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This Company Is Surely Not a Depressing Investment

Monday - 7/15/2013, 2:54pm  ET

According to a study, in any given year, 7% of adults suffer from major depression, and at least one in 10 youths will deal with the disorder at some point during their teenage years. But, about 20% of these cases will not respond to current treatments; for those that do, relief may take weeks to months to come.

Current solutions, including drugs like Celexa and Prozac, often consume a month to provide some relief to patients. It is at this point where Johnson & Johnson’s Ketamine, showed fast response. This Fortune 500 listed company is engaged in the research and development, manufacture, and sale of a broad range of products in the healthcare field. Founded in 1886, the company is operating in 60 countries, including the U.S.

All about Ketamine

Ketamine doesn’t work in the traditional way. It takes effect within hours. A single dose of Ketamine produces relief of depression that has been shown in studies to last for up to 10 days. It has an effect in reducing bipolar disorder and suicidal thoughts. It is already FDA approved, so there’s nothing stopping psychiatrists from trying it, and patients from asking for access to it in emergency situations when all else has failed.

It is an approved drug as an anesthetic. To understand how this drug performs, a trial in New York was performed. Many antidepressants work by increasing levels of a brain chemical called serotonin, which is linked to mood. But Ketamine work a different way by preventing the binding of a brain chemical called glutamate to nerve cells.

Competition

Johnson & Johnson’s competitor, AstraZeneca , suffered some hiccups over the years in a bid to find new treatments. It is a U.K.-based drug company that is developing drugs that act similar to Ketamine. Scientists believe that for treating depression, glutamate is a much more appropriate target than serotonin. Again, this is a positive attribute of Ketamine.

The company is expected to post earnings declines both this year and next, following on from 2012's 12% earnings per share drop. As a consequence, it does not offer a valid PEG rating during the next two years. The firm does, however, boast a price-to-earnings to growth ratio below the value benchmark for this year, although this is expected to edge above the threshold in 2014.

It may take some time for it to catch up to its peers. The company has embarked on an aggressive acquisition policy to overcome the lack of internal growth, which is certainly a risky path, but it also means big upside potential if management makes the right strategic decisions.

AstraZeneca’s trailing revenue is $27 billion, while it has a net income of $5.68 billion. It has an enterprise value of about $62 billion and EBITDA of 10.6.

The company is a relatively late entrant into the field of antidepressants. The new CEO is trying to take the company in a new direction by restructuring the company, and focusing on three key therapy areas. The U.K.-based company has cut almost 15,500 jobs since 2006, which is not a sign of a healthy company. The loss of over 10,000 sales jobs will ultimately affect revenue. It faces one of the worst patent cliffs in the industry.

The company wrote off over $146 million for Targacept's TC-5214, due to failure to make patients feel any better than a placebo did. All these don’t go in favor of this company, and Johnson & Johnson seems to have a clear cut edge over its competitor by creating shareholder value.

Areas of concern

While Ketamine has an accepted medical use as a veterinary and human anesthetic, the drug has the potential for abuse, which can lead to physical or psychological dependence, according to the U.S. Drug Enforcement Administration. There remain several unresolved issues with the studies and concerns about the drug’s safety in this setting that need to be better addressed before widespread implementation in clinical practice.

It is uncertain whether it will be possible to maintain the Ketamine-induced antidepressant response for a sustained period. Safety concerns emerge surrounding the drug’s acute and chronic, physiological and psychological effects, its abuse liability, its effects on the kidneys and liver, and also its potential neurotoxicity. It has got hallucination effects also.

To put the pieces together

In general, the pharmaceutical industry remains one of the riskiest in the market. The companies operating in this industry expose themselves to the high risks with heavy investment in research and development, subject to results, which have to be approved by the Food and Drug Administration (FDA).

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