ViewPoints: Johnson & Johnson Q2 results analysis – five key themes

FirstWord analysed Johnson & Johnson’s second quarter performance through the lens of five themes:

Diversity wins the day?

Johnson & Johnson is a multinational corporate behemoth with myriad revenue-generating irons in the fire, which every so often is the focus of criticism from investors who contend that moving away from its highly diversified structure could reveal hidden value and position the company to better execute on core strengths.

Many of its peers – AstraZeneca, Boehringer Ingelheim, Eli Lilly, GlaxoSmithKline, Merck & Co., Novartis, Sanofi and Takeda among them – have been aggressively divesting business units as a means for unlocking shareholder value over the past few years.

One could argue that Johnson & Johnson is doing just as it is though, especially after the company beat the Street’s second quarter earnings projections and raised its full year guidance, which pushed its share price up to an all-time high of $125.25 – representing a market cap of $345 billion – as of the close on July 19.

Specifically, Johnson & Johnson reported that sales were up 3.9 percent year-over-year to $18.5 billion for the period, beating the consensus estimate of $18 billion.

But pharma carries the water, again

Despite the sturdy overall print for Johnson & Johnson, a more detailed look at the numbers reveals the results were driven by – yet another – strong quarterly performance from the company’s pharmaceuticals business unit, which has been outpacing its consumer products and medical device units for several years running.

Indeed, whereas the pharmaceutical division, which accounted for almost 47 percent of total revenues, posted an 8.9 percent increase in sales compared to 2Q15. In contrast, medical device sales grew by a paltry 0.8 percent while those from consumer products declined quarter over quarter by 1.8 percent.

The continued underperformance of the two non-pharma businesses may rekindle interest in Johnson & Johnson going their separate ways. (See Spotlight On: Time for Johnson & Johnson to go their separate ways?)

However, the company has resisted calls for doing so on numerous occasions in the past, and chairman and CEO Alex Gorsky stated confidently on a quarterly analyst call that the consumer products and medical device units are poised to return to growth in the near term. “We continue to see consumer as great growth opportunity going forward,” he said, adding that a recent restructuring of its med-tech operations have already begun to bear fruit.

Rumours have been swirling that Pfizer may be exploring a possible breakup that could take place as soon as later this year, and while at least one analyst suggested this month the split is looking less likely, if it does take place it could either increase the pressure on Johnson & Johnson to follow suit or throw cold water on the idea – depending on how successfully it works out.

Biosimilar clouds looming

One of the biggest threats to Johnson & Johnson’s pharma unit is competition from biosimilar versions of two blockbusters – anaemia drug Procrit (epoetin) and, more importantly, immunology drug Remicade (infliximab) – that are on the market in Europe and could be soon in the US.

Remicade’s $1.8 billion in sales represented roughly one-fifth of the company’s total pharma sales in the second quarter, and were driven by a 13.6-percent year-over-year growth to $1.2 billion, which offset the 23.2-percent decline in ex-US sales of the drug as biosimilars really began making their mark.

In April, FDA approved Celltrion’s Inflectra, a biosimilar version of Remicade that will be marketed by Pfizer, though the companies are locked in an intellectual property dispute that may keep the erstwhile competitor off the market for a few more quarters.

Dominic Caruso, executive vice president and CFO of Johnson & Johnson, said that the company’s baseline expectation is that a Remicade biosimilar will not launch in the US this year, though a hearing on a patent dispute scheduled for August could potentially change that. “Whether a biosimilar launch happens is uncertain but it is not in our guidance estimates right now, though our guidance is a range of between 3 percent to 4 percent growth so we feel confident in reaching that in any event,” he remarked.

Growth spurts

Some of the strongest growth in Johnson & Johnson’s pharma portfolio came from Imbruvica (ibrutinib), a leukaemia drug partnered with AbbVie that nearly doubled its sales to $295 million in 2Q16 versus the same period last year, but Gorsky saved his most effusive praise for the company’s evolving immunology franchise.

Gorsky was particularly bullish about Johnson & Johnson’s ability to build on the success of Remicade thanks to strong quarterly performances of Stelara (up 41 percent to $804 million) and Simponi (up 46 percent to $448 million)), which he said will soon be complemented by sirukumab, a mAb against IL-6 partnered with GlaxoSmithKline on the verge of regulatory submissions, and guselkumab, a mAb against IL-23 in Phase III testing.

“There have been 2.4 million patients treated with Remicade and 70 percent of them are getting good relief, so we know these patients are unlikely to switch” to a biosimilar,’ said Gorsky. Even so, that still leaves a massive unmet need among patients with rheumatoid arthritis, psoriasis and related conditions where “there is a lot of patient variability,” which should make for plenty of new patients to target, he added.

Views on SGLT2

A big question on the mind of investors is how much Johnson & Johnson’s diabetes drug Invokana (canagliflozin) will benefit from the unexpected success of fellow SGLT2 inhibitor Jardiance (empagliflozin) EMPA-REG outcomes study.

Based on the second quarter print the conclusion seems to be so far so good, as sales of Invokana grew year over year by more than 20 percent to $383 million for the period compared to $318 million in the same quarter last year, though Gorsky was circumspect about predicting how a possible label expansion for Jardiance – under review by FDA at the moment – might impact Invokana uptake going forward. (See Spotlight On: Diminishing returns from EMPA-REG but Jardiance's cardiovascular claim deserves to get over the finishing line.)

“We are pleased with the performance of Invokana, which is number one in new and total scripts among SLGT2 inhibitors in US,” commented Gorsky. He sidestepped the question about what the addition of language describing a cardiovascular benefit on Jardiance’s label would mean for the Johnson & Johnson product, instead noting the importance of results from an outcome study of Invokana expected next year.

Jardiance is marketed by Boehringer Ingelheim and Eli Lilly.

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