Goldman Sachs analyst Jami Rubin's dream of a Johnson & Johnson break-up will not be deterred. In what amounts to a 23-page wish list, the analyst laid out reasons for breaking up the company in a research note dated May 30. Although the conglomerate has come to conjure images of parents and children almost as often as it does recalls, consumer perceptions aren't what's bugging the analyst. Instead, Rubin is bothered by what amounts to poor management that is the result of a company being far too big to navigate its best interests.
Breaking up J&J is not a new proposal – Rubin's note acknowledged that the company has dismissed similar talk in the past. Among the reasons given: J&J wants to be perceived as a healthcare company. But other forces may be more important. “As it has grown, J&J may simply have gotten too big for the decentralized, diversified model to work as effectively as it once did,” the analyst wrote.
Further, Rubin noted that interviews with J&J's CEO Alex Gorsky indicate the exec is thinking not just big for his company, but bigger. In Rubin's mind, this is far from the right direction, and Gorsky's proposals could transform the industry behemoth into a Wall Street pet. Among her reasons why:
- Lack of unit synergy, by which Rubin means pharmaceutical, consumer and medical devices and diagnostics (MD&D). As an example, Rubin wrote that there really isn't an overlap between pharma and consumer goods, because specialty drugs are becoming a greater focus. She said this means Rx-to-OTC switches are unlikely. The analyst also noted that drugs and devices are not sold together, a knock against having drug and device units under the same corporate roof.
- Too few leadership resources for too many needs. “The full merits of each business are not fully understood within a conglomerate structure” Rubin wrote.
Investors like spin-offs. Rubin's report cites Abbott's impending split as one that plays well with the finance guys who like pure-play companies. Additional examples: Pfizer's nutrition business sale, Bristol-Myers Squibb's “conscientious efforts to slim down,” and Covidien's spin-off plans. “Evidence is building across healthcare that smaller, more focused companies can perform better than their diversified peers,” Rubin noted.
Rubin's post-breakup vision includes the following:
- Estimated share prices: pharma $34/share, MD&D $27/share, Consumer, $9/share.
- A free-standing pharma powerhouse. Rubin said under-performing sisters are sapping the pharma division's strength, despite having a portfolio that “is among the broadest and most impressive in the industry. [Products of note: Zytiga, Xarelto, Incivo] Sum-of-parts valuation: $95 billion.
Consumer could regain its footing, despite all the recalls. Rubin speculated that the mega-company structure “may have disguised issues that may have been discovered earlier in a smaller, more nimble company.” Challenges: Rubin said recalls cost the company $1 billion in sales since 2010 and recovery has been slow. Sum-of-parts valuation: $25 billion.
A revived MD&D division, if Johnson & Johnson put more money behind it. Rubin wrote that the company has ignored entire therapies, including transcatheter heart valves, and is more focused emerging markets instead of new technologies. Meanwhile, he said J&J's management estimates the recall-plagued division has lost $1 billion in sales. Rubin said a renewed focus on innovation could increase growth. Sum-of-parts valuation: $76 billion.
Johnson & Johnson did not respond to reporter inquiries by press time.