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New Study Could Clear Johnson & Johnson on Talc, but Is It a Buy Signal?

Johnson & Johnson (NYSE:JNJ) just had a big win regarding its ongoing talc problem. On Jan. 7, 2020, The Journal of the American Medical Association (JAMA) published the results of a study consisting of pooled data going all the way back to 1989 from over a quarter of a million women. The objective was to determine whether using talc powder products in the genital area increases the risk of ovarian cancer.

While the study did find that risk increased slightly, the increase was not statistically significant. This is indeed a positive for J&J, but does it constitute a buy signal for the stock? Not really.

First, let's look at the data a little more deeply. Researchers reported that over 11 years of follow-up, women who have never used any powder in the genital area had an ovarian cancer rate of 55 per 100,000 person-years, versus 61 per 100,000 for those who have. Adjusting for variables such as age and status of the reproductive system, there was an 8% overall increase in ovarian cancer risk for women who reported using talc powder in the genital area.

At first glance, the ambiguity of these results could be interpreted either way. A small increase in risk could still be cited in the over 14,000 cases still open against J&J from women who claim its baby powder caused their risk of ovarian cancer. However, the principle of innocent until proven guilty requires that guilt be proven beyond a reasonable doubt. This study did not prove conclusively whether use of talc powder increases the risk of ovarian cancer.

Beyond that, the evidence against J&J was not incontrovertible in the first place. That evidence was made public in a bombshell investigative report published by Reuters back in 2018, revealing that J&J knew of evidence since the 1970's that its talc powder contained small amounts of asbestos but did not disclose this to regulators. That sounds bad, but if we look into the sources directly, the amounts found were so miniscule that J&J may not have even been required to report them in the first place. For example, a key document cited by Reuters showing the existence of asbestos in J&J talc products reads:

"...crysotile asbestos does exist in the specimens...supplied to this laboratory. It is, however, further concluded that, on the basis of samples supplied to us, transmission electron mircoscopy can only find a total material by volume of less than 1/100 of 1 percent crysotile asbestos in the shower to shower material and less in the lewin material."

The Occupation Safety and Health Administration (OSHA) sets legal limits on asbestos exposure, and those limits are not zero. The limits are for airborne exposure as it pertains to mesothelioma lung cancer rather than for powders, but the point is that zero is a nearly impossible threshold and regulators understand this. That may sound understandably disturbing, but legal realities are what they are and it does provide potential legal cover for J&J in addition to the study just published. Then, why settle these cases at all? Perhaps because drawing out the smaller cases may not be worth the time and effort in incurred legal costs.

What's the bottom line for Johnson & Johnson and its stockholders? Despite the billions of dollars hanging in the balance here, the answer is "not much." Let us assume for the sake of argument that all talc lawsuits are dropped in the wake of this study, which is surely the best possible outcome for J&J shareholders. According to Forbes, that would save J&J around $4 billion in potential settlement costs. That sounds like a lot, but compared to the sheer size of J&J, it's barely a drop in the bucket, accounting for just 1% of its market cap of $385 billion. The company has more than enough cash on its balance sheet to meet those costs with about $14 billion to spare anyway. This answers the question as to why the stock is right near all time highs despite all the negative press lever since Reuters published its investigative report. The totals here are relatively insignificant.

Plus, it doesn't even seem that the negative press since 2018 as specifically relates to baby powder is affecting sales all that much in the first place. Baby Care segment sales were down about 10% for the first three quarters of 2019 compared to 2018, according to the company's latest quarterly report, which averages out to about a $175 million decline for the full year. That's 0.21% of total 2019 revenues.

Whether J&J continues to trend higher from here largely depends on trends in the broader equity markets. Recent talc developments are good news for J&J, but by themselves are relatively insignificant.

Disclosure: No positions

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This article first appeared on GuruFocus.