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J&J (JNJ) Loses Landmark Opioid Case: What's Next for Pharmaceuticals?

Christopher Vargas

An Oklahoma judge ruled on Monday that large cap pharmaceutical company Johnson & Johnson JNJ would have to pay $572 million to the state. J&J is accused of helping fuel the opioid epidemic that killed more than 400,000 people from 1999-2017. The verdict was much better than what many investors and analysts had been anticipating, falling on the low end of the $500 million and $5 billion estimated range. Let’s take a closer look at how the trial went for J&J and how pharma investors can navigate the litigated market.

Oklahoma Trial

District Judge Thad Balkman, ruled that J&J’s marketing of their opioid products was misleading and in turn compromised the health and safety of thousands of Oklahomans. He noted that the defendants “caused an opioid crisis that’s evidenced by increased rates of addictions and overdose deaths.” The ruling concludes that J&J and their pharmaceutical subsidiary, Janssen, downplayed the risks of addiction to their opioid products, marketing the risks as low as 2.6% or less.

The $572 million awarded to the state covers one year of the states plan to combat the opioid crisis despite the state’s plea that it would take up to 20 years to successfully carry out the campaign. J&J is planning to appeal the verdict; they believe that the decision is flawed because the state failed to present evidence that J&J’s actions caused a public nuisance.

J&J expressed their innocence in court stating that the marketing of their opioid products was appropriate and responsible. The company provided testimonies from doctors and current and former employees who agreed that their marketing practices were appropriate.

The verdict was significantly less than the penalties sought by the state, sending JNJ up about 2% after the verdict announcement. Teva Pharmaceutical TEVA and Purdue Pharma both reached a settlement with the state of Oklahoma before the trial began.

Looking Ahead

While the verdict makes owning J&J stock a little easier, Oklahoma is only one plaintiff in a plethora of cases pending before a federal judge in Ohio. The consolidated lawsuit includes 22 defendants who were opioid manufacturers and distributers, including J&J.

Recession fears have already plagued the stock market this month and pending lawsuits is not what pharmaceutical companies need. If investors do wish to stay in the sector, dividend paying pharmaceutical companies would be their best bet.

Novo Nordisk A/S NVO sports a 1.22% dividend yield and has a beta of 0.6, providing stability for investors. Estimates anticipate Y/Y growth of 6.9% in earnings and a 3.39% revenue jump to $4.46 billion this quarter. NVO has gained 13.2% YTD, outpacing the broader drug market. NVO is sitting at a Zacks Rank #2 (Buy).

Novartis AG NVS is a large cap pharma that pays out a dividend yield of 2.06% and has a beta of 0.58. NVS has beaten our earnings estimates twice in the last four quarters for an average EPS surprise of 2.84%. Earnings estimates anticipate a 4.58% jump to $1.37 per share this quarter. Earnings estimates have been revised upwards for NVS earning it a Zacks Rank #2 (Buy).

Eli Lilly LLY is an additional large cap pharma that boasts a dividend yield of 2.33%. Eli Lilly is also resilient to broader market trends with a beta ratio of 0.19. The company has surpassed our earnings estimates three out of the past four quarter for an average EPS surprise of 0.69%. Consensus estimates project the company’s bottom line to increase 3.06% to $5.72 in fiscal 2019. LLY is a Zacks Rank #2 (Buy).

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