Few things fascinate as much as a mystery. And the recent report compiled by a special committee of Johnson & Johnson board members has certainly generated some intrigue. The report was undertaken in response to a derivative shareholder lawsuit that was filed on behalf of the healthcare giant against insiders — in this case, those insiders are J&J directors and executives — in the wake of a long-running scandal over millions of recalled products, production gaffes and managerial doubts.

For those who did not follow this particular strand of the Johnson & Johnson saga, the committee report essentially absolved higher management of any wrongdoing or failures during the past couple of years. Despite serious manufacturing breakdowns, government investigations into off-label marketing and, in one case, bribes paid to overseas officials, the committee decided that there were no red flags or indications of systemic failure that were overlooked by the board or J&J executives, including chief executive officer Bill Weldon.

“The special committee finds that there was no breach of any fiduciary duty by senior management or the board of directors and McNeil’s and J&J’s quality and control organizations, policies and procedures did not present any obvious weakness or inadequacy that should have been corrected by senior management or the board of directors,” the report stated. The committee also insisted that subpoenas related to off-label marketing — notably, of the Risperdal antipsychotic — were received after such practices allegedly ended, suggesting the problem was a thing of the deep, dark past. 

Of course, such a conclusion was bound to be contentious. Venerable products like Tylenol are still hard to find on store shelves. A key manufacturing plant, where the offices of the McNeil Consumer Healthcare unit are headquartered, is still being retooled due to a host of violations that contributed to a consent decree with the FDA. And litigation over recalled hip replacements, which allegedly have untenably high failure rates, has not yet taken center stage in a courtroom.

So it was hardly surprising that several attorneys, representing various shareholders who insisted that J&J conduct an investigation, trashed the report as a self-serving pile of paper that was simply designed to allow the healthcare giant to more easily move to dismiss shareholder suits. In fact, Mark Lebovitch and Jeroen Van Kwawegen, who are part of the same legal team that settled similar litigation with Pfizer last year, pulled no punches by labeling the report as a “whitewash.” here were numerous reasons for their response, starting with the composition of the special committee itself. Of the four directors who conducted the investigation, three were named as defendants in the derivative lawsuit. The lawyers were clearly suggesting these directors had a keen interest in absolving management and the board, although J&J pooh-poohed this notion in a subsequent court filing. They also seized on the special outside counsel that was hired to assist the committee — Doug Eakeley, an attorney with Lowenstein Sandler, who has regularly done work for J&J for years.

At issue, of course, was the extent to which these folks could truly be independent. Certainly, independent board members should be capable of directing an inquiry, especially if given sufficient resources and unrestricted access to the necessary documents and personnel.
However, there is an argument to be made that such situations are akin to the fox guarding the henhouse. And the committee certainly did not help its cause by retaining a lawyer who is a known commodity to J&J execs.

J&J had no explanation for another issue that was raised: why some people were not interviewed as part of the investigation. The committee reviewed a database with 21 million documents and insisted that numerous employees were interviewed — the appendix to its report lists 57 individuals, including nearly three dozen current and former senior executives from across the J&J organization, as well as nearly two dozen attorneys who either work directly for the health care giant or for outside law firms who were somehow involved in one or more of the numerous infractions cited in the lawsuit.

But there were some glaring omissions. In particular, Robert Miller, who is head of quality compliance management at McNeil, was not interviewed. This seemed odd, given that McNeil underwent such difficulty with more than one manufacturing plant for such a protracted period. After all, this is the unit that was behind the infamous ‘Phantom Recall’ episode in which contractors surreptitiously purchased various over-the-counter meds, rather than conduct a proper recall.

This was also the unit that prompted FDA inspectors to issue numerous 483 enforcement reports for a variety of manufacturing failings. With tens of millions of over-the-counter products subsequently recalled within a compact period of time, interviewing Mr. Miller would seem like a necessary part of the process. Not surprisingly, the attorneys representing shareholders involved in the derivative litigation jumped on this point in their responses to the report. 

“He is the person most knowledgeable about what occurred with respect to quality control at McNeil OTC, as well as who he communicated with at J&J concerning quality control issues,” wrote Jeff Abraham, one of the attorneys, in a letter to U.S. District Court Judge Freda Wolfson, who is presiding over the litigation. “Concluding no one breached their fiduciary duties at McNeil OTC without interviewing Miller is farcical since he is the person most knowledgeable about the actual events which transpired.”

Yet the committee simply said he was not available for an interview. Why the committee was unable to speak with Mr. Miller, even if meant incurring a delay, is unclear. A J&J spokeswoman declined to comment on his unavailability or why the committee did not take added steps to sit down with him. “Despite his unavailability,” the report stated, “the Special Committee was able to gain what it considers to be an accurate and adequate perspective on the McNeil cGMP issues.”

How that is possible is also not clear, although the report did note that, rather than paying attention to the nuts and bolts of his job during 2007 and 2008, he was focused on “other matters,” such as integrating the recently acquired Pfizer Consumer Healthcare business and a supply chain initiative. The Pfizer integration involved boosting production — in terms of volume and complexity — at the pair of troubled McNeil plants in Fort Washington, PA, and Las Piedras, PR. Meanwhile, two of his senior direct reports were out on sick leave for part of 2009.

This three-year period, by the way, was the run-up to the more recent foibles that have vexed McNeil ever since and also coincided with internal audits and a consultant report that “revealed some cGMP issues that went uncorrected for long periods of time,” according to the committee report. In other words, Mr. Miller was supposedly not positioned to thoroughly oversee quality issues at McNeil. Still, the committee should have insisted that an interview take place, given that the most egregious problems arose after 2009.

On a related note, it also remains unclear the extent to which the committee interviewed mid-level and lower-level personnel who may have had more familiarity with day-to-day decision-making and operations. This is an important — and ironic — point. Remember that J&J directors and senior executives religiously remind anyone and everyone that the health care giant is really not one big company, but is actually a sprawling collection of some 250 far-flung operating units, most of which function autonomously in varying degrees. 

However, this underscores an unanswered question about the committee report. Interviewing senior-level executives at the various operating companies that had problems is a necessity, of course, but then there are the myriad mid-level executives and lower-level employees. Their day-to-day observations might have filled in some blanks when questions went begging about why so many things went wrong. Any committee investigation should dive that deep to understand the real internal workings of a trouble entity.

There were other warning signs that surfaced in the report. Notably, compliance staffing was reduced dramatically, on a percentage basis, in the years immediately before many of the different problems arose. And that is an important disclosure, because this suggests managerial oversight and insight were lacking. The committee argues that the board and senior executives responded to each and every infraction as they learned of them.

That remains debatable, especially when considering the off-label marketing practices. But there are sins of omission and sins of commission. If nothing else, the J&J brass revealed itself unable to effectively get its collective arms around its empire and anticipate what can happen when reorganizations, acquisitions and cutbacks are undertaken. In those situations, the outcome is often not a mystery. 

Ed Silverman is a prize-winning journalist who has covered the pharmaceutical industry for The Star-Ledger of New Jersey, one of the nation’s largest daily newspapers, for more than 12 years. Prior to joining The Star-Ledger, Ed spent six years at New York Newsday and previously worked at Investor’s Business Daily. Ed blogs about the drug industry at Pharmalot, at www.pharmalot.com. He can be reached at [email protected].