Litigation Begets Litigation

Johnson and Johnson’s legal struggles and what it means for stockholders

All companies, particularly drug companies have seen their share of lawsuits, and Johnson and Johnson (JNJ) has not been immune to legal action. This is of some concern to In Sickness and Wealth as JNJ has been in its portfolio for decades. And while we have no intention of selling our shares at this point, we do have some concerns surrounding not only the large verdicts awarded to patients/customers, but the collateral and reputational damage suffered by JNJ.

First let’s be clear that if there is wrongdoing, shareholders or not, we believe that punitive damages are justified. Johnson and Johnson has lost several court cases related to the following products:

  • Talcum Powder – recent verdicts have seen JNJ on the losing side regarding cases of ovarian cancer in patients who have used Talcum Powder over long periods of time. Talcum is used in some of their baby powder products. JNJ has won some of the cases, but they have suffered from some negative verdicts with large monetary awards as well. They are appealing many of the cases in the courts.
  • Artificial Hip Replacements—its DePuy orthopedic device subsidiary has seen some adverse jury awards in patients suffering severe bone loss and tissue death in metal hip replacements.
  • Transvaginal Mesh Implants—these implants are used to anchor pelvic organs in cases where the tissues are not able to hold the organs in place themselves. In some cases, the mesh shifts from its original location and protrudes into the vagina. JNJ is seeing adverse litigation impact with this as well.
  • Anti-Psychotic Drugs—Risperdal is a focal point for several lawsuits. JNJ is the manufacturer of the antidepressant, Risperdal, and there have been a few serious side effects for some patients taking the drug.

The total number of lawsuits against JNJ has climbed substantially over the past couple of years. Should some of the large awards be reduced or perhaps overturned, it will help stem additional lawsuits. Hence, the company is vigorously contesting the cases. If large adverse judgements should prevail, more people will jump on the bandwagon, as litigation seems to beget litigation in the United States. More at risk is their reputation. They have been in business for over 100 years, and it doesn’t take much to wipe out a century of good will.

Having laid out all the negatives, JNJ is an exceptionally strong company with billions in cash in reserves and terrific cash flow. However, another concern is that they would be in danger of losing their AAA credit rating—a rating that only 2-3 companies in the United States share. If they are guilty and responsible for causing ovarian cancer, they should be held accountable, as we mentioned earlier. But the problem is, no one really knows the exact cause of cancer, and JNJ might see adverse rulings, despite the fact that Talcum powder might not cause cancer. In the end, JNJ could weather extremely adverse litigation for years to come. Just look at the tobacco companies for a comparison. After decades of tobacco litigation and gigantic awards over the years, they are still doing well. The problem with all verdicts is that they encourage more lawsuits. We would hate to have to sell JNJ, but will not have a long-term exposure to a company if some of their products are, in fact, responsible for so much suffering in patients. This will take years to figure out. And for the record, JNJ’s stock is only a few points below its all-time high. A substantial downward move in the stock (below $100/share) would indicate that investors fear the worst-case scenario – multiple billion-dollar awards, as far as the eye can see – and a significant haircut to earnings. Stay tuned.

David Lerman and Jodie Warner


This article has 2 comments

  1. Jodie Warner

    Thanks for the kind words. We are trying to build a business here…so if you could pass the word on….thx

    Dave Lerman

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