What To Make Of J&J’s First Xarelto Lawsuit Loss

by Trefis Team
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Johnson & Johnson (NYSE:JNJ) and Bayer were recently ordered by a Philadelphia court to pay $28 million in damages to an Indiana couple, related to internal bleeding about which the companies did not sufficiently warn patients. The companies had previously won several lawsuits related to the drug, and this judgment marks its first Xarelto lawsuit loss.

Xarelto, which is an anti-coagulant (blood thinner), was launched in 2011 in the U.S. and its revenues for J&J stood at nearly $2.3 billion in 2016 and $1.8 billion for the nine month period ending September 2017. J&J has marketing rights for the drug in the U.S. Xarelto’s performance so far has been strong, considering that the drug has broken into a crowded and competitive therapeutic area of cardiovascular diseases. Xarelto accounted for 7% of J&J’s overall pharma revenues in 2016. Given the recent judgment, it is important to assess the risk associated for Xarelto and its impact on J&J’s pharma portfolio.

While $28 million is not a significant number by itself for either company, it could have future implications given the number of lawsuits that are pending related to Xarelto. There are around 1,500 Xarelto cases pending in the Philadelphia court alone, and over 18,500 cases are pending in federal court. This was the first loss of a Xarelto case for the pharma giants, as they won the previous three. It is unlikely that the drugmakers will lose a significant percentage of these cases, given that Xarelto was already approved by the FDA. Still, to better understand the financial impact of these lawsuits, we will take a look at a few scenarios in which the companies lose varying numbers of these suits. In the chart below, we consider four scenarios in which the drugmakers lose 10%, 15%, 25% (which is the current loss rate, albeit in a small sample size) and 35% of the overall cases filed. In the recent ruling, the overall fine was split $1.8 million in compensatory damages and $26 million in punitive damages. For our dollar impact calculation for future cases, we take into account the compensatory damages figure of $1.8 million from the recent case. As indicated in the chart below, even losing just 10% of the cases at the smaller dollar amount could cost the companies up to $3.6 billion. Note that these figures are just for illustrative purposes based on the most recent settlement, and we believe that these draconian results are fairly unlikely.

There is also a possibility that the companies could decide to offer a settlement for all pending cases. German pharma company Boehringer Ingelheim paid $650 million in 2014 to settle around 4,000 cases in state and federal courts over its blood thinner Pradaxa. If we were to apply the same rate to settle all cases, the amount for J&J and Bayer could be up to $3.25 billion. At this point it is difficult to estimate a single figure that the Xarelto litigations could end up costing the companies, but in a pessimistic scenario it could be north of $3 billion, per the above figures.

J&J’s litigation expenses have been fairly high over the past few years. The company spent $806 million in 2016, $141 million in 2015 (which includes gains from the litigation settlement agreement with Guidant for $600 million) and $1.25 billion in 2014. However, most of these expenses were related to the medical devices segment. It will be interesting to see how this figure trends in the coming years given the pile of lawsuits related to the pharma business.

Overall, we do not expect that the recent Xarelto-related loss will have a significant impact on J&J’s valuation. Moreover, the two companies intend to appeal the recent court decision. It should also be noted that this was the fourth case related to Xarelto, and the drugmakers won the first three cases. Also, out of 20,000 + cases, only 1,500 cases are in Philadelphia, and it remains to be seen how judges in different jurisdictions will rule.

We have a $125 price estimate for Johnson & Johnson, which is around 10% below the current market price.

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