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Jeff Jonas, an analyst at Gabelli & company pointed out that the part of the fourth quarter charges included $800 million in medical costs related to the recall. He stated, “The hip recalls worry me because their eventual costs are unknown.” The eventual costs he is referring to may include possible lawsuits and settlements down the road involving those who received the hip implants.
Product recalls are one of the possible outcomes when a product is declared a potential danger to those using it. Although product recalls are very costly, companies analysis the expected cost of recall against the possible cost of lawsuits involving potential victims. When the cost of possible lawsuits outweighs the cost of a recall, a voluntary recall may be ordered. In other situations, if a product is declared potentially dangerous by the FDA or other regulating power, they can demand a recall, and the company is legally obligated to comply.
The problem with a recall on a medical device such as an artificial hip is that the ones used are in patients’ hips. This isn’t like a recall on car seats when they can send out notices asking consumers to return the car seat if they bought it for a full refund. For those in danger of the faulty hips, they are still in danger. No new artificial hips are being implanted, but that doesn’t change the fact some were already implanted.
As a result of the recall, Johnson & Johnson is expected a slight drop in their earnings from $5.21 a share to $5.05 a share. Despite this drop, Johnson & Johnson has still recorded earnings of $218 million for the fourth quarter. For Johnson & Johnson, maintaining their reputation is also important and a priority in light of dealing with the hip recall.
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