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Woes for Johnson & Johnson

by Michael L. DiamondUSA Today
November 20th, 2011

Johnson & Johnson, the gold standard for American corporations, has been admired for its devotion to a simple business philosophy: Put your customers first, no matter the cost, and profits will follow.

That idea, found everywhere from giant tablets in the lobby of J&J's New Brunswick, N.J., headquarters to its annual report sent to shareholders, serves as a guiding light for its tens of thousands of employees around the globe.

Yet today, the largest health care company in the world finds itself fending off critics who say the company puts quality behind Wall Street's never-ending quest for higher quarterly profits.

As J&J's profits last year swelled to a record $13 billion, the company has been found liable or reached settlements totaling $751 million in taxpayer health care fraud claims; paid $70 million to settle foreign bribery charges; been sued by consumers who say J&J's hip replacement devices failed inside their bodies; and seen the shutdown of a major plant that produces Tylenol and other best-selling pain relievers because it failed to meet federal safety standards.

And that was just for the last two years.

The company also faces the prospect of paying millions or more to settle outstanding government fraud claims stemming from what the government says is J&J's questionable marketing of at least one brand-name drug.

Last week, facing pressure from a consumer group, J&J agreed to phase out the use of potentially harmful chemicals from its baby products, including the popular Baby Shampoo line.

"There are so many mistakes being made now, it is shocking," said Elliot Schreiber, a marketing professor at Drexel University's LeBow College of Business in Philadelphia, an expert in brands and corporate reputations.

J&J Chairman and Chief Executive Officer William Weldon, 62, through a spokeswoman, declined to comment for this story. But he told shareholders last spring in the company's annual report that, after facing severe tests in 2010, the 125-year-old company would restore quality and consumer confidence, and find new products to meet growing health needs.

"We are deeply committed to the people who use our products, to our employees, to the communities in which we live, and to you, our loyal shareholders," he wrote.

Company credo

In 1943, with the company set for a public offering, Robert Wood Johnson, son of one of the company's founders, wrote "Our Credo," a mission statement to guide the company in everything that it does.

At 308 words, the credo dictates that the company's first responsibility is to doctors, nurses, patients, mothers and fathers and everyone else who uses its products. And it says it is responsible to its stockholders, so it needs to make a sound profit, experiment with new ideas and invest in its facilities.

What makes the credo so admirable to observers, though, is that it wasn't an empty promise.

When seven people in Chicago died after taking cyanide-laced Tylenol in 1982, the company turned to the credo and removed the product from the shelves, even though it wasn't at fault. Johnson & Johnson eventually regained its market share, and its response became a standard part of the curriculum in business schools that teach crisis management.

Claims of pain and fraud

The pain Juergen Schaberick feels every day is a constant reminder of how, he says, Johnson & Johnson failed him.

Three years ago, Schaberick, who lives in Venice, Fla., received a new right hip -- a state-of-the-art Pinnacle Acetabular Cup System made by a subsidiary of Johnson & Johnson. Schaberick said he thought the device would allow him to walk normally again. Yet the 53-year-old spends most of his days confined to a white leather recliner as he tries to keep the weight off of his right leg.

Metal particles have splintered from the alloy ball-and-socket device and traveled through his bloodstream, a lawsuit he filed says. Sometimes, standing in the shower, he falls. Even small, everyday tasks feel like the cut of a knife.

J&J has recalled another hip device after the United Kingdom found nearly 13 percent of them failed within five years. But it denied the Pinnacle hip device was faulty. Schaberick, in the suit, says J&J defrauded him and that the device ruined his life. Others with the same devices have also filed suit against J&J.

Cracks in the foundation

Signs that the Johnson & Johnson empire is experiencing cracks in its foundation can be seen in several recent cases. Among the claims:

Taxpayer fraud. J&J's pharmaceutical subsidiaries have been sued by the U.S. and a number of states for tactics the companies have used to promote three popular drugs. One of the drugs, Risperdal, generated nearly $30 billion in sales. Even though the U.S. Food and Drug Administration allowed J&J to market it only for schizophrenia and bipolar disorder, government lawsuits claim the company downplayed its side-effects and gave kickbacks to a company that managed nursing home pharmacies, where doctors could use the drug as a "chemical restraint."

The company's marketing tactics caused one J&J executive to excoriate his colleague for sending a letter to doctors that explained new warnings about side-effects that the FDA required for Risperdal and other similar drugs. He thought the letter violated an FDA ruling that prohibited the company from saying its drug had fewer side effects than its competitors. "No competent person would have sent this out," he wrote.

Recalled medication. Another subsidiary, McNeil Consumer Healthcare, based in Fort Washington, Pa., shut down one of its manufacturing plants and agreed to tighter inspections in two other plants after the FDA found they didn't meet the government's minimum quality standards. Some lots of children's and infants' liquid medicine had "tiny particles" in them, according to the FDA. The plants made millions of bottles of medicine that have been recalled since 2009.

The company said the risk to the public's health from the recalled medicine was low. But the FDA said the drugs never should have gone to market.

The company wasn't always at odds with consumers and regulators. The founding Johnson family, no longer involved with its operation, set the company on a course to find remedies to society's health problems, resulting in products ranging from Band-Aid bandages to cancer drugs and helping it to develop a pristine reputation.

But now, observers, who admired J&J for adhering to a mission statement that makes patients and customers its first priority, believe the company is caving in to investor pressure to deliver higher profits every quarter.

As of Nov. 1, the company's stock, adjusted for dividends and splits, was up 37.5 percent over 10 years. By comparison the Dow Jones industrial average rose 25.8 percent.

But it came with a steep price, namely its reputation, said James Rodgers, an Atlanta management consultant who has studied Johnson & Johnson's issues.

"When pressure from Wall Street gets so heavy, even all the evidence telling you to stick to your values, stick to your character, it's diminished in favor of, 'Let's do all we can to make this month's and this quarter's numbers and exceed them so Wall Street will be pleased,' " Rodgers said.

'Phantom' recall

The state of Oregon sued Johnson & Johnson and its McNeil Consumer Healthcare subsidiary in January for failing to tell the public that batches of Motrin, a pain reliever manufactured at its plant in Puerto Rico, might actually lead to a "worsening of pain, fever or inflammation."

The company scrambled in 2008 and 2009 to contain both the cost and the public relations fallout from defective Motrin that made its way to retailers' shelves nationwide, according to documents from the Oregon lawsuit and internal company emails given to Congress. McNeil executives, according to emails, came up with a plan: Instead of alerting the public, the company hired contractors to search stores and buy Motrin that came from the defective lots.

The Oregon lawsuit said McNeil alerted the Food and Drug Administration about the Motrin and pledged to remove the product by July 15, 2009. But by late May, according to company emails, it was in danger of missing the deadline.

Not long after, the lawsuit said, an employee from a company hired by McNeil to remove Motrin from the shelves in Oregon became concerned about the "phantom recall" and alerted the Oregon Board of Pharmacy. The board passed the information to the FDA. And on July 16, 2009, an FDA investigator sent a McNeil executive an email that spelled out the agency's position more clearly. She said the company should voluntarily -- and publicly -- recall the product.

A company representative said McNeil's actions weren't unlawful and didn't pose a health risk. The company is seeking to dismiss the case.

Oregon is seeking $25,000 for each violation of the state's Unlawful Trade Practices Act. It alleges hundreds of violations. No trial date has been set.

Demand for growth

Maintaining its profits -- and its stock price -- hasn't been easy for Johnson & Johnson. Faced with recalls, the expiration of patents on blockbuster drugs like Topamax and Risperdal, and a global recession, Johnson & Johnson in 2009 reported its first decline in revenue in more than 70 years.

Near the end of 2009, it announced plans to cut its workforce by 6 percent to 7 percent, saving as much as $1.7 billion by 2011.The company's 114,000 employees in 2010, for example, were down from 115,500 in 2009.

For companies as big as Johnson & Johnson, the landscape can be particularly tough, said John Longo, a finance and economics professor at Rutgers Business School.

"The economy grows maybe 3 percent a year, 2 percent a year in a sluggish economy, and Wall Street wants, let's say 7 to 12 percent earnings growth," he said.

"The question is, how can I grow earnings, let's say at 10 percent, when my sales are growing at 3 or 4 percent? And the answer is either you grow by acquisition or you improve profit margins by either cutting costs or making your manufacturing more efficient."

Johnson & Johnson still reported a profit of $13.3 billion in 2010, up from $12.3 billion in 2009.

CEO Weldon was rewarded last year with $17.5 million in salary, bonus and stock options, according to company documents. That was down, though, from $19.8 million in 2009 because, the board of directors said, recalls at the McNeil division "negatively impacted both the Company's reputation and revenue."

The chain of events that have beset Johnson & Johnson, to many observers, are stunning.

"When you start unpeeling the onion of the multiple issues of 2010," said Stephen A. Greyser, a marketing professor at Harvard Business School, "I think one has to conclude that the corporate culture wasn't -- and maybe isn't -- as strongly embracing of the principles of the credo as used to be the case."