For more than 130 years, Johnson & Johnson has been synonymous with healthcare. Today, as one of world’s largest healthcare companies, it manufactures many pharmaceutical, medtech, and consumer products.
But just over a year ago, the conglomerate made a major shift, creating a new publicly traded company — Kenvue — as the new corporate brand for its consumer products. This move serves to not only strengthen the consumer arm, but to allow the company to focus on growing its biopharmaceutical and medical device businesses. In early 2022, J&J had also named Joaquin Duato as its new CEO to replace Alex Gorsky, who had served in that role since 2012. Larry Merlo, former president and CEO of CVS Health, has been appointed nonexecutive chair of the new consumer health company. Kenvue’s purpose, to “Realize the Extraordinary Power of Everyday Care,” will guide the company’s actions and long-term aspirations, from strategy to talent philosophy.
“This planned transaction would create two businesses that are each financially strong and leaders in their respective industries. We believe that the new Johnson & Johnson and the New Consumer Health Company would each be able to more effectively allocate resources to deliver for patients and consumers, drive growth, and unlock significant value,” Duato said. “Importantly, the new Johnson & Johnson and the new consumer health company would remain mission-driven companies with exceptional brands, commitments to innovation, and remarkable talent. Each company would carry on the Johnson & Johnson legacy of putting the needs and well-being of the people we serve first.”
The reconfigured Johnson & Johnson is poised to continue to play a leading role in advancing these industries.
“Since becoming CEO, I have tried to reconnect in my new role with our employees globally and with important stakeholders,” said Duato, who spoke at the Morgan Stanley 20th Annual Global Healthcare Conference in September 2022. “My impression when I talked to employees, investors, and government officials is that they have a strong expectation of what Johnson & Johnson can do and what our contribution can be to advanced healthcare — and they have a high bar for us.”
J&J’s Global Goals for 2023
A key deliverable for J&J in 2023 is the separation of the consumer company and the creation of what Duato calls “a global consumer champion.”
“This is a historical moment for Johnson & Johnson and a historical opportunity to make the new Johnson & Johnson focus on pharma and medtech more competitive, nimbler, and faster,” he said.
The planned separation is expected to create value for all stakeholders by aiming to achieve the following key goals:
Increase management focus, resources, agility, and speed to effectively address differing industry trends and to better meet the needs of the new Johnson & Johnson and the new consumer health company patients and consumers.
Further focus capital allocation based on the objectives of each independent company.
Provide each company with a compelling financial profile that more accurately reflects the strengths and opportunities of each business and, as a result, offers investors a more targeted investment opportunity.
Align corporate and operational structures so each company is better able to drive growth and value creation.
With that realignment under way, Duato’s second priority is to make sure that medtech is a best-in-class franchise for Johnson & Johnson. “We are already the second largest medtech company globally, and we are on a journey of improvement in our performance. We went from growing 1.5 percent in 2017 to growing 6 percent in the first half of 2022.” With results from the second half of 2022, Duato says the medtech group was able to surpass its competitors.
The medical devices business plans to accelerate its momentum across orthopedics, interventional solutions, surgery, and vision, with an increased cadence of meaningful innovation, enabled by a strong digital surgery pipeline and focus on execution across all geographies.
The company’s third priority going into 2023 is to continue to fuel its success in pharmaceuticals. “With a trajectory of more than 10 years of our market growth,” Duato says. J&J has an ambitious goal of getting to $60 billion by 2025, growing every single year even with the patent expiration in 2023 of Stelara, its top-selling drug for severe psoriasis, Crohn’s, and ulcerative colitis.
Strategic Financial Outlook and Direction
J&J also recently announced a $5 billion share repurchase program. Duato says that the move “underscores the strength of Johnson & Johnson’s financial performance, but probably more importantly the board and management’s conviction about our internal estimates going forward.” Because of the cash flow that J&J generates on an annual basis along with the strength of the business currently and going forward, the company is in a position to continue to grow its dividend, invest in R&D on an increasing basis, and make some “impactful” acquisitions.
Because its business is broadly diversified, J&J is seeing a recovery to pre-pandemic levels everywhere geographically — but with some exceptions like China, said Duato.
“As a business we’re going to be able to do better. We are also seeing our level of competitiveness increased in every single sector — medtech, consumer, and pharma. We’re seeing that we are maintaining or gaining share. So that’s helping us. We are delivering in our pipeline, both in medtech and pharmaceuticals. We are increasing the value of our pipeline and getting approvals of new products like cell therapy with CARVYKTI very recently.”
He also addressed the supply-chain issues that plagued the first half of the year. “While [supply-chain issues] are not disappearing, they are getting better,” he said. “So overall I want to be positive about the fact that despite all of the challenges and volatility that we’re seeing — and we’re going to see different pressures by sector or by geography — the total picture is that things are getting gradually better in the second half of the year.”
The Future Role of China. “So if I take a step back, we think that China is an important growth driver for Johnson & Johnson, and it’s an important piece of our future. We look for the long term. We don’t think in intervals of a year when we think about capital allocation.” Rather, he said, J&J acts in intervals that are long term, and China remains a very important component of its growth moving forward, and remains a very important geographical area for Johnson & Johnson. That growth, he said, will be seen in every sector — consumer, pharmaceutical, and medtech. He said J&J’s participation in China is about 5 percent, making it a relatively important geographical region for the company’s businesses.
“When I look at the situation in China, there is a general recovery in our consumer and our pharmaceutical businesses. I don’t see any particular issues there that are different from what you would see in other countries.” However, he said, he sees a spottier recovery for the medtech side of the business in China.
“Things are getting better, but we still see that some mobility restrictions exist in certain provinces (it may vary by province). We still are long-term thinkers about China and about the important potential that they will have. But, in the short term, you may see some variability due to the mobility restrictions that we have in China.”
Growth in Medtech
Focusing on J&J’s medtech business, Duato said he expects it to remain somewhat level. “When you think about the 6 percent in the first half of the year, we think that things generally for medtech are not going to get worse. So, we see things even improving for medtech, too, on the revenue side. Despite of the situation with China, we see our medtech revenue continuing to improve from the base of the 6 percent in the first half of the year.”
“When you think about medtech, it’s important to note that we’ve significantly improved that business over the last four years,” said Joseph Wolk, executive vice president and CFO. “The execution both on the commercial side as well as R&D productivity is much better than what it was in 2017.”
On the commercial side, Wolk said J&J was previously “locked out of the 11 major platforms” that the company has today. “We were lucky to be maintaining let alone gaining share in half of them. Today, 10 out of that 11 are either maintained or improving share position — so great job on the execution side. Then with respect to the pipeline portfolio in medtech — back in that 2017–2018 timeframe, we had six assets that were expected to deliver about $100 million in net present value each. Today there are more than 25 assets in that pipeline.”
He also notes that J&J plans to play in some higher-growth segments. “The nice thing about the financial strength in Johnson & Johnson is that we have the ability to pursue meaningful acquisitions in both pharma and medtech, so we don’t really have a bias, per se. We’re looking for the right opportunity where we have a skill, a capability, and expertise that will enhance the value of that asset currently and will reward shareholders for the risk that we’re bearing on their behalf.”
A More Competitive J&J
Following the spinoff of the consumer business, Duato sees a stronger J&J emerging. “I want to reinforce that we are making sure that we use this opportunity to create a Johnson & Johnson that is more competitive, that is leaner from a cost perspective, that is one that is more aligned from pharma and medtech, and that we continue to deliver optimal results both in pharma and medtech.”
He also says J&J will create synergies between the two sectors designed to enable the company to run more efficiently and that will ensure that J&J has more scale in certain capabilities. These synergies could translate into creating new products that combine biopharmaceutical and surgical interventions, similar to what the company is doing in interventional oncology.
“While we are very keen on launching our new consumer health company, we are also taking this opportunity to accelerate the growth of the new Johnson & Johnson,” said Duato.