DRIP PORTFOLIO
J&J's Drugs
Skimming the top of the pool

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By Jeff Fischer (TMF Jeff)
March 17, 2000

On December 31, 1999, the stock of Johnson & Johnson (NYSE: JNJ) closed at $93 1/4. By mid-February, it traded in the mid-$70s, down nearly $20. During the first week of March (when we bought more shares) the stock hit the high $60s. This week, it ran back to $79. So, what has changed since December 31 to make the stock so drastically volatile!?

Actually, nothing has changed with the business. Nothing negative, anyway. J&J continues to chug along and grow.

In mid-January, our healthcare giant announced fourth quarter '99 results that didn't stun, but didn't disappoint. Sales grew 6.3% year-over-year (international currency rates erased 3% from sales growth), while earnings per share gained 12%. J&J's pharmaceutical division grew sales 20% worldwide. Accounting for about 50% of J&J's operating earnings, J&J's drugs will continue to drive much of the company's performance.

With that in mind, let's touch on some of J&J's key drugs on the market and drugs in development, or in the product pipeline.

Drugs on the Market
First in our update is Procrit, J&J's anemia drug that it licenses from Amgen (Nasdaq: AMGN). Procrit is identical to Amgen's best-selling Epogen. The drug is sold to the chemotherapy-related anemia market and to the dialysis market. Procrit is a giant seller at J&J. It accounted for nearly 7% of the company's total sales in 1999, earning $1.8 billion in revenue.

As of January this year, J&J raised Procrit's price 3.9%. This simple move should result in an additional $65 to $70 million in revenue for the company this year. Combined with strong, double-digit sales growth, the price increase helps insure another record year for Procrit at our company. (By the way, because Amgen feared repercussions from J&J, it raised Epogen's price 3.9% soon after J&J's price increase.)

Johnson & Johnson's anti-infective drugs, called Levaquin and Floxin, increased sales 55% last year on the heels of new FDA approvals for new treatments, including use against one strain of pneumonia. Levaquin is waiting on new approvals for skin infections. Things look good with these two drugs.

Duragesic, J&J's chronic pain treatment, grew sales 27% last year thanks in part to the approval of a new delivery method, the transdermal (through the skin) patch. This market is under-treated and J&J is in a good position with Duragesic.

Risperdal, the anti-pyshchotic drug that Brian takes (he's away this week, so it isn't fair to make fun of him -- but we just did), grew sales 28% last year. This drug is now in phase III trails for new uses, including bipolar disorders. Demand for Risperdal continues to grow, perhaps because talk shows continue to proliferate on television (or so Brian tells us).

These are a small handful of J&J's big drugs, and all are well positioned. All are young or fairly young drugs, and many are being tested for additional uses. Therefore, despite the ever-present competition, everything looks favorable regarding J&J's biggest drugs. But what truly drives a drug company's future growth is new drugs. How does J&J look on that front?

Pipeline Highlights
Two drugs in J&J's pipeline with good potential were acquired with the purchase of biotech company Centocor last year for over $5 billion. The first drug is called Remicade. It was actually approved for arthritis treatments under certain conditions in November of 1999. Remicade is now being reviewed for the prevention of joint damage, and, if approved, the drug could serve a very large market.

J&J also acquired the drug Reopro through Centocor. Reopro is under review for numerous cardiovascular uses, including mycocardial infraction and unstable angina. The drug is in phase III (of III) in its trials. It has already been approved for use in certain cardiovascular procedures. Heart disease continues to be the number one cause of mortality in the United States, so any treatments for the disease are very welcome.

Drugs in the pipeline (or nearly out of it) that were created by J&J include Prefest, a hormone replacement drug for osteoporosis patients. This drug has already been approved and it should hit the consumer market early this year. Next, Reminyl, J&J's Alzheimer's drug, is waiting for word from the Food and Drug Administration (FDA), while Evra, a contraceptive patch that works via the skin, is being developed with Cygnus.

Finally, Vestra is waiting for FDA approval. Vestra is an anti-depressant drug that will be co-marketed by J&J with Pharmacia & Upjohn. You say there is a lot of competition on the market for anti-depressant drugs? Yes? Is that your final answer? You are correct. However, most of the competing drugs are considerably "older," and partly because of this Vestra is expected to have considerably fewer side effects compared to most leading anti-depression drugs on the market. Vestra could be selling by the middle of this year.

All told, J&J has promising young drugs already on the market that could be used for many more treatments in the years ahead, and it has a good handful of drugs in its pipeline. Of course, uncertainties are high until a drug is approved, but odds are at least a few of J&J's pipeline drugs will succeed. The company spends a few billion dollars annually on research and development, and it doesn't go to waste (even mistakes are a form of progress). To discuss J&J, visit the Drip companies board linked below, or the J&J discussion board.

Have a great weekend. Be Foolish!

--Jeff Fischer, TMF Jeff on the boards.

Drip Portfolio

3/17/00 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP-2 1/8$31.88
INTCINTEL CORP13/16$129.88
JNJJOHNSON & JOHNSON-1/4$79.56
MELMELLON FINANCIAL CORP-11/16$32.31

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip 1.29% 10.62% 12.50% 18.99% 54.58% 17.94%
S&P 500 .41% 4.97% 7.18% -.33% 56.00% 18.35%
S&P 500(DA) .41% 4.97% 7.18% -.33% 58.62% 19.10%
S&P 500(DCA) n/a n/a n/a n/a 29.01% 10.13%
NASDAQ 1.71% -4.96% 2.16% 17.91% 205.70% 52.71%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9722.9859INTC45.653$129.88184.48%
11/14/9713.323JNJ79.310$79.560.32%
11/5/9831.5773MEL34.290$32.31-5.77%
4/13/988.269CPB54.401$31.88-41.41%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9722.9859INTC$1,049.37$2,985.29$1,935.92
11/14/9713.323JNJ$1,056.65$1,060.01$3.37
11/5/9831.5773MEL$1,082.79$1,020.34($62.45)
4/13/988.269CPB$449.84$263.57($186.27)
  Cash: $24.47  
  Total: $5,353.69  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.