Band-Aid Won't Stop Generic Bleeding at Johnson & Johnson

Despite best efforts to build a diversified health care business, the fortunes of Johnson & Johnson remain tethered to prescription drug sales, which comprise almost 40 percent of total revenue. Generic cannibalization of blockbuster drugs that have lost — or are losing — patent protection, combined with other challenges irrupting on the scene, will make recapturing lost revenue ever more difficult at U.S. operations.

Notwithstanding a diversified portfolio covering five therapeutic areas — like most drug manufacturers — J&J derives most drug sales from a few blockbuster medicines. Third-quarter U.S. pharmaceutical sales at the world’s largest health care conglomerate fell 19.2 percent to $2.9 billion, as demand for seizure medicine Topamax (topiramate) and Risperdal oral (risperidone), a treatment for schizophrenic and bipolar disorders, was trodden beneath the feet of cheaper copycats:

• Topamax, which is also an FDA-approved treatment for migraine, recorded U.S. sales of $2.3 billion in 2008, an increase of 11.3 percent compared with 2007, according to J&J’s 2008 annual report. The drug lost patent protection in March 2009. In the latest third quarter, sales of Topamax declined 88 percent to $72 million!
• Risperdal experienced a similar fate following the June 2008 U.S. patent expiration. In the second half of fiscal 2008, U.S. sales of Risperdal dropped to $200 million, from $1.1 billion in the first half. Third-quarter 2009 sales were an anemic $35 million, down from $122 million in the prior year, according to a J&J 2009 supplemental sales report.  

Further patent risks to stateside sales include exclusivity challenges to the attention deficit disorder medicine Concerta (methylphenidate), Aciphex (rabeprazole) for heartburn and acid reflux, and Levaquin (levofloxacin), an antibiotic for urinary tract infections. These three drugs alone represented 22 percent of actual U.S. sales for the nine-months ended September.

Sales of Invega (paliperidone), the heralded successor to Risperdal (introduced last year), have been disappointing, too. Third-quarter U.S. revenue fell 16.4 percent to $61 million, as providers voiced skepticism that the drug was nothing more than an expensive “me-too” psychotropic — and health insurers continue to restrict its usage and reimbursement (Tier-3, non-preferred status on the drug formulary plans of Kaiser and United).

More worrisome, the workhorse drug Procrit (epoetin alfa) is starting to look like its got a stone embedded in one hoof: this biologic, an injectable treatment for end-stage renal failure or chemotherapy patients with anemia, contributed $950 million, or about 10 percent of aggregate U.S. revenue for the first nine months of 2009. However, recurring safety concerns on the possible risk of increased mortality or shorter time to tumor progression in cancer patients receiving Procrit — and competitive erythropoiesis-stimulating agents, like Amgen’s Epogen or Aranesp — have opinion leaders opining that risks possibly outweigh perceived benefits in oncology patients. Ergo, sales declined more than 10 percent in the last quarter.

Of greatest concern, the slowing growth of its flagship drug, the tumor necrosis factor-α (TNF -α) blocker Remicade (infliximab), which contributes almost 29 percent to total U.S. sales. The biologic, approved for the treatment of Crohn’s, rheumatoid arthritis, and other systemic inflammatory diseases, had worldwide revenue of $3.7 billion in 2008. Overall growth in recent years was driven by new clinical data showing the drug’s benefit in an expanding range of autoimmune diseases. Growth slowed in the most recent quarter to 5.7 percent [both in the U.S. and worldwide], down from 13 percent in 2008, due to new entrants and the expansion of indications for other existing TNF-alpha blockers.

An opportunistic infection could weaken future demand for Remicade, too. It is already known that TNF-alpha inhibitors are associated with an increased risk of developing a latent viral or bacterial infection, such as the reemergence of herpes or tuberculosis. However, as Remicade — like other immune-modulating TNF agents (Enbrel) — also inhibits tumorgenesis, the drug class has been implicated in recent cases of lymphoma in kids and teens. Remicade’s drug labeling has been updated to include this increased risk of cancer in a boxed warning on its package insert, which will likely restrict wider use of the drug.

In the coming year, look for J&J to leverage time-tested tactics to manage profitability, such as the global restructuring initiatives announced on November 3, which management projects will generate pre-tax cost savings of $800 - $900 million in 2010 and between $1.4 - $1.7 billion when fully implemented in 2011.

Longer-term, the company’s robust product pipeline and recent flurry of deal making — from acquiring the rights to Elan’s drug research on Alzheimer’s disease to partnering with Crucell on a universal influenza vaccine — should mitigate revenue losses from other blockbuster drugs going off-patent. A word of caution: replenishing its product pipeline is the easy part. Getting buy-in from physicians, however, might require some tinkering to its selling strategies. Otherwise, J&J managers might need to ingest some of their own extra-strength Tylenol gel-caps to rid themselves of future migraines like Invega.