Johnson & Johnson Tumbles as Pfizer Set to Launch Remicade Biosimilar; Solid 3rd Quarter Doesn’t Quell Market’s Overreaction

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Thriving pharmaceutical sales drove stellar quarterly results for Johnson & Johnson (New Brunswick NJ), but the company’s shares fell 3% so far this week on worries that its smash hit, the Remicade arthritis drug, will soon face lower-priced competition.

@jnjcares shares fell on worries that Remicade #arthritis drug will face lower-priced competition Click To Tweet

Pfizer Inc. (New York City) late on Monday, Oct. 17, said it would begin US shipments of Inflectra, its biosimilar version of Remicade, by late November at a 15% discount to J&J’s current wholesale prices, according to Reuters. A year’s Remicade treatment can cost $28,945 for many patients before rebates.

Remicade was J&J’s top-selling drug in the quarter, with $1.2 billion in US sales alone. Chief Financial Officer Dominic Caruso said on a conference call that J&J didn’t expect its yearly results to be affected by any Inflectra competition, according to The Wall Street Journal. With annual US sales of nearly $5 billion and its wide use to also treat Crohn’s disease and psoriasis, Remicade is J&J’s leading, company wide product.

Biosimilar drugs are close copies intended to bestow savings compared with pricey branded products. Inflectra is already available in Europe.

J&J is appealing an August federal court decision that quashed a US Remicade patent, setting the stage for a February court mêlée with Pfizer. Should Pfizer launch Inflectra and later lose the court fight, that could entitle J&J to triple damages.

Meanwhile, analysts predicted US Remicade sales will fall 15% to 20% next year, even though J&J on Tuesday predicted the vast preponderance of patients taking Remicade are unlikely to switch to a biosimilar, says Reuters.

“There’s fear [with] what happens to Remicade,” said Guggenheim Securities analyst Tony Butler. “It will lose some market share.”

But Edward Jones analyst Ashtyn Evans predicted J&J’s annual pharmaceutical sales will grow in the “high single digit” percentage range over the next 3 to 5 years, despite Remicade’s likely deterioration, as newer drugs for inflammatory conditions and cancer continue posting strong sales.

Getting back to J&J’s brighter earnings picture, in the third quarter, revenue rose 4% to $17.82 billion from $17.10 billion a year earlier. Its pharmaceutical sales jumped 9.2% to $8.40 billion, with strong growth for its new Imbruvica and Darzalex cancer drugs and its blood thinner Xarelto. US sales of Remicade jumped 9.4% to $1.22 billion. Global medical device sales rose 1.1% to $6.16 billion in the quarter, while consumer product sales fell 1.6% to $3.26 billion.

Looking ahead, J&J raised the lower end of its full-year 2016 profit forecast to $6.68 per share from $6.63 a share. It retained the upper end at $6.73 per share. The company’s net earnings rose to $4.27 billion, or $1.53 per share, in the third quarter, from $3.36 billion, or $1.20 per share, a year earlier.

Excluding special items, J&J earned $1.68 per share, topping analysts’ average forecast of $1.66 per share, according to Reuters.

Steve’s Take:  Talk about comprehensive media coverage. I stopped counting, at 30, the articles about Pfizer’s seemingly callous, yet strategic perhaps, announcement that shipments of its biosimilar version of J&J’s best-selling Remicade will hit the US market in late November–at a 15% discount to the branded product.

I use that particular modifier because the pharma constellation can be cutthroat as firms vie for position with competing multi-billion-dollar drugs. But even in that milieu, Pfizer’s decision to announce a late-November launch of its competing version of J&J’s best-selling drug the afternoon before J&J released its third-quarter earnings does seem a bit malicious.

Of course, markets hit the panic button on Pfizer’s announcement which investors decided cast a shadow on another blockbuster quarter from J&J, whose shares fell 3% on Tuesday. But J&J isn’t going to let Remicade’s $6.5 billion in sales slip through the rough-and-tumble sales wars into Pfizer’s coffers. And there are many of us who believe it’s better positioned than just about any other company to weather such a storm, including analysts at Bloomberg.

But first, some brief background on the biosimilar world.

Insurers and healthcare providers had hoped a new class of medicines called biosimilars would keep a check on high drug prices and reduce health spending in America. As it turns out, that may not be the case, says Fortune.

Just three biosimilar treatments have been approved by the Food and Drug Administration–the first one winning clearance in 2014–and there are still open questions surrounding the regulatory pathway for the therapies that present headwinds for drugmakers.

The early biosimilar pricing data haven’t been particularly encouraging from a cost-cutting standpoint. The 15% reduction on Pfizer’s Inflectra isn’t anywhere near the savings biosimilars provide in other countries, where they’ve been available for nearly a decade. For instance, Remicade biosimilars in Europe have been sold at 45% and even higher discounts compared to the original drug, helping draw enormous market share away from the therapy in countries like Norway.

Such an immense effect is unlikely to occur in the US given the relatively modest price advantage, and the fact that Inflectra can’t be automatically substituted for Remicade, says Fortune.

J&J says it’s prepared for the fight with Pfizer and other potential copiers. The “US commercial team is ready for a potential biosimilar launch,” Joaquin Duato (pdf), pharma group chairman, said on the company’s 3Q conference call Tuesday. It’s already an “extremely competitive” market on price, he said, and J&J intends to develop “innovative contracts” to “utilize the full breadth” of its portfolio.

Duato also said the company expected stable Remicade patients to stay on the therapy, and that J&J will compete on price. The discount Pfizer is offering on Inflectra is at the bottom of the range that analysts and payers had expected. J&J also detailed how new uses for existing medicines and drug launches through 2019 could offset any sales losses and provide new revenue growth.

Mr. Duato said J&J is working on 10 line extensions on existing products that could add more than $500 million in sales apiece and 10 new drugs that could have $1 billion or more in sales each.

“We plan to continue to grow our pharmaceuticals business in the face of biosimilar competition,” including in the treatment of immunology diseases like the ones treated by Remicade, Duato added.

“Inflectra’s 15% discount should provide enough of an incentive to help attract new patients to start on Inflectra, but probably won’t be enough of a discount to entice stable patients to switch over,” wrote J.P. Morgan’s Michael Weinstein in a note to investors.

Though J&J’s device and consumer businesses are declining in relative importance, they still combined to deliver $9.4 billion in sales in the quarter and give the company a steady base other competing pharma firms lack. That makes J&J less dependent on Remicade.

Yes, Remicade accounted for 21% of pharmaceutical sales in J&J’s latest quarter. But it provided only 10% of J&J’s total sales. Contrast that with AbbVie Inc. (North Chicago), whose biosimilar-threatened blockbuster Humira accounted for 64% of revenue in the second quarter.

If that’s not enough, J&J also has $42.5 billion in cash on hand and is stalking new, potential acquisitions. It’s on its way to more than $72 billion in revenue in 2016 and delivers on or exceeds expectations quarter after quarter.

A point not entirely overlooked in Wall Street’s crystal ball is J&J’s long-standing, strong patient-assistance program which could prove to be a market differentiator, says Zachs. Moreover, the company is ready to compete in all channels to provide patients with the most affordable option in every situation.

Oh, and also overlooked in the knee-jerk investor reaction is the fact that in Canada, Australia and Brazil, where biosimilar Remicade is already available, J&J has maintained more than 90% volume share. Note well, Pfizer–and J&J deserters.

Surely, Inflectra’s introduction will cause J&J investors to wince and does provoke some uncertainty regarding the company’s sales. But J&J should be able to maintain share, even possibly increase it, as the 15% discount offered by Pfizer may not really prompt huge patient changeovers. And when Inflectra starts circulating in the far bigger general population, who knows what new side effects might appear that were not seen in the considerably smaller, clinical trials.

Steve's Take: The negative market reaction to Inflectra is overdone and will be soon forgotten Click To Tweet

As for J&J’s stock, I believe the negative market reaction to Inflectra’s introduction is overdone and will be long forgotten six months from now. It’s J&J’s evolving product mix, not just one drug, that should drive continued growth in the face of biosimilar competition such as this and other market dynamics.