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The Landmines Hidden in J&J's Consent Decree With the FDA

At first glance, the consent decree the FDA obtained against Johnson & Johnson (JNJ) ought to be good news: the company can finally say it is reaching the beginning of the end of its Tylenol recall woes (there have been 19 recalls of various products so far). But the agreement -- which requires J&J to meet strict standards at its McNeil Consumer Healthcare unit -- contains some issues that may hurt the company down the road:

  1. The criminal investigation isn't over: The decree -- which gives the FDA power to monitor J&J's business until it feels satisfied it is meeting federal standards -- does not head off of the probe by the U.S. Attorney's Office in Philadelphia, which is holding grand jury hearings. In addition, according to page 70 of J&J's annual report, "the government" has served the company with a civil investigative demand looking into whether the McNeil violated the False Claims Act. No details were given, but that's a new level of liability for the company in addition to its existing ones directly related to failures at its Tylenol plants. Even J&J admits that other shoes may drop. It alluded to them darkly in its statement on the decree: "There are other outstanding legal matters involving Johnson & Johnson companies that have been discussed in past public filings and covered in the media."
  2. J&J no longer expects the Fort Washington, Pa., Tylenol plant to reopen this year: J&J has consistently underestimated the time it will take the get back up to full, compliant capacity. In July 2010, J&J said it expected to see the facility operational in the "middle of next year." By October CEO William Weldon admitted he did not know when the factory would reopen. J&J's losses on Tylenol, Benadryl and the other brands made at Fort Washington are running at $900 million a year.
  3. Management issues at McNeil still exist: and the way the decree is arranged suggests that C-level executives have avoided being held accountable. McNeil president Peter Luther is still in charge of the unit even though all its problems occurred on his watch. The FDA even accused McNeil in January 2010 of hiding information from its inspectors. It was Luther that urged the secret "phantom" recall of Motrin -- in which mystery shoppers cleared the shelves of the drug without alerting consumers anything was wrong. Instead, the FDA decree names only vp of quality Veronica Cruz and vp operations/OTC products Hakan Erdemir as "defendants," not Luther and not Weldon. Cruz and Erdemir were brought aboard in February 2010. Yet McNeil was slammed by the FDA in inspection reports in October and December of that year, and in a March 2010 inspection report. The FDA said McNeil -- under Cruz and Erdemir's control at the time -- had a "... failure to thoroughly investigate any unexplained discrepancy of the failure to a batch or any of its components to meet any of its specifications, whether or not the batch has already been distributed, ..."
  4. It's not just Fort Washington: The decree extends to two other factories making Tylenol and other over-the-counter medicines, in Lancaster, Pennsylvania; and Las Piedras, Puerto Rico. FDA inspectors will be all over those facilities for months to come, slowing the pace of McNeil's recovery.
Given the experts' historically poor record of predicting when McNeil will get back to normal, how likely is it that this episode will be in J&J's rear view mirror in 2012?

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Image by Flickr user WXRN, CC.
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