Wednesday, 16 October 2019

Johnson & Johnson Told to Pay $8 Billion in Damages

In August 2017, we looked at a case whereby Johnson & Johnson, the global pharmaceutical company, were ordered to pay more than $400 million in damages. However, this month a Jury in Philadelphia decided that the company would face a much higher financial penalty on account of its development and marketing of an anti-psychotic drug that has been linked to the development of breast tissue in men. In this post we will look at this award, what it means for J&J, and what happens next.

The case has been brought by Nicholas Murray of Maryland, who has claimed that he developed female breast tissue after taking the drug Risperdal when he was younger. It has been reported that the drug has been linked to the abnormal growth of breast tissue in boys. Risperdal is used to treat a number of mental/mood disorders, including schizophrenia, bipolar disorder, and some variants of autistic disorder. The US Food and Drug Administration approved the drug for use in 1993 for these conditions. When assessing online medical websites, the associated side-effects seem to be common for this type of drug (dizziness, difficulty swallowing, mood changes etc.), but now this new link has fundamentally changed the conversation surrounding this drug.

In just one of thousands of cases pending on this subject, Murray had claimed that J&J failed to warn of the risk of ‘gynecomastia’, and that the company had marketed the drug for the usage of children, in appropriately. In 2015 a jury awarded Murray $1.75 million for not warning against the risk of gynecomastia, but this was reduced to $680,000 on appeal. Murray’s lawyers stated that the ‘conduct that the jury saw in the courtroom, was clear and convincing that J&J disregarded the safety of the most vulnerable of children’ and that J&J is a company ‘that has lost its way’. Whilst J&J have responded by saying that the award is ‘grossly disproportionate with this initial compensatory award in this case’ and that it will be appealing, the horizon looks troubling for the corporate giant.

This month the company reported third-quarter earnings and revenue figures that beat expectations (revenue was around $20 billion), the potential for losses relating to legal issues is mounting every day. This current case is potentially going to open the floodgates, especially as a court recently allowed for a mass tortious litigation to take place. Yet, cases relating to sale of this particular drug are not the company’s only problem. They are also currently embroiled in cases surrounding the cancerous effects of baby powder, their development and distribution of opioid-based products, and also artificial hips – in May the company agreed to settle for more than $1 billion for the manufacture and sale of defective metal-on-metal hip replacements. Add to this the liability the company is facing regarding the development of defective vaginal mesh products, it becomes clear the company is facing serious legal difficulties in spite of its good financial performance. It has been suggested in the media that settling these cases will cost the company near $20 billion, but that is certainly not set in stone. Depending upon the example that the judiciary may want to set, it could be much higher indeed.

The question then becomes what this all means for J&J moving forward. Its shares are down in response to the potential for liability costs, but they will probably rebound. However, it is the company’s business practice that is being called into question, with it being commented that the company used to be known for its gold-standard ethical approach and, now, that is evaporating. Yet, it may just be the case that the environment around J&J is changing rapidly, and they are being caught out. 30/40/50 years ago, the ingredients and effects of their baby powder were not high on the agenda, but in the current climate that focuses on health, wellbeing, and sustainability, they are. The effect of the opioid crisis and the new demographic of its victims has shone a light on the selling practices of these massive firms, and J&J has been found to have come up short. Perhaps the important question is what J&J will do now moving forward. If the financial penalty is large enough, the move to reacquaint themselves with those gold-standard ethical principles will be more attractive. However, if they can ride this wave, or ‘bronco’, and come out of it intact, then there is less of an incentive to change. The collective financial penalty has to be so large so as to inspire change because that is the only form of punishment that is allowed within the current system – J&J executives will not be personally punished for the drop in standards, only financially punished by proxy. The future for J&J, and for their customers, hinges on how they react to this current crisis facing them as a company.


Keywords – Johnson & Johnson, Pharmaceuticals, business, law, @finregmatters

Monday, 7 October 2019

Morningstar Move into Cryptocurrency Ratings, but is it too soon?

It has been reported recently that Morningstar, a credit rating agency, is attempting to move into the rating market for digital assets. Whilst the article breaking this news contains a number of issues, it does raise an interesting point regarding a. the rating of digital assets, and b. whether the credit rating industry is ready to move into that particular marketplace. In this post we will assess the lead article, and discuss some other elements within this particular field.

The article in Brave New Bitcoin starts off on a worrying footing right out of the gate, announcing that ‘Morningstar Credit Ratings launched in 2016… despite only being in the market for three years the financial services company managed to generate over $1 billion revenue in 2018’. We can dismiss this error as we know that, in 1984 Joe Mansueto founded the agency in Chicago. The article has mistaken Morningstar’s receiving of permission to rate corporate bonds in 2016 as the beginning of it as an agency. Nevertheless, the points the article raise are of interest. In Forbes an article discusses how Morningstar are pushing to become the first formal agency to get involved in the rating of ‘cryptoassets’. COO Michael Brawer said recently that ‘we’re working closely with a number of blockchain-oriented firms who are looking to issue debt instruments on a blockchain… we’re looking to see how we can also provide credit opinions, whether it’s a credit rating or different types of credit data and credit analytics that accompany those debt instruments, and we’re also looking to provide our services on a blockchain’. Whilst there have been suggestions and small advances into this marketplace, Morningstar are attempting to be ambitious to steal a march on their larger rivals. This movement was apparently initiated by an approach from a blockchain start-up looking to issue home equity loans on a blockchain, and who were in need of some third-party verification process. The article discusses how the Big Three agencies have acknowledged that moving debt issuances into blockchains could create potential savings and increased transparency, but that Morningstar is leading the way on a system that may eventually result in assets being originated in a blockchain and then securitised, at which point financial institutions that want to partake in the technology would join the fold.

Morningstar are apparently developing two particular routes. The first is via a system called an oracle. This essentially means that Morningstar’s ratings could be attached to a given asset or product, and it could not be doctored – this means that it could be utilised securely and, potentially, as part of ‘smart contracts’. Interestingly, Brawer discusses how no new people are being hired for this effort, but that this year’s takeover of DBRS means there are skilled people within DBRS who can assist with the effort. The second route is particularly interesting. Morningstar, under this particular plan, would make their quantitative model available for users who would pay for the privilege, so that investors could test the creditworthiness of a product for themselves. There are natural limitations to this, like slow settlement times, but the plan is extremely ambitious. Morningstar already develops bespoke models for some clients, but the scope of this plan is much larger than anything they run at the moment. This market is developing at a pace, with Figure and Cadence amongst a number of firms who are engaging with credit rating agencies for the purposes of securitising within a blockchain, and who are having early successes in doing so.

However, there are concerns. There already exists a crypto-rating agency, and it is being massively criticised. Weiss Crypto Ratings began operations in 1971, but has been attempting to make its place in the crypto world. Proudly operating the subscriber-pays remuneration system, the firm suggest it provides crypto-ratings and that there ‘are the first by a financial rating agency’. To do that, it combines ‘robust, intelligent computer models built by our team of analysts and software developers, analysis of vast amounts of data, and, above all, independence’. This process results in letter-graded ratings for digital products. However, its ratings have been labelled ‘laughably bad’, based on a number of issues. Their rating of Bitcoin, as the standard-bearer, is much lower than much newer and more unknown offerings, which has raised red flags. It has also been suggested that, apart from the massive rating divergence within the crypto world, the process of rating within this realm is actively operating against the ethos of cryptocurrencies, which are designed (through distributive ledger technologies) to be essentially trustless and transparent – it has been argued that unless Weiss Ratings offers a rating system that is fundamentally transparent, then it should not exist within the technology. However, Moody’s has warned against the inherent risks of trading within environments with no formal structures, which seems to put the two worlds at fundamental odds.

Ultimately, it appears that Morningstar’s potential offering of opening their quantitative models for consumers, within a blockchain, could be advantageous. However, this is only the case if they can sort out the time-lags that accompany credit ratings, which is no small feat. Also, there is a more philosophical question as to why ratings are needed in a blockchain – the whole point is to remove informational walls so that everybody can see everything. Perhaps the issue, again on a philosophical footing, is that blockchain technology cannot cure the informational asymmetry that keeps the rating agencies in business. Whether it is through an inability, an inefficiency, or something else, people often do not understand financial-based data. This is where rating agencies, with their letter-based rating systems, exist. Efforts after the Crisis to reduce the position of the rating industry have not only been ignored, but the industry has become more prevalent – this is because they are, fundamentally, required. This is not, arguably, for their informational value, but for their signalling value – and that value is required in a blockchain. Whilst crypto-believers may believe that a trustless system can be developed, it is extraordinarily unlikely, and whilst that is so the credit rating system will be alive and well.


Keywords – business, cryptocurrency, bitcoin, credit rating, Morningstar, @finregmatters