Johnson & Johnson (JNJ) shares are rebounding today, up nearly 1.5% to $65.51. The drugmaker is trying to recover from a rough week, when the Justice Department charged it with paying kickbacks to a pharmacy company to boost sales of its drugs to nursing-home patients, and the Food and Drug Administration accused it of being too slow with its product recall during a Tylenol scare.Late last year, J&J, based in New Brunswick, N.J., expanded its recall of its top-selling Tylenol line, which sold at least $1 billion in the U.S. last year. The incident echoes an unsolved 1982 crime in which seven Chicago-area Tylenol consumers died after using tampered Tylenol laced with cyanide. Johnson & Johnson's quick, decisive response to the incident earned plaudits and sparked reforms in packaging over-the-counter drugs. The current recalls began in September, expanded in late December, and then expanded again last week to include more batches and other brands.
The issue at hand is an unusual moldy, musty, or mildewy odor in the drugs caused by small amounts of a chemical associated with the treatment of wooden pallets. Users who reported the smell complained of nausea, stomach pain, vomiting, and diarrhea.
Despite a voluntary recall, J&J's McNeil Consumer Healthcare Products got a stern warning from the FDA for manufacturing-standards violations and for failing to report and investigate the problem quickly. Timothy Calkins, a marketing professor at Northwestern University's Kellogg School of Management, told The New York Times that the FDA's criticisms "were devastating, because they make the company seem to be complacent and sloppy."
To make matters worse, the Justice Department has filed a civil False Claims Act complaint against Johnson & Johnson for paying millions of dollars in kickbacks to Omnicare, the nation's largest pharmacy to specialize in dispensing drugs to nursing homes.
The allegation isn't a huge surprise: In Novevember, Omnicare entered into a $98 million settlement for taking kickbacks from J&J. Omnicare's pharmacists, according to the complaint, reviewed charts of nursing-home patients with dementia and then recommended that the physicians add antipsychotic drug Risperdal if the patient showed signs of agitation or inappropriate behavior. Physicians, who were not involved in the scheme, agreed with the pharmacists' recommendations about 80% of the time, although Risperdal isn't approved to treat this form of psychosis.
"Kickbacks in the nursing home pharmacy context are particularly nefarious, because they can result in excessive prescribing of strong drugs to patients who have little or no control over the medical care they are receiving," said U.S. Attorney Carmen Ortiz.
Risperdal sales brought J&J $1.73 billion in the first nine months of 2009: nearly 4% of the company's $45.3 billion in revenue.
Risperdal doesn't reverse or relieve dementia, and in fact carries a "black box" warning of increased chances of death among elderly patients with dementia-related psychosis. Still, it has been widely prescribed in nursing homes, in a practice criticized as "chemical restraints": altering patients' behavior for the convenience of the staff. The practice still continued by 2006, as a study published Monday in the Archives of Internal Medicine shows, although at a lower rate. Because most elderly patients are covered by Medicaid, the lawsuit suggests, J&J and Omnicare J&J and Omnicare had to have been creative in accounting for the kickbacks and listed them as education funding, grants, and data on the drug. J&J did not respond to inquiries.
J&J is on the hook not only with the FDA and the DOJ but with public opinion. The company's actions after the Tylenol scare of 1982 fully restored its corporate and brand images, but this recall and the FDA letter (not to mention the kickbacks allegations) has harmed its stature.
J&J reports financial results on Jan. 26. Whether the recall affects its business is unclear. The company doesn't expect the recall to be material, but the lasting effects on the company's image might be significant.
What's your investing game plan?View Course »