Johnson & Johnson Prepares to Untangle Finances Ahead of Planned Split

J&J’s consumer-health unit generated $14.1 billion in sales last year, compared with $45.6 billion for pharmaceuticals and $23 billion for medical devices, according to a filing with securities regulators. The company operated 90 manufacturing facilities globally at the end of 2020.

Chief Financial Officer Joseph Wolk and his employees have numerous tasks ahead of them, including opening bank accounts for the new company, setting up new financial systems for accounting and reporting, developing employee-benefit plans and selecting an independent auditor, he said. “All of those things that you might imagine exist today at Johnson & Johnson now have to be replicated for this new company,” Mr. Wolk said.

The separate firm will market over-the-counter medications and consumer-health goods, while the remaining company will continue selling prescription drugs and medical devices. Those operations are in many cases intertwined. For example, the company generally manufactures pills for over-the-counter medicines and prescription drugs in a similar process in the same type of facility, he said.

“Over decades of being a combined business, things have become very entangled,” Mr. Wolk said. “Some of that was for efficiency reasons, others because it just made logical sense.”

Mr. Wolk said he will become CFO of the remaining company. The board is expected to name a new chief executive and finance chief, as well as potentially board members, to lead the new consumer-health business sometime in the first half of 2022, he said.

Deciding which assets fall into which business will require some discretion and judgment, but it is too early to determine how those decisions will be made, he said.

The company recently began “censusing” the organization, or reviewing employees’ roles in certain operations to determine which of the two companies they would become part of, Mr. Wolk said. An employee is considered part of the new consumer-health business if they currently spend at least 51% of their time working in consumer health, he said. The company had 134,500 employees at the end of 2020.

Dividing up the company’s extensive supply chain will take years to complete, likely after the transaction has closed, Mr. Wolk said. J&J expects to manage the supply chain in the interim through transitional service agreements and potentially contract manufacturing arrangements, he said. The remaining business might set up new facilities depending on the number of properties representing its particular business lines, he said.

Companies frequently spin off parts of their business to unlock value. Nearly 150 global corporate spinoff deals closed this year through Dec. 1, already surpassing 130 for all of 2020 and 115 in 2019, according to data firm Refinitiv. Drugmaker

Merck

& Co., French media company

Vivendi SE

and freight-transportation company

XPO Logistics Inc.

in recent months completed such deals.

J&J’s split won’t necessarily be more complex or challenging than those of other companies, but questions remain about how issues such as litigation will be handled, said

Damien Conover,

director of healthcare research at research firm

Morningstar Inc.

For example, it is unclear which business would handle future litigation relating to when the companies were one, he said. A spokeswoman for J&J declined to comment. The company in October placed into bankruptcy its liabilities for thousands of lawsuits tying talc-based products to cancer.

“It’s pretty likely that litigation stays with the separate companies and the cash flows are strong enough to support that, but still, there’s a bit of uncertainty,” Mr. Conover said.

Write to Mark Maurer at [email protected]