Johnson & Johnson shares decline as failed bankruptcy filing opens door to more talc lawsuits

Johnson & Johnson (NYSE:) declined after its latest attempt to resolve tens of thousands of lawsuits over baby powder and talc products through bankruptcy of a unit was dismissed by a U.S. judge. The ruling puts a proposed $8.9 billion settlement that would stop new lawsuits from being filed in doubt.

Johnson & Johnson’s LTL Management subsidiary filed a second time for bankruptcy in an attempt to settle the majority of claims by cancer victims and end future lawsuits, but a judge ruled the bankruptcy must be dismissed because the lawsuits didn’t put LTL in immediate financial distress.

“In sum, this Court smells smoke, but does not see the fire,” Judge Michael Kaplan wrote, describing the financial condition of the company.

J&J said it plans to appeal the ruling.

“The Bankruptcy Code does not require a business to be engulfed in ‘flames’ to seek a reorganization supported by the vast majority of claimants. As the Bankruptcy Court urged in its decision, we will continue to work with counsel representing about 60,0000 claimants to pursue a resolution of the talc claims,“ said Erik Haas, Johnson & Johnson’s Worldwide Vice President of Litigation.

Shares of J&J declined 4.3% after trading resumed on Monday, as Wall Street assessed the impact from the latest developments.

“As we previously noted we view this news as an incremental negative for the stock, as talc litigation has been an overhang on the stock given the range of potential outcomes, and as a result, we expect JNJ shares to retrace some of the recent gains,” said Morgan Stanley equity analysts.

Credit Suisse analysts also commented, stating, “Currently JNJ has 68% (c.58k) of claimants supporting the settlement with 32% opposing (c.29k). It is possible JNJ can resolve these cases through settlement outside of bankruptcy filing, however this passes through the remaining holdouts and future claims (stay anticipated to be lifted later in the summer with run rate expected at 10-20k annually but drop off significantly over time) to the tort system.”

Cantor Fitzgerald analysts said, “The talc litigation creates headline noise, but does not change our positive investment thesis on the stock, since we believe that the potential liabilities will be manageable.”