Do This Drug's Sales Make J&J a Hepatitis C Powerhouse?

The scoop on JNJ and Gilead

Jul 22, 2014 at 11:37AM

Johnson & Johnson (NYSE:JNJ) beat analyst second quarter earnings estimates last week, with an impressive quarterly net income increase of 13% and mostly optimistic projections going forward. So why, you may ask, did the shares tank by 2%?

As so often happens in the financial universe, I believe the reaction had more to do with perception than reality. There is also the "sell the news" mentality that pervades the industry, with so many fickle investors and money managers chasing the next big story and quickly losing interest in anticipated news that has become relatively boring reality. The earnings report was actually good, with strong growth shown in the company's key segments and promising projections.

A possible reason why
If there was a focal point of the earnings and the sell-off, it has to do with one of JNJ's most promising, newsworthy and profitable new drugs; the hepatitis C drug Olysio (who on earth thinks up the crazy names for these drugs anyway?). Olysio has been a home run for JNJ so far, achieving the lofty "blockbuster" status ($1 billion + in sales). But the share-spanking pessimism we see stems in part from the fear that competition will begin to put a damper on this drug's sales and dent the company's overall profits.

Competitors in the "hep C" space include Gilead Sciences (NASDAQ:GILD), Bristol-Myers Squibb, AbbVie, and Merck. In particular, Gilead's remarkably promising hep C drug Sovaldi is a bit of a two-edged sword for Olysio. After all, a good bit of Olysio's success results from the drug being prescribed off-label in combination with Gilead's Sovaldi, as a treatment for type 1 hepatitis c. However, the combination of Gilead's Sovaldi and ledipasvir (which may be approved later this year) more or less could make Olysio obsolete, and the approval for this combination is expected pretty soon (Gilead filed for approval back in February).

So the bottom line is that investors should view Olysio as a wonderful revenue enhancer which has helped JNJ sock away a few billion in their cash war chest. However, we should substantially discount the potential value of this drug for future JNJ earnings.

Let's take a step back and look at the big picture for JNJ. After all this pharmaceutical and consumer product behemoth is far from a one-trick pony. The company's pharmaceutical segment shows especially promising prospects due to strong showings in immunology, oncology and infectious diseases drugs. You can see a better view of the company's big picture from the following graphic of JNJ's pharmaceutical division Janssen, showing the market leading strength in new product launches and the impressive resultant revenue growth:


Source: Johnson & Johnson second quarter earnings presentation. 

So, what should a Foolish investor take-away from the JNJ earnings report? If you want exposure in the pharmaceutical industry, there are certainly worse companies than JNJ for your portfolio.

However, investors should consider Olysio's ending benefit to the company's revenues when looking forward. Although JNJ would be an acceptable addition to an investor's health care portfolio, Gilead may be a stronger bet for future growth prospects due to the strong potential its drug combinations hold for capturing a large segment of the hepatitis c market, as well as strong potential growth in HIV.

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Jeff Manera has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences and Johnson & Johnson. The Motley Fool owns shares of Gilead Sciences and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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