CAN JOHNSON & JOHNSON STOP THE FALLOUT FROM DAMAGING ASBESTOS CONTROVERSY?
Company loses $40bn of market value in two days. Rob Crilly reports
For more than a century, Johnson & Johnson promised parents its baby powder was gentle enough for their children. It was one of its core products, described as a “sacred cow” in an internal email, that helped the company grow into one of the world’s most trusted brands, selling everything from household toiletries to medical devices.
Yet none of that history or reputation could inoculate it from a two-day 13 per cent drop in its share price – wiping more than $40 billion (Dh146.9bn) from its market valuation – as investors responded to allegations that the company knew its baby powder sometimes contained asbestos since the 1970s.
The new evidence, reported by Reuters last week, threatens to tilt thousands of court cases against the pharmaceutical and consumer giant, leaving the multinational scrambling to protect one of the most well known brands in the world.
In a briefing note, Colin Scarola, an analyst at CFRA, said the news would affect sales of everything, from baby shampoo to prosthetic hips, despite J&J’s denials.
“We expect significant damage will unfold for J&J’s valuable brand name in consumer products and medical devices, which has been built over decades,” he wrote, advising investors not to buy shares.
“The consumer and medical devices segments generate 39 per cent of profits, and the brand name and accompanying consumer trust are critical for their success.”
J&J developed its Johnson’s baby powder in 1893, after customers reported using small tubs of Italian talc to ease nappy rash.
Today, the white bottle bearing a replica of one of its founder’s signatures is immediately recognisable. Even the distinctive floral fragrance, with notes of rose and vanilla, is familiar around the world.
Asbestos, a carcinogen, has long been a concern in products made from talc – a mineral in clay mined from underground deposits. Seams of the two minerals are often found close together and stringent control measures have been in force throughout the industry since the 1970s.
Even before the new allegations surfaced, J&J faced thousands of lawsuits, mostly over claims that its baby powder, or talc, caused ovarian cancer. In recent months the litigation has also included accusations that the products contained asbestos fibres, which can cause mesothelioma, an aggressive cancer affecting the mesothelium, the lining of the abdomen, lung, heart and testes. It is most commonly noticed in miners exposed to asbestos.
In April, the company lost a trial in New Jersey, where it is based, when a jury awarded $117 million to a man suffering from mesothelioma, and the following month a California jury ordered it to pay $25.7m to a woman suffering from the same disease. In July, a Missouri jury hit J&J with a $4.69bn verdict in the first trial alleging asbestos contamination had caused ovarian cancer in 22 women.
J&J is appealing each decision.
The cases have hinted at a graver problem. Although a jury in New Jersey found the company not responsible for causing another plaintiff Rosalind Henry’s mesothelioma, her lawyers in October claimed it had long known about the risk of asbestos fibres in its baby powder, but withheld the details from consumers and regulators.
Details are emerging as
J&J has been forced to share thousands of pages of internal reports, memos and other confidential documents with lawyers for some of the 11,700 plaintiffs that say the company’s talc caused their cancers.
Reuters examined the documents and concluded: “From at least 1971 to the early 2000s, the company’s raw talc and finished powders sometimes tested positive for small amounts of asbestos, and that company executives, mine managers, scientists, doctors and lawyers fretted over the problem and how to address it while failing to disclose it to regulators or the public.”
Contaminants described as “acicular”, or needle-like, tremolite – one of the six recognised forms of asbestos were found as far back as 1957.
In 1976, when the US Food and Drug Administration was deciding limits on asbestos
We expect significant damage will unfold for J&J’s valuable brand name, which has been built over decades COLIN SCAROLA CFRA analyst
in cosmetic talc products, J&J told regulators that no asbestos was detected in any sample from December 1972 to October 1973. Yet the documents reveal three positive tests by three labs from 1972 to 1975, Reuters found.
The report also suggests the company had commissioned and paid for a study on talc miners in the early 1970s, telling researchers the results it wanted and hiring a ghostwriter to redraft the article that was published in a journal.
In other cases, experts hired by plaintiffs have detected the presence of asbestos. One lab found it present in more than half of samples tested – including a 1978 bottle kept in J&J’s corporate museum.
The company has responded defensively to allegations, saying tests were finding “background” asbestos and accusing Reuters of failing to take into account what were thousands of tests showing its talc was asbestos free.
“The Reuters article is one-sided, false and inflammatory,” the company said. “Johnson & Johnson’s baby powder is safe and asbestos-free.
“Studies of more than 100,000 men and women show that talc does not cause cancer or asbestos-related disease. Thousands of independent tests by regulators and the world’s leading labs prove our baby powder has never contained asbestos.”
The company took its message directly to consumers on Monday. J&J ran a full-page ad in the New York Times titled “Science. Not Sensationalism”, pointing readers to a link where they can download its research that talc is safe to use. Its chief executive, Alex Gorsky, is also on the offensive, giving his first interview to CNBC reiterating talking points in defense of the company and denying allegations that J&J hid information about the safety of talc.
The company has also pledged to buy back $5bn of shares to boost investor confidence after its worst two-day trading session in nearly two decades.
But if that is not enough to rebuild J&J’s share price, the company may have more luck in court, according to Nathan Schachtman, a New York lawyer who has defended companies against asbestos claims. He said the term might trigger panic when it appears in headlines but juries often have weeks to absorb complex science.
“It is not a new issue whether talc deposits are contaminated by asbestos and it turns on the definition of asbestos, which sounds like I’m resorting to semantics but is actually pretty important and hasn’t got a lot of attention,” he said.
Each of the six minerals in question can exist in different forms: as a fibre, non-fibre or something in between. It is the fibrous material that is defined as asbestos and regulators look for a particular length to width ratio. Mineralogists and doctors, looking for clinical effects, may worry about different forms or definitions.
“When you say asbestos … boy, it’s not always clear what is meant in one of these old documents about which definition you are using,” said Mr Schachtman.
Some analysts are bullish about the J&J’s prospects and say the reports need not lead to further gloom.
Damien Conover, of the global investment research and investment firm Morningstar, said there remained uncertainty around the credibility of some of the legal claims lodged against the company.
“By litigating these cases one by one, we expect J&J will wear down the plaintiff group, ending with a settlement that does not cause a major impact to the company’s stock price,” he wrote to investors.
The company’s portfolio, which includes the manufacturer of Acuvue contact lenses and Neutrogena skincare products, may offer sufficient diversity to insulate it from a slump in baby care sales. The division had sales of $472m in the third quarter, representing only about 2 per cent of its top line.
That was not enough to help shares rebound when trading began after the weekend but may help the company tough it out in the long term.