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Moody's: Talc litigation poses long-term social risk for Johnson & Johnson

As Johnson & Johnson fends off thousands of lawsuits alleging that its talc products caused cancer, the ripple effects could negatively impact the company's social reputation and pose more risk long-term, Moody's Investors Service said in a new report.

Although the financial risk from the lawsuits will take years to begin impacting the company, the attention from media and an inquiring letter from U.S. Sen. Patty Murray, D-Wash., could cause further harm to the pharma behemoth's reputation, according to Moody's.

A December 2018 report from Reuters alleged that the company knew about the presence of asbestos in its talc products as far back as the 1950s. Johnson & Johnson is facing 11,700 legal cases that claim exposure to its baby powder caused cancer, which the company has disputed.

Because the talc litigation is in early stages with mixed outcomes in the several cases that have been decided, the ratings agency said the financial exposure for Johnson & Johnson cannot be quantified as of now. But as a result of the social risk and a modest 2019 outlook, Moody's concluded that Johnson & Johnson is more likely to perform a large acquisition or repurchase shares to improve shareholder value.

Johnson & Johnson already made one share buyback effort, offering to repurchase $5 billion in shares after losing $25 billion in market value in the immediate aftermath of the Reuters report.

"J&J may pursue large deals that consume its existing cash or result in incremental debt," Moody's wrote in its Feb. 5 report.

Moody's rates Johnson & Johnson at "Aaa," its highest rating, with a stable outlook.

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A reputation at stake

The risk to Johnson & Johnson's reputation is significant but not surprising, said Philipp Aeby, CEO of RepRisk, a business intelligence and research firm that specializes in environmental, social and governance risks.

"It's not surprising that such allegations and safety risks actually come up with a company the size of Johnson & Johnson," Aeby told S&P Global Market Intelligence. "The question is how well do they react to that and, more importantly, to the allegations that the company knew about the safety risks."

Johnson & Johnson's situation is the product of a corporate environment that has changed in two major ways, according to Aeby: companies are being held to higher standards by consumers, and companies have learned how to manage exposure when a crisis occurs. Companies have struggled, however, to become more proactive and manage risk before a problem occurs, Aeby said.

Aeby said Johnson & Johnson needs to reckon with the past rather than try to avoid it.

"Eventually, Johnson & Johnson will need to be as firm as possible about potential deficiencies in the way they have been managed in the past," Aeby said. "Obviously, to gain credibility is the main thing."

For pharmaceutical companies, taking fire for a problem like product safety is fundamental to the nature of the business.

"The fundamental challenge to pharmaceutical companies is that they're profit-driven but that their product serves the greater good," Aeby said. "It's normal for a company to face some problems, but when it's learned that management knew about it and did not respond, that's when they face trouble."

Drawing from the past

Moody's noted that the talc situation has parallels with other high profile products that were linked to serious health risks, although Johnson & Johnson's product has not been definitively linked to cancer.

Both Merck & Co. Inc.'s pain medication Vioxx, as well as American Home Products' (now Wyeth, owned by Pfizer Inc.) diet drug fen-phen were pulled from the market due to established links to heart conditions in 2004 and 1997, respectively. The risks posed by the Merck and American Home Products drugs were clear enough to lead to the companies removing them from the market.

But like Merck, Johnson & Johnson seems to have failed to warn consumers of a risk that management was aware of. This fact weighed heavily on Merck's reputation and could do the same for Johnson & Johnson, according to Moody's.

Johnson & Johnson's size and cash on hand could be helpful in the response, Moody's said, as the company's financial profile is "considerably stronger than that of Merck and American Home Products at the onset of their respective litigation exposures."