The FBI is investigating a surgical device used on tens of thousands of women each year, and this could be bad news for Johnson & Johnson (NYSE:JNJ).

Last year, Johnson & Johnson voluntarily stopped selling power morcellators, a surgical instrument used to cut up large masses of tissue for removal during laparoscopic surgery. Now the FBI is investigating whether J&J had knowledge of the hazards and danger surrounding the power morcellator while it was still being sold.

Power morcellators had been commonly used during laparoscopic hysterectomies. Hysterectomy is the second most common surgery performed on women in the United States, with 500,000 performed annually. Roughly 40% of all hysterectomies are performed to remove symptomatic uterine fibroids, which are usually benign uterine growths. Power morcellators had been used in approximately 25% of fibroid-related hysterectomies, which amounts to roughly 50,000 fibroid-related hysterectomies annually.

FDA alert

The FDA issued a rare safety alert in April 2014, in which it estimated that 1 in 350 women who underwent a hysterectomy for the treatment of fibroids was found to have unsuspected uterine sarcoma, a type of uterine cancer. The report stated that if laparoscopic power morcellation is performed on women with unsuspected uterine sarcoma, there is a risk that the procedure could spread the cancerous tissue within the abdomen and pelvis, significantly worsening the patient's long-term survival prospects.

During a laparoscopic hysterectomy, the uterus is sliced, or morcellated, into smaller pieces in order to extract them via small abdominal incisions. However, FDA's alert implies that the morecellation process may spread microscopic cells throughout the abdominal cavity when any previously undiagnosed cancerous tumors are sliced, thereby releasing malignant cells contained within. Scientists are indicating that if malignant cells are released into the abdominal cavity, they can seed multiple new tumors. The most troubling aspect is that if the uterus had been removed intact, with the fibroids intact as well, the cancer would often also have been removed and the patient would have recovered. However, once this type of cancer, leiomyosarcoma, has spread, it is usually fatal.

What this means for Johnson & Johnson

In July 2014, soon after the FDA announcement, J&J halted sales of the power morecellator, contacted doctors, medical associations, hospitals, and advocacy groups, and issued a voluntary recall of the device. Before the company pulled the device off the market, Johnson & Johnson was the largest manufacturer of power morcellators, with an estimated 72% market share of all such devices in 2011.

The FBI is currently investigating the potential dangers and hazards surrounding the morcellation procedure, and it is looking at Johnson & Johnson specifically to determine whether the company was aware of the risks prior to pulling its product off the market.

The FBI has been speaking with Robert Lamparter, a former pathologist from Pennsylvania, who in 2006 contacted Ethicon, a wholly owned subsidiary of Johnson & Johnson and the manufacturer of the company's power morcellator, about the device's potential risks. After noticing an increased number of morcellated cancer samples in his lab, Lamparter wrote to Ethicon, "If a morcellation is done, the patient's survival is jeopardized." A J&J spokesman confirmed that the 2006 correspondence with Lamparter took place and indicated that the doctor's concerns led the company to revise the instructions for use of the device.

A larger issue: Do medical devices lack FDA scrutiny?

Medical devices don't undergo the same level of scrutiny in the U.S. as medications do. "The FDA is essentially approving devices for marketing which have not undergone stringent enough safety testing," said Hooman Noorchashm, the husband of Amy Reed, an anesthesiologist who learned that she developed Stage 4 cancer after she had a laparoscopic hysterectomy with a power morcellator to remove uterine fibroids. Reed has spoken out about the dangers and risks associated with the power morcellator since her procedure in 2013.

The FBI's investigation into morcellators and Johnson & Johnson's prior knowledge of any risks and hazards associated with the use of the device is ongoing. Meanwhile, it is uncertain whether this investigation will ultimately have any impact on the company. J&J does not provide sales figures for morcellators; however these devices likely represented a relatively small portion of the company's medical devices unit, which made up just over a third of Johnson & Johnson's total 2014 sales. Consequently, even though J&J had been the dominant provider of power morcellators, the impact of this product to the company's bottom line is relatively insignificant.

Although loss of this single device likely won't break the bank, investors should keep an eye on legal expenses tied to lawsuits that Johnson & Johnson will inevitably encounter. Earlier this month, the first power morcellator case was settled as Lina Medical ApS, a Danish manufacturer of these devices, reached a settlement for an undisclosed amount. Recent Johnson & Johnson settlements include a $2.2 billion settlement for its antipsychotic drug, Risperdal in 2013, and a settlement over transvaginal meshes and sling devices with more than 100 plaintiffs for an undisclosed amount earlier this year.

Investors should also take note that stories involving FBI investigations of large corporations and lawsuit settlements typically make headlines, and Mr. Market tends to react negatively to the news. This was indeed the case with J&J, as the company's stock price declined about 3.5% soon after the FBI story broke. The results of such investigations are frequently insignificant, and such declines in stock price can provide excellent opportunities to increase your ownership in the company. However, in this instance I believe J&J's stock is fairly valued, and like many other value investors, I buy or add to my positions only when I believe a company's stock is priced well below its fair value.