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Will J&J be Able to Overcome Its Legal Troubles in 2020?

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Johnson and Johnson (JNJ - Free Report) has the most diversified revenue stream among large-cap pharma companies. The company’s portfolio comprises several blockbuster drugs approved for a broad range of diseases as well as medical devices and consumer products.

However, with such a diverse revenue stream, the company also faces several legal issues across its verticals. Although the company posted strong quarterly sales and profits, raised sales guidance thrice and saw rapid pipeline progress, it witnessed share price volatility during the year due to its ongoing litigations.

J&J faces a slew of lawsuits, which allege personal injuries to patients caused by the use of its medicines, mainly its talc and opioid products. These lawsuits have resulted in uncertainty.

Talc Litigations

The lawsuits allege that the company’s talc-based products, primarily its baby powders, contain asbestos, which may cause ovarian cancer. There are more than 16,000 lawsuits pending related to these products. In 2018, J&J was ordered by a Missouri court to pay $4.7 billion in damages to 22 women who made such allegations. However, the company has appealed against the decision. Earlier this month, the company provided results from 155 tests on its talc-based products conducted by two different third-party labs. The test results showed no trace of asbestos in the products. However, the company’s pending litigations related to its talc-based products will continue to remain an overhang in 2020.

Opioid Litigations

Apart from talc-based products, the company has been in the news in 2019 for its alleged involvement in opioid-based drug abuse in the United States in the past two decades along with Teva Pharmaceuticals (TEVA - Free Report) , Mallinckrodt (MNK - Free Report) and Endo International (ENDP - Free Report) . The company has been named in more than 2,500 lawsuits filed by various state and local governments in the United States related to the marketing of its opioid drugs including Duragesic, Nucynta and Nucynta ER.

In August, J&J was ordered by a district court in Oklahoma to pay $572 million to the state in connection with a lawsuit filed by the latter. In October, J&J settled with two counties of Ohio for $10 million plus other cost reimbursements, in connection with the multi-district opioid case in Ohio. The company is planning to enter an agreement with several state attorney generals in attempt to resolve all pending opioid litigations for $4 billion. A criminal investigation was launched last month by federal prosecutors in Brooklyn on opioid manufacturers and distributors.

Other Lawsuits

J&J faces more than 13,000 similar lawsuits alleging that use of its antipsychotic drug, Risperdal causes enlargement of breast tissues in boys, a condition called gynecomastia. The company has been directed to pay $8 billion in punitive damages related to Risperdal use in October. The company is also facing several other injury claims and patent litigations against several of its products.

Conclusion

We expect volatility in J&J’s share price to subside and start an uptrend going forward in 2020 as the litigation issues are already priced in its stock now. Although 2019 was a volatile year for J&J, it still managed to outperform its broader Large Cap Pharmaceuticals industry in the past year. Moreover, the company’s sound cash resources are expected to help it absorb any costs related to legal issues.

 

 

J&J’s anticipated growth in 2020 is also backed by its strong fundamentals. The company registered sales growth across all its divisions in the first nine months of 2019. Sales growth is expected to continue as the company has been raising its guidance every quarter this year. The company expects its Pharmaceutical unit to deliver above-market growth in 2020 on the back of strong performance of its core products including Imbruvica, Darzalex, Stelara and others.  It is also developing several of its marketed drugs for new indications or treatment settings. J&J announced promising data from several pivotal studies and made rapid progress with its pipeline and line extensions in 2019. J&J gained FDA approval for two new drugs and line extensions for several drugs in 2019. These approvals are likely to drive sales in 2020 as well.

The company is also working on turning around its Medical Devices business by developing innovative products, expanding global presence and implementing novel commercial models. Sales in the segment improved in 2017 and 2018 from 2016 levels. J&J is optimistic that this segment will deliver above-market growth by 2020 driven by innovation, strategic partnerships, portfolio management and new business models.

J&J currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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