J&J AIDS Pill Signals $9 Billion in Revenue to Ease Recalls

Johnson & Johnson's Zytiga
The prostate cancer therapy Zytiga was cleared for sale by the FDA on April 28. Source: Johnson & Johnson via Bloomberg

Johnson & Johnson, the drugmaker that won approval last week for the first new AIDS medicine since 2008, plans to introduce four drugs this year that may combine for annual sales of $9 billion, helping to offset product recalls and declining profit for medical devices.

The AIDS pill and therapies for prostate cancer, hepatitis C and stroke make New Brunswick, New Jersey-based J&J’s program “among the most exciting in the industry” and should help it outpace profit growth at drugmakers including Pfizer Inc., Merck & Co. and Bristol-Myers Squibb Co., said Jami Rubin, a Goldman Sachs Group Inc. analyst in New York.

The prospects have helped push J&J shares up 6 percent this year, defying a decline for artificial hip sales and recalls for over-the-counter medicines such as Tylenol. The drugs, developed through an acquisition and licensing deals, show J&J hasn’t lost the ability to pick a winner, said Christopher Molloy, dean of Rutgers University’s School of Pharmacy in Piscataway, New Jersey.

“They’ve placed a lot of big bets and four of them are coming in,” said Molloy, a former researcher at Bristol-Myers and J&J, in a telephone interview. “What J&J has been very nimble at is identifying good prospects and bringing them along.”

J&J, the second-biggest seller of health products after Pfizer, fell 13 cents to $65.56 at 4:01 p.m. in New York Stock Exchange composite trading.

Share Rise

The shares reached their low for the year on March 16, a week after the company settled a U.S. lawsuit over its recalls by giving regulators expanded oversight at three plants. Since then, the stock has increased 14 percent, helped by the April 27 announcement that J&J would buy device maker Synthes Inc. for $21.3 billion. The deal would be the biggest in J&J’s 125-year history.

The anticipated drug approvals are “a signal that things are improving” for a pharmaceutical unit that has seen sales slide 3.7 percent since 2006 amid competition from generic drugs, said Les Funtleyder, a fund manager at Miller Tabak & Co. in New York who holds J&J shares, in a telephone interview.

“If you combine that with Synthes, which should bolster their device side, that means that they just need to clean up their consumer unit and they can get back to faster growth.”

J&J will gather analysts in New Brunswick on May 26 for a meeting to showcase the drug division.

Rival Treatments

The new medicines will face competition, some from treatments already with a head start in the market, and the company must persuade doctors and patients that the products offer greater benefits than their rivals, Funtleyder said.

Zytiga, a prostate cancer therapy gained in the $877.8 million acquisition of Cougar Biotechnology Inc. in 2009, was cleared for sale by the U.S. Food and Drug Administration on April 28, two months ahead of schedule. Last week, the agency approved Edurant, the first new AIDS treatment in three years.

J&J also is awaiting European approval for telaprevir, a treatment for the liver disease hepatitis C licensed from Cambridge, Massachusetts-based Vertex Pharmaceuticals Inc. It’s seeking U.S. approval for Xarelto, a blood thinner to prevent strokes shared with Bayer AG of Leverkusen, Germany.

Addressing conditions that affect millions of people, Zytiga and telaprevir may each reach peak sales of $3 billion while Xarelto may generate $2 billion annually, said Goldman Sachs’s Rubin in a May 11 note to investors.

Profit Expectations

Profit may grow by about 10 percent a share annually the next three years, making J&J “the only accelerating earnings story across global pharma,” she wrote. Adjusted earnings grew 3 percent a share in 2010 and 2 percent the year before.

Edurant will be sold in a combination pill with Foster City, California-based Gilead Sciences Inc., the world’s biggest seller of AIDS drugs, and may generate sales of $870 million for J&J in 2015, said Larry Biegelsen, a Wells Fargo & Co. analyst in New York, in a May 20 note.

J&J’s drug-development approach “starts with the unmet medical need,” said Sheri McCoy, a vice chairman of the company’s executive committee, in an e-mail. “We have extremely talented R&D leaders who are passionate about addressing critical medical needs and they value both internal and external sources of innovation. And our commercial teams have a strong track record of successfully launching new products.”

The company is “rigorous about prioritizing our investments, with a view for the long term,” she said.

Merck, Pfizer

Merck, based in Whitehouse Station, New Jersey, won FDA approval this month for its hepatitis C drug, Victrelis. Xarelto may face products from Pfizer and Bristol-Myers, both based in New York, and closely held German drugmaker Boehringer Ingelheim GmbH. Medivation Inc. of San Francisco is developing a prostate-cancer pill to compete with Zytiga.

The opportunities are big enough, and J&J’s clinical results are good enough for its drugs to stand their own, Rubin said. Prostate cancer affects 550,000 people in the U.S. and Europe annually, and markets to treat hepatitis C and atrial fibrillation, an irregular heartbeat that can cause stroke, are expected to reach at least $10 billion a year each, she said.

J&J has marketing rights to Xarelto in the U.S. and for telaprevir in Europe, South America, Australia and the Middle East.

The company had $61.6 billion in revenue last year, down 3.3 percent in the past two years.

Timing Helps

Johnson & Johnson may be benefitting from timing as much as anything else, with four drug approvals lining up at a time rivals have hit pipeline delays, said David Maris, a Credit Agricole Securities analyst in New York.

J&J isn’t known for having the biggest or most innovative drug research program, praise more often applied to Merck or Bristol-Myers, Maris, Molloy and Funtleyder each said. Merck’s anti-cholesterol candidate, anacetrapib, may generate more than $10 billion in yearly sales if it works as expected, Maris said.

“Saying you have a great pipeline and taking credit for a drug you didn’t develop is really like saying, ‘we have a lot of cash and we have an ability to identify other people’s good science,’” he said in a telephone interview.

What J&J has done better than its peers is strike a balance between spending on internal drug-research and finding outsiders’ compounds to acquire or license, Molloy said.

“They’re looking for a product that’s pretty far along, already in clinical trials and that is showing a proof of concept or pretty close to showing proof,” he said. “That requires a lot of investment and a little bit of risk, too.”

J&J has also benefitted from a corporate culture that’s long given individual units the freedom to make their own decisions, said Barbara Ryan, a Deutsche Bank analyst in New York. It’s a model fellow drugmakers have pursued with mixed success, she said.

“They’ve been able to acquire companies that were entrepreneurial and productive and allowed them the integrity to continue to do so,” she said in a telephone interview. “Each company runs at its full speed rather than trying to have it integrated and moving in lock step.”

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