These should be the best of times for Johnson & Johnson (NYSE:JNJ) stock. The company reported third-quarter earnings on Oct. 15 and announced that it earned $4.8 billion, or $1.81 per diluted share, on revenue of $20.7 billion.
Revenue was higher than forecast and earnings beat estimates by 11 cents per share. The company also raised its guidance for the year, estimating profits will be up 5.4%-6%.
So, buy, buy, buy, right? In pre-market trading, shares were due to open higher by 1.6% at $132.30. The company’s market cap is now a whopping $352.3 billion.
In some ways the shares are a bargain. The dividend of 95 cents per share currently yields 2.9%, at a time when the 30-year U.S. Treasury bond struggles to hold 2%. You’re paying about 15.7 times operating cash flow, and the trailing price-to-earnings ratio is 22.2.
But in some ways, these are the worst of times for Johnson and Johnson.
The Plaintiff’s Bar
That’s because the plaintiff’s bar is now on J&J like a house cat after a songbird.
In August, an Oklahoma jury fined the company $572 million over its involvement with opioids. The company’s Janssen Pharmaceuticals unit, acquired in 1961, is involved in the manufacture of three opioid drugs, including pills and a fentanyl skin patch.
Johnson & Johnson is appealing the verdict. Its lawyers were able to get out of a federal trial against opioid makers early this month, agreeing to a $20.4 million fine. The shares rose on that news but are up only 5% year-to-date.
That’s partly because Johnson and Johnson also faces an $8 billion verdict in Philadelphia thanks to Risperdal, an anti-psychotic drug. Plaintiff Nicholas Murray said he took the drug in 2003, when he was 9 years old. His lawyers claim that Risperdal was being pushed on children for conditions beyond what it is approved to treat. The company had previously paid $2.2 billion over the “off-label” prescriptions.
Then there’s talcum powder. A New Jersey jury awarded four sets of plaintiffs $37.3 million last month over claims its talcum powder contained asbestos. The company has been targeting the science behind the talcum powder claims, but it’s now facing a federal criminal investigation, as well as 13,000 other civil suits. There was also a $4.7 billion award in St. Louis to 22 women who used its baby powder and its Shower to Shower product.
Bulls Hang In
Bullish analysts continue to insist that the stock can weather these verdicts.
In the opioid case, Johnson and Johnson’s involvement was mainly that of a distributor and ingredient supplier. It wasn’t doing the marketing. Legal experts are stepping up to assert the company’s innocence.
But nearly 60% of consumers now view the whole pharmaceutical industry in a negative light. The biggest exchange-traded fund covering the industry, the Invesco Dynamic Pharmaceuticals ETF (NYSEARCA:PJP), is down almost 7% so far this year.
Analysts continue to back J&J stock, with half of the 18 following the company calling it a “buy.” The average target price on the stock is almost $150 per share, about 15% higher than its Oct. 15 opening price.
The Bottom Line on Johnson and Johnson Stock
Not all the drug news from J&J today is bad. Xarelto, its blood thinner, has now been approved for prevention of some blood clots in hospitalized patients.
To me, however, the cases against the company show the cost of deregulation. When drugs are prescribed off-label, when manufacturing isn’t closely inspected and when regulators don’t police the market, drug companies are going to push the envelope.
This is true for everyone in every market. When regulations fail to catch trouble, the plaintiff’s bar swoops in, with justice far rougher than anything the government might dish out.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.