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How Johnson & Johnson Really Makes Money

Anand Chokkavelu, CFA
October 7, 2010

Tylenol, Listerine, Band-Aids, Neutrogena, Stayfree, Splenda, Visine, Reach, Bengay, Purell, Rogaine, Motrin, Rolaids, and Nicorette.

You may know that Johnson & Johnson (NYSE: JNJ  ) makes all of these famous brands. But what may shock you is that these brands represent a very small part of J&J's business.

Its consumer goods cohorts Procter & Gamble (NYSE: PG  ) and Kimberly Clark (NYSE: KMB  ) make their money exactly where you think they would -- from brands like Tide, Head & Shoulders, Huggies, and Kleenex.

Not so with J&J. Believe it or not, consumer brands like the ones I listed above account for only about a quarter of J&J's sales. And these sales convert to a bite-sized 15% of J&J's pre-tax profits.

Where the money's at
Johnson & Johnson is called a virtual health-care mutual fund for good reason; it has a passion and proficiency for all things healthcare. The consumer goods division is the smallest of three health-related segments-- the other two being pharmaceuticals (39% of profits) and medical devices (46% of profits).

The general public is the ultimate consumer of all of these segments, but marketing is only primarily targeted at you and me in the consumer goods segment. The other two segments market to the health care professionals and organizations that we trust to make those brand decisions for us.

That's why we've all heard of Tylenol and Band-Aids, but most of us haven't heard about Johnson & Johnson's top pharmaceutical brands (Remicade, Procrit, Levaquin, Risperdal Consta) or top medical devices brands (Cordis, DePuy, Ethicon).

As investors, there are two important takeaways from this surprising product mix.

The takeaways
While P&G and Kimberly Clark can rely indefinitely on the moats they've built with their brands, Johnson & Johnson can only do so for the consumer division (assuming its recent recalls are a temporary blip). L