Johnson & Johnson's Power Morcellator Recall Could Result In Further Pullback

Aug. 7.14 | About: Johnson & (JNJ)

Summary

Johnson & Johnson recently withdrew three laparoscopic power morcellators due to a risk of spreading cancerous tissue, following FDA's warning in April.

FDA warned that healthcare providers and patients should carefully consider available alternative treatment options for symptomatic uterine fibroids.

The negative news could result in further pullback in Johnson & Johnson's stock, offering excellent investing opportunity.

Johnson & Johnson (NYSE:JNJ) recently recalled three laparoscopic power morcellators used in hysterectomy or myomectomy for the treatment of women with uterine fibroids because of a risk of spreading cancerous tissue. In a letter sent to hospitals, J&J asked them to return three of its devices, which are the Gynecare Morcellex, the Morcellex Sigma and the Gynecare X-Tract.

J&J's Ethicon division said that the "worldwide voluntary market withdrawal" is the next step following the company's April suspension of device sales and distribution. J&J's stock could see 5-7% pullback as a result of this withdrawal-related negative news, which I believe would offer an attractive entry point for medium- to long-term investors.

Impact on J&J's Business: Could It Be Affected?

A morcellator is used for morsellation (division) of large masses of tissues into smaller pieces inside a woman's belly cavity during laparoscopic surgery in order to extract the tissues from the abdomen. Approximately 50,000 operations are performed each year using power morcellators. In April, FDA warned doctors that using morcellators could result in spreading cancerous tissue. FDA said:

When used for hysterectomy or myomectomy in women with uterine fibroids, laparoscopic power morcellation poses a risk of spreading unsuspected cancerous tissue, notably uterine sarcomas, beyond the uterus. Health care providers and patients should carefully consider available alternative treatment options for symptomatic uterine fibroids. Based on currently available information, the FDA discourages the use of laparoscopic power morcellation during hysterectomy or myomectomy for uterine fibroids.

The Pittsburgh Business Times reported on August 1 that a spokesperson for Pennsylvania-based UPMC said that J&J's move to recall its three power morcellators was an "appropriate and prudent course of action" while the hospital network awaits further guidance from the FDA.

Apart from hysterectomy or myomectomy, patients with symptomatic uterine fibroids can be treated with traditional surgical hysterectomy and myomectomy, and laparoscopic hysterectomy and myomectomy without morcellation. Further, minilaparotomy, catheter-based uterine artery embolization, high-intensity focused ultrasound, and drug therapy can also be employed.

J&J doesn't report how much revenue it generates from power morcellation products. Although J&J dominates the market of power morcellators, they contribute only a small part to its total revenue, and hence its overall business isn't going to be negatively impacted.

Legal Consequences

Approximately 1 in 350 women undergoing hysterectomy or myomectomy are expected to have an unsuspected uterine sarcoma, a type of uterine cancer that includes leiomyosarcoma. Since alleged victims of uterine sarcomas and other cancers spread via a power morcellator can file a morcellator lawsuit against the manufacturer, J&J's reputation could be affected.

Apart from morcellator lawsuits, numerous hip implant-related lawsuits are pending worldwide against J&J, and the company is facing more than 30,000 lawsuits involving its pelvic mesh implants, which it withdrew from the market in 2012. Close to 8,000 patients, who got J&J's all-metal hip implants removed and replaced, are eligible to receive $2.5 billion in compensation from the company. Recall-related legal consequences not only involve huge sum of money, but also have the potential to tarnish J&J's reputation.

The Bottom Line

In one of my past J&J articles on SA a month ago, I said that J&J's valuation wasn't compelling enough for medium- to long-term investors to be in. The stock was trading around $106 at that time, near the 52-week high. The stock has seen a modest correction since then and currently it's trading around $100. The negative news involving power morcellators could result in further pullback. I believe that another 5-7% pullback from here would provide an attractive entry point for medium- to long-term investors.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.