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J+J, Teva - >>> Why The Opioid Verdict Is Actually A 'Devastating Body Blow' For J&J


Investor's Business Daily

by ALLISON GATLIN

8/27/2019


https://www.investors.com/news/technology/opioid-crisis-jnj-stock-pops-oklahoma-verdict-ohio-case-looms/?src=A00220&yptr=yahoo


Pharmaceutical company Johnson & Johnson's (JNJ) reputation sustained a "devastating body blow" following a $572 million verdict in Oklahoma's opioid crisis, an industry observer said Tuesday.

Unlike most pharmaceutical companies, Johnson & Johnson is also a consumer-facing brand with products like shampoo and Band-Aids, said finance and brand management expert Eric Schiffer. Schiffer is the chief executive of Patriarch Organization and Reputation Management Consultants.

The Oklahoma verdict was $572 million out of a potential $17 billion. But the real cost could be in the billions of dollars in terms of brand equity, Schiffer said. The judgment decimates public trust in Johnson & Johnson via what he called a "devastating body blow that could haunt them for years."

"The judgment is like the black death for the reputation of Johnson & Johnson," he told Investor's Business Daily. "You're witnessing the single greatest self-inflicted reputational wound to a health care brand in modern American history."

Meanwhile, privately held Purdue Pharma appeared on the verge of offering $10 billion to $12 billion to settle more than 2,000 outstanding lawsuits against the company, according to people familiar with the matter cited by CNBC.

Purdue is the maker of OxyContin, a notorious painkiller often noted at the center of the opioid crisis. Lawsuits claim it and other pharmaceutical companies used deceptive marketing practices to stoke sales of opioids, leading to thousands of overdose deaths.

JNJ Stock Rises After Oklahoma Verdict
However, on the stock market today, JNJ stock rose 1.4%, to 129.64. Judge Thad Balkman said Monday that Johnson & Johnson and its Janssen subsidiary created a public nuisance through "misleading marketing and promotion of opioids."

The judgment is just a small portion of the $17 billion Oklahoma attorneys sought. It's also below most investor expectations, which ranged from $500 million to $1.5 billion, according to various analyst reports.

But Schiffer says investors aren't baking in the potential longer-term impact to sales. The verdict adds a "blistering level of disgrace among the public," he said. He predicted a slowdown in sales of products carrying J&J's brand — a massive list of goods like Neutrogena face wash and Pepcid.

"No one believes that this will be the death knell, but it will bring them to their knees in terms of reputation, and that has an impact on sales with consumers," he said. "When you decimate trust, you blow up the opportunity to capture future revenues from consumers."


J&J To Pay For One Year Of Abatement

The $572 million payment equals one year of costs to abate the opioid crisis in Oklahoma, RBC Capital Markets analyst Brandon Henry said in a report to clients. Oklahoma attorneys estimated it would cost $13 billion to $17 billion over 20 years to resolve the opioid crisis.

"Although several of Oklahoma state's witnesses testified that the abatement plan will take at least 20 years of work, the court found that the state did not present sufficient evidence of the amount of time and costs necessary, beyond year one, to abate the opioid crisis," he said.

Before trial, privately held Purdue Pharma and Teva Pharmaceutical (TEVA) settled with Oklahoma for a respective $270 million and $85 million. The $572 million verdict against Johnson & Johnson is out of bounds with the scope of its sales, SVB Leerink analyst Ami Fadia said in his note to clients.

"It shouldn't be a surprise that this value is proportionally greater given that J&J elected to go to trial and ended up getting an unfavorable ruling, but the penalty amount was relatively moderate compared with the $17.2 billion the state attorney general was looking for," she said.

Comparing Opioid Sales In Oklahoma

However, J&J's sales were historically lower than those of Teva and Purdue. Fadia attributes that to the pharmaceutical company's fentanyl patch, dubbed Duragesic, which wouldn't be included in databases tracking pills. In addition, J&J has sold off several subsidiaries that make ingredients for opioids.

The pharmaceutical company is planning to appeal, claiming it abided by laws and used responsible marketing practices. Further, J&J says its drugs have accounted for less than 1% of total opioid sales in Oklahoma and the U.S.

"Janssen did not cause the opioid crisis in Oklahoma, and neither the facts nor the law support this outcome," J&J General Counsel Michael Ullmann said in a written statement. "We recognize the opioid crisis is a tremendously complex public health issue and we have deep sympathy for everyone affected."

Pharmaceutical Companies Brace For Ohio Trial

Relatively speaking, the case in Oklahoma was small.

Investors are now turning to a consolidated case in Ohio featuring some 1,600 claims. The cases are vastly different, analysts say. Both the public nuisance claim and the limited number of defendants make the Oklahoma case an outlier.

The Ohio case features roughly a dozen pharmaceutical companies, their subsidiary and drug distributors. The opioid crisis claims have been consolidated in one court. A jury trial will begin in late October, RBC's Henry said.

"Recall that in Cleveland, Ohio, more than 1,600 cases brought by states, counties, cities and other groups (representing 85% of outstanding cases) have been consolidated in a federal court," he said. "This is the more important trial for the drug manufacturers."

Last week, Endo (ENDP) reached a not-yet-finalized $10 million settlement with two counties in Ohio. Reports also suggested Allergan (AGN) could be nearing a settlement.

Pharmaceutical companies Teva and Mallinckrodt (MNK) are also defendants. UBS analyst Navin Jacob suggested the Oklahoma verdict against J&J could extrapolate out to $3.9 billion to $16.8 billion in damages across all 50 states for Teva.

Teva stock toppled 9.6%, to 6.71, on Tuesday. Mallinckrodt stock crashed 15.6%, to 3.56.

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