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Johnson & Johnson's Quality Catastrophe

After 50-plus product recalls in 15 months, the $60 billion company is fighting to clear its once-trusted name

The cover of the April 4-10 issue referred to Johnson & Johnson as "The Family Company" in a headline noting recent recalls at the company. SC Johnson uses the tag line "A Family Company." These two companies are not affiliated in any way. We regret any confusion this may have caused.

In the split second after the blast, Lance Corporal Cody Perkins thought he was still sitting in his unit's Humvee, enveloped in blinding dust kicked up by the roadside bomb. It was only when he slammed with shattering force onto the pavement that the 20-year-old U.S. Marine realized he'd been ejected from the rolling vehicle and thrown into the air.

Perkins's commanding officer was killed in the November 2005 incident outside Haditha, Iraq, and two other Marines were injured. Perkins came away with scrapes, bruises, and a fractured femur, or thigh bone. After emergency surgery in Iraq, the Mississippi native was transported back to the U.S., where surgeons implanted screws to fuse the broken bone.

That failed, leaving Perkins hobbled. A military surgeon, Dr. Keith Holley, told him that his best option was a so-called metal-on-metal prosthetic hip made by DePuy Orthopaedics, a unit of Johnson & Johnson (JNJ). The new hip was being promoted as tough and durable—and thus perfect for younger, physically active patients like Perkins. On Dec. 13, 2006, Dr. Holley implanted DePuy's ASR XL Acetabular System in the soldier at the Navy Medical Center in San Diego.

Perkins never regained the mobility he had before the injury, but he was able to resume full-time work. By late 2009, however, while he was working as a Marine criminal investigator at California's Camp Pendleton, it started—muscle fatigue at first, which led to shin splints, followed by pain in his hip that radiated up to his back and down to his knees. Soon he was unable to sleep through the night. "It's always uncomfortable," he says. "There's never a completely pain-free day."

The cause of his trouble, his current physician Dr. Richard Conn says, isn't a complication from his original injury but the replacement hip. Perkins has been told he'll need to undergo "revision" surgery to replace the ASR hip with another implant—a highly invasive procedure with a heightened risk of infection and joint dislocations down the road. It's also likely to render him unable to pass the Marines' rigorous annual physical fitness test.

"I wanted to retire out of the Marine Corps," says Perkins, who has earned two Purple Hearts. "But there's no way that can happen ... not a chance."

Now a sergeant based at North Carolina's Marine Corps Air Station Cherry Point, Perkins has joined more than 1,000 other people who are suing Johnson & Johnson over its DePuy ASR implants, seeking damages for medical costs, lost wages, and pain and suffering.

On Aug. 26 last year, DePuy announced a voluntary recall for two types of ASR hips, including the one in Perkins's leg, but only after 93,000 had been implanted in patients worldwide, including 37,000 in the U.S. J&J says DePuy withdrew the hips for safety reasons, while denying in court papers that the devices are defective. Announcing the voluntary recall, it cited unpublished 2010 data from the U.K. showing that within five years, 13 percent of ASR XL hips failed and needed to be replaced, and 12 percent of the similar ASR Hip Resurfacing System failed. (The U.S. doesn't collect numbers on hip failure rates.) All types of implants are susceptible to post-operative problems; Australia's registry for joint implants says 3.3 percent of all implants fail after five years. But the stats DePuy cited for the recall—three to four times that norm—now appear sadly optimistic. On Mar. 9 the British Orthopaedic Assn. and the British Hip Society said preliminary data put the ASR XL's failure rate in the U.K. as high as 49 percent after six years.

The new report adds weight to plaintiffs' lawyers predictions that thousands more patients will file similar lawsuits. Case after case describes patients in pain and immobilized by joint dislocations, infections, and bone fractures. Their claims are backed by surgeons who say metal debris from the hips, made from a cobalt-and-chromium alloy, causes tissue death around the joint and may increase the amount of metal ions in the bloodstream to harmful levels. "There's so much metal, it's toxic to the tissues," says Dr. William Jiranek, a professor at Virginia Commonwealth University School of Medicine in Richmond and an orthopedic surgeon who has removed ASR hips.

Accusations of selling bum hips are bad enough; the lawsuits allege worse: that DePuy continued to push the hips even after it received preliminary numbers as early as 2007 indicating rising failure rates for both ASR models. "This wasn't driven by science. This was driven by marketing," contends Michael Kelly, a lawyer at San Francisco's Walkup, Melodia, Kelly & Schoenberger, which has filed 75 cases on behalf of patients with the DePuy hips.

J&J has so far committed $280 million to the recalls, and has pledged to "address reasonable and customary costs associated with testing and treatment," including new hips for patients who need them. Based on the latest estimates of failure rates, Kelly and others say, the total tab could reach billions of dollars.

With $28 billion in holdings of cash and short-term securities at the end of 2010, J&J will surely weather the financial blowback from the bad hips. More troubling to customers and stakeholders, however, is that the DePuy recalls may be symptoms of a systemic quality-control problem at the 125-year-old corporation: a pattern of behavior that is distinctly at odds with the comforting image long enjoyed by the creator of brands like Band-Aid and "No More Tears" Baby Shampoo.

The DePuy crisis is one of more than 50 voluntary product recalls that J&J has issued just since the start of 2010, covering brand names that read like an inventory of the family medicine cabinet. Tylenol and St. Joseph Aspirin were recalled for foul odors people said made them sick. Benadryl and Zyrtec were recalled for botched amounts of ingredients. Rolaids were recalled for containing bits of wood and metal. Most of these drugstore stalwarts come from J&J's McNeil Consumer Healthcare unit, which has been plagued by dismaying revelations about the conditions and lax controls at its factories in the U.S. It shuttered one factory in Fort Washington, Pa., for a quality overhaul. Under a Mar. 10 consent decree, that plant and two others—in Lancaster, Pa., and Puerto Rico—will remain under Food and Drug Administration (FDA) oversight for five years. J&J/McNeil faces fines of $10 million per year if the agency isn't satisfied with its progress.

Johnson & Johnson management, from Chief Executive Officer William Weldon on down, maintains that the company's quality-control issues are aberrations. Any suggestion of a broader malaise, says Weldon, "is just Monday morning quarterbacking. ... There's a lot of 'J&J has lost its way,' but I think that everything has been overshadowed by one company [McNeil]," Weldon says. "This is not a systemic problem. This is not an issue around J&J."

Except the problems don't end with McNeil or DePuy. Over the last 15 months, the company has also recalled contact lenses, syringes filled with prescription medications, hernia devices, and other products made by subsidiaries around the world. In the year ended Mar. 8, 2011, J&J was involved in at least 11 major recalls, as defined by the FDA, almost twice as many as Pfizer (PFE), the world's largest health-care-products company by revenue, or Procter & Gamble (PG), the world's largest consumer-products company. "I'm not familiar with another company that has had this many debacles in a very short period of time," says Ira Loss, an analyst at investment research firm Washington Analysis who has followed the FDA for more than three decades.

Moreover, J&J's woes aren't confined to the last couple of years. During the last decade, the company has been repeatedly confronted with claims that it sold a product that was defective, or that carried risks J&J downplayed in its marketing. It has been accused of paying kickbacks and using other financial incentives to promote off-label use of drugs and devices. It has been cited by federal authorities for trying to avoid the publicity of a recall by quietly buying up tainted products. And it frustrated FDA regulators who were urging the company to strengthen quality control at the factories that produced many of the recalled over-the-counter products. J&J has steadfastly denied these claims, but its own annual report for 2010 contains eight pages detailing government criminal and civil investigations and thousands of private lawsuits covering a wide range of drugs, devices, and business practices.

"This is a real American tragedy," says Erik Gordon, a professor at the University of Michigan's Ross School of Business in Ann Arbor who studies the biomedical industry. "They really have blown one of the great brands."

"A Huge Disappointment"

New Brunswick, N.J., nestles along the south bank of the Raritan River, a city of little more than 50,000 people where the jury still seems to be out on the success of efforts at urban renewal. Two institutions dominate—Rutgers University and J&J, the latter's headquarters built in the early 1980s from a design by the firm of architect I.M. Pei. As befits a company that got its start selling surgical supplies, the 16-story tower and surrounding low-rise buildings, with their alternating horizontal bands of bare white wall and reflective glass, could be mistaken for a hospital. Inside hang photos of some of the many beneficiaries of J&J's philanthropy over the years, and in the main lobby, two looming limestone slabs greet visitors. On them is carved the 308-word credo J&J executives are wont to invoke, penned in 1943 by legendary CEO Robert Wood Johnson II.

The company's "first responsibility," the credo states, "is to the doctors, nurses, and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality." It next lays out J&J's responsibilities to its employees, and then to the communities "in which we live and work and to the world community as well." The company's "final responsibility" is to shareholders, who "should realize a fair return," so long as J&J abides by its credo.

In an 11th-floor conference room—a generic space but for the sword in a display case on the wall, a replica of the one used by Scottish nationalist William "Braveheart" Wallace—the credo comes up often during a Bloomberg Businessweek interview with CEO Weldon. The 62-year-old Brooklyn native concedes that the recalls have tarnished his brand and that events of the past year "have been just a huge disappointment." He sticks to his story, however, that the problems have been confined almost exclusively to the McNeil Consumer Healthcare group, specifically the three factories that produced most of the recalled over-the-counter products.

"What this is really about is the first tenet of our credo, and that's about patients," Weldon says. "The most unfortunate part of everything that happened last year is that there are people who need these products who can't get them. ... I don't want to say it's not an embarrassment. It's painful. And we're going to fix it."

Weldon, who joined J&J in 1971 and worked his way up through sales, marketing, and management positions in the device and drug segments, refuses to admit any culpability. The DePuy voluntary hip recall, in his view, affirms J&J's commitment to caring. "DePuy made a decision to protect patients," he says. On Mar. 4, DePuy Orthopaedics' president, David Floyd, announced his resignation.

Citing litigation, Weldon wouldn't comment further on details of DePuy's recall. DePuy spokeswoman Lorie Gawreluk describes the recent data suggesting failure rates as high as 49 percent, which haven't been published in a peer-reviewed journal, as "difficult to interpret." She points out that these data have "not been verified and validated." Despite the recall, Gawreluk adds, "the benefits of metal-on-metal technology often outweigh the risks for many patients who suffer from severe osteoarthritis."

For his part, Weldon most regrets that "there are children who need" the Motrin and other McNeil products absent from drugstore shelves, but then: "There has never been a serious injury resulting from everything that happened here to any patients, as opposed to the circumstances in 1982. It's a very different situation."

October 1982 saw the most serious crisis in J&J's history, as the company recalled 31 million bottles of Tylenol after capsules of the pain medication were spiked with cyanide by a still-unknown saboteur, killing seven people. J&J's sure-footed response, at the time the largest recall in U.S. corporate history, turned the incident into a case study in effective crisis management. Under then-CEO James Burke, the company began pulling every package of Tylenol from the market within six days of the first death, quickly replacing them with new tamper-resistant packaging, now an industry standard. The incident prompted a 1989 Harvard Business School study that HBS professor Sandra Sucher says has been a perennial hit with students who "are fascinated by seeing a leader live up to his responsibilities."

The J&J that so expertly navigated the Tylenol tragedy began in 1886, when three Johnson brothers founded the company in New Brunswick as a maker of sterile gauze and other products for the then-innovative practice of antiseptic surgery. Soon came the first commercial first-aid kits, mass-produced dental floss, and an array of health and hygiene products for women and babies. In 1921, Band-Aids arrived on the scene. If you have any doubt about the lasting impact of that event, try to recall the last time you heard someone ask for "an adhesive bandage."

J&J made its first forays into overseas markets in the 1920s, but it wasn't until Robert Wood Johnson II, son of one of the founders, took over in 1932 that J&J began to transform itself into a global "family of companies." Implicit in the use of the word family was the concept of decentralization—a collection of largely independent subsidiaries operating around the world, developing and marketing their own products under the aegis of their Johnson & Johnson parent.

After J&J went public with a listing on the New York Stock Exchange (NYX) in 1944, expansion and decentralization proceeded apace. The 1959 purchases of Cilag Chemie of Switzerland and McNeil Laboratories, maker of then-prescription-only Tylenol elixir for children, along with the 1961 purchase of Belgium's Janssen Pharmaceutica, put J&J on the map in research and development of prescription medicines. It acquired the LifeScan diabetes line in 1986, Neutrogena skin-care products in 1994, Cordis and its artery-opening heart stents in 1996, and biotechnology company Centocor three years later. In 2006, Weldon spent $16.6 billion to buy New York-based Pfizer's consumer division, adding a drugstore's worth of household names, including Listerine, Bengay, and Visine. Today, J&J operates more than 250 companies in 60 countries, generating $61.6 billion in sales last year, down 0.5 percent from a year earlier.

Somewhere along the way, though, the company seems to have lost the lesson of the example it set with the 1982 Tylenol recall. Compared with 1982, "it's clearly a different company, with a different culture," says the University of Michigan's Gordon, "both in terms of safety and quality, and in terms of how you react when faced with a problem."

Parsing the problems at J&J leads many analysts to identify three likely causes, none of them mutually exclusive: decentralization, fat margins, and lapses in leadership. "Each division has its own culture, and they fell off the tracks at the same time," says Loss of Washington Analysis. Since the 1982 recall, the number of J&J subsidiaries in the U.S. alone has more than tripled, to nearly 100, while annual sales worldwide have grown more than tenfold. Expansion of that scope makes it harder for management in New Brunswick to keep tabs on every corner of the empire, says Frederick Wise, a New York-based analyst for investment bank Leerink Swann who has covered J&J for 20 years. He points out that while McNeil is responsible for some "unimaginable screw-ups," all companies in the health-care industry have confronted a tighter regulatory environment in recent years, with more frequent and stricter inspections and bigger fines from regulators.

Not only is J&J bigger and more decentralized; it's also much more profitable. Its operating margin in 1990 was 17.7 percent; in 2010 it was 26.8 percent. "Where did that increase in margin come from?" asks Sucher, the Harvard business professor. When J&J acquired Pfizer's consumer health-care division in 2006, it predicted cost savings of $500 million to $600 million. Sucher says numbers like that suggest cost-cutting may have gone too far.

If decentralization is the root problem, that indicates a lack of oversight on the part of senior management' an error of omission, in other words. If ruthless pursuit of savings to increase profit is the culprit, that would suggest an error of commission. It doesn't really matter to Diana Zuckerman, president of the National Research Center for Women & Families, a Washington-based nonprofit that advocates for medical-safety issues. Her father spent 40 years as

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