Conglomerates are out of style -- particularly in health care, which has seen a decade of spinoffs, sales, and asset swaps aimed at greater focus. Johnson & Johnson has bucked that trend, even as some of its units have struggled. But sometimes being out of step is the right move.
The company on Tuesday reported second-quarter earnings that topped Wall Street forecasts and boosted revenue guidance for the year, thanks to its pharmaceutical division, which grew sales 8.9 percent from a year ago. In contrast, the company's consumer-products sales declined 1.8 percent, and sales of medical devices grew just 0.8 percent. Those businesses have been laggards for a while, and investors have called for J&J to break up or sell those units.
But J&J's unfashionable sprawl has made a relatively safe haven in a turbulent and anxious market, particularly for pharma stocks. Its shares rose more than 1 percent on Tuesday to new highs.
J&J is managing to have it multiple ways right now. The company is seen as uniquely safe due to its size and the diversity of its business, despite the fact that nearly half of its sales come from potentially risky markets outside the U.S. And it is delivering all of the growth and potential an investor could want via its pharma division. It has $39 billion in cash and marketable securities on hand for M&A, and room to be patient in deploying it. That helps it appeal both to investors looking for upside, and those terrified of downside.
If nascent turnarounds in its device and consumer businesses take hold, then the company will look even more appealing. Pharma, which accounts for 46.8 percent of sales, has been J&J's rock star for the past year, with nearly all of its biggest drugs beating expectations. The other businesses are flattish or declining. The device business was once the company's biggest, at 40 percent of sales as recently as 2013. It's now down to 34.7 percent. Consumer sales produced 18.5 percent of total revenue in the second quarter, down from 25.5 percent back in 2009.
J&J has been restructuring the device unit, and the consumer unit is still dealing with the aftermath of a series of recalls and quality control scandals. But both businesses seem to have stabilized. Excluding acquisitions and divestitures, operational sales in devices grew 3.9 percent year-over-year in the quarter. Excluding negative currency impact, consumer sales grew 1.5 percent year-over-year, and the division's margins are improving.
On its call Tuesday morning, J&J trotted out a succession of rationales for its tight embrace of a broad business model. It cited resistance to economic cycles, access to a wider variety of growth opportunities, cross-category innovation, and the general advantages of scale.
Regardless of how seriously you take those arguments, it's hard to argue the company hasn't benefited lately, or at least been insulated against some of the drug pricing concerns that have depressed biotech stocks in particular. J&J shares are outperforming all pharma and biotech companies with a market cap greater than $60 billion year-to-date. It passed fellow pharma conglomerate GSK as this year's top performer Tuesday morning -- despite the fact that, unlike its British competitor, it is not likely to reap Brexit-related currency benefits from the declining pound sterling.
A deterioration in J&J's pharmaceutical business -- which could come from competition to the company's lead inflammation drug Remicade in the next couple of years -- could reduce its safe-haven status and restart investor grumbling.
But for now, Johnson & Johnson is having its cake and eating it, too. Long live the conglomerate.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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