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Johnson & Johnson Faces Setback as Bankruptcy Strategy Falters

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Shares of Johnson & Johnson (JNJ) took a hit on Monday, dropping by 4.1% in trading. The decline comes as concerns grow over the pharmaceutical giant’s struggles to manage the thousands of lawsuits it faces relating to allegations of injury caused by its talc products.

The recent selloff can be attributed to the news from Friday, where a federal judge in New Jersey rejected J&J’s second attempt at filing for bankruptcy for its subsidiary responsible for handling talc liabilities. This move was part of a controversial legal tactic known as the “Texas Two-Step,” aimed at shifting costly litigation away from civil courts and into the bankruptcy system, which is viewed as more predictable.

With the judge’s decision, it seems that J&J’s hopes of executing the Two-Step strategy have been dashed, raising doubts about the future of the $8.9 billion settlement the company announced in April. This settlement was contingent on the bankruptcy filing, and without it, its outcome is uncertain.

Now, instead of a resolution through bankruptcy, J&J faces the prospect of prolonged legal battles in trial courts. While the company has stated its readiness to fight, a recent jury verdict awarding $18.8 million to a single plaintiff in California serves as a warning of the risks involved.

Leerink Partners analyst David Risinger acknowledged this setback in a note to investors, stating that while JNJ may still be able to settle most of the talc-related litigation, Friday’s news delays the resolution of this long-standing issue. Risinger maintains an Outperform rating on J&J stock with a $190 price target.

The pharma giant is confronted with product liability claims from tens of thousands of individuals who allege harm from J&J’s talc-containing body powders. Since 2021, the company has been attempting to consolidate the talc litigation under a single subsidiary named LTL Management and pursue bankruptcy for this entity. However, this latest development has thrown a wrench into their plans.

J&J’s Bankruptcy Efforts Hit a Roadblock

In a recent legal battle, Johnson & Johnson’s (J&J) attempt to declare LTL Management bankrupt has encountered setbacks. After initially succeeding in the bankruptcy court, J&J faced a reversal of the ruling by the U.S. Court of Appeals for the Third Circuit in January 2023. They then made a second bankruptcy filing in April, which aimed to address the criticisms raised by the Third Circuit.

However, on Friday, Judge Michael Kaplan dismissed this second filing, stating that LTL was not experiencing sufficient financial distress to meet the criteria set by the Third Circuit. J&J has expressed its intention to appeal the ruling, but considering the previous decision by the Third Circuit, prospects for a reversal are uncertain.

While the way forward remains uncertain, there may still be opportunities for J&J to negotiate settlements with plaintiffs who are amenable within the framework of the bankruptcy proceedings. Nevertheless, if plaintiffs choose to opt out of the bankruptcy process, they can still pursue legal action against J&J in civil court.

Analysts note that J&J will continue its efforts to negotiate potential global settlements and handle relevant court cases during the appeal. These actions may lead to increased costs beyond the proposed $8.9 billion settlement offer. However, experts do not anticipate a significant impact on J&J’s market capitalization of $437 billion.

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