J&J struggle with quality

Little red flags jut out from the shelves at a CVS drugstore in suburban Boston, alerting shoppers to shortages of nearly a dozen Johnson & Johnson products. Among them are Motrin, Rolaids, children’s Tylenol liquid and adult Tylenol, Mylanta, Pepcid AC and even some Neutrogena skin care products.

“Looking for Tylenol pain relief products?” asks one of the signs. “Due to manufacturer recalls, Tylenol pain relief products will be periodically out of stock throughout the year at all retailers.”The notices at CVS serve as a stark reproof to Johnson & Johnson, whose brands have for more than a century been synonymous with quality. Some of its products are in short supply at drugstores and supermarkets because the McNeil Consumer Healthcare unit of J&J last year recalled about 288 million items, including about 136 million bottles of liquid Tylenol, Motrin, Zyrtec and Benadryl for infants and children.

Johnson & Johnson has had to recall such a variety of products because of quality-control problems across product lines, in multiple factories and in several units last year. Some of its consumer products, for instance, may have contained bits of metal. Others came in bottles with a mouldy smell. And some products have gone missing from stores with hardly an explanation. All of this has put the company and its manufacturing under the intense scrutiny of lawmakers and officials at the Food and Drug Administration.

“It looks like a plane spinning out of control,” says David Vinjamuri, a former J&J marketing employee who now trains brand managers at his company, ThirdWay Brand Trainers.

While the drugstore signs that helpfully suggest “Try CVS/pharmacy brand” are intended to assist frustrated shoppers in identifying alternatives to missing brand-name products, they also serve as constant reminders of another of J&J’s continuing problems: It must persuade millions of disappointed customers to once again pay a premium for products that may no longer seem to be of any higher quality than the less expensive store brand.

J&J’s troubles with some of its consumer products began in earnest last January, when McNeil recalled millions of pill bottles after some consumers complained that they smelled like mold. By December, when it recalled 13 million packages of Rolaids soft chews that may have been contaminated with metal or wood particles, the company had closed one plant in Fort Washington, Pennsylvania, for an overhaul and had yet to solve the quality problems at another, in Puerto Rico.

The response of J&J’s chief executive, William C. Weldon, has been to allocate more than $100 million to upgrade McNeil’s plants and equipment, appoint new manufacturing executives, hire a third-party consulting firm to improve procedures and systems at McNeil and shore up quality control companywide. In congressional testimony last fall, he promised that when the Pennsylvania plant reopened, it would “represent the state of the art in medicine production.” And he has repeatedly tried to reassure consumers, as he did when he promised that J&J had “no higher concern than providing parents with the highest-quality products for their children.”

Those reassurances, however, have been followed by yet more recalls. What is most perplexing is the seeming inability of executives to solve – and satisfactorily explain – the manufacturing issues that dog the company.

Johnson & Johnson, with about $62 billion in sales in 2009, makes thousands of different kinds of products, including Band-Aids, baby shampoo, cardiac stents and advanced drug treatments for rheumatoid arthritis. It solidified a reputation for product quality with a company credo, dating from 1943, saying

that the company owed its first responsibility to the mothers and fathers, doctors, nurses and patients who use its products.

With such a diversity of products and operating companies, Johnson & Johnson’s overall business has not suffered significantly. But the string of recent recalls at McNeil threatens to weaken the kind of trust that made many people willing to pay more for J&J brands.

J&J’s troubles have not been limited to its over-the-counter products, which could suggest that the company may suffer from even broader problems. Last year, its DePuy medical device unit recalled two kinds of hip implants, affecting tens of thousands of patients worldwide. Its vision care unit recalled millions of soft contact lenses sold abroad.

A shareholder lawsuit filed in December against Johnson & Johnson’s directors, meanwhile, catalogues a long list of “federal and state regulatory investigations, subpoenas and requests for documents, FDA warning letters, news articles and the recall of products accounting for hundreds of millions of dollars of corporate losses.”

Jacobs says the company intends to defend itself in court.

The manufacturing problems over the last year have clearly cost J&J In the third quarter, overall consumer sales in the United States fell 25 percent, to $1.3 billion from $1.7 billion for the same period in 2009, but sales of over-the-counter medicines and nutritional products declined about 40 percent, to $438 million, the company said.

While the company is estimating that the total hit to sales in 2010 from problems at the Pennsylvania plant is likely to be around $600 million, it has begun reintroducing only a few of the products that were once available. Although some in the industry are optimistic that the company can quickly regain its perch, some Wall Street analysts are not convinced. In January, Goldman Sachs lowered its 2011 earnings estimates for the company, partly because of the time it might require to bring the closed plant up to the FDA’s standards.

“We believe recovery could be slower than expected,” Jami Rubin, a Goldman analyst, warned investors, noting that generic alternatives may now be entrenched with consumers.

The variety, magnitude and duration of the manufacturing and quality problems perplex some industry watchers.

“This is really unusual to have this gross systemic failure,” says Donald Riker, the editor of OTC Product News, an industry newsletter on over-the-counter drugs. The reasons for McNeil’s woes remain unclear. Some critics, including former employees, say Johnson & Johnson has lost sight of its credo, while others suggest that the company decentralized its oversight of manufacturing and quality control in error.

Others say it was simply a matter of cost-cutting. The December lawsuit, for example, cited two unnamed former employees who contended that the company failed to address the manufacturing problems at McNeil because it was trying to save money.

Other former employees who are not involved in the lawsuit say that J&J seemed to hesitate in recent years to invest in new manufacturing equipment.

“It takes a lot of money to buy equipment and maintain quality,” says Patrick Bols, who left Johnson & Johnson’s pharmaceutical division in the late 1990s and owns stock in the company.

McNeil declined to comment on what specifically led to its manufacturing troubles. But Jacobs said the company was taking steps to address all the factors that could have contributed.

Even some critics say Johnson & Johnson seems to be taking steps to remedy its problems. “It takes a while,” Bols says, “to get it right again.”