Johnson & Johnson Threatens Merck’s Diabetes Business

Merck (NYSE:MRK) is bracing itself for new competition as Johnson & Johnson (NYSE:JNJ) inches closer to making inroads into the lucrative diabetes drug market with favorable results in its recent clinical trials. JNJ’s experimental drug for type 2 diabetes, canagliflozin, has shown greater reduction in blood sugar levels than Merck’s Januvia, one of the market leaders. Further, the use of canagliflozin has reportedly resulted in greater weight loss than Januvia. ^[1] Below we take a look at the event and its potential impact on both the companies.

Our price estimate for Merck stands at $41, implying a premium of nearly 15% to the current market price. We are in process of revising our price estimate for the JNJ.

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Drug manufacturers are striving to tap into the growing diabetes market as obesity, which increases the likelihood of diabetes, is rising rapidly. While a number of drugs are available in the market to treat diabetes, they have been associated with a host of side-effects and limitations such as hypoglycemia (a steep drop in blood sugar levels) and low ability to reduce weight. This offers a multi-billion dollar opportunity for drug manufacturers to come up with a diabetes drug that can lower blood sugar levels as well as reduce obesity.

The conventional way of treating the disease is through controlling insulin production (converts blood sugar into energy). JNJ is trying to address the disease through an unconventional approach. Its experimental drug, canagliflozin, removes excess sugar from the body through urine before glucose rises to critical levels. ^[2] In the latest clinical trials, the drug is found to be more effective for both blood sugar and weight loss compared to its closest competitor Merck’s Januvia.

JNJ has filed an application with the FDA and is awaiting approval, which could be declared in a couple of months. However, uncertainty looms over the approval due to unknown risks of the drug. Many trial patients have reported higher rates of genital infections, urinary tract infections and increased urination. The drug could be potentially dangerous for diabetes patients, who also have kidney disease. Further, it is not known if  prolonged use of the drug could damage the kidney. Apprehensions are also raised on the fact that the FDA had earlier rejected a drug that worked the same way as canagliflozin. ^[2] But, if these apprehensions are proved wrong, it could mean a huge upside from the drug sales.

Canagliflozin, if approved, will threaten Merck’s position in the alimentary & metabolism (diabetes) drugs market, which forms nearly 17% of the our $41 price estimate for Merck. However, one will have to closely watch for Merck’s bid for Amylin, which owns a patent for recently approved type 2 diabetes drug Bydureon. If successful, it could help boost Merck’s market share.

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1. Johnson & Johnson diabetes drug tops older therapies in studies, Reuters, June 09, 2012 [↩]
2. J&J Diabetes Drug Seen Challenging Merck’s Market Leader, Bloomberg, June 09, 2012 [↩] [↩]