Tylenol Recall Isn't Hurting Johnson & Johnson Shares

Children's Tylenol
Children's Tylenol

The recent recall of children's Tylenol and other drugs ordered by Johnson & Johnson's (JNJ) consumer unit McNeil Consumer Healthcare may generate investor concern about Tylenol's dominant position in the children's medication market. But so far, JNJ stock isn't showing much evidence of worry.

McNeil said Friday it is voluntarily recalling 43 over-the-counter medicines made for infants and children, including liquid versions of Tylenol, Motrin, Zyrtec and Benadryl. The U.S. Food and Drug Administration said the drugmaker implemented the voluntary recall because of "manufacturing deficiencies which may affect quality, purity or potency."

"Some of the products included in the recall may contain a higher concentration of active ingredient than specified; others contain inactive ingredients that may not meet internal testing requirements; and others may contain tiny particles," the FDA noted, adding it recommends that consumers stop using these products.

No Medical Problems

The recall, McNeil said, "is not being undertaken on the basis of adverse medical events." And indeed, the FDA gave the assurance that according to the information it has received at this time, "the potential for serious medical problems is remote."

With every recall Johnson & Johnson issues, though, it's hard not to remember the 1982 poisoning disaster, when seven people in the Chicago area died after taking Extra Strength Tylenol capsules that had been laced with potassium cyanide. Yet the company rebounded well from that incident, after recalling 31 million bottles with a retail value of over $100 million. Perhaps it is because of that event that consumers and the company alike react strongly to any potential hazards with Tylenol, even with ones that may be remote.

To be sure, recalls of Tylenol and other over-the-counter medicines are not that unusual. Just since September 2009 the company has issued several recalls, some for manufacturing problems dating back to 2008. It also got a stern warning from the FDA for manufacturing-standards violations and for failing to report and investigate the problem quickly.

The recalls most likely hurt the top line; in the first quarter, J&J's sales of OTC and nutritional products, which the Tylenol products are a part of, dropped 25% in the U.S. to $542 million. When J&J reported 2009 results, William Weldon, chairman and CEO, tried to alleviate shareholder concerns, saying the company is doing everything to address the FDA's concerns. So far, it seems whatever quality measure were taken weren't enough.

Going forward, many parents would think twice before giving their children Tylenol and other products, opting for other brands and perhaps even for generic versions as the FDA recommends -- something they may not have considered before. And overall, the mistrust of these medicine is likely to increase.

Tylenol sales -- part of the half billion for OTC and nutritional products -- pale in the grand total of J&J's $15.6 billion in revenue in the first quarter. This is evident by how little effect this news had on JNJ shares, which are up over 1% this morning. Still, some analysts may be underestimating the long term impact on the company.