The Outlook For Johnson & Johnson’s Immunology Drug Business

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Johnson & Johnson’s (NYSE:JNJ) immunology portfolio, which primarily consists of Remicade, Simponi and Stelara, accounts for around 15% of the company’s value, according to our estimates. Within pharmaceuticals, the company derives most of its value from oncology drugs, which we believe will also be the key growth driver in the coming years. Looking at the immunology segment, we expect the overall sales to decline in the coming years, primarily due to Remicade, which lost its patent in 2016 and it now faces biosimilar competition. In this note we discuss the performance of J&J’s immunology drugs and its pipeline with new compounds under trial.

Remicade, which is used for treatment of a number of diseases including ulcerative colitis, rheumatoid arthritis, Crohn’s disease and others, lost its patent in the EU in 2015. While its U.S. patent was valid until 2018, a federal judge invalidated the patent in 2016. This prompted Pfizer to launch a biosimilar version of the drug, Inflectra, in November 2016. Inflectra is available at a Wholesale Acquisition Cost (WAC) that is 19% lower than that of Remicade. However, J&J has asserted that there will not likely be a significant patient shift to Inflectra. We believe that over the course of next few years, Remicade will see its revenues decline. The drug’s revenues peaked in 2016 at $7 billion, and we expect it to decline to less than $1.5 billion by the end of our forecast period. It should also be noted that Remicade has managed to hold its ground against Inflectra over the past year, and its sales haven’t seen a sharp decline. Physicians still seem to have a strong preference for the drug compared to its biosimilar, which bodes well for the company. For the nine months period ending September 2017, Remicade sales declined 9% to $4.85 billion.

Looking at Simponi and Stelara, the combined sales stood at nearly $5 billion in 2016, accounting for about 42% of J&J’s immunology revenue. The drugs registered revenue growth of more than 30% over 2015. Simponi is a self-injectable biologic for rheumatoid arthritis, active psoriatic arthritis, active ankylosing spondylitis and ulcerative colitis. Stelara is used for treatment of plaque psoriasis and psoriatic arthritis. We expect the drugs’ combined peak sales to be around $7 billion by the end of our forecast period. Stelara’s Q3 2017 performance is notable with a 38% jump in sales. This can be primarily be attributed to two factors – 7% growth in the U.S. immunology market size and 1.8 points of market share gains for Stelara led by strong adoption for the newer Crohn’s disease indication, according to the company’s management.

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Beyond the existing immunology drug portfolio, J&J has Guselkumab in its phase 3 pipeline. Earlier this year, the U.S. FDA approved Guselkumab (marketed as Tremfya) for adults with moderate-to-severe plaque psoriasis who are candidates for systemic therapy or phototherapy. The drug’s estimated peak sales are north of $1.5 billion. However, one other drug, Sirukumab, was rejected and the same has now been halted by J&J for further trials. J&J is also looking at label expansion opportunities with Simponi Aria (golimumab) for juvenile idiopathic arthritis and ankylosing spondylitis, and Stelara (ustekinumab) for pediatric psoriasis and ulcerative colitis. We expect the company to add nearly $2.5 billion in annual sales from the overall pipeline towards the end of our forecast period.

The chart below shows the historical and projected revenue trajectory for J&J’s immunology segment.

We have a $125 price estimate for Johnson & Johnson, which is around 10% below the current market price.

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