Johnson & Johnson

Late last month, J&J recalled 40 widely used nonprescription products for children and infants, such as Tylenol and Motrin, after Food and Drug Administration inspectors found filthy equipment and contaminated ingredients at a Pennsylvania factory.

This is an issue of trust, House Oversight and Government Reform Committee Chairman Edolphus Towns told a hearing held to investigate the recall. When parents and grandparents give these medicines to their children, they want to be confident that they are not harmful.

A J&J executive told the panel that the company had not lived up to its reputation and apologized for the concern and inconvenience created by the recall.

The FDA says there have been hundreds of complaints but no children have been known to be harmed.

Investors, previously confident the problems were a minor financial concern for the diversified maker of medical and consumer products, are beginning to be cautious.

JP Morgan analysts said on Tuesday that the recall could shave J&J's sales by $300 million this year to nearly $62.3 billion. It is also likely to dent earnings by 3 cents per share or more depending on how much it costs to fix the problems, they said.

Shares of J&J closed down 0.2 percent at $59.03 on the New York Stock Exchange on Thursday, underperforming the S&P Pharmaceuticals Sub-Industry Index which rose 1.3 percent on a day of broad stock gains.

I think it's beginning to be an issue, Noble Financial Group analyst Jan Wald said of the recall. The more serious the government is going to take it, the more serious investors are going to take it.

Lawmaker said the episode highlighted the need to give FDA more power over drugmakers. Towns said he would introduce legislation to expand FDA's ability to order a drug recall, something that now requires a lengthy legal process and court orders if a drugmaker refuses to voluntarily issue a recall.

Since the nationwide recall was announced last month, 136 million bottles of medicine have been recalled in the fourth company recall in the last 12 months.

QUALITY PROBLEMS

Food and Drug Administration officials told lawmakers it was the latest evidence of systemic quality problems at J&J and its McNeil Consumer Healthcare unit and demonstrated a failure to comply with basic good manufacturing principles.

FDA has had growing concerns about the quality of the company's manufacturing process, Deputy Commissioner Joshua Sharfstein testified, citing poor inspection results and multiple consumer recalls.

Although the public risk from these quality problems is low, these problems should never have occurred, Sharfstein said, calling the manufacturing failures unacceptable.

The agency is weighing whether to penalize the company through either civil or criminal charges, but no decision has been made yet, he added.

Colleen Goggins, worldwide chairman of J&J's consumer group, said the company has not lived up to its reputation but has taken drastic steps to clean up its manufacturing process and shake up management.

I apologize to all the mothers, fathers, and caregivers for the concern and inconvenience caused by the recall, she said.

EXTRAORDINARY STEPS

Sharfstein said the FDA has been concerned by J&J's history of problems, with FDA inspectors checking McNeil's facilities increasingly often. In February it took the extraordinary step of meeting with top management at its J&J parent company.

In late April, FDA cited McNeil's Fort Washington, Pennsylvania, plant for a variety of lapses that included bacterial contamination of ingredients, grimy facilities and the potential for medicines to be too potent.

Sharfstein said the FDA cited similar problems at McNeil before 2009, but added the unit resolved the issues. But in May and June 2009, FDA again found multiple problems, including the failure to meet its own standard for quality, he said.

Both Democrats and Republicans blasted J&J for allowing widespread lapses at its McNeil unit even as it touts itself as serving patients first.

When a parent gives her child a Tylenol Product or other children's medicine produced by Johnson & Johnson, they are relying on the 120-year-old reputation of a company who claims that it puts 'the needs and well-being of the people we serve first,' said the committee's ranking Republican, Representative Darrell Issa.

McNeil appears to have a culture of mediocrity, said Representative Elijah Cummings, a Democrat.

J&J's Goggins said the company worked quickly to ensure recalled products were removed from stores and the public informed. McNeil has also made significant organizational changes, hiring six new top officials to oversee quality and plant operations, she said.

The companies have been working to improve product quality and will expend whatever resources are necessary to ensure the Pennsylvania plant can resume production, she said.

(Reporting by Susan Heavey; Additional reporting by Lewis Krauskopf in New York; Editing by Lisa Von Ahn, Phil Berlowitz and Tim Dobbyn)

Pennsylvania Storm Medicine Recall