Johnson & Johnson (NYSE:JNJ), a staple in investor portfolios, has plenty of news for us to digest in its first-quarter earnings release.
In this episode of The Motley Fool's Industry Focus: Healthcare, host Kristine Harjes is joined by Motley Fool contributor Todd Campbell to explain how Johnson & Johnson is doing and if it can overcome the threat to its top-selling drugs from generics. Plus, Harjes and Campbell weigh in on the Food and Drug Administration's about-face on Alkermes' (NASDAQ:ALKS) ALKS-5461 depression drug and what could be next for Celldex Therapeutics (NASDAQ:CLDX) following a disappointing flop for its lead drug candidate.
A full transcript follows the video.
This video was recorded on April 18, 2018.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. We're talking healthcare today, April 18th. My name is Kristine Harjes, and Todd Campbell, a fool.com healthcare writer, is joining me on the phone. Hi, Todd!
Todd Campbell: Hi Kristine! Happy Wednesday!
Harjes: Happy Wednesday! As our listeners, and Todd, you know, I am just barely back from vacation, and I'm still fighting some serious jetlag, so I'm only just beginning to catch up on my healthcare news. So, this episode is going to get us all up to speed on what's been happening in the healthcare world over the last two weeks. Todd, I hope you're ready for me to lean on you for some crucial information.
Campbell: [laughs] Absolutely. I'm more than happy to pitch in and help you and all of our listeners figure out at least a couple of stories. I mean, there were a number of different things that we could talk about today, but I was able to pick out a few that I think everybody will find interesting.
Harjes: Alright. Let's dive into the first one.
Campbell: For the first one, you're going to have to put the car in reverse and back it up a little bit to the end of March. April 2nd actually was when they reported this. The company I'm going talk about first is Alkermes. And listeners, you might remember that we did a show where we talked about Alkermes on April 4th. Specifically, we talked about a refusal to file letter that the company had received from the FDA. Now, that's a dreaded thing. We talked about how that's not good news. It was for a drug, ALKS-5461, for major depressive disorder. And the FDA shot it back and said, "No, we're not even going to review this drug." And of course, as you can imagine, that caused the share price to fall dramatically. Now, Kristine, in the April 4th episode, you said that management sounded a little incredulous.
Harjes: They did, yeah. When you listen to their reaction to this refuse to file -- I mean, this is not something that you see happen a lot, especially not to companies that are talking to the FDA and seem like they have a good handle on things. So, I think everybody, management included, was surprised.
Campbell: Yeah, and you know, it turns out that they had a reason, maybe, to sound a little incredulous, because this week, Alkermes put out a very short couple of paragraphs note saying the FDA has changed its mind, and they will now review ALKS-5461 after all.
Harjes: That's insane. Is the timeline the same as it was?
Campbell: This is fascinating to me. I've been doing this for over 20 years, Kristine, I cannot remember something like this happening, a refusal to file and then so quickly thereafter the FDA being willing to accept it. There is a new PDUFA date, a new decision date. The decision will be expected January 31st, 2019.
And of course, what's probably on everybody's mind, especially investors who maybe owned the stock higher, sold it on the news, and are now looking at it going well, wait a minute, did I just sell it for the wrong reason, because now, could 5461 get approved, is -- why was that refusal to file even sent back to Alkermes if they were going to change their minds so rapidly or so quickly? And I think that's a valid question. Unfortunately, the FDA is very tight-lipped about these kinds of things. Scott Gottlieb, the FDA commissioner, he actually was in front of Congress recently and he said that they really don't have a system in place where they can go back, and they can take a look at the specific reasons behind decisions that they have made in the past. So, I think investors are just going to be scratching their heads for the next however many months, until we get to January 2019, wondering whether or not they had a real reason to be concerned about the data that they were seeing in this application, and thus won't approve it, or whether or not simply the schedule A meeting that Alkermes has had with the FDA, they sat down and they were able to explain away all of the questions that they had.
Alkermes did say though, Kristine, that they didn't have to submit any new data to the FDA, that the FDA was completely fine with just a sit down and talk and some clarification.
Harjes: Which is just crazy to me, because couldn't that have happened before now? Why did they have to send the refused to file first in order to have this conversation? I'm sure Alkermes shareholders and management are equally frustrated by that decision. But I think you're right that there's a little bit of an uncertainty here now, and that was reflected in the share price movement. I think the stock gained around 8%, if I'm recalling this correctly, and that was not as much as they initially lost when the refuse to file was first received.
Campbell: Yeah, shares are still trading at quite a discount. It seems that investors really aren't factoring in much of a likelihood of 5461 getting a go-ahead in next January. That could create an opportunity, though, right? In the past, when we've seen Alkermes get beat up, this happened in 2016 when the first two 5461 trials came up shy of their endpoints, the shares fell dramatically. Then, when the third trial panned out, shares shot up significantly. So, I suppose that you could say we're back to where we were before in 2016, where there's not a lot of expectation for an approval of 5461. And then, if they do manage to successfully get it across the finish line, then maybe the shares will trade up fairly substantially, because as we said on the show on the 4th, a significant percentage of people with major depressive disorder don't respond to existing treatments. And this is a big indication, it's a multi-billion-dollar indication.
Harjes: Yeah, absolutely. There are a lot of people out here that do not have their depression fully met with existing drugs. The company claims that it's the first new approach to depression medication since Prozac, which was approved about 30 years ago. So, if it's approved, it's expected to be the company's first blockbuster drug. But, of course, that's a big if. And as you mentioned, Todd, this drug has had a bit of a roller coaster ride. So, we'll keep our eyes on it, we'll see what happens.
Alright, Todd, we heard all about Alkermes' latest news. What else has been going on?
Campbell: I think the investors that have followed The Fool for years and years might recognize this second company that I thought we should talk about today, Kristine, and that's Celldex Therapeutics.
Campbell: Do you remember that, Kristine, Celldex?
Harjes: Yeah, [laughs] I'm still a shareholder, so I know this company quite well.
Campbell: Oh, good, you and I have something in common. Yes. We both own shares, and we're both very, very sad this week. [laughs]
Harjes: Yep. [laughs] Yeah, like I said, I haven't been following healthcare news extremely closely while I was away, but I do get notifications when the stocks that I hold move sizably, which this one did, and not in a good way.
Campbell: Yeah, shares got more than cut in half when their lead drug candidate, Glemba -- I'll call it Glemba for short, right, Kristine, it's crazy long.
Harjes: We're not even going to try with this one. [laughs]
Campbell: Right. [laughs] When Glemba failed to pan out in metastatic triple negative breast cancer, a very tough to treat cancer indication. They had hoped that by targeting a protein that was overexpressed called GPNMB that Glemba would be able to outperform another drug that's used in this indication called Xeloda. And unfortunately for patients and unfortunately for us, shareholders, that didn't happen.
Harjes: This is really disappointing. Xeloda is not a particularly good drug, either. It's just such a tough indication that there was a lot of hope here for patients and investors alike that Glemba would work out. But it didn't meet its primary endpoints. It also didn't even meet many of its secondary endpoints. The only bright spot was that be safety profile was fine, but it doesn't even matter at this point because the drug is now in the dustbin for all indications.
Campbell: Yeah. A lot of times, cancer companies -- because, again, there's a big unmet need for new cancer treatments -- they'll look at and do a post-hoc study and try to figure out if it worked in some subgroups, so maybe they can salvage the drug that way. In this case, they looked at all the data and said, progression-free survival is 2.9 months vs. Xeloda's 2.8 months, no real improvement there. All the secondary endpoints for overall response rate, duration of response, overall survival, no significant advantage there, either. So, they're basically pulling the plug on Glemba's development, all of the different trials that they were conducting and thinking of conducting, and now that's a reset button action. So, investors are stuck looking at it and saying, is it game over for Celldex?
Harjes: And not necessarily. Ever since Rintega, which was their first huge flop, had its failure, the company has really been leaning on two different drugs for its future. One of them was Glemba, so that's no longer an option, but they are still working on a drug that we'll nickname Varli. That's being studied in combination with Opdivo. It's in Phase II. So, that's where all of their efforts will focus right now, and the company will certainly be streamlining all of its expenses toward this one drug. We can expect job cuts coming, expense reductions. The company's cash position is OK, they have about $140 million as of the end of last year, which, now that they're going to be more focused, should last them a little bit longer.
Campbell: If you look at the beginning of the year, Kristine, management was saying that that cash stockpile should get them through 2019. They came out and obviously told everybody about this news on Glemba. One of the things they did say is that because they're not going to have those expenses for theoretically trying to get Glemba commercialized, that they're going to be able to extend out the runway of that money, and now they'll be able to maybe last beyond 2019 with it. We don't know how much further. It's going to depend, again, like you said, on the amount of job cuts they do and what they decide to do with the rest of the drugs that are in their pipeline. It's probably also going to depend a lot on Varli.
Campbell: Varli is being developed in Phase II trials with Bristol-Myers' Opdivo, so, as part of a combination therapy. And we should start to get data reading out on that this year. I think at first, we're going to get ovarian and colorectal and kidney cancer [...] to read out data, and I think that's going to happen probably sometime by the fall. So, if the Varli data is good, maybe, just maybe, that reignites the share price a little bit. I think one of the things investors might be scratching their heads and wondering about, so I think maybe we should talk about it, is that there's $140 million in cash on the books and no debt, but the market cap is only $111 million.
Harjes: Yeah. That's a really good point. Walk me through how that makes any sense.
Campbell: Well, I think people might be looking at it and saying, wait a minute, you're basically not valuing the pipeline at all. You're giving the pipeline a negative valuation because, again, you have more cash on the books than you have as far as market cap. So, I think one of the things investors should remember is that, because there's no commercial revenue coming in, you're going to have to discount that cash. It's really not $140 million, it's probably going to end up continually drip-drip-dripping down to a lower level over the course of the next couple of years until some point in 2019 or whenever they tell us they run out of money. So, you can't really value it that way.
So, there is some value being attached to the pipeline because of the fact that the cash is falling. The real question will be Varli, though, because Varli is now their most advanced drug. They have four or five other programs, but those are all either in Phase I or heading toward Phase I. So, if Varli doesn't pan out, Celldex basically becomes a company with the most earliest of stage drugs, and obviously that's not the position we were hoping to be in when you and I bought this stock a couple of years ago.
Harjes: Yes, but I also want to point out that, I think you and I both recognized how risky this stock was. I know for me personally, I had it in a really tiny portfolio that I keep in Robinhood, which is a zero-commission trading app, and I use that account specifically to build really small positions where I don't want commission taking anything away from it, because it would be too high of a percent for me. So, while I was disappointed to see this, it wasn't a huge loss for me. And hopefully, any of our listeners out there that built a position having heard us talk about this company recognized how risky it was, and you didn't put any money into it that you couldn't afford to lose.
Campbell: Right, I think that's an excellent point. We talk about on this show over and over again, diversify, diversify, diversify, because the fact is that clinical trials fail. It's very common when you're investing in biotech. We've seen it before and we'll see it again. One of the things that David Gardner talks about is not adding to your losers but focusing instead on your winners. I think that, when you go out and buy a company like this -- and it sounds like you did this -- and it's not working, don't chase it lower, don't try to catch that falling knife. Let it play out. Let's see what happens with Varli. And in the meantime, focus on the winners in your portfolio.
Harjes: Words of wisdom from one of the founders of The Motley Fool. Alright, Todd, we have time for one more news item. What do you want to talk about?
Campbell: I thought it would be important for investors to understand a little bit about what happened with Johnson & Johnson in the first quarter. They just reported their first quarter earnings results, so I feel like that's probably a great topic for you and I, to give people an overview of what's going on with J&J, because it's a core holding probably in most of our listeners' portfolios.
Harjes: This could not be a harder pivot from Celldex, [laughs] tiny little biotech that essentially only has one pipeline candidate. Johnson & Johnson is enormous. It's a pillar of our ongoing coverage of the healthcare sector, so I'm glad that you want to talk about it. You're right that so many investors own it, especially dividend investors. They're part of so many index funds, as well, that chances are, nearly all of our listeners have some sort of stake in J&J.
Campbell: Right. Even if you don't know you own it, you own it.
Harjes: Yeah. So, what are the headline figures?
Campbell: To give a little bit of context, let's take a look at Q1's numbers and compare them a little bit to what happened in Q4, so you get a little bit of sequential feel. In the first quarter, revenue clocked in at $20 billion. Now, that was up 12.6% on an adjusted basis. In Q4, revenue was $20.2 billion. So, you saw a nice little pop year over year, but flat quarter over quarter. As far as earnings per share, those came in at $2.06. This is adjusted numbers. Again, up 12.6%. That was up nicely from $1.74 in the fourth quarter.
There is, though, a caveat, and I think we highlighted this the last time J&J reported their earnings as well, to taking a look at the top line revenue numbers. Kristine, as you'll remember, Johnson & Johnson made that big splash when they bought Actelion. So, you have the positive impact of the sales that have come from Actelion in that 12.6% growth.
Harjes: Yeah, that was a game changer. That was a $30 billion acquisition, so of course we're now seeing the effects of it.
Campbell: Right. If you back out that deal to try to get a feel for how, operationally, J&J is doing, you get a much more, we'll call it realistic growth figure for an $80 billion company. You usually don't see $80 billion companies growing double digits, right? So, the overall sales if you back out Actelion and adjust for currency conversion and all that jazz, was up 4.3%. So, let's call that solid, Kristine. Right? 4.3% for a company of this size?
Harjes: I'll take it.
Campbell: Great. Why not, right? So, you and I have talked about on the show before, that J&J breaks out their business into three different segments.
Harjes: Yeah. They have the medical devices segment, they have the consumer products segment, and then they have the pharma segment. So, I'm sure you'll tell me a little bit about the first two, but I'd really love to focus on the pharmaceutical segment, because as usual, that's the one that really matters and really drives the growth.
Campbell: Yeah, that's where the rubber hits the road for this company, and it does for most biopharma companies. The consumer business is a steady-eddy business. As a matter of fact, in the first quarter, the sales were up 1.3% year over year. Big deal, right? Medical device business, that was only up to 3.2% year over year. It's really that pharmaceuticals business that was the big driver for J&J's results in the quarter. Sales there for the pharma segment grew 15.1%. And even if you X-out Actelion, growth was still up 7.5%. For a company of this size, that's pretty solid growth.
Harjes: Yeah. That also speaks good things about the Actelion acquisition, that it accounted for about half of their pharmaceutical growth.
Campbell: Very good point. It was a big deal. But, it wasn't the only thing that was in the pro column for the pharma segment. I think investors should be aware that Stelara, which won approval for Crohn's disease back in 2016, continues to get more and more market share, and as a result, its sales jumped 24% year over year to over $1 billion, so that's now a $4 billion a year drug. Darzalex, which recently won approval for use in the second line of multiple myeloma treatment, sales there soared. They jumped 64% to $432 million. So, that's now a $1.6 billion a year drug and still climbing, and with potential to go even higher, because they're hoping to win approval for first line use of Darzalex. That's, of course, a very big indication, so there's a lot of opportunity there. They also saw really good growth for Zytiga, their prostate cancer drug, that grew 54% because of, again, a label expansion. And, Imbruvica, which they share with AbbVie, sales of that drug, which is used in CLL, jumped 35% to nearly $600 million. So, they had a number of different bright spots in the pharmaceutical product lineup.
Harjes: Yeah, especially in oncology, which was up 37%. But, turning to the cons column, we've been watching Remicade for a while, and some price erosion there has caused an 18% drop. What's going on with Remicade?
Campbell: Listeners might remember, Kristine, you and I have talked about this on the show in the past, Remicade, one of the largest, top-selling drugs for use in autoimmune disorders, that lost its patent protection. Pfizer and a couple of other companies have come out and are challenging it with their biosimilars. Johnson & Johnson, there's a little controversy there in how they're going about doing this, but they've been very aggressive about maintaining their market share in terms of volume, and they've done that by being aggressively negotiating deals with the insurers that give them preferential treatment. They're cutting costs, they're cutting the cost of Remicade to maintain their volume. And that's really the reason behind the 18% year over year drop in Remicade's sales to $1.4 billion. And I think, from a business standpoint, that's probably the right move, that's a smart move, because they can still make plenty of money on Remicade even by cutting its prices. These are expensive drugs.
Harjes: Yeah, it's a necessary evil.
Campbell: Yeah. And they also have Concerta that's facing off against some generic competition, so sales of that fell 20% to $173 million. Invokana, which is a type II diabetes drug, an SGLT2 drug, sales of that fell about 14% to $248 million, just because other drugs with the same mechanism of action have come to market in the past year, so the money is getting spread out across more players.
Nothing really here very concerning to me. We should probably factor in that Remicade sales will continue to trickle lower over time, but this certainly isn't the 50% drop off you might expect when generics come to market. It seems to be more of a controlled decline. And if you have a controlled decline, then new drugs can come to market and offset some of that headwind.
Harjes: And they do have some new drugs. They have a new prostate cancer drug, they also have a new psoriasis drug that showed superiority to Humira, which is one of the best-selling drugs ever, in a head-to-head analysis. So, there are definitely good things coming up in the future for Johnson & Johnson.
Campbell: Right. You mentioned those two drugs. You have Tremfya, which is, again, that drug that outpaced Humira, and Humira is obviously the best-selling drug in the world with over $18 billion in sales, so any time you can best that drug, right, [laughs] it's a good thing for commercial revenue. Then, you also have your new prostate cancer drug, and remember, prostate cancer is a massive indication, they get $3.6 billion a year just from their prostate cancer drug Zytiga. I don't know if this will be a blockbuster, too, but I think we'll be watching that over the course of the next couple of quarters because it could add meaningful revenue. As far as 2018, they did issue guidance, Kristine. Do you want me to outline what that guidance is?
Harjes: Absolutely, tie a bow on it.
Campbell: Alright. In 2018, the company is now expecting between $79.5-80.3 billion in revenue. And if they can deliver on that number, that's going to be up 4-5% on an operational basis. That's slightly better than the revenue expectation they had exiting Q4, when they were expecting $79.1-79.9 billion. So, on the top end, they increased their outlook by about $400 million. They left their EPS guidance unchanged, though, somewhere between $7.80-8.00 a share.
Harjes: OK, sounds good. Todd, thanks so much for catching me up!
Campbell: Oh, my pleasure, Kristine! I'm glad you had a nice trip!
Harjes: Thank you! As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!