J&J Places Talc Liability Affiliate Into Bankruptcy

Johnson & Johnson's JNJ decision to place an affiliate with the talc-related liabilities into bankruptcy doesn't affect our fair value estimate or moat rating. The decision was guided by the firm's desire to reduce the uncertainty around the almost 35,000 lawsuits claiming a link between J&J's talc powder and illnesses (including ovarian cancer). J&J will fund the affiliate with a $2 billion trust and a royalty stream with a net present value of over $350 million. The funding to satisfy the claims is largely in line with our expectations. While we had expected J&J to continue to litigate more cases and then finally settle, the bankruptcy pathway appears to expedite a similar result had the firm continued to challenge each lawsuit. Even though we believe there is still some uncertainty that the bankruptcy pathway will be acceptable for the plaintiffs, we expect the plan will likely end the risk overhang of these claims on J&J. From a moat perspective, the brand power of J&J has likely taken a minor hit from the legal issues surrounding the talc litigation. Even though we believe it is unlikely that J&J's talc caused the claimants' illnesses, the high-profile cases appear to have cast a negative cloud over the firm's brand power. However, we don't expect much brand damage to flow to other products, given that many of J&J's other brands are marketed under different labels like Neutrogena. Further, we believe the trust in the Johnson & Johnson name remains strong, based on decades of marketing support and research and development. Also, the majority of the firm's moat rests in intangible assets (patents) and switching costs from the larger drug and device divisions. The firm had already halted sales of talc-based baby powder in the United States and Canada in mid-2020. The lost sales were less than 0.1% of overall sales, representing a nonmeaningful contribution to cash flows for the firm.

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