Valeant Pharmaceuticals Intl Inc’s (NYSE:VRX) legal mess is a red flag for investors because the heavily indebted drugmaker hasn’t earmarked enough liquidity to cover potential cash obligations. The situation may be worsening – or at least getting more attention from Wall Street. According to David Maris, an analyst at Wells Fargo, Valeant has a staggering total of 33 lawsuits involving Shower to Shower body powder, a talc-based OTC product that was acquired from Johnson & Johnson in 2012.
Shower to Shower is a veritable nightmare for Johnson & Johnson. The potential cost of legal losses has already run into the hundreds of millions, and Valeant could face similar settlements. However, unlike the larger firm, Valeant may lack the liquidity to survive this challenge on top of so many other headwinds. Valeant’s management intends to make Johnson and Johnson pay for its lawsuits, but this is not guaranteed to work.
Talcum Powder: An Expensive Legal Mess
The problem stems from a possible link between talcum powder and cancer. This link has been known for decades and led to the minerals disuse in many disposable contraceptive products. Johnson & Johnson is alleged to have ignored the risks associated with its talc-based products, failing to provide adequate warnings to consumers.
Johnson & Johnson is losing case after case as lawyers build upon the evidence presented in earlier cases to strengthen their claims against the company. Last year, a jury ordered Johnson & Johnson to pay $72 million to a woman who died of ovarian cancer linked to a talc-based product she used for decades. And this month, a similar suit put the drugmaker on the hook for a Jawdropping $110.5 million. Valeant has 33 similar (related to talc) cases and the math is not pretty.
What Does This Mean for Valeant?
Johnson & Johnson’s legal setbacks may be bad omens for Valeant because Valeant acquired Shower to Shower, a talc-based asset in 2012. Thankfully, newer formulations of the product seem to be made with cornstarch. But the early versions were made with talcum powder and may have lacked what many feel is sufficient warning labeling.
Valeant is facing 33 lawsuits associated with Shower to Shower alone. The talcum cases are in addition to several more product liability cases, an insider trading lawsuit involving Bill Ackman along with multiple SEC, IRS, and other government investigations. The settlements for these suits could run into the billions of dollars, but Valeant has less than $600 million in liquidity on its balance sheet as of the most recent annual report for the full year of 2016.
Johnson & Johnson is in an expensive legal mess related to its talc-based products due to a possible link between talc and cancer. Valeant may find itself on the hook due to Shower to Shower, a talc-based product it acquired from Johnson & Johnson in 2012. If enough cases go badly, it could pose a serious threat to Valeant due to the company’s poor liquidity and other expensive headwinds.
Valeant and Johnson & Johnson can be expected to fight these cases and minimize liability to the best of their ability. To this end, Johnson & Johnson has appealed last year’s settlement and plans to appeal the most recent one as well. Valeant may take similar actions and is looking to make Johnson and Johnson responsible for any damages. David Marris’ notes make no mention of potential indemnity insurance coverage in either company. Headline risk may pressure the stock price of Valeant regardless.
Disclaimer: The author has no position or business relationship in any stock or company mentioned in this article, and he has no plans to initiate. The author is not receiving compensation for this article expect from Smarter Analyst. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.