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Johnson & Johnson's (NYSE:JNJ) received a major boost as its blockbuster potential type 2 diabetes drug, Invokana (commonly known as Canagliflozin), was granted FDA approval. [1] The approval marks JNJ's first entry into the huge diabetes market. Despite overall strong efficacy in reducing blood sugar in diabetics and market potential being significantly higher, we currently expect the drug to achieve over $1 billion in expected peak sales as some safety issues were raised with the trial results. [2] In addition, it is the first drug in its class in a huge type 2 diabetes market and physicians may want to wait before extensively prescribing the drug. An already competitive market will also make it difficult for JNJ to penetrate the market.

Huge Market Potential

With obesity on the rise, diabetes is affecting more people everyday globally. In the U.S. alone, roughly 26 million people suffer from the condition. [3] Owing to these factors, the global diabetes drug market has seen rapid growth rate in the last couple of years. According to GBI Research, a leading business intelligence provider, the type 2 diabetes drug market, which constitutes a significant chunk of the total diabetes drug market is expected to grow from $26 billion in 2011 to $50 billion in 2021, in developed markets including the U.S., Japan and Europe. [4]

While the market is crowded with several major drugs available for the condition, the fact that the disease is often associated with several other disorders such as cardiovascular events, kidney impairment etc., it limits its target patient population. [5] This presents an opportunity for new drug compositions like Canagliflozin. It is a member of a new class of diabetes drugs known as sodium-glucose co-transporter-2 (SGLT2) inhibitors that lower blood sugar by blocking the re-absorption of glucose by the kidney and increases the excretion of glucose in urine.

In phase III clinical trials, Canagliflozin exhibited very strong efficacy in lowering blood glucose levels in diabetics. The drug also led to meaningful decline in weight loss. However, the downside was that it came with an elevated risk of heart problems. [2]

Canagliflozin To Offset Revenue Losses From Patent Expiry

Like many others in the pharma industry, JNJ has been battling with patent cliffs too and is in a better position than many of its peers. Its patent protection on Concerta and Levaquin expired in 2011, while Invega lost patent exclusivity in 2012. All of these patent expirations put nearly $1.5 billion of revenues at risk. However, with drugs like Canagliflozin, we can expect continued growth in pharmaceutical revenues ahead.

While looking at the huge diabetes market the sales potential of the drug could be significantly higher than $1 billion in peak revenues that we currently expect, but what limits the revenue potential of the drug is its not-so-strong efficacy in patients with impaired kidney functions. [2] This is a common condition in diabetics and potential safety risks may well outweigh the benefits. Physicians may want to stick to old therapies whose safety have been proven. However, should this not prove as a hurdle, the drug could garner significantly more than $1 billion in peak revenues.

Significant competition from rivals are also expected to hinder the growth potential of the drug. Merck (NYSE:MRK), a clear market leader with its blockbuster drugs Januvia and Janumet, is also developing MK-3102, which has exhibited strong efficacy in clinical trials. Merck already has a team of trained sales representatives to sell its diabetes drugs while JNJ has just stepped into the competitive market. However, with the unique proposition of a single drug offering qualities like reducing blood glucose levels and weight, JNJ may actually make in-roads into the diabetes market.

We believe that JNJ's stock has already discounted the impact of the news as the approval was being widely anticipated by March end (Read Johnson & Johnson Could Tap The Huge Diabetes Market With New Drug Approval). The stock has already risen over 20% this year and is currently hovering around our $81 price estimate.

Notes:

  1. U.S. FDA Approves INVOKANA™ (Canagliflozin) for the Treatment of Adults with Type 2 Diabetes, JNJ, March 29 2013
  2. J&J diabetes drug effective in high risk patients, Reuters, Oct 2 2012
  3. National Diabetes Fact Sheet, 2011, CDC
  4. The Type 2 Diabetes Drug Market Will Almost Double Over The Next Decade, Increasing From $26 Billion In 2011 To Nearly $50 Billion In 2021, Decision Resources, Oct 15, 2012
  5. Johnson & Johnson: can canagliflozin do what dapa didn't?, Datamonitor, June 14 2012

Disclosure: No positions

Source: Johnson & Johnson Gets A Big Win As FDA Approves New Diabetes Drug