J&J Recalls Keep On Coming, And So Does A Lawsuit

J&J Recalls Keep On Coming, And So Does A Lawsuit

December 22nd, 2011 // 1:55 pm @

How is this for irony? On the same day that a federal judge allows a lawsuit to proceed over charges that Johnson & Johnson misled investors about quality control-failures at manufacturing plants that led to massive recalls, the healthcare giant announces that retailers are being asked to return 12 million bottles of Motrin because the painkiller may not dissolve as quickly as intended (see here).

The one-two punch is yet another setback for Johnson & Johnson, which has been plagued by round after round of recalls for the past two years of tens of millions of over-the-counter meds, contact lenses, epilepsy drugs and hip replacement devices, among other items. There have also been shortages of Tampons and shampoos.

The manufacturing gaffes led to an FDA probe and a consent decree; highly publicized congressional hearings; a closed plant and accompanying job losses; managerial changes; eroded consumer confidence; various lawsuits; hundreds of millions of dollars in lost sales, and unsuccessful calls for ceo Bill Weldon to resign.

The investor lawsuit, which was filed by Ronald Monk, charges that J&J and various execs made misleading statements about the recalls, but that the stock then lost value after details became known. These included a ‘phantom recall’ in which outside contractors hired to surreptitiously buy Motrin from stores in hopes of circumventing FDA recall procedures and obscure the problem (see this).

The lawsuit also maintains that J&J failed to take sufficient corrective actions at two plants that made many of its recalled over-the-counter items – Las Pedras, Puerto Rico, and Fort Washington, Pennsylvania, which has remained shuttered for about a year as a massive retooling remains under way and is not expected to be completed until at least the end of 2012.

“As a result of the gradual disclosure of defendants’ conduct, the price of JNJ stock has declined significantly, causing damages,” Monk charges in his lawsuit. “…Later, when defendants’ prior misrepresentations and fraudulent conduct became apparent to the market, the price of JNJ’s securities fell precipitously, as the prior artificial inflation came out of the price over time” (here is the lawsuit).

But while ruling that the lawsuit can proceed against Colleen Goggins, the former head of the J&J consumer group and J&J cfo Domnic Caruso, US District Court Judge Freda Wolfson dismissed claims against Weldon and Peter Luther, who had been president of the McNeil Consumer Healthcare unit, but earlier this year was made president of US Consumer Healthcare (look here).

Monk’s “assertion that Goggins attended (a) February 19, 2010, meeting where the phantom recall was discussed sufficiently alleges that she had knowledge of the recall when she testified at the May Congressional Hearing that she did not have such knowledge,” Wolfson writes. “In my view, while the statement was not directed at investors, it was nonetheless a public hearing, reported to the public, and it was under oath. In this way, a congressional hearing that is reported publically is similar to media statements or press releases”

Wolfson, by the way, is the same judge who, two months ago, tossed a so-called derivate lawsuit in which a group of J&J shareholders charged that the health care giant’s board of directors breached their fiduciary duty, despite a series of red flags in the form of FDA warning letters; government subpoenas; a criminal plea to kickback charges; whistleblower lawsuits; product recalls and off-label marketing.

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