Johnson & Johnson Earnings Preview: Pharma Is Where The Party Is

This year has been eventful for Johnson & Johnson (NYSE:JNJ). The company completed the divestiture of Ortho-Clinical Diagnostics to Carlyle Group in Q3 2014 and got the approval for its new blockbuster drug Olysio in Europe in the second quarter. Recently, it announced the acquisition of biotech firm Alios BioPharma to leverage its potent drug pipeline catering to treatment of viral diseases. Also, given the recent Ebola outbreak in West Africa, the company has accelerated the development of vaccine which may be available for human trials by early 2015. These developments suggest that Johnson & Johnson is becoming more centered around its growing pharmaceutical business. We believe that its upcoming third quarter results will demonstrate the same. We expect strong growth in the pharma segment driven by Olysio and Zytiga when the company reports its Q3 2014 earnings on October 14th. Here is what we think  investors should know.

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

See our complete analysis for Johnson & Johnson

Olysio And Zytiga Will Continue To Drive Pharmaceutical Growth

Johnson & Johnson received the approval for its Hepatitis C drug Olysio in the U.S. in November 2013 and in Europe in May 2014. ^[1] Olysio’s sales doubled sequentially in the second quarter of 2014, amounting to $725 million in Q2 2014. The impact of European approval is likely to be even greater in Q3 2014, considering the inclusion of all three month’s sales. The drug is already a blockbuster as its has reigned in more than $1 billion in sales in the first six months of this year. The combination of strong demand and steep pricing suggests that Olysio can become one of the biggest drugs for Johnson & Johnson in coming years. The demand stems from the drug’s  high efficacy and short treatment window as compared to traditional therapies. Close to 150 million people suffer from Hepatitis C globally. ^[2]

Continuing the past trend, there will be notable impact of strong growth of cancer drugs on Johnson & Johnson’s pharmaceutical business. Zytiga and Velcade are two key oncology (cancer-related) drugs, constituting roughly 85% of the company’s therapeutics in this disease area. While both are doing well, Zytiga’s performance stands out. During the first half of 2014, Zytiga’s sales totaled $1.07 billion compared to $811 million for Velcade. Despite higher sales, Zytiga registered mammoth growth of 45.3% during the the same period. The drug continues to gain market share globally and third quarter will be no different considering that new potent rival Xtandi was approved for similar indication only in September. In a recent study, Zytiga has shown significant improvement in survival rate of chemo-naive patients when used in combination with Prednisone.

New Drug Approvals Will Have Mild Impact

Johnson & Johnson received approval for some new drugs during Q3 2014 but the impact is likely to be mild. The U.S. FDA approved Invokamet, which is a fixed-dose therapy that combines canagliflozin and metformin hydrochloride in a single tablet and is used to treat type 2 diabetes in adults. ^[3] The drug builds upon the success of Invokana which has established strong presence in the U.S. diabetes market, and combines two therapies in one. In addition to this, Johnson & Johnson also received approval of Imbruvica, for the treatment of patients suffering from chronic lymphocytic leukemia and have received at least one therapy in the past.

What Can Put Brakes On This Growth In The Medium Term?

We believe that Johnson & Johnson is highly reliant 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 doesn’t bode well. While the expected competition for Olyiso is a cause of concern, there is another drug Remicade which is expected to lose patent protection 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. In addition to this, Zytiga will face competition from Astella’s  Xtandi which has now been approved for the treatment of chemo-naive patients suffering from prostate cancer. The drug was previously being administered to those who had already received some form of chemotherapy, and thus did not directly compete with Zytiga. Considering Xtandi’s impressive trial results, Johnson & Johnson’s fastest growing cancer drug could lose its steam.

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1. Johnson & Johnson’s R&D Pipeline [↩]
2. Gilead offers Egypt new hepatitis C drug at 99 percent discount, Reuters, Mar 21 2014 [↩]
3. U.S. FDA Approves INVOKAMET^® (canagliflozin/metformin HCl) for the Treatment of Adults with Type 2 Diabetes, J&J Press Release, Aug 8 2014 [↩]