Here's What Investors Need to Know About Johnson & Johnson's Split

Last month, pharmaceutical giant Johnson & Johnson (JNJ -0.46%) announced a change that investors never saw coming. The company plans to split its pharmaceutical and medical device business from its legacy consumer health business. Fool contributors Rachel Warren and Toby Bordelon discuss the terms of the split in this segment of Backstage Pass, recorded on Nov. 19. 

Rachel Warren: It's really crazy. Johnson & Johnson, last Friday, made this breaking news announcement. This is a company I talk about a lot. I'm a shareholder of Johnson & Johnson, but after more than 130 years in business, during which time it's grown to control something like a few 100 subsidiaries across its consumer health, pharmaceutical, and medical device businesses, management announced the company is splitting up.

Like you said, Toby, this comes on the heels of a number of massive companies announcing splits, including Toshiba and GE. For anyone who doesn't follow this company closely, up until this point, Johnson & Johnson's business has been divided into three key segments.

There's its pharmaceutical business, which has historically been its fastest-growing business and from which it generates the most revenue. This includes products ranging from its COVID vaccine to the immunosuppressive drug, Stelara. Then there's its consumer health business, which is probably one of the most well-known to consumers, and that includes brand names like Band-Aid, Tylenol, Neutrogena.

Finally, there's its medical device business which includes a range of products like surgical vision products and wound closure products.

Johnson & Johnson is going to be doing something that I don't think investors or analysts thought coming. It's going to be splitting its consumer health business from its pharmaceutical and medical device businesses. The product of the split is going to be two separate companies, both of which will be publicly traded, and both of which will be dividend payers.

The pharmaceutical and medical device company will be one company, and that will retain the well-known Johnson & Johnson name, and the newly independent consumer health company will be the second company, and that has not had a new name or management announced as of yet.

When management announced the deal, they said "the planned separation will create two global leaders that are better positioned to deliver improved health outcomes for patients and consumers through innovation, pursue more targeted business strategies, and accelerate growth".

The goal being the new consumer health company which "would be a global leader with iconic brands and products to touch over a billion lives every day." Johnson & Johnson, the pharmaceutical/medical devices giants would remain "a global leader in healthcare focused on major unmet medical needs and advancing the standard of care."

Essentially, management is saying the separation is designed to enhance operational performance, give them more strategic flexibility, and benefit both patients, consumers, as well as stakeholders. The new consumer health company is expected to separate from the pharmaceutical/medical devices company within the next 18-24 months.

There's still some time before that happens. The current CEO, Alex Gorsky of Johnson & Johnson, he's transitioning that role to Joaquin Duato, the current Vice Chairman of the company's executive committee as of this coming January. The new CEO would continue to lead the new Johnson & Johnson once the separation happens.

Toby Bordelon: So the current CEO, is he sticking around at all or is he just totally retiring?

Warren: There was a previous change announced that he was going to be handing the CEO role over to Joaquin and that is continuing as planned.

Bordelon: So that's not related to breakup necessarily?

Warren: It's not related, but it's continuing ahead. Joaquin is essentially going to be in charge of the company from January, and then he'll continue to lead the Johnson & Johnson company after the split takes place and as of yet, we don't know the management structure for the yet to be named consumer health side.

A lot go over here in terms of transaction details. As I mentioned, the product of the split, you'll have two independent companies, both of which will be publicly traded.

The company said the transaction is intended to qualify as a tax-free separation for U.S. income tax purposes, targeting a plant separation at 18-24 months, subject to a variety of conditions, including final approval by the board of directors.