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How Much Litigation Risk Is Priced Into Johnson & Johnson?

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Johnson & Johnson (NYSE: JNJ) just can't seem to shake its talcum powder problems.

On Friday, Johnson & Johnson recalled 33,000 bottles of baby powder after a bottle purchased online by the FDA tested positive to asbestos.

Last year, a jury awarded a group of 22 women $4.69 billion in a ruling against J&J. The women claimed contaminated baby powder is linked to cases of ovarian cancer. J&J is currently facing additional lawsuits by more than 15,000 customers claiming that tainted talcum powder contributed to cases of ovarian cancer and mesothelioma.

How Much Is Priced In?

Bank of America analyst Bob Hopkins said Monday the uncertainty surrounding the J&J litigation has taken about a $50 billion bite out of the company’s market cap.

“Some of JNJ’s current valuation discount to the market might be due to broad drug pricing concerns, but we think the vast majority is due to the various litigations currently overhanging JNJ,” Hopkins wrote in a note.

The $50 billion number may seem excessive when it comes to J&J’s ultimate liability, but Hopkins said it’s difficult to predict how the process will play out.

Even if the stock is being unjustly punished based on the ultimate outcome of the lawsuits, Hopkins said Friday’s news is a perfect example of the type of headline risks J&J investors will be dealing with for the foreseeable future.

For patient investors willing to ride out the rollercoaster of litigation headlines, Hopkins said Johnson & Johnson’s core business is performing extremely well, and its stock is trading at a historically large discount to the S&P 500.

The analyst has a Neutral rating and $150 price target on J&J's stock.

Benzinga’s Take

Based on historical precedent, it seems unlikely that Johnson & Johnson will ultimately face $50 billion in baby powder liabilities. However, it may take years for these court cases to play out, so J&J investors will need to be extremely patient.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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Photo credit: Raysonho, Wikimedia Commons

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