Why Is Johnson & Johnson's Pharmaceutical Segment Outgrowing Its Other Businesses?

Diversified medical giant Johnson & Johnson (NYSE: JNJ  ) recently reported its third-quarter earnings, topping analyst estimates for both sales and profits. It earned an adjusted $1.36 per share, which was an 8.8% year-over-year increase over the prior-year quarter. Revenue climbed 3.1% year over year to $17.6 billion.

However, a notable shift occurred -- its pharmaceutical segment outgrew its medical device and diagnostics segment in both sales growth and total revenue, now making it the largest of J&J's three business segments.

Segment

Third-Quarter Revenue

Growth (YOY)

Percentage of Total Revenue

Pharmaceuticals

$7.0 billion

9.9%

39.7%

Medical devices & diagnostics

$6.9 billion

(2%)

39.2%

Consumer health care

$3.6 billion

0.8%

20.5%

Source: J&J Q3 earnings report.

This shift wasn't a huge surprise, since the medical devices segment remains under pressure from European austerity measures, increased pricing competition, and a slowdown in elective surgeries -- challenges that competitors such as Boston Scientific and Medtronic have also cited.

Meanwhile, the consumer segment, which has been plagued by recalls over the past three years, is stabilizing. J&J reported that it has relaunched some key products, with the intent of delivering a reliable and consistent stream of its OTC products by the end of the year.

Since J&J's pharmaceutical segment is now the company's core growth driver, let's dig deeper to understand where its growth is coming from.

Analyzing the newer players in J&J's pharmaceuticals business
During the third quarter, J&J's pharmaceutical segment was boosted by strong sales of newer drugs, such as Zytiga, Stelara, Xarelto, Simponi, and Invega Sustenna. Together, these five drugs accounted for $1.67 billion in sales, or 24% of the segment's top line.

Drug

Primary Indication(s)

Third-Quarter Revenue

Growth (YOY)

Zytiga

prostate cancer

$464 million

75.1%

Stelara

plaque psoriasis

$370 million

28.9%

Xarelto

blood thinner

$246 million

N/A

Simponi

rheumatoid, psoriatic arthritis

$266 million

43.8%

Invega Sustenna

antipsychotic

$324 million

52.8%

Source: J&J Q3 earnings report.

J&J also reported strong sales of its new diabetes treatment, Invokana, which launched in April, but did not disclose total sales figures. However, during the conference call, J&J stated that Invokana had become the No. 1 branded non-insulin product with U.S. endocrinologists, with a 17% new to brand share.

Invokana is one of the most closely watched products in J&J's drug portfolio, since it is the first SGLT2, or sodium glucose transport inhibitor, approved by the FDA. SGLT2 inhibitors are a new class of orally administered drugs for diabetes type 2 patients, which help them excrete more glucose through the urine. Some analysts believe that Invokana can achieve annual peak sales of $1 billion.

Therefore, Invokana is considered a major threat to current non-insulin diabetes treatments like Merck's (NYSE: MRK  ) Janumet and Januvia, which prompted Merck to partner with Pfizer to create their own rival SGLT2 inhibitor in April.

Meanwhile, the growth of Zytiga was aided by the ongoing collapse of another high-profile prostate cancer drug, Dendreon's (NASDAQOTH: DNDNQ  ) Provenge. Last quarter, Provenge only generated $73 million in revenue for Dendreon, which warned that it would miss its original sales target for the year, which merely called for flat year-over-year growth.

Both Zytiga and a competing treatment, from Medivation and Astellas called Xtandi, are orally administered treatments, whereas Dendreon is an intravenously injected one. Looking forward, Zytiga's sales should be boosted by launches in additional countries, such as Japan, where it is co-promoting the drug with AstraZeneca, as well as the expansion of its label for use on chemotherapy-naive patients.

Meanwhile, Simponi is part of J&J's rheumatoid arthritis empire, which is dominated by its top-selling treatment, Remicade. J&J co-markets both Simponi and Remicade with Merck, although J&J gets a bigger percentage of global sales.

Let's check in on some older pillars of growth
As expected, Remicade generated the majority of the segment's revenue, accounting for 24% of total pharmaceutical sales on its own.

Drug

Primary Indication(s)

Third-Quarter Sales

Growth (YOY)

Remicade

rheumatoid, psoriatic arthritis

$1.7 billion

6.2%

Prezista

HIV

$410 million

12.6%

Velcade

blood cancers

$404 million

23.5%

Source: J&J Q3 earnings report.

As year-over-year sales of Remicade slow down to the single digits, a major new threat J&J faces is Hospira (NYSE: HSP  ) , which won European approval for its first biosimilar version of Remicade in September. Hospira's victory -- which was expected since the CHMP already recommended it for approval in June -- could deal a crushing blow to Remicade sales in the region.

Remicade's patent expires across most of the EU in 2015, but it is patent protected in the U.S., its largest market, until 2018.

Let's not forget about the potential $9 billion blockbuster
Although the approval of a biosimilar version of Remicade is a big disappointment for J&J investors, they should take comfort in the fact that the company is entitled to half of the future sales of Pharmacyclics' (NASDAQ: PCYC  ) ibrutinib, a new treatment for two rare blood cancers that has been designated as a breakthrough therapy by the FDA.

Ibrutinib has shown remarkable efficacy in treating mantle cell lymphoma and chronic lymphocytic leukemia, with patients showing response rates of 68% and 71%, respectively -- the highest rates ever recorded in a clinical trial. Based on these facts, analysts at Deutsche Bank pegged its annual peak sales at $9 billion -- which could make it the fourth-best selling drug in history, with half of that going to J&J. Ibrutinib could be approved by next year.

The Foolish takeaway
For now, J&J's pharma segment is definitely the key to its future growth. With the future of medical devices and consumer health care looking stagnant, it's good that J&J can fall back on its tightly managed drug portfolio of newer and older treatments, most of which are reporting strong growth.

With exciting new products like Invokana and ibrutinib in its future, and rapidly growing treatments like Zytiga fueling the segment's growth, I believe bright days could be ahead for this lumbering Dow component, which is up 32% over the past 12 months.

More dividend stock ideas beyond health care
One of the best parts of owning big pharma stocks is their attractive dividends, but smart investors know the importance of diversifying -- seeking high-yielding stocks from multiple industries. The Motley Fool's special free report "Secure Your Future With 9 Rock-Solid Dividend Stocks" outlines the Fool's favorite dependable dividend-paying stocks across all sectors. Grab your free copy by clicking here.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2685089, ~/Articles/ArticleHandler.aspx, 12/20/2014 3:10:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement