We can expect to see changes in Johnson & Johnson (JNJ) coinciding with the induction of the company's new CEO.
Alex Gorsky, the new CEO, who will soon be taking his position at the company's head, plans to adopt a realistic and optimistic approach to the challenges and opportunities that Johnson & Johnson will face. Although Gorsky was very optimistic in the first speech to the company's shareholders recently, the question still on my mind is whether or not a simple change in attitude will be enough to counteract the company's mounting problems.
Recently, Johnson & Johnson has found itself on the wrong side of about 30 product recalls. Recalled products include Tylenol, as well as many other non-prescription drugs. The drugs were recalled due to concerns about their quality. The financial implications of this extend beyond simply losing money on the recalled products. As a result of the recalls, the company has also been required to spend an enormous amount of money on rebuilding a factory in the hope that this will ensure better production quality in the future. This factory will not be functional until 2014.
On top of this, Johnson & Johnson is involved in a number of lawsuits over faulty hip implants. It was recently required to pay a fine of $1.1 billion to the state of Arkansas, for a lack of honesty regarding the side effects its antipsychotic drug, Risperdal. If the company's appeal against this ruling fails, it will probably mean that many other states will also file, and win, in cases against Johnson & Johnson.
Gorsky recently stated that he feels personally responsible for letting down patients so severely and that these important concerns will be appropriately addressed. He intends to get reliable products back on the shelves and hopes to soon win back the confidence of Johnson & Johnson customers. Hopefully, for the sake his company's stock, he is able to stay true to his word. However, as I see it, with the deadline for returning products to shelves having been pushed back so many times, we may not see the realization of Gorksy's promise very soon.
It is interesting to note that the previous CEO, William C. Weldon, stepped down due to criticism that he manufactured the problems the company is now facing. However, he remains with the company, in the position of Chairman, with Gorsky only taking on the role of CEO. This leaves me wondering if the same problems will continue to manifest given Weldon still has such a huge influence in the company.
In many ways, I feel that Gorsky has the right idea about how to move forward with the company. Unlike companies like Pfizer (PFE), which are downsizing in areas such as its baby nutrition business, Gorsky intends to increase the size of Johnson & Johnson. He plans to expand the company by acquiring more subsidiaries such as Synthes. Perhaps this is one of the reasons why the "Negative Watch Rating" was recently removed from Johnson & Johnson and why the company is now listed as "Stable". I'd have to agree with the analysts reasoning to promote the company, though if the acquisitions don't pan out, the company has a weak product line to rely on due to these recalls.
Some drug companies, such as Spectrum Pharmaceuticals (SPPI), are well on the way to getting approval for and manufacturing new drugs. In the case of Spectrum, its new drug, for the treatment of colorectal cancer, was approved last year and now the company is working toward increasing the production of the drug so that no patient with the illness will go untreated. Spectrum's success will only work to help it gain ground on Johnson & Johnson while the latter deals with its recalls.
Spectrum is not the only company that appears to be doing reasonably well at a time when Johnson & Johnson struggles. Keryx Biopharmaceuticals (KERX) recently recovered from its unfortunate failure with the drug, Perifosine, by achieving marked success with a new drug Zerenex, which passed the phase three trials without a hiccup. It looks as though the company is taking a turn for the better, a trend clearly illustrated by the marked rise in the company's share price.
Pfizer and Teva (TEVA) recently entered in an agreement revolving around patents for a generic epinephrine auto-injector. The settlement will render the need for further litigation unnecessary. According to the terms of the settlement, Teva will be permitted to market a generic epinephrine auto-injector under certain circumstances and if the drug as approved by the FDA. At this point, the FDA has not even given tentative approval for Teva's drug, so the actual outcome of the settlement is not yet fully understood. On top of that, the settlement has yet to be reviewed by the U.S. Department of Justice and the Federal Trade Commission. Additional terms of the contract are confidential at this point. The outcome of this agreement remains to be seen for both companies.
Recently, the Novartis (NVS) produced drug for treating Cushing's disease was approved for use in adults by the European Commission. This drug is an option for people with the disease who are unable to undergo surgery or who have already had surgery that turned out to be unsuccessful. This is something of a breakthrough in the field and gives us a very good ground for understanding the company's success over recent days and months.
It would seem that Johnson & Johnson's competitors are in a better state than it is. I recommend buying Spectrum, Keryx and Novartis at this time. As discussed earlier, Johnson & Johnson will have to make some major changes to continue as a reasonable stock option for investors. If Gorsky's plans hit the mark, then things should be well and good. But, as things stand, there appears to be a lot of other options that are well worth considering instead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.