There are two big pharmaceutical companies that both have big market cap, due to a many big blockbuster drugs on the market. Johnson & Johnson ;(JNJ) has a market cap of $270 billion and Pfizer (PFE) has a market cap of $209.6 billion.There are a lot of reasons though why I'm long Johnson & Johnson and selling Pfizer.

Johnson & Johnson

Johnson & Johnson is a big pharmaceutical company that was founded in 1886 and it is headquartered in New Brunswick, NJ. J&J has a wide range of products including: consumer products, medical devices, and prescription products.

Partnerships

Johnson & Johnson has been very successful in developing partnerships which is the key reason to be long J&J. The first good partnership developed by J&J was when its subsidiary Janssen biotech partnered with Pharmacyclics. The second good partnership that was established was when J&J made a deal with a hepatitis C player known as Achillion Pharmaceuticals (ACHN).

Pharmacyclics

Back in 2011 Janssen gave Pharmacyclics about $150 million in upfront payments and the ability for the company to also obtain additional milestone payments of up to $825 million. At this time Janssen picked up 60% of the costs for blood cancer trials and Pharmacyclics the rest of the costs (40%). Most importantly, in this deal Janssen obtained the ability to split 50% of the profit stemming from the blood cancer products being sold in the market. The main drug used for blood cancers is known as Imbruvica which is an oral cancer pill that is used to treat:

1. Chronic Lymphocytic Leukemia
2. Mantle Cell Lymphoma
3. Waldenstroms macroglobulinemia

Imbruvica

As mentioned before Imbruvica is a new class of medicines known as Bruton Tyrosine kinase -- BTK -- inhibitors. This BTK inhibitor prevents B cells activation in the patient's body. B-cells in the body are important for activating a patient's immune system to fight off infections. The problem is that some B-cells mutate into cancerous cells and proliferate - divide - at an alarming rate. Imbruvica works by blocking the activation of these B-cells, by interrupting the pathway that allows B-cells to divide.

Chronic Lymphocyitc Leukemia

Chronic Lymphocytic Leukemia is a blood cancer that begins in white blood cells, in the bone marrow. Eventually though this cancer leaves the bone marrow and enters into the patient's blood. It is a type of cancer that slowly builds up over time and many patients don't even know they have it until many years later. The American Cancer Society estimates that there are about 14,620 new cases in the United States each year.

Mantle Cell Lymphoma

Mantle Cell Lymphoma is a cancer that starts in the patient's lymphatic system - meaning non-hodgkins lymphoma - that occurs due to mutated B-cells. This cancer is known as Mantle Cell Lymphoma because it originates in the "mantle zone" of the lymph node. It is a rare form of cancer but it typically develops in Men over the age of 50. Only 5% to 10% of men, over the age of 50 get this type of cancer.

Waldenstroms Macroglobulinemia

Waldesntrom's Macroglobulinemia is a type of non-hodgkin Lymphoma cancer that produces large amounts of abnormal proteins in the patient's body known as macroglobulin. The buildup of these abnormal proteins in the body can lead to many side effects such as: vision problems, nervous system problems, and a lot of bleeding. One thing to note is that this type of cancer is very rare. There are only up to 1,500 patients per year in the United States, diagnosed with this form of cancer.

Achillion Pharmaceuticals

Just about a month ago Johnson & Johnson was able to establish another good deal with Achillion Pharmaceuticals. This time J&J wanted to get in on a deal in the Hepatitis space. Under the terms of the deal J&J will develop and sell Achillion's Hepatitis C drugs for a total combined deal of $1.1 billion dollars. About $225 millions of that $1.1 billion dollar deal will be used to invest in Achillion's common stock.

J&J's subsidiary JJDC is investing $225 million in Achillion for an exchange of 18.4 million shares of common stock at $12.25 per share.

ACH-3102

ACH-3102 is one of Achillion's mid-stage hepatitis C drug that has already received fast track designation from the FDA. ACH-3102 is a once daily NS5A inhibitor pill that was able to achieve a sustained virological response in genotype 1b infected HCV patients without the addition of an interferon drug or other second direct-acting anti-viral agent. With this drug compound the company hopes to help clear the Hepatitis C virus from patients in a 6-week treatment regimen therapy. Gilead Sciences's (GILD) FDA approved Harvoni, requires at least 8-weeks of treatment to help clear these hepatitis C patients of their virus. Harvoni combines ledipasvir and sovaldi as one treatment regimen. If all goes well with the testing in ACH-3102 then this treatment could possibly hit the market by 2018.

ACH-3422

ACH-3422 is a nucleotide NS5B polymerase inhibitor that has already demonstrated a large amount of HCV clearance using high dosages up to 700mg. The drug compound was able to reduce viral RNA by more than 4 log 10 after 14 days of dosing using 700mg. Now Achillion intends to treat these treatment-naive genotype 1 patients by combining ACH-3422 together with ACH-3102 (mentioned above). This combo treatment will go through a test to see if HCV can be cleared in 8-weeks or less depending upon dosage and timing.

Hepatitis C

According to the Center for Disease Control and Prevention -- CDC -- there are about 2.7 million people in the United States with a chronic Hepatitis C infection. Hepatitis C is a disease characterized by a virus that attacks the liver and leads to liver inflammation. This liver inflammation leads to many health problems and can eventually lead to death.

Johnson & Johnson Earnings

On April 14, 2015 J&J reported earnings of $1.54 per share on revenues of $17.4 billion dollar according to the 10-Q SEC filing. Analysts were expecting earnings of $1.54 per share on revenue of $17.31 billion. J&J just met the EPS for earnings and beat revenue for the 1st quarter of 2015. The company did pretty well on earnings but there was one problem - the strong U.S. dollar which may have contributed to putting a hamper on earnings.

Pfizer

Pfizer is a big pharmaceutical company founded in 1849 and it is headquartered in New York City, New York. Some of the products the company has are: over the counter medical products, vaccines, and prescription drugs.

Partnerships

Pfizer was having trouble with its own pipeline, mainly due to many drugs coming of patent. At one point Pfizer was near a deal to acquire AstraZeneca (AZN) although that deal never went through. Now Pfizer has to seek out other options in hopes of staying alive. One of Pfizer's partnerships was when it entered into an agreement with Merck KGaA. Another agreement was when Pfizer collaborated with Repligen (RGEN) to conduct a study in patients with Spinal Muscular Atrophy -- SMA.

Merck KGaA

Pfizer established a collaboration with Merck KGaA to co-develop the company's PD-L1 drug known as avelumab. Pfizer made an upfront payment of $850 million dollars. This is quite a lot of money in itself but then Pfizer is also expected to give up to an additional $2 billion dollars over time as regulatory and commercial milestones are met as well. These PD-L1 drugs are known for their ability to boost the immune system to target and attack cancerous cells. This ability of being able to boost the immune system to fight off cancerous cells is known as immunotherapy and it seems Pfizer wants its foot on the door in this area. The problem is that Pfizer had paid way too much money to get itself in this area. Not to state by any means that PD-L1 drugs are bad themselves. There are a few late-stage trials though that have been running with avelumab and those trials began April of this year. Results from these trials can be seen for 2 or 3 years later. As seen on this press release of American Society For Clinical Oncology -- ASCO -- 2015 avelumab is mostly in phase 1 testing in multiple types of cancer.

Avelumab

Avelumab in its early stages of clinical testing was also known as MSB0010718C. This drug is an anti-PD-L1 monoclonal anti-body that stops PD-L1 interactions between cells. The drug is also known to stimulate the patient's T-cells and activate the adaptive immune system.

Repligen

Back in January of 2013 Pfizer entered into a research collaboration agreement with Repligen. Under the terms of the deal Pfizer gave Repligen an upfront payment of $5 million dollars with an additional $65 million in milestone payments. Pfizer wanted access to Repligen's drug compound known as RG3039 and a few other pre-clinical candidates. More specifically, Pfizer was interested in RG3039 which was developed to treat a rare disease known as Spinal Muscular Atrophy -- SMA. Pfizer made this deal when the drug compound was only in phase 1 clinical testing. RG3039 was a drug designed to block an enzyme known as DcpS and improve motor function in patients with SMA. Things were going well for a few years, until the beginning of 2015. In January of 2015 Pfizer announced that wanted to get out of the deal made back in 2013 with Repligen. Both companies didn't discuss about the reasons for abandoning the program but there was one clue as to a possible reason why Pfizer dipped out on the deal. One of Pfizer's director of Research and development for the rare diseases unit mentioned a problem with the RG3039 drug compound. The director mentioned that the drug DcpS enzyme levels dropped in SMA patients but the drug was unable to increase a protein known as SMN which is the underlying problem of the disease. This possible setback could be the reason why Pfizer decided to abandon the program.

There are many other competitors who want to enter the SMA area as well. For instance Roche (RHHBY) entered the SMA area in January of 2015 when it acquired Trophos for $545 million. At the time of this acquisition Trophos clinical candidate was in phase 2 clinical testing for SMA patients. If that wasn't enough competition Isis Pharmaceuticals (ISIS) has its clinical candidate ISIS-SMNrx partnered with Biogen (BIIB). About a week ago Isis reported additional positive phase 2 results in its SMA trial which showed remarkable improvement.

RG3039

RG3039 is a DcpS inhibitor to attempt to help treat patients with SMA. The hope for this drug was to restore a defect in the SM1 -- known as survival motor Neuron gene -- to help improve movement in SMA patients. As we noted above, the drug was able to inhibit DcpS in the SMA indication but failed to increase protein production of the SMN1 gene.

Spinal Muscular Atrophy

Spinal Muscular Atrophy is an inherited neuromuscular disease. According to the National Institute of Health - NIH - about 1 in 6,000 to 1 in 10,000 children are born with the disease. Even more interesting is that at least 6 million Americans in the U.S. are carriers of the disease. Those 6 million Americans are not affected because they do not have two copies of the SMA gene, instead they have one. Only those patients born with two copies of the SMA gene are the ones that develop SMA. The key for a person to get this rare disease is having one defective gene from each parent.

Pfizer Earnings

On April 28, 2015 Pfizer reported earnings of $0.51 per share on revenue of $10.9 billion. This compares with analysts expecting earnings of $0.50 per share on revenue of 10.8 billion. Pfizer beat estimates and again earnings were capped because of the strong U.S. dollar.

J&J Versus Pfizer

J&J is better than Pfizer in the partnership area. That is because J&J established partnerships with companies that target large markets. The partnership with Pharmacyclics was successful because Imbruvica targets a large portion of the B-Cell blood cancer market. It is expected to make peak sales of at least $6 billion. The partnership J&J did with Achillion was also a good deal as well, because Achillion is working on Hepatitis C drugs that could potentially challenge Gilead's and Abbvie's (ABBV) Hepatitis C drugs. If Achillion can achieve positive efficacy in Hepatitis C in a 4-week treatment regimen than it can definitely be a long term winner. Again J&J was smart for making this move as well.

On the flip side Pfizer has a partnership with Merck KGaA for avelumab. It is great that Pfizer is attempting to get into the immunotherapy space, but avelumab at the moment is behind a lot of other competitors. There is a possibility that this partnership may prove useful in the future but for now it is too early to tell. SMA market is expected to be a $1 billion market at the peak. In addition there are no current therapies approved for SMA, therefore there wouldn't be any competitors in the space to steal market share. As seen above, Pfizer abandoned the deal with Repligen because it failed to produce the proper proteins that patients needed in order to improve muscular movement functions.

In addition a comparison could be made based on earnings. J&J earns about $17 billion per quarter while Pfizer earns roughly about $10.8 billion per quarter. That is a pretty big difference in revenues, $7 billion dollars per quarter. J&J also managed to increase in share price by a huge margin over Pfizer over the last decade.

Conclusion

With all listed above, we feel that J&J has a brighter future than Pfizer for the time being. Pfizer needs to step up and produce proper partnerships that can potentially propel itself with a great pipeline to maintain its enterprise value. On the other hand J&J has been establishing great partnerships and continues to build an elaborate R&D pipeline that will continue to build future value for its shareholders. For these reasons listed above we are long J&J and Selling Pfizer.