New Diabetes Drug Can Bolster J&J’s $74 Value
Johnson & Johnson’s (NYSE:JNJ) experimental drug, canagliflozin, for type 2 diabetes has shown efficacy in phase III trials in reducing blood sugar in diabetics with an elevated risk of heart problems. The drug also led to meaningful declines in blood pressure and weight loss. [1] The company has already filed approval applications with the U.S. FDA and the European Medicines Agency (EMA). The drug will be the company’s first treatment in a huge and fast growing diabetes market and a timely approval can douse concerns about its pharmaceutical pipeline.
We have a $74 price estimate for JNJ, which is about a 5% premium to the current market price.
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J&J, like other major pharmaceutical giants, has been battling revenue losses due to patent headaches in recent years. It lost its patents on Concerta and Levaquin in 2011, while Invega and Aciphex are losing patent exclusivity in 2012 and 2013. This will put at risk nearly $2.5 billion in revenues. Remicade, its biggest blockbuster biologic with sales of more than $5 billion in 2011, will also lose patent protection in 2014, affecting JNJ’s sales in immunology drugs segment. Due to loss of patent/market exclusivity and pressure on some franchises, a strong pipeline is critical for the future growth of this segment.
While the company plans to file 11 new products and over 30 line extensions over the 2012-2015 period, the company had seen several negative developments relating to its pipeline in recent past. Xarelto, a blood thinning drug with blockbuster potential, was rejected even as the company filed a second application for approval (Read JNJ Knocks On FDA Door A Second Time For Broader Use Of Anticlotting Drug Xarelto). In addition, JNJ had to dump the development of Alzheimer drug Bapineuzumab (Read Pfizer and Johnson & Johnson Dump Alzheimer Drug After Failed Clinical Trials). Therefore, encouraging clinical results for diabetes drug canagliflozin may be seen as a silver line in the dark times.
With obesity and diabetes on the rise, the diabetes drug market is seeing rapid growth. The global diabetes market was estimated at $29.3 billion in 2010 and demonstrated 10% compound annual growth rate (CAGR) between 2003 and 2010. The market is forecast to grow to $47 billion by 2017, an annual growth of 7%. Within this market, 72% sales were contributed by the type 2 diabetes product, which is expected to grow from $21 billion in 2010 to $34 billion in 2017 at a CAGR of 7%. [2] Pharmaceutical companies, including JNJ, are aware of this opportunity and have been striving to launch new drugs to tap the market.
We expect the drug to receive approvals by early next year. If approval for the drug comes in time, it will help the company fend off looming patents expiry. The drug can bring more than $1 billion in revenues at its peak. However, the way forward will be challenging due to stiff competition in the market. For example, Merck (NYSE:MRK), the clear market leader with its blockbuster drugs Januvia and Janumet, is developing a follow-on drug for Januvia, MK-3012. The drug has shown strong efficacy results in clinical trials. Further, Merck already has trained sales representatives to sell its diabetes drugs. But, given that a single drug offers qualities like reducing blood glucose, weight and blood pressure, JNJ could make in-roads in the competitive diabetes market.
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Notes:- J&J diabetes drug effective in high risk patients, Reuters, Oct 2 2012 [↩]
- Diabetes Therapeutics Market to 2017 – Better Glycemic Control and Reduced Potential Risk of Hypoglycemia to Increase the Market Share of DPP-IV Inhibitors and GLP-1 Agonists, marketresearch.com, Feb 29, 2012 [↩]