Johnson & Johnson’s woes go beyond defective DePuy hip replacements. The company recently recalled 300 million packages of medicine, including over-the-counter standards like Children’s Tylenol, Motrin, Rolaids, and Benadryl. Evidently, the plants that manufactured the pills were contaminated, and the U.S. government even intervened and began supervising three of them. Other J&J subsidiaries have not been doing well either. Patients reported malfunctions with Cordis’s heart devices and leaking insulin cartridges sold by Animas.
Meanwhile, J&J’s revenue dropped in 2010 by 19%, amounting to $900 million. Investors took notice: J&J’s stock has lost 8% of its value in the last 15 months, down to about $59 per share. One would think that in these circumstances, Johnson & Johnson’s competitors would be circling in the water like sharks, picking off its customers and increasing advertising for their competing products. Instead, some investors think now is the time to buy up J&J, and more surprisingly, they think its stock might sell for 30-35% of its current value in the near future. Why?
The simple answer: Brand name. Johnson & Johnson still ranks as number one in consumer opinion surveys of pharmaceutical companies. Investors believe that J&J will change its decentralized business model; that is, its 250 subsidiaries will cease operating independently. In the future, J&J will exercise more control, which should lead to safer products. Investors see the scourge of recalls as a fluke that will be corrected, and one that can make them money.
While we’re lawyers and not financial consultants, we wonder whether the investors are accounting for the severity the DePuy recall.