Reference no: EM131145904

Tylenol: Decades of Dilemmas The Chicago Capsule Poisonings In 1982, twenty-three-year-old Diane Elsroth died after taking a Tylenol capsule laced with cyanide. Within five days of her death, seven more people died from taking tainted Tylenol purchased from stores in the Chicago area. At that time, Tylenol generated $525 million per year for McNeil Consumer Products, Inc., a subsidiary of Johnson & Johnson. The capsule form of the pain reliever represented 30 percent of Tylenol sales. McNeil’s marketing studies indicated that consumers found the capsules easy to swallow and believed, without substantiation, that Tylenol in capsule form worked faster than Tylenol tablets. The capsule’s design, however, meant they could be taken apart, tainted, and then restored to the packaging without evidence of tampering. After the Chicago poisonings, which were never solved, McNeil and Johnson & Johnson executives were told at a meeting that processes for sealing the capsules had been greatly improved, but no one could give the assurance that they were tamperproof. The executives realized that abandoning the capsule would give their competitors, Bristol-Myers (Excedrin) and American Home Products (Anacin), a market advantage, plus the cost would be $150 million just for 1982. Jim Burke, CEO of Johnson & Johnson, told the others that without a tamperproof package for the capsules, they would risk the survival of not only Tylenol but also Johnson & Johnson. The executives decided to abandon the capsule. Frank Young, a Food and Drug Administration (FDA) commissioner, stated at the time, “This is a matter of Johnson & Johnson’s own business judgment, and represents a responsible action under tough circumstances.” Johnson & Johnson quickly developed “caplets”—tablets in the shape of a capsule then offered consumers a coupon for a bottle of the new caplets if they turned in their capsules. Within five days of the announcement of the capsule recall and caplets offer, 200,000 consumers had responded. Johnson & Johnson had eliminated a key product in its line—one that customers clearly preferred—in the interest of safety. Otto Lerbinger of Boston University’s College of Communication cited Johnson & Johnson as a “model of corporate social responsibility for its actions.” President Ronald Reagan, addressing a group of business executives, said, “Jim Burke, of Johnson & Johnson, you have our deepest admiration. In recent days you have lived up to the very highest ideals of corporate responsibility and grace under pressure.” Within one year of the Tylenol poisonings, Johnson & Johnson regained its 40 percent market share for Tylenol. While many attribute the regain of market share to tamperproof packaging, the other companies had moved to that form as well. However, it is interesting to note that McNeil was able to have its new product and packaging on the shelves within weeks of the fatal incidents. There had been some preparation for the change prior to the fatalities, but the tragedy was the motivation for the change to safer packaging and product forms. McNeil has continued to enjoy the goodwill from its rapid response to the poisonings as well as its willingness to take the financial hit for what experts believed was a very small risk that there was more cyanide-laced Tylenol out on the shelves. In fact, the recall was so indelibly etched in the public’s mind and in the minds of those in the field of business ethics that McNeil, Johnson & Johnson, and Tylenol itself were often given free passes on conduct that did pose safety risks to customers. As new issues with Tylenol have developed, McNeil seems to be given the benefit of the doubt because of the goodwill and reputational capital it purchased with the capsule recalls. Tylenol and Liver Damage On December 21, 1994, the Journal of the American Medical Association published the results of a five-and-one-half-year study showing that moderate overdoses of acetaminophen (known most widely by the brand name Tylenol) led to liver damage in ten patients. The damage occurred even in patients who did not drink and was most pronounced in those who did drink or had not been eating. Further, the study by Dr. David Whitcomb at the University of Pittsburgh Medical School found that taking one pill of acetaminophen per day for a year may double the risk of kidney failure. 64 By 2001, there were 450 deaths due to liver failure from Tylenol overdoses. At that time, the American Association of Poison Control Centers called acetaminophen poisonings the most common of all reported poisonings. 65 The number of pediatric poisonings from overdoses of acetaminophen has more than tripled since 1996. As a result, the FDA adjusted the adult and pediatric doses that were acceptable in 2009. However, adult deaths from overexposure are more likely to be the result of suicidal ingestion. Tylenol is a stunning source of revenue for McNeil and Johnson & Johnson, with revenue totals growing at double-digit rates as Tylenol expands market presence into 5,000 convenience stores with new and smaller packaging of its product and its new formulas such as Tylenol PM. Tylenol users who claimed they were victims of overdose and liver damage and the lack of effective warnings have not been successful against Johnson & Johnson. McNeil has modified the recommended dosages, the ad claims, and language on its labels. The product labels before current modification read, “Gentle on an infant’s stomach,” and Tylenol’s ad slogan was “Nothing’s safer.” That language has been removed and McNeil added to its infant Tylenol label: “Taking more than the recommended dose . . . could cause serious health risks” because of liver damage in children. McNeil also responded to data that showed patients who combine Tylenol with alcohol have produced 200 cases of liver damage in the past twenty years, with fatality in 20 percent of those cases. The level of alcohol use by patients among these cases was multiple drinks every day. McNeil modified its labels to include bold warnings about alcohol use and the dangers of combining Tylenol with any drinking. Despite the extensive coverage of the issues surrounding Infant Tylenol, Tylenol overdoses, and issues with liver damage from combining alcohol and Tylenol, the company did not experience any loss of market share or even extensive negative media coverage. The goodwill from Tylenol’s earlier recall appeared to see it through these crises. However, others issues were emerging. The Tylenol Quality Control Program In May 2010, the FDA was considering bringing criminal charges against McNeil for a pattern of violations in its quality control in the production of children’s Tylenol. The charges would spring from the April 30, 2010, recall by McNeil of 136 million bottles of liquid pediatric Tylenol, Motrin, Benadryl, and Zyrtec because the medicines contained too much metal debris or too much of the necessary active ingredient in these over-the-counter drugs. Because of the presence of metal debris, the medicine batches failed FDA testing. However, prior to the FDA testing and the recall, there was evidence that McNeil was aware of the developing problem but took no public action. A purchase order that the company turned over to congressional investigators indicated that McNeil had hired a contractor in 2009 to visit 5,000 stores and buy Motrin from the shelves. The contractor’s PowerPoint materials instructed employees to act like any other customer and make “no mention of this being a recall when making a purchase.” McNeil indicated to congressional investigators that “The Motrin Purchase Project” was created by a McNeil subcontractor without its knowledge and approval. McNeil said it notified the FDA about two Motrin lots that did not dissolve properly and that it was removing the Motrin from the shelves. The evidence submitted for the hearings showed that McNeil had received forty-six complaints from consumers about black particles in Tylenol and other McNeil products. However, McNeil did not notify the FDA nor did it recall the medicines. The inaction in the face of customer harm represented the straw that broke the FDA’s back of tolerance because the company, at that point, was finishing two years of an ongoing tussle with regulators over quality control. At one plant that manufactured Children’s Tylenol, seven batches of product were released after testing revealed problems in three batches. The agency’s frustration in dealing with the plants and managers for inaction and ongoing violations led to the review of the company for possible criminal charges. The surreptitious removal of Motrin from retail stores because McNeil had discovered quality control problems with that product was referred to by the FDA as, in effect, an unannounced or “phantom” recall. Also in 2008, McNeil failed to notify the FDA that it had received complaints from customers about a moldy smell in some of the products made in its Puerto Rico production facilities and, at the same time, failed to disclose complaints from customers about stomach problems experienced after they had used the “moldy” products. McNeil tested the products and found no problems, but the complaints continued through 2009. Further testing showed that the medicine had been contaminated by a chemical used in the plant for the treatment of wooden shipping pallets. One member of Congress noted that the recall on the “smell” issue took one year and that it should have taken 3 days. At another plant, the FDA found that the company “knowingly” used an ingredient that was tainted with Burkholderia cepacia, a bacteria that most healthy people can handle but that can cause serious infections in those with chronic illnesses such as cystic fibrosis. Another member of Congress said of the congressional inquiry, “We are not getting the kind of information and cooperation from Johnson that I would like.” As consumers purchased generic brands to substitute for the recalled Tylenol products, quality problems emerged in those medicines as well. In addition to the criminal charges, the FDA is studying the production quality issue from an industry perspective and is considering revamping the production and testing requirements for all over-the-counter drug manufacturers. The agency released the letters that it sent to forty-three drug factories for their failure to correct “shoddy manufacturing practices that may have exposed patients to health risks.” The letters indicated that FDA inspectors had found insects in equipment and ingredients, improper testing, failure to conduct required tests, and disregard for customer complaints. More than half of the plants inspected had violations, even if those violations did not rise to the level of receiving the agency’s letter warning.

Discussion Questions:

1. Were the shareholders’ interests ignored in the decision to take a $150 million write-off and a possible loss of $525 million in annual sales by abandoning the capsules?

2. Suppose that you were a Tylenol competitor. Would you have continued selling your capsules?

3. Was Mr. Burke’s action a long-term decision? Did it take into account the interests of all stakeholders? How did Mr. Burke’s action help the company with the liver-damage issues?

4. A lawyer who represents clients suing McNeil offered the following observations: “It [McNeil] markets itself as a company that takes children’s safety very seriously and that’s why they can charge a premium price for the Tylenol. People are willing to pay a premium price because of a reputation for safety. Now they’re being deceived.” Another lawyer who represents companies before the FDA added, “The value of the brand is such that that’s got to be the first thought.” What thoughts are the lawyers offering on cost analysis in ethical issues through their experiences and observations?