Johnson & Johnson’s (NYSE:JNJ) pharmaceutical business continued its impressive growth in Q2 2013 driven by the surge in oncology and immunology drug sales. This is an encouraging sign given the competitive and pricing pressure that the company is facing in its medical devices & diagnostics business. Including the negative impact of currency movements, J&J’s global pharmaceutical sales rose by 11.7% in the second quarter with international markets leading the way.  On the other hand, the consumer segment grew by just 1.5%, and medical devices & diagnostics business saw growth of only 0.5%, excluding the impact of Synthes’ acquisition and currency movements.  At the moment, it appears that pharmaceutical business will continue to be the primary source of growth for the company traditionally known for its medical devices and consumer products.
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J&J Is Gaining Share In The Immunology Drugs Market
In Q1 2013, J&J’s immunology drug sales surged by 16.3% globally. The second quarter was no different as the figure saw 16.8% growth worldwide, amounting to $2.24 billion.  International markets accounted for 30% of the revenues up from 23% in the second quarter of 2012. While the company’s biggest immunology drug Remicade showed healthy growth of 9.8%, the sales for Simponi and Stelara grew substantially. The overall immunology drug market is increasing and international markets present a large growth potential. Stelara and Simponi are gaining market share with the former doing especially well in Japan. Remicade saw higher growth this quarter compared to Q1 2013 due to better performance in Canada and emerging markets where the drug’s sales grew by 20%. 
Cancer Drugs Are Doing Very Well
Oncology is a smaller segment for J&J but presents substantial growth opportunity. The company’s global oncology drug sales grew by 51% during Q2 2013, up from 33.2% growth it saw in the first quarter. 
Zytiga, which is now approved to treat both chemo refractory and chemo naïve metastatic castration resistant prostate cancer, saw its sales increase by 70% globally due to strong market growth and share gain. The drug has captured 30% share of metastatic castrate resistant prostate cancer market in the U.S.  In addition to this, J&J’s acquisition of Aragon Pharmaceuticals will allow it to take ownership and control of Aragon’s androgen receptor antagonist program, which can complement Zytiga’s success. Under this program, Aragon is developing a second generation androgen receptor signaling inhibitor, ARN-509, which is currently in phase 2 development stage and could potentially become a very viable drug for treatment of castration resistant prostate cancer. Prostate cancer is the second most common cancer in men worldwide and is among the leading causes of death. While the market opportunity is big, the acquisition can be seen as a strategic move by the company to mitigate the impact of Zytiga losing patent in 2016. Zytiga garnered close to $1 billion in sales in 2012. 
Velcade, J&J’s biggest cancer drug, saw its sales jump by an impressive 9.2% in Q2 2013. The drug is used for treatment of multiple myeloma and is benefiting from strong performance in the frontline setting and the launch of the subcutaneous version. Velcade’s sales stood at $1.5 billion in 2012, and we expect the figure to continue to grow till 2014, when the drug loses its patent.
What Does This Imply?
J&J seems to be doing exceptionally well in the pharmaceutical department, but this field has many big players such as Pfizer, Merck, Bristol-Myers Squibb, Novartis and Sanofit-Aventis, which can pose competitive concerns in the future. In addition to this, there is risk of patent expiry and generics flooding the market, thus putting pricing pressure. On the other hand, J&J is global leader in medical devices and diagnostics, and can leverage its market position to grow this business. Even though pharmaceuticals growth is currently compensating for the lull in devices business, it is in the company’s interest to invest in R&D (research & development) and perhaps acquisitions, to improve its medical devices and diagnostics sales. Synthes’ acquisition is likely to help in this regard.
Our price estimate for Johnson & Johnson stands at $88, implying a slight discount to the market price.Notes: