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Will Legal Problems Bankrupt Johnson & Johnson?

By David Jagielski – Jul 2, 2020 at 9:11AM

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The company's facing thousands of lawsuits.

A flurry of legal challenges is always a good reason for investors to be wary of a company. Even if the business is not in danger today, things could get worse down the road.

Johnson & Johnson (JNJ -1.94%) falls into that category. Lawsuits related to its talc-based products and the company's role in the opioid crisis present some of the biggest risks to long-term investors. Although J&J may be able to manage those legal challenges today, that doesn't mean it always will. There's a real risk that as these fines pile up, they could end up bankrupting the company.

Company to pay $2.1 billion for talc-based products

Last month, J&J learned that it would have to pay $2.1 billion to women who said they contracted ovarian cancer as a result of using the company's talc-based products. There are two things to concern investors here. The first is that this relates to a verdict from 2018 that involved just 22 women. The second is that the amount was reduced upon appeal -- the initial verdict was for J&J to pay a staggering $4.7 billion. The $2.1 billion charge is less than half of that total, partly because the Missouri court did not include some out-of-state plaintiffs.

Gavel laying on top of paper currency.

Image source: Getty Images.

Of the total fine, $1.6 billion is related to punitive charges. The appeals court had a scathing opinion of the company, stating that "viewing the evidence in the light most favorable to the verdict, we find plaintiffs proved with convincing clarity that defendants engaged in outrageous conduct because of an evil motive or reckless indifference."

J&J can handle these fines, for now

As bad as a $2.1 billion fine sounds, it's going to have a limited effect on a company that in 2019 recorded a profit of $15.1 billion and had $19.9 billion in free cash flow.

But that can change in a hurry, especially if the courts aren't convinced that J&J has been doing a good job of protecting its customers, as the recent Missouri ruling suggests. And there are many more cases that are likely to come forward, with more than 19,000 current lawsuits related to its talc products and their role in causing cancer. The legal issues have even been impacting demand for the company's products.

In May, the company announced that it would no longer sell its talc-based baby powder in Canada and the U.S., saying that demand "has been declining due in large part to changes in consumer habits and fueled by misinformation around the safety of the product and a constant barrage of litigation advertising."

Management says that this would affect just 0.5% of its U.S. Consumer Health segment. In 2019, that segment contributed $5.8 billion in sales -- a little more than 7% of J&J's total revenue of $82.1 billion.

Why J&J will see larger fines in the future

The bigger blow could come in the way of larger penalties and awards to plaintiffs. Last month, drug company Bayer settled lawsuits related to its weed-killing product Roundup, which is made by the company's subsidiary, Monsanto. The settlement could result in Bayer paying as much as $10.9 billion. Consumers have claimed that Roundup causes non-Hodgkin's lymphoma. In that settlement, there were about 125,000 claims; the settlement even included a $1.25 billion penalty for possible future litigation. If J&J looks to settle the thousands of claims it's facing, it'll also pay a hefty price.

J&J could also see larger fines related to its involvement in the opioid crisis. In November, an Oklahoma judge ordered the company to pay $465 million related to the state's opioid problem. In January, the state of Washington state also filed a lawsuit against J&J related to opioids. According to the Institute on Drug Abuse, in 2018, opioid-related overdose deaths in Oklahoma were among the lowest in the country, at 7.8 per 100,000 people. Washington's death rate of 9.4 was higher, but still nowhere near West Virginia's. That state had the highest rate at 42.4. If states with more devastating opioid problems follow suit and go after J&J, the fines could get a whole lot more expensive for the New Jersey-based company.

Should investors be worried?

It's still far too early to know how all of these lawsuits will play out. It's unlikely they will entirely bankrupt the company, simply given its size and how profitable it is. Even though Bayer was facing hundreds of thousands of lawsuits, it came away with a relatively modest penalty.

There's no formula or multiple that can help predict how much J&J will have to pay out over the years due to the lawsuits it's facing. But one thing's for sure: The more lawsuits the company faces, the more likely its financials will take a big hit sooner or later. And that could impact the stock price and potentially even J&J's dividend, which the Dividend King's hiked for 58 years in a row.

J&J's still a safe stock for now, but I'd be wary of buying and forgetting about this one. There are better yields out there that aren't as risky for dividend investors to hold on to.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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