Johnson & Johnson Unfazed By $25 Million Fine

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Mar 13, 2015

On March 11, New Jersey-based Johnson & Johnson (JNJ, Financial) has pleaded guilty to misdemeanor charges and agreed to pay damages worth $20 million for selling contaminated infant and children products six years back. Additionally, Johnson & Johnson’s subsidiary McNeil has agreed to forfeit $5 million towards the settlement proceeds.

Cause and Effect

The company began receiving complaints about unusual particles in infant feeding bottles. But McNeil failed to investigate the multiple instances reported by customers. This compelled the FDA to intervene and conduct inspections. Eventually the company had to recall millions of bottles of various products. In a knee jerk reaction, J&J replaced some top officials of McNeil at that time but the incident casted a dark shadow over the safety of the J&J products for infants and children. The bad reputation spread beyond the domestic borders and the unit saw sales dipping over the years across global markets. Despite the monetary compensation, the trouble for J&J is far from over as the key manufacturing plant located in Fort, Washington is still locked out. As a part of a consent decree the company has been attempting to restart the facility by trying to convince the FDA about the plant’s adherence to regulatory requirement through a third party expert certification.

The company is also striving to revive its Pennsylvania plant which also happens to be the headquarters of McNeil division.

The health care and pharmaceutical giant had faced another embarrassing situation of higher order when in 1982, its over the counter pain killer Tylenol capsule was found to be laced with cyanide. Several people who had consumed Tylenol were killed at that time.

Stock performance

For the period from Feb. 2010 to Feb. 2015, Johnson and Johnson delivered returns of 13.4%. The figure is below the industry average during the given period. Competitors like Pfizer (PFE, Financial) delivered returns of 18.5%, Bristol Myers Squibb Co. (BMY, Financial) delivered 24.9% and Merck & Co (MRK, Financial) delivered 14.2% during the given period. The healthcare sector achieved an annualized return of 20.38% during this period. The stock made revenue of $62 Billion and profit of $12 Billion. The EPS stands at $5.70 and the dividend yield at 2.80%. In the last year the stock price, has seen less fluctuation. Exactly a year back, the stock was trading at $93 post which it has seen gradual upswing. Bedsides a slight decline in mid October last year, the stock has been mostly traded above $100 mark, peaking at $108 in November. Currently it is trading roughly around $100 mark, which indicates a scope for the prices to go up.

The company recently announced a 48% hike in the salary of Alex Gorsky, the Chairman and Chief Executive Officer. Is this an indication that despite lagging behind the industry standards, the company is doing well in its own might?

Conclusion

With a market cap of more than $275 billion, Johnson & Johnson is a major global player in Pharmaceuticals, Medical Devices & Diagnostics and Consumer Products category. The recent legal debacle impacted the stock price marginally. The market is confident that the stock will perform well in the future as Johnson & Johnson risk is spread across 250 companies in 57 countries. Hence such fines will not affect the strong fundamentals of the company. The stock guidance for J&J stands at ‘Buy’ or ‘Hold’.