Please ensure Javascript is enabled for purposes of website accessibility

3 Drugs That Are Moving the Needle at Johnson & Johnson

By Todd Campbell – Apr 18, 2018 at 8:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Johnson & Johnson owes a lot of its early success this year to rapidly growing sales of three key products.

Johnson & Johnson (JNJ -0.71%) reported first-quarter 2018 results this week that outpaced industry watchers' forecasts. Its $20 billion in quarterly revenue clocked in over $600 million higher than expected and its adjusted earnings per share of $2.06 beat analysts by $0.05. There were a lot of contributors to the company's outperformance last quarter, but sales growth for Darzalex, Stelara, and Zytiga provided the biggest tailwinds.

First, the numbers

J&J generates billions of dollars in annual sales from selling consumer goods, such as Band-Aid products, and medical devices used in surgeries, but it's the company's pharmaceuticals business that determines whether the company's results are better or worse than anticipated.

A person's hands arrange cut out pieces of construction paper into the shape of an upward aiming arrow.

Image source: Getty Images.

During the first quarter, pharmaceutical sales accounted for $9.8 billion, or 49%, of the company's revenue. For comparison, consumer goods and medical devices contributed $3.4 billion and $6.8 billion, respectively.

Overall, J&J's drug revenue increased by 19.4%, but a big chunk of that increase came from drugs acquired when it bought Actelion and currency exchange tailwinds. If you back out currency impacts, year-over-year drug revenue growth drops to 15.1% in the quarter, and if you remove the sales associated with Actelion's drugs, then J&J's biopharma sales growth falls to a much tamer 4.3%.

Three big drivers of growth

J&J's fastest growing drugs did a lot of heavy-lifting last quarter, and as a result drug revenue was able to increase despite biosimilar competition to its best-selling drug Remicade. Remicade is a widely used autoimmune disease drug, and until recently it accounted for more than 15% of J&J's pharmaceutical revenue.

But the drug's contribution to J&J's financials is decreasing following the entrance of biosimilars, including Pfizer's (PFE -0.91%) Inflectra. Last quarter, competing on price to maintain its market share caused Remicade's sales to slip 18% to $1.4 billion after adjusting for currency conversion. As a result, it only represented 14.3% of J&J's pharmaceutical sales.

The $283 million headwind to revenue caused by declining prices for Remicade was more than made up, though, by growing demand for by its multiple myeloma drug, Darzalex, its autoimmune disease drug, Stelara, and its prostate cancer drug, Zytiga.

Darzalex's sales skyrocketed 69.4% year over year, or by $177 million, to $432 million in the quarter. The reason for the growth in the past year is twofold. First, Darzalex is becoming a more widely used drug globally. As of March 31, it's available in 29 countries, including Japan, where it secured approval last November. Second, Darzalex secured an important FDA label expansion last year for its use as a second-line multiple myeloma treatment rather than only as a third-line therapy. In Q1, it secured 24% of new-to-brand market share in the second-line setting.

Initially approved in 2009 for psoriasis, Stelara's been around a lot longer than Darzalex, but like Darzalex, its sales are benefiting from a label expansion. In 2016, it won an FDA go-ahead for use in Crohn's disease and its sales have been accelerating ever since. Stelara's sales increased 24.1%, ex-currency, to $1.06 billion in Q1. That growth contributed an extra $238 million to J&J's top line compared to Q1 2017.

Zytiga wasn't a slouch, either. Sales of the prostate cancer drug jumped 61.6% to $845 million in Q1 following a label expansion in February that allows its use for patients with metastatic high-risk castration sensitive prostate cancer. Zytiga's approval was based on trials showing a 38% reduction in the risk of death in this subset of patients, an improvement that's clearly influencing doctor's use of the drug.

A man in a suit bites his finger nail.

Image source: Getty Images.

Can this growth continue?

Zytiga's future is murkier than the other two drugs because Zytiga's patent protection is expiring later this year and that may lead to the launch of generic drugs that begin to chip away at its market share. The company told investors on its Q1 conference call, however, that it doesn't anticipate any generic Zytiga launches this year, and as a result it expects Zytiga's revenue tailwinds to continue supporting its full-year revenue outlook for between $79.5 billion to $80.3 billion, which would be up 4% to 5% from 2017 on an ex-currency basis.

Stelara's U.S. patent doesn't expire until 2023, so it has a few more years to continue establishing itself in the Crohn's market. That market, however, could become more challenging if competing drugs, including Celgene's ozanimod, shine in late-stage studies. As a result, investors will want to keep an eye on progress being made by J&J's peers.

Finally, it seems that Darzalex's future may be the brightest of the three. So far, its trials have shown it can improve outcomes when used alongside other multiple myeloma drugs and that could offer it some insulation if the market gets disrupted by new treatment approaches, such as gene therapy.

Importantly, Darzalex's sales could get a significant boost if it wins FDA approval for use in the first-line setting. In December, management unveiled impressive first-line data from trials evaluating its use alongside Velcade and an FDA green light could be granted for first-line use within a few months. If so, then I think Darzalex could see another meaningful spike in its sales and it could be destined to be J&J's next big blockbuster.

Overall, J&J's got some challenges ahead of it because of expiring patents, but it's successfully using pricing to maintain market share. As long as that strategy continues to control the decline in Remicade's sales, then growth from these drugs should offset any drop -- at least until J&J has to deal with a generic Zytiga.

Todd Campbell owns shares of Celgene and Pfizer. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Celgene and Johnson & Johnson. The Motley Fool has the following options: short May 2018 $140 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$163.36 (-0.71%) $-1.17
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$43.76 (-0.91%) $0.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.