JNJ’s Medical Devices Business Faces Another Recall With Stapler

Johnson & Johnson (NYSE:JNJ) and recalls have started to seem like synonyms as the company is hit with another recall relating to its surgical stapler devices, which could pose serious health issues for patients. The company will recall as much as 157,000 stapler devices after the U.S. FDA tagged the recall as class I, the most serious. ^[1] The recall comes barely within two months of recent recall of the company’s Hemostatic Bone Putty, and  may not bode well for the company, which is grappling to revive its Medical Devices & Diagnostics division. The company’s brand value took a hit following the DePuy metal hip implants recall and related lawsuits. With its $21 billion Synthes aquisition, Johnson & Johnson is hoping to recover from these setbacks.

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While we don’t know the total sales of the device, one can be certain that such news can only result in a decline in sales in the short term.  A study from a couple of years ago listed the price of one of these devices at around $700 which could imply a recall of around $100 million. More importantly, the buyers care about potential side-effects when buying any healthcare product. Further, the company may see new product liability lawsuits associated with the product and it may have to set aside funds for litigation costs. While the litigation costs and settlements have an immediate impact on the cash reserves, the long-term impact could be hard to assess. If these lawsuits hurt Johnson & Johnson’s image, it may impact its sales across the division, which is already under pressure amid a strong outlook for the U.S. dollar, global economic slowdown and pricing pressure following the healthcare reforms.

Barring short-term hiccups relating to product recalls, including hip implants, bone putty, surgical mesh (the company is phasing out its surgical mesh products following a flurry of lawsuits) and now stapler devices, we are however optimistic on the prospects of the Medical Devices business due to recent Synthes acquisition, which seems to be beginning to pay-off as witnessed in the recent earnings. (Read JNJ Exceeds Expectations As Pharma, Synthes Acquisition Drive Growth)

Further, we expect Medical Devices & Diagnostics EBITDA margins to increase as the acquisition synergies will result in cost savings. Due to the these factors, the business contributes more than 50% to JNJ’s value, according to our estimates.

We are in process of updating our $74 price estimate for JNJ to reflect the earnings.

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1. FDA Recall Notice, U.S. FDA, Oct 24 2012 [↩]