J&J's Olysio makes strong debut in Q1 as firm raises 2014 guidance

US pharmaceutical firm Johnson & Johnson (J&J) has announced its financial results for the first quarter (Q1) of 2014, demonstrating a 3.5% year-on-year (y/y) boost to total revenues of USD18.1 billion. On an operational basis, revenues grew by 5.3% y/y, although foreign exchange rates had an unfavourable 1.8-percentage-point (pp) impact. The pharmaceuticals segment was the main contributor for growth, realising a 10.8% y/y rise in sales, generating USD7.5 billion in the first quarter, and overtaking the medical devices division for the first time. Strong pharmaceutical performance stemmed from the US and international markets, although sales outside the United States were negatively impacted by 2.9 pp due to currency effects.

The medical devices and diagnostics segment remained relatively flat in the quarter at USD7.1 billion, as growth in orthopaedics and speciality surgery businesses was offset by a decline in US diabetes care following the implementation of Medicare's competitive bidding procedure as of 1 July 2013. J&J's consumer product sales declined 3.2% y/y due to the divestiture of the sanitary protection business in the US as of October 2013, and a 4.1-pp unfavourable impact of foreign exchange rates in international markets.

With regards to cost structure, the firm realised a modest increase in its research and development (R&D) spend (+2.6%), while selling, marketing, and administrative expenses declined by 0.8 % y/y, and cost of product sales dropped by 1.8% y/y in the first quarter of 2014. Operating income increased 15.7% y/y, whereas net income saw a significant, 35.2% y/y boost to USD4.7 billion. This was due to a USD0.6-billion net charge after tax in 2013 associated with litigation expenses and Synthes's integration and acquisition costs, whereas 2014 saw a USD0.3-billion net gain after tax due to a favourable tax benefit associated with Conor Medsystems. An effective tax rate for the first quarter of 2014 was 12.9%, and diluted earnings per share (EPS) for the quarter stood at USD1.64.

Pharmaceutical products

Within the pharmaceutical segment, certain key products, many of them newly approved drugs, were behind the strong growth in the quarter. Notably, hepatitis C virus (HCV) drug Olysio (simeprevir) made a strong debut in the quarter, generating USD354 million. Other recently launched products also significantly boosted revenues this quarter, including prostate cancer drug Zytiga (+48.8%), anticoagulant Xarelto (+101.9%), and type 2 diabetes drug Invokana. Other strong contributors to growth this quarter were psoriasis treatment Stelara (+31.8%), antipsychotic schizophrenia treatment Invega Sustenna (+31.3%), HIV drug Prezista (+21.3%), and multiple myeloma drug Velcade (+15.6%).

J&J's breakthrough therapy-designated oncology drug Imbruvica (ibrutinib), developed in partnership with Pharmacyclics (US) has been granted expanded approval as a single-agent, second-line treatment for patients with chronic lymphocytic leukaemia (CLL), although sales for the drug have not been reported yet (see United States: 13 February 2014: US FDA approves J&J, Pharmacyclics' Imbruvica for CLL). Furthermore, a fixed-dose combination of Prezista and US firm Gilead Sciences' pharmacokinetic enhancer cobicistat is currently under the US FDA's review, much like US firm Bristol-Myers Squibb's (BMS's) recently filed combination of blockbuster atazanavir and cobicistat (see United States: 15 April 2014: BMS files for approval of fixed-dose combination of atazanavir and Gilead's cobicistat for HIV).

Outlook and implications

J&J has reported solid financial results for yet another quarter, led by the performance of its pharmaceutical segment. Double-digit growth, which was noted in eight products, significantly offset the unfavourable impact of losing the market exclusivity for proton pump inhibitor Aciphex (rabeprazole) and attention-deficit hyperactivity disorder drug Concerta (methylphenidate), as well as declining sales for Eprex and the first-generation HCV drug Incivo.

Olysio is part of a new wave of HCV drugs, and one of the first to receive approval in the US in November 2013 (see United States: 25 November 2013: US FDA approves J&J, Medivir's HCV pill simeprevir). The HCV drug has also been granted a favourable recommendation for approval by the European Medicines Agency's (EMA's) advisory committee (see Europe: 14 March 2014: EMA's CHMP gives positive opinion for marketing authorisation to seven originator treatments, Boehringer Ingelheim/Eli Lilly's empagliflozin recommended). Gilead Sciences' HCV drug Sovaldi (sofosbuvir) was not too far behind its competitor, but until an all-oral fixed-dose combination is approved by the FDA, physicians in the US have been requesting an off-label combination of Olysio and Sovaldi, according to J&J's CFO Dominic Caruso (see United States: 9 December 2013: Gilead's HCV drug sofosbuvir priced at USD1,000 per pill granted US FDA approval).

US legislators have criticised the price of Gilead's Sovaldi at around USD84,000 for a course of treatment, and raised concerns regarding the prescription of a USD150,000 combination regimen of Sovaldi and Olysio (see United States: 24 March 2014: US congressional representatives question cost of HCV drug Sovaldi). Furthermore, the California Technology Assessment Forum (CTAF) deliberated over comparative effectiveness evidence for the newly approved HCV drugs at a meeting in San Francisco last month, noting that the efficacy evidence albeit strong was not compelling enough to justify the elevated costs of the next-generation products (see United States: 11 March 2014: CTAF deliberates over cost-effectiveness of HCV drugs). Despite budget concerns by private and public payors, pharmaceutical expenditure on HCV medication is anticipated to soar over the next few years (see United States: 9 April 2014: US speciality pharmaceutical expenditure anticipated to demonstrate double-digit growth through 2016). However, it is important to note that US pharmaceutical firms Merck & Co, BMS, AbbVie, and Gilead all have all-oral HCV combination regimens in development or under review, and their approval may affect Olysio in the future.

J&J has raised its 2014 financial earnings guidance to USD5.80–5.90, up from a USD5.75–5.85 forecast announced in the fourth quarter of 2013 (see United States: 22 January 2014: J&J reports solid Q4 and full-year 2013 results led by double-digit pharma sales growth). Caruso has previously stated that the rate of growth of prescription drugs will probably decelerate in 2014, but the first-quarter performance has been strong. J&J also accepted the USD4.0-billion binding offer to divest its diagnostics business to the Carlyle Group (US), which will help the firm reinvest in areas of growth, and improve its agility and efficiency in the future (see United States: 1 April 2014: J&J agrees to divest Ortho-Clinical Diagnostics for USD4 bil.).