One of the stocks most owned by Guru investors, Johnson and Johnsons, has seen its revenue streams grow increasingly balanced. The pharmaceutical business which accounted for as much as 45% of total business in 2001 dropped to 36% in 2010 making way for the faster growing medical devices segment. In 2010 R&D expense accounted for 7.3% of medical device sales compared to 19.8% for pharmaceutical (I commented about the dynamics of medical devices in a previous post ).
Overall sales during the period have grown, but the shift in position is attributable to the success in medical devices as sales have more than doubled over the past 10 years while the pharmaceutical segment has barely increased by half.
R&D as a percentage of pharmaceutical sales has vacillated over the past 10 years from a low of 10.88% in 2001 to 13.36% in 2006 and back down to 11.11% in 2010. R&D in aggregate has nearly doubled over the period to $6.8 billion. Despite the industry-wide concern about drug pipelines the pharmaceutical business for Johnson and Johnson looks promising. The company presently has a total of 17 drugs awaiting approval or in the final stage of testing. By contrast in 2007 the company had 11 drugs in the pipeline.
The concern about the pharmaceutical industry is genuine. Much of the low hanging fruit has been plucked and drug approval has grown difficult for pharmaceuticals. A Congressional Budget Office paper noted in 2006 that the historical approval rate for drugs entering phase I had fallen from 14% to 8%. Patents of several blockbuster drugs will expire within the next couple years along with the revenues those drugs bring as generics enter the market.
Johnson and Johnson does have some promising drugs in the pipeline. One of which is Telaprevir which was researched in collaboration with Vertex Pharmaceuticals and currently sits awaiting registration. The drug is a treatment for Hepatitis C and has had exceptional late stage results in comparison with Roches’ drug Pegasys which is the current standard. Tests showed a 75% success rate over the 44% rate for Pegasys.
In the slightly dated CBO paper it also was noted that pharmaceuticals are gravitating towards chronic and degenerative illnesses which tend to have higher R&D costs compared to acute illnesses.
There are several drugs in Johnson and Johnson’s pipeline that treat chronic diseases. One of which is Bapineuzumab which treats Alzheimer’s disease and results for this drug are not expected until late 2012. J & J recently acquired Crucell and that appeared to be a step towards more acute care. With the purchase of the vaccines maker, the company is hoping to make Crucell the focal point for its company-wide vaccines.
The increasingly balanced sources of revenues likely make Johnson and Johnson a favorite for investors. But the Consumer division which I neglected to discuss may have the strongest brands of all 3 divisions. As is well documented the company is having protracted quality issues and having to recall products across many subsidiaries. Despite these quality problems, there remains salient demand for a number of J&J goods. This piece in the NY Times conveys exactly how strong of a brand J&J has trampled in their quality control shortcomings.
Disclosure: Long JNJ
Josh Zachariah
Overall sales during the period have grown, but the shift in position is attributable to the success in medical devices as sales have more than doubled over the past 10 years while the pharmaceutical segment has barely increased by half.
R&D as a percentage of pharmaceutical sales has vacillated over the past 10 years from a low of 10.88% in 2001 to 13.36% in 2006 and back down to 11.11% in 2010. R&D in aggregate has nearly doubled over the period to $6.8 billion. Despite the industry-wide concern about drug pipelines the pharmaceutical business for Johnson and Johnson looks promising. The company presently has a total of 17 drugs awaiting approval or in the final stage of testing. By contrast in 2007 the company had 11 drugs in the pipeline.
The concern about the pharmaceutical industry is genuine. Much of the low hanging fruit has been plucked and drug approval has grown difficult for pharmaceuticals. A Congressional Budget Office paper noted in 2006 that the historical approval rate for drugs entering phase I had fallen from 14% to 8%. Patents of several blockbuster drugs will expire within the next couple years along with the revenues those drugs bring as generics enter the market.
Johnson and Johnson does have some promising drugs in the pipeline. One of which is Telaprevir which was researched in collaboration with Vertex Pharmaceuticals and currently sits awaiting registration. The drug is a treatment for Hepatitis C and has had exceptional late stage results in comparison with Roches’ drug Pegasys which is the current standard. Tests showed a 75% success rate over the 44% rate for Pegasys.
In the slightly dated CBO paper it also was noted that pharmaceuticals are gravitating towards chronic and degenerative illnesses which tend to have higher R&D costs compared to acute illnesses.
There are several drugs in Johnson and Johnson’s pipeline that treat chronic diseases. One of which is Bapineuzumab which treats Alzheimer’s disease and results for this drug are not expected until late 2012. J & J recently acquired Crucell and that appeared to be a step towards more acute care. With the purchase of the vaccines maker, the company is hoping to make Crucell the focal point for its company-wide vaccines.
The increasingly balanced sources of revenues likely make Johnson and Johnson a favorite for investors. But the Consumer division which I neglected to discuss may have the strongest brands of all 3 divisions. As is well documented the company is having protracted quality issues and having to recall products across many subsidiaries. Despite these quality problems, there remains salient demand for a number of J&J goods. This piece in the NY Times conveys exactly how strong of a brand J&J has trampled in their quality control shortcomings.
Disclosure: Long JNJ
Josh Zachariah
