Johnson & Johnson Scores a Solid Hit With Imbruvica

The biggest cancer conference of the year is over, and star talent Imbruvica one out of the ballpark for its Big Pharma part-owner, Johnson & Johnson .

Shares of Johnson & Johnson outperformed the S&P 500 since the beginning of the year, with a gain of around 13%. Since the company has some major patent expirations coming that will take a bite out of revenue, and operating income has only grown 3.5% on an annual basis, the dividend stalwart looks like it may need some better cost management.

Back in 2010, the spotlight was on Johnson & Johnson, when they jockeyed their way past a scrum of Big Pharma competitors to acquire 50% rights to a mid-stage blood-cancer drug. The developer of the drug, Pharmacyclics was then an obscure little biotech.

The co-licensed drug proved to be a superstar. Imbruvica snagged three FDA breakthrough designations on its way to score early FDA approval in mantle cell lymphoma. Overall, Imbruvica is slated to bring in about $1.3 billion a year at its peak, according to FierceBiotech.

Johnson & Johnson immediately slapped a nosebleed-level price on Imbruvica ($130,000 per year), making it one of the highest-priced cancer drugs in recent memory. Label expansion followed, triggering a February $60 million milestone payment to Pharmacyclics from J&J. 

Of course, things can rapidly cool off. But at ASCO 2014, Imbruvica proved that it's still providing plenty of value for both companies.

At ASCO, Imbruvica squared off against GlaxoSmithKline's drug Arzerra in relapsed chronic lymphocytic leukemia patients, or CLL. (CLL is the most common form of blood cancer among adults in Western countries.) The Phase III trial focused on patients who had proven refractory to other forms of treatment.

According to the New England Journal of Medicine, Imbruvica "significantly improves progression free survival, overall survival and overall response as compared to [GlaxoSmithKline's drug]." Gregory Master, who moderated the release of the results, predicted that Imbruvica might in fact "transform the treatment" of CLL. 

Unfortunately for GlaxoSmithKline, the bad news on Arzerra added to a string of recent strike-outs. Just last month, darapladib failed to meet the primary objective in a phase 3 study. Glaxo's top line is also being pressured as key products give way to generic competition. And then, there's the ongoing nightmare with China's Public Security Ministry. The company desperately needs continuing pipeline success in its COPD candidates in the coming year.

So what's ahead for J&J?

The consumer and medical devices business is flat, but Johnson & Johnson has a new plan, to increase its high margin oncology and immunology lines to pick up the slack. While Imbruvica's revenue gains are mostly still ahead, oncology in general is doing extremely well at Johnson & Johnson. According to the 10-Q, the company's two best selling cancer drugs, Velcade and Zytiga, grew by 15.6% and 48.8% year-over-year respectively last quarter.

Johnson & Johnson still looks a little pricey. Shares are trading at a premium relative to peers and even its own history of valuation. Against an industry average of 18.8 times trailing earnings, J&J is at 19.7 times, which is significantly higher than its own five-year average of 16.7 times.

But just recently, the company downsized its medical devices business, selling off a diagnostic unit (Ortho-Clinical Diagnostics) for $4 billion. Additional divestitures could occur in the near-term future, making the company more attractive. In short, focusing more on its growing pharmaceutical segment would give this company a new look, and a new lease on life.

Another big plus is that Johnson & Johnson knows how to make win-win deals come together, a costly weakness of other Big Pharmas. (Witness Pfizer's debacle with AstraZeneca.) Research director Peter Lebowitz personally engineered the Johnson & Johnson-Pharmacyclics agreement on Imbruvica, according to the Wall Street Journal. It was an outstanding move, and at the time Lebowitz had only been with Johnson & Johnson three weeks.

Meanwhile, what's up with Pharmacyclics? The company's earnings growth has been strong. But compared to where it was a year ago, the stock is also trading at a higher level, which could mean that the market has already priced in a lot of potential growth.

Pharmacyclics shares rose 3.8% a few days ago, when the FDA granted priority review to an application for approval of Imbruvica for treatment of patients with refractory CLL and SLL. The target PDUFA date is early October 7, so keep your eyes and ears open.

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Cheryl Swanson has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of 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.

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