Johnson & Johnson (NYSE:JNJ)

Johnson & Johnson didn’t have a good day on Friday as it was ordered by a jury to pay $1 billion in damages for defective hip implants. These implants are metal on metal and were surgically put in place to help these patients with respect to movement.

The jury made the ruling against JNJ, citing that it had failed to tell doctors and patients of the potential risk of failure of the devices. This will more than likely paint a bad image for JNJ in the hip replace department.

There is no denying that it will be affected by it in a minor way. What was not affected by this ruling was the JNJ stock itself. The stock was able to close higher for the day by 0.52% at $111.96 per share.

JNJ Extreme Ruling

A Dallas Jury had awarded 6 patients $1 billion in damages. The reason for the lawsuit was that these patients claimed to have experienced severe problems with their hip replacement devices. The devices caused harm to these patients ranging from tissue death and bone erosion.

The cause for these issues was how the devices were designed. The devices are known as Pinnacle Ultamet hip implants, and are produced by the JNJ unit DePuy. This is where it gets interesting, because these devices are no longer sold in the market. JNJ pulled the devices in 2013, when the FDA became adamant about changes to rules about hip replace devices.

This led the company to completely pull the devices from the market. That’s the good news, but the bad news is that it still faces many lawsuits. JNJ still faces 9,000 or more lawsuits for these hip devices. The question remains, Why didn’t the stock crumble after the news was announced? There are two reasons why. The first is that JNJ has stated and will be able to file an appeal.

Such an appeal could reduce damages, and potentially reverse the ruling. Secondly, the $1B it stands to lose will not cripple the company. After all, the company has at least $40.45 billion of cash on hand. A potential charge of $1B will not affect it at all.

Value Still Exists

As noted before, the JNJ DePuy unit stopped selling those devices a long time ago. The company has been doing good ever since, building a pipeline of products. It has a mix of consumer and medical device products that continue to generate revenue.

In the third-quarter of 2016 it had reported an earnings per share number of $1.53 pershare or $4.27 billion. This compares to the prior year where it had only earned around $1.20 per share. What’s notable about the improved earnings year over year is that it is attributed to strong medical device and pharmaceutical sales.

The consumer department was lagging behind, but the other departments more than made up for it. This signals that the medical device department is still going strong, despite the Pinnacle device setback.

Looking Forward

The stock closed slightly higher after the jury announcement. This means that going forward the JNJ stock should not be greatly affected by this decision. The long-term story is still intact as revenue has been steadily growing.

In addition, the stock has continued to accelerate upwards over the last 5 years. During the five year period the JNJ stock has gained 76.40%. Even taking a look at the short-term trade, it doesn’t look bad at all either.

Year-to-date the stock is up 9% which is not bad considering that the S&P 500 only managed a 7.24% gain in the same timeframe. With JNJ appealing the jury decision, it will be a long time before this issue is resolved. The company has noted that it will defend itself with respect to all the lawsuits against it because of the hip device.

Even though it had already another ruling against it back in March stemming for $500 million, it will still defend its practices with respect to the pinnacle devices. In the meantime, the company should be able to continue to grow its business.