Analysts: Closing of PR McNeil plant could represent billions in losses for parent J&J

Written by  //  January 25, 2011  //  Manufacturing  //  No comments

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Stateside pharmaceutical industry analysts placed their bets this week on whether Johnson & Johnson officials will decide to temporarily shut down the McNeil production plant in Las Piedras to correct manufacturing problems that have led to a string of major recalls in the last year.

Calling it J&J’s “next big headache,” industry analysts told Reuters a decision to close the sprawling Las Piedras plant — which one ventured to predict could go for a year or longer — could cost the pharmaceutical company between $1 billion and $2 billion in production and sales losses. Analysts are hoping J&J officials will address the issue when it discloses fourth quarter earnings next week.

The Puerto Rico facility, which is said to be responsible for producing about 60 percent of McNeil’s U.S. total revenue, has already received two warning letters from the Food & Drug Administration over quality issues related to batches of Motrin, Tylenol and Benadryl made there in the last year.

Its problems, however, seem to pale in comparison to those encountered at J&J’s McNeil plant in Pennsylvania.

That’s where the bulk of Tylenol and Rolaids products were made and was shuttered in April 2010. That plant is not expected to reopen until late this year, when J&J should complete the review of procedures there to avoid the quality lapses experienced in the recent past.

“All told, recalls by the company’s McNeil Consumer Healthcare unit are believed to have cost J&J $600 million in lost revenue last year, crimping J&J earnings and souring some investors,” Reuters said.

The latest recall occurred Jan. 14, when the pharmaceutical company, in consultation with the FDA, recalled certain lots of Tylenol 8 Hour, Tylenol Arthritis Pain, Tylenol upper respiratory products, and certain lots of Benadryl, Sudafed PE and Sinutab products made at the Pennsylvania plant prior to the closing.

‘Disastrous scenario’
Tim Nelson, senior analyst for Nuveen Asset Management, told Reuters if a second McNeil plant goes down, “it would be almost a disastrous scenario. It’s certainly the major risk factor I see for J&J’s near-term outlook.”

Kevin Broglio, an analyst with Geneva Investment Management of Chicago, seemingly shared Nelson’s rationale, saying that if the Puerto Rico plant closes simultaneously with the Pennsylvania plant, “J&J’s problems would mushroom. It would be more difficult to get that unit straightened out, and it would be one more piece of evidence that company has lost its focus on quality.”

Despite its troubles, J&J is expected to see an increase in profits in 2011 that according to Wall Street predictionsnwould be an improvement over last year’s results, which remained flat in comparison to the prior year.

Nelson, whose company is a J&J stockholder, said the forecast does not take into consideration a closing of the Puerto Rico plant. He said, however, that a growth would be difficult without that operation’s contribution.

“Wells Fargo has warned that J&J earnings could be crimped 6 percent to 7 percent if the Puerto Rico plant is closed for a full year, though consumer medicines account for only a tiny fraction of the company’s annual global sales of $60 billion,” the Reuters report said.

So far, J&J has declined to offer any details regarding the Puerto Rico plant, except to say that it implemented a corrective plan in July 2010 to respond to the FDA’s warning letters.

The bottom line for many of the analysts Reuters interviewed is that J&J’s string of troubles — now the focus of a Congressional investigation — have shaken decades of almost flawless credibility to the core.

Leerink Swann analyst Rick Wise told Reuters “it will take J&J years to regain the trust of the public and regulators,” noting, that the “company now has all hands on deck to fix the lapses.”

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