Johnson & Johnson (JNJ -1.52%) plans to cut or dramatically scale down its vaccine and infectious disease division. It won't be developing new medicines in the segment, and it's unclear whether it plans to continue making and selling its existing portfolio. The move comes roughly around the same time the company finalizes the spinoff of its consumer health division, called Kenvue.
Given these changes, some investors have reason to question the behemoth's growth prospects, as J&J can no longer expect to boost its revenue with new commercialized vaccines or through new personal care products.
Is the latest cut doomed to endanger its performance as an investment?
Context is key as it relates to J&J's latest move
First, let's examine how much money J&J's prior research and development (R&D) efforts were yielding with its infectious disease medicines. In the second quarter, sales of pharmaceutical products were worth nearly $14 billion out of total revenue of more than $25 billion. Infectious disease drugs brought in about $1 billion in the period. This includes its coronavirus vaccine as well as its once-daily antiviral pill to treat HIV. None of those products are posting rapid growth, and aside from the antiviral pill, most are experiencing shrinking sales year over year. At the same time, it spent almost $4 billion on R&D, but that sum includes all of its other pharmaceutical segments as well as its medical device segment.
At first glance, the above numbers make the scale-down plans look insignificant. If it continues to sell the medicines it already commercialized, the impact on its revenue will be small and very delayed, as its market share will only start to erode once lower-cost generic copies or better drugs come onto the scene. For its coronavirus vaccine, that happened more than a year ago, and revenue is already crashing, but the same is unlikely to happen soon with its other products.
The R&D savings are also likely to be minimal. In the context of its massive pipeline, it only has a small handful of global public health and infectious disease programs in development, three of which are in the registration phase awaiting approval, and three of which are in phase 3. There won't be much in the way of potential future growth lost by stopping development efforts; programs like its ebola vaccine and its antivirals against HIV for children and adolescents were never going to make much money, even if they might have served noble humanitarian ends. The restructuring costs associated with stopping development are $275 million as of the second quarter, which is also just a drop in the bucket for a business of J&J's size.
J&J's new growth thesis is unproven, and it might be in jeopardy already
In short, Johnson & Johnson's move to exit most of its infectious disease activities will probably not be noticeable by shareholders. Nonetheless, it does slightly undermine the new investing thesis for the stock as proposed by management. Per that argument, the company's moves to spin off or cut slower-growing segments will enable it to focus more on core pharmaceutical and medical device development, which, so the story goes, will result in a faster pace of growth than what it was capable of before.
But the R&D cycle for pharmaceuticals and medical devices can take up to a decade before the company can commercialize anything, and it's fraught with risks. It's hard to see how any of the programs currently approaching maturity in the pipeline will benefit from the Kenvue spinoff or the shuttered division. And closing a division right when growth is meant to accelerate seems like going in the wrong direction, even if the impact will be marginal.
While J&J's new more focused approach hasn't been proven to work any better than its old model yet, catastrophe is very unlikely. Still, this latest move tips the scales slightly further toward uncertainty that the stock will perform as well in the future as it did in the past. Therefore, if you're in the market for a stock that's going to grow rapidly, the case for buying Johnson & Johnson is now a bit weaker, and it was already quite weak. On the other hand, if you're thinking about a purchase to capture its dividend, which has a forward yield approaching 3%, it's still as solid of a pick as it ever was.
