Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Johnson & Johnson doesn't want to explode its way out of the conglomerate business by breaking up. But it has been scooting with increasing rapidity in one particular direction.

Many of J&J's peers once depended on medical devices and/or consumer products as well as drugs. But after years of spinoffs and asset sales, they are predominantly pharma companies. Novartis, for example, gets 81.2 percent of its revenue from pharmaceuticals, including generics. Pfizer is at 92 percent. At GSK, which is more diversified, pharma alone is still nearly 60 percent of its business, and vaccines add another 15.3 percent. 

J&J, in contrast, gets a mere 46.8 percent of its revenue from pharma products.

The company's approach is working at surface level. Its first-quarter earnings per share, announced Tuesday morning, beat analyst estimates. The company's shares opened at an all-time high on Tuesday and have beaten the rest of the sector so far this year.

Leader of the Pack
Johnson & Johnson's shares have climbed more than 10% year to date to an all time high. An index of its peers is up less than half a percent.
Source: Bloomberg

But J&J's outperformance has nothing to do with the diversity of its business. It's all about the drugs. Pharma sales grew 8.2 percent compared to the same quarter last year. Consumer and device sales fell 5.8 and 2.4 percent, respectively.

Three years ago, devices still outstripped pharma as a percentage of J&J's sales. Now pharma looks to be inching ever closer to an operationally meaningless, but psychologically significant, 50 percent of sales from 39.7 percent at the end of 2013. 

Investors are watching what the company will do with its $40 billion in cash and marketable securities. The company could try to regain revenue balance by buying more devices or consumer products. But the better bet is to focus on what's working, by bolstering its drug offerings even more.

Pharm Firm
Johnson & Johnson's pharmaceutical business is the one that matters most now.

Pharma's prominence at J&J is already likely to grow, even without acquisitions. Drugs such as psoriasis treatment Stelara, blood-cancer treatment Imbruvica , and blood thinner Xarelto beat analyst sales expectations in the latest quarter and are projected to keep growing. Stelara sales grew 33.9 percent in the quarter, while Imbruvica's more than doubled, and Xarelto grew by 28.6 percent. Analyst consensus estimates have the trio bringing in more than $6 billion in 2016. 

J&J has a promising pipeline, as well. Last May, it told analysts it expected to launch 10 new products between 2015 and 2019 that have billion-dollar sales potential; the company reiterated that forecast on Tuesday. 

The big question mark is the company's best-selling drug Remicade, which brought in $6.5 billion in revenue last year. Just as the company likely feared, the FDA earlier this month approved a biosimilar copy of Remicade from Pfizer and Celltrion. Those firms may attempt to launch their version of the drug this fall. J&J has patents that last until 2018 and beyond and will fight the launch. It doesn't include biosimilar competition in the U.S. in its 2016 guidance. But that competition is coming, sooner or later. 

As a result of that looming threat and other potential competition, and because it's sitting on by far the biggest cash pile in the industry, there's major speculation the firm will buy up biotechs. The company at least pointed in that direction on Tuesday's call. Speaking about how J&J might use its cash, CFO Dominic Caruso noted biotech valuations are coming down, while medical-device valuations remain "inflated." 

The company is cutting jobs in its devices business, which is being restructured. The division's last quarter of reported sales growth was in 2014. Its consumer division has been rocked by a series of quality control scandals, and J&J has relaunched a variety of its products as a result. The company's U.S. market share in pediatric over-the-counter products was about 70 percent before those issues; it's now 46 percent, according to the earning's call. 

J&J reaffirmed its commitment to diversification on the call, with Caruso saying that having three major franchises lets it pursue opportunities in a changing health-care market "no matter where they be."

But money talks, and opportunity seems rather concentrated on the pharmaceutical side right now. Even if J&J resists calls from some shareholders to break up, the natural progression of its business is already making it more like its more pharma-centric peers. And that's just fine. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Max Nisen in New York at

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