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Investment Overview for Johnson & Johnson (NYSE:JNJ)
Below are key factors that present opportunities for upside or downside to the current Trefis price estimate for J&J:
Phase 3 pipeline fires
- J&J's Immunology Drugs Revenue, J&J's Oncology Drugs Revenue and J&J's Anti-Infective Drugs Revenue: Despite the fall of J&J's hepatitis C drug Olysio, there still exists some potential in its pharma business that can be unlocked. Its immunology and oncology drugs can do well although Remicade will face competitive challenge from biosimilar Inflectra. Other immunology drugs such as Simponi and Stelara are growing fast. J&J’s oncology division is likely to do very well and Imbruvica and Darzalex will help tremendously. 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, there are additional clinical data that could potentially strengthen Imbruvica's sales going forward. Also, the company is likely to file multiple phase 3 drugs for FDA review in the next two to three years. Our valuation reflects probability adjusted revenues assuming 50% chance of phase 3 drugs reaching commercial stage launch. There are 12 drugs in phase 3 pipeline with an estimated peak sales of $12 billion. If all phase 3 drugs are approved within next 3 years, it could add additional $6-$7 billion in total revenues by the end of our forecast period. This could lead to an upswing of about 10% in J&J's stock price.
Immunology phase 3 drugs
- Guselkumab:Expected to be filed for FDA approval in 2017 for the treatment of psoriasis. It targets cytokine, IL-23, which plays an important role in managing the immune system but is also responsible for inflammation. If approved, it could face competition in future from other potential drugs by Merck, AstraZeneca and Eli Lilly which are in currently in development. We estimate peak sales of $1.5 billion for the drug.
- Sirikumab: Expected to be filed for FDA approval in 2017. Co-developed with GSK, it is used for the treatment of rheumatoid arthritis. However, the market is already mature with possible competition from biosimilars in future. We estimate peak sales of $1.3 billion.
Oncology phase 3 drugs
- Apalutamide: It is currently being tested in combination with Zytiga for the treatment of prostate cancer. It could face stiff competition from Medivation's Xtandi. If approved by 2018, the drug could reach peak sales of $1.6 billion.
- Imetelstat: Developed in collaboration with Geron, the drug is aimed at treating myelofibrosis. It could be filed for FDA approval by 2019. We estimate peak sales of $1.5 billion.
- Erdafitinib: This is a small molecule FGFRI kinase inhibitor and is used for the treatment of urothelial cancer. It could be filed for FDA approval by 2019 and could reach peak sales of more than $1 billion.
- Niraparib: This is a small molecule mall molecule PARP inhibitor being developed to treat ovarian cancer. It could be filed for FDA approval by 2019 and could reach peak sales of more than $1 billion.
Neuroscience phase 3 drugs: This includes Esketamine, which could be filed for FDA approval by 2017. Esketamine has already got FDA breakthrough therapy designation and could turn out to be a blockbuster drug for the treatment of depression. We estimate peak sales of more than $1 billion.
Anti-Infective phase 3 drugs: J&J's anti-infective phase 3 portfolio includes JNJ-3872, Al-8176 and 3DAA. Together these could be filed for FDA approval by 2018 and could generate peak sales of $3 billion.
Phase 3 pipeline fails
- J&J's Immunology Drugs Revenue, J&J's Oncology Drugs Revenue and J&J's Anti-Infective Drugs Revenue: Our valuation of phase 3 drugs incorporates 50% probability of phase 3 drugs reaching commercial launch stage and therefore, our revenue forecast includes probability-adjusted revenue for these drugs. Neuroscience, immunology, anti-infective and oncology drugs together account for 40% of our price estimate for Johnson & Johnson. In March 2016, the company dropped all phase 3 trials for its medicine fulranumab which it had acquired from Amgen in 2008. After years of expensive trials, the company gave back all the rights to Amgen for the development of fulranumab. If such issues plague JNJ's other phase 3 drugs and the company is unable to achieve FDA approval for them, it could imply 10% downside to our price estimate.
Medical devices business crumbles under competitive pressure
- J&J's Share in Spinal and Orthopedics Devices Market and J&J's Surgical Devices Revenue: The revenues from J&J's medical devices & diagnostics segment increased slightly in 2016, excluding the impact of currency movement and divestiture and acquisitions. This could signal a revival but it remains to be seen if J&J can sustain it. Competition from lesser known names has led to pricing pressure, which has brought down incremental growth despite increased shipments. We currently expect low growth in medical devices and diagnostics business. However, if the competition intensifies and J&J fails to find new growth drivers, its revenues can dip further by $5-$6 billion leading to approximately 10% downside.
Johnson & Johnson (NYSE:JNJ) is an American multinational pharmaceutical, medical devices and consumer packaged goods manufacturer founded in 1886. The company (also called J&J) and its subsidiaries are engaged in the research and development, manufacture and sale of a range of products in the health care field. It has more than 250 operating companies conducting business worldwide.
J&J is an industry bellwether and therefore its shares generally reflect the overall performance in healthcare products at any given point in time. It also reflects investor appeal for “defensive” securities, as during periods of economic or market uncertainty investors have generally sought haven in J&J shares as its earnings are less cyclical.
We believe that both pharmaceuticals and medical devices business are almost equally important to J&J's value.
Pharmaceuticals business has grown significantly in the past few years
J&J's pharmaceutical business accounted for nearly 47% of its revenues in 2016 and more than 55% of EBITDA (earnings before interest, taxes, depreciation and amortization). These percentages have increased over the last few years, thanks to the growth in immunology, anti-infective and oncology drugs. Besides, the division has significantly higher EBITDA margin (~ 56%) as compared to consumer business, and slightly higher than that of medical devices segment.
Strong market position in medical devices industry
J&J has leading market position in several sub-segments of the medical devices market due to its diversified product offerings, established brand, R&D focus, and strong sales and marketing capabilities. Medical devices business constituted roughly 35% of total revenues in 2016 and nearly 31% of EBITDA. Furthermore, J&J acquired Synthes in 2012, which 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 and will help J&J expand its leadership.
Pharmaceutical business becoming increasingly important
J&J has made some great strides in the pharmaceutical sector in the last few years. The company, traditionally known for medical devices and diagnostics, is now becoming more centered around pharmaceutical business. The segment saw strong growth driven by increasing sales of Remicade, Zytiga, Simponi and Stelara. However, there are near term challenges as Remicade faces competition from Inflectra and Invokana and Xarelto face pricing pressure. Much of the future growth is likely to come from oncology drugs such as Imbruvica and Darzalex. In addition to this, J&J's pipeline will contribute meaningfully in the next 5 years.
Loss of patents impacting sales
Over the last few years, several of J&J's drugs including Levaquin, Concerta, Invega & Aciphex lost their patent protection. Over the next few years, about 3-4 drugs are expected to lose their patent and J&J will need to develop new drugs to offset these losses.
Growing threat of generic products
The fast growing pharma market in emerging economies or referred to as the 'Pharmerging' economies have the capability and technical prowess to manufacture generic versions of blockbuster drugs. These generic drugs are often sold at prices that substantially cheaper then their branded counterparts, thereby severely affecting big pharma's ability to generate profits in the long run. Remicade faces potential threat from biosimilars, which are generic versions of biologics. The drug is already witnessing significant sales decline in Europe where its biosimilar versions have been approved. However, J&J holds marketing rights for Americas, Japan and other regions. If a biosimilar version of Remicade is approved in the U.S., Remicade's sales, attributable to J&J, will suffer.
Globalization of healthcare reforms
Governments around the world are trying to rein in fiscal spending in order to manage their budget deficits
Since healthcare costs are one of the biggest components of any national budget, increased healthcare legislation and reforms around the world will hurt revenues for the entire pharmaceutical sector.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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