Earlier this year, Toyota (TM) faced an intense congressional investigation into its runaway cars. Then, just last week, the House of Representatives' oversight committee began investigating the gushing Deepwater Horizon oil rig owned by Transocean (RIG) and operated by BP (BP). Now you can add another company to the list of those facing quality-control issues under investigation by lawmakers: Johnson & Johnson (JNJ).
The Committee on Oversight and Government Reform is scheduled to hold a hearing next week as part of an investigation into the pharmaceutical giant's recall of Children's Tylenol and other over-the-counter drugs for infants and children. The committee has asked CEO William Weldon to testify and also wants to hear from Food and Drug Administration Commissioner Margaret Hamburg. Weldon has already said he will not testify as he recovers from back surgery.
Johnson & Johnson has survived recalls before, of course, most notably the 1982 fiasco when seven people in the Chicago area died after taking Extra Strength Tylenol capsules that had been laced with potassium cyanide. In that disaster, the company's reputation came out ahead, with its strong response -- in which it recalled 31 million bottles worth more than $100 million -- turning the incident into a textbook public-relations coup.
McNeil Consumer Healthcare, the subsidiary that makes Tylenol products, had posted seven recall notices between September and March. But McNeil's April 30 recall soon emerged as one the public wouldn't easily brush aside. It seems that much will be forgiven until children are put at risk.
The company voluntary recalled 43 over-the-counter medicines, including liquid versions of Tylenol, Motrin, Zyrtec and Benadryl, because of "manufacturing deficiencies which may affect quality, purity or potency," according to the FDA. Those "manufacturing deficiencies" included myriad manufacturing process, control and procedure issues, such as inadequate laboratory facilities and untrained staff, as well as grime, dust, a hole in the ceiling, clutter and bacteria-contaminated raw ingredients in the Fort Washington, Penn., plant. One pharmaceutical professor described the conditions as "shocking," CNN reported.
The result? Some samples of the recalled infants' Tylenol contained as much as 24% more of the active ingredient than described on the label, according to a letter -- uncovered by The Wall Street Journal -- that McNeil sent to health-care providers. A pediatrics professor, however, told the Journal that "children would have to take the higher concentrations over a long period of time in order to be harmed," not only over a day or two.
Still, Johnson & Johnson itself called the manufacturing problems "unacceptable," apologized and promised to fix them. And after eight months and five recalls, the company earlier this month suspended production at the plant. Critics contend that with so many recalls, it's difficult to see how the company failed to discover the issues earlier. And the FDA, finally realizing that the problems could be more widespread, on Monday said it would expand its investigation of McNeil's drug-manufacturing practices "to determine whether similar problems exist throughout the company."
So far, Johnson & Johnson's reputation doesn't seem to be faring as well in this recall as it did in 1982. Some industry watchers have accused Weldon of being completely out of touch with consumers, while others found his short apology on the company blog -- as well as other apologies in media interviews -- insufficient.
In spite of all the bad news, however, shareholders appear unconcerned so far. Unlike shares of BP and Toyota, which fell during their disasters, JNJ shares have actually outperformed the S&P 500 and the Dow Jones industrials, as well as healthcare companies Abbott (ABT) and Novartis (NVS) and pharmaceutical giants Pfizer (PFE) and Merck (MRK), since the recall.
But investors and the company had better watch out. After all, Tylenol is perhaps the most prominent Johnson & Johnson brand. If the company can't regain parents' trust, the handling of this recall could send the company's reputation -- and eventually its revenue from Tylenol -- to the ground.
Basics of Diversification
Learn one of the fundamental concepts of building a portfolio.View Course »