Johnson & Johnson Gets a Slap on the Wrist

You could see this one coming from a mile away. As soon as Johnson & Johnson's (NYSE: JNJ  ) recalls became so numerous that reporters stopped mentioning the number of recalls that the company had issued, it was inevitable that J&J would end up with a consent decree with the Food and Drug Administration.

Yesterday, the two parties reached an agreement on what the company needs to do to fix its myriad manufacturing problems. The consent decree covers two plants in Pennsylvania and one in Puerto Rico. One of the plants manufactures over-the-counter drugs for Johnson & Johnson's joint venture with Merck (NYSE: MRK  ) .

A consent decree isn't the end of the world. Genzyme (Nasdaq: GENZ  ) and Schering-Plough both got one and turned things around enough to be purchased by sanofi-aventis (NYSE: SNY  ) and Merck, respectively.

And Johnson & Johnson's agreement looks like little more than a slap on the wrist. There's no up-front penalty; Genzyme, by contrast, had to pay a $175 million fine. J&J could face fines of $15,000 a day for violating the decree, which could cost the company up to $10 million a year. But somehow, I doubt J&J will make the same mistake twice.

Johnson & Johnson will have to pay for third-party oversight to ensure that things get up to snuff, but that's a drop in the bucket, considering that its manufacturing issues cost the company $900 million in lost sales last year. No one wants these issues fixed more than J&J.

While the consent decree isn't a major issue, it is another blemish on J&J's tarnished reputation. The company will be able to turn things around, but it may take a while to get customers back. I'm guessing the person that said, "There's no such thing as bad press," never had a consent decree with the FDA.

Johnson & Johnson is a Motley Fool Inside Value recommendation, a Motley Fool Income Investor pick, and Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Johnson & Johnson. Motley Fool Alphaowns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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


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  • Report this Comment On March 11, 2011, at 9:01 PM, TimothyVR wrote:

    It's still a 'buy' as far as I'm concerned and will very likely come back from this - but it's a shame that JNJ has allowed things to go this far.

    The company that wrote the book on overcoming terrible news in 1982 has allowed this to develop, and there is STILLno attempt to address this publicly in a serious way. Where are the execs at the top?

    They were completely blameless regarding the Tylenol tragedy in '82. This is not a tragedy - but it is a mess and they are entirely to blame on this one. Someone (many) are asleep at the switch.

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