More Product Recalls at J&J - Analyst Blog

Johnson & Johnson's (JNJ) reputation took another hit recently with the company announcing yet another product recall. This time round, the company said that it is voluntarily recalling all lots of children's Benadryl Allergy Fastmelt tablets (cherry and grape flavors) distributed in the US, Belize, Barbados, Canada, Puerto Rico, St. Martin and St. Thomas. The company is also recalling all lots of junior strength Motrin caplets, 24 count, from the US market.

Moreover, the company said that it is recalling one product lot of Rolaids extra strength softchews (cherry flavor) from the US market. While the Rolaids product recall was initiated on the basis of complaints regarding an uncharacteristic consistency or texture, the company said that the other two product recalls were not due to quality-related issues.

Johnson & Johnson said that the Benadryl and Motrin recalls are on a wholesale and retail level and these products can continue to be used by consumers. The company stated that the recall was part of a review process which showed that there were certain shortcomings in the development of the manufacturing process.

Product Recalls Hit OTC Segment Performance

Back-to-back product recalls over the course of the year have adversely affected sales of Johnson & Johnson's consumer healthcare segment. Third quarter Consumer segment sales declined 10.6% to $3.6 billion, with OTC pharmaceutical and nutritional sales declining 19.4%. The product recall and the suspension of manufacturing at the Fort Washington, Pennsylvania plant resulted in a $240 million negative impact on revenues.

In January 2010, Johnson & Johnson had announced the recall of Tylenol, Motrin and Benadryl that were sold in the US, the United Arab Emirates (UAE), and Fiji. The product recall was initiated following complaints from customers regarding an unusual smell.

In July 2010, Johnson & Johnson recalled 21 lots of certain over-the-counter (OTC) medicines being sold in the US, Fiji, Guatemala, Dominican Republic, Puerto Rico, Trinidad & Tobago, and Jamaica. The recalled medicines included Benadryl, Tylenol (including children's Tylenol) and Motrin.

Although Johnson & Johnson has started shipping one of the recalled products, we believe the company will not be in a position to resume normal supply of all the recalled products before the first quarter of 2011. Meanwhile, the Fort Washington plant, which has been shut down, is not expected to be operational until late 2011. Johnson & Johnson is also facing legal action related to the product recall.

Other product recalls at Johnson & Johnson include the Aug 2010 recall of two hip replacement systems - the ASR XL Acetabular System and DePuy ASR Hip Resurfacing System. 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. In Sep 2010, Johnson & Johnson along with Amgen (AMGN) recalled certain lots of Epogen and Procrit due to the possible presence of thin glass flakes in the vials.

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.