An in-depth look uncovers astonishing evidence that all is not well at a long-revered icon. How bad is the diagnosis- and could some tough medicine help?
IMAGINE:
- ADMITTING PUBLICLY you have made “improper payments” in violation of the Foreign Corrupt Practices Act.
- BEING SUED by the former head of your clinical trials in a whistleblowing lawsuit that alleges he was terminated because he raised safety concerns overdeaths and injuries caused by your products.
- BEING FORCED to divulge internal emails over a less-than-forthright Internet-based marketing campaign undertaken to try to blunt negative talk about your products.
- BEING ORDERED by a jury to pay $5 million in damages for the death of a one-year-old due to inadequate safety labeling on one of your most popular products.
- FACING A CLASS ACTION LAWSUIT in Canada for negligent testing and marketing of your heartburn product which resulted in the death of a 15-year-old girl, among others.
- BEING SUED by the Attorney General of Texas for fraudulent dealing and improperly influencing a state employee to purchase more than $100 million of your product.
- HAVING A LABORATORY REPORT COME OUT that reportedly uncovers a relatively high amount of undisclosed carcinogenic chemicals in your company’s flagship products: baby and kids’ body washes and shampoo.
Imagine all of these events happening in the past year.Now stop imagining. For Johnson & Johnson, this is reality.
Talk about a stunning surprise. For many years, the New Brunswick, NJ-headquartered Johnson & Johnson, or J & J (NYSE: JNJ) has been a poster child for an ethically-managed company- “Exhibit A” in the argument that businesses can do well by doing good.
However, a pattern of developments seem to suggest that halo is no longer deserved.
Granted, the pharmaceutical and drug industry is an area where litigation is rampant. People get sick. Treatments emerge and are effective for many, but some people will die or become further injured. And some of those people will think that it is your product’s fault. They may sue. They may win. But is that an indictment of a business’s ethics?
In most instances, no.
But J & J is emerging as a for-instance where the range and diversity of cases is so severe that perhaps it is not a series of isolated incidents, but rather more a pattern that strongly suggests the business is in the throes of a compliance and ethics crisis.
Each case has been reported in the press as it happened. What no one has done, until now, is assemble all the many pieces into one package- and that is where the story about today’s J & J becomes quite disturbing.
Flashback a quarter-century to the event that sealed J & J’s reputation as one of the good guys. A deranged individual in the Chicago area had tampered with Extra Strength Tylenol capsules by filling them with cyanide and replacing them on store shelves. Seven people died.
Without knowing the scope or source of the problem, the company immediately launched a nationwide recall. Ultimately the company’s manufacturing quality control was exonerated and- because it stuck to a policy of full and honest disclosure throughout the Tylenol scare and it took quick actions to safeguard the public’s health, no matter the cost- J & J emerged from this crisis with a strong reputation and with the Tylenol brand intact.
Much can happen in 25 years.
More recently, has J & J been putting short-term profits ahead of patient safety? Ironically, that is the exact reverse of the famous Johnson & Johnson credo, which starts out, “We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services.” Shareholders are last in line, assuming that if you take care of everything else the profits will follow (http://www.jnj.com/our_company/our_credo/index.htm).
TEXAS-SIZED LAWSUIT
J & J is not accused of more peccadilloes. One of the hardest slaps came in December 2006, when the State of Texas decided to join a whistleblowing lawsuit filed against the company in 2004. The case revolves around Risperdal, an antipsychotic sold at very high prices (up to $190.49 for a 30-day supply, according to Drugstore.com). Bloomberg News reports that drugs like Risperdal account for more than 90 percent of a $10.5 billion a year market for anti-psychotics, with most of the tab picked up by taxpayers.
A high price alone is not a problem. The sticking point is that according to the Texas suit, J & J improperly influenced the adoption of Risperdal by paying off state officials. Case in point: Dr. Stephen Shon, the former medical director of behavioral health at the Texas Department of State Health Services and original architect of the TMAP initiative prescribing guidelines that encouraged sales of Risperdal. Shon was forced out of his job amidst allegations that he had served as what amounts to a paid mouthpiece for J & J, making nearly 100 paid trips around the country to jawbone officials in other states on behalf of Rispersal.
And then there is TMAP itself. Short for the Texas Medication Algorithm Project, TMAP was a 1995-1997 project offering a series of flowcharts to help doctors determine which psychotropic medication to prescribe for individual patients. The TMAP flowcharts often result in a recommendation to specifically prescribe Risperdal.
Developing TMAP cost the State of Texas $5.6 million. However, a third of the cost ($1.8 million) was offset by a grant from the Robert Wood Johnson Foundation, the nation’s largest health-oriented foundation whose assets are mainly invested in J & J stock. Coincidence?
In 2004, Allen Jones, a former investigator for the state of Pennsylvania filed the original whistleblowing suit, alleging that the company improperly influenced the development of TMAP to promote sales of Risperdal by manipulating data during the algorithm design stage so that Risperdal would appear more effective and safer than it really was.
“We believe Texas has been defrauded, and we’re going to be looking to get our money back” says the state’s Attorney General, Greg Abbott. Over the past three years, Texas alone has purchased nearly $200 million of Risperdal. Analysts estimate that penalties, fines or settlements over this case across a series of states could potentially run into the billions of dollars.
PUBLIC ADMISSION OF BRIBERY
On February 12, 2007, Johnson & Johnson admitted that improper bribery payments had been made in violation of the Foreign Corrupt Practices Act (FCPA).
In its statement, J & J admitted that certain subsidiaries “are believed to have made improper payments in connection with the sale of medical devices in two small-market countries.”
This may be a bigger problem for J & J than it initially appears. As Morgan Stanley analyst Glenn Reicin pointed out in a research note for clients, this public disclosure may well have been a preemptive attempt to avoid federal prosecution. That is particularly important to J & J because “a company that is found guilty of a felony can be barred from Medicare programs,” Reicin wrote.
This is just the latest in a series of overseas missteps for J & J in recent years.
In early 2006, the company received a subpoena from the SEC requesting documents relating to the participation by several subsidiaries in the United Nations Iraq Oil-For-Food Program. In 2005, Portugal’s regulators fined J & J for participating in an illegal cartel in supply bids to 22 different hospitals on 36 occasions. In 2004 J & J Poland was fined over distribution agreements which illegally restricted market competition and prices under Polish law.
CLASS ACTION IN CANADA OVER KIDS AND HEARTBURN
In January of this year, the Ontario Superior Court of Justice in Canada certified a class action lawsuit against J & J over its Gastroesophageal Reflux Disease (GERD) drug, Propulsid. Many people commonly call GERD symptoms “heartburn.”
This was welcome news to Terence Young, whose 15-year-old daughter Vanessa died of a heart arrhythmia after taking the drug in 2000.”Vanessa would be pleased because the work that I’ve done is to try and save other families from going through what we went through,” Young, a politician based in Ontario, said to the Canadian Press news agency upon hearing that the suit had been certified.
Propulsid was originally introduced in 1993. While initially only approved for treatment of adult nighttime heartburn, Johnson & Johnson decided that there was a large market for the drug in the pediatric market, despite a lack of studies showing effectiveness- or safety- in children.
Yet J & J marketed aggressively to this demographic, as doctors are generally free to prescribe medicines beyond the specific, FDA-approved uses.
In 1998, Propulsid sales topped $1 billion, according to the New York Times, which noted that perhaps 20 percent of babies in neo-natal intensive care were on the drug. The questionable side, as reported by the New York Times, was that “dozens had died and more than 100 patients had suffered serious heart problems by March 1998 after taking Propulsid.”
More questionable still were the aggressive marketing efforts- masquerading as “educational efforts” and thus permissible under FDA guidelines, such as footing the bill for a press run of 10,000 textbooks about childhood digestive problems (the book recommended Propulsid) and sponsoring groups that made presentations about treating reflux with Propulsid to nearly 8,000 pediatric doctors and nurses.
J & J even developed a cherry-flavored liquid version of Propulsid, saying it was designed for geriatric patients. Yet documents show that as much as 90 percent of it actually went to children.
Along the way, doubts and worries began to swirl around Propulsid. In 1998, the FDA even made a presentation to the company expressing its growing concerns over reports of death and injuries resulting from the drug. According to the New York Times, that presentation included a slide that read, “Is it acceptable for your nighttime heartburn medicine to have the potential to kill you?”
By this time the FDA scheduled a meeting to discuss its concerns with a panel of outside experts to be held in a public forum. The New York Times also reported that in preparing for the hearing, a senior J & J executive wrote a note, “Do we want to stand in front of the world and admit that we were never able to prove efficacy!” The words “never able” were underlined for emphasis.
Apparently not. Three weeks before the scheduled hearing, Johnson & Johnson pulled the drug off the market in the United States. The hearing was canceled.
In 2004, Johnson & Johnson reached a $90 million agreement in the U.S. to settle federal class action suits that alleged more than 300 people had died and 16,000 were injured due to the use of Propulsid. The Canadian class action is ongoing.
FABLES AND LABELS
Central to J & J has always been its over-the-counter (OTC) health and beauty product lines- but trouble lurks there too. For example, in February of this year the Campaign for Safe Cosmetics (a coalition of U.S.-based health and environmental NGOs) announced that its lab tests found significant amounts of carcinogenic chemicals in a variety of children’s bath products, including Johnson’s Head-to-Toe Baby Wash and Johnson’s Kid’s Shampoo Watermelon Explosion.
Perhaps more worrisome, however, was last September’s $5 million punitive judgment against J & J’s Ortho-McNeil division for the March 2002 death of a one-year-old infant from Tylenol. J & J initially offered the parents $10,000 to settle the case.
The baby’s parents had sued Johnson & Johnson, claiming that the labeling on Infant’s Tylenol did not adequately disclose that the product is three times stronger than Children’s Tylenol. They argued that it is counterintuitive to think that an infant’s formulation would be that much more potent. The child died from acetaminophen toxicity three days after receiving the medicine for cold symptoms.
This case mirrored a lawsuit from over a decade earlier, where a14-month old girl underwent a liver transplant due to being overdosed with grape-flavored Infants’ Tylenol. At that time, J & J had vowed changing the labels to prevent recurrence.
A search of the Internet uncovers many other desperate and similar parents’ stories with Tylenol.
STUDENT DIES IN MIDTOWN MANHATTAN
Perhaps no problem faced by J & J was potentially more damaging than a death on April 2, 2004.
On that day, Zakiya Kennedy, an 18-year-old who dreamed of being a model, was waiting for a subway on the 42nd Street platform in midtown Manhattan when she fell down. After getting up, she approached a policeman complaining of a headache and leg pains. Within seconds the Berkeley College freshman collapsed and died. The tabloids of the nation’s largest city were ready to pounce on the story.
At first the story was that she died due to being pushed by her boyfriend- who was quickly vilified. However, the story took a less interesting turn when an autopsy revealed the cause of death was a blood clot, a pulmonary embolism, which is extremely rare in healthy 18 year-olds.
Later it was learned that the teenager had recently started using the Ortho Evra birth control patch manufactured by Ortho-McNeil Pharmaceutical division of J & J. The teenager’s family began to speak out against the company, and soon a confidentially agreement and financial settlement was reached with them. At that point the story largely disappeared from public view.
Yet this death was important as a tip of the proverbial iceberg- with persistent questions beginning to arise about potential misconduct by Johnson & Johnson around the design, launch and marketing of Ortho Evra patches.
As of December 31, 2006 more than 1,500 claimants were pursuing J & J over Ortho Evra. Claimants include a Texas woman paralyzed by a stroke just 12 days after initial use and the families of a 25-year-old mother of two who died of a heart attack after six weeks on the patch; a 14-year-old girl who died from a blood clot in her lower pelvis after just eight weeks; and a 25-year-old mother of three who died from a brain blood clot after two weeks on the patch.
Grave concerns had in fact taken root still earlier. By late November 2005, the FDA had required J & J to change the product labeling to include bold-face language that stated “You will be exposed to about 60% more estrogen if you use Ortho Evra than if you use a typical birth control pill.”
Ortho Evra remains on the market but sales have dipped due to “labeling changes and negative media coverage concerning product safety” according to J & J.
Bolstering the ever-growing series of legal claims against the company is an increasing amount of evidence that the company knew that its product caused problems.
For example, in the 17 months between April 2002 and September 2003, the FDA logged 9,116 adverse reaction reports, according to Online Legal Marketing Ltd. In contrast, the Ortho birth control pill garnered only 1,237 adverse event reports to the FDA even though six times as many women were using the pill. CBS calculated that the risks of a clot are 14 times higher with the patch versus the pill.
Some think that worse is yet to come for the company.
For example, recent studies have conclusively linked estrogen supplements with increased incidence of breast cancer, due to estrogen providing stimuli to cause the cancer to grow more rapidly. In January 2007, researchers at the University of Illinois extended the link further with studies that found that estrogen also shielded cancerous cells in the breast from the body’s immune system.
If future researchers establish a link between Ortho Evra’s high doses of estrogen and increased rates of breast cancer, J & J would be headed into a financial and PR storm. But that’s the future. J & J is dealing with the here and now.
In the Internet age, news travels fast. Recognizing that, J & J designed a comprehensive online marketing campaign allegedly intended to make negative information on Ortho Evra harder to find.
According to internal documents unsealed by a New Jersey Superior Court this spring (over J & J protestations), the company was in the process of buying (or planning to buy) all the top keyword positions for related searches online, as well as intending to create an “unbranded website” seemingly unaffiliated with J & J. With “search engine optimization” strategies, J & J hoped to have this unbranded website show up as second most popular behind the official Ortho Evra site, thereby covertly getting its message out.
J & J also bought approximately 100 dubious URL names such as: deathpatch.com, badevra.com, the Patchkills.com, ThePatchTruth.org; and patchsucks.com.
CHIEF MEDICAL OFFICER BLOWS THE WHISTLE
On other fronts, things are already getting worse for the New Brunswick company. In November 2006, Dr. Joel S. Lippman, a former VP, filed a wrongful termination lawsuit, claiming that he was dismissed for raising safety concerns about various products, including Ortho Evra as well as at least two products that he had urged not to be released, and which were later recalled after causing injuries or deaths.
J & J denied Lippman’s charges, stating that Lippman was fired “as a result of inappropriate conduct and mismanagement of responsibilities unrelated to the allegations he raises in the lawsuit.”
It’s hard to imagine Dr. Lippman, with a Masters Degree in Public Health from Harvard, as a bad apple. During his 15-year career with Johnson & Johnson, he rose to be head of Clinical Trials at the Ethicon division.
In 2005, his role was Vice President of Worldwide Medical Affairs and Chief Medical Officer at Johnson & Johnson. And in the fall of that year, he was also feted as “supporter of the year” by the New Jersey-based company at its annual ball.At this writing, Lippman’s case remains active.
DELIVERING TO THE BOTTOM LINE
Whatever problems there may be, shareholders are also bearing the pain.
Over the past five years, J & J aggregate stock performance has been anemic- flat over the five years ended this March.
J & J stock woes, however, are not transposable to the market at large, or even its industry segment. During the period, the S&P is up over 30%. Meanwhile direct competitors such as Sanofi- Aventis, Novartis and Procter & Gamble rang up 49%, 30% and 40% gains respectively over the same period.
BAND-AID OR A TRANSFUSION?
Back to the original question: are the ethics and compliance efforts at Johnson & Johnson ailing? It appears so. But as the turnarounds at companies like Tyco and Boeing have proven, even sick companies can become well if they take harsh medicine.
Some observers feel that J & J has simply pulled back into a shell in the face of criticism. That is the wrong approach. Ethical leadership cannot be delegated to attorneys, but is the job of the entire executive suite.
The J & J brand remains respected around the world. However, it appears increasingly vulnerable and may be beginning to wane. The good news is that with over $11 billion in annual earnings, the company has the resources to do whatever is necessary.
It is going to take a lot more than a Band-Aid to help it get better, and whether or not Johnson & Johnson will be able to stomach a tough prescription remains to be seen.
PRESCRIPTION FOR IMPROVING J & J’s REPUTATION
1 // INVEST IN QUALITY CONTROL, COMPLIANCE AND ETHICS
It is inexcusable in this day and age for a sophisticated multi-billion global corporation to have a FCPA problem. And quality control problems, such as those pointed out by the FDA in a 2004letter to J & J’s stent-manufacturing subsidiary appear to be a huge distraction to management.
2 // SETTLE THE TEXAS RISPERDAL LAWSUIT
The facts thus far do not look good. Get this behind the company.
3 // SHRINK LEGAL- GROW R&D
The key to growth in medical devices, pharmaceuticals and consumer products is innovation,not lawsuits. When L’Oreal “out-innovated” J & J in sunscreen, J & J’s response was a lawsuit against their advertising claims. J & J has a recent history of acquiring other companies to get new products as opposed to internal development. J & J cannot afford to cutback on R&D. Without innovation J & J will be stuck with continuing to buy the high prices and problems of other companies through acquisitions in order to grow.
4 // LEAD ON SAFE PRODUCT INGREDIENTS
Scrutiny of OTC health and beauty product ingredients has increased in recent years, with newlaws in the EU, Canada and now California. This trend will only increase. J & J could transform itself into the leader for safe product formulations- and its brand would support that. Absent such, it will continue to find itself on the defensive as an inert target.
5 // REFORMULATE OR PULL ORTHO EVRA
It is just not acceptable, by any measure, for young healthy women to die due to a lifestyle convenience product (and alternatives exist). It’s time to reformulate the company’s proprietary patch technology with lower estrogen doses. If that’s not possible, discontinue and get out before brand damage and liability become worse, and more importantly, before many more young women are injured or killed.
6 // IMPROVE WARNING LABELING ON OTC PRODUCTS
With the popularity of Tylenol, this would be a difficult step, unless J & J were to use its leverage to get regulators to require all industry vendors of Acetaminophen (the chemical ingredient in many popular pain relievers) to enact similar more descriptive warning labels.
7 // DISTANCE THE COMPANY FROM RWJF AND VICE-VERSA
The fact that the Robert Wood Johnson Foundation is caught up in the Texas AG’s lawsuit is embarrassing. The Company and the Foundation should clearly distance themselves- perhaps so far that RWJF divest its substantial stock position.
8 // ENGAGE
J & J is encountering more controversy than ever. Pulling back and relying on historical brand strength is dangerous. In the age of the Internet, news travels fast and opinions can be formed quickly. While a company cannot control the message, it can positively impact it when it takes actions to offset negative position. But it must engage in a productive and transparent manner.
