Medical devices companies including Johnson & Johnson (NYSE:JNJ) and Boston Scientific (NYSE:BSX) are seeing a continuous surge in product liability lawsuits associated with their surgical mesh products, used for relieving pelvic pain in women. After reports of injury and numerous deaths in patients who have had mesh implants, hundreds of lawsuits related to the side-effects of surgical mesh have been slapped on these companies. While these litigation costs and settlements may have an immediate impact on the cash reserves, one should be concerned about its long-term impact on business, which could be hard to assess.
We have a $6 price estimate for Boston Scientific, which is about 10% ahead of the market price. We are in process of updating our $74 price estimate for JNJ to reflect the earnings and recent developments.
The buyers care about potential side-effects when buying any healthcare product. As the brand value takes a hit, it hurts the company’s sales. It certainly doesn’t bode well for these companies, which are grappling with declining sales in their medical devices & diagnostics business. A strong outlook for the U.S. dollar amid the global economic slowdown and pricing pressure following the healthcare reforms continue to pose concerns for them in the short term.
While JNJ has already decided to phase out its surgical mesh products blaming the changing market dynamics for its decision instead of lawsuits. 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.
Boston Scientific, however, has shown no such intention till now. But, if the company decides to follow the suit, it could lead to a significant decline in the company’s market share in Urology/Women’s Health market. Consequently, it will have an impact on our price estimate of the company as Urology/Women’s Health division contributes nearly 10% to the company’s value. By tweaking the chart below you can see the impact.