US Videos

Upside Attraction to J&J

Erik Kobayashi-Solomon

Erik Kobayashi-Solomon: Hi, I'm Erik Kobayashi-Solomon. I'm co-editor of Morningstar's OptionInvestor.

Today, it's my great pleasure to welcome Damien Conover, who's the editor of Morningstar's Healthcare Observer. This is a specialized newsletter covering very detailed topics in the health-care industry. Damien, thanks for coming today.

Damien Conover: Great, thanks for having me, Erik.

Kobayashi-Solomon: Right at the end of February, I recommended an investment to our readers, where they would basically buy the upside to J&J, one of your companies; all the upside from $60 on, and bought it for $3--sounds like a really good deal to me, and it's been working out well.

So, I just wanted to ask you a little bit more about J&J as an investment idea. Mainly what I want to ask you about are their longer-term projects, especially their stent pipeline, and also the drug pipeline. How's that looking to you, those two divisions?

Conover: Both of those divisions are very important. Let's take them one at a time.

Read Full Transcript

The drug division, this is an area where Johnson & Johnson generates the majority of its profits. It is a group that is facing some patent erosion, so it's very important to bring on this next generation of products.

Kobayashi-Solomon: But their pipeline is pretty good, I think, right?

Conover: The pipeline is pretty good, especially the immediate term, meaning products that will likely be approved in the next year.

There are two that are the most important. The first one is called Rivaroxaban, and that is a drug that will help anti-clotting of the blood. Why it's so important is that it's the first oral medicine in this therapeutic class in a long, long time. Most of the other drugs that are out there that are being used right now are injectable. So you can see that doctors and patients would definitely prefer the oral dose.

Kobayashi-Solomon: Much more convenient.

Conover: Yes.

Kobayashi-Solomon: And the efficacy is also pretty good?

Conover: The efficacy looks pretty good.

One complication with it is, the first indication won't be for a huge piece of the pie. But, as more studies come out, and we can see a broadening of that label, this drug definitely has blockbuster potential.

The only other drug that I would mention--Johnson & Johnson has quite a few, but the other one that's important to note--is called the Golimumab. This is for rheumatoid arthritis; it's a follow-on product to their Remicade product. It's better than the older-generation one, because you can take it outside the doctor's office, rather than their first-generation one, where you had to go into the doctor's office.

Kobayashi-Solomon: How about the stent side? That's one other side that was very interesting to me.

Conover: Johnson & Johnson is having a lot of problems with its drug-eluding stent that's currently on the market. It was, again, one of the first to market. Its drug-eluding stent is called Cypher, and Cypher is losing a lot of market share to Abbott's Xience.

What J&J is getting ready to do is launch a new drug-eluding stent called Nevo. This product is pretty interesting in the fact of how the stent is actually constructed, and how it will elude a drug.

We've yet to see some head-to-head data, but Johnson & Johnson is very confident of this product being able to help stabilize, and maybe even regain, some market share.

Kobayashi-Solomon: It sounds like in both the case of the stents, and especially the rheumatoid arthritis, they're really building on a franchise of theirs that's strong, and now just extending that out through the next generation, is that right?

Conover: Right, that's kind of what we're seeing. It's particularly important in the drug-eluding stent area, because they've lost a tremendous amount of market share. Right now, their RA drug Remicade is still doing very well, so I think they're almost anticipating the challenges there, and they're going to get ahead of it, whereas in the drug-eluding stent, it's more reactionary.

Kobayashi-Solomon: The last thing that I wanted to ask you about: Everybody's worried right now in terms of the present administration's health-care policies. How worried should I be, and how worried should our readers be, that there's going to be some real game-changing legislation?

Conover: We've done some scenario analysis with the different ideas that Obama's bringing to the table. I think what we're going to likely see is some increase in pricing power from the government for Medicare Part D drugs. Johnson & Johnson sells a lot of drugs to that patient population, so we do expect the pricing point on those drugs to fall a little bit.

But we also expect that President Obama will bring out further insurance coverage. Right now, we've got about 46 million uninsured folks here in the U.S...

Kobayashi-Solomon: So, kind of offset that price pressure?

Conover: Yeah, absolutely. We see a big volume coming out with that, so that's going to largely offset some of that pricing pressure in the Medicare Part D patient population.

Kobayashi-Solomon: Damien, thanks a lot for coming in today.

Conover: Great, thanks Erik.

Kobayashi-Solomon: And thank you all for joining us today. I'm Erik Kobayashi-Solomon, I'm co-editor of the Morningstar OptionInvestor.

Please stop by the OptionInvestor site, where we publish regular option investment strategies, based on Morningstar's fundamental research.