UNDER SIEGE,

DUCKING

AND

WEAVING

‘VIGOROUSLY CONTESTING

THE ALLEGATIONS,’

BUT…

By March 2010, when Johnson & Johnson filed its financial disclosure with the Securities and Exchange Commission covering the events of the year 2009, the world’s leading healthcare company was forced to list a daunting collection of suits and investigations involving Risperdal. Subpoenas seeking testimony of its executives “before a grand jury” had been received from the U.S. attorney’s office in Philadelphia investigating the marketing of the drug. Other subpoenas had been issued for company officials to testify before a grand jury in Boston looking into the Omnicare relationship. Twoqui tamsuits had been filed in Massachusetts related to that deal, too, and suits seeking damages and fines had been filed by nine different states.

J&J 2009 SEC Filing (p. 46, 88, 100) Beyond that, the company reported that “multiple products of Johnson & Johnson subsidiaries are subject to numerous product liability claims and lawsuits.” Two other allegedly faulty J&J products targeted by the plaintiffs lawyers were a device called a transvaginal mesh patch and an artificial hip implant. Suits involving these two products would soon end up competing with Risperdal for claims on the company’s reputation and treasury.

Johnson & Johnson seemed to take the threats in stride. “The Company and its subsidiaries are vigorously contesting the allegations asserted against them,” its SEC filing declared.

But just in case, the amount that Johnson & Johnson had removed from earnings for 2009 and reserved for liabilities was listed as $1.014 billion—or about 6 percent of its $15.755 billion in pretax earnings for the year. Putting that much aside each year over what was perhaps the fifteen-year life of these potential legal battles was not going to cut deeply into the company’s bottom line.

“In the Company’s opinion,” the filing declared, “based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities already accrued in the Company’s balance sheet, is not expected to have a material adverse effect on the Company’s financial condition.”

Perhaps, but its reputation was another matter. Its best known, family-friendly products were also about to take a turn in the penalty box. And in this case, the alleged misconduct went to the core of Johnson & Johnson’s reputation; it wasn’t about how the company marketed its products, but about the basic care it took in making them.

‘GRAM NEGATIVE’ BACTERIA

IN CHILDREN’S TYLENOL

AND THE ‘PHANTOM RECALL’

FDA Inspections

April 2010 (p. 1, 2, 5, 8-10) Beginning in 2009 and extending into 2010, the FDA division that regulates the safety of over-the-counter products conducted inspections of factories at J&J’s McNeil Consumer Healthcare division. The result was a series of lurid reports documenting deficiencies in how the company was producing everything from Tylenol, to Pepcid, to Visine, to Rolaids, to children’s Motrin, to Benadryl, to PediaCare cough syrup for babies. Many of the inspectors focused on what an April 2010 report described as “known contamination of gram negative organisms.” These are bacteria that can cause a variety of infections, such as E. coli and even cholera. The inspectors found routine contamination that included bacteria and metal particles in products such as children’s Tylenol, as well as haphazard controls on the precise mixes of the chemicals that were supposed to be contained in the products, causing some to be too strong and others to be too weak. The overall picture brought to mind production facilities in a developing country rather than the pristine factories of R.W. Johnson’s idyllic American enterprise.

Then-FDA deputy commissioner Joshua Sharfstein would tell a congressional committee in September 2010 that “one common concern the Agency has found across these facilities is the failure to investigate and correct product problems in a prompt and thorough manner.”

“In February of this year,” Sharfstein continued, “FDA called an extraordinary meeting with senior executives of Johnson & Johnson. … FDA confronted these executives about whether [its] corporate culture supported a robust quality system to ensure the purity, potency and safety of its products.”

Among the cultural issues Sharfstein raised was what he called J&J’s “phantom recall” of Motrin tablets in the spring of 2009. That was when, as he explained, “the company had paid a contractor to go into retail stores across the country to purchase all available product while acting like a regular customer, and not disclosing whether it was a recall.”

As a result of these FDA inspections, J&J was ordered to do a series of real recalls of a dozen of its consumer products. The agency also forced the company to shut down a factory in Pennsylvania until repairs could be made, sanitation safeguards could be implemented and entire processes retooled.

For students of corporate management, the phantom recall should have been especially emblematic of how a company could change.

Johnson & Johnson had burnished its reputation for honest dealing with customers and regulators in 1982, when it was discovered that Tylenol capsules had been poisoned with cyanide. Seven people died. Scary headlines about the dangerous product dominated the news.

From the moment the crisis began to unfold, James Burke, J&J’s chairman and chief executive, took a series of extraordinary steps that he said he believed the company’s Credo dictated. He immediately recalled all Tylenol products. He was readily accessible to the press. He went on television and issued press releases telling people not to buy any Tylenol that might still be on the shelves. He apologized. And he organized an all-hands-on- deck drive to repackage Tylenol and all similar Johnson & Johnson products in sealed containers.

It took a few years, but a brand thought to have been irretrievably damaged resumed its place as a consumer favorite.

In the years since, Burke’s blunt, upfront handling of the Tylenol sabotage has been celebrated in management schools as the ultimate model of corporate crisis management.

Alarming Tylenol headlines dealt a major blow to J&J's image.