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The FDA will decide on the fate of Invokana (canagliflozin) this Friday (March 29, 2013). This is an investigational drug submitted by Johnson & Johnson (JNJ) last May for the treatment of adult patients with type 2 diabetes. If approved, this will be the first-in-class SGLT2 inhibitor for the treatment of type 2 diabetes. The market size for diabetes was $20B in 2009 and is estimated to reach $36B by 2017. Therefore, the FDA's decision on Invokana will have a significant impact on JNJ's revenue growth. In this article, we assess the probability of Invokana receiving FDA approval. In addition, we estimate the revenues the drug could generate for JNJ going forward.

Invokana (or canagliflozin) is an investigational sodium glucose co-transporter 2 (SGLT2) inhibitor for the treatment of patients with type 2 diabetes. The drug prevents glucose re-absorption by the kidneys, thus lowering blood glucose levels. In May and June of 2012, Johnson & Johnson filed New Drug Applications (NDA) to the U.S. FDA and the European EMA seeking approval of canagliflozin for the treatment of adult patients with type 2 diabetes.

From its Phase III data, it seems that canagliflozin provides substantial and sustained glycemic improvements in adult patients with type 2 diabetes, and was generally well tolerated (Canagliflozin Phase III data). In two studies comparing canagliflozin to current standard treatments, canagliflozin provided significantly greater reductions in A1C levels, fasting plasma glucose levels, body weight, and systolic blood pressure. Hypoglycemia episodes occurred at a much lower incidence (4.9%) with canagliflozin compared to standard treatment with glimepiride (34.2%), which is impressive. The drug also increased HDL-C levels; however, it also increased LDL levels.

On January 10, 2013, the FDA Advisory Committee voted 10-5 to recommend approval for Invokana (FDA advisory panel on Invokana Jan2013). Among the issues of concern were the cardiovascular risk. In fact, Bristol Meyers Squibb (BMY) and AstraZeneca (AZN) had submitted their SGLT2 inhibitor Forxiga for approval in 2012 but failed to get the drug approved by the FDA. Therefore, the FDA's analysis of the cardiovascular safety data for Invokana suggests the agency is still being very cautious in evaluating CV adverse events for diabetes therapies.

The market size for type 2 diabetes was $20B in 2009 and is estimated to reach $36B by 2017 (T2D market size pipeline, T2D market size-Nature). There will be several drugs in the market to address diabetes needs, as companies such as Merck (MRK), Novartis (NVS), Novo Nordisk (NVO), and Sanofi Aventis (SNY), already have products in the market or which are under development.

Based on its clinical data, we estimate that Invokana has an 80% probability of receiving FDA approval. We assume that JNJ's market share at peak level will be 5%, translating to estimated revenue of approximately $240M, $330M, $430M, $520M, and $630M from the years between 2013 and 2017. Invokana, if approved, has the potential to become a blockbuster drug for JNJ (with over a billion dollars in sales) in the future. If the FDA issues a complete response letter, this would delay the launch of the drug.

Our financial model suggests that Invokana's approval will contribute $0.58/share to JNJ's stock value. In our next article, we will follow up with a JNJ's stock valuation. We have a buy recommendation for JNJ with a fair value of $91-$92.

Source: How Much Will FDA Action On Invokana Affect Johnson & Johnson's Revenue And Stock Price?