FDA’s New Warning About Invokana May Not Matter Much For J&J, Let’s Focus On Pipeline Instead

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The FDA has issued a new warning for a number of SGLT2 Inhibitors, including  Johnson & Johnson‘s (NYSE:JNJ) diabetes drug Invokana, as well as for similar class of drugs from AstraZeneca and Eli Lilly. [1] The agency has stated that these diabetes therapies can cause high levels of acid build up in the blood (called ketoacidosis), which may require hospitalization. Does this warrant any serious concern? We don’t think so as this safety issue is not uniquely attributed to these drugs (SGLT2 inhibitors). This same condition is already identified as a contraindication for market leader Merck’s competing therapies Januvia and  Janumet.  These therapies saw a growth of 4% (excluding currency impact) in 2014 and 6% in the fourth quarter of the year, despite having a large revenue base. J&J’s Invokana is moving up the ladder too as the market for diabetes 2 is expanding due to changing lifestyle and growing incidence of obesity. Additionally, the market is going to be more competitive in future. Eli-Lilly is making efforts to comprehensively cover multiple diabetes drug classes. These figures establish that the demand for this class of diabetes 2 drugs will expand, as long as they are effective.

Our current price estimate for Johnson & Johnson stands at $105, which is at a slight premium to the market price.

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See our complete analysis for Johnson & Johnson

In fact, it is more critical to focus on the company’s pipeline. J&J’s pharmaceutical business has seen strong growth in recent quarters driven by immunology and oncology drugs. However, the scene is changing now as the sales growth could slowing down in the coming years. There is still some hope from the pipeline though, and the stock could go up if there is convincing data from the ongoing trials for immunology and oncology drugs. Immunology drugs such as Simponi and Stelara are growing fast.  J&J’s oncology division, although small, is also doing well. The addition of Imbruvica is likely to help. We have factored in these expectations in our price estimate.

However, positive data pipeline drug trials could lead to our forecasts being conservative. For instance, it remains to be seen how Zytiga’s label extension will help it compete against Xtandi. There are additional clinical data that could potentially strengthen Imbruvica’s sales going forward. Also, the company is likely to file multiple immunology and oncology drugs for FDA review in the next two to three years. More than expected success could add additional $5-$6 billion in annual revenues by 2021. This could lead to an upswing of about 10% in J&J’s stock price.

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Notes:
  1. FDA warns on newer class of type 2 diabetes drugs, Reuters, May 15 2015 []