, including poor merger-and-acquisition activity and mediocre shareholder returns.
Over the last decade shareholders have largely come to the conclusion that pharmaceutical firms should focus on developing medicines. After all, there’s little in common between using science to discover a cure for Alzheimer’s and selling shampoo. That has led Abbott Laboratories to spin off the pharmaceutical division AbbVie; Pfizer and Merck each to sell their consumer-goods business;and GlaxoSmithKline to divest nutritional drinks. The results have been largely favorable to investors too, because the cash thrown off by consumer goods companies is coveted by yield-starved investors.
Johnson & Johnson has resisted the trend. About one-fifth of its revenue comes from selling consumer health and beauty products such as Band-Aids and Listerine. Over 40 percent comes from cutting-edge drugs, and the rest from medical devices. The diversity may produce relatively steady results, but investors aren’t terribly appreciative of the fish-fowl hybrid. The company is valued at about 11.5 times estimated earnings before interest, taxes, depreciation and amortization, or Ebitda, over the next 12 months. That’s lower than the multiples attached to the consumer goods maker Colgate and the drug maker Eli Lilly, which trade between 14 and 15 times Ebitda, and the medical device firm Medtronic, at 12.5 times.
This has not escaped investors. Artisan Partners tried to pressure Johnson & Johnson to split earlier this year. However, Artisan owned well under 1 percent of its stock; combined with Johnson and Johnson’s scattered investor base, the activist had almost no power to battle its giant target.
The company’s girth comes at a cost. The drug business is faring well, but the other divisions are not. The consumer-goods unit’s margins are below rivals’ and some of its factories still operate under regulatory oversight from the Food and Drug Administration after a wave of product recalls a few years ago. The medical device division’s profits have been essentially stagnant since 2010 despite buying a rival, Synthes, for around $20 billion five years ago. Slimming down, or even splitting into three, would serve Johnson & Johnson well.