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A contamination of Johnson & Johnson's (NYSE: JNJ ) Tylenol in 1982 nearly killed the brand. Someone tainted bottles of the drug long after it left Johnson & Johnson's facilities.
A short-term-thinking company would have blamed the cops for not catching the individuals responsible for the poisoning. Not Johnson & Johnson. The company recalled all of the Tylenol at a cost of millions of dollars, and then relaunched the drug with tamper-resistant packaging.
The decisive action allowed Johnson & Johnson to regain consumers' confidence and grab a hold of the consumer market.
Fast-forward nearly three decades
Johnson & Johnson's current fiasco is mostly the company's fault. From shipping pallets causing musty odors to drugs that don't have the correct amount of active drug, there's little doubt that Johnson & Johnson screwed up.
The solution the company is taking is the same as it was in 1982, albeit on a larger scale: recall any and everything that could be a problem and relaunch it better than before.
Since the initial issues arose, Johnson & Johnson has gone through all its products to ensure there aren't any additional problems. It's found more than I've been able to keep track of, from serious quality control issues to less mundane issues of not listing on the bottle that there was a minute amount of alcohol in its Tylenol Cold Multi-Symptom.
The culmination -- one can only hope -- came last week when the company announced that it was recalling 667,632 packages of Sudafed tablets because the instructions contained a typo: a repeated word in the instructions: "do not not divide, crush, chew, or dissolve the tablet."
While the double negative technically means that you should do it, no one seems to have been hurt if they did take the advice literally. Still Johnson & Johnson made the recall as it's clearly trying to clean up any and every mistake it's made over the last few years.
This is getting costly
Last year the recalls cost the company $900 million in lost sales. That doesn't include whatever Johnson & Johnson is going to have to spend to get consumers back.
Steep discounts close to the price of generics? Coupons? Whatever the company decides, it isn't going to be cheap.
Will it work?
I think the strategy of getting all the issues out on the table is a good one. At the very least, the multitude of recalls has caused consumers to become numb to the problems. "Look Mabel, Johnson & Johnson issued another recall. And also the sun came up in the east today."
The problem is how do you win back the consumers that have headed to competing products sold by Bayer, Merck (NYSE: MRK ) , and Pfizer (NYSE: PFE ) as well as generic over-the-counter drugs made by Perrigo (Nasdaq: PRGO ) ?
Johnson & Johnson's thorough cleaning of the house should give consumers confidence that the company has eliminated all the quality-control issues, but once it's done, it's going to have to relaunch in a major way.
Investors also have to be concerned about how the recalls in the consumer division is affecting the company's reputation with doctors that prescribe its other products. That's especially an issue in the medical device space where replacing a faulty product is more complicated than returning it to your local drugstore. If Johnson & Johnson can't keep its reputation among doctors, other medical device makers like Boston Scientific (NYSE: BSX ) and Medtronic (NYSE: MDT ) are going to cut into its market share even where it hasn't recalled any products.
Bad news buy?
You could do worse. The solid 3.6% dividend yield should prop up the company's share price. Just be conscious that the dividend could be all the increase in value you see over the next year or so.
It'll likely be years before we know if Johnson & Johnson was able to repeat its comeback. If it can, investors will be playing Survivor's 1982 hit Eye of the Tiger all the way to the bank.
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