J&J Plagued by Product Recalls

Johnson & Johnson (JNJ) took another hit recently with the company announcing yet another product recall. This time round, the company said that it is voluntarily recalling two hip replacement systems - the ASR XL Acetabular System and DePuy ASR Hip Resurfacing System.

The company decided to issue the product recall as it was observed that several patients using the products required a second hip replacement procedure or a revision surgery.

Moreover, new data, which is yet to be published, indicate that the five-year revision rate for people using the ASR XL Resurfacing System was 12%. The five-year revision rate for the DePuy ASR Hip Acetabular System was higher at 13%. The data was generated by the National Joint Registry (NJR) of England and Wales.

Although Johnson & Johnson is yet to update its guidance for 2010 based on the product recall, we do not expect the recall to have a major impact on the company’s financials. The company had decided in 2009 itself that it would discontinue the ASR System due to a lower demand. Moreover, Johnson & Johnson has been focusing on developing the next-generation of hip replacement products.

We are currently more concerned about the impact the latest product recall will have on investor confidence in the company. Johnson & Johnson has been in the news lately for all the wrong reasons. The hip replacement product recall is the latest in a series of recalls conducted over the past few quarters.

Johnson & Johnson’s consumer healthcare segment took a hit in the first half of 2010 with the company recalling medicines, including Benadryl, Tylenol (including children’s Tylenol) and Motrin. Consumer segment sales declined 5.4% in the second quarter to $3.6 billion with OTC pharmaceutical and nutritional sales declining 13.4%.

Johnson & Johnson also received a warning letter from the US Food and Drug Administration (FDA) regarding the marketing of its Corail Hip System for unapproved uses. The company also recalled contact lenses from several countries in Asia and Europe.

Neutral on Johnson & Johnson

We currently have a Neutral recommendation on Johnson & Johnson, which is supported by a Zacks #3 Rank (short-term Hold rating). We believe Johnson & Johnson’s diversified business model, lack of cyclicality and strong financial position are helping the company pave its way through tough situations.