Johnson & Johnson (JNJ) is not having much luck having recalled a number of its products and being thrown into several lawsuits. Most recently it announced an intention to set aside $600 million for potential settlement of civil lawsuits related to the marketing of Risperdal.
Risperdal is not the only drug that the company has made plans for. There are a number of drug-related court cases that Johnson & Johnson has set aside funds for. As far as I am concerned, you know when a company is in trouble when it has to start putting money aside specifically for use in lawsuits. This is not an expense that a company should encounter as regularly as Johnson & Johnson does, and yet it seems that the pharmaceutical company is so certain that it will have to pay out in the near future it has actually made provisions for the event. In a way I suppose this is better than not planning at all, but the fact of the matter is that Johnson & Johnson is simply not the reliable stock it once was.
The charges that Johnson & Johnson faces are quite serious. They include allegations that the company offered kickbacks to a company that supplies drugs to nursing homes in order to improve the sale of certain of its drugs. As one source puts it, the company viewed the pharmacists in question as an "extension of its sales force" because it knew that the physicians who served the nursing homes would more often than not act on the recommendations of those pharmacists.
This is a situation that is far from being in the best interests of consumers, let alone stockholders in the company. Johnson & Johnson, however, maintains that the "kickbacks" in question were merely discounts, and that it is allowed under law to provide discounts to pharmacies as long as those discounts are properly disclosed. However, many of the companies that were accused of receiving kickbacks from Johnson & Johnson have effectively admitted their guilt in that they have agreed to pay damages.
All of this is in addition to the equally serious charges that Johnson & Johnson marketed the anti-psychotic drug Risperdal to patients for whom it was not approved by the US Food and Drug Administration. The recipients of this drug included elderly residents living in nursing homes. Johnson & Johnson has a lot to answer for. Additionally, I think these charges will have negative repercussions on its stock going forward. The $600 million set aside for the potential settlement could be going toward research and development and dividend increases. The stock rose sharply on June 11th from the Synthes acquisition approval, but has been hovering around $66 since then. I expect the stock to take a big hit if the $600 million is paid out.
However, there are still a few innovations up the company's sleeves. Johnson & Johnson recently introduced a novel diabetes drug that is unique in that it has "turned one of diabetes' most worrisome warning signs into a treatment that lowers dangerously high levels of blood-sugar before the disease can cause blindness, kidney damage and heart disease". This is a significant breakthrough for the company. Johnson & Johnson will now be a significant player in the area of diabetes and this new drug. It will probably be available from next year and should be a big rival to the current bestseller, Januvia from Merck (MRK). It's not a cure, but it is a new way to deal with the disease.
This is not the only avenue of competition that Merck may have to face when it comes to its highly successful diabetes drug. Sanofi (SNY) announced that a recent clinical study shows that its Lantus insulin is more effective at reducing blood sugar levels in patients that suffer from Type 2 Diabetes than Merck's Januvia. This presents a far lesser threat, however, as Lantus has more side effects than Januvia. In addition its efficacy is best when started early in treatment. Most doctors and patients prefer to delay the administration of insulin for as long as possible.
Diabetes is one of the 'trending' markets at the moment when we look at the pharmaceutical stocks. Bristol-Myers Squibb (BMY) and AstraZeneca (AZN) are also in the game with the new compound dapagliflozin. As compared to a placebo this drug is far more effective at reducing blood sugar levels. Again this is a treatment aimed at patients with Type 2 diabetes. This collaboration between the two pharmaceutical companies could be a great step forward for both of them. Significant moves in the treatment of condition such as diabetes are the best way for pharmaceutical companies to go at this point in time.
Eli Lilly (LLY) is also in the game with its Type 2 diabetes drug linagliptin. The company developed this drug in partnership with Boehringer Ingelheim Pharmaceuticals, a private company. The drug so far has shown to be effective in controlling blood sugar levels in adult patients, but the clinical trials are still underway at this point and it will be some time before the efficacy and safety of the diabetes drug is conclusively established.
So, although the news is not all bad, Johnson & Johnson faces a huge amount of competition in terms of diabetes medication. It may end up being as if it entered the game a little too late. Hopefully, the novelty of the drug will be enough to keep the company in this game. If the drug is a resounding success in every way imaginable, Johnson & Johnson will still have to deal with the negative press created by the lawsuits and rumors of lawsuits that it is and potentially will be involved in. However, I think that the advent of the new diabetes medication may be an indication that Johnson & Johnson is in the process of making a comeback. At this point, it is probably better to hold onto your stock in this company. The potential lawsuit settlement bears close watching if you are to make the best decision possible.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.