Has JNJ Finally Moved Past Its Quality-Control Woes?

by Susan J. Aluise | November 13, 2013 5:23 pm

It has been a blistering few years for pharmaceutical giant Johnson & Johnson (JNJ[1]). Massive quality control problems and a criminal complaint over marketing of an antipsychotic drug triggered more than $1 billion in lost sales, a black eye for the brand and regime change in the C-suite.

But last week’s $2.2 billion settlement of criminal and civil claims and a tentative $4 billion settlement over defective DePuy hip implants signal that the worst problems are finally behind the 127-year old pharmaceutical giant.

JNJ’s settlement with the Justice Department and 45 states closes the book on investigations into off-label marketing of the antipsychotic drugs Risperdal and Invega — as well as the congestive heart failure drug Natrecor — by its Janssen and Scios subsidiaries. The settlement is the third largest by a pharmaceutical company, eclipsed only by GlaxoSmithKline’s (GSK[2]) $3 billion Paxil settlement and Pfizer’s (PFE[3]) $2.3 billion Bextra agreement in 2012 and 2009, respectively.

Massive quality-control problems in products ranging from common over-the-counter medications such as Tylenol, Benadryl and Motrin to high failure rates in hip prostheses and recalls of insulin syringes have bedeviled J&J since 2009. The government has put the company on the hot seat with congressional hearings, closure of a manufacturing plant and a court-enforced consent decree requiring government oversight of certain plants for five years.

Not surprisingly, JNJ’s sterling brand quickly tarnished.

The company that had owned first or second place since the inception of Harris Interactive’s annual corporate-reputation survey, fell to seventh place 2012. As recalls and litigation piled up, the New York Times proclaimed then-CEO Bill Weldon as “the most complacent chief executive in America” and “almost the Tony Hayward of America” — a reference to the much-maligned former BP (BP[4]) CEO whose tenure ended over the Deepwater Horizon fiasco.

By the beginning of last year, JNJ clearly needed a game-changer. Enter Alex Gorsky, a former captain in the elite U.S. Army Rangers who had headed up J&J’s worldwide medical devices and diagnostics unit since 2009 and started out as a pharmaceutical sales rep in 1988.

After 19 months at the helm, Gorsky’s leadership strengths are beginning to pay off — JNJ stock is up more than 45% since he took over, and the company’s reputation has bounced up two positions to fifth place in the 2013 Harris Interactive Poll.

Now, the company is showing several signs that JNJ is finally ready to move past its quality-control woes.

Litigation Wrapping up Sooner Than Later: With the government accord now behind it, it should be easier for JNJ to lay to rest other pending litigation that the company has been grappling with — particularly as many as 11,500 lawsuits related to defective hip implants. JNJ’s DePuy subsidiary has recalled some 93,000 devices due to unacceptably high failure rates. On Tuesday night, reports surfaced that JNJ had reached a tentative settlement of $4 billion[5] and that the deal could be announced within days. The $4 billion estimate would have to gain court approval, and provisions for future compensation could increase the total as well. Despite the hefty price tag, a settlement now would be a win for Gorsky, who took over the medical devices and diagnostics group in 2009, around the time the problems began bubbling to the surface.

JNJ’s Amazon Spat Signals Fresh Focus on Control: The recent dust-up between Johnson & Johnson and Amazon (AMZN[6]) over the apparent sale of damaged or expired products through third-party sellers might seem like a tempest in a teacup, but it illustrates how protective JNJ is about its brand these days. JNJ temporarily yanked some of its popular products like Tylenol and Band-Aids[7] after its online mystery shoppers received expired or damaged goods. While policing third-party sellers is a tough challenge for Amazon, JNJ’s move to protect its brand is smart given its recent challenges.

New Recalls an Abundance of Caution: It’s fair to question whether the status quo has really changed at JNJ after two new recalls recently emerged: one lot of Janssen’s Risperdal Consta was recalled after a routine inspection found mold, and 200,000 bottles of infants’ liquid Motrin were pulled after small plastic particles were found. There are two reasons to be encouraged rather than concerned about these recalls: 1) The problems were traced to ingredients supplied by other companies, and 2) the move indicates that JNJ is prepared to move fast to address quality control problems rather than sitting and hoping they blow by.

 As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Endnotes:
  1. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  2. GSK: http://studio-5.financialcontent.com/investplace/quote?Symbol=GSK
  3. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  4. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  5. reached a tentative settlement of $4 billion: http://www.nytimes.com/2013/11/13/business/johnson-and-johnson-said-to-agree-to-4-billion-settlement-over-hip-implants.html?hpw&rref=health&_r=0
  6. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  7. yanked some of its popular products like Tylenol and Band-Aids: http://www.foxbusiness.com/industries/2013/11/11/report-jj-drops-tylenol-band-aids-from-amazon/

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