Johnson & Johnson Earnings: New Blockbuster Drug Olysio Lifts Sales But May Face Competition Soon

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Johnson & Johnson (NYSE:JNJ) recently released its second quarter results. While the company beat consensus estimates, its stock fell slightly due to a weaker-than-expected outlook for the second half of 2014. This can be attributed to the competition that its new blockbuster drug Olysio is likely to face going forward, as well as the impact of divestiture of Ortho-Clinical Diagnostics. Nevertheless, the broader story remained the same. Pharmaceutical business grew stronger driven both by the ramp up of Hepatitis C drug Olysio and the continued growth in immunology and oncology drugs. Not a lot changed with J&J’s medical devices and diagnostics business which registered a meager growth of 0.7%. [1] The utilization rates of devices remain low and the company continues to face pricing pressure due to bidding competition in the U.S.   However, it expects the situation to improve once the economy picks up and healthcare reforms kick in. That may take a while.   At the moment, it is the pharmaceutical segment that warrants most attention from investors.

Our price estimate for Johnson & Johnson stands at $97, implying a discount of little over 5% to the market price.

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See our complete analysis for Johnson & Johnson

Olysio was a Star Performer

Much of the growth in J&J’s pharmaceutical business in Q2 2014 can be attributed to Olysio, a relatively newly launched Hepatitis C drug. This came as no surprise as we expected the drug’s sales to ramp up significantly during the quarter. Olysio’s sales doubled sequentially and stood at $725 million in Q2 2014. [1] It has already achieved the blockbuster status with more than $1 billion in revenues in the first half of 2014. Even though Olysio is priced steeply, the uptake of the product is impressive as it is highly effective and significantly shortens the treatment window as compared to traditional therapies. Gilead Sciences’ Hepatitis C drug Sovaldi is also witnessing tremendous success. The drug’s sales for 2014 may amount to anywhere between $7 billion to $12 billion, according to ISI Group. [2] This suggests strong growth potential for Johnson & Johnson’s Olysio, which has also been recommended by Liver Society for concurrent dosage with Sovaldi. The demand for Olysio is likely to be high since close to 150 million people suffer from Hepatitis C globally. [3]

The Risk with the Pharmaceutical Business

Even though the growth in J&J’s pharmaceutical business was strong during the second quarter, the market wasn’t impressed. This can be attributed to the company’s reliance on its new drug Olysio for its incremental growth, and the fact that it expects to face some stiff competition in Hepatitis C market in late 2014 and 2015. This acknowledgement begs the question – whether J&J’s success is sustainable or should we expect a significant change in the scenario by next year? While the expected competition for Olyiso is a cause of concern, there is another drug Remicade which is expected to lose patent in Europe in 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. Remicade accounts for roughly 25% of J&J’s pharmaceutical revenues. In this context, Olysio’s growth becomes even more important, which suggests that if competition intensifies, J&J’s overall growth can suffer. We are taking a cautious view even though the company has stated that approximately 40% of its overall revenues (not just pharma) in Q2 2014 came from products launched since 2009.

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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 SEC Filings [] []
  2. Politicians add fuel to the firestorm over Gilead’s hep C drug pricing, FiercePharma, Mar 24 2014 []
  3. Gilead offers Egypt new hepatitis C drug at 99 percent discount, Reuters, Mar 21 2014 []