Johnson & Johnson Stock Valuation - Part 3

Sep. 6.12 | About: Johnson & (JNJ)

Part 3: JNJ drug pipelines and new drug applications awaiting FDA action

Please refer to Parts 1 and 2 of the Johnson & Johnson (NYSE:JNJ) series for more information on JNJ's overall business strategy and existing products (Johnson & Johnson Stock Valuation - Part 1, Johnson & Johnson Stock Valuation - Part 2).

In Part 3, we will analyze JNJ's drug pipelines, i.e. its future growth in its pharmaceuticals segment. JNJ has aimed for 11 product launches from 2011 to 2015, with 6 approvals in 2011 alone that have contributed to JNJ's revenue growth (JNJ 2011 annual report). In 2012, JNJ also filed several New Drug Applications (NDA), with expected Prescription Drug User Fee Act (PDUFA) dates in late 2012 to early 2013. Below we discuss each application and assess the likelihood of FDA approval.

XARELTO for other indications

XARELTO® (rivaroxaban) is a first-in-class anti-coagulant drug that precisely targets a key enzyme (factor Xa) in the blood coagulation cascade. The drug was developed in collaboration with Bayer. As an oral drug, it is superior to conventional anti-coagulation medicines which require injection, such as heparin.

In 2011, XARELTO received FDA approval for prevention of deep vein thrombosis (DVT), which may lead to pulmonary embolisms (NYSE:PE) in patients undergoing knee or hip replacement surgeries. XARELTO also received approval for the purposes of reducing risks of strokes and systemic embolisms in patients with atrial fibrillation.

In 2012, JNJ and Bayer submitted two more NDAs to the FDA to extend the uses of XARELTO in other indications. The first proposal was for reducing the risk of thrombotic cardiovascular events in patients with Acute Coronary Syndrome (ACS), but in June 2012, the FDA issued a complete response letter (NYSE:CRL) for this indication. Although JNJ may resubmit its application, the likelihood of receiving FDA approval is low.

The second proposed NDA is for the treatment of Deep Vein Thrombosis (DVT), Pulmonary Embolism (PE), and the Long-Term Prevention of Recurrent DVT and PE. This application is still under review by FDA, with a final action expected in late 2012. Based on data published in the New England Journal of Medicine (Xarelto data in preventing VTE-NEJM), we believe there is an approximately 50% probability of approval. The data in the NEJM showed that XARELTO has comparable efficacy to the standard therapy. However, its lower overall bleeding events may provide benefit to patients.

According to a JNJ news release, (Xarelto NDA submission for DVT PE) "Each year an estimated 900,000 Americans experience a DVT or PE, and one third of those events are fatal. If approved for these indications, XARELTO® has the potential to address critical unmet needs in treating patients with these serious medical conditions." Based on our own research, we estimate that the market for DVT and PE is about $1B. Given a 50% probability of approval, our estimated revenues from Xarelto in this new indication are ~$50M, $100M, $180M, and $260M for the four years between 2013 and 2016.

Canagliflozin for glycemia in type 2 diabetes

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, JNJ filed New Drug Applications (NDA) to the U.S. FDA and the European EMA seeking approval for canagliflozin in the treatment of adult patients with type 2 diabetes.

From its Phase III data, it seems that canagliflozin provided 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 a standard treatment of glimepiride (34.2%), which is impressive. The drug also increased HDL-C levels; however, it also increased LDL levels.

Overall, we believe the drug has an 80% probability of receiving FDA approval, which may come in early 2013. 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 (NYSE:MRK), Novartis (NYSE:NVS), Novo Nordisk (NYSE:NVO), and Sanofi Aventis (NYSE:SNY), have already had products in the market or under development. We assume that JNJ's market share at peak level will be 5%, translating to estimated revenues of $160M, $320M, $560M, and $840M from the years between 2013 and 2016. Nonetheless, canagliflozin, if approved, has the potential to become a blockbuster drug for the company, with over-billion-dollar sales in the future.

SIMPONI for ulcerative colitis

JNJ has a solid track record in developing autoimmune therapies. There are at least 80 autoimmune diseases afflicting various tissues such as joints, the central nervous system, the intestines, or the skin. It is estimated that autoimmune diseases affect 5-8% of the human population, and approximately 23.5 million Americans. The combined market size for autoimmune diseases is $47B in 2010.

The most common autoimmune diseases are rheumatoid arthritis (NYSE:RA), multiple sclerosis (NYSE:MS), psoriasis (PS), and inflammatory bowel disease (IBD). Since the fundamental pathological mechanisms are similar, drugs effective for one autoimmune disease are likely to work for others. This explains why pharmaceutical companies are expanding their autoimmune drugs to more indications.

Remicade is an anti-TNF based drug and has been approved for 16 autoimmune diseases, including rheumatoid arthritis, psoriatic arthritis, plaque psoriasis, spondylitis ankylosing, Crohn's disease, and ulcerative colitis. It generated $5.5B sales in 2011 alone for JNJ. However, the drug's patent will expire in 2018, thus prompting the company to develop new drugs to replenish its revenue.

SIMPONI is a different anti-TNF antibody that JNJ has successfully developed to complement Remicade. It has been approved for subcutaneous treatment for adults with moderate to severe active rheumatoid arthritis, psoriatic arthritis, and ankylosing spondylitis. In July 2012, JNJ submitted NDAs to the FDA and the EMA requesting approval of SIMPONI® (golimumab) for the treatment of adult patients with moderate to severe active ulcerative colitis (UC) who have had an inadequate response to conventional therapy.

The released Phase III results are very promising, and it is likely that the drug will receive FDA and EMA approval (Simponi ulcerative colitis Phase III data). In the trial, over 50% of patients receiving SIMPONI met the primary end point, compared to the control group's 29.7% (P < 0.0001). There were also significant improvements for patients receiving SIMPONI in several major secondary endpoints compared to the control group. These included clinical remission, [18.7% vs 6.3%, (P< 0.0001)]; mucosal healing, [43.2% vs 28.5% (P = 0.0005)]; and a significant change from the baseline in the Inflammatory Bowel Disease Questionnaire (NYSEARCA:IBDQ) score [(27.4% vs 14.6% (P < 0.0001)]. We believe there is a 90% probability that SIMPONI will receive FDA approval for ulcerative colitis in early 2013.

The market for ulcerative colitis was $1.4B in 2008 and estimated to reach $2.1B in 2018 (Ulcerative-colitis-market size, IBD market size). Competitions include other anti-TNF drugs, such as Abbott's (NYSE:ABT) Humira and UCB's Cimzia. As we assume JNJ's market share could reach as high as 25% in 2016, we estimated revenues for the drug at $90M, $180M, $270M, and $340M for the years between 2013 and 2016.

JNJ also has several clinical programs in Phase III for autoimmune indications. SIMPONI® is in Phase III studies for the treatment of juvenile idiopathic arthritis, and for an intravenous formulation for rheumatoid arthritis. It is also in a Phase II study for sarcoidosis.

As JNJ expands SIMPONI's indications, this drug will become a blockbuster in several years.

STELARA® (ustekinumab) is another drug for autoimmune treatment. It is an anti-IL12/lL23 antibody, previously approved as treatment for moderate to severe plaque psoriasis in 61 countries. STELARA® is currently in Phase 3 studies for the treatment of psoriatic arthritis and Crohn's disease, and Phase 2 studies for the treatment of sarcoidosis and primary biliary cirrhosis. JNJ is also conducting clinical trials on new classes of drugs for autoimmune diseases, such as an anti-IL6 based therapy (sirukumab) for rheumatoid arthritis and lupus nephritis.

ZYTIGA for chemotherapy naïve prostate cancer patients

In June 2012, JNJ submitted supplemental NDA application to FDA and EMA for ZYTIGA® (abiraterone acetate) administered in combination with prednisone for the treatment of patients with metastatic castration-resistant prostate cancer (mCRPC) who have not received chemotherapy previously. In August, FDA has granted Priority Review for this application.

JNJ reported the Phase III data in American Society of Clinical Oncology (OTC:ASCO) in June 2012 (Zytiga Phase III data on chemo-naive prostate cancer patients). Results from the Phase III study demonstrated that patients with metastatic castration-resistant prostate cancer (mCRPC) treated with abiraterone acetate (ZYTIGA®) plus prednisone showed a statistically significant improvement in radiographic progression-free survival (rPFS) and all secondary endpoints compared to patients treated with placebo plus prednisone. The results also showed a trend for increased median overall survival (OS), the co-primary endpoint, in patients receiving ZYTIGA plus prednisone.

Based on the data, it is highly likely that ZYTIGA will be approved for treatment of naive prostate cancer patients. We assume 90% probability of FDA approval sometime in early 2013. The sales of docetaxel (a conventional treatment) for castration-resistant prostate cancer (mCRPC) were ~$2.6B in 2009 (mCRPC docetaxel market size). We assume JNJ's market share could reach 16% (or $525M) in 2016, given competition from companies, including Dendreon (NASDAQ:DNDN), Medivation (NASDAQ:MDVN), and Sanofi-Aventis (New drugs in development for mCRPC). The estimated revenues for the drug are $90M, $180, $315M, and $470M from 2013 to 2016.

NUCYNTA for pain management

During the development of this report, the FDA approved NUCYNTA extended-release oral tablets for the management of neuropathic pain associated with diabetic peripheral neuropathy (DPN) (FDA approved Nucynta for pain-diabetic neuropathy). This approval makes NUCYNTA the first and only opioid for neuropathic pain associated with DPN. NUCYNTA has already been approved for the management of moderate to severe chronic pain in adults when a continuous, around-the-clock opioid analgesic is needed for an extended period of time.

According to JNJ's news release: "Diabetes affects nearly 26 million people in the United States, and approximately 60 to 70 percent of people with diabetes have some form of neuropathy." Our research indicates that pain management for diabetic neuropathy is a multi-billion dollar market. With conservative assumptions on market penetration, we believe that JNJ could generate revenues of $100M, $200, $350M, and $525M for the years between 2013 and 2016.

Bedaquiline (TMC 207) for multi-drug resistance tuberculosis

In July 2012, JNJ filed a NDA for bedaquiline (TMC207) as an oral treatment for pulmonary, multi-drug resistant tuberculosis (MDR-TB) in adults. If approved by the FDA, bedaquiline would be the first drug with a new mechanism of action for TB in more than 40 years, and the first and only drug specifically indicated for MDR-TB.

The submission is based on two Phase II clinical trials, with JNJ planning to conduct Phase III trials by the end of 2012. Notably, it is unconventional for a company to submit a NDA with just Phase II data (Bedaquiline for multi-drug resistant TB), and JNJ's news release did not provide sufficient data to evaluate the effectiveness of the drug. While MDR-TB has emerged as a global health issue with an estimated prevalence of 650,000 cases, it remain an orphan disease in the US with approximately 130 patients annually; therefore, its impact on JNJ's revenue will be negligible in the short run.

Bapineuzumab for Alzheimer's disease

JNJ also has seen setbacks in its clinical programs. The most publicized was the recent discontinuation of Phase III development of Bapineuzumab in mild-to-moderate Alzheimer's disease (JNJ discontinues Alzheimer drug trials). Bapineuzumab is an antibody that targets beta-amyloids, protein aggregates believed to be associated with Alzheimer's disease.

JNJ's program was developed in collaboration with Pfizer (NYSE:PFE). Notably, clinical trials conducted by several other pharmaceutical companies targeting beta-amyloids, including Eli Lilly (NYSE:LLY), all failed to meet primary clinical endpoints. The aggregated data suggests a need to reconsider the theory that beta-amyloid is a cause for Alzheimer's disease.

In its news release, JNJ stated that it will record an after-tax, non-cash special item related to in-process research and development related to the discontinuation of the phase 3 clinical development of bapineuzumab IV in mild-to-moderate Alzheimer's disease. This will result in a net charge to earnings of between $300 and $400 million in the third quarter of 2012.

Other drugs

JNJ has strong drug pipelines both through internal research and development and partnerships with other biotech and pharmaceutical companies. In particular, we have paid close attention to several Phase III programs in development. These include the Btk inhibitor for chronic lymphocytic leukemia (ibrutinib, PCI-32765) in partnership with Pharmacyclics (NASDAQ:PCYC), Yondelis for soft tissue sarcoma developed in collaboration with PharmaMar, TMC435 for chronic HCV infection developed in collaboration with Medivir AB, and Invega Sustenna for schizophrenia developed in collaboration with Alkermes (NASDAQ:ALKS).


We expect FDA decisions on the 6 NDAs by early 2013. The new drugs awaiting FDA approval discussed here are estimated to generate aggregate revenues of $490M to $2.5B from 2013 to 2016. These new products will have more meaningful impact on revenue growth after 2013. The recent launched drugs including, XARELTO, SIMPONI, ZYTIGA, and canogliflozin, have potential to become JNJ's blockbuster drugs.

Disclosure: I am long JNJ, NVS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.