J&J Halts Talc Powder Sales in U.S. and Canada

Johnson & Johnson’s JNJ decision to halt sales of talc-based baby powder in the United States and Canada doesn’t affect our valuation or wide moat rating. While the loss of the iconic product may slightly weigh on the company’s brand power and intangible asset moat source in the consumer division, we believe the increasing litigation surrounding the product’s potential to cause cancer had already impaired the brand. We don’t expect much brand damage to flow to other products, given that many of J&J's other brands are marketed under different labels like Neutrogena. Further, we believe the trust in the Johnson & Johnson name remains strong, based on decades of marketing support and research and development. From a valuation perspective, the lost sales are less than 0.1% of overall sales, representing a nonmeaningful contribution to cash flows for the firm.

On the litigation front, we don’t expect the sales strategy shift to affect the legal cases, which number close to 20,000. The decision to keep talc powder on the markets outside the U.S. and Canada reinforces J&J's belief in the safety of the product. The company has been successful in several cases defending its talc powder while losing some cases, and in one large trial loss, the $4 billion in damages was concerning. However, we expect the firm to vigorously defend itself against all cases and appeal those cases that are lost, likely leading to much lower damages. Overall, we continue to factor in $2 billion in legal costs associated with the talc cases based on the likely pathway that J&J will eventually settle the majority of the cases.

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