Johnson & Johnson (NYSE:JNJ) posted a moderate growth of 3% in Q3 2013 amid a stable healthcare environment, beating consensus estimates on the back of strong performance from its pharmaceutical business.  The company carried the momentum it built in the first half of the year as sales of immunology and oncology (cancer therapy) drugs continued to surge. While the newly launched drugs including Invokana gained market share, Johnson & Johnson continued to face pricing and competitive pressure in medical devices and diagnostics business, where sales declined by 2%.  Going forward, the bulk of the growth is likely to come from the pharmaceutical segment until the competition from generics kicks in.
As expected, the negative impact of currency movements eased off this quarter due to the recent weakness in the U.S. dollar against some key currencies such as euro, yen and yuan. Our price estimate for Johnson & Johnson stands at $90, roughly in line with the market price.
Immunology Stars – Remicade, Simponi & Stelara
Continuing their success story, J&J’s immunology drugs played a vital role in the company’s third quarter growth. Remicade, which is J&J’s largest selling drug, registered a growth of more than 6% during the quarter, accounting for roughly 25% of the company’s total pharmaceutical revenues.  Additionally, sales from Simponi and Stelara jumped by 44% and 29% respectively, with majority of the growth coming from international markets due to its launch in additional countries.  The overall immunology drug market is increasing and J&J seems to be riding the tide. The immunology segment constitutes 10-15% of the company’s value according to our estimates.
For now, the revenues are well protected. The growth is likely to slow down when Remicade, expected to cross $6.4 billion in sales this year, loses its Europe patent in February 2015. The region accounts for a significant proportion of the drug’s sales. The European Commision has already approved a lower priced version of Remicade for the treatment of rheumatoid arthritis. 
Oncology Sales Surged, Invokana Advanced
Oncology, or cancer therapeutics, is one of the key growth segments for J&J as the global incidence of cancer is likely to increase from about 12.7 million in 2008 to 21.3 million in 2030.  The sales from the company’s oncology drugs jumped by over 56%, with Zytiga and Velcade leading the way.  Zytiga, which is now approved to treat both chemo refractory and chemo naïve metastatic castration resistant prostate cancer, has seen its sales jump substantially this year on strong market growth and share gain. Prostate cancer is the second most common cancer in men worldwide and is among the leading causes of death.
J&J stated that its newly launched drug Invokana took a significant share of type-2 diabetes market (non-insulin products), which indicates that the drug’s adoption has been good so far.  Some of the early signs came from the initial three-week prescription data for the third quarter, which suggested that Merck’s Januvia franchise’s prescriptions declined by 1.7%. This was attributed to Invokana taking some volume away from Januvia.
Silver Lining For Medical Devices & Diagnostics Segment
Although the overall sales were down for J&J’s medical devices & diagnostics business, some of the key categories including cardiovascular and specialty surgery registered growth. Cardiovascular care sales were up 4.2% excluding the impact of currency movements, primarily due to the success of Biosense Webster.  According to Transparency Market Research, the global atrial fibrillation market is expected to hit $14.8 billion in 2019, growing at a compound annual growth rate of 13%-14% over the next few years.  This growth will be driven by higher incidence of obesity and hypertension. Within this industry, catheter ablation accounts for almost half of the non-drug therapy which puts J&J in a good position.
Orthopaedics accounts for roughly 33% of medical devices & diagnostic sales and close to 20% of J&J’s value according to our estimates. The good news is that this division has more or less stayed put. Although the revenues saw a mild decline of 0.3%, they were up 1.1% excluding the impact of currency movements. Notes:
- J&J’s SEC Filings [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- European Commission Approves Biosimilar of J&J and Merck’s Remicade, The Wall Street Journal, Sept 10 2013 [↩]
- J&J’s Investor Presentation [↩]
- J&J’s Q3 2013 Earnings Transcript [↩]
- Global Atrial Fibrillation Market to Be Worth $14.8B in 2019, mddionline.com, Oct 9 2013 [↩]