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Is it Feast or Famine at Johnson & Johnson?

|Includes: Johnson & Johnson (JNJ)
Is it Feast or Famine at Johnson & Johnson?

Courtesy of Pharmboy at PSW and Phavorites of Pharma

Over the past few years, there has been a lot of talk about pharmaceutical manufacturing and persistant problems in quality control.  Genzyme, Schering Plough, are ones that comes to mind, but now Johnson & Johnson came under fire.  Manufacturing is a killer for any pharmaceutical company, as news breaks, companies scramble, and CEOs come on saying that everything is OK, and we are going to recall the product and get things fixed.  Unfortunately, those fixes take a long time, and in the case of a company as diverse as Johnson & Johnson (NYSE:JNJ), its current crisis is a good one.

Johnson & Johnson is a global American pharmaceutical, medical devices and consumer packaged goods manufacturer founded in 1886.  The corporation's headquarters is in New Brunswick, New Jersey, United States. Its consumer division is located in Skillman, New Jersey. The corporation includes some 250 subsidiary companies with operations in over 57 countries. Its products are sold in over 175 countries. J&J had worldwide pharmaceutical sales of $22.5 billion for the full-year 2009 represented a decrease of 8.3% versus the prior year.  Net earnings and diluted earnings per share for the full-year 2009 were $12.3 billion and $4.40 respectively. Full-year 2009 net earnings included an after-tax restructuring charge of $852 million and an after-tax gain of $212 million representing the net impact of litigation matters. Full-year 2008 net earnings included special items related to in-process research and development charges of $181 million with no tax benefit and an after-tax gain of $229 million representing the net impact of litigation matters. Excluding these special items, net earnings for the full-year 2009 were $12.9 billion. Diluted earnings per share for the full-year 2009 were $4.63, an increase of 1.8%, as compared to 2008.

The Company announced earnings guidance for full-year 2010 of $4.85 to $4.95 per share, which excludes the impact of special items.

In 2010, a suit brought by the United States Department of Justice alleges that the company from 1999 to 2004 illegally marketed drugs to Omnicare, a pharmacy that dispenses the drugs in nursing homes.  JnJ is vigorously fighting this claim, but is likely to settle it out of court.  More recently JnJ broadened its recall of children's medications due to a manufacturing issue in a Puerto Rico plant.  Since last November, McNeil has recalled about 11.7 million bottles of various Motrin products and about 6.3 million bottles of Tylenol Arthritis Pain caplets, according to the F.D.A.’s Web site. The company began the recall after receiving consumer complaints about a moldy odor emanating from some products.  The smell was caused by contamination from a chemical byproduct of a substance used to treat wooden transport pallets, the company said.  Senators on capital hill have called JnJ uncooperative.  Time will tell, but I think JnJ should survive this ordeal.  With the recent pull back in price, I am looking under the hood to see what JnJ has leaving (patent expiries), moving, and coming down the pipe.

JnJ's brands include numerous household names of medications and first aid supplies. Among its well-known consumer products are the Band-Aid Brand line of bandages, Tylenol medications, Johnson's baby products, Neutrogena skin and beauty products, Clean & Clear facial wash and Acuvue contact lenses.  Its medical device division has implants, surgery, vision, blood diagnostics and many more products.  It is also a steady income stream, but does not offer the punch that the pharma unit has with respect to profits.  

Click here for profit table. 

Here is JnJ's 2008 pipeline (does not include their Cougar Bio purchase in 2009).

[click on image to enlarge]

Noted in the pipeline:  

  • Xarelto (blood thinner w/ Bayer).  This is a new mechanism and should set the stage and most likely their most important small molecule in development.    JnJ and Bayer have spent considerable time showing the safety and efficacy of Xarelto, and unlike warfarin and other anticoagulants, this drugs does not typically require coagulation monitoring and has no significant drug-drug interactions.
  • Invega Sustenna is an oral dose, extended release (ER) formulation of paliperidone—a metabolite of risperidone, the active component in Risperdal (mouthful, huh?)  The formulation uses the J&J subsidiary ALZA's OROS drug delivery technology (of whom they closed down a few years ago (remember the $12B for ALZA?).  I am not sure the premium is going to be paid for by insurance and medicare, but what do I know.....patients forget to take their meds, so a once monthly may help, or hinder if one has to take it only once a month.... 
  • Simponi (golimumab) is a human monoclonal antibody which is used as an immunosuppressive drug  and targets tumor necrosis factor alpha (TNF-alpha), a pro-inflammatory molecule and hence is a TNF inhibitor (Humira; Enbrel; Remicade lineage).  Simponi is approved in Canada and the United States as a once monthly subcutaneous treatment for adults with moderately to severely active rheumatoid arthritis, psoriatic arthritis, and ankylosing spondylitis.  Simponi is marketed by Schering-Plough(NYSE:MRK) in Europe.  The real question here is - do we need another and what will be its advantages over the above mentioned?  Simponi can be given IV, so that offers some advantage over Remicade, but otherwise, I am not sure if the real world will pay the premium.....this remains to be seen.
  • Velcade was in-licensed from Millennium Pharmaceuticals (now Takeda) and was launched for multiple myeloma.  The drug has a low toxicity profile, and Millennium and J&J are attempting to garner line extensions by conducting trials in several other cancer types.
  • Bapineuzumab - with the influx of money into Elan, JnJ is trying to corner their share of Alzheimers.  Remember that LLY and PFE have two monoclonals that hit the same target, but one works in the brain, the other in the blood.  Well, this one is the PFE one, and by buying a big stake of Elan, JnJ hopes to also corner this area using bapineuzumab.  I do not see it working, but IF it does, it will corner the market for years to come.
  • Others of note:  Procrit (Eprex) was J&J’s largest product in 2002, with global sales of $4.3 billion, but Amgen’s Aranesp eroded J&J’s market share. In addition, the emergence of safety concerns relating to the wider epogen market helped to pull sales down to $2.2 billion in 2009.  Tibotec-Virco have the non-nucleoside reverse transcriptase inhibitors (NNRTIs), Intelence and rilpivirine.  Intelence reached the market in 2007 and rilpivirine is expected to launch in 2010 (Gilead).

JnJ has increased its annual dividend payments by an average of 13% annually since 2000, which is much higher than the growth in EPS.  A 14% growth in dividends translates into the dividend payment doubling almost every five years. Thus, since 1971, JNJ has managed to double its dividend payment every 5 years.

Chuck Carnevale wrote on Seeking Alpha recently that the recent weakness in the stock market, recent recall and marketing faux pas have caused JNJ's stock price to trade at one of its lowest valuations in over 20 years. Notwithstanding these issues, Johnson & Johnson recently raised its dividend by 10.2%.'  Below is Chuck's graph showing JnJs performance. 

JNJ has some real challenges ahead.  The patent cliff remains steep, but the company purchased Cougar Biosciences for its prostate cancer treatment last year.  If a few of the things in the pipe become winners, JNJ should have a decent (not stellar) few years ahead.  With the stock price being a bit higher than MRK, BMY, and even PFE (ugh), and the dividend lower, I favor buying the January 2012 $57.50 calls and selling September 2010 $57.50 calls in a 2:1 ratio for a net debit of ~ $8.50.  If  one has the margin for it, selling an equal amount of January 2012 $50 Leaps as the 2012 Calls for $4 makes the entry a net $0.50.

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Disclosure:  I do not own any JNJ as of this writing.  I do have shares of MRK and BMY. 

See also: Gilead - Not Your Run of the Mill Mid-Tier Pharma

Disclosure: none