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J&J Needs To Fix It’s Problems Fast

J&J Needs To Fix It’s Problems Fast

Courtesy of YCharts

The announced departure of a top Johnson & Johnson executive last week, Colleen Goggins, who oversaw consumer products, could signal that J&J is moving to put its regulatory problems behind it. That would be welcome news for investors who admire J&J’s business but have been troubled by a recent series of lapses.

J&J has suffered product recalls affecting three of its businesses – over-the-counter medicines, including those sold for children; contact lenses; and hip replacement implants. J&J is accustomed to appearing in Fortune magazine as one of the most admired corporations (#4 this year), but finds itself in the September 6 issue of Fortune as the subject of an investigative story about deterioration of its quality-control operation.

That followed months of coverage of the product problems and recalls in the New York Times and other papers.

So far, despite the problems J&J shares have been moving with other pharmaceutical stocks.

JNJ, PFE, MRK, ABT, LLY Chart

And the worst of the immediate financial impact seems to be the loss of about $600 million in sales after J&J was forced to temporarily shut down an over-the-counter drug manufacturing plant at Fort Washington, Pa. That’s only 1% of J&J’s annual revenue of roughly $60 billion.

JNJ Stock Chart

The recalled over-the-counter products include forms of Motrin, Tylenol, Benadryl, Rolaids and St. Joseph Aspirin, all brands that have commanded a premium price and helped provide to J&J’s consumer business a lush profit margin (operating profits of about 17% of sales vs. about 31% for the pharma and device lines). Here are margins overall for J&J:

JNJ Stock Chart

The impact from the contact lens and hip implant recalls is less clear; in coming years J&J could end up paying for thousands of patients to have new implants installed. But the bigger threat is that J&J ceases to receive the benefit of the doubt from consumers; why buy St. Joseph Aspirin or Tylenol instead of generic brands if the J&J reputation is tarnished? And, just as importantly, will it lose the trust of regulators?

The Food and Drug Administration not only regulates the Fort Washington plant, but also oversees J&J’s efforts to license new drugs and sell medical devices. It’s not a good idea to embarrass an agency that holds that much sway over your business.

J&J is unusual in operating a big pharmaceutical company, a major medical device manufacturer and a consumer health products operation. The diversification has brought J&J stability. Losing $3 billion of pharma sales because of patent expirations last year would have hurt more if J&J didn’t have such a large and diverse base of revenue. But the breadth also brings complexity. The company has made eight large acquisitions since the beginning of 2008. It began a global restructuring in 2009 designed to cut costs by $1.4 billion or more, including dismissing 7,500 workers. And it has had its hands full at Fort Washington with FDA inspectors.

J&J is cheaper than some pharma stocks right now.

JNJ, PFE, MRK, ABT, LLY Chart

And its Remicade drug for rheumatoid arthritis and other immune system-related diseases, with 2009 sales of $4.3 billion, is hugely profitable. The company needs to clean up the distractions of its recalls and make nice with its regulators, so that investors can focus on J&J’s substantial upside.


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