In a strategic move aimed at fueling growth in pharmaceuticals and medical technology, Johnson & Johnson (J&J) plans to utilize the substantial proceeds from its recent split-off of its consumer-health business. The New Jersey-based healthcare giant embarked on this multiyear endeavor, culminating in the split-off in August 2023.
This significant development is expected to reshape J&J’s focus and capital allocation strategies.The journey began in 2019 when J&J decided on a plan to untangle its finances and operations for the eventual split-off, which was put into action in 2021.
The sale of shares in Kenvue, the entity that owns well-known brands such as Band-Aid and Tylenol, through an initial public offering in May, followed by the split-off in August, yielded approximately $53.2 billion in cash for J&J. These financial maneuvers now enable J&J’s executives to concentrate more on developing innovations and expanding their businesses in medical technologies and pharmaceuticals.
Chief Financial Officer Joseph Wolk emphasized the company’s renewed focus, stating, “We need to be a top-tier medical tech company and a top-tier pharmaceutical company, first and foremost. That is what’s going to carry us for the medium term.” J&J has set its sights on acquiring businesses with scientific expertise and commercial capabilities that can benefit from its global reach.
Wolk highlighted that the company’s growth strategy will continue to involve a 50-50 split between organic, in-house development and expansion through acquisitions and partnerships, a formula that has historically proven successful.
Wolk emphasized that any potential acquisitions must make sound strategic sense, a principle that has guided J&J’s success in the past. The company could explore acquisitions involving firms with already approved drugs and those with late-stage pipelines capable of launching drugs just as existing J&J products lose exclusivity.
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J & J’s Strategic Financial Moves
Damien Conover, director of healthcare equity research at Morningstar’s research arm, noted the potential for J&J to assemble a portfolio that supports steady earnings growth over the next decade. Recently, J&J provided an initial glimpse of its expected sales and earnings as a stand-alone business.
The company forecasts full-year sales of $83.2 billion to $84 billion, representing a 7% to 8% increase compared to the previous outlook, which included Kenvue. Additionally, J&J expects adjusted earnings of $10 to $10.10 per share, with plans to maintain its quarterly dividend at $1.19 per share.
The completion of the share repurchase, amounting to $33 billion, will lead to annual savings of more than $900 million in dividend payments. This significant financial flexibility provides J&J with the means to explore various growth opportunities, including acquisitions and investments in internal programs.
Looking ahead, the company anticipates reaping approximately $4.2 billion in cash from selling its 9.5% equity stake in Kenvue, a move being considered over the next year. This timeline would result in tax-free profits, given certain conditions.
Meanwhile, J&J is actively eliminating stranded costs, with the process expected to conclude ahead of schedule by the middle of the next year.
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Source: Yahoo finance
