Does J&J’s Submission Of Supplemental New Drug Application For Olysio Warrant A Change In J&J’s Valuation?

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Recently, Johnson & Johnson (NYSE:JNJ) submitted a supplemental New Drug Application (sNDA) for Olysio in combination with Sovaldi. [1] The question is:  if approved, will this imply any meaningful change in Olysio’s sales forecast and, consequently, our valuation? We believe the answer is NO. While the Optimist trials have shown some improvement in therapy duration, J&J mostly seems to be playing catch-up with the already competitive drug, Harvoni. Olysio’s sales can spur only if there is a significant enhancement of current therapies. J&J’s filing is certainly an improvement, but not big enough to challenge the market leader, Gilead Sciences.

Our current price estimate for Johnson & Johnson stands at $107, which is at little under 10% premium to the market price.

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Olysio’s Rise And Fall? 

Olysio’s introduction fueled the growth in J&J’s revenues as well as its stock price. The drug’s sales doubled sequentially in the second quarter of 2014, amounting to $831 million. However, the figure slightly declined sequentially in the third quarter, suggesting signs of growing competition. In Q4 2014, revenue plummeted to merely $321 million and, by the second quarter of 2015, quarterly sales came down to $264 million. The drug’s U.S. sales registered a year-over-year drop of 90% in Q2 2015. It became clear that Olysio fell prey to the competition from rivals such as Gilead Sciences’ Harvoni and Abbvie’s Viekira Pak. While Sovaldi and Viekira are priced almost the same, Harvoni is priced higher. Despite this, Harvoni turns out to be cheaper than the combination therapy of Olysio and Sovaldi (which offers all oral interferon and ribavarin free therapy).

Is The New Filing Meaningful? 

The supplemental New Drug Application is essentially about reducing the treatment duration, especially for patients with cirrhosis (a degenerative disease in which normal liver cells are damaged and scarred). SVR or sustained virological response is a technical measure used to assess whether a patient has been cured or not. Traditionally, SVR24 was used as a standard measure which essentially means checking viral response during 24 weeks following the end of the treatment. Currently, SVR12 (12 week period) is generally accepted as sufficient to determine that a patient is free of hepatitis C. Olysio (in combination with Sovaldi) has shown SVR12 rates of 97% in patients without cirrhosis and 84% in patient with cirrhosis (treatment experienced or treatment-naive) following 12 weeks of combination treatment with Sovaldi. [1] However, if we look at Harvoni, it has competitive SVR12 rates and turns out to be cheaper than this combination. In patients co-infected with HIV, Sovaldi does exceedingly well in treating hepatitis C thus creating another advantage. At best, with this move, J&J can probably have minor advantage for treatment of treatment-experienced patients with cirrhosis but that may not be enough to materially increase Olysio’s sales.

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Notes:
  1. Janssen Submits Supplemental New Drug Application to U.S. FDA for All-Oral, Once-Daily OLYSIO® (Simeprevir) in Combination with Sofosbuvir, Press Release, July 23 2015 [] []