Johnson & Johnson Bankruptcy Talk: Q2 Earnings Soar, But Litigation Looms On Horizon

The company has proposed a $8.9 billion settlement to end tens of thousands of cases and stop new ones from coming through
Johnson & Johnson Bankruptcy Talk: Q2 Earnings Soar, But Litigation Looms On Horizon

Key takeaways

  • Johnson & Johnson has been ordered to pay nearly $19 million in damages by a California to a mesothelioma victim
  • The company has proposed a $8.9 billion settlement to end tens of thousands of cases and stop new ones from coming through
  • The stock declined at the news, but gained 6% at the upbeat Q2 earnings report

Big Pharma stalwart Johnson & Johnson suffered a blow to its talc litigation defense when a California court determined the company must pay a 24-year-old man nearly $19 million in damages. The victim had developed cancer from a Johnson & Johnson baby talcum powder, with Johnson & Johnson looking to settle thousands more through the U.S. bankruptcy court.

It was a downbeat moment for the company’s share price but soon revived with a stellar earnings report for the second quarter two days later. The looming shadow of further litigation might be enough for investors to get cold feet in the long term. Let’s get into the details.

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What happened in the Johnson & Johnson ruling?

In the first litigation Johnson & Johnson has faced over its talcum powder in nearly two years, a California court has ruled in favor of 24-year-old plaintiff Emory Hernandez Valadez. He developed mesothelioma in the tissue around his heart, which he claimed resulted from heavy exposure to Johnson & Johnson talcum powder throughout his childhood.

The judge ruled that Hernandez was entitled to $18.8 million in damages to compensate him for medical bills and the pain and suffering caused, but he was not awarded punitive damages. The case was allowed to proceed given the rarity of Hernandez’s cancer and his limited life expectancy.

Johnson & Johnson has said it will appeal the verdict, with the company’s vice president of litigation, Erik Haas, calling the judgment “irreconcilable with the decades of independent scientific evaluations confirming Johnson’s Baby Powder is safe, does not contain asbestos and does not cause cancer.”

How long could the litigation go on for?

Tens of thousands of plaintiffs have sued Johnson & Johnson, alleging that the company’s baby talcum powder contained life-threatening asbestos, leading to mesothelioma and ovarian cancer. The company has always maintained that the talcum powder has never contained asbestos.

In April, Johnson & Johnson subsidiary LTL Management filed for bankruptcy in New Jersey and proposed a $8.9 billion settlement for over 38,000 lawsuits and to stop new cases from being filed. The figure dwarfs the original $2 billion J&J offered.

The bankruptcy filing is part of a strategy to resolve the talc claims in bankruptcy proceedings rather than expose Johnson & Johnson to massive litigation; most litigation is halted while the Chapter 11 bankruptcy proceedings ensue. The tens of thousands of plaintiffs argue the filing was done in bad faith, and the courts rejected an earlier attempt from J&J to file a subsidiary for bankruptcy in January.

In a bankruptcy court filing, Johnson & Johnson said the running cost of the talcum powder litigation had so far totaled $4.5 billion – and the vast majority of claims haven’t even gone ahead yet. The plaintiffs will vote on whether to accept the $8.9 billion settlement this summer, which needs a 75% majority; if they reject it, investors should expect this to rumble on for years, if not decades.

What were Johnson & Johnson’s latest earnings like?

Despite the litigation drama, Johnson & Johnson posted a decent earnings beat for the second quarter. The conglomerate recorded adjusted earnings per share at $2.80 on revenue of $25.5 billion, which surpassed analyst expectations. Initial predictions had come in at $2.62 a share on revenue of $24.6 billion.

Worldwide sales were up 6.3% compared to last year’s period, with the increase down to the company’s MedTech division outperforming. The arm saw a 14.7% increase in sales on an operational basis.

Johnson & Johnson also updated its full-year earnings guidance, saying it expects to reach $10.75 per share for the 2023 fiscal year. That’s slightly higher than the $10.65 per share figure the company and Wall Street forecasted in April.

In a boon for shareholders, Johnson & Johnson also announced it would be letting shareholders exchange the company’s shares for Kenvue shares. Consumer health business Kenvue is the company Johnson & Johnson spun out at the start of this year but still retains a 90% ownership. Further details on the share-swapping scheme are yet to be announced.

Wall Street’s reaction

At the California court verdict, Johnson & Johnson shares slid 1.5% in premarket trading on Wednesday last week, falling a further 0.2% when the markets opened. Thanks to the good news from the second-quarter earnings, Johnson & Johnson pulled back the losses. The stock rose 1.3% in premarket trading last week, reaching as high as 6% during trading hours.

As Johnson & Johnson’s earnings usually act as a barometer for the sector, its competitors saw a small lift to their share prices as well. Pfizer
was up 0.2%; Merck rose by 0.3%, as did Bristol Myers Squibb

J&J might have its litigation woes, but on the whole, the healthcare sector has been weak in 2023. Johnson & Johnson is down 4.49% since the start of the year; Pfizer, struggling to get past its pandemic success, is down 27%. Bristol-Myers Squibb has declined 10.5% in value, while Merck and AstraZeneca have stayed flat.

Part of the reason is the Medicare drug price negotiations passed as part of the Inflation Reduction Act. Most of Big Pharma, including Johnson & Johnson, has sued the U.S. government over the move in a bid to overturn the law. A statement from the company said the pricing limits would “constrain medical innovation, limit patient access and choice, and negatively impact the overall quality of patient care.”

The bottom line

Johnson & Johnson will want to see the California case go through the appeal process as quickly as possible, lest it trigger a fresh wave of lawsuits. Wall Street might still be keen on the stock as the earnings look good, but there’s a question mark hovering over the company’s future. It all depends on whether a settlement can be reached – and if it can, Johnson & Johnson has clearer skies ahead.

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