Troubles At Johnson & Johnson Infect PPH

by on June 9, 2010 | ETFs Mentioned:

Through almost six months, 2010 has not been kind to many of the world’s largest companies, as a choppy market has given investors plenty of reasons to stay on the sidelines; debt issues threaten to drag down bank profits and a massive oil spill in the Gulf has sliced BP’s shares nearly in half since the spill began almost six weeks ago (weighing on the entire sector in the process). Meanwhile, an often overlooked situation is brewing at pharma giant Johnson & Johnson (JNJ), as the firm was recently forced to recall several children’s pain and cold medicines over manufacturing issues which may have put metal particles into the products. Since hitting its 2010 high of just over $66/share, JNJ has plummeted more than 11.2% to its current share price of roughly $58.6/share, and some believe that the worst could still be ahead for the pharmaceutical giant.

The formal recall, announced on April 30th, involved more than 136 million bottles of medicine, had metallic molecules and more active ingredients than approved. Moreover, the FDA found bacteria in some raw materials as well. This issue is likely to be dealt with easily by the gigantic firm but it could have long-term repercussions in terms of JNJ’s brand name power which is likely to suffer greatly from the incident. In addition to outrage from the public, many government officials are furious at the company for allegedly hiring a contractor to pose as consumers to buy the medicines in question rather than issue a formal recall. The FDA is now looking into criminal penalties against JNJ with Joshua Sharfstein, the FDA’s principal deputy commissioner, telling lawmakers at a hearing that J&J’s McNeil Consumer Healthcare unit had a “pattern of noncompliance” and that regulators were considering “seizure, injunction or criminal penalties” in order to punish the firm. More recently, the House Committee on Oversight and Government Reform said that J&J had not met its 4 p.m. deadline for handing over the recall related documents  and that the committee is mulling its next steps in order to get JNJ to hand over the documents including subpoenaing them.

These issues add to what has already been a pretty interesting year for most health care ETFs given the passage of the health care reform bill as well as concerns over a possible recession in Europe which may temper sales growth. While these issues have negatively impacted most biotech and health care ETFs, JNJ issues has been especially brutal for the Merrill Lynch Pharmaseuctical HOLDR (PPH) which allocates 25% of its assets to JNJ and is down 11% thus far in 2010. In fact, of all the ETFs in the Health & Biotechnology ETFdb Category with at least $20 million in assets, PPH is the second worst performer year to date, only beating the iShares S&P Global Healthcare Index Fund (IXJ). That ETF, in addition to having an 8.7% allocation to JNJ, has 31.6% of its portfolio in European firms which have been among the hardest hit by the sovereign debt crisis. Should any criminal penalties or large fines come out of this case look for JNJ and by extension, PPH to be especially hard hit.

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Disclosure: No positions at time of writing.