Health authorities will take over supervision of three Johnson & Johnson manufacturing plants after the healthcare giant failed to stem quality lapses that sparked a flood of recalls for consumer medicines like its Tylenol painkiller.
J&J's McNeil unit has recalled more than 300 million bottles and packages of Tylenol, Motrin, Rolaids, Benadryl and other products in the past year over faulty manufacturing.
The Food and Drug Administration said a consent decree was filed on Thursday in Philadelphia federal court against McNeil. It gives the FDA authority to oversee plants operated by J&J's McNeil Consumer Healthcare unit, which makes Tylenol and the company's array of other over the counter medicines.
The decree will prevent the McNeil unit from making consumer medicines at a large factory in Fort Washington, Pennsylvania until the now-closed facility corrects quality lapses. It also sets a strict timetable to fix quality problems at McNeil's plants in Lancaster, Pennsylvania and Las Piedras, Puerto Rico.
The company must retain an independent expert to inspect all plants and ultimately verify that violations have been corrected.
Morningstar analyst Damien Conover said J&J, now that it will be under far closer FDA scrutiny for years, will have less flexibility in solving its manufacturing problems.
"The company will have to jump through these hoops differently, which will be more expensive," he said.
J&J said two company executives were named as defendants in the consent decree. They are Veronica Cruz, vice president of quality at J&J's McNeil Consumer Healthcare unit, and Hakan Erdemir, vice president of operations at McNeil.
"This is a strong, but necessary, step to ensure that the products manufactured by this company meet federal standards for quality, safety and purity," Deborah Autor, head of compliance in the FDA's drug division, said in a statement.
Some of the lapses led to metal particles entering liquid medicines, and also included mislabeling and moldy odors.
While the medicines recalled have not proven harmful to any consumers, they have tarnished J&J's reputation, which was built on a pledge to serve its patients first and deserve their trust.
As recently as late February, the company recalled Sudafed allergy tablets for incorrectly repeating the word "not" on its label to say "do not not divide, crush, chew or dissolve the tablet."
J&J shares closed down 1.3 percent, or 79 cents, at $59.61 after the news.
NO UPFRONT PENALTY
The chain of recalls lost the company $900 million in consumer product sales last year and hurt earnings. Consumer products account for about one-quarter of J&J's total annual sales of $62 billion.
Wall Street analysts initially downplayed the potential financial costs of the escalating number of recalls, which were partly to blame for a 7.5 percent decline in J&J shares since the end of 2009, compared with a 16 percent rise in the Standard & Poor's 500 Index in the same time.
J&J said the decree does not require it to pay an upfront penalty to the government. By contrast, Schering-Plough Corp in 2002 had to pay the federal government $500 million as part of its consent decree to fix a slew of quality control problems.
If McNeil violates the agreement, the FDA can order a manufacturing halt, product recalls or fines of up to $10 million annually.
McNeil said it expects the consent decree will govern its operation of the facilities for at least five years once a plan to rectify its problems is completed.
"Being monitored for five years tends to be very expensive with a lot of lawyers and outside consultants," said Jeff Jonas, analyst at Gabelli and Co. "For a company of J&J's size it's not going to move the numbers. It's just another step in the process."
"There's one thing that's positive and that is now they have an actual road map for what they have to do to get back in compliance," Jonas said.
J&J shut down the Fort Washington plant almost a year ago after recalling scores of products made there, including a wide variety of children's formulations of Tylenol. It plans to reopen the plant after costly installation of new equipment and better quality-assurance procedures.