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Johnson & Johnson Special Committee: No Wrongdoing

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In an eagerly awaited report, a special committee of the Johnson & Johnson (JNJ) board has concluded that, despite manufacturing gaffes that caused countless product recalls, government investigations into off-label marketing and bribes paid to overseas officials, there were no red flags or indications of systemic failure that were overlooked by the board or executive team.

The committee, which claims to have reviewed a database containing 21 million pages of documents and interviewed dozens of current and former employees, lawyers and consultants, rejected claims made in a derivative shareholder lawsuit that fiduciary duties were breached. But a new regulatory and compliance committee to oversee quality control and compliance practices will be created.

The report concludes:

As issues arose, they were appropriately addressed and resolved, often with the expenditure of significant resources. The special committee also finds that no officer — with the possible exception of one former J&J officer and the one former DePuy officer implicated by the (foreign bribery) investigation — or director breached any fiduciary duty owed to J&J.

As for J&J CEO Bill Weldon, there was no evidence that he engaged in or had knowledge of any wrongdoing. Overall, the committee determined that, rather than committing transgressions, the J&J board and management was responsible for implementing “substantial enhancements” to healthcare compliance and quality control systems and organizations over the past several years. The report also decided that most serious problems were confined to the McNeil Consumer Healthcare unit.

The report states:

The special committee finds that there was no breach of any fiduciary duty by senior management or the board of directors And McNeil’s and J&J’s quality and control organizations, policies and procedures did not present any obvious weakness or inadequacy that should have been corrected by senior management or the board of directors.

The committee also insists that several subpoenas were received after alleged off-label marketing practices had been allegedly discontinued.

The conclusion follows more than a year of scandal surrounding the health care giant, which has experienced a blow to its once venerable corporate image as products disappeared from store shelves; patients were alerted to faulty hip replacement devices and contact lenses, among other items; J&J execs appeared on television to answer harsh questions from Congress and a consent decree was signed with the FDA after a series of failed plant inspections (read here).

Meanwhile, a steady stream of whistleblower lawsuits have passed through various courts concerning allegations that J&J units illegally marketed several meds, including the Natrecor heart pill, the Topamax drug for epilepsy and the Risperal antipsychotic, which was also cited in litigation accusing a J&J unit of paying kickbacks to nursing homes in order to boost sales (read here).

In response to these events, a derivative shareholder lawsuit was filed on behalf of the corporation against insiders — in this case, the J&J directors and execs. And several shareholders sent so-called demand letters to insist on an investigation. As a result of the committee findings, J&J is now expected to seek a dismissal of the derivative lawsuit; a hearing is scheduled for next week. Lawyers who filed the derivative lawsuit declined to comment.

If you were wondering who did the investigating, Weldon did not participate. The special committee numbers four directors, three of whom are named in the derivative lawsuit — Mike Johns, William Perez and Chuck Prince (see here). And the special outside counsel that was hired to assist the committee — Doug Eakeley of Lowenstein Sandler — has regularly done work for J&J for years.

A witness list is included in the report and the names include various executives, although it is not clear the extent to which the committee interviewed mid-level and lower-level personnel who may have had more familiarity with day-to-day decision-making and operations. Why is this important? J&J regularly notes that its empire includes some 250 far-flung operating units that are independently managed, suggesting that an inquiry should dive deep into lower levels to understand practices.

In any event, a mea culpa was issued here and there, although some of these disclosures should have set off alarms. For instance, the worldwide staffing for healthcare compliance was reduced by 25 percent, from 16 to 12 people, in 2007. And the worldwide staffing for quality and control was slashed by 35 percent, from 43 to 28 people.

These moves were part of a broader restructuring that also involved absorbing the Pfizer (PFE) consumer healthcare business after the 2006 acquisition. And this involved adding production, in terms of volume and complexity, to a pair of plants in Fort Washington, Pa., and Las Piedras, Puerto Rico, run by J&J’s McNeil unit, which has so far recalled more than 200 million bottles of meds, including Tylenol, Motrin and Benadryl. In some cases, pediatric items were recalled, upsetting parents nationwide.

The report notes that quality and control staffing may not have increased sufficiently to adjust. There was also a “virtual hiring freeze” in 2008 and 2009, which made it difficult to hire additional McNeil quality personnel. And there was no compliance group inside McNeil to conduct internal good manufacturing practice audits. Instead, these were performed by personnel from other plants.

“With the benefit of hindsight, it appears that the restructuring may have been imperfectly executed,” the committee confesses. The J&J consumer group “should have paid more attention to Q&C, and exercised more management oversight of McNeil. With reduced central oversight and tasked with implementing the Pfizer Healthcare acquisition, some McNeil employees may have lost focus and commitment to maintain quality standards. And the change in the corporate Q&C audit function meant that cGMP issues at McNeil had more of a chance to develop until they reached a critical point.”

Nonetheless, the special committee found there was no culpability at the McNeil management level. “Although the demand shareholders and the derivative plaintiffs claim that J&J’s quality problems were ’systemic,’ they were largely confined to McNeil. There appears to be no single cause for the developments at McNeil. Senior management never issued any directives to the effect that quality should be sacrificed for production; nor did anyone report to senior management that McNeil was in jeopardy of significant regulatory intervention because it was out of compliance with good manufacturing practices,” the report states.

The report goes on to say that senior management and the board were unaware of the quality issues that were developing at McNeil, but the quality and control problems “seem to have developed inadvertently, rather than deliberately.” Yet, the committee concedes there were managerial issues that were not recognized or addressed.

“Nonetheless, and with the benefit of hindsight, it appears that several different factors may have contributed to the series of recalls, FDA Warning Letter, 483 observations, and, ultimately, the McNeil Consent Decree. McNeil had a string of successive leaders in a short period of time who may not have had sufficient understanding of what was taking place at the plant level,” the committee writes.

As an example, “at the plant level, there seemed to be a lack of attention to product quality by some non-quality personnel (especially in engineering and operations), which at times produced an adversarial relationship between quality personnel and operations. Periodic headcount freezes and an emphasis on production volume may have contributed to this situation. In addition, some equipment was outdated and insufficient.”

There was also a January 2009 report of an internal audit of the Las Piedras plant, which rated the site overall as “marginal.” Meanwhile, although FDA inspections of McNeil plants between 2006 and 009 resulted in few observations of “significant noncompliance,” internal audits conducted by McNeil and by one outside consultant in 2007 revealed issues that went uncorrected for long periods of time.

Then there were internal reports known as QScans conducted during 2008 and 2009 for the Fort Washington and Las Piedras plants reported critical (red) scores under the category “Focused Assessments/Internal Audits.” However, when those scores were averaged with the other nine attributes being evaluated, the average totals dropped below the critical zone. And the averages were the figures that were reported up the chain of command.

Another interesting disclosure: The consumer group operating committee did not have a chief compliance officer until June 2008. Who was responsible for these oversights? Not the board or senior management. And McNeil management, which reports to J&J senior execs, was not culpable, either.

There were also a couple of interesting admissions in the section that discusses the allegations of off-label marketing of the Risperdal antipsychotic. J&J recently was ordered to pay $327 million by a South Carolina judge for deceptive marketing, who called the practices “detestable,” and is talking to various parties about settling some of the sprawling Risperdal litigation.

The report notes that in September 2000, the FDA requested that J&J’s Janssen unit change the labeling from MMPD, or management of the manifestations of psychotic disorders, to schizophrenia. The agency did not want drugmakers to promote their meds for symptoms of certain disorders for which the pills were never approved. So what happened? Janssen agreed to the change in January 2002. The change was made two months later after the FDA signed off.

“Our investigation suggests that Janssen could have moved more expeditiously to change the label, and indeed we note that other manufacturers changed their labels before Janssen did. Significantly, however, FDA lacked the legal authority to force Janssen to change the label (which is why it termed its September 25, 2000 letter a “request”). Given that Janssen could have simply refused to make the change at all, we cannot conclude that Janssen delayed doing so in bad faith.”

So why the delay? A wider potential patient population over a longer period of time means more money, perhaps? As the report notes, “the FDA-initiated change in the Risperdal label meant that a large number of prescriptions that had been consistent with an indication for MMPD were now technically off-label.” Nonetheless, Janssen changed its sales material, but conceded “the symptoms-based promotional message remained essentially the same” and marketing to physicians practicing in nursing homes continued, of course.

However, the special committee argues that “Janssen had a good-faith basis to pursue its marketing strategy after the March 2002 label change. Janssen did, in fact, change its sales aids to reflect the schizophrenia indication. While the materials continued their symptoms-based message, a substantial body of literature makes clear that psychiatrists treat schizophrenia by addressing symptoms. Importantly, (the FDA) did not issue a Warning Letter, Untitled Letter, or make any comment at all concerning the revised sales aids following the label change.” So it must have been okay.

Nonetheless, the committee does suggest that “one area of potential improvement would be the implementation of procedures whereby such marketing plans received advance review and input from the Regulatory and/or Law Departments. In the past, the sales aids that the company planned to use received such review and approval by the promotional review committee, but the marketing strategy of where to deploy them (whether nursing home, out-patient clinic, or psychiatrist’s office) apparently did not receive such review.”

Here is the complete report

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