Johnson & Johnson’s Growth Avenues

by Trefis Team
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Johnson & Johnson
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Johnson & Johnson’s (NYSE:JNJ) stock has gone up by more than 10% this year. As its market valuation continues to inch up, we discuss certain key growth opportunities for the company. J&J’s drug sales have registered a phenomenal growth in recent quarters with consumer segment doing better due to improvements in supply chain and manufacturing. Its diversified business spanning across the pharmaceutical, consumer and medical devices segments reduces the overall risk. The company’s main growth opportunities lie in capitalizing on cancer therapy market, trimming medical devices business but maintaining supremacy in key sub-segments, and pushing its relatively new Hepatitis C drug. However, uncertain currency fluctuations, generic competition and pricing pressure in medical devices industry remain the primary risks.

Our price estimate for Johnson & Johnson stands at $96, implying a discount of little under 10% to the market price.

See our complete analysis for Johnson & Johnson


Growing Cancer Therapeutics Market

Oncology, or cancer therapeutics, is one of the key growth segments for J&J and for the pharmaceutical industry in general. Primary care areas such as cardiovascular and allergy are already flooded with products, and therefore the focus on oncology could help the company command better pricing. The opportunity comes from the fact that global incidence of cancer is likely to increase from about 12.7 million in 2008 to 21.3 million in 2030. [1] In addition, the number of deaths are likely to show a similar growth trajectory as depicted in the chart below. Cancer is a not a single disease, and it has in fact more than 200 types and thousands of subtypes affecting more than 60 organs. That gives an opportunity for the company to develop novel therapies and capture niche markets.

Johnson & Johnson has made meaningful advancement in the field of cancer therapy. Zytiga, which is approved to treat both chemo refractory and chemo naïve metastatic castration resistant prostate cancer, saw its sales grow 48.8% globally in Q1 2014 due to strong market growth and share gain. The drug has captured 34% share of the metastatic castrate resistant prostate cancer market in the U.S. [2] Prostate cancer is the second most common cancer in men globally. Approximately 900,000 men were diagnosed worldwide with this disease in 2008, which represented 14% of the cancer cases diagnosed in men that year. [3] If we look at only the U.S., we note that prostate cancer was the most common cancer in men in 2009, with a total of 206,640 men diagnosed with the condition during the year. [4] The number of deaths stood at 28,088. It is estimated that developed countries accounted for over 70% of the total number of prostate cancer cases in 2008. [3] This can be primarily attributed to widespread use of prostate-specific antigen testing in these nations, which detects the disease with high accuracy. [3] J&J has an opportunity here as it has significant expertise in developed markets, with added assurance of transparent patent laws.

According to Evaluate Pharma, the global oncology market stood at $67.7 billion in 2012. [1] This figure is expected to grow to $100.5 billion by 2017, implying a compounded annual growth rate (CAGR) of 7%. In comparison, the market for prostate, heme and lung cancer is expected to grow at a CAGR of 8% and it appears that J&J is aptly directing its efforts. Additionally, the market for immuno-oncology drugs could be as big as $35 billion according to some estimates. J&J can leverage this opportunity by developing cancer drugs that leverage body’s immune system to target cancer cells. It can either develop such drugs in-house, or partner with smaller innovative biotech firms as other big pharma companies are doing. Given their focus on biologics and relatively strong immuno-oncology pipelines, Merck (NYSE:MRK), Britol-Myers Squibb (NYSE:BMY) and Roche Diagnostics stand to gain from this opportunity.

Leveraging Strong Medical Devices Portfolio

Johnson & Johnson is the market leader in medical devices and diagnostics business, which constitutes roughly 60% of its value. Orthopedics and surgical devices sub segments are doing well, and cardiovascular devices business has started to show some recovery. Given its strong brand, supply chain and marketing capability, the company is well positioned to dominate the global medical devices market.

Synthes, which J&J acquired in 2011 for $21.3 billion, is a global manufacturer of medical devices for orthopedics market including trauma and spine. The combined DePuy/Synthes orthopedic division has the broadest orthopedic portfolio globally. The company has a strong market position which can be attributed to its diversified product offerings, established brand, R&D focus, strong sales and marketing capabilities and vertical integration. In the long term, the company will benefit from its strong brand and the overall growth in the global spinal & orthopedics devices market.

Despite J&J’s gradual exit from drug-eluting stents business, its cardiovascular medical devices segment seems to have started doing well. Biosense Webster is gaining market share and J&J’s endovascular products are seeing good growth driven by the re-launch of the S.M.A.R.T. vascular stent system and the EXOSEAL Vascular Closure Device. Going forward, the negative impact from exiting drug-eluting stents business will fade and the growth in other cardiovascular devices will become more prominent

Building Strong Position In Hepatitis C Market

Johnson & Johnson’s relatively newly launched Hepatitis C drug, Olysio, has done better than expected, and echoes the success of Gilead Sciences’ drug Sovaldi. Olysio’s sales for Q1 2014 stood at $354 million, making it the second biggest anti-infective drug for the company within a short period of time. Gilead Sciences is currently the market leader in Hepatits C treatment, and is on its way to make a fortune selling its breakthrough drug Sovaldi. The drug’s sales for 2014 may amount to anywhere between $7 billion to $12 billion, according to ISI Group. [5] This suggests strong growth potential for Johnson & Johnson’s new drug, which has also been recommended by Liver Society for concurrent dosage with Sovaldi.

The demand for Olysio is likely to be high as close to 150 million people suffer from Hepatitis C globally. [6] The overall market for Hepatitis C treatment could reach $20 billion by 2020 and Gilead Sciences could capture around 80% of this market according to Deutsche Bank, unless viable alternatives emerge. [7]

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2009

2010

2011

2012

Streaming Content Costs as % of Revenue

3%

7%

22%

44%

Total Content Costs as % of Revenue

13%

14%

25%

46%

Streaming Content Obligations as % of Revenue

60%

122%

156%

Total Streaming Content Obligations ($ Million)

1,299

3,907

5,634

Notes:
  1. J&J’s Investor Presentation [] []
  2. J&J’s Q1 2014 Earnings Transcript []
  3. Cancer Research UK [] [] []
  4. Center for Disease Control and Prevention []
  5. Politicians add fuel to the firestorm over Gilead’s hep C drug pricing, FiercePharma, Mar 24 2014 []
  6. Gilead offers Egypt new hepatitis C drug at 99 percent discount, Reuters, Mar 21 2014 []
  7. Gilead offers Egypt new hepatitis C drug at 99 percent discount, Reuters, Mar 21 2014 []
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