Outperform
`
`Sector: Diversified
`Market Weight
`
`Company Note
`
`2014A
`
`Prior
`NC
`NC
`NC
`NC
`NC
`
`2016E
`2015E
`Curr. Prior
`Curr.
`CASH EPS
`Q1 (Mar.)
`NE
`
`$1.56 A
`$1.63
`Q2 (June)
`NE
`
`1.67
`1.78
`Q3 (Sep.)
`NE
`
`1.47
`1.61
`Q4 (Dec.)
`NE
`
`1.44
`1.37
`FY
`$6.47
`NC
`$6.14
`$6.39
`CY
`$6.47
`$6.14
`$6.39
`FY P/E
`15.1x
`15.9x
`15.3x
`Rev.(MM)
`$73,091
`$70,621
`$74,331
`Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters
`NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful
`V = Volatile,
` = Company is on the Priority Stock List
`EPS excludes amortization expense.
`2014 excludes $0.42 of amortization.
`2015 excludes $0.32 of amortization.
`
`
`Ticker
`Price (06/29/2015)
`52-Week Range:
`Shares Outstanding: (MM)
`Market Cap.: (MM)
`S&P 500:
`Avg. Daily Vol.:
`Dividend/Yield:
`LT Debt: (MM)
`LT Debt/Total Cap.:
`ROE:
`3-5 Yr. Est. Growth Rate:
`CY 2015 Est. P/C. EPS-to-Growth:
`Last Reporting Date:
`
`JNJ
`$97.68
`$95-110
`2,875.0
`$280,830.0
`2,057.64
`7,559,850
`$2.28/2.3%
`$18,400.0
`17.5%
`27.0%
`6.0%
`2.6x
`04/14/2015
`Before Open
`Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters
`Larry Biegelsen, Senior Analyst
`(212) 214-8015
`lawrence.biegelsen@wellsfargo.com
`Lei Huang, Associate Analyst
`(212) 214-8039
`lei.huang@wellsfargo.com
`Craig W. Bijou, Senior Analyst
`(212) 214-8038
`craig.w.bijou@wellsfargo.com
`
`
`
`June 29, 2015
`
`Equity Research
`Johnson & Johnson
`JNJ: Xtandi Continued Lead Zytiga In Overall Share In May
`
` Summary: We reviewed May 2015 data from AlphaImpactRx (formerly
`Symphony Health) survey and IMS for JNJ’s Zytiga and competing prostate
`cancer drugs. May was the first-time in this survey that competitor Xtandi led
`Zytiga in overall, pre-chemo and post-chemo market shares among sample
`oncologists. Specifically, Zytiga’s overall share among sample oncologists fell
`250bps to 29% from April to May, remaining behind Xtandi’s more modest share
`decline of 40bps to 31% over the same period. Zytiga TRx (total prescription)
`volume decline accelerated to high-single digit from low- to mid-single digit
`decline earlier in the year while NRx (new prescription) volume continued to fall
`in the low-double digits. Among sample urologists, Xtandi also moved ahead of
`Zytiga with 26% share vs. Zytiga’s 23% share for the rolling three-months through
`May. While Zytiga’s label was updated in March to include positive OS (overall
`survival) benefit data in the pre-chemo population, the enhancement does not
`appear to be adding a boost to the franchise. While we expect price increases and
`greater OUS (outside of the U.S.) penetration to drive Zytiga growth in 2015, we
`expect the growth to remain modest due to increased competition. We model
`Zytiga sales of $1.1B (+8%) in the U.S. and $2.3B (+11%) globally in 2015. In
`terms of life cycle management, JNJ is studying ARN-509, which may have
`broader spectrum of disease activity, in Phase 3 studies as both monotherapy and
`in combination therapy with Zytiga. The drug could be launched as early as 2018.
` Xtandi led Zytiga in overall, pre-chemo and post-chemo market shares
`in May. Zytiga’s share among sample oncologists in the overall CRPC (castration
`resistant prostate cancer) market fell by 250bps to 29% in May (Figure 1). This
`compares to JNJ’s estimate of Q1 overall U.S. CRPC market share of 30.3%, down
`1.2 points sequentially due to increased competition. Key competitor Xtandi’s
`overall share fell by 40bps to 31% in May, staying ahead of Zytiga for the second
`consecutive month. DNDN/VRX’s Provenge share fell by about 100bps to 3%
`while Bayer/Algeta’s Xofigo share rose by 100bps to nearly 5%. In the pre-chemo
`segment, Zytiga’s share fell to below 35% in May from 39% in April, for the first-
`time trailing Xtandi whose share fell to 35% in May from 36% in April (Figure 3).
`In the post-chemo segment, Zytiga share rose to 21% in May from 19% in April,
`while Xtandi share rose 70bps to over 34% during the same period. Over the past
`year, the increasing use of Zytiga and Xtandi in the pre-chemo segment has
`pushed Taxotere into a market leading position in the post-chemo prostate
`market with roughly one-third market share (Figure 4). Both Zytiga and Xtandi
`usage in pre-chemo stood at 70% or higher in May (Figure 5). During the six
`months through May, Zytiga’s usage as first-line therapy was 67%, which was still
`far ahead of Xtandi’s 43% first-line use (Figure 6).
` Continued on the following page.
`Valuation Range: $128.00 to $130.00
`Our valuation range of $128-$130 implies about 20x our 2016E cash EPS of $6.47
`and is mainly based on a sum-of-the-parts analysis. Risks include delays to pipeline
`products, additional product recalls and unexpected deterioration in the industry.
`
`Investment Thesis:
`We believe that JNJ is positioned for solid growth, driven by strength of its
`pharmaceuticals business, recovery
`in the consumer segment and market
`stabilization coupled with share gain in MD&D.
`
`Please see page 10 for rating definitions, important disclosures
`and required analyst certifications
`All estimates/forecasts are as of 06/29/15 unless otherwise stated.
`
`Wells Fargo Securities, LLC does and seeks to do business with companies
`covered in its research reports. As a result, investors should be aware that
`the firm may have a conflict of interest that could affect the objectivity of the
`report and investors should consider this report as only a single factor in
`making their investment decision.
`
`WCK1057
`Page 1
`
`

`
`Medical Technology
`
`Continued from the previous page.
`
`WELLS FARGO SECURITIES, LLC
`EQUITY RESEARCH DEPARTMENT
`
`
`
`
`
`Zytiga share among sample urologists dipped while Xtandi moved ahead. Urologists are key
`prescribers in the pre-chemo segment of the market. On a rolling 3-month basis through May, Zytiga held
`a 23% market share, down from 26% in April while Xtandi moved ahead from 21% in April to 26% in May
`(Figure 2). However, hormone therapy (ADT or androgen deprivation therapy) remained the clear market
`leader among the sample urologists, with Lupron Depot holding 54% rolling 3-month share (vs. 58%
`average share a year ago). Casodex’s rolling 3-month share was largely steady around 16%. The key caveat
`we highlight here is the small sample size of on average 50 urologists each month compared to about 150
`oncologists in the survey. As such, AlphaImpactRx provides the urologist share data on a rolling 3-months
`basis while the oncologist data are shown monthly.
`
`Zytiga new prescription (NRx) volume decline largely holding steady while TRx volume
`decline accelerated. Weekly Zytiga Rx volume continued to decline in the US (Figure 7-8), with TRx
`volume decline accelerating somewhat in the recent weeks despite an enhanced label that includes OS
`benefit. For the 4-week period ended 6/12/15, Zytiga TRx totaled 8,378, -10% yr/yr, while 4-week NRx
`totaled 2,415, down 14% yr/yr. Given the competition, we expect to see continued dampening in Zytiga Rx
`growth.
`
` No discernable impact from recent Zytiga label enhancement. At the end of March, FDA
`approved adding overall survival (OS) benefit from the COU-AA-302 study in pre-chemo prostate cancer
`patients in the Zytiga label while the data was also published in the February 2015 issue of The Lancet
`Oncology. The data showed that Zytiga plus prednisone provides a statistically significant OS benefit vs.
`prednisone alone (median OS 34.7 vs. 30.3 months; p=0.0033). Previously, MDVN had touted Xtandi as
`the only new prostate cancer drug with significant OS and rPFS benefit. However, the label enhancement
`does not appear to be having a meaningful impact in driving Zytiga share or demand volume.
`
`
`
`ARN-509 remains attractive long-term growth opportunity. Long term, we continue to see ARN-
`509, currently in Phase 3 development as monotherapy and combination therapy with Zytiga, as an
`important growth driver with approval/launch possible in 2018. ARN-509 is a second-generation
`androgen receptor signaling inhibitor with a mechanism of action that may be complimentary to current
`therapies like Zytiga and Xtandi. The compound represents the next leg of growth potential in JNJ’s
`prostate cancer franchise with potentially broader utility and a longer patent life. We understand that the
`issued US composition of matter of patent expires in 2028 (before extension) while the EU patent goes out
`to 2027. Although these two Phase 3 studies are expected to complete in December 2016 and December
`2018, we understand that the studies include opportunities for interim looks that may allow for early
`termination of the studies on exceptional data (or safety concerns). We assume that ARN-509 reaches the
`market in 2018 and our model includes risk-adjusted sales of $200MM in 2018 and $475MM in 2019.
`
` We assume modest Zytiga sales growth in 2015. Zytiga was one of JNJ’s best new drug launches
`with global sales totaling $2.2B or 26% ex-FX growth in 2014, its fourth year on the market. Q1 2015 US
`Zytiga sales of $253MM represented nearly 11% yr/yr growth, a deceleration from growth of 21% in Q4
`and 30% in full year 2014. Q1 represented only the second time that US Zytiga sales fell sequentially (first
`time was in 4Q12 and reflected adjustments related to the start of a patient assistance program). OUS
`Zytiga sales of $303MM represented 26% ex-FX growth, down modestly from +30% in Q4 and +36% in
`full year 2014. According to JNJ, the U.S. prostate cancer market grew 12.5% in Q1, vs. +15% in Q4 and
`+11% in the first 9 months of 2014. Zytiga held 30% share in Q1, down 1.2 points Q/Q due to increased
`competition, largely from Xtandi approval in the pre-chemo segment in late 2014. OUS Zytiga growth was
`driven by additional country launches with the drug now approved in over 95 countries. We expect that
`overall market growth, further pre-chemo penetration, price increase (JNJ has taken 7-8% price increase
`per year the last 3 years) and additional OUS uptake to drive 2015 Zytiga growth, albeit at a more modest
`pace. We model 2015 Zytiga sales of $2.3B or 11% ex-FX growth WW and $1.1B or 8% growth in the US.
`Our market model (Figure 9) reflects aggregate results for primarily newer agents approved for CRPC (i.e.
`excludes Lupron Depot, Taxotere, etc).
`
`Caveats about AlphaImpactRx survey: 1) Small physician sample size; 2) post-chemo represents
`50%+ of the survey market even though there are 2-3x as many pre-chemo patients--likely due to
`concentration of oncologists in the survey, who prescribe more for post-chemo; 3) inclusion of supportive
`care products likely understates brand share; 4) overall share trend may show small discrepancy (+/- 1%)
`to the pre- and post-chemo share trends due to inclusion of “unknown” chemo status patients in the
`overall population.
`
`
`
`2
`
`WCK1057
`Page 2
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`

`
`Johnson & Johnson
`
`WELLS FARGO SECURITIES, LLC
`EQUITY RESEARCH DEPARTMENT
`
`Figure 1. Overall Monthly CRPC Market Shares Among Sample ONCOLOGISTS (May 2015)
`
`Source: AlphaImpactRx’s BrandImpact.
`
`Figure 2. Overall Monthly CRPC Market Shares Among Sample UROLOGISTS (May 2015)
`
`Source: AlphaImpactRx’s BrandImpact.
`
`3
`
`WCK1057
`Page 3
`
`

`
`Medical Technology
`
`WELLS FARGO SECURITIES, LLC
`EQUITY RESEARCH DEPARTMENT
`
`Figure 3. Monthly Chemo-Naïve CRPC Mkt Share Among Sample ONCOLOGISTS (May 2015)
`
`Source: AlphaImpactRx’s BrandImpact.
`Note that Zytiga was approved for pre-chemo naïve use in September 2014.
`
`Figure 4. Monthly Post-Chemo CRPC Market Shares Among Sample ONCOLOGISTS (May 2015)
`
` Source: AlphaImpactRx’s BrandImpact.
`
`4
`
`WCK1057
`Page 4
`
`

`
`Johnson & Johnson
`
`WELLS FARGO SECURITIES, LLC
`EQUITY RESEARCH DEPARTMENT
`
`Figure 5. Growing Usage in Pre-Chemo CRPC Market Among Sample ONCOLOGISTS
`
`Source: AlphaImpactRx’s BrandImpact.
`
`5
`
`WCK1057
`Page 5
`
`

`
`Medical Technology
`
`Figure 6. CRPC Line of Therapy By Brand Among Sample ONCOLOGISTS
`
`R6M May 2015
`
`WELLS FARGO SECURITIES, LLC
`EQUITY RESEARCH DEPARTMENT
`
`R4M January 2013
`
`Source for both charts: AlphaImpactRx’s BrandImpact
`
`6
`
`WCK1057
`Page 6
`
`

`
`Johnson & Johnson
`
`Figure 7. Weekly TRx and NRx Uptake of Zytiga
`3,000
`
`WELLS FARGO SECURITIES, LLC
`EQUITY RESEARCH DEPARTMENT
`
`TRx
`
`NRx
`
`2,500
`
`2,000
`
`1,500
`
`1,000
`
`500
`
`Prescriptions (Rx)
`
`0
`4/12/14
`9/11/13
`2/10/13
`7/12/12
`12/12/11
`5/13/11
`Source: IMS Health Incorporated, National Prescription Audit; Wells Fargo Securities, LLC
`
`11/11/14
`
`6/12/15
`
`Figure 8. Four-Week Growth Run Rate of Zytiga Rx Demand
`100%
`
`TRx
`
`NRx
`
`11/26/12
`
`5/30/13
`
`12/1/13
`
`6/4/14
`
`12/6/14
`
`6/9/15
`
`80%
`
`60%
`
`40%
`
`20%
`
`4-week Y/Y Rx growth
`
`0%
`5/25/12
`
`-20%
`
`4-week ended
`Source: IMS Health Incorporated, National Prescription Audit; Wells Fargo Securities, LLC
`
`Any analysis is independently arrived at by Wells Fargo Securities, LLC, on the basis of the data and other
`information, and IMS is not responsible for any reliance by recipients on either the data or any analyses
`thereof.
`
`7
`
`WCK1057
`Page 7
`
`

`
`Medical Technology
`
`WELLS FARGO SECURITIES, LLC
`EQUITY RESEARCH DEPARTMENT
`
`2013A
`
`Q1'14A Q2'14A Q3'14A Q4'14A
`
`2014A
`
`Q1'15A
`
`Figure 9. Global Prostate Cancer Market (Newer Agents)
`($ in millions)Approved Indications
`2011A
`2012A
`Q1'13A Q2'13A Q3'13A Q4'13A
`JNJ's Zytiga
`WW Rev
`US Rev
`OUS Rev
`
`$512
`$229
`$283
`
`$172
`$125
`$48
`
`$562
`$235
`$327
`
`$227
`$144
`$83
`
`$568
`$252
`$316
`
`$301
`$181
`$120
`
`$595
`$255
`$340
`
`$356
`$230
`$126
`
`$2,237
`$971
`$1,266
`
`$1,057
`$680
`$377
`
`$556
`$253
`$303
`
`$357
`$224
`$133
`
`Pre-Chemo (Dec-12); Post-Chemo (Apr-11)
`Pre- and Post-Chemo
`
`$301
`$191
`$110
`
`$961
`$463
`$498
`
`$344
`$161
`$183
`
`$395
`$174
`$221
`
`$464
`$204
`$260
`
`$495
`$211
`$284
`
`$1,698
`$750
`$948
`
`Astella/MDVN's Xtandi (a)
`WW Rev
`US Rev
`OUS Rev
`
`Post-Chemo (Aug-12); Pre-Chemo (Sep-14)
`Post-Chemo (Jun-13); Pre-Chemo (Dec-14)
`
`-
`
`
`-
`
`-
`
`$71
`$71
`
`-
`
`$75
`$75
`-
`
`
`$86
`$82
`$4
`
`$122
`$109
`$13
`
`$162
`$126
`$36
`
`$445
`$392
`$53
`
`DNDN's Provenge (b)
`WW Rev
`US Rev
`OUS Rev
`
`Pre-Chemo (Apr-10)
`Pre-Chemo (Sep-13)
`
`Sanofi's Jevtana
`WW Rev
`US Rev
`OUS Rev
`
`Post-Chemo (Jun-10)
`Post-Chemo (Mar-10)
`
`$214
`$214
`
`-
`
`$325
`$325
`
`-
`
`$68
`$68
`-
`
`
`$73
`$73
`
`-
`
`$68
`$68
`
`-
`
`$75
`$75
`
`-
`
`$284
`$284
`
`-
`
`$69
`$69
`
`-
`
`$82
`$82
`
`-
`
`$73
`$73
`
`-
`
`$80
`$80
`
`-
`
`$304
`$304
`-
`
`
`$263
`$182
`$81
`
`$302
`$140
`$162
`
`$69
`$26
`$42
`
`$71
`$29
`$42
`
`$78
`$28
`$50
`
`$90
`$31
`$59
`
`$307
`$114
`$193
`
`$90
`$27
`$63
`
`$91
`$30
`$60
`
`$89
`$31
`$58
`
`$92
`$32
`$60
`
`$362
`$121
`$242
`
`$87
`$30
`$56
`
`$61
`$61
`
`-
`
`Bayer's Xofigo (c)
`WW Rev
`US Rev
`OUS Rev
`
`Symptomatic bone metastases (May-13)
`Symptomatic bone metastases (Nov-13)
`
`-
`
`
`-
`
`-
`
`-
`
`
`-
`
`-
`
`-
`
`
`-
`
`-
`
`-
`
`
`-
`
`-
`
`$16
`$16
`
`-
`
`$38
`$38
`
`-
`
`$54
`$54
`
`-
`
`$49
`$49
`
`-
`
`$59
`$59
`
`-
`
`$65
`$65
`
`-
`
`$37
`$37
`
`-
`
`$211
`$211
`-
`
`
`Total Sales
`WW Rev
`US Rev
`OUS Rev
`
`Y/Y Growth
`WW Rev
`US Rev
`OUS Rev
`
`Total Sales ex-Provenge
`WW Rev
`US Rev
`OUS Rev
`
`$778
`$587
`$191
`
`$1,660
`$1,000
`$660
`
`113%
`70%
`246%
`
`$564
`$373
`$191
`
`$1,335
`$675
`$660
`
`$556
`$330
`$225
`
`58%
`51%
`68%
`
`$488
`$263
`$225
`
`$625
`$358
`$266
`
`58%
`53%
`65%
`
`$552
`$285
`$266
`
`$748
`$424
`$323
`
`75%
`63%
`94%
`
`$680
`$356
`$323
`
`$860
`$481
`$378
`
`77%
`68%
`91%
`
`$785
`$407
`$378
`
`$2,788
`$1,594
`$1,193
`
`$893
`$499
`$394
`
`$1,021
`$550
`$471
`
`1,096$
`
`
`602$
`
`494$
`
`1,161$
`
`
`635$
`
`526$
`
`$4,171
`$2,286
`$1,884
`
`68%
`59%
`81%
`
`$2,504
`$1,311
`$1,193
`
`61%
`51%
`75%
`
`$824
`$430
`$394
`
`63% 47%
`53% 42%
`77% 53%
`
`35%
`32%
`39%
`
`50%
`43%
`58%
`
`$939
`$468
`$471
`
`$1,023
`$529
`$494
`
`$1,081
`$555
`$526
`
`$3,867
`$1,982
`$1,884
`
`$1,061
`$568
`$492
`
`88%
`94%
`81%
`
`69%
`64%
`75%
`
`70% 51%
`64% 48%
`77% 53%
`
`38%
`37%
`39%
`
`54%
`51%
`58%
`
`29%
`32%
`25%
`
`Y/Y Growth ex-Provenge
`WW Rev
`US Rev
`OUS Rev
`Source: Company reports, Wells Fargo Securities, LLC
`(a) Xtandi 1Q13 sales include $4.4M favorable gross-to-net adjustment relating to prior quarters, 3Q13 sales include $7M of distributor inventory increase and 4Q14 included a favorable gross-
`(b) Provenge sales in 4Q12 include $3.8M favorable adjustment to chargeback reserve. Pro forma sales were $82M. Provenge assets acquired by VRX in Feb-2015 and is no longer reported.
`(c) Xofigo 4Q14 sales affected by temporary product shortage.
`
`137%
`81%
`246%
`
`80%
`92%
`68%
`
`75%
`85%
`65%
`
`95%
`95%
`94%
`
`97%
`102%
`91%
`
`8
`
`WCK1057
`Page 8