Johnson & Johnson: second talc bankruptcy dismissal hits share price

Johnson & Johnson is a very valuable company, notwithstanding its efforts to convince US federal judges of the contrary. Late on Friday, a New Jersey bankruptcy court ruled that the big pharma company could not pursue a bankruptcy deal with tens of thousands of consumers who claim its talc powder caused serious illness.

The court said that a financially engineered J&J subsidiary — created through the so-called Texas two-step process — was “not sufficiently financially distressed to avail itself of bankruptcy”. On Monday J&J shares fell about 4 per cent — or $17bn — of value on fears the talc litigation could continue for years.

Alleged victims now will have to rely on the broader US court system to potentially get settlements. The bankruptcy court acknowledged this process was slow and perhaps more inefficient than a single global deal struck in bankruptcy. Big companies including the likes of 3M have attempted to use US bankruptcy law as a way to quickly resolve so-called mass torts.

The Friday bankruptcy dismissal was a second attempt by the J&J subsidiary known as LTL to satisfy the court system that bankruptcy was appropriate. A previous 2023 ruling had said that LTL was insufficiently financially distressed to belong in bankruptcy court because it had secured funding from its parent J&J and had its own assets. 

With some more asset shuffling, along with a raised $8.9bn settlement offer and agreements with thousands of victims, J&J tried again. But the court said that, even this time, LTL had far too much in the bank for a bankruptcy filing. It had access to perhaps $30bn in resources.

J&J and other big companies say that they are not trying to shirk their responsibilities. The particular powers of the bankruptcy court make for a cleaner resolution for all sides, they argue.

US courts are not impressed with their arguments. But when ad hoc litigation proves to be disappointing, US jurisprudence will probably need to be reformed.