U.S. Markets closed

2 Big Pharmas Pleased With J&J's Third-Quarter Earnings Report

Cory Renauer, The Motley Fool

Johnson & Johnson (NYSE: JNJ) recently kicked off earnings season for the healthcare sector, and big pharma investors expecting stagnating sales were pleasantly surprised. Despite a pledge not to raise drug prices earlier this year, pharmaceutical sales kept on climbing, especially among the company's young oncology lineup.

Strong uptake of innovative new cancer therapies bodes well for a couple of J&J's peers. Let's look at what's in store for Pfizer, Inc. (NYSE: PFE) and Merck & Co. (NYSE: MRK) in light of the industry's first big earnings report.

Two people in lab coats examining a microscope slide.

Image source: Getty Images.

What U.S. pricing pressure?

Big pharmaceutical companies led by Pfizer agreed to limit price increases of popular drugs in the U.S. earlier this year following hints the Trump administration will punish middlemen that have made life difficult in recent years. Peering into J&J's third-quarter report suggests the company's gesture isn't about to limit U.S. sales. In fact, domestic pharmaceutical revenue rose 4.8% in the third quarter, compared to the same period last year.

The pharmaceutical segment's performance was especially impressive because sales for Johnson & Johnson's best-selling drug in recent years, Remicade, slipped 18% compared to the prior-year period. Remicade losses were overcome by eye-popping growth for three cancer therapies that generated a combined $2.2 billion in sales during the three-month period, a 44% increase compared to last year.

The three musketeers that drove J&J's pharmaceutical segment forward in the third quarter have some important similarities to growth drivers in Merck's and Pfizer's lineups. Darzalex, Zytiga, and Imbruvica all offer vast improvements over previous standards of care, and they're at, or at least near, the front of the line for their respective indications.

Prescription tablets on a pile of money.

Image source: Getty Images.

Merck & Co.: Keytruda to the rescue

If there's one company glad to know that cancer therapy sales aren't in danger of a slowdown, it's Merck & Co. Sales of its lead growth driver, Keytruda, jumped 114% in the first half of the year to a stunning $3.1 billion, making it the most important drug in the company's lineup by a mile.

Earlier this year, investigators showed us that adding Keytruda to standard chemotherapy reduced the risk of death by half for newly diagnosed lung cancer patients with the most common form of the disease. Those are the sort of results that inspire even the stodgiest oncologists to change their routine.

Keytruda's continued success is extra important to Merck at the moment because the Januvia franchise has flatlined. Sales of the aging type 2 diabetes tablet still make up 16% of total revenue, and it's losing ground to next-generation treatments. Generic pressure for Zetia and a promise to cut the price of a hepatitis C antiviral that was already losing ground are also dragging down the top line. If Merck didn't have Keytruda's rocket to latch on to, pushing the needle forward would be nearly impossible.

Cancer patient consulting with doctor in hospital room.

Image source: Getty Images.

Pfizer, Inc.: Lots to look forward to

Oncology is a big part of Pfizer's growth strategy as well, and unlike Merck, Pfizer has several first-line cancer therapies, including recently approved Talzenna. The drug formerly known as talazoparib is now a chemotherapy-free, oral treatment option for all breast cancer patients with HER2-negative tumors who also test positive for a BRCA mutation.

AstraZeneca (NYSE: AZN) markets a similar drug, called Lynparza, that earned approval to treat the same population after they've been treated with chemotherapy. An FDA approval that puts Talzenna a step ahead in the pecking order, plus strong oncology sales across the industry suggest Pfizer has another blockbuster cancer therapy in the making.

While investors wait for updates from Talzenna's commercial launch, they get to look forward to rising sales of a treatment approved to treat HER2-negative patients who are also HR-positive. Ibrance has only been available a few years, but it has a place at the top of the pecking order for this patient group. The first-line indication has already put Ibrance on pace to generate $4.1 billion in annual sales.

Pfizer's prostate cancer treatment, Xtandi, hasn't replaced hormone therapy as an initial treatment, but this summer it took an important step up the line. Now the capsules are available for patients with tumors that haven't spread yet, a group that tends to stay on treatment much longer.

Only to the victors

According to healthcare analytics provider Iqvia, global spending on cancer medicines hit $133 billion in 2017, up from $96 billion just five years earlier. While overall spending is on the rise, it's important to remember that the top 35 drugs accounted for 80% of total spending.

Even though promises to limit price increases haven't held back Johnson & Johnson, companies that don't have a strong oncology program with products near the top of the list could have a tough time ahead.

More From The Motley Fool

Cory Renauer owns shares of Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and has the following options: short October 2018 $135 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.