One Day, the J&J Recalls Will End

Last Wednesday, Johnson & Johnson (NYSE: JNJ  ) announced a new quality assurance czar. This week it was back to its old ways, announcing another product recall.

The company recalled 100,000 boxes of its 1 Day Acuvue contact lenses sold outside the U.S. Customers in Japan complained about the lenses causing stinging after inserting them. The company traced the problem back to an issue with one of the machines that rinses the lenses during the manufacturing process.

Like its other recalls, this one won't have a major effect on earnings. Beyond the cost of fixing the rinsing machine, the only direct cost seems to be the cost of manufacturing the lots that will have to be destroyed.

The indirect costs of these ongoing quality control issues could be devastating, though. At some point, consumers are going to shun anything with a Johnson & Johnson logo on it for fear that it too has quality control issues. That's great news for GlaxoSmithKline (NYSE: GSK  ) , Abbott Labs (NYSE: ABT  ) , Merck (NYSE: MRK  ) , and Pfizer (NYSE: PFE  ) . These all sell consumer health-care and nutrition products in addition to prescription drugs, and you can just bet that they're trying to take advantage of J&J's problems to steal market share.

Because this latest recall occurred outside the U.S., it might not get much media play like earlier recalls of children's medicine. Still, Johnson & Johnson's consumer health segment gets more than half of its sales from outside the U.S., so tainting its image outside the U.S. could be costly as well.

When will Johnson & Johnson step up its quality control and stop this madness? I don't think we'll know the answer to that until after the fact. Warren Buffett seems to feel Johnson & Johnson is cheap enough, but I think cautious investors should consider looking elsewhere until management's focus is back on growing revenue and expanding margins.

Adam Wiederman suggests you avoid this bubble.

Pfizer is a Motley Fool Inside Value pick. GlaxoSmithKline is a Global Gains recommendation. Johnson & Johnson is an Income Investor pick, and Motley Fool Options has recommended a diagonal call position on its shares. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of GlaxoSmithKline. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (2)

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  • Report this Comment On August 24, 2010, at 5:08 PM, guyhick wrote:

    JNJ has gotten into the mode they are in now because managements focus has been on growing revenue and expanding margins. They need just the opposite, to get back to the basics that made them strong, the CREDO. When that is followed the profits will come, it worked for 100 years. The question is why did they stop?

  • Report this Comment On August 25, 2010, at 10:16 AM, Ivan0310 wrote:

    @guyhick Corporate greed knows no bounds. And when a company becomes as large as J&J, it eventually loses site of its roots, values and even morals.

  • Report this Comment On August 25, 2010, at 1:10 PM, danthony wrote:

    Ouch! If I am on the positive side of J&J, the story goes that the appointing of a new Quality Czar last week is meant to stop the quality issues like the Japanese recall this week. Does anyone really believe a new manager last week somehow made the quality better on product shipped weeks or months earlier???

  • Report this Comment On August 27, 2010, at 11:54 AM, TMFBiologyFool wrote:

    danthony,

    I wasn't trying to imply that. I just thought it was ironic.

    -Brian

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