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Johnson & Johnson (JNJ): Is the Market Underestimating Product Liability Impact?

A Missouri jury awarded $110 million to a plaintiff after connecting JNJ's talcum powder to her ovarian cancer. Does the market appreciate the potential impact of further liability?

Regular readers of this space will know that our focus has been on the microcap names that drive the innovation economy of this country. There are times, however, when developments at the megacap end are too meaningful to ignore. In that vein we have been examining for some time the news and corporate disclosures concerning Johnson & Johnson (NYSE: JNJ) and its numerous product liability proceedings.

A Missouri jury awarded $110 million to a plaintiff last week who said that she contracted ovarian cancer after many years of using JNJ’s famous talc-based Baby Powder. The award – which consisted of $5 million in actual damages plus $105 million in punitive damages – is the largest one so far among the thousands of pending lawsuits involving the baby powder. The crux of the cases is that JNJ may not have
warned customers sufficiently about the risks of using the powder.

According to an article in RX Injury Help last week, the plaintiff’s attorneys “presented jurors with several internal Johnson & Johnson documents indicating that company officials had long been aware of research linking genital talc use to an increased risk of ovarian cancer. Apparently, those documents played a significant role in the decision…. with one member of the jury telling Bloomberg News that their contents were ‘mind-blowing.’ ”

A March 2017 article by Bloomberg highlighted that JNJ’s losses in court last year included six out of the seven largest verdicts awarded in product liability cases, totaling nearly $1.8 billion. While the largest of these were decreased by judges after trial, and while JNJ is of course appealing every verdict, we are left to wonder just how deep this rabbit hole goes.

JNJ’s most recent 10-Q, filed three days ago, yields some data that we feel is critical for investors to assess. We specifically would highlight two elements from page 17 of the filing:

  1. There’s a seemingly boilerplate sentence that reads, “The Company records accruals for loss contingencies associated with these legal matters when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated.”
  2. A few paragraphs beneath that sentence, JNJ delineates the “most significant” cases pending against the company. We’ve extracted the numbers into the chart below to make them easy to digest:

We draw several conclusions from the news coverage, from the 10-Q data and from discussions we’ve had in the past week with individuals familiar with the proceedings:

  • The sheer volume of pending lawsuits is so enormous that the costs to JNJ are effectively deferred over a span measured not in quarters, but in years. Decades, even. This isn’t simply an isolated Tylenol case that JNJ will be able to turn into a case study of how to handle adversity. Rather, we view this as a significant albatross that JNJ and its shareholders will have to bear constantly every single year for the foreseeable future. As the Bloomberg article points out, litigation is routine for drugmakers, but the pileup of bad verdicts is rare.
  • These cases are not predominantly about the drugs and products. Rather, they appear to be focused on the marketing practices of JNJ – specifically surrounding the disclosure to customers of risks that may have been known to the company.
  • While the stock price has lagged behind the major indices over the past year – 18.6% behind the Russell 2000 and 8.6% behind the S&P 500 – we believe it’s fair to wonder if that performance gap could widen even further as these verdicts continue to go against JNJ.

We will continue to keep an eye on the outcome of JNJ’s court battles, and we would urge investors to do the same.

Source: Yahoo Finance

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