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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
By David Voreacos, Alex Nussbaum and Greg Farrell
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 a chemist and quality-control manager for J&J's Ortho
Diagnostics division, amassing, she says, a reverence for his employer's integrity as well
as a portfolio of company stock that he passed to his daughter. "The CEO of Johnson &
Johnson has to be accountable for what's going on at all these little companies," says
Zuckerman. "The buck's got to stop at the CEO at some point." Sucher characterizes what
has happened at J&J as a failure of management to live up to its own pledge. "The spate
of recalls, compliance and quality failures, and the company's muscular profit margins,"
she says, "suggest that the investor may now be the primary focus of management."
Talk like that naturally triggers a reaction from CEO Weldon. "I can tell you factually
that we will never put a dollar ahead of a patient," he says, jabbing his finger in the air,
his voice losing its typically measured tone. Cost-cutting? "I don't think I would say that
cost-cutting was an issue," he says. Lack of oversight? "If it was a weakness of
decentralization, it would be a systemic problem across J&J," he says, underscoring his
fundamental assertion that the recall problem at J&J has been restricted to McNeil. He
swats away any suggestion he might retire and let someone else lead the fight to restore
J&J's name. "I don't have a timetable," he says in response to a question about
succession. "There's an issue that needs to be dealt with, and I'm going to deal with it."
Deathbypatch.com In 2002, the year Weldon became chief executive, J&J's Ortho
Evra birth-control patch hit the market, pitched heavily toward younger women as a
convenient alternative to the pill. Time magazine lauded it as one of the "coolest
inventions" of the year. By 2005, the first lawsuits were filed against J&J alleging that the
patch caused blood clots that could lead to heart attack or stroke, and that J&J misled
doctors and regulators for years by withholding data on those risks.
The survivors of more than 40 women who died after using the patch filed wrongful
death lawsuits, according to plaintiffs' attorney Wendy Fleishman of San Francisco-based
Lieff Cabraser Heimann & Bernstein. One victim was Ashley Lewis, a 17-year-old high-
school junior from St. Louis who died in 2003, leaving behind a 1-year-old son. Alycia
Brown, a 14-year-old girl from La Crosse, Wisc., died when she developed two blood
clots in her lungs after using the patch for several weeks. Her family received a $1.25
million settlement from J&J, which did not accept liability, court records show. Of the
4,000 lawsuits the Ortho Evra patch has spawned, most have either been settled under
confidential terms without J&J's admitting liability or dismissed—outcomes that have
helped to keep the story mostly out of the news.
For pharmaceutical companies, product-related litigation is a fact of life, and there will
always be factors beyond their control. In J&J's case, though, the Ortho Evra lawsuits
ended up publicizing alleged behavior that didn't comport with the company's image.
Plaintiffs' lawyers claimed in court papers that when seeking FDA approval for the patch
in 2001, J&J altered and withheld clinical-trial data showing that the patch delivered
higher levels of estrogen than oral contraceptives. A J&J spokeswoman at the time denied
the claims, saying plaintiffs' lawyers selected a few documents to create a misleading
impression. A judge never ruled on the matter. Once the first lawsuits were filed, J&J
bought dozens of Internet domain names, such as "orthoevrakills.com" and
"deathbypatch.com," according to internal J&J documents submitted in court. Plaintiffs'
lawyers said the aim was to prevent them and consumer groups from setting up
informational websites for patch users. A J&J spokesman said at the time that the move
was "standard and accepted business practice for companies that are trying ... to
safeguard the defendant's reputation."
In response to FDA warnings, J&J has strengthened the Ortho Evra label several times
since 2005 to warn users of its risks. The patch remains on the market, and J&J is still
defending against patient lawsuits over the product.
The first signs of trouble at J&J's McNeil unit emerged in September 2009, when the
company recalled about 8 million bottles of children's and infant's Tylenol for what the
FDA said was possible contamination of ingredients. Two months later the company
recalled 6.3 million bottles of Tylenol Arthritis Pain caplets after consumers complained
about a moldy odor and side-effects, including nausea, vomiting, and diarrhea. The smell
was traced to 2,4,6-tribromoanisole, a byproduct of a pesticide and flame retardant used
to treat wooden storage pallets at McNeil's plant in Las Piedras, Puerto Rico. While the
chemical's health effects hadn't been well-studied, consumers' reactions so far had been
"temporary and nonserious," McNeil said in a Dec. 18, 2009, statement.
In January 2010, this nonserious recall expanded to include millions of bottles of skunked
Rolaids, Motrin, Benadryl, and St. Joseph Aspirin, and the FDA stepped up its criticism.
J&J had known of the odors for more than a year and only began pulling products at
regulators' urging, Karen Hirshfield, acting chief of the FDA's Recalls and Shortages
Branch, told reporters.
McNeil learned of the odors as early as April 2008, yet waited 17 months to officially
notify the FDA, the agency said in a Jan. 15, 2010, warning letter to the unit. McNeil's
initial 2008 probe was "unjustifiably delayed and terminated prematurely," the letter said.
While company tests pointed to the chemical, McNeil didn't tell the FDA until after an
inspection began and the agency requested the information. By February 2010, the FDA
called "an extraordinary meeting" with senior J&J managers, Joshua Sharfstein, then the
agency's principal deputy commissioner, told a U.S. House committee during a May 27
hearing. The agency drove home its "concerns about whether McNeil's corporate culture
supported a robust quality system," he said. Sharfstein later warned J&J that it could face
criminal charges over the matter. Weldon chose not to respond when asked about the
delays. Peter Luther, president of the McNeil Consumer Healthcare division beginning in
February 2009, declined to comment. In late March, Luther was reassigned to lead a
different J&J division. His replacement had not been officially announced at press time.
Amid the tumult over consumer products, J&J agreed in April 2010 to pay more than $81
million to resolve federal criminal and civil claims over illegal promotion of the epilepsy
drug Topamax. In its case, the government accused J&J's Ortho-McNeil Pharmaceutical
of promoting Topamax for treatment of bipolar disorder and alcoholism—afflictions for
which it did not have FDA approval—and said the company hired physicians through its
"Doctor for a Day" program to join company reps on sales calls and to speak to
colleagues about off-label uses and doses.
The next McNeil recall came on Apr. 30, 2010, covering 40 types of Tylenol, Motrin, and
allergy medicines Zyrtec and Benadryl made at the company's since-closed factory in
Fort Washington. The drugs contained incorrect amounts of active or inactive
ingredients, or were tainted with flecks of metal, McNeil said. Laying off 300 workers,
J&J closed the plant indefinitely.
On May 4 the FDA released an inspection report saying that in the year prior to the
shutdown, the company had failed to take action despite 46 complaints of foreign
materials and black specks in the products. Inspectors had found raw materials
contaminated with bacteria at Fort Washington, a "large exposed hole" in a laboratory
ceiling, and equipment filled with dust and debris. At the May 27 congressional hearing
on McNeil's problems, U.S. Representative Darrell Issa (R-Calif.) called the lapses "a
moral outrage" allowed by "a culture of neglect and irresponsibility to taint the medicines
that parents and physicians trust to help children get well."
That hearing also brought revelations of the now-notorious August 2008 "phantom
recall" of Motrin after reports that the painkiller wasn't dissolving properly. In an internal
memo obtained by congressional investigators, a McNeil subcontractor advised
employees to "quickly enter each store, find ALL of the Motrin product described, make
the purchase transaction, secure the receipt, and leave." It further instructed: "You should
simply act like a regular customer while making these purchases. THERE MUST BE NO
MENTION OF THIS BEING A RECALL OF THE PRODUCT!"
J&J responded to the mounting outcry over the recalls in August by appointing a
corporate quality-control czar and announcing a companywide set of compliance
standards. J&J would spend $100 million to build "state-of-the-art" equipment and
facilities across its McNeil unit, Weldon said in another Capitol Hill hearing on Sept. 30.
The CEO defended the 2008 Motrin recall, saying the FDA was aware of the move. The
FDA's Sharfstein told Congress that J&J never explained the scope of the effort and had
couched it as an attempt to assess how much Motrin remained on the market. J&J "did
not disclose the phantom part of the phantom recall," Sharfstein testified, and only issued
a recall in July 2009 at the agency's demand.
None of it stopped the product withdrawals. On Aug. 19, 2010, J&J pulled millions of 1-
Day Acuvue TruEye contact lenses in Europe and Asia after customers complained of
pain and redness linked to problems with a factory rinsing process. A week later came
DePuy's hip recall. Skipping FDA Approvals Fifty-three-year-old Roger Poulter
lives with his wife, Loretta, 55, on 150 acres of farmland in Medford, Wisc. He loves to
hunt and fish when he isn't teaching agriculture to high-school students. In 2006,
worsening arthritis prompted him to have his right hip replaced with a ceramic-on-
polyethylene device made by DePuy rival Smith & Nephew of London. A year later, his
left hip was replaced with a DePuy ASR XL. Poulter didn't recover from the DuPuy
surgery, and by July 2008, an infection around the implant had gotten so bad that doctors
removed the device in one of five surgeries he underwent within 11 days. Poulter lay
immobilized for two months, without a hip in one leg, until the infection cleared and
doctors implanted a different DePuy hip. He missed about 90 days of school—many
times more than in all of his previous 31 years of teaching, he says.
Loretta Poulter, who runs the family sporting-goods business, had her own ASR XL
implanted in March 2008, before it was clear that her husband's ASR had failed. One
night a few weeks later, she says, she woke in pain with a dislocated hip. Her husband
drove her through a snowstorm to a hospital, where doctors a few days later removed the
prosthetic hip. She had to wait four more days, as her infection healed, before doctors put
in a new ASR. She says the pain in her hip is constant, and "I live every day with the
thought that my hip will dislocate again like the other one did."
With their failed his-and-her ASR hips, the Poulters say it's hard to enjoy their favorite
pastime: hunting for bear and white-tail deer. The pain both of them are now living with
makes it difficult to cut wood for heating their house and to prune their apple, plum, pear,
and cherry trees. "It's disappointing that the company would sell this product without
being absolutely positive that it was safe," Loretta says. "How could they do that?"
Hips and knees may sound like an obscure niche next to the marquee brand names
coming out of McNeil, but last year DePuy's $5.59 billion in sales accounted for 9.1
percent of J&J's total revenue; over-the-counter pharmaceuticals and nutritional products
trailed with 7.4 percent. In hips alone, Warsaw (Ind.)-based DePuy was the market leader
last year, with $1.33 billion, or 25.1 percent, of the $5.28 billion global hip market,
according to a Feb. 28 report from investment advisory firm BMO Capital Markets.
Metal-on-metal hips have been around for decades but fell out of favor until new models
emerged in the late '90s, billed as the answer for patients who didn't want their implants
to cramp their style. Smith & Nephew got the ball rolling with its Birmingham Hip
Replacement, or BHR, the year before J&J bought DePuy. The J&J unit already had a
couple of metal-on-metal devices on the market when in 2003 it started selling the ASR
Hip Resurfacing System outside the U.S. (In hip resurfacing, a newer procedure more
popular abroad than in the U.S., the femur is left intact, with a metal cap fitted onto the
head.)
DePuy didn't seek FDA approval for its ASR resurfacing system until July 2007. Instead
it submitted the ASR XL Acetabular Hip Replacement System, already approved for sale
outside the U.S., for the agency's O.K. That came easily because of a grandfathering
process requiring no clinical trials so long as DePuy, per FDA guidelines, was able to
show that the ASR XL was "substantially similar" to the company's other metal-on-metal
devices. The ASR XL hit the U.S. market in 2005.
Within a year, the Australian Orthopaedic Assn.'s National Joint Replacement Registry
was saying in its 2006 annual report that doctors replaced the ASR resurfacing device at a
higher rate than they did Smith & Nephew's BHR. The FDA received 87 reports of
adverse events for DePuy ASRs in 2007, rising to 239 in 2008 and then to 426 in 2009.
By 2007 the Australian registry said the ASR posed twice the risk of revisions as other
resurfacing devices.
As the data on rising failures accumulated, DePuy continued with the hard sell. Just how
hard became clear after Chris Christie, then the U.S. attorney in New Jersey (and now the
state's Republican governor), reached a settlement in 2007 of criminal charges against the
company and three of its rivals, accusing them of paying kickbacks to doctors who used
their hips and knees. DePuy ultimately paid $84.7 million out of a total $311 million
settlement, with Smith & Nephew, Biomet, and Zimmer Holdings (ZMH) covering the
balance. Among the doctors named on the DePuy website are two orthopedic surgeons
who helped design the ASR, Thomas Schmalzried and Thomas Vail. DePuy paid
Schmalzried more than $3 million "in royalty income for intellectual property and/or
product development contribution" in 2009 and 2010, while it paid $552,000 to Vail for
similar services rendered, according to the DePuy website.
On "numerous occasions between 2005 and 2010," Schmalzried and Vail joined DePuy
representatives at meetings where doctors confronted them with complaints that said the
ASR "failed frequently, generated excessive and dangerous levels of metal debris, and
had disastrous complications," according to a complaint by Scott Broccoli, a 36-year-old
San Francisco restaurateur and ASR hip recipient. "Dr. Vail, Dr. Schmalzried and the
DePuy representatives assured the orthopedic surgeons during these meetings that the
ASR System was safe, was the best product on the market, had an excellent track record
and a low and acceptable failure rate," according to the complaint. Schmalzried and Vail
are named as defendants in patient lawsuits against DePuy. (Schmalzried did not return
phone calls seeking comment. Vail, through a spokeswoman, declined to comment.)
Plaintiff Broccoli had both hips replaced with DePuy ASRs in 2007, but increasing pain
prompted a revision surgery last December. He has since had two dislocations of that hip,
requiring emergency hospital visits and more surgery. The name Johnson & Johnson used
to give him a "warm and fuzzy feeling," he says. Now, though, "I can't imagine that a
company with their reputation and history would knowingly put this product on the
market." Weldon's Legacy So far, the dismay of hip patients such as Broccoli, the
Poulters, and Perkins has yet to spread among investors, although they have turned
cautious. The blue chip's shares have been the third-worst performer in the Dow Jones
industrial average since March 2009, and have fallen 8.6 percent over the past 12 months,
compared with a 1.8 percent rise in the Standard & Poor's 500 Health Care Index and a
12 percent gain for the broader S&P 500. The company has said that product recalls
reduced sales by $900 million last year and will likely shave 2011 earnings by 6 cents a
share.
Yet the news isn't getting better. In December, a jury in federal court in Minneapolis
decided J&J must pay $1.1 million in punitive damages to an 82-year-old man who
claimed it failed to properly warn of the risks of tendon damage linked to its antibiotic
Levaquin. The jury also awarded compensatory damages of $700,000. The trial was the
first of more than 2,600 claims in U.S. courts over Levaquin.
Then, on Feb. 25, a federal judge in Boston ruled that J&J must defend against a lawsuit
brought by the Justice Dept. claiming that the company paid kickbacks to Omnicare
(OCR), the largest U.S. pharmacy for nursing-home patients. According to the suit, J&J
promoted Risperdal, a drug used to treat schizophrenia and bipolar disorder, for
unapproved uses to elderly dementia patients, for whom the drug has been shown to carry
a heightened risk of death. The government says J&J paid Omnicare millions of dollars—
much of it in the form of interest-free loans—and covered the cost of junkets by
Omnicare managers to a Florida resort. J&J denies the U.S. claims, saying the payments
were legally permissible rebates. Even so, Omnicare agreed in 2009 to pay $98 million to
settle civil claims by the U.S. and several states that it took J&J's kickbacks. In Louisiana,
meanwhile, J&J is appealing a verdict, by a jury last October, requiring J&J to pay
$257.7 million to that state for misleading claims about Risperdal's safety. J&J had
increased its product liability reserves for the ASR hip, Risperdal, and Levaquin cases to
$570 million.
At J&J's headquarters, Weldon insists things are back on track. "We had issues at
McNeil, and McNeil identified that, and they shut down the McNeil facility to remediate
that," he says. He casts the Mar. 10 consent decree to have FDA oversight at its three
McNeil plants as helpful. The FDA's past communications on McNeil's operations
suggest more frustration than cooperation, but Weldon says: "The relationship with the
FDA is a very positive relationship today."
"When you look at it across the spectrum of Johnson & Johnson, at the end of last year
we had 120 manufacturing facilities," he says. "We had three of the facilities that
basically overshadowed everything else that took place. The important question is, when
will patients have their products?" That, he says, should happen by the end of this year. "I
hope that when this is all settled and we have resolved the issues, that J&J will be held in
as high esteem as it was when Jim [Burke] handled the Tylenol situation."
Perhaps it will be. At Harvard Business School, however, faculty "became
uncomfortable" teaching the popular Tylenol-poisoning case study amid all the J&J
recalls, Sucher says. Last month it added another study to the curriculum: "On Weldon's
Watch: Recalls at Johnson & Johnson From 2009 to 2010."
2.docx
2-3 pages about the case
The report must contain:
a.) Central Problem: Define clearly and concisely the basic problem in the situation.
b.) Analysis of Situation: SWOT analysis for this company related to the problem of interest.
c.) Identify Alternative Strategies: Based on the analysis in b., identify possible alternative strategies to cope with the problem defined in a. Involve the class in evaluating the pros and cons.
