Johnson & Johnson (JNJ -0.69%) is one of the largest healthcare companies in the world. However, the drugmaker is currently going through a transition. The company is spinning off its consumer health division, which is home to popular over-the-counter brands such as Neutrogena, Aveeno, Tylenol, and more. This ongoing planned separation should be complete by the end of the year.
The split will affect Johnson & Johnson's stock price and market cap -- which is $432.8 billion as of this writing -- but the company will remain one of the most prominent healthcare players in the world. And given its leadership in the pharmaceutical and medical devices (medtech) industries, Johnson & Johnson still has plenty of room to grow. But can the company join the exclusive group of trillion-dollar corporations within 10 years?
The benefits and drawbacks of the split
Almost every business strategy has pros and cons, and the same applies to diversification. Johnson & Johnson has operated three segments -- pharmaceuticals, medtech, and consumer health -- for quite some time, a model that has undoubtedly helped it better absorb and manage challenges to any single business unit it runs.
However, too much diversification can spread a company's resources thin and expose it to additional risks it otherwise wouldn't have had if it maintained a smaller, more focused business. In Johnson & Johnson's case, its consumer health unit has seen a barrage of lawsuits over the years. Notably, the drugmaker has faced legal challenges related to its talcum powder products.
Some of these lawsuits allege that Johnson & Johnson deceptively marketed these products and hid their potential safety issues (such as the presence of cancer-causing substances). By spinning off its consumer health unit, Johnson & Johnson will decrease exposure to the roughly 40,400 plaintiffs (as of Jan. 2) with claims in lawsuits concerning the company's body powders containing talc.
One more perk of spinning off this segment will be to improve the company's revenue growth rates since Johnson & Johnson's pharmaceutical and medical devices segments typically see higher revenue increases. For instance, during the second quarter, the drugmaker's revenue jumped by 8.1% year-over-year to about $24 billion.
Johnson & Johnson's pharmaceuticals and medtech segments saw operational revenue increases of 12.3% and 3.4% year over year, respectively. Meanwhile, consumer health sales jumped by 2.3% compared to the year-ago period.
Johnson & Johnson's opportunities
Johnson & Johnson will remain a leader in the pharmaceutical industry after its split. The company boasts several medicines with fast-growing sales and a robust pipeline. Some of its key products include immunology drugs Stelara and Tremfya. In the second quarter, sales of the former jumped by 14.3% year-over-year to $2.6 billion.
Revenue from Tremfya came in at $597 million, 24.4% higher than the prior-year period. Other critical medicines in Johnson & Johnson's arsenal include cancer drugs Erleada and Darzalex, and blood thinner Xarelto. Meanwhile, the company's pipeline features several dozen programs.
During the second quarter, European regulatory authorities granted conditional approval for Johnson & Johnson's Carvykti as a treatment for multiple myeloma. Ongoing long-term trends will serve as powerful tailwinds for innovative drugmakers like Johnson & Johnson. That includes the world's aging population.
People use more medical care as they age, which means the need for groundbreaking therapies won't subside anytime soon -- quite the opposite. Johnson & Johnson's medtech unit will also benefit from this demographic shift, especially as the company pushes into the lucrative robotic-assisted surgery area thanks to its surgical robot Ottava.
The healthcare giant's remaining divisions should continue on their upward paths.
Look beyond size
There is little doubt that Johnson & Johnson will remain one of the largest healthcare companies in 10 years. And in my view, the pharma giant has a great shot of reaching that elusive $1 trillion market cap. Even if it doesn't, Johnson & Johnson is a solid stock to buy, particularly for those investors with low-risk tolerance who want to sleep easy at night.
It is a stable blue chip company that generates consistent revenue and profits, and it is also a Dividend King, making it an excellent option for income-oriented investors. Johnson & Johnson also knows how to reward its shareholders in other ways, including a recently announced share repurchase program. In short, size matters in the stock market, but it isn't everything.
