Johnson & Johnson (JNJ) has been wrestling its way up since early fall of 2012 and as the New Year unfolds, one new drug could add some moderate revenue and its OTC troubles are winding down. Let's take a look at what lawsuit challenge the company may be facing this year and one of the newer drugs that may be coming out soon.
Even though JNJ has had many problems the last two years, 2013 could be a good year as many of its struggles are coming to an end. Deutsche Bank upgraded Johnson & Johnson from "hold" to "buy" sighting the changes to some of these struggles the company has been going through.
"For the past several years, JNJ has weathered through patent expirations, a general slowdown in utilization trends, and challenges with its OTC businesses. As we look ahead to 2013, we believe JNJ will see improving trends. We expect recent and new drugs to continue to drive pharma sales. J&J should continue to work through the McNeil Consent Decree and return products to market.
Here Comes Canagliflozin
The diabetic drug canagliflozin from Johnson & Johnson was approved by the FDA advisory committee in a 10 to 5 vote. There were questions raised about possible cardiovascular risks in this drug that will be the first in a new class of drugs to treat diabetes. This particular class of drug lowers blood sugar by causing it to be excreted through the urine while most drugs today focus on insulin. It will be taken once a day by adults with type II diabetes.
Concerns were raised about effects on kidneys. Some doctors were concerned that people with moderate kidney disease should not have the drug prescribed to them. In the study, the drug did not seem to work as well for people with kidney problems as it did for those with normal kidney function. So any signs of kidney disease would make a person a (non-candidate) for the drug. Other concerns that were raised included signs of stroke; small increase in heart attack risk and the elevated levels of good and bad cholesterol.
It is always hard wrestling with a new drug and working through side effects to determine if the benefits outweigh the risks. In many of the drugs taken today, weight gain, hypoglycemia, or a drop in blood sugar levels are potential side effects. Canagliflozin results included fewer episodes of hypoglycemia. Improved blood sugar levels lead to weight loss and lower blood pressure. These are major concerns for patients with type II diabetes. Struggling with weight loss is a big part of dealing with the disease and this drug holds promise to help reduce that risk.
If authorized, the drug is not supposed to be a huge revenue maker. Lawrence Biegelsen, of Wells Fargo, has estimated that the drug could bring in $111 million this year if is authorized by the current agency deadline of March 29. Estimates of revenue growth were expected to possibly reach $600 million by 2016.
Mesh Law Suites will Hit Bottom Line in the Future
We will continue to hear about the lawsuit developing from the failed vaginal mesh implants and this will surely have an effect on JNJ's bottom line. It has been stated that the mesh failed in 20 percent of the time within 6 months, even before the first mesh was sold in 2005. It has also been argued that the mesh was found to have failed 27% of the time within the first year. The first lawsuit by Linda Gross, a nurse from South Dakota is the first of about 1800 lawsuit said to be going to trial. Of course, the company has stopped selling the mesh claiming it not to be commercially viable anymore. We will see how these develop.
Through the last half of 2012, Johnson & Johnson has been bullish and moving up in a broad peak and valley pattern as it touches to top and bottom Bollinger Bands. And it recently pushed through the 52-week high it reached in October and it is a very healthy move. It remains bullish in the RSI indicator and this last move did not hit an overbought position, so it still has room to move up. The MACD MA's have remained above the "0" line throughout the move and rarely dipped below the line as the stock reached valleys. This shows it continues to have strength as it moves up.
The Options Play
Presently trading at 72.56, I believe the stock will pull back if it is going to keep the same pattern it has been following. It is in this pullback that I am looking to collect a short-term income play.
- Buy the March 2013 put with a strike of '72.50' (priced at $1.51)
- Net Debit to Start: $1.51
- Maximum Profit: unlimited (value of stock)
- Maximum Risk: net debit
- Maximum Length of Trade: 2 months
Reasoning behind the Trade
- Trade with the trend. (I am expecting a pullback).