Recently, Johnson & Johnson ([stock]JNJ[/stock]) faced a major embarrassment when it agreed to pay $ 70 million to settle bribery charges against itself. Johnson & Johnson is hopeful of a similar settlement with authorities in the UK shortly.
Johnson & Johnson reached a settlement with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) after it was alleged that Johnson & Johnson had bribed physicians in Europe (Greece, Poland and Romania) to prescribe its products. Johnson & Johnson was also accused of paying kickbacks to the Iraqi government to get business.
We note that Johnson & Johnson had informed the authorities of suspected illegal activities by some of its ex-US subsidiaries in 2007. The resultant probe, in which Johnson & Johnson fully co-operated, revealed the misdeeds.
The agreement to pay a hefty sum to settle the charges is the latest setback to the company. Over the past few months, Johnson & Johnson has recalled a series of consumer products because of concerns over manufacturing quality.
The series of product recalls adversely affected sales of Johnson & Johnson’s Consumer Healthcare segment. Consumer segment sales declined 7.7% in 2010 to $ 14.6 billion with over-the-counter (OTC)/nutritional sales declining 19.2%. We believe the company will not be in a position to resume normal supply of all the recalled products before late 2011.
Our Take & Recommendation
Johnson & Johnson currently carries a Zacks #4 Rank (‘Sell’ recommendation) in the short-run highlighting near-term pressure on the stock due to the series of OTC product recalls, pricing austerity in the European Union and generic competition.
Although we expect the company to continue facing these headwinds, we believe Johnson & Johnson’s diversified business model, lack of cyclicality, strong financial position will continue helping the company pave its way through tough situations. Consequently, we are more cautious in the long-run and have a ‘Neutral’ stance on the stock.
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