Most people usually consider Johnson & Johnson (JNJ -0.69%) a stodgy, low-growth income stock. However, over the past year, shares of the diversified medical giant have climbed 34% -- outperforming both the market and most of its big-pharma industry peers.
That fact might surprise some investors, since J&J often looms large in negative headlines with costly settlements in off-label marketing and safety recalls. Let's take a look three things investors should know about J&J before 2014 and how they affect other companies, such as Merck (MRK 0.10%), Hospira (NYSE: HSP), and Pharmacyclics (NASDAQ: PCYC).
Source: Ycharts.
J&J's top-selling drug
J&J's most important product is Remicade, its blockbuster arthritis treatment. Last quarter, sales of Remicade rose 6.2% year over year to $1.7 billion -- accounting for 9.6% of the company's revenue and 24% of the pharmaceutical segment's top line. J&J co-markets Remicade with Merck, but J&J's share is nearly triple the size of Merck's.
Remicade is one of three blockbuster arthritis treatments on the market, along with AbbVie's Humira and Amgen's Enbrel. All three treatments are biologic treatments known as TNF blockers, which dramatically reduce inflammation in 70% of patients suffering from rheumatoid arthritis.
However, Remicade's patent has already expired in some parts of Europe, and is scheduled to expire across most of the European Union in 2015, although it will be patent protected in the U.S. until 2018. Remicade generated $2 billion in sales in Europe in 2012.
Those patent expirations opened up a window of opportunity for Hospira, which gained EU approval for its biosimilar version of Remicade, Inflectra, in September. Hospira co-developed Inflectra with Celltrion, a South Korean company. Hospira intends to launch Inflectra in Eastern Europe in late 2013 and early 2014, eventually expanding into larger markets in Western Europe as Remicade's other patents expire -- a bleak warning that Remicade's sales growth, already in the single digits, could flatten out or decline in 2014.
3 key areas of growth
Although Remicade's ultimate fate is worrisome, J&J has shown some progress in branching out into other treatments such as diabetes, hepatitis C, and blood cancers.
In diabetes, J&J continues to lead the market with the only SGLT2 inhibitor approved in both the U.S. and European markets, Invokana. SGLT2 inhibitors are a new class of diabetes drugs that help patients with type 2 diabetes excrete more glucose through the urine -- which can decrease the number of required daily insulin injections. The only other SGLT2 inhibitor currently on the market is AstraZeneca and Bristol-Myers Squibb's Forxiga, which is only approved in Europe. In 2014, investors will be closely watching sales of Invokana, which is forecast to hit annual peak sales of $2.5 billion.
J&J's hepatitis C drug portfolio is also growing. The company recently won FDA approval for Olysio, a new treatment that is administered along with pegylated interferon and ribavirin. Olysio only treats genotype 1 hepatitis C -- the most common type of the virus -- but it is notably the second approved hepatitis C treatment in J&J's portfolio after Incivo. In addition, J&J also recently acquired an experimental hepatitis C drug from GlaxoSmithKline, which it intends to test in phase 2 studies as a combination treatment with Olysio and another experimental hepatitis C drug.
The third major area of growth J&J investors should watch is its partnership with Pharmacyclics. The two companies currently have a split stake in Imbruvica, a potential blockbuster treatment for mantle cell lymphoma (MCL) and chronic lymphocytic lymphoma (CLL). Imbruvica is expected to generate peak sales of up to $9.2 billion if approved for both indications.
On November 13, the FDA approved Imbruvica as a treatment for MCL -- a positive development for the company that was met with a mixed response, since it wasn't simultaneously approved for CLL. Therefore, the upcoming approval for CLL would be a major catalyst for both J&J and Pharmacyclics' top-line growth.
Quality control issues
Last but not least, we need to address J&J's glaring streak of quality control failures over the past four years, during which the company recalled Tylenol, Motrin, K-Y Kelly, contact lenses, blood glucose meters, vaginal mesh implants, artificial hip implants, and numerous other products due to safety issues.
J&J's problems became so severe that the FDA notably took over three of its Tylenol plants in 2011 to ensure the product's safety. Earlier this year, batches of its antipsychotic drug Risperdal Consta were recalled after being tainted with mold. J&J also recently reached a $2.5 billion settlement for failed metal-on-metal hip implants from its subsidiary Depuy, which caused physical problems in approximately 8,000 patients after metal debris from the devices caused muscle and nerve injuries.
Rather than fix these problems, however, J&J launched a new ad campaign to fix its tarnished PR image, which didn't amount to more than a Band-Aid for its deeper supply chain issues. Investors should keep an eye out for any future recalls in 2014 to see if J&J can finally break this vicious cycle of recalls, which could throttle the growth of all three of its key businesses: pharmaceuticals, medical devices, and consumer health products.
The Foolish takeaway
Johnson & Johnson has great opportunities for growth in diabetes, hepatitis C, and blood cancer treatments, but its top blockbuster Remicade will soon face generic competition in Europe, and the company has repeatedly failed to effectively address its severe quality control problems.
As a whole, however, J&J is a solid play in health care. With $25 billion in cash and equivalents and a forward annual dividend yield of 2.8%, this stock should still appeal to growth and income investors alike in 2014.
