Is Johnson & Johnson's Future on the Fast Track?

By Markets Fool.com

Credit:David Kutschke via Flickr.

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Johnson & Johnson has been a pharmaceutical industry leader for decades, but is its future on the fast track? The company's growth rate has exceeded those of its peers over the past two years. However, that's not enough to keep shareholders happy. We live in a "what have you done for me lately" society, and that's especially true in the stock market. If a company misses its quarterly earnings projections, even by just $0.01 per share, the price of the stock may get battered and bruised. Drug companies aren't immune to this scrutiny, either.

"In the past two years, our performance and growth rates have been industry-leading, and we look forward to continuing to drive above-industry growth with our current in-market portfolio and next wave of medicines," said Joaquin Duato, J&J's worldwide chairman of pharmaceuticals. Although J&J is not your typical pharmaceutical company, boasting business lines in medical devices and consumer products, it is the pharmaceutical segment that is the biggest growth driver.

One of the biggest issues that all pharmaceutical companies, including J&J, must continually deal with is the issue of patent expiry. When patents expire, competitors are free to manufacture generic and biosimilar versions of the developer's drug. These new drugs then compete head-to-head with the branded version. Typically the biosimilar and generic versions are priced well below the original drug developer's price, oftentimes meaningfully eroding the revenue stream for the branded drug's manufacturer. As such, pharmaceutical companies such as Johnson & Johnson must always be looking toward the future, developing new drugs to help the company grow and alleviate the potential revenue impact of patent expirations.

In a meeting last month, Johnson & Johnson provided a road map of its drug R&D pipeline and offered up some rather lofty goals. Between 2015 and the end of 2019, the company expects to file for regulatory approval on 10 new blockbuster-potential drugs which will be used in the treatment of various types of cancers, rheumatoid arthritis, and influenza, just to name a few indications. During that same timeframe, J&J plans on filing 40 patent extensions as well in hopes of preserving exclusivity on key drugs.

Lofty expectations
A company the size of J&J needs considerable revenue from its new products to move the needle. In its May 20 press release, J&J suggested that each of the 10 new drugs it plans on submitting for regulatory approval has the potential to exceed $1 billion in revenue, thereby moving each of the drugs into blockbuster territory.

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Given J&J's recent history, these projections may well be achievable. Janssen, a wholly owned subsidiary of J&J, has launched 14 new drugs since 2009. Seven of those 14 new drugs have already exceeded, or are on track to exceed, that $1 billion revenue plateau by the end of 2015.

On the fast track
It's worth noting that two of the 10 drugs J&J has slated for the regulatory approval process over the next four years have received breakthrough-therapy designations from the U.S. Food and Drug Administration, meaning the FDA will review on an accelerated schedule. If the FDA then approves the drugs, they'll reach their intended marketplace quicker than usual. J&J's potential breakthrough-therapy drugs are daratumumab for multiple myeloma, and esketamine for patients with treatment-resistant myelofibrosis.

Janssen announced plans to submit to the FDA a biologic licensing application for daratumumab. This application requests permission to introduce a biologic product into interstate commerce. Janssen also plans to submit a marketing authorization application to the EMA this year. The submission will be based on phase 2 data, which will be presented at an upcoming meeting of the American Society of Clinical Oncology.

Historically, Johnson & Johnson has developed drugs which treat diseases. However that approach may be changing somewhat towards a more preventative approach. According to William N. Hait, global head of Janssen Research & Development:

"The future of healthcare lies in not only treating disease but also preventing and intercepting diseases before illness occurs. Using our powerful research platforms in combination with our five focused therapeutic areas, underpinned by strong in-house capabilities and cutting-edge external partnerships, we are striving to deliver the next generation of medical innovations that prevent, intercept, and treat disease."

The roadmap
Even though Johnson & Johnson has been the market leader for the past two years, the company understands that it can't rely on its past successes. J&J's roadmap takes the fast track to continued success. It's looking to extend its existing patent expiration dates and developing new pharmaceuticals in various markets. If recent history is a reasonable predictor of the future and the company is able to duplicate its successes at Janssen, the company's near-term prospects look bright.

I have happily been a long-term part-owner of this pharmaceutical giant. I expect to be a shareholder throughout this decade, and I hope to continue investing in the company for what Warren Buffett calls his favorite holding period: forever.

The article Is Johnson & Johnson's Future on the Fast Track? originally appeared on Fool.com.

David Weinberg owns shares of Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.