Johnson & Johnson’s (NYSE:JNJ) has been battling with patent cliffs like many in the industry, but it still is in a better position than many of its peers. Its patent protection on Concerta and Levaquin expired in 2011, while Invega lost patent exclusivity in 2012. All of these patent expirations put nearly $1.5 billion of revenues at risk. However, March could bring some relief to the healthcare company as its blockbuster potential experimental drug, Canagliflozin, is expected to receive FDA approval by the end of the month. After this, the European Medicines Agency approval should not be far away. 
The type 2 diabetes drug had earlier shown strong efficacy in reducing blood sugar in diabetics, even as some safety concerns were also raised.  While the potential of the drug is much higher, currently we expect the drug to achieve over $1 billion in expected peak sales. Below we take a detailed look at the drug’s prospects.
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With obesity on the rise, diabetes is affecting more people everyday globally. In the U.S. alone, roughly 26 million people suffer from the condition.  Owing to these factors, the global diabetes drug market has seen rapid growth rate in the last couple of years. The type 2 diabetes drug market, which constitutes a significant chunk of the total diabetes drug market, is expected to grow from $26 billion in 2011 to $50 billion in 2021, in developed markets including the U.S., Japan and Europe. 
While the market is crowded with several major drugs available for the condition, the fact that the disease is often associated with several other disorders such as cardiovascular events, kidney impairment etc., it limits its target patient population.  This presents an opportunity for new drug compositions like Canagliflozin. Canagliflozin is a member of a new class of diabetes drugs known as sodium-glucose co-transporter-2 (SGLT2) inhibitors that lower blood sugar by blocking the re-absorption of glucose by the kidney and increases the excretion of glucose in urine.
Canagliflozin: The Road Ahead
In phase III clinical trials, the drug exhibited very strong efficacy in lowering blood glucose levels in diabetics. The drug also led to meaningful decline in weight loss. However, the down side was that it came with an elevated risk of heart problems. Following the results, the company filed approval applications with the FDA and the European Medicines Agency (EMA).
Despite the history of the FDA rejecting Bristol-Myers’ and AstraZeneca’s similar experimental SLGT2 inhibitor called Dapagliflozin on safety concerns, we expect Canagliflozin to be approved. Canagliflozin exhibited significantly higher efficacy than Dapagliflozin , which should weigh the overall risk benefit profile in its favor. An advisory panel to the FDA also recommended in January that the drug be approved and the agency usually heeds these recommendation. 
What limits the revenue potential of the drug is its lower efficacy in patients with impaired kidney functions.  This is a common condition in diabetics, and the FDA may not approve the drug for those patients as the risks may well outweigh the benefits. However, should the FDA grant approval for this condition, the drug could garner significantly more than $1 billion in peak revenues that we currently expect.
Significant competition from rivals could also hinder the growth potential of the drug. Merck (NYSE:MRK), the clear market leader with its blockbuster drugs Januvia and Janumet, is also developing MK-3102, which has exhibited strong efficacy in clinical trials. Further, Merck already has trained sales representatives to sell its diabetes drugs while this would be JNJ’s first diabetes drug. However, with a sound marketing strategy coupled with the unique proposition of a single drug offering qualities like reducing blood glucose levels and weight, JNJ may not find it difficult to make in-roads in the competitive diabetes market.
We are revising our $75 price estimate for JNJ to reflect the annual earnings and recent developments.Notes:
- FDA Panel Backs J&J Diabetes Drug, Wall Street Journal, Jan 10 2013 [↩] [↩] [↩]
- J&J diabetes drug effective in high risk patients, Reuters, Oct 2 2012 [↩]
- National Diabetes Fact Sheet, 2011, CDC [↩]
- The Type 2 Diabetes Drug Market Will Almost Double Over The Next Decade, Increasing From $26 Billion In 2011 To Nearly $50 Billion In 2021, Decision Resources, Oct 15, 2012 [↩]
- Johnson & Johnson: can canagliflozin do what dapa didn’t?, Datamonitor, June 14 2012 [↩] [↩]