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CEO: J&J learned lessons, improved after recalls

Thursday, April 28, 2011
Johnson & Johnson

Johnson & Johnson's CEO says he hopes the company's many product recalls are behind it, but he isn't making any promises.

William Weldon, who has run the health care giant since 2002, told The Associated Press in an interview Wednesday that J&J has learned some lessons, invested heavily in improving quality and will work to regain consumer confidence.

"We're going to make sure ... people have confidence in the quality of the products," said Weldon, as the company's recalled nonprescription drugs come back on the market. "We have very high standards now."

Since September 2009, the company has had about two dozen recalls of prescription and nonprescription medicines, replacement hips, contact lenses and diabetes test strips. Among the recalls were tens of millions of bottles of children's and adult Tylenol and Motrin, plus Benadryl, Zyrtec, Rolaids and Simply Sleep pills. The latest recall, of epilepsy pill Topamax, was as recent as April 14.

The recalls have hurt the company's reputation. Its credo of responsibility, posted on the wall of its New Brunswick, N.J., headquarters, touts its responsibility to the doctors, patients and parents who use its products and demands that "everything we do must be of high quality."

Now, three plants are under close scrutiny by federal regulators and even Congress has been investigating J&J's handling of the recalls. Apart from the dent to J&J's reputation, the recalls have also hit its bottom line. During the recession, customers turned to lower-cost generics and store-brand medicines. Convincing those customers -who may be put off by the continuing recalls - to come back and pay a premium won't be easy.

Weldon said the company has made many leadership changes at its McNeil consumer health division, which makes many of the recalled products, and has trained more than 3,000 people there on quality. He said J&J has gutted its shuttered consumer health products factory in Fort Washington, Pa., which has been at the center of its recall woes, including recalls of various Tylenol, Benadryl, Sudafed and Rolaids products. J&J is investing more than $100 million to upgrade the plant, which has been shut for a year and was taken over by federal regulators last month, pending improvements.

"We need to make sure ... when we have an issue that we make sure we investigate down to the root cause, follow our own (standard operating procedures) and make sure we maintain our equipment and our facilities the way they should be maintained," Weldon said.

He said that the product recalls were "not an endemic problem across J&J," but "specific to a few manufacturing facilities" within McNeil. However, the recalls also involve J&J's prescription drug and medical device divisions. Those recalls included prescription drugs for schizophrenia and for epilepsy, replacement hips, Acuvue contact lenses sold in Japan and Europe, and blood sugar test strips. Those were manufactured at different factories than the three involved in the consumer product recalls, at sites in California, Indiana, Florida, Puerto Rico and possibly other locations.

Weldon noted that "50 percent of our recalls last year came from McNeil, not all of them."

And while J&J said that none of the recalls have involved serious risk to patients, many patients who received its DePuy hip replacements had such pain and difficulty walking that they need corrective surgery and are suing J&J.

When Weldon faces shareholders Thursday at the company's annual meeting, he'll be hoping to assuage any anger over the recalls and damage to Johnson & Johnson's finances and reputation with news of the biggest deal that the 125-year-old company has ever made.

Earlier Wednesday, J&J announced an agreement to buy U.S.-Swiss medical device maker Synthes Inc. for $21.3 billion. The deal, which should close next year, would give J&J a much bigger share of the market for surgical trauma equipment and orthopedic implants.

That's a lucrative, fast-growing area, given the aging worldwide population, the wear and tear that obesity puts on bones and increasing health spending by governments and the rising middle class in emerging markets.

Weldon also will discuss some innovative products that could come to market soon, and plans to lure back consumers with a marketing campaign stressing the quality of its products and new designs, such as a new dose-limiting cap on liquid children's medicines.

"We'll talk about the commitment Johnson & Johnson has to patients," when the recalled products return, he said. Most will hit shelves again this year and the rest next year.

Weldon said he plans to make sure all the problems are fixed and has no plans to retire early. The 62-year-old has spent his entire career at J&J, starting in sales and working his way up.

It's unclear whether Weldon's explanations and promises of innovative new products to come will satisfy stockholders who have had a bumpy ride with J&J shares during Weldon's tenure. After a steady rise through the prior three decades, shares are now just below their level of about $65 when he took over. After falling $1.55 early Wednesday after news of the Synthes deal, J&J shares ended the regular trading session up 62 cents at $65.57.

But despite all of the problems and bad press over the recalls, many analysts still have "Buy" recommendations on Johnson & Johnson's stock. That's because as the world's biggest maker of health products it has such a diverse product line, generates strong cash flow, has leading market positions for the majority of its products and has some innovative drugs in the pipeline.

Over the past five years, J&J's share price movement has mostly tracked that of the New York Stock Exchange Health Care index, the company notes. From 2001 through 2010, J&J's 4 percent total shareholder return - share price appreciation plus dividends - is slightly better than the S&P 500 and the S&P healthcare equipment indices. Over last year, however, J&J's total shareholder return was a 0.6 percent decline, far worse than the S&P 500 and S&P pharmaceutical indices, but better than S&P's healthcare equipment index.

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