Late last year, it was Tiger Woods. For the new year, it is the company that held the top 2009 reputation ranking by both the Harris Interactive Survey and the Steel City Re Corporate Reputation Index – Johnson & Johnson (NYSE:JNJ). What happened this time?

There were early hints with FDA letters in August and September 2009. But the big stories broke last Friday when the U.S. Justice Department announced that it is suing the drug giant for allegedly paying millions of dollars in kickbacks to geriatric pharmacy company Omnicare Inc. (OCR) to induce the company to buy and recommend Johnson & Johnson drugs. That same day, the Company widened its voluntary recall several of the company’s top selling over-the-counter brands across the country. There is a concern that a chemical called 2,4,6-tribromoanisole is causing an unusual odor in select brands. The smell is due to the breakdown of the chemical that is used to build wood pallets that transport and store product packaging materials. The expanded recall was announced after the FDA reprimanded the Company for waiting close to a year to remedy the well-documented problem.

In short, two reputational issues: ethics and quality. We expect repercussions. Turning to the Steel City Re Corporate Reputation Index, we focus on Aug and Sept when JNJ received FDA warning letters. Here we see a slight dip in the reputation index and correspondingly, a lack in equity growth while both the pharmaceutical sector and the S&P were rebounding. See arrows marking Aug/Sept window on both the reputation index (red) and the equity returns (blue diamond/red outline). The full reputational and financial effects are yet to be recognized.


To be fair, JNJ’s overall ROE underperformance of 23% relative to the Pharmaceutical sector can be explained, in part, by JNJ’s resilience during the 2008 crisis. A two-year ROE in the chart below from Bigcharts.com shows that at the low point of the market in December 2008, JNJ had lost only 20%. The sector had lost 30%, while the S&P lost 40%. In march of 2009, JNJ 'caught up' with the industry and has followed the sector mean since. The ‘cost’ of that historic resilience is poorer apparent performance in the short term this past year. The gain is lower volatility and therefore lower cost of credit. Provided that the effects of the latest disclosures do not materially shave reputation value. The year is still young.