Healthcare conglomerate Johnson & Johnson (NYSE: JNJ) might be stuck in a bit of a trading range over the past year, but that in no way reflects that its growth is at a standstill.
In Johnson & Johnson's most recent quarterly report, after taking out the negative effects of a stronger U.S. dollar on its overseas operations and the benefits and impacts of acquisitions and divestitures, the company witnessed its global sales increase by 5.7%, with a notable jump of 9.1% in the United States.
The big impetus for growth, as it's been for many years now, is J&J's pharmaceutical division, which has introduced 14 novel compounds to market since 2009. Seven of those 14 compounds have since gone on to become blockbuster drugs, or drugs generating more than $1 billion in revenue annually.
The pharmaceutical segment is J&J's key to additional growth since it boasts substantially higher margins than J&J's slower-growth consumer health division and its highly competitive and partially commoditized medical device and diagnostics segment. If new branded pharmaceuticals are coming to market, then J&J is likely to see its gross margin expand and profits rise.
Go big or go home
Earlier this week, in a meeting with Wall Street analysts, J&J's pharmaceutical subsidiary Janssen Pharmaceuticals announced a bold plan to file for 10 new blockbuster drugs between 2015 and 2019, which should allow the company to continue to deliver above-industry-average growth prospects.
Additionally, J&J plans to file more than 40 line extensions, which is a fancy way of saying that it'll expand the label indications of existing drugs. The great thing about label extensions is that the drug in question is already approved and safety data is often well-established, meaning a supplemental new drug application approval can be more streamlined.
J&J's internal growth engine
Sirukumab, a subcutaneously administered late-stage candidate for rheumatoid arthritis (RA) that's being co-developed with a partner, could be coming to market at the perfect time for J&J. Humira, the top-selling anti-inflammatory drug, will soon lose patent protection, potentially paving the way for sirukumab to pick up market share (assuming it dazzles in phase 3 studies).
In a two-part phase 2 study reported in 2011, J&J noted in part B of its study that sirukumab led to a significant improvement in arthritis signs and symptoms as measured by the American College of Rheumatology 50 response (ARC50) at week 12. In the study, 24% of patients in the sirukumab arm exhibited an ARC50 response compared to just 3% in the control group. With RA expected to be a $15 billion market in the most developed countries by 2021 per Decision Resources, sirukumab represents a great opportunity for J&J.
Johnson & Johnson also singled out daratumumab for multiple myeloma as another expected winner. Also being developed in collaboration with a partner, phase 2 studies that were released in February showed an overall response rate of 29.2% and a median duration of 7.4 months in treating double refractory multiple myeloma. Keep in mind daratumumab is for patients who've received at least three lines of therapy and witnessed their disease progress, so to see a median response of more than seven months in those that do respond is pretty substantial.
Daratumumab also has been categorized by the Food and Drug Administration as a breakthrough therapy for double refractory multiple myeloma, which could speed its approval process. By 2021 the multiple myeloma market could be worth as much as $7 billion, and J&J clearly hopes to get a piece of that pie, as well as help tens of thousands of patients along the way.
Don't forget about licensing deals
However, J&J also wants to remind you that in addition to developing therapies in-house and with the assistance of other drug developers, it has no qualms about licensing/collaborating on potentially game-changing compounds.
In November, Johnson & Johnson paid small-cap biotech company Geron (NASDAQ: GERN) $35 million upfront and dangled a $900 million carrot filled with the potential for various regulatory, development, and commercial milestones in order to get its hands on experimental myelofibrosis drug imetelstat.
What makes Geron's imetelstat such an intriguing drug is that it did something no other myelofibrosis therapy has ever done: induce a clinical response. The only currently-approved FDA product works to minimize symptoms caused by the disease, including an enlarged spleen. Imetelstat, in various early-stage clinical studies, actually produced partial and complete remission in select patients. If this data is replicable in larger studies and imetelstat proves safe, it could potentially become the leading myelofibrosis treatment.
Also, this week J&J announced a deal with Achillion Pharmaceuticals (NASDAQ: ACHN), giving the healthcare giant access to Achillion's three oral hepatitis C therapies currently in clinical studies. Under the terms of the deal, Achillion can earn up to $1.1 billion in various payments and milestones, which includes the $225 million direct equity investment that J&J is making in Achillion's stock.
Although Harvoni, Sovaldi, and Viekira Pak are revolutionizing HCV treatment and delivering an effective cure, there's still room for modest efficacy improvements and significant treatment time improvements. If Achillion can develop a therapy capable of delivering 90% or greater elimination of all detectable levels of HCV in say four or six weeks, we could be looking at a new standard of care. Achillion's ACH-3102 has the potential to shorten HCV treatment time to as little as six weeks from the current eight-to-24-week regimen, depending on genotype.
Can J&J really deliver 10 new compounds?
The big question on everyone's mind here is whether or not J&J can actually make good on filing for 10 new compounds over the next five years.
Personally, I think it's doable, although I wouldn't count on every single compound J&J listed in its press release being a success. For instance, imetelstat demonstrated worlds of promise in early stage studies, but Geron also went through a lengthy clinical hold imposed by the FDA when examining the safety of the product on patients' livers. There's still some degree of uncertainty surrounding the long-term safety of the product. And of course, it's not as if the odds are ever in pharmaceutical companies' favor, with far more drugs failing in clinical studies than meeting the mark.
Yet with 14 new compounds brought to market over the prior five years, J&J obviously is doing something right. With management clearly not afraid to incentivize growth via deal-making, I'd opine that J&J's plan to bring 10 new compounds to market and expand dozens of label indications is all the more reason to consider owning this stock in your retirement and investment portfolios.
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Sean Williams has no material interest in any companies mentioned in this article.