J&J 4Q15 - SGLT-2 Invokana sales $372 million in 4Q15, $1.3 billion in 2015; Slight TRx gains despite EMPA-REG results; LifeScan/Animas sales down 2% operationally; No commentary on Vibe/Calibra/AP - January 26, 2016

J&J provided its 4Q15 update this morning in a call led by CEO Mr. Alex Gorsky. Below, we include our top ten highlights from the call, along with relevant Q&A.

Janssen Highlights

1. SGLT-2 Invokana (canagliflozin) and Invokamet (canagliflozin/metformin) sales were $372 million in 4Q15 and $1.3 billion in 2015. Quarterly sales rose 85% year over year (YOY) as reported and 9% sequentially; annual results more than doubled from ~$500 million in 2014 and rose nearly 20-fold from ~$70 million in 2013.

2. During Q&A, management expressed confidence that most in the field will interpret the EMPA-REG OUTCOME results as an SGLT-2 inhibitor class effect. We agree.

3. Management briefly highlighted Janssen’s early-stage diabetes and obesity efforts during prepared remarks.

4. While not mentioned during the call, Janssen is conducting a number of trials that could support expanded indications for Invokana, including type 1 diabetes, obesity, and diabetic nephropathy.

5. The public scrutiny over drug prices was once again a topic of discussion during Q&A.

LifeScan/Animas Highlights

6. Global LifeScan/Animas revenue totaled $480 million in 4Q15, declining 7% as reported and 2% operationally YOY; full-year sales totaled just $1.9 billion, down 10% as reported and 1% operationally, the lowest full-year total since 2004. Global sales have declined in 14 of the past 15 quarters. Some continue to question whether J&J can continue to support this business though this was not addressed on the call.

7. US Diabetes Care sales totaled $202 million in 4Q15, dropping 2% YOY against an easy comparison to 4Q14 (down 6% YOY); full-year sales fell 4% YOY to an all-time low of $833 million.

8. International Diabetes Care revenue totaled $278 million, declining 10% as reported and growing 5% operationally YOY; the OUS business has grown operationally in three of the past four quarters, a notable watermark despite the currency headwinds. 2015 international revenue reached $1.1 billion, falling 14% as reported and rising 1% operationally.

9. J&J was silent on both its Calibra Finesse bolus-only insulin delivery patch device (expected in 2Q15 to launch this year) and artificial pancreas project. We hope to hear updates on the latter next week at ATTD 2016.

10. The accompanying slide deck highlighted the FDA approval of the pediatric indication for the Animas Vibe integrated with Dexcom G4, though shared no commentary on trajectory, sales, or plans to integrate G5. 

Janssen Highlights

1. SGLT-2 Invokana (canagliflozin) and Invokamet (canagliflozin/metformin) sales were $372 million in 4Q15 and $1.3 billion in 2015. Quarterly sales were up 85% year over year (YOY) as reported (87% in constant currencies) from $201 million in 4Q14 and up 9% sequentially from $340 million in 3Q15. As expected (and as we anticipated in 2014), the franchise easily cleared the bar for blockbuster status in 2015. The annual sales more than doubled from approximately $500-$600 million in 2014 (J&J hasn’t officially made available the full 2014 sales) and rose nearly twenty-fold from an estimated $70 million in sales in 2013. As in past quarters, the vast majority (94%) of revenue came from the US. The two consecutive quarters of single-digit sequential growth (7% in 3Q15) do suggest that Invokana’s impressive trajectory could be tapering off a bit, which is to be expected with more competition – although we expect J&J’s Invokana franchise to benefit from class expansion, which we expect to see for some time. The impact of the EMPA-REG OUTCOME results for competitor Lilly/BI’s Jardiance (empagliflozin) on Invokana sales will be a key question for Janssen in 2016. To date, the results do not appear to have meaningfully impacted Invokana’s total prescription share (TRx) or revenues (see below), but that could well change if Lilly management is correct that Jardiance’s gains in new-to-brand share (NBRx) reflect total market share gains. That said, Invokana retains strong advantages due to its first-in-class status and favorable reimbursement position.

• TRx for Invokana in the US type 2 diabetes market (excluding insulin and metformin) totaled 6.5%, virtually the same or up slightly from 6.3% in 3Q15. TRx among US endocrinologists fell to 12.8% from 13.1% in 3Q15, while TRx among primary care physicians rose from 5.6% to 5.8%. Management highlighted the drug’s “strong momentum in market share” during prepared remarks, though these gains do represent a bit of a plateau compared to past quarters. As mentioned above, the EMPA-REG OUTCOME results do not appear to have had a major impact on Invokana’s prescription share thus far though we would expect that they will – although since formulary status is such a driver, this may be less so than in the past. Jardiance has made modest but steady NBRx gains since the results were reported (up from 15% before the topline results announcement to 25% as of Lilly’s 2016 Financial Guidance call this month), but it is not clear whether this has come at Invokana’s expense or is primarily due to patients new to the SGLT-2 inhibitor class. Looking at Invokana sales over time, one realizes the extent to which this class is truly a US phenomenon and the degree to which international sales are not only extremely low, likely very low profit, but also without an upward trajectory.

Figure 1: Invokana Sales (1Q14-4Q15)

2. During Q&A, management expressed confidence that most people will interpret the EMPA-REG OUTCOME results as an SGLT-2 inhibitor class effect. Management indicated that most physicians J&J has interacted with view the results as a class effect and argued that the recently updated AACE/ACE guidelines interpret them that way as well. The latter statement is debatable: the algorithm mentions a “possible benefit” of SGLT-2 inhibitors on atherosclerotic cardiovascular disease, but the accompanying executive summary makes clear that the results only pertain to Jardiance. That said, we do believe many anticipate an ultimate class effect. That said, it is true that guidelines committees and payers appear (at least officially) to be reserving judgment until other SGLT-2 inhibitor CVOTs report results rather than interpreting the benefit as a clear drug-specific effect. We have not seen any systematic data on whether providers have been favoring Jardiance over other SGLT-2 inhibitors in the meantime. AZ has joined J&J in suggesting that the results will most likely be interpreted as a class effect, but several speakers at the Cardiometabolic Health Congress last fall said they would support switching patients from other SGLT-2 inhibitors to Jardiance based on the results. Hmm – while the market for this class is clearly expanding, we believe formulary decisions will guide what patients take in the US more than a preference for Jardiance (even if patients want Jardiance). It will be interesting to see, once the label changes for Jardiance, what impact that has on HCP and patient preferences and formulary status.

• The CANVAS CVOT for Invokana is still on track to report in mid-2017. The trial is expected to complete in June 2017 according to ClinicalTrials.gov, and the CANVAS-R renal outcomes trial (which is also investigating cardiovascular outcomes) will report in January of that year. Positive results from these trials would go a long way toward establishing a consensus around a beneficial class effect, at least for high-risk patients. The implications for the broader type 2 diabetes patient population will be less clear until the DECLARE trial for AZ’s Farxiga (dapagliflozin), which enrolled a more diverse population, reports results in 2019.

3. Management briefly highlighted Janssen’s early-stage diabetes and obesity efforts during prepared remarks. A slide in the presentation on “driving innovation with cross-segment collaborations” mentioned Janssen’s cross-sector diabetes/obesity efforts and its islet cell replacement program as two examples of such innovations. We have been particularly impressed over the past year with the company’s Disease Interception Accelerator program, which is focusing on type 1 diabetes prevention as its first area of interest. The program announced its first research collaboration last June; the effort will be led by renowned immunologist Dr. Emil Unanue (Washington University, St. Louis, MO) and focus on the role of antigen-presenting cells in the initiation and progression of type 1 diabetes. Janssen also has a hand in multiple efforts to develop cell replacement therapies for type 1 diabetes, through subsidiary BetaLogics and an option to license/acquire ViaCyte’s VC-01 cell replacement therapy. Most recently, the company has taken several steps to refill its type 2 diabetes/metabolic disease pipeline. It licensed Hanmi Pharmaceutical’s phase 1 GLP-1/glucagon dual agonist HM12525A in November and entered a collaboration with Intrexon to develop oral biologics for type 2 diabetes, obesity, and other metabolic diseases in December. We are glad to see that Janssen’s interest in metabolic disease extends beyond Invokana and are particularly encouraged by its potential willingness to take on the challenges of obesity pharmacotherapy.

4. While not mentioned during the call, Janssen is conducting a number of trials that could support expanded indications for Invokana.

• Type 1 diabetes: Phase 2 results for Invokana in type 1 diabetes presented at EASD demonstrated significant placebo-adjusted reductions in A1c (0.3%) and body weight (~3-5%) but at the expense of a significant increase in ketone-related adverse events. Unlike in recent quarters, the SGLT-2 inhibitor/ketoacidosis controversy received no attention during this call. The recent AACE/ACE announcement advising no changes in prescribing recommendations for the class based on the available evidence has likely helped reassure the diabetes community about the risk in type 2 diabetes. The risk could still pose obstacles to the class’ future in type 1 diabetes (we believe the risk can “be managed” but we do not believe education is where it must be on DKA yet), but we are hopeful that this will not be the case with better and more attuned education. EASD presenter Dr. Robert Henry (UCSD, San Diego, CA) suggested that rates of DKA with Invokana in type 1 diabetes could potentially be much lower in phase 3 based on lessons learned from phase 2. Lilly/BI and AZ have both advanced their SGLT-2 inhibitors into phase 3 for type 1 diabetes, and we remain optimistic that Janssen will follow suit.
• Obesity/prediabetes: J&J has indicated on several recent occasions that it considers obesity to be an area with great potential, including for Invokana. The company completed a phase 2 trial of Invokana in combination with phentermine for obesity in June 2015, and we hope to see results at ADA on this important front. Another trial investigating Invokana’s effects on body weight and metabolism in patients with type 2 diabetes and a BMI ≥25 kg/m² is currently recruiting participants and expected to complete in August 2017. We were also very interested to hear Janssen mention the possibility of a prediabetes indication for Invokana in its Pharmaceutical Business Review last May but have not heard any updates since then.
• Diabetic nephropathy: The CREDENCE renal outcomes study of Invokana is still recruiting participants (!) and is expected to complete in January 2020. Positive results from this trial would be hugely meaningful given the enormous unmet need in this area.

5. The public scrutiny over drug prices was once again a topic of discussion during Q&A. This topic became a mainstay of pharmaceutical company earnings calls (including J&J’s) in 3Q15 and is likely to remain in the spotlight as long as it is a popular issue in the presidential race. Management declined to predict whether the rhetoric will translate into concrete price reductions in the next year or two but emphasized J&J’s commitment to being “part of the solution.” We felt that was a bit of a corporate response and didn’t really mean very much. The company also noted, as others in the industry have in the past, that pharmaceutical spending accounts for only a small percentage of total healthcare expenditures. This is certainly true at a systems level, but the issue of unaffordable drug prices for individual patients is a separate question, particularly for those with inadequate or no insurance coverage. While this is a complicated problem that will require thoughtful approaches, we are not particularly optimistic about the direction we see it taking. The repeated discussion of drug pricing in company earnings calls suggests that analysts are taking the issue seriously, though on the flip side, Gilead management predicted at this month’s JP Morgan that the public discourse will not actually have a substantive impact.

LifeScan/Animas Highlights

6. Global LifeScan/Animas revenue totaled $480 million in 4Q15, declining 7% as reported and 2% operationally YOY on a relatively easy comparison (sales fell 9% YOY in 4Q14). It goes without saying that this has been a very tough business for J&J. We keep looking for positive signs though can’t say we’ve seen the light at the end of the tunnel just yet … though management continues to insist it is there. Of more concern, 4Q15 now marks 14 of the past 15 quarters with global sales declines (3Q14 was the lone exception and that was an easy comparison). Of more concern, the performance in actual revenue marks four consecutive quarters in which quarterly sales have come in under $500 million – a pattern never before seen in our J&J model (which goes back to 2004). Sequentially, sales grew 2% against a very low base (3Q15 sales of $470 million were the lowest-ever in our model). As in 2Q15 and 3Q15, J&J’s accompanying slides attributed this weakness to US price declines that partially offset the “double-digit” growth of the Animas Vibe and volume growth in SMBG.

• For the 2015 fiscal year, global sales totaled $1.9 billion, down 10% as reported and 1% operationally; this was against an easy comparison as sales fell 7% as reported and 5% operationally in FY2014. Figure 3 below captures just how tough the devices business has been for J&J since the onset of competitive bidding. Figure 3 below captures just how tough the diabetes device business has been for J&J since the onset of competitive bidding: from the all-time full-year sales high of $2.7 billion just four years ago, 2015 total sales of $1.9 billion mark an astounding ~27% decrease!
• Notably, Mr. Gorsky mentioned “Diabetes Care” (LifeScan/Animas) only VERY briefly in his prepared remarks and Q&A. The business is certainly underperforming, and we can understand the desire to focus on other strides in diabetes, including Invokana. That said, we’d love more color on how management is thinking about the future. After all, the 4Q15 slide deck (slide 13) did highlight J&J’s goal of “leveraging innovative device, pharma and consumer capabilities to treat and/or prevent obesity and diabetes.” Hmmm … what could this mean? We loved seeing the reference and especially the shout-out to Diabetes Care amongst broader commentary, though are not quite sure how such goals would translate to practice. How could J&J combine its diabetes device and pharma divisions to provide more integrated and holistic care?
• We are eager for the remaining Big Four blood glucose monitoring companies (Abbott [January 28], Roche [January 28], and Bayer/Panasonic [TBD – we are in conversations about reporting structure]) to report later in the quarter, particularly to see whether these companies experienced comparable global challenges. For context, Roche and Abbott all announced steep global YOY reported declines in 3Q15 offset by stronger operational performance: Abbott sales fell 8% as reported but grew 1% operationally; and Roche sales dropped 18% as reported and 9% operationally. As a reminder, Bayer does not break out operational numbers though Diabetes Care sales grew 5% YOY in 3Q15 against an easy comparison (sales fell ~5% in 3Q14).

Figure 2: Global, US, International Quarterly Sales (1Q12 – 4Q15)

Figure 3: Global, US, International Full-year Sales (2007-2015)

7. US Diabetes Care sales totaled $202 million in 4Q15, dropping 2% against an easy comparison to 4Q14 (down 6% YOY). As expected, management did not comment extensively on the US business except to acknowledge “past” pricing pressures during Q&A – whether these are entirely in the rearview mirror remains an open question in our eyes. The performance does mark the second-lowest US revenue ever recorded in our J&J model and is getting awfully close to dipping sub-$200 million (only sales of $192 million in 1Q14 came in under this milestone) though Figure 2 does seem to suggest that declines have plateaued somewhat. Sequential sales fell 2% against a low base ($205 million in 3Q15).

• For the full year, US sales declined 4% YOY to reach $833 million despite an easy comparison to FY2014 when sales fell 6% YOY. Given the struggles the business has seen over the past year, we can’t say we are wholly surprised though what did catch our attention is the no single quarter in 2015 broke the $220 million plateau – yikes! This is the first time we’ve seen this pattern and contributed to the lowest-ever full-year US total for J&J in our model (which tracks back to 2003).

8. International Diabetes Care revenue totaled $278 million in 4Q15, falling 10% as reported but rising 5% operationally YOY. On one hand, the performance came against an easy comparison as sales declined 11% as reported and 2% operationally YOY in 4Q14 and marks 4Q15 as a sixth consecutive quarter of reported YOY decline. At the same time, the operational growth gives us hope that declines are driven in large part by currency as opposed to underlying weakness in the business’ fundamentals – indeed, the OUS business has grown operationally in three of the past four quarters, a trend that we believe stands as a noteworthy watermark for the business. Sequential sales also grew 5%, consistent with the trend we typically see between 3Q and 4Q (five of the previous six years) and we think 1Q16 sales will be a better benchmark of the business health considering that sequential sales typically fall heading into the new year (patients haven’t hit their deductibles in 1Q so are more hesitant to replenish supplies).

• International sales for 2015 fell 14% as reported and rose 1% operationally to reach $1.1 billion despite an easy comparison to 2014 (sales fell 3% as reported and grew 1% operationally). It’s the lowest annual international revenue since 2006 ($940 million) though we’re less concerned given the operational growth. [Admittedly, we feel like a broken record on this point though we can’t underscore how much the strengthening of the US dollar is skewing this picture. Indeed, one of our biggest questions for 2016 is when – and even if – the currency impacts will abate.]

9. J&J was silent on both its Calibra Finesse bolus-only insulin delivery patch device and artificial pancreas project. Guidance on Calibra in 2Q15 called for a Finesse launch in 2016 and we hope that has not changed. J&J is “currently recruiting” for a 24-week clinical trial (n=312) of the device that will randomize type 2 diabetes patients not achieving glycemic targets (A1c 7.5-10%) to either Finesse or the Novo Nordisk FlexPen to initiate bolus insulin therapy. The primary endpoint is A1c at 24 weeks, with secondary endpoints including time-in-range and treatment satisfaction. Primary completion is slated for December 2016. We expect that J&J would report the trial post-launch to stick to this timeline, and use results to help with reimbursement. We’re very positive on Calibra’s potential and wonder in what patients it will resonate the most with. Could J&J revive its device business with this product?

• J&J’s artificial pancreas project has moved at a glacial pace since signing its partnership with JDRF in 2010. We hope the company is being a good steward of JDRF funds. J&J has repeatedly said it is working on it, though at what pace and how it will compare to Medtronic’s MiniMed 670G (in a pivotal study) and others is a big question. We hope to hear updates next week at ATTD 2016 where Animas reps are slated to discuss its work on the company’s next-generation CGM-integrated pump (the “hypoglycemia-hyperglycemia minimizer”). See below for an Automated Insulin Delivery Competitive Landscape.

10. Though it was not mentioned in the prepared remarks or Q&A, the accompanying slide deck highlighted the FDA approval of the pediatric indication for the Animas Vibe integrated with Dexcom G4. We learned at JPM 2016 that the approval goes down to age two, the youngest indication for a sensor-augmented pump in the US. The new approval bodes well for J&J as it looks to stay ahead of the other two most recently launched sensor-integrated pumps in the US: Medtronic’s MiniMed 530G (16 years and older) and the Tandem t:slim G4 (12 years and older). See our JPM commentary for more thoughts on the tradeoffs and tough choices for patients.

• Echoing commentary from 2Q15 and 3Q15, the slide deck highlighted that the Animas Vibe saw strong “double-digit” growth during the quarter. Management did not remark further on Vibe trajectory/sales. Big questions on our radar include how the ongoing launch of Dexcom’s G5 and Tandem’s t:slim G4 will impact Vibe uptake. The Tandem pump is a highly competitive Dexcom-integrated offering (t:slim G4 has a much better screen and user interface), while with G5, Animas patients have to choose between getting data on their phone/receiver (with the G5 transmitter) and getting it on their pump (with the G4 transmitter). The Vibe also doesn’t have Dexcom’s latest Software 505 algorithm, nor is it compatible with Dexcom Share (a key advantage for parents). We’ve never heard a timeline for Animas to integrate the G5.

LifeScan/Animas Pipeline Summary

Automated Insulin Delivery Competitive Landscape

• See below for an overview of the automated insulin delivery landscape, as far as we aware. We acknowledge this list may be incomplete, as there may be other stealth startups or academic groups working to commercialize closed-loop technology.
  
  • It’s essential for Animas to move on automated insulin delivery, given the competition from other companies. JDRF’s Dr. Aaron Kowalski has publicly stated multiple hybrid closed loop systems are coming in the ~2017-2018 timeframe, led by Medtronic’s MiniMed 670G (currently in a pivotal study)

Questions and Answers

Q: Could you give us a sense of what’s happening in the market for Invokana post-EMPA-REG OUTCOME as it relates to class expansion or your market share? And can you give us any updates on the CANVAS trial?

A: I’ll give you the market share for the third quarter vs. fourth quarter, which will give you nice trend information. This is in the US. For the total, we went from 6.3% in the third quarter to 6.5% in the fourth quarter. In primary care we went from 5.6% to 5.8%. Endo is flat at about 13% quarter to quarter.

In fact, some guidelines were recently published saying that the cardiovascular benefit we saw with the other SGLT-2 is most likely a class effect. And the reading that we’re getting from the field is that’s the way most physicians treat it. Our data won’t be available until sometime mid-2017. We’ll then actually be able to put those results on our label, but until then, I think the market recognizes it as a beneficial effect on cardiovascular outcomes.

Q: We heard Bernie and Hillary last night go after drug pricing again and I think that’s also something we’re going to hear from the Republican candidates. What are your expectations in terms of pricing in 2016 and 2017? Do you expect that there will be a change in terms of list prices going forward?

A: We understand the pricing in pharmaceuticals, and in all of healthcare, is certainly a very important issue. And we believe it’s important to consider it in that way. As we think about pharmaceuticals, for example, they currently make up about 12% of healthcare spending in the United States, slightly higher in Europe. If you think about medical devices, they represent about 6%. And if you go beyond those areas, there are a lot of other costs built into that system, ranging from hospital, patient care, insurance companies, many other people. And particularly in an environment today where we’re seeing such transformational outcomes and moving more and more towards cures, disease prevention, and interception than we ever have because of some of the great science that’s being produced. So we understand and would certainly expect there to be a continued spotlight in this area. We’re working with a lot of stakeholders to make sure we look at it in a very holistic way. And it’s very difficult at this point to try to project what’s going to happen in 2016 or 2017. All of us know that the healthcare system, not only here in the United States but around the world, is complex. There are a lot of other issues that are intertwined. But it’s obviously a conversation we’ll be participating in and ultimately where we want to be part of the solution.

--by Emily Regier, Ava Runge, Varun Iyengar, Adam Brown, and Kelly Close