Does Johnson & Johnson Need a Lot More than Just a Band-Aid?

Johnson & Johnson
Johnson & Johnson

If you've ever put on a Band-Aid, popped a Tylenol, or used a cotton swab, then you know Johnson & Johnson (JNJ). Most of us recognize that familiar name stretched across a bottle of baby shampoo.

But what people don't realize about this brand is that Johnson & Johnson is primarily a pharmaceutical and medical device company. In fact, it's actually the largest medical device company in the world, and the eighth-largest pharmaceutical company.

Those consumer products we all know and love -- Listerine, Bengay, and Neutrogena, to name only a few -- make up just 23% of this giant company's revenues. Medical devices, such as glucose monitors, and pharmaceutical drugs, including Risperdal and Velcade, account for the majority of dollars, at more than 37% and 40% of revenue respectively.

This particular combination of a strong, trusted brand plus a diversified health-care business has long made Johnson & Johnson a favorite of investors.

But in recent years, a series of drug recalls and management missteps at the fabled blue chip have had investors scratching their heads and asking: Is Johnson & Johnson broken?

Lawsuits and Recalls and Smells, Oh My

In 2010, the Department of Justice filed a civil False Claims Act against Johnson & Johnson, alleging that the company had illegally paid kickbacks to nursing-home pharmaceutical supplier Omnicare to induce Omnicare to use Johnson & Johnson drugs.

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"We will pursue those who break the law to take advantage of the elderly and the poor," said Tony West, assistant attorney general for the Civil Division of the Department of Justice, in a press release. "Kickbacks such as those alleged here distort the judgments of health care professionals and put profits ahead of sound medical treatment."

Later that year, Johnson & Johnson was twice forced to recall dozens of its over-the-counter medicines, many of them intended for use by children, including children's Benadryl, Motrin, Zyrtec, and Tylenol. The recalls came as the result of "manufacturing deficiencies" at a Pennsylvania plant as well as a "musty odor" associated with drugs manufactured at a Puerto Rican facility. (It is important to note that no deaths or ill effects were ever attributed to the recalled drugs.)

These issues arose at an especially fraught time within the wider health care arena -- most notably, President Obama's controversial Patient Protection and Affordable Care Act was signed into law in the spring of 2010 -- making investors even more wary.

%Gallery-147263%Since 2010, Johnson & Johnson has trailed the larger indexes, such as the S&P 500 and the Dow, of which it is a component. Certainly, past performance is no indication of future returns. But it's clear investors are spooked by Johnson & Johnson's missteps.

Weigh In: What's your take, DailyFinance reader? Do you still trust Johnson & Johnson? What are your thoughts on the company as a consumer -- and as an investor?

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Motley Fool contributing writer Catherine Baab-Muguira does not have a financial interest in any of the companies mentioned here. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and creating a diagonal call position in Johnson & Johnson

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