For the past year, Johnson & Johnson execs have been saying that the cost to get their troubled Fort Washington, Pennsylvania plant, which was the scene of numerous quality control problems that caused countless products recalls, will be about $100 million. But the cost of reviving its beleaguered over-the-counter business and, by extension, the related expense for remediating the facility just rose by $23 million, thanks to a settlement of a class-action shareholder lawsuit over their managerial foibles.
The health care giant agreed to resolve the dispute brought over allegations that J&J management shirked their responsibilities and allowed a chain of events that resulted in congressional probes; lost market share, consumer confidence and revenue, and a consent decree with the FDA. In the lawsuit, a shareholder charged that J&J bungled the integration of the Pfizer consumer health acquisition, placed inexperienced execs in charges of its OTC unit and cut costs so drastically that quality control suffered.
The lawsuit, which was brought by Ronald Monk, alleged that the health care giant made misleading statements about its products before disclosing problems with the Fort Washington plant and another in Puerto Rico. He also maintained that J&J withheld material information before its decision three years ago to shut down the Fort Washington plant, where contamination led to the unpublicized recall of defective Motrin tablets in 2009.
In agreeing to the settlement, J&J refused to admit any wrongdoing (here is the settlement and the lawsuit). The outcome, by the way, contrasts with a J&J victory two years ago in a derivative lawsuit brought by shareholders that alleged the board breached its fiduciary responsibilities involving a host of problems, not just the over-the-counter manufacturing gaffes (back story). J&J did, however, agree to bolster internal oversight in response (read here).
Meanwhile, the health care giant remains optimistic about getting Fort Washington where, ironically, its McNeil Consumer Health Care unit is headquartered, back on track. In remarks made yesterday in conjunction with its most recently released earnings report, J&J chief financial officer Dominic Caruso says the facility “has been completely redesigned, consistent with the other manufacturing facilities in the J&J network, and we now have a quality management system that runs across our J&J facilities.”
In fact, one slide in the J&J slide show yesterday noted predicted that, by year’s end, 75 percent of the J&J over-the-counter brands should be restored to the supply chain and that full distribution of key brands was recently achieved with its six-largest retail customers. The results reflect an ongoing effort to bolster its supply chain systems, which include some 120 manufacturing sites around the world. Of course, Fort Washington is integral to this effort.
So when will the plant come back on line? “The Fort Washington facility is just about ready for regulatory inspection in the back of this year,” Caruso said. “As soon as the inspection is completed, we’ll be ready to put that facility back on line. But even without the facility, we’re already seeing 20 percent growth in the US (over-the-counter) business this quarter.”
Indeed, Wall Street noted that the overall consumer business, which generated $1.3 billion in the second quarter, met most expectations (see this). “The recovery (is) remaining on track,” Wells Fargo Securities analyst Larry Biegelsen wrote in an investor note. However, analysts were most excited about the performance of the pharmaceuticals unit, which notched a 9 percent sales increase in the US and 14 percent internationally, thanks to big gains by two of the newest drugs - the Zytiga prostate cancer treatment and the Xarelto bloodthinner – among others.
And while the medical devices business had a mixed performance, Biegelsen expects a “strong operational performance to continue.” For months, investors have agreed and looked past – or baked in – the troubles with the over-the-counter business. Over the past year, in fact, J&J stock has climbed 36 percent, not including dividends.
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