A closely watched talc trial in California goes against Johnson & Johnson (JNJ), adding uncertainty around whether tens of thousands of other plaintiffs suing the company will sign on to J & J’s proposed $8.9 billion settlement offer or seek to get their own days in court. Jim Cramer believes the biopharmaceutical company was “too hopeful” about winning. “The plaintiff system is stacked against them,” Jim said. Still, he added, “I believe J & J is a great American company, I believe they’ll see through this. … They need to be a bit more realistic about what they say.” Jim’s conversations with J & J’s legal team led him to believe there could be a path to victory in what we think is a pivotal case . But on Tuesday, J & J was ordered to pay $18.8 million after jurors found in favor of 24-year-old Emory Hernandez Valadez who claimed in his lawsuit that he developed mesothelioma, a deadly cancer linked to asbestos, from exposure to J & J talc products. Ultimately, we’re not sure how this decision will impact J & J’s separate case in federal court seeking bankruptcy for a new subsidiary, LTL Management, where the company has siloed its talc litigation exposure. Often times in bankruptcy proceedings, there’s a pause on new cases going to trial. But the Valadez claim was allowed to proceed due to his failing health. JNJ YTD mountain Johnson & Johnson YTD performance The verdict is “very significant,” according to Moshe Maimon, partner at Levy Konigsberg LLP, who has won significant judgments in talc suits against J & J brought on behalf of his clients. “Verdicts like the Valadez case advance the cause of resolving the talc liability much more than bankruptcy filings,” Maimon said. J & J has said that over 60,000 claimants support its latest $8.9 billion settlement to be paid out over 25 years. However, there are some 40,000 others who object. Support from a 75% supermajority of claimants would set a clear path to victory in the LTL case. Johnson & Johnson issued an official statement following the verdict in favor of Valdez, intending to appeal. “We thank the jurors for their efforts but intend to pursue an appeal based on erroneous rulings by the trial judge,” J & J said Wednesday. J & J has staunchly denied its now-discontinued talc products ever contained asbestos or ever caused cancer. The next step in this years-long legal saga is likely to come by in early August from the court of U.S. Chief Bankruptcy Judge Michael Kaplan in the LTL bankruptcy proceedings. If Kaplan dismisses the bankruptcy proposal, J & J will go back into the tort system. In that case, the company intends to “fight the claims aggressively,” according to Erik Haas, worldwide vice president of litigation at J & J, who spoke during Thursday’s second-quarter post-earnings call. “We feel very confident in our ability to prevail in the vast majority of claims as we have done in the past in the tort system,” he added. J & J reported strong second-quarter profit and revenue Thursday. While the stock popped on positive financial results — and added to those gains Friday — the talc issue is still an overhang. Even so, J & J got a few of price target increases on Wall Street on Friday. One was from Stifel, which raised its PT to $175 per share from $165 and kept its hold rating. Another one was from Credit Suisse, which went to $175 from $170 and maintained its neutral rating. SVB Leerink increased its PT to $190 from $186 and reiterated its outperform buy-equivilant rating. Just hours after Thursday’s Q2 release, we reaffirmed our 1 rating and $195 price target on the stock. While encouraged by the company’s strong operating results and management’s update on its Kenvue (KVUE) separation, we remain cautious due to the talc situation. “We don’t anticipate additional individual actions” outside the bankruptcy beyond the Valadez case, Haas added during the call. However, Maimon expects there to be more litigation ahead: “There will be claimants and plaintiffs who want their day in court and who will push their cases to trial.” In this scenario, J & J will likely go down the road of settling the talc legal disputes, which is historically how a majority of such cases end, he explained. The J & J subsidiary LTL Management filed for Chapter 11 bankruptcy to protect against talc litigation while resolving the thousands of lawsuits filed against the company. The entity, which was created to hold the talc liabilities, proposed the $8.9 billion settlement to be paid out in segments over 25 years to claimants as a means to end continued talc litigation. Looking ahead, there’s concern that Tuesday’s verdict in California could sway other plaintiffs to opt out of the settlement. We believe there will only be pressure off the company and a better path forward for what investors should do next when there’s more clarity around the proposed talc compensation plan. Bottom line The uncertainty around the fate of the bankruptcy is making us hold off on adding to our J & J position. However, Jim said this is a problem “for the stock, not for the company.” Outside of the talc saga, J & J’s business fundamentals are very strong. Jim likes fast-growing J & J for its AAA balance sheet and its great product pipeline, which he believes are long-term catalysts for the stock. The split-off of J & J’s consumer health division into Kenvue, which went public in May, should also create more value for shareholders over time. The higher growth pharmaceuticals and medical technology businesses are remaining as the new J & J. The Kenvue separation is expected to be completed before the end of the year. (Jim Cramer’s Charitable Trust is long JNJ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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In this photo illustration, a container of Johnson and Johnson baby powder is displayed on April 05, 2023 in San Anselmo, California.
Justin Sullivan | Getty Images
A closely watched talc trial in California goes against Johnson & Johnson (JNJ), adding uncertainty around whether tens of thousands of other plaintiffs suing the company will sign on to J&J’s proposed $8.9 billion settlement offer or seek to get their own days in court.