DAY (15/15): PRRN CHALLENGE!

 

Hello! I am Priya, and thank you so much for being here! :)

I recently watched the '100 day challenge' to build a career in finance by The Valuation School, and immediately jumped into it. This is a series where for the next 15 days I:

1) 'Pick' a sector

2) 'Read' relevant news articles, annual reports, sector analysis reports etc 

3) 'Report' what I've read

4) Make 'Notes' and see how they evolve!

To make it more interesting I've decided to pick a sector that has always been intriguing to me - the Pharma sector. I've picked 3 companies for my reference - Eli Lilly, Novo Nordisk, Johnson and Johnson.

A quick disclaimer, none of this should be treated as professional investment advise. Life is all about evolving into the best version of yourself, and I'd like to take you all on this journey of mine. Kindly only read this for gaining some additional insight, and feel free to give me any sort of feedback.

Also, 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! :) 

As a writer, I strongly advise you to do your own research as our team cannot assume any liability for your use of this information.

Let's get learning! 

20/04/2025

Welcome to Day 15! :)

Unfortunately there was an unanticipated long break that came in this blog, for which I'm truly sorry! Hopefully I should remain more consistent from this point on, and add a lot more value through my work :)

Today I spent my time reading J&J's recently published earnings call report for Q1 2025, and it was really exciting to see how some of the things we have touched on before, developed in this quarter.

OUTSTANDING QUARTERLY PRFORMANCE?

Innovative medicine is J&J's pharmaceutical segment. This segment saw about a 4.2% growth, driven by incredible growth in 11 major brands.

1) EXTREMELY EFFECTIVE DRUGS: There have been a range of existing and in process developments at J&J which have been proving rapid efficacy, which is expanding the usage of these drugs across many different patient segments and therapy areas.

For example, their drug Darzalex, for multiple myeloma (it is a type of cancer that attacks specific white blood cells), has now been approved as a frontline treatment for the disease in EU. For specific cancers, the survival rate for patients could be quite low, hence approving a drug as the frontline treatment is the ultimate proof of its efficacy against other competitors.

Similarly their neuroscience drug Caplyta has become the only approved drug for treating depression in BPD patients and this really proves how effective their formulations are and how radically talented their scientests are. This is truly their master selling point, where they are carving out monopolies in certain disease segments through their research expenditures.

Even in medtech, their heart pumps have been moving up the rating charts of institutions like the American Heart Association and it is through such efficacy, that the demand for these pumps are increasing.

2) WONDEROUS WAYS OF WORKING: There have been some interesting developments even within their existing portfolio, which enhances the efficiency of administering the drug thereby reducing the time required to treat the condition.

For example, their formulation Rybrevant and Lazcluze when combined is used for the treatment of EFGR mutated non small cell lung cancer (don't get too invested into the complexity of this name, haha). In EU, this formulation has now been approved to be administered in the subcutaneous form.

According to the BOD, this is expected to reduce the administration time of this medicine from hours to a few seconds, which is brilliant. Currently the medicines are administered via IV in most countries, and in US, hospitals are currently experiencing an IV shortage.

If this development works out, the subcutaneous form can be introduced in US as well, and this could help in reducing the burden on healthcare systems as well, which can ensure more people are diagnosed timely and accurately for this disease.

Another interesting development here would be that of their drug Tremfya, which is their recent launch for treating a variety of bowel and colon conditions. This drug works using a very unique mechanism where it inhibits IL23, which is a protein released by some white blood cells. 

This protein increases the risk of developing autoimmune conditions, and this is interesting, because the medicine doesn't treat the affected organ specifically, rather it treats the root cause of the autoimmune disorder in itself. 

From my viewpoint, this increases the probability that the company could obtain more approvals from the authorities to use the same drug for a myriad different autoimmune diseases (although this might vary from disease to disease). 

This is already the case for one of their drugs in development, Icotrokinra, which is being tried both for ulcerative colitis (bowel) as well as plaque psoriasis (skin).

This is particularly relevant now,as just over the last decade or so the number of patients being diagnosed with autoimmune conditions has increased by 46%, hence, the more autoimmune conditions that can be brought within the scope of a pharma company, the better.

SEASONALITY OF DISEASES: Pharma has long been associated with somewhat of an inelastic demand as we cannot exactly predict which disease will ramp up at which time.

However, when a company operates in as many therapy areas as J&J an interesting insight can be obtained on the seasonality of diseases.

For example, there is a concept where some people may experience more depression symptoms at specific seasons of the year, let's say, the winter season. Thus even in pharma the demand may unexpectredly ramp up at certain times of the year and obtaining these relevant insights can be crucial so the company may strategize their production accordingly.

Another aspect here would be medtech. So in 2023, J&J completely restructered the orthopedics division of their medtech segment, by exiting many unprofitable markets. The reason why so many markets were unprofitable was because of the growing rise in weight loss drugs!

So obese people are typically the target patient base for orthopedic surgeries like knee replacments or hip replacements, although other patients may require it too. With the advent of obesity medication far fewer patients actually require these surgeries which reduces demand for such surgical equipment.

However this isn't exactly a bad thing for business. This is because the obesity market isn't just filled with people who can go from 'fat to fit', it also includes people who are highly obese and can only move into a less dangerous BMI zone (in a given time frame).

Since obesity is often seen as a criteria due to which many people become medically ineligible for surgical procedures, the shift from being morbidly obese to somewhat less obese, makes them eligible to take on these procedures, which again expands the market for surgical operations.

The learning here would be to use the myriad data analysis tools available today in order to identify in which specific geographies do most surgery claims get rejected specifically due to obesity, and reallocate most amount of medtech supply to those regions.

Lastly, there is seasonality in the patient mix as well. Even in this specific quarter, J&J did experience a favourable patient mix for a few medicines, which essentially means the majority of the buyers were covered by private insurers, who are a bit more generous with their payments.

REALLY TACTICAL MOVES?

Within the earnings call that I read so far I noticed very tactical initiatives taken by the board which I believe positions the business at a really great standing.

Market expansion: The company has been expanding its base in the US, by setting up more R&D and manufacturing facilities. Given the advent of tariffs, expanding production bases in other countries can be damaging for business, as when these goods are imported into the US, they will be extremely expensive.

Additionally this paves the way to focus a little more on the US patient base as well, which is important now, since countries like China are placing more emphasis on cheaper alternatives of medicines rather than the quality of the medicine, or equipment. Hence, companies like J&J might find it difficult to thrive in such an environment.

Another way to think about this would be how it's slightly easier for J&J to localize their production as they don't deal with a therapy area (like obesity) for which there is extremely high demand, and hence they can plan the supply-demand dynamics of their business with a bit more flexibility.

Talc bankruptcy: If you read our article on J&J's previous earnings call, you'd remember how they had set up a company specifically to settle plaintiff claims against their talc powder. They had suggested that this entity was going to be liquidated for the same purpose.

However now, given the rising number of claims in this space, the company has decided to opt for the 'Daubert Challenge'. Daubert Challenge is a benefit given to science based companies wherein they can request for the testimonials of non-experts to not be considered, as they do not understand the scienetific backing of the product.

Due to this, the company is expecting its legal claims to reduce significantly so much so that they reversed most of their provisions. Due to this there was big, one-off, jump in the EPS of the company as well.

BIGGEST RISKS

Part D Redesign: Part D Redesign directly relates to how much Medicare coverage J&J's drugs will get.

Obviously more Medicare coverage implies that the company will be able to reach more patients, however, when a drug is included under the Medicare list, it is obligated to provide a specific amount of rebate to the government. This reduces the realization of prices.

Indeed a $2B loss in revenue is projected in 2025 due to the same reason. Negative movements in the $ also impacted the company's profitability.

 

To overcome such difficulties the company seems to be adopting the fianncial strategy of phasing out their investments. This is an incredibly powerful method of financial planning wherein expenditures like R&D and marketing are phased out into small chunks across the year, thereby enhancing cash flow at any given period.

Overall, it appears the company is planning to enhance its profitability by keeping a very conscious focus towards releasing very high quality drugs that essentially have no competition. 

With that my 15 day challenge comes to an end! A new industry awaits me tomorrow, for which I'm really excited!!