Johnson & Johnson is set to spin off its orthopedics division, DePuy Synthes, within the next two years, a pivotal move designed to supercharge the healthcare giant’s growth and profitability. This strategic divestiture, following the Kenvue consumer health spin-off, underscores J&J’s unwavering commitment to high-growth, high-margin sectors and has analysts projecting accelerated revenue and earnings per share into 2026.
In a significant announcement that will reshape its portfolio, Johnson & Johnson (J&J) revealed plans to separate its orthopedics business, to be named DePuy Synthes, into a standalone company within the next 18 to 24 months. This marks the second major spin-off for J&J in just two years, signaling a determined pivot towards higher-growth, higher-margin healthcare segments. The news arrived alongside robust third-quarter earnings, further cementing J&J’s strategic direction.
The Strategic Rationale Behind the Split
This spin-off is not an isolated event but a continuation of J&J’s long-term strategy to optimize its portfolio for maximum growth. The company aims to sharpen its focus on key areas such as oncology, immunology, neuroscience, surgery, vision care, and cardiovascular products. These segments represent the future of high-growth, high-margin innovation in healthcare, where J&J believes it can create the most value.
The orthopedics unit, which manufactures a range of products including hip, knee, and shoulder implants, along with surgical instruments, generated approximately $9.2 billion last year. While this accounted for about 10% of J&J’s total revenue, and 30% of its MedTech segment, its growth trajectory has been notably slower than other parts of the portfolio. Over the last decade, the orthopedics business posted a compound annual growth rate (CAGR) of less than 1%, struggling to keep pace with competitors’ innovations, particularly in enabling technologies. J&J’s Chief Financial Officer, Joe Wolk, indicated that while the orthopedics business was profitable, the next phase of innovation in this sector was “beyond our scope and probably in better hands somewhere else,” as reported by Reuters.
DePuy Synthes: A New Chapter for Orthopedic Innovation
The spun-off entity, DePuy Synthes, will be led by industry veteran Namal Nawana. J&J acquired Switzerland-based Synthes for $21 billion in 2012, combining it with its existing DePuy business. This new standalone company is poised to become the largest and most comprehensive orthopedics company worldwide, according to J&J. However, analysts note that DePuy Synthes will face its own challenges post-spin, including existing portfolio and innovation problems, potentially necessitating a period of “right-sizing” or a refocus on specific priority segments through further divestments.
The Financial Outlook: J&J’s Accelerated Growth Projections
The strategic reorientation is expected to yield substantial financial benefits for the remaining J&J entity. The company now anticipates total revenue growth to exceed 5% next year, a significant jump above current analysts’ estimates of 4.6%. Furthermore, adjusted earnings are projected to surpass Wall Street estimates of $11.39 per share by as much as 5 cents. These optimistic forecasts are underpinned by anticipated new drug launches and a strengthened medical devices portfolio, aligning with CEO Joaquin Duato’s vision for J&J to become the “best-in-class MedTech group in the industry.”
Q3 Earnings Bolster Confidence
The spin-off announcement coincided with a strong third-quarter financial report, reinforcing investor confidence in J&J’s underlying health and strategic direction. The company posted adjusted earnings of $2.80 per share, beating analysts’ expectations by 4 cents. Third-quarter sales reached $23.99 billion, edging past Wall Street estimates of $23.75 billion. Key performance highlights include:
- Pharmaceuticals Sales: Jumped 6.8% to $15.56 billion, slightly outpacing estimates.
- Medical Device Sales: Rose 6.8% to $8.43 billion, primarily driven by electrophysiology products.
- Darzalex: The blood cancer treatment generated $3.67 billion in sales, in line with forecasts.
- Stelara & Tremfya: Despite the loss of exclusivity for blockbuster drug Stelara, it still brought in $1.5 billion. Its successor, Tremfya, saw sales surge by 40% to $1.4 billion, with J&J expressing bullish sentiment about its future potential, estimating peak sales of $10 billion.
J.P. Morgan analysts described J&J as “one of the cleaner stories” among large healthcare companies, benefiting from steady growth across its core portfolio even as it navigates the patent cliff for Stelara. For more insights on market analysis, you can refer to J.P. Morgan’s official insights page.
Investor Sentiment and Potential Roadblocks
While the market generally views portfolio streamlining positively, some investor concerns have emerged. Shares of J&J were down 1.2% in early trading following the announcement, though they remain up 32% year-to-date, significantly outperforming the broader S&P Healthcare Index’s 3% rise. Brian Mulberry, portfolio manager at Zacks Investment Management, highlighted the significance of the orthopedics division, noting, “It’s roughly 10% of revenue generation and it is a fairly large strategic pivot to make.” He also suggested that broader market worries around trade and tariffs with China could be contributing to the stock’s dip. Guggenheim analysts also cautioned that J&J’s recent stock rally might limit further upside.
A History of Portfolio Optimization
This isn’t J&J’s first foray into significant portfolio restructuring. In 2023, the company executed a two-year restructuring program for its orthopedics business, which involved exiting certain markets and discontinuing some product lines. More notably, J&J spun off its $15 billion consumer health unit into Kenvue in 2023, a move that successfully created shareholder value by isolating a slower-growth, but stable, business from the faster-growing pharmaceutical and medical device segments. These actions reflect a consistent strategy by J&J’s leadership to focus on agile, high-potential areas, thereby driving superior long-term returns for investors.
What This Means for Long-Term Investors
For long-term investors, J&J’s latest spin-off signifies a reinforced commitment to sustained growth and higher margins. By shedding a lower-growth asset, J&J aims to accelerate its overall financial performance, driven by innovation in its core pharmaceutical and MedTech segments. This strategic focus is expected to unlock greater value, making J&J a more streamlined and dynamic healthcare powerhouse. Investors should monitor the progress of the DePuy Synthes spin-off, which is not expected to have material updates until mid-2026, as well as the performance of J&J’s pipeline drugs and medical devices that are central to its future growth narrative.
