Johnson & Johnson’s (NYSE:JNJ) recently announced collaboration with Evotec for developing novel Alzheimer disease therapies underscores the company’s growing pharmaceutical business, and the ambition that drives it. J&J was primarily known for its medical devices and diagnostics business, but its pharmaceutical segment has done exceedingly well in recent quarters. Under the new agreement, the company will contribute $10 million in Evotec’s research and development efforts, and make commercial payments of $125-$145 million on reaching certain agreed upon milestones.  While that may be a small investment for a company like J&J, the reward can be significant. The Alzheimer’s disease market is still open, provided a novel therapy is developed that treats the root cause. This could have a huge impact on the quality of life of patients and could potentially allow J&J to develop another blockbuster drug.
Our price estimate for Johnson & Johnson stands at $90, implying a slight discount to the market price.
Encouraging Performance Of Pharmaceutical Business May Have Prompted the Deal
J&J’s agreement with Evotec seems to be motivated by the stellar performance of its pharmaceutical business in the past few quarters. It is indeed doing well. The company beat consensus estimates in Q3 2013 as the revenues from immunology and oncology (cancer therapy) drugs surged. Oncology drug sales were up by more than 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. Additionally, J&J’s newly launched drug Invokana has taken a significant share of type-2 diabetes market (non-insulin products), which indicates that the drug’s adoption has been good so far. 
Alzheimer Market Is Up For Grabs
A drug for Alzheimer’s has long eluded the drug companies as the current medicines primarily treat the symptoms rather than the pathological origins of the disease. Additionally, due to the recent drug failures alternative therapies such as the one from Eli Lilly, even the underlying causes are being debated. This leaves the ground open with tremendous opportunity if J&J can leverage Evotec’s proprietary TargetAD database and develop a novel therapy. According to CDC (Centers for Disease Control and Prevention), there are over 5 million patients living with Alzheimer’s disease in the U.S. The number of deaths from several major diseases including heart disease, HIV, stroke, breast cancer and prostate cancer, have gone down significantly during the last decade. However, the mortality figure for Alzheimer’s disease jumped by 68% between 2000 and 2010, which indicates a pressing need for potent drug discovery. According to BCC research, the market for Alzheimer’s disease therapy stood at $10.2 billion in 2012, which suggests that there is lot of money to be made if J&J can get a breakthrough in this area. Notes: