J&J Reports Solid Earnings Growth in Q2, Updates Near-Term NME Filings

CEO: J&J OK

Johnson & Johnson (J&J), the world's most diversified healthcare business, has posted better-than-expected financial results for the second quarter of 2006. In a press release, company CEO William Weldon described the results as demonstrating an "improving performance which is anticipated to continue throughout the remainder of the year". Total product sales for the quarter rose by 4.7% year-on-year (y/y) to US$13.4 billion. The company's medical devices and diagnostics (MD&D) businesses contributed strongly to these increased sales, which boosted the company's bottom line for the quarter by 9.0% y/y to US$2.8 billion. J&J's increasing strength in this area offset some of the continued weakness observed among certain products within the company's pharmaceutical business - its largest unit. In this business sector, J&J encountered its most challenging operating environment in the domestic U.S. market, where sales rose by 2.4% y/y; this contributed substantially to J&J's struggling worldwide pharmaceutical sales, which rose by 3.2% y/y to US$5.8 billion.

Environment Remains Challenging for Pharma Business

J&J's traditionally strong pharmaceutical business struggled to provide significant growth for the company during the second quarter. Despite a strong performance from Risperdal (risperidone), Remicade (infliximab), Topamax (topiramate) and Concerta (methylphenidate extended release), growth in this sector was tempered by continued generic erosion of sales of the company's transdermal pain relieving patch Duragesic (fentanyl), competitive challenges to its one-time top-selling product Procrit (epoetin alfa), and slipping sales from its contraceptive franchise.

However, despite the challenges that J&J's pharma sales have faced over recent quarters, the company remains bullish about the future for this division. J&J expects that near-term growth will be provided by line extensions to the company's multi-talented anti-TNF (tumour necrosis factor) drug Remicade (infliximab) and cancer drug Velcade (bortezomib), as well as the launch of HIV treatment Prezista (darunavir). This product represents a significant success for J&J, as it is the company's first HIV drug to be approved in the United States, allowing entry into a new high-value market.

Strength of MD&D Reflects J&J's Changing Business

J&J's medical devices and diagnostics (MD&D) business has grown in importance for the company over recent quarters, and this sector continued to provide strong revenue growth in the second quarter of 2006. The company has primarily attributed this continued growth to contributions from sales of minimally invasive products from the company's Ethicon Endo-Surgery unit, Cordis' Cypher sirolimus-eluting coronary stent, Vistakon's disposable contact lenses, and LifeScan's blood glucose monitoring and insulin-delivery products.

In the near term, J&J hopes that growth in this sector will be bolstered through the recent acquisition of Vascular Control Systems and its July acquisition of Colbar LifeScan blood glucose monitoring and insulin delivery products. However, neither of these deals will provide the kind of accretive earnings growth that would have been provided by the acquisition of Guidant, had that deal - which failed earlier in the year - been successful. It looks now as if J&J will turn its attention to its consumer products business to provide further diversification away from its pharmaceutical business.

Outlook and Implications:

More Diversification!

In recent quarters, J&J has looked towards its MD&D business to provide growth and diversification away from its pharmaceuticals businesses, which have suffered at the hands of generic competition and an increasingly challenging pricing environment in the United States. However, the company recently agreed to buy the consumer-products arm of Pfizer for US$16.6 billion, after the U.S. pharma giant decided to streamline its business. This deal, which should add around US$3.9 billion in revenue to J&J's consumer health business, should significantly build on the company's strength, although a number of analysts have questioned the deal's hefty price tag. This new sideways expansion for J&J could ultimately provide a safer option for the company in the short term, over its continued expansion in MD&D, as uncertainty currently exists in the United States about the future of reimbursement for medical device products.

J&J Enthusiastic About the Future of Its Pharma Business

During their webcast presentation, J&J officials enthusiastically went into great detail about developments in the company's pipeline that should sustain its pharmaceutical business into the medium-term, highlighting a multitude of products being developed through either in-house activities or strategic licensing deals, such as those recently forged with Canada's Vertex Pharmaceuticals. The company hopes that these pipeline developments will maintain J&J's leadership position in areas where it sees a considerable market opportunity, as well as taking it into a number of new high-value markets.

J&J predicts that 2007 will be a pivotal year for this business, and the company is targeting the filing of 10 new molecular entities (NMEs) by the end of this year, including its strongly touted anti-thrombotic rivaroxaban, being developed in partnership with Germany's Bayer, and the anti-bacterial with anti-MRSA activity ceftobiprole. Among these NMEs is the atypical antipsychotic paliperidone ER - the company's follow-on drug to Risperdal (risperidone). J&J expects to initially pursue the development of this product, which is key to the future of its antipsychotic franchise, as a treatment for schizophrenia - the main driver of the atypical antipsychotic market - but confirmed that it will pursue its development in bipolar disorder at a later date. J&J believes that paliperidone ER can meet the significant unmet need for a product with both an exceptional safety/tolerability profile and class-leading efficacy within this rapidly growing market, which the company forecasts will be worth around US$18.0 billion annually by 2010.

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