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Are Antibiotics Dead Weight for Johnson & Johnson?

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Johnson & Johnson (NYSE: JNJ  ) may offer well-known personal care products such as Listerine and Neutrogena, but it also boasts an impressive portfolio of market-leading therapeutic compounds. The health-care leader was one of the few to show growth in both worldwide pharmaceutical sales and earnings last year; they grew to $25 billion and $3.86 per share, respectively. The company finds itself in an enviable position heading into 2013 as one of the best-positioned companies to tackle the patent cliff head-on.

Even with the recent success, there is no time to rest on laurels in the highly competitive landscape of pharma and biotech. The industry's most successful drugs are under constant pressure from generics, which are either already on the market, or timing their entrance for the moment exclusivity is lost. Luckily, 2012 showed that several new drugs are already shaping up to be critical driving forces in the company's future. Today, we will look at the company's fallen star Levaquin.

Does antibiotic mean anti-profit?
There is a common conception that antibiotics are not worth the time, effort, or costs associated with development. Of course, the industry's infatuation with blockbuster drugs does little to curtail that opinion. In 2012, Johnson & Johnson's infectious disease segment brought in $3.19 billion in worldwide sales, although it's important to note that the segment includes antivirals and other non-antibiotic therapies.

Source: Johnson & Johnson

The segment grew a minuscule 0.16% during 2011. However, if we disregard the falling star Levaquin, it actually grew at a 21.6% clip -- the fastest of any pharmaceutical revenue stream. HIV therapies Intelence and Prezista grew just enough to offset the decline of Levaquin.  

The bad news for antibiotics
You could say that cherry-picking sales data doesn't prove or disprove anything -- and you would be right. While there is favorable growth in anti-viral medicine, the outlook for antibiotics is not so great. I recently hinted at the dismal attitude around developing new antibiotics. Companies such as Abbott Laboratories (NYSE: ABT  )  are more interested in diagnosing infections than treating them. Even its pharmaceutical spinoff AbbVie (NYSE: ABBV  ) has a pipeline devoid of antibiotics, choosing instead to focus on anti-virals. 

Other than Johnson & Johnson, the only other members of Big Pharma pursuing antibiotics or anti-infectious drugs are the ailing AstraZeneca (NYSE: AZN  ) and GlaxoSmithKline (NYSE: GSK  ) . Whether or not the poor outlooks for the two will jeopardize the future of their respective infectious disease businesses remains to be seen.

Dead weight or opportunity?
It may be difficult to believe, but Levaquin had peak sales of $1.6 billion, and represented 6.4% of total pharmaceutical revenue for Johnson & Johnson in 2007. It's not alone: Zithromax from Pfizer nearly touched $2 billion in peak sales within the last decade, although it, too, has fallen from grace. Are these antibiotics flukes or examples of how to be successful?  

To say that antibiotics cannot be blockbusters is a bit misguided. As long as a novel therapy can be safely developed, there will always be blockbuster potential. What the drugs lack in selling prices, they make up in target market, which includes, well, everyone -- with a pulse. The problem may be in finding new molecules. Consider that in the 1980s, a total of 42 antibiotics were approved, followed by 20 approvals in the next decade, and just six since 2000. That represents the fewest approvals or releases of anti-infective therapies in any 13-year span, since 1912 to the early 1930s.

As long as the company keeps churning out blockbuster biologics and oncology drugs, I don't see antibiotic research becoming a burden on the bottom line. I'm hopelessly optimistic that the growing problem of microbial resistance will eventually create a sense of urgency within the industry. Essentially, by not acting in full force now, the industry is creating a potentially huge future opportunity for a world with limited options in responding to common infectious diseases.

Will keeping antibiotics under its umbrella make Johnson & Johnson a bloated corporate whale, or a well-diversified giant that's perfect for your portfolio? To answer that question, check out The Fool's new premium report outlining the Johnson & Johnson story in terms that any investor can understand. Claim your copy by clicking here now.


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