JP Morgan: Talcum powder lawsuit debt has been priced, maintains a "neutral" rating on Johnson & Johnson (JNJ.US)

After US bankruptcy court judge Christopher Lopez rejected Johnson & Johnson's request to use bankruptcy proceedings to settle over 90,000 unresolved talcum powder claims, JPMorgan commented on the matter. Overall, although Johnson & Johnson's stock price has declined, JP Morgan believes that the stock price already reflects the debt of approximately $10 billion from talcum powder lawsuits, and the additional debt is relatively insignificant compared to Johnson & Johnson's market value. JP Morgan maintains a "neutral" rating for Johnson & Johnson. On Monday, a federal judge in Texas rejected Johnson & Johnson's third attempt to have its created subsidiary declare bankruptcy. This proposal aimed to terminate lawsuits alleging that its baby powder and other talcum powder products caused ovarian cancer, marking the third failure of the company's bankruptcy strategy in court. Johnson & Johnson had claimed that the plan had the support of 83% of claimants, exceeding the 75% requirement set by US bankruptcy regulations, to resolve tens of thousands of lawsuits alleging that the company's talcum powder caused cancer. Under the plan, the subsidiary Red River Talc would declare bankruptcy and then receive approximately $9 billion in funding to pay claimants, rather than through legal proceedings. Johnson & Johnson now faces an uncertain path, as the case was dismissed due to what the judge typically refers to as improper voting procedures that rendered over half of the votes invalid. Lopez stated that the claimants' voting was flawed. Lopez criticized Johnson & Johnson for providing "an unreasonably short time for thousands of creditors to vote, and at any cost achieved the 75% ratio." Johnson & Johnson's settlement was rejected due to the inability to prove the validity of the plaintiffs' votes in the case. Johnson & Johnson needed 75% of the plaintiffs to support its settlement, and the company reported that approximately 83% of the plaintiffs voted in favor. However, the court summary indicated that at least half of these votes were deemed invalid because they relied on proxies, and due to the unreasonably short voting time for claimants, and/or the inappropriate reliance on general language in the agreements, the proxies did not receive support. Overall, the court's "on-site" assessment led to the case being dismissed, which is the culmination of these factors (relative to any single factor). At this point, the next steps of the story are unclear. However, this update has certainly been a surprise and setback, as the structured settlement appeared to have the support of a large group of plaintiffs and represented an important step for Johnson & Johnson in the litigation. From here, Johnson & Johnson can further update/revisit its talcum powder settlement and return to plaintiffs to seek support. Alternatively, the company could seek to settle with a large group of plaintiffs who support the settlement, while litigating against stubborn factions, or seeking out-of-court settlements (encouraged by Judge Lopez). As the ruling pointed out, the talcum powder settlement did indeed receive "substantial support," including "some companies that were initially opposed to the plan but now support it," but it is currently unclear whether Johnson & Johnson will pursue a settlement that does not involve future talcum powder claims. Johnson & Johnson's stock price has already reflected the approximately $10 billion talcum powder lawsuit liability, but the ruling reintroduces uncertainty into talcum powder litigation. JP Morgan notes that while Johnson & Johnson's stock price has fallen, it already reflects the $10 billion talcum powder liability, and even if Johnson & Johnson's total liabilities significantly increase, the impact on the company's value is minimal (for every $5 billion increase in debt, it is equivalent to about $2 per share for Johnson & Johnson, slightly higher than its market value of $1 per share). JP Morgan states, "We would not be surprised if Johnson & Johnson's valuation overstates any potential talcum powder lawsuit risks until we see further clarification of the issue."