Johnson & Johnson (NYSE:JNJ) will phase out its surgical mesh products which are used for relieving pelvic pain in women. Many believe the recent reports of injury and numerous deaths is the reason even as the company cites commercial reasons behind the move. JNJ has been slapped with hundreds of lawsuits related to the side-effects of surgical mesh and, if proved true, could open a Pandora’s box for the company as it continues to face trouble on its hip implant lawsuits. We are in process of revising our price estimate for JNJ to reflect the effect of the current developments on the company’s long-term outlook.
The U.S. Food & Drug Administration (FDA) recently said there is no substantial evidence that mesh is better than traditional surgery with stitches. In fact, it claims that mesh implants could lead to higher rates of pain, bleeding and infection compared to the traditional method.
In January, the FDA mandated six companies, including Johnson & Johnson, to conduct rigorous studies to prove safety and efficacy and track complication rates of their products over time. Many believe this would be difficult for these companies to prove. 
Johnson’s move to phase out its surgical mesh products could have been influenced by these factors. The company, however, blames the changing market dynamics for its decision. The move will certainly impact the revenues from the Ethicon franchise. According to our estimates, Ethicon currently contributes 10% to the company value even as we expect a decline in its market share.
The company has also reported that the product liability lawsuits associated with the mesh continue to increase and that it has set aside money to pay for litigation costs. While these litigation costs and settlements may have an immediate impact on the cash reserves, we are concerned about its long-term impact, which could be hard to assess. The buyers care about potential side-effects when buying any pharmaceutical product. Further, if these lawsuits hurt Johnson & Johnson’s image, it may impact its sales across the segments.Notes:
- Company halts surgical mesh sales after news investigation, khou.com, June 06 2012 [↩]