A special committee of the board of directors at Johnson & Johnson (NYSE:JNJ) unveiled the results of a probe into shareholder complaints, concluding that the board met its fiduciary responsibilities and recommending the creation of a regulatory and compliance committee to oversee quality control and compliance matters.
"The Board and Audit Committee devoted substantial amounts of time and effort to review compliance efforts and issues; there were no red flags or indications of systemic failure that were overlooked," according to the report. "As issues arose, they were appropriately addressed and resolved — often with the expenditure of significant resources."
The special committee was formed in April 2010 after a flurry of shareholder demand letters and lawsuits accused the New Brunswick, N.J.-based medical products conglomerate of an array of misdeeds, including bribery, illegal drug kickbacks, off-label drug and medical device promotion and concealing device defects. The board tapped a slate of four of its independent members to investigate the allegations and recommend corrective actions.
J&J has been mired in a seemingly endless cycle of recalls and lawsuits in recent years, including a slew of ongoing lawsuits and federal investigations into subsidiary DePuy Orthopaedics’ metal-on-metal ACR hip implants. Analysts estimate that lawsuits concerning the recalled artificial hips could ultimately cost the company up to $1 billion in settlements.
In the face of the recalls, federal investigations and patent infringement penalties, the committee’s report concluded that the board met its fiduciary duties. The report finds further that most of the quality issues that arose in late 2009 and continued through 2011 were isolated to operations of J&J’s McNeil Consumer Healthcare division, which makes over-the-counter drugs.
"The Special Committee finds that there was no breach of any fiduciary duty by senior management or the board of directors," according to the report. "McNeil’s and J&J’s [quality and care] organizations, policies and procedures did not present any obvious weakness or inadequacy that should have been corrected by senior management or the board of directors."
"[W]ith the benefit of hindsight," the authors found, several factors may have come into play, including a sequence of management turnovers and "a string of successive leaders in a short period of time who may not have had sufficient understanding of what was taking place at the plant level — although when Peter Luther took over as president of McNeil in February 2009, he introduced quarterly quality reviews and requested more substantive quality presentations. But issues began to arise before the reporting got into full gear."
The committee advised against any pursuing lawsuits against any present or past employees. The company should also look to dismiss shareholders’ lawsuits and demands and form a regulatory and compliance committee to oversee health care and quality compliance issues.
The special committee was composed of directors Charles Prince, who joined the board in 2007; Michael Johns, who joined in 2005; Anne Mulcahy, who joined in 2009; and William Perez, who joined in 2007.
Since the inception of the special committee, the medical device goliath (ranked second in the MassDevice Big 100 list of the world’s largest medical device makers) has logged more than 20 instances of recalls, fines and lawsuits for its medical device and pharmaceutical divisions. Some were due to relatively minor issues such as typos on product labels, but others involved more serious issues:
- May 2010: The largest batch of children’s medicines are pulled
- June 2010: The company widens the recall of drugs made at a Puerto Rican plant
- June 2010: The first patient sues JNJ subsidiary DePuy Orthopedics, alleging that her ASR metal-on-metal hip replacement was defective and accusing the company of knowing about the device’s problems but failing to warn physicians.
- July 2010: Some OTC medicines are pulled, including varieties of Benadryl, Tylenol and Motrin, in a follow-up to a recall of musty-smelling products made at a plant in Puerto Rico
- August 2010: A recall of about 100,000 boxes of 1-Day Acuvue TruEye contact lenses
- August 2010: JNJ’s DePuy Orthopedics unit pulls two hip implants off the market because of an unusually high rate of replacement surgeries
- October 2010: A recall of 127,000 bottles of Tylenol 8-Hour caplets due to a musty odor.
- November 2010: The company recalls children’s Benadryl and Motrin products.
- November 2010: The company recalls three Tylenol Cold Multi-Symptom products, also due to an alcohol labeling issue.
- December 2010: JNJ recalls a dozen different Mylanta liquid products and one AlternaGEL product because they were mislabeled to omit the presence of small amount of alcohol and widened a recall of daily-use contact lenses in Japan and elsewhere due to traces of an acid that can cause stinging.
- December 2010: The company recalls all lots of Rolaids Extra Strength Softchews, Rolaids Extra Strength Plus Gas Softchews and Rolaids Multi-Symptom Plus Anti-Gas Softchews following consumer reports of foreign-particle contamination.
- January 2011: JNJ pulls 43 million bottles of Tylenol, Benadryl, Sinutab and Sudafed made at its Ft. Washington, Pa., plant while equipment there may not have been properly cleaned and yanks almost 4 million units of Rolaids due to a labeling problem
- February 2011: JNJ recalls 70,000 syringes preloaded with its Invega injectable anti-psychotic drug over cracks found in the syringes.
- February 2011: Ethicon pulls 700,000 vials of a liquid wound sealant and a hernia-treatment product.
- February 2011: JNJ pulls at least 395 injection pens preloaded with rheumatoid-arthritis drug Simponi because they may not deliver a full dose of the drug.
- February 2011: JNJ recalls more than 667,000 Sudafed packages after a discovering a double-negative typo on the label ("do not not divide, crush, chew, or dissolve the tablet").
- March 2011: Ethicon pulls 104 batches of surgical sutures.
- March 2011: JNJ recalls nearly 400,000 insulin cartridges because of the risk that they might leak.
- April 2011: JNJ pays $70 million to settle charges that it bribed doctors in Europe and ran a kickbacks scheme to win business under the U.N. Oil-for-Food program in Iraq.
- April 2011: A federal judge adds $111 million to a patent infringement dispute that has already cost JNJ $482 million.
- May 2011: Federal prosecutors seek $1 billion from JNJ to resolve a 7-year-old investigation into the company’s off-label promotion of the antipsychotic drug Risperdal.
- July 2011: Analysts estimate that JNJ may be on the hook for up to $1 billion in Depuy hip recall lawsuits.
