(Recall story updated with more analyst commentary and stock price)
NEW YORK (TheStreet) -- What will be the financial impact of recalls by Johnson & Johnson's (JNJ) - Get ReportDePuy Orthopaedics unit of two hip replacement devices and the company's recent contact lens recalls -- only days after receiving a warning letter from the U.S. Food and Drug Administration for violating FDA rules by marketing two orthopedic products without proper approval or clearance?
According to many observers, it will likely be a few months before anyone knows.
Cowen and Company analyst Mayank Gandhi, for one, views the financial impact in two ways. On the one hand, from a financial perspective, the contact lens recalls may not be as significant as the others and should be more easily manageable. In addition, "keep in mind the hip products were discontinued last year anyway. So that limits the financial impact."
Still, J&J will have to reimburse the cost of hip replacement surgeries tied to the problematic hip replacement devices, "which can be pretty substantial." However, Gandhi said it's somewhat unusual for companies to reimburse for repeat surgeries and that there are "many patients and too many moving parts" to assess the exact financial impact at the moment. "The company doesn't have a handle on the total impact," he said.
Gandhi believes that J&J's drug recalls have had a much bigger impact on J&J's public image that the contact lens and orthopaedic product recalls and that any damages to its reputation will be repaired with relative speed.
Meanwhile, Morningstar analyst Damien Conover agrees that J&J hasn't provided much clarity on the financial impact of the contact lens and orthopaedic product recalls. However, he's certain the company will be taking a $600 million sales hit this year from its over-the-counter drug recalls.
Given that this constitutes only 1% of J&J's sales, Conover isn't concerned about the financial impact of the OTC drug recalls. Furthermore, while the J&J McNeil division that makes much of these recalled drug products shuttered its Fort Washington, Pa. plant in connection with the recalls, Conover believes the company will start to recoup sales slowly in 2011 and ramp up in 2012 as it shifts the manufacturing to other plants.
Thus, what's more critical for J&J right now, according to Conover, is how all the recent recalls hurts the company's image. While brand name isn't crucial in many of the divisions that J&J competes in, it's "critical in the over-the-counter and consumer health businesses." Brand name there greatly factors in establishing market share.
Currently, J&J has been "pretty aggressive with getting to the bottom of all the problems," Conover said,with a new leadership in charge of quality control for major segments in the company, who's "taking the right steps." But if the recalls continue, he speculates, "we can see some market share shift."
The major beneficiaries of such a market shift in the OTC business would be ones with bigger OTC drug franchises, like
, since its acquisition of Wyeth; and
, with its relatively large OTC business, Conover said.
"When you can capture some market share of a powerhouse like J&J, it could really help these companies," he said.
This month, J&J's DePuy Orthopaedics unit said it's recalling the ASR XL Acetabular System and DePuy ASR Hip Resurfacing System used in hip replacement surgery due to the number of patients who required a second hip replacement procedure.
"We regret that this recall will be concerning for patients, their family members and surgeons," DePuy Orthopaedics president David Floyd said in a prepared statement. "We are committed to assisting patients and health care providers by providing information through multiple channels and paying for the cost of doctor visits, tests and procedures associated with the recall."
The statement was released as the FDA issued a warning letter to the J&J unit about its TruMatch Personalized Solutions System and the Corail Hip System.
"A review of our records reveals that you have not obtained marketing approval or clearance before you began offering the TruMatch Personalized Solutions System for sale," the FDA said in the letter to J&J. In addition, the product has been misbranded, according to the FDA.
The agency said that the Corail Hip System was also misbranded and that it was being marketed for "unapproved uses."
Both products are being sold by J&J's DePuy Orthopaedics unit.
The FDA has asked DePuy Orthopaedics to "immediately cease marketing the Corail Hip System for unapproved uses" and said that it will evaluate the information J&J submits for TruMatch to determine whether the product may be legally marketed.
Meanwhile, it was also reported that J&J, which has already issued massive over-the-counter drug recalls including Tylenol, has issued a recall of millions of disposable 1 Day Acuvue contact lenses available in Japan and numerous other Asian and European countries.
Shares of J&J stock are flat at $57.31 Tuesday afternoon.
-- Written by Andrea Tse in New York.
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