More Trouble at J&J, This Time Over Data for Hip Implants

More Trouble at J&J, This Time Over Data for Hip Implants

January 28th, 2013 // 7:12 pm @


Last week was significant for Johnson & Johnson ceo Alex Gorsky in different ways. For one, it was the first time that he presided over a discussion of an annual earnings report as ceo of the healthcare giant. At the same time, J&J made headlines, once again, over a potentially scandalous disclosure of previously unknown data concerning its troubed hip implants.

So it was a good-news-bad-news few days. On one hand, Gorsky had a chance to engage investors and analysts as he outlined his views on remaking the troubled consumer healthcare business, shifting the product portfolio and the resurgent pharmaceutical unit. On the other hand, there were lingering questions about the extent to which J&J has been living up to its storied credo.

The credo, which is emblazoned at the entrance of J&J headquarters in New Jersey, begins by reiterating a responsibility to ‘doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs, everything we do must be of high quality” (here is the complete credo).

Mindful of the diminished reputation caused by numerous products recalls traced to manufacturing problems at its over-the-counter business and the latest controversy surrounding hip implant data, Gorsky was careful to mention the J&J credo during the earnings calls last week before delving into results and strategy.

“Now, on a personal note I want to say how fortunate I am to be working alongside the many great people of Johnson & Johnson, and as always I want to start with the comment on our credo. Together, there are more than a 128,000 of us around the world with wide ranging responsibilities and capabilities and we’re united by a common purpose. At Johnson & Johnson we’re committed to caring for the world one person at a time,” he said (here are his remarks).

There is irony in this, however. Two of the most contentious scandals have taken place in business units on his watch. Take the case of the hip implants. The New York Times last week reported that an internal J&J analysis that was conducted in 2011 had estimated that the all-metal device would fail within four to six years in 37 percent of patients.

The recall took place in mid-2010 and those subsequent estimates were never released. But at the same time its analysis was under way, J&J publicly downplayed similar findings from a UK registry showing an early failure rate of as high as 49 percent. In announcing its recall, J&J cited unpublished UK data showing that, within five years, 12 percent to 13 percent of two different ASR devices would fail. The internal estimate was made public last week, along with numerous other documents, as the first in some 10,000 lawsuits headed to trial in California court.

As for Gorsky, he was named worldwide chairman of the J&J Medical Devices and Diagnostics Group in 2009. In other words, he presided over the division, known as DePuy Orthopaedics, that was responsible for ensuring that the hip implants performed properly, and that regulators and physicians were fully informed of the product performance.

This is not the only instance in which Gorsky and his executive role have been linked to a scandal. Last year, the feds tried unsuccessfully to compel him to provide a deposition in a widely publicized kickback case involving the Omnicare nursing home pharmacy. At issue were charges Omnicare received kickbacks – in the form of rebates, educational grants and payments for marketing data – so that the J&J Risperdal antipsychotic would be prescribed more often.

As we wrote last year, from October 1998 to October 2001, Gorsky was vp of marketing at the Janssen unit that sold the drug, and from October 2001 to early 2003 he was the Janssen president. During that time, he was responsible for selling Risperdal, and Omnicare was the biggest Risperdal customer.

Moreover, according to the feds, his resume noted that Gorsky instituted a Janssen compliance program for regulatory and legal issues. He also regularly received monthly reports on J&J’s Long Term Care Group, including reports which had details about Omnicare efforts to promote Risperdal prescribing of Risperdal. And Gorsky met repeatedly with senior Omnicare execs to discuss those efforts (back story).

In other words, Gorsky has had direct supevisory responsibility for J&J (JNJ) businesses that purportedly strayed far afield from the credo. There is nothing to suggest that Gorsky committed any wrongdoing, but as a West Point graduate and six-year veteran of the US Army, he most likely understands the notion of the chain of command and taking ultimate responsbility for events on his watch.

The episodes have surfaced since Gorsky was tapped to succeed the embattled Bill Weldon, who presided over the manufacturing blunders that led to a consent decree. Prior to the announcement, there were growing calls for Weldon to step aside. However, the move to promote Gorsky, ostensibly after an internal horse race, signaled to some that the J&J board failed to recognize the need to infuse the healthcare giant with fresh leadership from the outside (see the comment from University of Michigan business school professor Erik Gordon here).

Gorsky, however, is unlikely to be jeopardized by these events, if only because investors have largely been pleased lately with the J&J performance. Since hitting a 52-week low in late May last year, when J&J execs conceded that manufacturing problems would take longer to fix than originally thought (see this), J&J shares have climbed more than 20 percent and the dividend yield is 3.3 percent. In particular, the pharma business has scored some successes with growing sales for the Zytiga prostate cancer treatment and Xarelto bloodthinner, for instance.

This explains why Wall Street remains bullish. “As we look ahead to 2013, we believe J&J will see improving trends,” wrote Deutsche Bank analyst Kristin Stewart in a research note. “We expect recent and new drugs to continue to drive pharma sales. A slight improvement in utilization and new products should benefit (medical devices and diagnostics group). For (the) consumer (business), J&J should continue to work through the McNeil Consent Decree and return products to market.”

Nonetheless, the scandals continue to take their toll on the J&J corporate reputation and renew questions about the leadership at the healthcare giant. If the J&J board wants to reinforce confidence not only in the stock price, but also the credo, the directors may want to ensure that the credo is not only mouthed at the appropriate times, but that executives themselves are doing their utmost to uphold those principles.

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