Johnson & Johnson: Is a breakup the right answer?

NEW BRUNSWICK, N.J. -- Johnson & Johnson's profits are down.

Its beleaguered over-the-counter drug division will not be back to full speed until late next year.

And it anticipates paying out hundreds of millions of dollars to settle litigation.

The world's biggest health care company might find salvation by breaking into smaller companies, one prominent Wall Street analyst says.

Such a move would free up money to invest, help the company grow faster and provide a bigger return to shareholders, says Jami Rubin of Goldman Sachs.

J&J's new chief executive officer, Alex Gorsky, dismissed the idea, which other big health care companies are running with — suburban Chicago-based Abbott Laboratories and New York-based Pfizer among them.

But he told analysts Tuesday that Johnson & Johnson will need to be more selective and decisive in pursuing products that will pay off.

The call with analysts after the company released its second-quarter earnings report spotlighted the central issue facing Johnson & Johnson: Can the 126-year-old health care giant stay true to its long-standing promise to put its customers' interests first and manage for the long term while satisfying Wall Street's demands for faster growth?

The company, based in New Brunswick, is one of New Jersey's biggest employers with 14,000 workers. Some of its biggest subsidiaries are headquartered in other states.

Johnson & Johnson said its second-quarter net income declined 49% to $1.4 billion from $2.8 billion in 2011. Sales slowed, and it had a series of one-time charges, including setting aside more money to cover a potential settlement on litigation.

Johnson & Johnson, previously counted on for sales growth year after year, has run into tough times across all its segments — consumer, medical devices and pharmaceuticals. The problems are of its own making and from getting caught in a slow global economy.

Observers have said the company's slip-ups are signs that the company has labored to meet Wall Street's increasingly short-term demands.

Rubin, the Goldman analyst, sees a way out: Spin off the three divisions into separate companies. Among her reasons:

— The divisions have different customers, manufacturing, distribution, research and development, and regulatory processes, making it unclear how they make the company more efficient by being together.

— Each has different investment requirements, management philosophies and growth prospects, leaving executives with the tough task of deciding where to invest for future growth.

— And the businesses that are doing well are not reaching their full potential, she says. The faster-growing pharmaceutical and medical device divisions have been absorbing the cost of improving manufacturing plants for its consumer business, the Goldman report said.

The company has fallen behind its peers "in our view due in large part to underinvestment … and a lack of focus on the specific needs of each business," according to the report.

The idea isn't without precedent. This past fall Abbott Laboratories said it would retain medical devices and spin off its branded drug company, to be called AbbVie, by the end of the year. In June, Pfizer said it would spin off its animal health business, to be called Zoetis.

Another analyst, Jeff Jonas of Gabelli & Co. in Rye, N.Y., says he doesn't think breaking up Johnson & Johnson is in the picture.

Gorsky, a long-time J&J veteran, took over as chief executive officer from a retiring William Weldon in April. He said Tuesday that the company is better equipped to serve its customers as a large, diversified company.

And he said it can accelerate growth by targeting its resources to its most promising and most profitable business lines while exiting businesses in which it is losing ground.