"I apologize to all the mothers, fathers, and caregivers for the concern and inconvenience caused by the recall." -- Colleen Goggins, worldwide chairman of Johnson & Johnson's (NYSE: JNJ) consumer group
That's great, but what about shareholders? Considering that reportedly no one has been hurt by the low-quality drugs that were recalled, it seems shareholders are the real losers here and deserve an apology, too.
I guess a congressional hearing about the recall of children's medicines probably isn't the place to be worrying about shareholders, but it seems to me that Johnson & Johnson had better fill in the details pretty quick; the shareholders are rightfully getting a little nervous.
Johnson & Johnson is diversified, so the closing of one plant isn't going to have the same effect on revenue as Genzyme's (Nasdaq: GENZ) plant closing did on the mid-sized biotech. But it's still unclear if Johnson & Johnson's problem is systemic, and if so, how much it's going to cost the company to fix the problem.
Longer term, the fix could have an effect on the bottom line through lost production. Presumably, Johnson & Johnson wasn't neglecting quality because it was lazy; it seems more likely that managers felt pressure to produce more with less, which cut into quality control. Increasing the level of quality control may end up decreasing margins, long term.
There's also the potential for sanctions from the Food and Drug Administration including criminal penalties. Because the company can't actually go to prison, investors should be most worried about how sanctions might delay the approval of new drugs and medical devices and how that could affect future growth.
The negative press could also permanently damage Johnson & Johnson's name. If it can't convince customers that Johnson & Johnson is synonymous with quality, customers will head to other branded products from companies like Pfizer (NYSE: PFE), the maker of Advil, and GlaxoSmithKline (NYSE: GSK), the maker of Gaviscon, or just settle for generic drugs from companies like Perrigo (Nasdaq: PRGO).
Johnson & Johnson has the potential to turn this around, but management would be wise to let investors in on its plan, lest they start turning their back on the company.
