GMI Ratings Governance Issue | Johnson & Johnson

Johnson & Johnson told the court that it will stop selling four types of vaginal implants because they’re no longer commercially viable. While the New Jersey pharmaceutical giant stressed that the devices are safe, investors have had warning signs for years about J&J’s high risk of running into cross hairs with regulators.

The company’s Ethicon unit has provided surgical mesh products, which treat urinary incontinence by bolstering pelvic muscles. But some complained the products caused complications such as pain, vaginal scarring and infections. As the Food and Drug Administration received increasing numbers of problem reports between 2008 and 2010, the regulator in January asked numerous vaginal mesh makers including J&J to study the issues raised. Now J&J wrote to judges overseeing hundreds of lawsuits, explaining that it would stop selling Gynecare TVT Secur system, the Gynecare Prosima, the Gynecare Prolift and the Gynecare Prolift+M by March 2013, according to news reports this week.

Obviously the jury is still out on whether J&J mishandled these four particular products.  Either way, the company has inarguably developed an impressive record with the FDA. Before 2009 the J&J unit McNeil Consumer Healthcare failed to investigate compliance problems at manufacturing facilities, according to the FDA’s congressional testimony. In January 2010, the FDA issued a warning letter expressing serious concerns about the company’s control over the quality of its drugs. The next month FDA compliance staff met with senior officials from McNeil and J&J; the agency warned about a pattern of failing to report information and miscalculating risks, among other things. Then the FDA inspected the company in April 2010 and found manufacturing problems including particles in liquid medications. McNeil announced a voluntary recall of over 136 million bottles of infants’ and children’s products at the end of that month including liquid Tylenol, Motrin, Zyrtec and Benedryl.

In August 2010 J&J recalled two hip replacement systems and contact lenses. More product recalls took place, and in March 2011 three J&J manufacturing plants were placed under an FDA consent decree — an action that takes the correction of manufacturing problems out of the company’s hands, according to news reports.

Some in the pharmaceutical world might see themselves as the innocent victims of rabid FDA regulators, and certainly safety is always a subjective matter that invites disagreement. But Johnson & Johnson has had so many run-ins with the law in the past, there’s no way of knowing what happens next. That’s the big point for anyone trying to stake money on what happens to J&J in the future.

Due to these issues as well as many others, GMI gives J&J an F on its corporate governance overall. The company’s financial statements also reflect an AGR score of 29, indicating higher risk than 71% of companies. J&J had an even lower AGR of 7 in September 2010.

Despite J&J’s unpredictability, the company’s stock has risen more than 6% since January 2010 to trade at $62.83 per share intra-day Thursday. For now, many investors seem willing to take the risks.

Region:  North America
Sector:   Healthcare
Industry: Pharmaceuticals – Diversified
Market Cap:  $ 171,675.7mm (Large Cap)
ESG Rating: F
AGR:   Aggressive (29)

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