Johnson & Johnson's Quality Catastrophe - Business Week

Johnson & Johnson's Quality Catastrophe - BusinessWeek
http://www.businessweek.com/print/magazine/content/11_15/b42230645...
Get our new FREE iPad app now
COVER STORY March 31, 2011, 5:00PM EST
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 durableand 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 startedmuscle 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 implanta 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
1 of 9
6/21/2011 11:47 AM
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 recallthree to four times that normnow 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 othersin Lancaster, Pa., and Puerto Ricowill 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.
2 of 9
6/21/2011 11:47 AM
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 dominateRutgers 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 rooma generic space but for the sword in a display case on the wall, a replica of the one used by Scottish nationalist William "Braveheart" Wallacethe 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."
3 of 9
6/21/2011 11:47 AM
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 decentralizationa 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.
4 of 9
6/21/2011 11:47 AM
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 dismissedoutcomes 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
5 of 9
6/21/2011 11:47 AM
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 alcoholismafflictions for which it did not have FDA approvaland 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
6 of 9
6/21/2011 11:47 AM
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 schoolmany 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
7 of 9
6/21/2011 11:47 AM
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 dollarsmuch of it in the form of interest-free loansand 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.
8 of 9
6/21/2011 11:47 AM
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 Tylenolpoisoning 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."
With John Blanton, Catherine Larkin, Jef Feeley, and Margaret Cronin Fisk. Voreacos, Nussbaum, and Farrell are reporters for Bloomberg News.
9 of 9
6/21/2011 11:47 AM

Johnson & Johnson's Quality Catastrophe - Business Week

Caricato da

Informazioni sul documento

Descrizione originale:

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Johnson & Johnson's Quality Catastrophe - Business Week

Caricato da

Copyright:

Formati disponibili

Johnson & Johnson's Quality Catastrophe - BusinessWeek

Get our new FREE iPad app now

COVER STORY March 31, 2011, 5:00PM EST