Johnson & Johnson’s Sale Of K-Y Brand To Reckitt Benckiser Confirms Focus on Pharma

A week ago pharmaceutical giant Reckitt Benckiser announced that it has signed a definitive agreement to acquire global rights to Johnson & Johnson‘s (NYSE:JNJ) K-Y brand. ^[1] K-Y is one of the leading brands in intimate lubricants market with global sales of more than $100 million across 50 countries. ^[1] With this acquisition, Reckitt Benckiser intends to strengthen its consumer portfolio and potentially improve its consumer business margin as healthcare products tend to have slightly higher margin compared to other consumer products such as detergents. From Johnson & Johnson’s perspective, the move is hardly surprising given the company’s performance in recent quarters.

J&J’s focus is gradually shifting from medical devices and consumer products to pharmaceutical business, and rightly so given the opportunity arising in this industry as major drugs continue to lose their patent. Moreover, offloading portions of consumer portfolio will improve the company’s overall profit margin, as the pharmaceutical business’s proportion in the total sales will increase. The price of the deal is not disclosed yet, but the additional cash will help J&J expand its pharmaceutical operations overseas, and fund research and development efforts. In other words, the move is in line with the company’s core strategy.

Our price estimate for Johnson & Johnson stands at $91, implying a slight discount to the market price.

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J&J’s Focus Has Shifted Away From Consumer Products

Consumer business constituted roughly 25.5% of J&J’s total revenues in 2009. This figure has declined over the years and amounted to 20.6% in 2013. ^[2] During the same period, the percentage contribution of pharmaceutical business went up from 36.4% to 39.4%. ^[2] Much of this can be attributed to the growth in J&J’s immunology drugs Remicade, Simponi and Stelara. The growth in the overall consumer healthcare market has been relatively low and J&J has lost some share in recent years due to manufacturing and supply chain issues. Even though a revival is on its way, we do not expect consumer business to outperform the pharmaceutical business. Also, the margins are extremely low, which suggests that there is an incentive for Johnson & Johnson to further trim its consumer healthcare operations and divert funds to pharmaceuticals.

Besides immunology drugs, J&J’s top line growth is also getting strong support from continued expansion of its type 2 diabetes drug, Invokana (commonly known as Canagliflozin). The drug was granted FDA approval in early 2013 and was approved in Europe in November for treatment of adults. It has shown great promise by challenging incumbent Januvia and could potentially be a Blockbuster for the company.

We have previously stated that immunology, diabetes oncology and anti-infectives are the way to go for J&J. Given that majority of J&J’s growth is coming from these segments, selling a consumer healthcare brand suggests desirable allocation of resources. The company has stated that 25% of its revenues are coming from products that were launched in the last five years, implying that patent loss risks for these products are a long way off.

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1. RB ACQUIRES K-Y BRAND, Reckitt Benckiser press release, Mar 10 2013 [↩] [↩]
2. J&J’s SEC Filings [↩] [↩]