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J&J Faces Longer Path to Resolving Talc Lawsuits After Appeals Court Defeat

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Johnson & Johnson

JNJ 0.88%

‘s loss in a federal appeals court over baby-powder litigation could force the health-products company to defend thousands of lawsuits case by case, just as it navigates the biggest restructuring in its 137-year history.

The decision by the Third U.S. Circuit Court of Appeals rejecting J&J’s efforts to use bankruptcy proceedings to handle talc-related lawsuits means the company won’t be able to resolve the allegations as soon as it could have and in a single court, according to legal experts and analysts. 

It could also deter other companies from trying the same legal tactic, the legal experts said.

For J&J, the ruling could mean it will have to contest the lawsuits in state and federal courts, and the litigation will probably take years longer as cases would revert to standard civil proceedings in each of the courts, the legal experts and analysts said. 

It could also raise J&J’s talc-settlement costs to as much as $10 billion, according to

Wells Fargo

analyst Larry Biegelsen.

“For J&J, the cost of this litigation just went up,” said Nora Freeman Engstrom, a law professor at Stanford Law School who studies personal-injury litigation. “J&J clearly wanted to cap its litigation exposure. The Third Circuit has thrown a wrench into its plans.”

Neal Katyal,

outside counsel for the J&J subsidiary, LTL, said the appellate ruling turned on the view that LTL didn’t meet a technical requirement of facing sufficient financial distress.

“But the current situation, with a significant volume of current and future claims, and a plaintiff bar business model primed to generate more, is exactly the sort of ongoing and future financial distress that courts have recognized as serving a valid bankruptcy purpose,” he said. “The same conclusion should have been reached here.”

J&J plans to seek a rehearing of its appeal before the entire Third Circuit court, he said.

J&J faces some 40,000 lawsuits alleging the company’s talc-containing powders including Johnson’s Baby Powder caused cancer. 

The New Brunswick, N.J.-based company had wanted to use the bankruptcy proceedings for a subsidiary to handle the litigation, but the appeals court ruled that the unit couldn’t demonstrate the necessary financial distress because it had access to significant funding from J&J.

J&J, which says its talc powder is safe and doesn’t cause cancer, plans to challenge the appellate court ruling. It wanted to handle the cases in bankruptcy, it said, to efficiently resolve the litigation “for the benefit of all parties, including current and future claimants.” 

Aside from helping the company resolve the lawsuits quickly and in one place, use of bankruptcy would have helped J&J limit its liability for future claims. Future claimants would have been able to draw only on the money set aside as part of the bankruptcy under a court-approved chapter 11 plan.

The ruling could deter other companies from turning to the particular bankruptcy strategy that J&J deployed to handle wide-ranging and costly litigation, said Samir Parikh, professor at Lewis & Clark Law School, who focuses on bankruptcy and mass tort restructuring. He wrote a brief for the appeals court supporting J&J’s position.

Companies had found creative ways to access bankruptcy on their own terms, Mr. Parikh said, allowing parents to reap all the benefits while shifting the liability to a unit. The appeals court ruling, however, suggests that judges are pushing back.

“This case is significant because the question is whether profitable companies can opt out of the justice system by filing for bankruptcy,” said Melissa Jacoby, a bankruptcy-law professor at the University of North Carolina at Chapel Hill. “The court said bankruptcy is not available, just because a company prefers to be there. Financial distress is the prerequisite.” 

Though J&J’s talc costs may be higher outside of bankruptcy, analysts still expect them to be manageable because of J&J’s vast financial resources. The company had about $24 billion in cash and marketable securities at the end of 2022, and generated free cash flow of about $17 billion for the year. 

Mr. Biegelsen of Wells Fargo noted that J&J may make talc settlement payments over time.

J&J, the biggest health-products maker by market capitalization, has been trying to resolve the litigation as it remakes itself. Later this year, it plans to separate its consumer-health unit, which sells Johnson’s Baby Powder and Tylenol, into a stand-alone company to be called Kenvue. 

J&J will retain the talc-related liabilities for products sold in the U.S. and Canada. Kenvue will be responsible for liability arising from products sold outside the U.S. and Canada, according to a Kenvue securities filing. 

That divestiture will leave the remaining J&J with two main units: pharmaceuticals and medical devices. J&J executives have been seeking to accelerate sales growth at the device unit, which sells artificial knees, surgical products and contact lenses and has been sluggish. 

J&J’s pharmaceutical division, which sells prescription drugs for cancer and immune disorders, has had strong sales and profit growth in recent years. 

Yet it is facing the loss of patent protection this year for its top-selling drug, Stelara, a treatment for psoriasis and gastrointestinal disorders that generates about 10% of the company’s total revenue. 

The loss of exclusivity will clear the way for competing, lower-cost copycat versions of the drug, which J&J expects will begin to reduce sales for its original brand.

J&J is navigating these challenges in the wake of a leadership transition, with

Joaquin Duato

succeeding Alex Gorsky as CEO last year, among other changes to the leadership team. 

Mr. Duato has said he plans to try to accelerate sales growth in the medical-device unit partly through acquisitions like the recent purchase of heart-pump maker Abiomed for about $16.6 billion. 

Mr. Duato has also said he expects the pharmaceutical unit to continue to post revenue growth, as sales growth from other drugs, such as the Darzalex cancer treatment, help offset the expected sales erosion for Stelara.

J&J this year will end global sales of talc-containing baby powder and instead is selling cornstarch-based powder. 

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



Johnson & Johnson

JNJ 0.88%

‘s loss in a federal appeals court over baby-powder litigation could force the health-products company to defend thousands of lawsuits case by case, just as it navigates the biggest restructuring in its 137-year history.

The decision by the Third U.S. Circuit Court of Appeals rejecting J&J’s efforts to use bankruptcy proceedings to handle talc-related lawsuits means the company won’t be able to resolve the allegations as soon as it could have and in a single court, according to legal experts and analysts. 

It could also deter other companies from trying the same legal tactic, the legal experts said.

For J&J, the ruling could mean it will have to contest the lawsuits in state and federal courts, and the litigation will probably take years longer as cases would revert to standard civil proceedings in each of the courts, the legal experts and analysts said. 

It could also raise J&J’s talc-settlement costs to as much as $10 billion, according to

Wells Fargo

analyst Larry Biegelsen.

“For J&J, the cost of this litigation just went up,” said Nora Freeman Engstrom, a law professor at Stanford Law School who studies personal-injury litigation. “J&J clearly wanted to cap its litigation exposure. The Third Circuit has thrown a wrench into its plans.”

Neal Katyal,

outside counsel for the J&J subsidiary, LTL, said the appellate ruling turned on the view that LTL didn’t meet a technical requirement of facing sufficient financial distress.

“But the current situation, with a significant volume of current and future claims, and a plaintiff bar business model primed to generate more, is exactly the sort of ongoing and future financial distress that courts have recognized as serving a valid bankruptcy purpose,” he said. “The same conclusion should have been reached here.”

J&J plans to seek a rehearing of its appeal before the entire Third Circuit court, he said.

J&J faces some 40,000 lawsuits alleging the company’s talc-containing powders including Johnson’s Baby Powder caused cancer. 

The New Brunswick, N.J.-based company had wanted to use the bankruptcy proceedings for a subsidiary to handle the litigation, but the appeals court ruled that the unit couldn’t demonstrate the necessary financial distress because it had access to significant funding from J&J.

J&J, which says its talc powder is safe and doesn’t cause cancer, plans to challenge the appellate court ruling. It wanted to handle the cases in bankruptcy, it said, to efficiently resolve the litigation “for the benefit of all parties, including current and future claimants.” 

Aside from helping the company resolve the lawsuits quickly and in one place, use of bankruptcy would have helped J&J limit its liability for future claims. Future claimants would have been able to draw only on the money set aside as part of the bankruptcy under a court-approved chapter 11 plan.

The ruling could deter other companies from turning to the particular bankruptcy strategy that J&J deployed to handle wide-ranging and costly litigation, said Samir Parikh, professor at Lewis & Clark Law School, who focuses on bankruptcy and mass tort restructuring. He wrote a brief for the appeals court supporting J&J’s position.

Companies had found creative ways to access bankruptcy on their own terms, Mr. Parikh said, allowing parents to reap all the benefits while shifting the liability to a unit. The appeals court ruling, however, suggests that judges are pushing back.

“This case is significant because the question is whether profitable companies can opt out of the justice system by filing for bankruptcy,” said Melissa Jacoby, a bankruptcy-law professor at the University of North Carolina at Chapel Hill. “The court said bankruptcy is not available, just because a company prefers to be there. Financial distress is the prerequisite.” 

Though J&J’s talc costs may be higher outside of bankruptcy, analysts still expect them to be manageable because of J&J’s vast financial resources. The company had about $24 billion in cash and marketable securities at the end of 2022, and generated free cash flow of about $17 billion for the year. 

Mr. Biegelsen of Wells Fargo noted that J&J may make talc settlement payments over time.

J&J, the biggest health-products maker by market capitalization, has been trying to resolve the litigation as it remakes itself. Later this year, it plans to separate its consumer-health unit, which sells Johnson’s Baby Powder and Tylenol, into a stand-alone company to be called Kenvue. 

J&J will retain the talc-related liabilities for products sold in the U.S. and Canada. Kenvue will be responsible for liability arising from products sold outside the U.S. and Canada, according to a Kenvue securities filing. 

That divestiture will leave the remaining J&J with two main units: pharmaceuticals and medical devices. J&J executives have been seeking to accelerate sales growth at the device unit, which sells artificial knees, surgical products and contact lenses and has been sluggish. 

J&J’s pharmaceutical division, which sells prescription drugs for cancer and immune disorders, has had strong sales and profit growth in recent years. 

Yet it is facing the loss of patent protection this year for its top-selling drug, Stelara, a treatment for psoriasis and gastrointestinal disorders that generates about 10% of the company’s total revenue. 

The loss of exclusivity will clear the way for competing, lower-cost copycat versions of the drug, which J&J expects will begin to reduce sales for its original brand.

J&J is navigating these challenges in the wake of a leadership transition, with

Joaquin Duato

succeeding Alex Gorsky as CEO last year, among other changes to the leadership team. 

Mr. Duato has said he plans to try to accelerate sales growth in the medical-device unit partly through acquisitions like the recent purchase of heart-pump maker Abiomed for about $16.6 billion. 

Mr. Duato has also said he expects the pharmaceutical unit to continue to post revenue growth, as sales growth from other drugs, such as the Darzalex cancer treatment, help offset the expected sales erosion for Stelara.

J&J this year will end global sales of talc-containing baby powder and instead is selling cornstarch-based powder. 

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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