Johnson & Johnson (JNJ 0.36%) recently shared its third-quarter financial report card with investors, and by all measures, it deserves kudos. However, the stock market rewards investors based on future expectations, not past successes. If J&J is going to keep putting up impressive results, it's going to need to keep cashing in on its fastest-growing medicines.
Keys to growth
Johnson & Johnson markets top consumer-goods brands like Band-Aid, and it's a big player in medical devices. But make no mistake -- this company's success or failure depends heavily on the performance of its pharmaceuticals business.
The pharmaceuticals segment accounts for about 50% of the company's sales and in the third quarter, it was by far the biggest contributor to the company's ex-acquisition top-line growth. After removing the positive impacts associated with acquiring Actelion, drug sales increased 6.7% year over year in the third quarter. For perspective, J&J's overall revenue was up 3.8% in the quarter after adjusting for one-time items and acquisitions.
The company's drug business is clearly performing well, but for that to continue, J&J will need its top drugs to continue growing because of mounting competition to its best-selling drug, Remicade. Remicade's a widely used autoimmune-disease drug that's already lost patent protection, and cheaper, biosimilar alternatives are already taking a toll on J&J's overseas Remicade sales. So far, J&J is fending off biosimilars in the U.S., but they could eventually eat away at sales, too. In Q3, Remicade's global sales fell 8.2%, to $1.6 billion.
Read on to see which five drugs are most important to J&J offsetting the risk to Remicade.
No. 1: Stelara -- quickly becoming J&J's most important drug
It's hard to generate significant growth for drugs that already rack up substantial revenue, but that's exactly what's happening for Stelara, an autoimmune disease drug. Stelara's been available for use in psoriasis since 2009, and it's established itself in that indication as a go-to drug. However, revenue has shot higher in the past year following its approval for Crohn's disease in 2016.
Like Psoriasis, Crohn's disease is a billion-dollar-plus indication, and because of increased use in that indication, Stelara's revenue jumped 38% year over year, to $1.1 billion last quarter. Stelara's $4.4 billion in annualized sales makes it J&J's second best-selling drug behind Remicade, and sales could continue growing because Stelara's market share in Crohn's disease is only 10%.
No. 2: Xarelto -- chipping away at Warfarin
Warfarin has been a mainstay drug used to prevent blood clots following surgery for decades, but Xarelto is part of a new class of drugs that work upstream of Warfarin that are chipping away at its dominance. Xarelto keeps blood from clotting by targeting factor Xa and, unlike Warfarin, its use doesn't require frequent testing or dietary changes.
In the third quarter, a growing addressable market and market-share growth resulted in sales of $635 million, up 20% from last year. Xarelto gained 2.5% market-share points away from Warfarin last quarter, but Warfarin still accounts for about 30% of this market, so there's still room for sales growth.
Sales could also increase if the Food and Drug Administration (FDA) approves Xarelto's use in more indications. J&J's already reported positive data from its compass study and it plans to file for supplemental approval for use in coronary and peripheral arterial-vascular disease soon.
No. 3: Imbruvica -- label expansion driving sales growth
J&J shares Imbruvica with AbbVie (ABBV 0.77%). Since launching Imbruvica in 2014, it's been one of the brightest shining stars in oncology.
Imbruvica is the leading first-line treatment for chronic lymphocytic leukemia (CLL), with a market share that's greater than 50%. In August, the FDA approved its use in graft-versus-host disease, a life-threatening condition in transplant patients. Growing use in CLL resulted in J&J reporting a 46.7% year-over-year jump in Imbruvica revenue, to $512 million in Q3 2017.
Studies are evaluating Imbruvica's use in at least six additional blockbuster indications. If those trials succeed, then future approvals could drive sales even higher. In 2015, AbbVie predicted Imbruvica's peak sales could be $7 billion someday, and while that's an aggressive target, it suggests this drug's still got upside.
No. 4: Zytiga: back on track
Zytiga's been a popular choice for treating late-stage, castration-resistant prostate cancer before and after chemotherapy since 2012. However, its sales leveled off after Pfizer's Xtandi began competing with it for market share in the pre-chemo setting.
In Q3, Zytiga got back to its winning ways with double-digit year-over-year growth. Zytiga revenue increased to $669 million last quarter, up 14.9% from Q3 2016. J&J cites the release of study data showing Zytiga can be used in combination with prednisone and ADT in patients with high-risk metastatic hormone-naive prostate cancer, or newly diagnosed, high-risk metastatic hormone-sensitive prostate cancer as one reason behind the uptick in sales.
Zytiga's got some patent-challenge risks that could create headwinds to sales, so investors will want to keep an eye on how those challenges progress. If patent decisions go against J&J, management's still got some options to protect Zytiga revenue. First, it's already filed for U.S. approval of a new prostate cancer drug, apalutamide, and if approved, patients could be switched to it. Second, management's evaluating using apalutamide in combination with Zytiga in prostate cancer patients, and if that pans out, then the patent threat becomes much less of a worry.
No. 5: Darzalex -- combo strategy success
Darzalex first won the FDA green light in November 2016 when it was approved to treat multiple myeloma patients who had seen their disease return, or progress, following three prior treatments. Since then, it's won approval for use in earlier lines of treatment.
In November 2016, it got the OK for use alongside Celgene's top-selling Revlimid in patients who have failed one prior treatment. Earlier this year, it won approval for use alongside Celgene's Pomalyst in patients who have failed on two prior treatments. Celgene's drugs are market-share leaders in multiple myeloma, so these wins have fueled a rapid run-up in Darzalex sales as it increasingly gets prescribed alongside them.
In Q3, Darzalex revenue nearly doubled from a year ago, to $317 million. Sales could continue climbing if the FDA approves Darzalex in the first-line setting. J&J plans on filing for that approval before the end of this year.
Big money at stake
J&J is targeting sales of between $76.1 billion and $76.5 billion and non-GAAP EPS of $7.25 to $7.30 in 2017, and a lot of its forecast rests on the success of these five fast-growing drugs. The biosimilar threat to Remicade puts $6.4 billion in annualized sales at risk, so the stakes are incredibly high for J&J to continue winning market share, expanding labels, and launching new drugs. Historically, the company's done a very good job at offsetting patent headwinds, but investors still need to keep close tabs on the company's progress toward diversifying sales through its other drugs.