Lawsuits and associated penalties have become so common for pharmaceutical companies that they are compelled to maintain restricted funds for such purposes. Recently, a Federal court announced that Pfizer (NYSE:PFE) may face liability suits for asbestos products manufactured by the company 30 years ago. On a similar note, an Arkansas court found Johnson & Johnson (NYSE:JNJ) and its subsidiary guilty of concealing certain dangers associated with an anti-psychotic drug for which the company was fined $1.2 billion.
Pfizer is one of the largest companies in the healthcare industry with operations only in pharmaceuticals, whereas Johnson & Johnson is more diversified with operations in research & development and manufacturing of pharmaceuticals, diagnostics, and consumer healthcare. Other key players in the healthcare sector are Merck (NYSE:MRK) and Abbott Labs (NYSE:ABT).
Pfizer Asbestos Lawsuit & Layoffs
Pfizer has been on a cost-cutting spree due to increased competition. Lipitor, one of its widely used cardiovascular drug that recently lost exclusivity, will have to compete with the generic versions in 2012, and this could likely cause a sudden dip in sales.
If the asbestos lawsuit results in more cash outflow for Pfizer, the company’s value may decline going forward. As part of its cost-cutting strategies, Pfizer plans to lay-off a sizable number of employees by May 2012 and would also reduce severance pay. These events are likely to impact its gross profit margin. We are presently reviewing our forecasts to incorporate these developments. We have a price estimate of $25.11 for Pfizer, implying a premium of 14% to the current market price as we expect the company to make handsome money from the anticipated sale of its nutritional business.
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Johnson & Johnson’s $1.2 Billion Fine
We previously discussed the impact of a possible fine for JNJ from a lawsuit against its anti-psychotic drug, Risperdal. The fine that was earlier estimated at $1 billion is now quoted at $1.2 billion. This penalty will deplete JNJ’s cash reserves even further. Risperdal is a widely used anti-psychotic medication and contributed nearly 40% of the central nervous system drugs revenues for JNJ in FY2011. JNJ derives 6% of its value from central nervous system drugs, by our analysis. We are in the process of incorporating the changes to its cash in our model.