Is This Johnson & Johnson's Worst Nightmare?

Editor's Note: The article below has been corrected to note that Xtandi is co-manufactured and co-marketed by Astellas and Medivation.

Johnson & Johnson (NYSE: JNJ  ) has been one of the top-performing Dow stocks of 2014, rising nearly 18% year to date. J&J's performance has been driven primarily by stellar top-line growth in its pharmaceutical division, where year-over-year sales grew by 10.8% in the first quarter of this year. 

JNJ Chart

JNJ data by YCharts.

Even so, there are two major threats to J&J's pharma business that could reverse this growth trend.

Threat No. 1
J&J's hepatitis C drug Olysio saw surprisingly strong sales in the first quarter, raking in a reported $354 million. The bulk of these sales came from off-label co-prescriptions with Gilead Sciences' (NASDAQ: GILD  ) Sovaldi.

Nonetheless, payers are making a huge fuss over the combo's price, which is reported to average roughly $150,000 per course of treatment. Alongside this pushback from those paying for this off-label use of the drugs, AbbVie's (NYSE: ABBV  ) new triple combo therapy is widely expected to gain approval from the Food and Drug Administration later this year. And given the stellar performance of this cocktail for genotype 1 hepatitis c patients, its approval could lead to a major shift away from the Olysio/Sovaldi mixture in the clinic.

Although Olysio only accounted for 4.7% of total J&J pharma sales in the first quarter, it was one of the biggest upside surprises that helped to push overall growth into double-digit territory. So this is clearly an issue that investors need to monitor moving forward.  

Threat No. 2
J&J's prostate cancer drug Zytiga has been one of its strongest performers since gaining FDA approval. In the first quarter, Zytiga sales grew by a whopping 48.8% year over year, gobbling up 34% of the prostate cancer drug market in the process.  

Zytiga's dominance may be on its way out, however. Astellas Pharma and Medivation's  (NASDAQ: MDVN  )  competing drug Xtandi has been grabbing market share at breakneck pace. Even more concerning are comments made by Medivation management at recent health-care investing conferences regarding doctors' increasing preference for Xtandi over Zytiga because of the former's superior efficacy and ease of use.  

Given that Zytiga sales composed 6.8% of total J&J pharma sales in the first quarter and is one of the pharma giant's fastest growing drugs, this is an issue that investors shouldn't take lightly. Xtandi could become the drug of choice for prostate cancer treatment, which would likely come at Zytiga's expense.

Foolish wrap-up
J&J is frequently a cornerstone of any health-care-oriented portfolio, and for good reason. Having beaten the Dow for 10 years running, the company offers an attractive dividend and a highly diversified business that has performed well across a diversity of economic environments.

That being said, the recent lackluster performance of its consumer and medical device segments has placed increasing pressure on pharmaceutical sales to deliver top-line growth for the company. Fortunately, pharma sales have come through in spades, significantly due to drugs like Olysio and Zytiga.

Viewed this way, the threats to the commercial performance of these drugs could be a linchpin for a reversal heading into the fourth quarter of this year. I strongly suspect that Olysio will see its sales drop off dramatically if AbbVie's drug is approved, and Zytiga may lose its battle with Xtandi for top dog in the prostate cancer market. Overall, I think J&J might be in for a disappointing couple of quarters.

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