JOHNSON & JOHNSON: THE BREAKUP IMPERATIVE
CEO Strategic Memo
June 2030 | CEO Edition
TO: J&J Executive Team
FROM: CEO Office
RE: The Case for Separation
Our stock is trading at an 18% discount to the sum of our parts. This discount exists because the market has concluded that J&J is better off as three separate companies than as one conglomerate.
The market is right.
We should separate into three companies by 2032.
THE CASE FOR SEPARATION
Pharma (45% of revenue, declining): - Patent cliff creates significant revenue pressure - Pipeline is good but not exceptional - Investors want high-growth pharma companies, not declining ones - Pure-play pharma trades at 18-20x earnings - As part of conglomerate, it drags down valuation
Medical Devices (40% of revenue, growing 3-5%): - Growing at reasonable rate with strong margins - Regulatory pathway is long but products are meaningful - Investors want pure-play medical device companies with 5%+ growth - Pure-play med device trades at 26-30x earnings - As part of conglomerate, it's valued too low
Consumer Health (15% of revenue, no growth): - Stable, profitable, but boring - Would trade at 16-18x as separate company - Currently dragging down conglomerate valuation
The Math: - Current J&J market cap: $438B - Pharma as standalone: $180B (too high, but assuming separation valuation boost) - Med Device as standalone: $280B (higher multiple for growth) - Consumer as standalone: $90B - Total implied value: $550B - Current J&J value: $438B - Value creation from separation: $112B (25%)
This is real money for shareholders.
THE SEPARATION PLAN
Target Timeline: Separation by Q4 2032
What Separates: 1. Janssen Pharmaceuticals (spins off as independent public company) - Retains: All pharma R&D, manufacturing, commercial - Divests: Medical devices, consumer health - Post-spinoff revenue: ~$32B, margin 35-38%
- Cordis Medical (spins off as independent public company)
- Retains: All surgical robots, orthopedic devices, cardiovascular devices, diagnostics
- Divests: Pharma, consumer health
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Post-spinoff revenue: ~$28B, margin 30-32%
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J&J Consumer & Wellness (either spins off or is acquired by private equity)
- Retains: Consumer health, wound care, OTC products
- Post-spinoff revenue: ~$10B, margin 23-25%
THE FINANCIAL CASE
Current J&J: - Revenue: $67B - Operating Margin: 28% - EBITDA: $18.8B
Post-Separation Values (2032 Estimate):
Janssen Pharma: - Revenue: $32B (assumed to stabilize) - Margin: 36% (slightly lower than today as patents decline further) - EBITDA: $11.5B - Fair valuation: $207B (18x EBITDA multiple for declining pharma)
Cordis Medical: - Revenue: $28B (growing 4% annually) - Margin: 31% (stable to slightly improving) - EBITDA: $8.7B - Fair valuation: $278B (32x EBITDA multiple for med device growth)
J&J Consumer: - Revenue: $10B (flat growth) - Margin: 24% - EBITDA: $2.4B - Fair valuation: $43B (18x EBITDA multiple for no-growth staples)
Total Implied Value: $528B Plus synergy savings/reallocation: ~$25B Total shareholder value creation: $115B
This is a 25%+ value creation event.
THE EXECUTION CHALLENGES
- Separation costs: ~$5B in one-time costs (legal, systems, facilities, etc.)
- Talent retention: Key executives will need significant incentives to stay through separation
- Regulatory approval: FDA and international regulators need to approve manufacturing/commercial bifurcation
- Transition period: 18-24 months of organizational complexity
But the upside justifies the pain.
THE CASE AGAINST (And Why We Reject It)
"Separation will destroy operational synergies" - Counterargument: Synergies between pharma, medical devices, and consumer health are modest (~$1-2B). Worth less than the valuation discount from being conglomerate.
"Separation will reduce scale and pricing power" - Counterargument: Each company will still be top-3 in its category. No meaningful loss of negotiating leverage.
"Separation will increase capital costs" - Counterargument: Possibly slightly, but premium valuations for pure-play companies offset this. Blended WACC probably stays similar.
"Investors like diversification" - Counterargument: If investors wanted diversification, they would buy all three stocks. They would choose pure-play exposures if available.
MY RECOMMENDATION
We should begin planning for separation in Q4 2030 with target separation by Q4 2032.
This creates: - Significant shareholder value ($115B) - Clear incentives for each management team - Pure-play investment theses for each company - Better strategic flexibility for each company to make acquisitions/partnerships
The only downside is that it's complex and will create organizational disruption for 18-24 months.
But the alternative is to remain a discounted conglomerate that's worth less than its parts.
I choose to separate.