JNJ hit with a lawsuit against hip replacement device

In the second-half of October, the FMCG company Johnson & Johnson (NYSE: JNJ) reported fiscal 2016 third-quarter earnings of $1.68 per share on revenues of $17.8 billion. This compares with earnings of $1.49 per share on revenues of $17.1 billion in the similar period last year. The quarterly results also exceeded Wall Street’s expectations of $1.65 per share in earnings on revenue of $17.74 billion. The company also reconfirmed its FY16 revenue guidance of $71.5 billion to $72.2 billion.

Furthermore, the baby care products manufacturer raised its fiscal 2016 adjusted earnings guidance to a range of $6.68 to $6.73 per share.

In spite of these positive developments, the stock appreciated only by about $3 to $122.33 before falling to a low of $109.31 in the first week of December. Since then, the stock had appreciated to $115 levels. Based on the facts presented below, we forecast another round of decline in the stock.

Johnson’s Baby U.S.

On December 9th , a man from Indiana filed a lawsuit against the New Brunswick-based company over its hip replacement products. The case was filed just four days after the company was slapped with a penalty of $1 billion in a similar case. The lawsuit claims that the patient suffered severe damages from the hip implant done by DePuy, which is a subsidiary of Johnson and Johnson. Furthermore, the suit points out that the defective product allows metal particles to mix with the patient’s bloodstream and tissue.

As of date, the medical equipment manufacturer faces nearly 8,000 lawsuits for its DePuy Orthopaedics product. The investors are concerned by the fact that the device has already lost one trial. In order to settle charges, the company has set aside $2.5 billion. It can be remembered that Johnson & Johnson had recalled another brand of its hip replacement product, the ASR device, in 2010.

Pfizer is scheduled to launch Inflectra, a Remicade biosimilar in 2017. It is expected to create severe competition for Johnson & Johnson as the drug is expected to be offered at about 15% discount. It should also be noted that Johnson and Johnson is the 17th most shorted stock in the Dow Jones component. Thus, considering the legal issues and the anticipated competition from the launch of Inflectra, we forecast a short-term correction in the stock.

The stock faces resistance at 116.30. The MACD indicator is moving downwards. Likewise, the RSI is about to go below the reading of 50, which bifurcates the bullish and bearish zone. This reflects the probability of a downtrend in the stock.

A binary trader can gain from the decline in the share price by investing in a low or below contract. The below contract can be purchased as long as the stock trades above $114.60. A time period of one week should be allowed for the contract to expire.

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