A California jury dropped a bombshell on Johnson & Johnson (JNJ) earlier this week when it awarded $417 million to a 63-year old woman who claimed she suffered ovarian cancer after using JNJ’s talc-based baby powder:

A massive California verdict in a lawsuit alleging Johnson & Johnson’s (JNJ.N) talc-based products cause cancer has opened a new front in the litigation, upending the company’s hopes that the cases were only gaining traction in Missouri, legal experts said.

The $417 million award by California jury to a California resident suggested so-called forum-shopping, in which parties seek to file cases in whichever jurisdictions seem most favorable, may not be the main problem facing J&J as it wrestles with some 4,800 outstanding talc lawsuits.

The award made headlines for its sheer size. Over the past two years J&J had lost four other jury verdict, but the California verdict was larger than the others combined.

The Situation

J&J said it would appeal the verdict. In the past it has also denied links between its talc-based products like Johnson’s Baby Power and Shower to Shower body powder. Research pursuant to a correlation between talc and ovarian cancer is mixed. Talc is composed of magnesium silicate; in the past it has been used for industrial purposes, talc mining, and for cosmetic and hygienic purposes. In its natural state some talc can contain asbestos, but talc-based products used within the home over the past few decades have supposedly been asbestos-free. Concerns over a correlation between talcum powder and cancer have been particularly focused on whether breathing in natural talc fibers at work could expose workers to risk of lung cancer, and whether women who apply talcum powder to the genital areas are exposed to a higher risk of ovarian cancer.

According to IFLScience the European Talc Association felt that US case-control studies suggested only slight differences in risk of ovarian cancer for those who used talc between the legs and those who did not. However, a 2013 analysis from Harvard University did suggest such a link:

But more recent scientific studies continue to confirm a trend that links talc use and epithelial ovarian cancer (the most common type of ovarian cancer). A 2013 analysis led by Harvard University of 8,525 ovarian cancer cases and 9,859 controls concluded that genital talc powder use is associated with a small-to-moderate increase in risk of various sub-types of ovarian cancer. It found that “genital powder use was associated with a similar increased risk of borderline and invasive ovarian cancer overall”. They also noted that, as there are few ovarian cancer risks women can avoid, “avoidance of genital powders may be a possible strategy to reduce ovarian cancer incidence”.

Given [i] that talc in its natural state can contain traces of asbestos and [ii] the findings from the Harvard study, it could potentially be damning for J&J.

Potential Costs For J&J

According to the company’s financial statements, among the lawsuits against J&J it has “4,800 with respect to body powders containing talc.” Again, the company has lost five verdicts with awards totaling about $724 million.The following chart breaks down the jury awards by amount and my state. One verdict was rendered in California and the others in Missouri.

Talc verdicts have a median of $72 million

The largest award was $417 million and the smallest was $55 million; the lion’s share of the awards comprised of punitive damages. The mid-point was $72 million in total. If J&J lost only 10% of its outstanding cases (480) and paid the mid-point of $72 million it could potentially cost the company about $34 billion. Given the size of the punitive damages in prior cases J&J’s potential liabilities could be staggering.

At quarter-ended July 2, 2017 J&J had cash of about $13 billion. It also generate $8.8 billion of cash flow from operations through the first six months of the fiscal year. Annual run-rate cash flow would be around $17 billion. To cover $34 billion in new liabilities would take [i] existing cash plus [ii] another six quarters of operating cash flow.

I understand that only a few talc-related lawsuits pursuit to J&J have come to trial, and the company have lost the majority of them. The $417 million verdict was jaw-dropping. J&J’s total potential exposure to talc-based claims is even more staggering.

Conclusion

Though J&J has yet to reserve for talc-based claims I believe investors should. Verdicts totaling over $700 million in two separate states has certainly gotten my attention. I believe these talc claims could have legs, making JNJ a strong sell.

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