DAY (9/15) : PRRN CHALLENGE
Hello! I am Priya, and thank you so much for being here! :)
28/03/2025
Quick disclaimer: There are a lot of medical and pharmaceutical terms mentioned below. Kindly note that this blog is simply to reinforce my learning and spread knowledge. I do not have a pharmaceutical background, so kindly make some provision for scientific inaccuracies, which may be possible! :)
Today was really exciting as the focus was on J&J's Earnings Call of Q4 2024!
A little off topic, but initially this process was really challenging as filtering out which aspects of the concall was most important was really tedious. However now I have reached the conclusion that rather than focussing on numbers, and one off events, I will focus on the deeper trends of the industry and the company's growth prospects. This actually made the process more enjoyable and I got to learn a lot!
Anyway, my first insight was that J&J is a pharma+medtech company. They primarily specialize in immunology, neuroscience and oncology. They also manufacture heart pumps, stunts and surgery equipment.
IMMUNOLOGY
THE BIG CAKE
In immunology J&J's star product was a drug called Stellara, which has been very instrumental in treating Irritable Bowel Syndrome. However now the patent of this drug is nearing expiry, and in several countries, especially in Europe, there are a large number of biosimilars that are coming into existance.
Despite this threat it is really interesting to see that this segment has shown pretty great growth this quarter and overall it seems 3 major reasons were attributable:
1) TREMFYA: J&J has recently experienced much growth with this drug, and its core speciality is that it has gotten FDA approval for treating a variety of autoimmune conditions including IBS. The growth of this drug has naturally substituted the decline in Stellara.
2) Hyperinflation: Some countries like Argentina have been experiencing hyperinflation in the recent period. Indeed most of J&J's operations are likely to be localized in the US, so there isn't much costs they incur in these countries.
However the other companies do incur costs in these countries, and hence they price their products much higher. This gave J&J a nice advantage, as they could now increase their prices to match with the competitors while maintaing costs at the same level.
The biggest learnings from these would be how important it is to keep the 'ever innovating' mindset in pharma. It is best to never rely on one blockbuster drug, but keep focussing on a variety of therapy areas, and alternatives to your own medicine.
It may also be useful to try and localize production in some specific countries as this helps to hedge economic risks like inflation trajectory or political uncertainities.
GROWTH PROSPECTS
As we have discussed in our previous blog, J&J is currently working on its autoimmune therapy Nippocalimab, which has gotten the priority review voucher now, and this is a big deal.
Relating to what we have said before, gaining faster access to the market is so crucial in pharma as this can help to enhance our distribution networks and gain faster IP protection. This way we can protect our market share throughout the period of our patency, which is critical.
ONCOLOGY
J&J has been focussing a lot on its oncology segment and specifically states that it looks into being with the patient throughout their 'patient cycle', and I'd divide it as:
1) The Frontline phase: Here the company has its drug Darzalex for blood cancer, which is already proven to show much efficacy and safety. Apart from this they deal with non small cell lung cancer and are developing medicines for bladder cancer too (TAR 200).
2) The Secondline phase: Here 2 drugs namely Carvykti and Tecvayli are performing quite well. This is especially for those patients on whom the initial treatment (called the frontline treatment) has not worked out and hence we would need to develop a slightly stronger regimen for them and for those who are experiencing the cancer coming back, respectively.
Here I would say I've earned 4 major insights:
1) Diversity: The company hosts such a wide variety of capabilities that they can cater to so many diseases.
2) Intricate segmentation: Where something like cancer can be very difficult to nuance treatments for, J&J has divided the life cycle of the customer into segments such that even if their drugs cannot deliver 100% efficacy, it generates a demand for their following products, which is incredible.
This is also interesting because these drugs are initially launched in an academic setting and from there it is developed into something that reaches the community at large. The fact that the management is able to describe this transition is very inspiring, as efforts towards marketing can appropriately be tailored.
3) Monopoly: Many of the names I've mentioned above, including in immunology are the only ones of their kind getting approved for a specific cause. For example, Carvykti is the only BCMA Targetted Treatment approved by the FDA for second line therapy. This really goes to show how a monopoly is getting established by catering to such nuanced segments, where no competitor is able to fight.
4) Benefits being flown over to other drugs: Some of the oncology drugs launched by J&J in the recent times have been incredibly effective in MRD (Minimal Residual Disease) negativity, which is a very critical aspect in judging the efficacy of a cancer drug.
Such great efficacy may prompt the FDA to provide accelerated approvals for the other drugs in their pipeline too, which is why focussing on efficacy is so critical. Indeed it is important to keep delivering newer drugs into the market but focussing on its safety and efficacy can ensure this process becomes all the more streamlined.
NEUROSCIENCE
Now, neuroscience is an area where business becomes a bit tricky, because there are several warnings and precautions that must be put in place before we can market it to the larger audience.
However here the company has done the acquisition of a large company called 'Intra Cellular Therapies', and given its already succesful portfolios in this category, it is enroute to achieving big strides in this space.
Again, this is one of the most crucial inferences: J&J grows via acquistions and necessary divestitures. Timing these at the right time, and selecting the right kind of businesses is helping them diversify into multiple areas, geographies and of course gives them the first mover advantage across many drugs.
Divestitures too are very important. We have discussed the divestiture of Kenvue before, but recently J&J's subsidiary 'Red River' filed for bankruptcy. Although this sounds bad, the reality is several cases have been filed on J&J's talc business, claiming it's unsafe. By filing for bankruptcy the business aims to settle all the related claims, which will be a big relief for this business.
MEDTECH
Medtech is a very prominent aspect of J&J. They develop many different equipments, with a focus on cardiac equipment/lenses and surgical equipment.
Now here too the company is investing in several acqusitions and some of their achievements have been brilliant. Their heart valves efficacy is proven to be so safe and strong, that now its uses have been extended to children as well.
This truly shows why R&D expenses and IPR&D expenses which is often seen as something that constricts EPS is actually so critical in pharma. When an effective drug is launched, which does not comprimise on quality or safety, its use may be extended to different patient segments, and hence with the same R&D costs we'd be reaping more benefit.
Thus, rather than evaluating the success of a pharma company based on profitability I've begun to realize focusing on its successful approvals/R&D expenditures would be a much better metric to assess its success.
SOME MAJOR RISKS
Risks in pharma is something I have discussed quite elaborately in my previous articles so I don't want to re-repeat the ones I've discussed before.
However, some interesting ones I identified here were:
1) IV shortages: The US is currently facing an IV fluid shoratge and this is relevant because without IV any treatment would be difficult to start. This shortage in some sense reflects lesser accesibility to medical procedures, which is likely to reduce revenues in the pharma and medtech sectors both.
2) Competitive pressures in PFA Segment: PFA stands for Pulse Fielded Ablation and it is a cruical technology used in medical equipments, like heart valves and surgical equipment.
Globally, there has been a surge in this arena, with a lot of companies manufacturing such products. To some extent I suspect J&J's acquisitions of these companies (for example, they acquired V-Wave) help to limit competition, however, it does pose a threat.
Another way of course, is to prioritize other key aspects of production. By this I mean that, while safety/efficacy etc is very critical in this business, so is ease of use. Making products easy to use, and convenient for patients is a great way to challenge this competition in a productive manner.
This is why J&J also introduced some customizations in the sizes of their heart valve, by enabling them to expand to the patient's requirements post surgery.
3) VBP in China: As we have discussed before US relations with China is limiting the scope of trade across both countries and this is further exacerbated by the Volume-Based-Procurement in China, where all medtech and pharma companies must auction their developments to the government, and only those that can offer maximum discount will eventually be able to sell to the government.
The government will buy a large quantity from them which is then distributed across hospitals.
In some cases, I've read the discounts may inch upto 50-90% and this constricts the margins of such companies, not to mention how if they fail, then they might find it challenging to even find a distribution network that can host its products.
There is also an anti corruption policy in China which gained impetus somewhere in 2012, which is likely to result in greater scrutinization when it comes to approving medicine. This could lead to delays in getting approval (as we would need to "prove" that our medicine has been approved genuinely).
Overall, the key is to invest in R&D wholeheartedly such that the products become foolproof to competition and become exactly what patients need. To achieve this across all sectors, mergers and acquisition can and should be prioritized, and adequate financial management is the way to go with such decisions.
THANK YOU, AND I LOOK FORWARD TO MEETING YOU IN OUR 10TH ARTICLE :)
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