Why One Johnson & Johnson Analyst Sees Oklahoma Opioid Ruling As Near-Term Sentiment Positive

The Cleveland County District Court in Oklahoma ordered Johnson & Johnson JNJ and its Janssen unit to pay $572 million to settle a lawsuit relating to their opioid drugs.

The Analysts

Morgan Stanley analyst David Lewis maintained an Equal-weight rating on Johnson & Johnson with a $145 price target for the shares of Johnson & Johnson.

Barclays analyst Kristen Stewart maintained an Equal Weight rating and $140 price target.

BMO Capital Markets analyst Joanne Wuensch maintained at Outperform, with a $157 price target.

Morgan Stanley: Oklahoma Verdict A Near-Term Sentiment Positive

The Oklahoma decision was better than feared, but does not materially alter Morgan Stanley's view on the path forward and the eventual outcome for the company, Lewis said in a Tuesday note.

The $572-million payment was closer to the firm's expectations, but below Street base-case assumptions, which were in the $1.5 billion to $2 billion range, the analyst said. 

Morgan Stanley therefore sees the verdict as a near-term sentiment positive, he said.

Cautioning against extrapolating too much in either a positive or negative direction, Lewis said the eventual outcome is far from clear, as the company plans to appeal the Oklahoma decision.

Additionally, the analyst does not see the decision as precedent-setting.

The decision cannot be used as a pointer toward outcomes in other states and municipalities, Lewis said.

Morgan Stanley projects a base case exposure of $6 billion for Johnson & Johnson's opioid liability and exposure of $16 billion in a bear case. 

"Yesterday's judgment does not alter our view," the analyst said.

The next steps in litigation for Johnson & Johnson are post-trial motions in the Oklahoma case and multidistrict litigation in Ohio that is set to begin Oct. 21 and cnsolidates about 85% of all opioid cases, according to Morgan Stanley.

Additional state cases in Washington, South Carolina, Alaska and California are set to take place in 2020, Lewis said. 

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Barclays: Shares To Trade At Discount Due To Litigation Overhang

The $572 million in damages are far less than the $17.2 billion the state of Oklahoma was asking for and less than what the Street was bracing for, Stewart said in a Tuesday note. 

The analyst believes the amount could ultimately be lower.

In comparison, Purdue settled for $270 million and Teva Pharmaceutical Industries Ltd TEVA paid $85 million in settlements, the analyst said. 

Even if J&J is not successful on appeal, it can afford to pay given the $15 billion in cash and securities and $18 billion in free cash flow it generates, she said. 

Stewart sees the litigation as an overhang on the stock. J&J is also involved in other legal matters, including the talc litigation, the analyst said.

"We believe J&J shares are likely to continue to trade at a discount to its sum-of-the-parts valuation due to the litigation overhang."

BMO Expects Extended Resolution

An appeal process could extend into 2021, and should it proceed to the U.S. Supreme Court, it could take an additional one to two years, Wuensch said in a Monday note. 

The analyst also pointed to the federal multidistrict litigation that bundles opioid cases for over 20 companies that is expected to begin Oct. 21.

Notwithstanding the $15.2 billion in cash, equivalents and marketable securities on the second-quarter balance sheet and its AAA credit rating, J&J is not into the habit of accruing legal payments until they are probable and reasonably estimated, she said. 

"We remind investors that litigation is long, lengthy, and difficult to read, and while the amount is less than it could have been, we would expect an extended resolution."

The Price Action

Johnson & Johnson shares were trading higher by 1.71% at $129.99 at the time of publication Tuesday. 

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