Johnson & Johnson (JNJ) is preparing next year to spin off its consumer health unit into a publicly traded company separate from its pharmaceutical and medical technology operations. Ahead of the split, Morgan Stanley put out a research note, highlighting some of the debates in the market over the move, which would result in a consumer brands company called Kenvue and a pharma company with the J & J moniker. For the Club, we consider Johnson & Johnson one of our 10 core holdings and believe the separation will sharpen the focus at both companies, allowing management at each to do what’s best for their respective businesses, unlocking more shareholder value without worrying about the impact on the whole behemoth. During Monday’s “Morning Meeting” for members, Jim Cramer said that J & J has the “best balance sheet in America.” Morgan Stanley’s note In a research note last week, Morgan Stanley posed a series of thought-provoking questions about the pending split and what the business might look like afterward. The analysts asked whether J & Js long-term 2025 goal of $60 billion in pharmaceutical sales might be under threat. The concern is around expected slower growth for a key drug, Stelara — an immunosuppressive treatment for conditions including plaque psoriasis, psoriatic arthritis, Crohn’s disease and ulcerative colitis — due to competition from generics. To be fair, this isn’t the first time the company issued a medium-term pharmaceutical revenue target that the Wall Street consensus did not initially believe in. As Morgan Stanley pointed out, back in May 2019 J & J provided 2023 guidance of over $50 billion for its pharma business. The consensus at the time this was issued was for sales of $46 billion — but if you fast forward to today, the consensus is at $54.4 billion for next year. So, this is a recent example of management providing a conservative forecast that the company is now on track to exceed. Analysts at Morgan Stanley also reviewed what growth will look like in J & J’s medical technology division, following its recent announcement to acquire heart pump maker Abiomed (ABMD), along with an updated analysis of what the consumer health business could be worth in the future. The results of their sum-of-the-parts (SOTP) analysis: “Each of the company’s segments has a similar growth outlook to a peer group average.” Analysts project J & J’s combined pharma and medical technology units to be valued at about $152 a share and consumer health at about $26 a share for consumer health, indicating J & J stock is trading right around fair value. Morgan Stanley raised its price target on J & J stock to $178 per share from $170, assigning no premium at all based on Friday’s close, and keeping its equal weight, or hold, rating. Current shareholders of J & J will end up with shares of both companies after the split. But the terms have not yet been disclosed. Look back, look ahead Johnson & Johnson currently operates three main units under one corporation umbrella: consumer health, which includes household names such as Band-Aids and baby shampoo; pharmaceuticals; and medical technology, which includes medical devices, surgical solutions, and vision. A little over a year ago , J & J announced plans to spin off its consumer products unit, forming two separate publicly traded companies. The standalone consumer company, Kenvue, will be led by J & J executive Thibaut Mongon. The pharmaceuticals and medical technology company will keep the J & J name and CEO Joaquin Duato will remain at the helm. Each segment is very profitable, but the consumer division has lagged behind the other units because it’s a slower-growing industry and also accounts for a smaller part of the overall business. However, once the consumer segment breaks off, J & J said both companies will have strong capital positions, significant cash flow, durable balance sheets, and an unchanged dividend. Pharmaceuticals Morgan Stanley analysts note Stelara will face biosimilar competition beginning in 2023 when it loses its patent protection, cutting into market share. This information about the threat of generics isn’t new. What’s up for debate is how fast the pace of erosion will be. Morgan Stanley estimates revenue from Stelara sales will decelerate in the coming years, modeling $10.2 billion in sales in 2023; $6.5 billion in 2024; and $4.6 billion in 2025. There is a silver lining, though, to Stelara losing sales. Johnson & Johnson hopes to convert many of its Stelara patients to Tremfya, another psoriasis-approved treatment that is also currently in trials for inflammatory bowel disease (IBD). “Tremfya is capable of replacing a majority of Stelara sales in the outer years,” Morgan Stanley said, modeling accelerating Tremfya sales in the coming years of $2.8 billion in 2022; $5.7 billion in 2025; and $9.2 billion by 2030. Together, Stelara and Tremfya could reach more than $12 billion in sales by 2030, the analysis showed. Moreover, J & J has an existing diverse portfolio of profitable medicines and a pipeline of new pharma products that have promise to deliver global growth. The company’s approved and pending treatments for blood cancer and multiple myeloma are “underappreciated,” Morgan Stanley said. The analysts added that the multiple myeloma market will grow to about $33 billion in 2030 — and by that time, J & J’s therapies could take more than 80% of that market share. A few promising pipeline products were called out in J & J’s post-earnings conference call back in October, including (1) Milvexian, in partnership with Bristol-Myers Squibb (BMY), to treat and prevent thrombosis, (2) an amivantamab and lazertinib combination for non-small cell lung cancer, (3) auto-antibody asset nipocalimab, and (4) carvykti to treat pipeline multiple myeloma. As part of their thesis, Morgan Stanley ranks J & J’s pharma business as the largest segment with the highest margin. It will represent about 66% of the total business in 2023 after the consumer business separates. Medical technology The Morgan Stanley report said growth at J & J’s medical technology business hinges on progress in the underdeveloped robotics market. According to projections from J & J and rival Medtronic (MDT), the robotics market captures a low 2% to 3% of global procedures. J & J has been making progress to stay ahead of the curve, including its agreement to acquire Abiomed, a provider of cardiovascular medical technology, to strengthen its position as it enters higher growth markets. According to data from Visible Alpha, total J & J revenue from its combined pharma and medical technology businesses can grow 1% to 2% following the Abiomed acquisition and could expand operating margins to 32.3% by 2027. Consumer health J & J’s consumer segment currently accounts for 16% of the overall business, a smaller allocation compared to pharma’s 55% and medical technology’s 29%. The consumer segment generates billions in sales every year, but its growth has also been weighed down of late by supply chain disruptions, inflationary pressures and higher input costs. While these factors are improving, management expects them to linger into 2023, according to commentary on the company’s third-quarter earnings call in October. Johnson & Johnson is still working through the separation plans and will make further announcements in 2023 on what business strategies for its consumer health business will look like. Additionally, as Morgan Stanley sees it, ongoing litigation related to J & J’s talc baby powder allegedly being “associated with an increased risk of cancer or asbestos-related disease” is seen as an overhang to the stock. However, the analysts cite a strong balance sheet as limiting the associated risk. Bottom line J & J is a high-quality health-care franchise with three strong business segments. We believe the long-awaited split of its slower-growing consumer business from its pharma and medical technology businesses represents a strong long-term growth opportunity for all segments. By strategically streamlining each segment and focusing on targeted investments, we believe J & J can better navigate different industry trends to meet the needs of its customers and patients. However, we do think it’s important for J & J to make investors more confident that it can reach the key $60 billion pharma revenue goal by 2025. As we see it, if the business continues to see growth from its diverse pharma product pipeline, sees progress in its medical technology unit and consumer health accelerates growth through tactical bolt-on acquisitions in the future, J & J stock could trade at a higher multiple. In an economic slowdown, J & J is a solid name to own that can outperform the broader market. The stock is up 4.5% for the year while the S & P 500 has dropped 14.5% over the same period. We also like that J & J has consistently raised its dividend. While the company spends to innovate through its research and development initiatives and strategic acquisitions, it has a pristine balance sheet and strong free cash flow. We rate J & J a 1 for the Club , meaning we would buy the stock at current levels given it aligns with our strategy. (Jim Cramer’s Charitable Trust is long JNJ. See here for a full list of the stocks.) — CNBC’s Jeff Marks and M atthew J. Belvedere contributed to this report. As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Johnson & Johnson (JNJ) is preparing next year to spin off its consumer health unit into a publicly traded company separate from its pharmaceutical and medical technology operations. Ahead of the split, Morgan Stanley put out a research note, highlighting some of the debates in the market over the move, which would result in a consumer brands company called Kenvue and a pharma company with the J&J moniker.
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