Johnson & Johnson (NYSE: JNJ) deflated today like a helium balloon that you get at the zoo when you're a child -- you know, it deflates as you walk around all day under the hot sun. Poor balloon. J&J deflated just like that.
Poof.
Someone like Brian still cries over such an event, but we've grown larger than that. Instead of crying, we watched, listened, and learned. And because we've been studying J&J for almost three years, Friday's news wasn't a shock. J&J's heartburn medicine, Propulsid, which had $940 million in 1999 sales, will no longer be marketed after July. However, Propulsid will still be available for patients who qualify via their doctor's orders.
Propulsid was approved by the FDA in 1993, but within a year problems related to the drug emerged. Reportedly, over 80 deaths are now associated with Propulsid. Even one unnatural death is a horrible, sad misfortune, and we would much rather see a dangerous drug removed from general sales and then absorb the financial loss (whatever it may be) as shareholders. The alternative would be to push on idiotically, pedal to the metal, for more sales, more dollars, more earnings -- more, more, more at any cost. And that's just plain ugly. Fools aren't this way, and we don't like to invest in companies that are, either.
J&J acted decisively and responsibly during the Tylenol tragedy in the 1980s. It didn't dither around with Propulsid, either. Johnson & Johnson has been working with the FDA and scientists to nail down the problems with Propulsid and it has continually changed the label on the drug to limit who can take it. The drug's label of instructions and warnings was changed five times in the recent past, each time in hopes of limiting the drug's use only to patients who need it and who wouldn't face undue risks by using it. In the end, however, even five changes wasn't enough. Now all marketing will stop.
This doesn't mean that all sales will end, however. With a doctor's approval and under strict watch, Propulsid will be sold to enough patients to earn approximately $250 million in revenue this year. Following recent label changes, the drug was already only expected to earn $500 million in sales this year, down almost 50% from last year's sales. This was already known, so today's news doesn't change the company's approximately $30 billion in annual revenue by probably any more than $250 million. In fact, J&J stated last night that it is still comfortable with consensus estimates that call for $3.36 per share in earnings this year. That hasn't changed.
The stock still deflated over 10% on Friday, however, most likely due to newly stoked fears of possible litigation against J&J. Such litigation is more than likely, and plenty of precedent for plaintiffs exists. American Home Products (NYSE: AHP) recently offered a $3.75 billion settlement to users of its discontinued diet pills. Those pills were linked to heart and lung damage. Although we're not Fools who unduly speculate, other analysts have hypothesized that J&J's settlement would not be "anywhere near" as high as American Home Product's settlement.
Whatever the outcome of possible litigation, the uncertainty of it is probably what is weighing most on the stock. If litigation does occur, J&J will likely seek to settle the claims out of court with a one-time payment. Although this would not be favorable news for shareholders, the families of victims may well deserve whatever retribution is possible (we're not in a position to judge this issue either way), and we know that J&J does want to treat consumers fairly. (Meanwhile, J&J has a new form of Propulsid with fewer side-effects in phase II trials.)
Overall, lawsuits are to be expected when you operate in medicine and drugs. Sometimes such lawsuits are an evil in society, but often they serve to protect all of us. We'll likely see several more healthcare-related lawsuits in the decade ahead, at least some of them dealing with J&J. This comes with the territory.
We're investors who believe that J&J is doing much more good than harm (and the harm is never intentional of course), and we're investors who see that, in the process, J&J is creating value for millions of people and for shareholders. Therefore, we accept the possibilities of litigation now and again as part of our investment risk regarding J&J. You need to accept this risk when investing in any drug company.
We'll likely send our next $100 investment to Johnson & Johnson next week. We would love to split the money 50/50 between J&J and Mellon Financial (NYSE: MEL), but Mellon requires a minimum $100 investment. Therefore, we may send $100 to J&J next month, and $100 to Mellon the month after. We'll announce this next week. Not a big deal either way.
Have a great weekend!
P.S. To discuss this column and J&J, visit us on the Drip boards linked below.
