Johnson & Johnson’s Pharma Business To See Challenges In The Near Term

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Johnson & Johnson

Johnson & Johnson (NYSE:JNJ) recently reported its Q1 2017 earnings, and the stock dropped more than 3% following the announcement of results. It is rare for J&J’s fairly stable stock to drop this much in a single day. So what went wrong? Let’s first look at what went according to expectations. Fortunately, the medical devices business continued its slow revival driven by growth in cardiovascular, vision care and surgery. Had J&J missed the mark here, the repercussions for the stock could have been worse. With the pharmaceutical business facing some near term challenges, investors expect the medical devices business to help J&J navigate the troubled waters. Having said that, let’s come back to what disappointed investors. Clearly, pharmaceutical segment underperformed and some of the drugs which were supposed to be growth drivers, have started facing pricing and competitive pressure in the U.S. In fact, the company’s pharma sales declined in the U.S., which is not an encouraging sign. Pipeline isn’t bad but the contribution likely won’t start kicking in until late this year.

Our price estimate of $119 for Johnson & Johnson is slightly below the market. We are reviewing our price estimate in the light of recent quarterly results, and will update it shortly.

Invokana and Xarelto Under Pressure

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J&J blamed the impact of price discounting in certain sales channels and competition for the underperfomance of its pharmaceutical business. In particular, Invokana/Invokamet sales fell nearly 16.8% in the U.S. due to lower prices, which resulted from higher discounts for managed care contracting and more sales coming from the Medicaid channel where pricing is lower. Additionally, while Xarelto’s prescription share increased slightly, its revenue fell nearly 9.5% due to lower pricing in the managed care and government channels. We expect this trend to continue in the second quarter. In addition, Xarelto could suffer from higher competition from Bristol-Myers Squibb and Pfizer’s Eliquis.

Sigh Of Relief On Remicade Front

Remicade has officially started facing biosimilar competition in the U.S. from Pfizer’s Inflectra. We were earlier concerned about possible surprises in the extent of competition, but it appears that the impact has been smaller than we expected. The drugs sales declined by 6% during the quarter but much of that came from decline in exports. Domestic sales fell just 2.4%, which suggests that the drug is holding its ground still.

This is likely due to the lack of big enough economic incentives to switch patients to the new drug, considering that Inflectra is priced just 15% below Remicade. Also, as biosimilars tend to be injectables and require a physician to administer them, the inertia to change the medication is higher.

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