J&J in Oncology Deal

Johnson & Johnson (JNJ - Analyst Report) recently entered into an agreement which should strengthen its oncology pipeline. Johnson & Johnson’s Janssen Biotech, Inc. signed an agreement with Pharmacyclics, Inc. (PCYC - Snapshot Report) for the development and marketing of a mid-stage oncology candidate, PCI-32765. The deal covers the development of PCI-32765 for oncology and other indications, excluding inflammation and immune mediated conditions.

The Candidate

The agreement is focused on anti-cancer compound, PCI-32765, which is currently in phase I and phase II studies for hematologic cancers like chronic lymphocytic leukemia, mantle cell lymphoma, and diffuse large B-cell lymphoma.

Posters on the efficacy and safety of PCI-32765 in chronic lymphocytic leukemia, mantle cell lymphoma, and activated B-cell subtype diffuse large B-cell lymphoma will be presented at the American Society of Hematology in December.

Deal Valued at $975 Million

Per the terms of the agreement, Janssen will make an upfront payment of $150 million. Additional payments of $825 million will depend on the achievement of certain development and regulatory milestones. Janssen will be responsible for 60% of the development costs. The $150 million upfront payment is expected to impact Johnson & Johnson’s 2011 earnings by 4-5 cents per share.

Once PCI-32765 is approved, Pharmacyclics and Janssen will book sales and co-promote the drug with the companies splitting equally the profits and losses from the commercialization activities. While US sales will be booked by Pharmacyclics, ex-US sales will be booked by Janssen. US commercialization activities will be shared by the companies. Outside the US, Janssen will spearhead commercialization activities.

Neutral on Johnson & Johnson

We currently have a Neutral recommendation on Johnson & Johnson, which carries a Zacks #3 Rank. Even though we expect the company to continue facing headwinds in the form of pricing pressure, manufacturing issues and US healthcare reform, we believe Johnson & Johnson’s diversified business model, lack of cyclicality, and strong financial position will continue helping the company pave its way through tough situations.

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