Analysis: New factory lapses complicate J&J’s struggle

By Ransdell Pierson

NEW YORK (BestGrowthStock) – Lapses at a third Johnson & Johnson (JNJ.N: ) factory making over-the-counter drugs will complicate and perhaps prolong the company’s struggle to cure quality control problems that have led to repeated product recalls in the past year.

The diversified healthcare company said on Monday it had been cited by the U.S. Food and Drug Administration for problems at a plant in Lancaster, Pennsylvania, where it makes nonprescription drugs as part of a joint venture with Merck & Co (MRK.N: ).

J&J said it had received a “Form 483” report of problems found by the U.S. Food and Drug Administration during a recent inspection of the facility. The plant is jointly owned by J&J and Merck, and makes nonprescription drugs derived primarily from Merck, including heartburn medicines Pepcid and Mylanta.

“We know adulterated products have been seen in other J&J plants, but we don’t have any clue what they found in the Lancaster plant,” said Jan Wald, an analyst with Noble Financial Capital Markets.

With inadequate quality safeguards now seen at all three of J&J’s McNeil Consumer Healthcare factories, the FDA could be tempted to probe conditions within the company’s more lucrative prescription drug operations, Wald cautioned.

“The fact that it’s occurring in more than one McNeil plant suggests there’s an endemic problem to some degree,” he said. “You begin to wonder, ‘Does it extend beyond that particular business?'”

J&J last week said it had given the FDA an “action plan” to bring the McNeil plants back into compliance. It promised a costly revamping of another factory in Fort Washington, Pennsylvania, that was shut on April 30 — the same day J&J recalled 40 children’s medicines made at the factory, including many formulations of Tylenol.

J&J said other plants will take up the slack as the closed facility is fitted with new equipment, but reaffirmed the products that had been made there are unlikely to become available before the end of the year.

Even if the FDA does not widen its focus to J&J plants that make prescription drugs, the company itself is likely scrutinizing those operations.

“I’m sure J&J is looking systematically at its network of all manufacturing, from consumer and other divisions, at everything, to make sure this kind of thing is not repeated,” said Mayank Gandhi, an analyst with Cowen and Co.

“J&J will do whatever it takes to satisfy the FDA,” he said. “Whether other plants get tagged and it has to mitigate (their) specific issues, we don’t know.”

For now, at least, Gandhi said investors should be relieved that the quality control issues have been confined to consumer brands. “If it spills over into pharma, that’s a bigger problem.”

Piper Jaffray analyst Matt Miksic said he is hoping J&J on Tuesday will provide details about the problems at the Lancaster plant, as it reports second-quarter company earnings.

“We don’t have an awful lot of detail on what happened at Lancaster. But I wouldn’t interpret this to mean that this is ballooning out of control” he said, referring to McNeil’s overall efforts to restore quality safeguards and favor with the FDA.

Miksic said the FDA issues “Form 483” citations to most plants that it inspects and that many of them are for minor infractions. “The FDA will often find something you need to tune up.”

But greater FDA scrutiny, reaching into J&J’s array of prescription drugs, is a risk, he said.

“I don’t think anybody knows whether this blows up into a bigger issue, or whether we just have to work down the current issues.”

Miksic said J&J has been wise in not giving a fixed timetable for curing the problems with its consumer medicines.

“The FDA has historically responded in a way that appears to say, ‘You may think you’re almost done, but you’ll be done when we say you’re done.’ ”

The Form 483 citations for the Lancaster plant follow four major J&J recalls, and a number of smaller related recalls, during the past year of Tylenol and other consumer brands. The FDA cited product contaminants, package odors, factory grime and other shortcomings.

Gabelli and Co analyst Jeff Jonas said such citations are normally fairly routine. “But given J&J’s recent history, they’re a little more interesting.”

For now, Jonas said J&J appears intent on satisfying all FDA concerns. “They’re taking the right steps and will take their time to do it properly.

“I have confidence they will do it, but obviously this has snowballed a lot further than it should have.”

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(Reporting by Ransdell Pierson)

Analysis: New factory lapses complicate J&J’s struggle