Johnson & Johnson Worst Days May Be Ahead Of It

| About: Johnson & (JNJ)
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The news yesterday is that an Arkansas court ordered Johnson & Johnson (JNJ) to pay $1.1 billion over the marketing of its drug Risperdal.

Commenters here yawned.

JNJ is on a national tour of courtrooms, with Texas taking a $158 million settlement, and South Carolina taking $327 million, both on Medicaid fraud charges. A Louisiana jury also handed in a $258 million verdict.

But that's not all. The U.S. Justice Department is reportedly demanding $1.8 billion to settle its charges against the drug, an anti-psychotic which was pushed at one time for things as common as ADHD. Congress is also getting in on the act.

The Arkansas verdict, and the way it was calculated (238,000 claimed violations, a $5,000 fine for each violation) could also raise the stakes in other states facing similar cases.

JNJ reported $9.67 billion in net income for 2011, which was actually a bad year, since it averaged almost $13 billion in net the previous three. So if this were the limit of JNJ's problems, they might not concern investors too much.

But they're not.

Warren Buffett dumped the stock in February, telling CNBC the company has "messed up in a lot of ways." The company has had a number of production problems with recalls of over-the-counter drugs, and it now faces action over a recall of artificial hips by its DePuy unit.

That unit had been under the command of incoming CEO Alex Gorsky. The pharmaceuticals business was run for many years by Sherilyn McCoy, recently appointed to run Avon.

Given that the Arkansas decision came in a jury trial, and his company has now lost three such trials, Gorsky is now under pressure to find a settlement that can draw a line under Risperdal, while at the same time taking command of a company troubled by manufacturing problems and recalls in the devices business.

With all this on his plate, can investors keep giving JNJ stock a PE of 18? Expectations are for earnings of $5.10 this year, with the first quarter due to be reported later today. If earnings disappoint at all, look for a hard fall.

Even if they do make the estimates, don't expect a strong run from here. JNJ has some long-term problems it will take Gorsky some time to fix.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.