Johnson & Johnson’s latest gambit to solve its massive talcum powder asbestos issue: A $6.5 billion settlement, paid out over 25 years

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Johnson & Johnson has a multibillion-dollar problem with its talcum powder and it just admitted that the best solution is also a multibillion-dollar one. The pharmaceutical giant, J&J for short, proposed a new way to settle thousands of pending lawsuits that allege its talc-based products, including an older baby powder formula, contained asbestos and caused ovarian cancer: a $6.475 billion payout over the next 25 years. 

The new settlement would be a financial hit for J&J, which maintains its products do not contain asbestos or cause cancer. When put in context of the company’s size, however, it doesn’t seem so extreme. The $6.475 billion, which again will be paid out over multiple decades, represents just 7.8% of the $85.2 billion in sales Johnson & Johnson pulled in last year, 18.3% of its $35.2 billion in net earnings, or 42.8% of its $15.1 billion in research and development expenses, SEC filings show.

Even looking at the nominal value of the latest potential talc-settlement—approximately $8.4 billion, which is then discounted at a rate of 4.4%—the payout represents less than 10% of J&J’s 2023’s revenue. And investors clearly saw the settlement as good news, with J&J’s stock surging as much as 5% on Wednesday. 

Expensive history of talc-related lawsuits

J&J’s proposed deal, if approved by claimants through a 75% majority vote, would resolve 99.75% of the talc-based product lawsuits that have plagued J&J for over a decade, while preventing further claims. That’s critical, considering just how expensive some of the talc-based lawsuits have been for the company.

In 2021, a Missouri jury ordered J&J to pay roughly $2.1 billion to a group of just 22 women who said asbestos in the company’s talc products had caused their ovarian cancer. That was frightening for investors, considering there are more than 50,000 total ovarian cancer claimants. J&J also agreed to pay $700 million to 42 states and Washington, D.C to settle a probe into the marketing of its talc-based products, the Wall Street Journal reported in January, demonstrating the financial impact of talc-related lawsuits and investigations.

J&J did not immediately respond to Fortune’s request for comment on the proposed settlement.

Another try at subsidiary bankruptcy

If J&J’s new deal is approved by claimants, it would also allow the company to settle its talc-related ovarian cancer cases through the bankruptcy of a subsidiary, LTL Management. 

J&J’s two previous attempts to use the Chapter 11 bankruptcy process to settle its talc-related cases were denied by courts that argued J&J’s subsidiary’s wasn’t in enough “financial distress” to merit bankruptcy. But now, the company is hoping to get the go-ahead from claimants for this new deal before going to court in order to try a different, so-called “prepackaged” bankruptcy process. 

And while J&J’s new deal has yet to be approved by the claimants, it has support from “the overwhelming majority” of them, J&J’s management said on the company’s earnings call Wednesday.

Erik Haas, J&J’s worldwide vice president of litigation, told analysts that he believes the deal is in the best interest of the claimants and should be confirmed by bankruptcy court, noting that J&J has won around 95% of ovarian cancer cases that have been tried so far, and New Jersey judge recently decided to allow the opinions of claimants’ experts on the alleged cancer-causing properties of J&J’s talc-based products to be reevaluated. 

“If plaintiff’s opinions failed that review, all the ovarian claims should then be dismissed. We fully expect that will be the result because the opinions of plaintiff experts are irreconcilable with the research conducted for decades by independent experts, as well as governmental and regulatory bodies,” Haas said. 

“Johnson & Johnson’s talc products are safe, do not contain asbestos and do not cause cancer and none of the talc related claims against the company have any merit whatsoever,” he added.

J&J recorded a $2.7 billion charge in the first quarter related to the new deal, lifting its reserve for talc-related claims to about $11 billion.

Mesothelioma and other state-specific consumer protection claims were not addressed in the $6.475 billion deal. Just last month, J&J and two subsidiaries were held liable for the asbestos-related death of a mother and grandmother and were forced to pay $45 million. But J&J’s management also discussed the hundreds of mesothelioma lawsuits that have weighed on the company in the earnings call, noting that they have settled all but 153 to-date, and have agreements “in principle” to resolve the state-specific claims.

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