Johnson & Johnson Needs A Band-Aid

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On November 13, 2013, Johnson & Johnson (NYSE:JNJ) was reported to have agreed to a $4 billion settlement for claims that one of its implant devices manufactured by the DuPuy Division caused significant health problems and expenses for patients who received the device. The ASR hip implant joined the lengthening list of medical devices that have been involved in a liability case for this company.

Hip Implant Problems
Johnson & Johnson's legal issues started in its DuPuy Orthopedics Division in regard to a particular hip implant that was introduced to the public in 2005 as an improvement over previous devices, offering greater range-of-motion. However, by 2008, it was clear that this device had significant design flaws, causing failure in a high percentage of cases and medical problems from minute splinters that wore off the metal surfaces.

Artificial hip implants generally are expected to last about 15 years, but the DuPuy metal-on-metal device failed after only a few years and created a number of additional health problems for the patient. Ongoing inflammation, tissue necrosis, chronic pain and disability were recorded in a number of patients. Revision surgery, in which the device is removed and replaced with another type, was required for many of these patients.

Recall of the Device
Internal documents from J&J indicate that they may have known the metal-on-metal device would fail in around 40 percent of patients. J&J spent around $993 million informing patients about the device's problems and related medical costs. The Articular Surface Resurface, or ASR, was recalled in 2010 because of the many reports of failure of the device. Their decision to continue to market the device in 2008 no doubt played a significant part in the high value of the settlement.

Largest Liability Payout in History
The tentative settlement that J&J has agreed to could reach up to $4 billion dollars. Each patient is expected to receive around $300,000, according to current calculations. The settlement affects somewhere between 7,000 and 8,000 patients. About 12,000 lawsuits are covered under the settlement. The plan is yet to receive final court approval. Johnson & Johnson could end up paying even more than this amount, depending on how many patients who have received the DuPuy device require replacement surgery in years to come. The company has also paid out millions in legal fees to their law firms to defend this litigation.

Johnson & Johnson is one of the largest medical products companies in the country. This recent settlement is expected to make a significant dent in profits for some time to come and it raises questions about a trusted name in healthcare products.

The Johnson & Johnson common stock has run up from $70 to $93 year to date. Conservative investors may want to take some profits and reallocate the profits to the common stock of Eli Lilly (NYSE:LLY) and Sanofi (NYSE:SNY) that pay a higher dividend.

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

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