In a previous article, I discussed Johnson & Johnson's (NYSE:JNJ) massive pharmaceuticals business, which accounted for 39.1% of its total revenue last quarter. It is the company's second largest business segment by revenue and the fastest growing one, reporting 11.7% year-over-year sales growth last quarter.
However, J&J's pharmaceuticals business has a glaring vulnerability -- its arthritis medication Remicade, which it co-markets with Merck (NYSE:MRK), generated 23.9% of its quarterly revenue last quarter. Although sales of the treatment rose 9% year-over-year last quarter, it faces a major challenge -- Inflectra, a biosimilar produced by Hospira and Celltrion, which was recently approved in the EU. During clinical studies, Inflectra showed better efficacy rates than Remicade and is expected to be cheaper -- making it a major threat to J&J's top line growth in the region.
Looking past arthritis treatments
Investors concerned about Remicade should watch sales of Simponi, another arthritis medication marketed with Merck, which reported 40% sales growth last quarter. In addition, sirukumab, a new rheumatoid arthritis treatment that it is developing with GlaxoSmithKline, could treat a niche group of patients on which traditional treatments have failed.
However, for a clearer glimpse of J&J's future, investors should look past these arthritis treatments at a new source of revenue for J&J -- diabetes treatments.
Leading a new class of diabetes treatments
J&J's most important new product is Invokana, the only FDA approved SGLT-2 (sodium glucose cotransporter) inhibitor on the market today. SGLT-2 inhibitors are a new class of orally administered drugs that help type 2 diabetes patients excrete more glucose through their urine to stabilize blood sugar levels. As a result, Invokana can reduce the number of required daily insulin injections.
Invokana only launched in the U.S. in April, but analysts expect the drug to eventually reach peak sales of $2.5 billion. Invokana has not been approved in the EU, but recently received a favorable recommendation from the Committee for Medicinal Products for Human Use, which bodes well for an eventual approval.
Here come the new challengers
J&J's success hasn't gone unnoticed, however.
Bristol-Myers Squibb (NYSE:BMY) and AstraZeneca (NYSE:AZN) teamed up to produce Forxiga, a competing SGLT-2 inhibitor that was approved in the EU last November. In the United States, the FDA rejected Forxiga in February 2012 on grounds that additional safety data, including the possible risk of breast and bladder cancer, was required. The two companies have now resubmitted new data to the FDA, with a final decision set for next January. Forxiga could also complement Byetta/Bydureon, another diabetes treatment produced by Bristol-Myers Squibb and AstraZeneca.
The U.S. approval of Forxiga could help Bristol-Myers Squibb and AstraZeneca offset some losses from patent expirations and generic competition, which resulted in the two companies posting 9% and 4% year-over-year revenue declines, respectively, last quarter. Annual sales of Forxiga are expected to reach $700 million to $1.5 billion.
Pfizer and Merck forge an alliance
Meanwhile, Pfizer (NYSE:PFE) and Merck have also teamed up to produce ertugliflozin, a SGLT-2 inhibitor that is currently ready for phase 3 trials. The two companies are planning to market ertugliflozin as either a stand-alone drug or in conjunction with Merck's diabetes drug, Januvia.
If ertugliflozin is approved, Pfizer stands to gain an important new source of revenue that could offset some of its lost sales from Lipitor, which have weighed on the company over the past two years. Merck could also use the treatment to boost sales of its diabetes treatments Januvia and Janumet, which have taken center stage after its top-selling asthma medication Singulair lost patent protection in the U.S. last year.
The Foolish takeaway
Invokana is notably J&J's first step into the highly crowded market of diabetes treatments.
Companies like Novo Nordisk, Eli Lilly, Bristol-Myers Squibb, and AstraZeneca have already saturated the market with a wide variety of treatments. Another closely watched company, MannKind, could even turn the entire market upside down with its inhalable insulin, which is currently in late stage clinical trials.
However, J&J only needs one treatment to make a huge impact on the market. It has sent its competitors scrambling to produce competing SGLT-2 treatments, but so far none have been successful at penetrating the U.S. market where Invokana now has a major head start. While Invokana might never replace Remicade, which generated $6.1 billion in sales in 2012, it is a valuable new product which will expand its defensive moat against its competitors.