With the arrival of the new year, we review the recent developments for healthcare companies under our coverage and evaluate our expectations for the new year. Last year was a good year for most drug makers as many saw sharp increases in their stock prices as patent expiries were well discounted by the market in 2011 and hopes for new drug approvals drove the rally. Johnson & Johnson’s (NYSE:JNJ) stock rose a modest 7% after a trying year that included a series of mixed announcements surrounding its pharmaceuticals business as well as a host of lawsuits and recalls for its medical devices business. One positive was that it completed one major acquisition, which has been well received by the market.
We maintain our $75.50 price estimate, which is around 10% ahead of the market price.
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2012 At A Glance
JNJ, like other pharmaceutical companies, has been battling revenue losses due to patent expiries in recent years. While J&J lost patent protection for some of its largest selling drugs like Concerta and Levaquin in 2011, one more drug, Invega, a mental disorder pill, lost its patent in the first half of 2012. Adding to the woes was a lawsuit against its anti-psychotic drug, Risperdal, threatening the company with a huge penalty of over $1 billion.
However, during the same period, positive reports about its metastatic prostate cancer drug, Zytiga, helped assuage concerns. The drug helped in eliminating aggressive tumors in some patients after their prostate glands were removed and stopped the tumors from spreading in nearly 33% of patients being treated.
Further, in May JNJ’s experimental drug for type II diabetes, Canagliflozin, exhibited strong efficacy in phase III trials by reducing blood sugar in diabetics with an elevated risk of heart problems over Merck’s Januvia, one of the market leaders.
In the beginning of the second half of 2012, the company faced a setback when the FDA rejected its application to broaden use of Xarelto, a blood thinning drug, to prevent heart attack and stroke in patients who have previously had severe chest pain or heart attack. Then came the failure of its experimental drug Bapineuzumab for Alzheimer’s.
In November, Zytiga secured a much needed FDA approval for expanded use in metastatic castration-resistant prostate cancer (mCCRPC) patients, who have not yet been treated with chemotherapy, but have failed hormone treatment. And to add to the good news was a positive opinion from the European Medicines Agency’s (EMA) committee for a similar indication.
JNJ’s medical devices and consumer healthcare businesses have had a rough year, owing to declining sales of ASR hip implants and surgical mesh and repeated FDA concerns over product safety for patients. JNJ decided to phase out production for this equipment.
Then, the company had to recall its surgical stapler devices, which was exacerbated by several lawsuits regarding hip implants and surgical mesh throughout the year. A big relief came when JNJ completed its big bang $21 billion acquisition of medical devices company Synthes. This was shortly after it acquired Chinese device maker, Guangzhou Bioseal Biotech, to immediately enter the fibrin sealant market in China, and later to enhance its global reach in biologic solutions.
Meanwhile, its consumer healthcare business continued to grapple with manufacturing issues (quality control issues first emerged in 2009) and several recalls, including the recall of diarrhea medicine Imodium by its arm McNeil Consumer Healthcare. A strong U.S. dollar during the year also weighed down the company’s growth.
What 2013 Holds
JNJ will lose patent of Aciphex, a heartburn drug, in mid 2013. Despite recent patent expiries, we expect the company’s pharmaceutical franchise to perform relatively well due to some potential blockbuster drugs like Canagliflozin. The drug, which will be the company’s first treatment in the fast growing diabetes drug market, should be approved in 2013, following strong clinical efficacy and could bring more than $1 billion in revenues.
Xarelto should also be able to get the FDA’s nod for broader usage in 2013. (Read JNJ Knocks On FDA Door A Second Time For Broader Use Of Anticlotting Drug Xarelto). Further, JNJ has just managed to get an early approval for Bedaquilinean, an experimental drug for the treatment of tuberculosis (TB) on the last day of 2012.  The drug could earn $300 million in sales. The healthcare company has also filed for label extensions for auto-immune drug Simponi to other diseases like ulcerative colitis, and we expect it to receive approvals for these additional indications in 2013, which should drive sustained growth going forward.
In its medical devices business, Synthes will continue to lend support to the company’s efforts to tap growth opportunities in the orthopedics market while bringing vast exposure to the fast growing emerging countries such as China, India and Russia. The company is also upgrading its consumer healthcare plants in the U.S. after the quality control lapses and is on track to restore many brands to store shelves by early 2013. One could expect further acquisitions, especially in China, as has been rumored earlier (Read Johnson & Johnson’s CEO Looks To Bolster Cardiology Devices Segment Through Acquisitions and Johnson & Johnson Mulls Acquisition of Baby Product Manufacturer in China).Notes: