While $572 million is rarely viewed as a small figure, in terms of the penalty that was possible in the state of Oklahoma's opioid case against Johnson & Johnson (JNJ) it could have been much worse.
Shares of the New Jersey-based pharmaceutical giant rose around 2% following the ruling by Oklahoma District Judge Thad Balkman that hit Johnson & Johnson with a hefty penalty for its role in the opioid crisis in the state.
"The opioid crisis is an eminent and menace to Oklahomans," Balkman said in a scathing decision. "The defendants caused an opioid crisis that is evidenced by increased rates of addiction, overdose deaths and neonatal abstinence syndrome in Oklahoma."
From the J&J #opioid opinion. $JNJ rebranded addiction as "pseudoaddiction" and recommended treating this problem with ever more pills. pic.twitter.com/qO2dg8dE6l— Tom Hals (@tomhals) August 26, 2019
Balkman called J&J a "nuisance" to the public that aggressively marketed highly addictive substances and said its actions must be remedied by financial remuneration to the state, calling for a final total fine of $572 million.
However, as the state was originally seeking $17 billion from J&J, the amount of Balkman's fine should be encouraging to the company ahead of any appeal to reduce the penalty. Given the company's healthy cash position, the ruling is not crippling. J&J currently holds more than $15 billion in cash and cash equivalents and maintains a AAA credit rating.
"Even though the ruling went against the company, the stock is telling a different story in after-hours trading," Jim Cramer's Action Alerts PLUS team commented. "Shares are trading higher because that $572 million fine is well below the expectations many investors and analysts had into the announcement...as shareholders we are pleasantly surprised to see the sum this low." J&J is a holding of Cramer's Action Alerts PLUS charitable trust.
Indeed, Morgan Stanley noted that the consensus expectation ahead of the decision was a fine in the range of $1.5 billion to $2 billion, adding to downside pressure on the stock in recent weeks.
Morgan Stanley's pharmaceutical analyst expected that not only Johnson & Johnson but also Teva Pharmaceutical Industries (TEVA) , Mallinckrodt (MNK) and Endo Pharmaceuticals (ENDP) to trade higher on the relatively dovish decision and prospects of an appeal. IN pre-market hours, that forecast has proven true.
Despite what is considered a relatively minor fine, the company has stated its intention to appeal the decision vigorously.
"Janssen did not cause the opioid crisis in Oklahoma, and neither the facts nor the law support this outcome," Johnson & Johnson general counsel Michael Ullmann said. "We recognize the opioid crisis is a tremendously complex public health issue and we have deep sympathy for everyone affected. We are working with partners to find ways to help those in need."
Ullmann added that the U.S. Food and Drug Administration's (FDA) approval of each of its opiate drugs and strong regulations on labeling should protect the company from harsh penalties in the future and he remains confident in J&J's chances on an appeal.
"This judgment is a misapplication of public nuisance law that has already been rejected by judges in other states," Ullmann said. "The unprecedented award for the State's 'abatement plan' has sweeping ramifications for many industries and bears no relation to the Company's medicines or conduct."
Bigger Fires to Put Out
Still, J&J investors are not out of the woods yet.
"With over 2,000 similar lawsuits outstanding against the company, we expect this issue could take years to resolve," Stifel analyst Rick Wise said. "The challenge for the stock remains occasionally uncomfortable headlines as cases/appeals are won or lost."
Most prominent in the next few years will be the ongoing appeal of the Oklahoma decision and the coming federal case in Ohio set for October.
"Looking forward, an appeal process could extend into 2021; should it proceed to the U.S. Supreme Court, we could be looking at an additional 1-2 years," Jefferies analyst Joanne Wuensch said. "Next, J&J is part of a Federal MDL (Multi-District Litigation) that bundles opioid cases for 20+ companies, expected to begin on October 21."
The multidistrict case set to take place in Ohio will bring together thousands of suits into one landmark case involving numerous alleged statute violations, including RICO laws, and could set a strong precedent for further penalties. The case will be held in federal court and is likely to serve as a better bellwether for coming opioid cases the drug industry faces.
The Ohio trial has the added wrinkle of being a jury trial, which are generally less friendly to defendants, especially if the perception that JNJ got off easy in Oklahoma persists.
Johnson & Johnson has shown a preference to fight these cases in court given its belief that it is not responsible for the ills of the opioid crisis, but noted in a press release that it would still consider a settlement, as has been the hope of plaintiffs in that case.
With a great degree of uncertainty surrounding any appeal in Oklahoma and the larger coming case in Ohio as well as concerns about ongoing talc litigation facing J&J, analysts warned not to get carried away in thinking that the bad news has been shaken out.
"We caution against extrapolating too far in either the positive or negative direction," Morgan Stanley analyst David Lewis said. "The eventual outcome and/or settlement is far from clear given JNJ plans to appeal the Oklahoma decision, the decision is not definitively precedent-setting, and the decision cannot be used to imply the outcomes of other states or Municipalities."
Lewis said he expects the total fine exposure could reach as high as $16 billion, which would put an end to the initial positive reaction to the latest decision.