Memorandum

J&J 4Q17 – Continued decline for Invokana, sales fall 28% YOY worldwide and 34% YOY in the US; LifeScan/Animas revenue of $390M declines 19% YOY operationally – January 23, 2018

Executive Highlights

  • In a fourth consecutive quarter of YOY decline for SGLT-2 inhibitor Invokana, sales fell 28% YOY to $267 million in 4Q17 vs. $371 million in 4Q16. This is striking in a class that is expanding – we expect easily $3.5 billion in 2017, up from $2.8 billion in 2016. For the full year 2017, Janssen’s worldwide revenue fell 21% YOY to $1.1 billion, down 21% vs. $1.4 billion in 2016. This weak financial performance came entirely from the US market, where sales of $221 million declined 34% YOY in 4Q17 and 26% YOY in 2017, to $944 million, just shy of the all-important billion milestone. Management attributed this to increasing patient discounts, greater segment mix (a higher proportion of prescriptions in the Medicaid channel), and a 1% loss of share – presumably, to Lilly/BI’s Jardiance. In contrast, OUS Invokana sales of $46 million grew 24% YOY in 4Q17 and 25% YOY in 2017, to $167 million.
  • We look for the SGLT-2 class as a whole to post ~$3.5 billion-plus in 2017 revenue, compared to $2.9 billion in 2016. YTD, Invokana, Jardiance, and Farxiga (AZ) have posted $2.5 billion all together, which represents a 25% YOY rise over the $2 billion in pooled class revenue at this time last year (1Q16 + 2Q16 + 3Q16). The trend we’ve noticed is Jardiance “stealing share” from Invokana and off-setting Invokana’s decline to drive the majority of class growth, while Farxiga sales grow on par with the overall market.
  • Management remained characteristically vague when discussing the fate of the LifeScan/Calibra business during Q&A, indicating a public decision has yet to be made. In response to a question regarding the future of the “residual” Diabetes Care business, which withstood a $35 million impairment loss in 4Q17, CFO Mr. Dominic Caruso would only comment: “We’re always, constantly looking at our business and making the determination of whether it is better in someone else’s hands.” That was not a particularly patient-friendly comment, but did give listeners a sense of how the CFO viewed the entire business. With the Animas exit in October and management’s continued lukewarm assessments of the remainder of the portfolio (including at JPM), the future of LifeScan as a business within J&J seems less and less likely although overall, this is hard to speculate upon. As for Animas, the company now plans to fully exit the pump market (including international) by September 2019. 
  • 4Q17 global LifeScan/Animas sales of $390 million declined 16% as reported  YOY (-19% operationally) and dropped 4% sequentially. This marked the lowest sales ever recorded in our model (dating back to 2005) and came on an easy YOY comparison. US sales had a particularly tough Q4, down a staggering 32% YOY to $130 million. International sales of $260 million fared better, relatively speaking, down 4% as reported and down 9% operationally. 2017 sales declined 10% as reported (-11% operationally) to $1.6 billion.
  • There were no updates on the LifeScan/Calibra pipeline on the call or in the supplementary materials. The OneTouch Via meal-time insulin delivery device remains, in our view, a valuable asset that could see a warm market response. In a follow-up, the company confirmed its ongoing commitment to the WellDoc partnership and foreshadowed news to come later in 2018.

J&J provided its 4Q17 update in a call this morning led by CEO Mr. Alex Gorsky. Those of you with our handy Closer Look app saw our First Look published soon after the call wrapped up! Don’t have the app? You can download it here.

This full report expands on our First Look with more detail on the SGLT-2 inhibitor Invokana business, LifeScan, and more generally, J&J’s approach to diabetes. Relevant Q&A follows the highlights below. The company’s presentation slides are available here, the press release is here, and the earnings infographic is here.

Table of Contents 

Janssen Highlights

1. Tough Year for Invokana Business: Franchise Sales Decline 21% YOY to $1.1 Billion for 2017, Drop 28% YOY to $267 Million in 4Q17; Limited Commentary from Management

Invokana (canagliflozin) franchise sales fell 21% YOY in 2017 to $1.1 billion, down from $1.4 billion in 2016. The SGLT-2 inhibitor business performed similarly in 4Q17, with revenue falling 28% YOY (~flat sequentially) to $267 million from a base of $371 million in 4Q16. While global sales have been declining throughout 2017 – a trend that’s crystal clear from the graph below – this marks the largest YOY drop to-date (-13% in 1Q17, -23% in 2Q17, -19% in 3Q17). In the US, franchise revenue declined 26% YOY in 2017 to $944 million (-34% YOY and ~flat sequentially in 4Q17 at $221 million) – J&J emphasized that this market has been particularly challenging for Invokana and Invokamet (canagliflozin/metformin) of late. Management cited increasing patient discounts as the primary driver of decline (presumably, this means more people with diabetes are accessing the product, but no volume information was shared on the call), also listing greater segment mix (more prescriptions going to patients on Medicaid) and a 1% share loss in 4Q17. We do think J&J invests disproportionately more than its peers on patient access, which reduces revenue and profitability, but is positive for patient populations. We are not sure the extent to which the CFO is aware of this, as it sounded like the CFO was referencing competitive patient discounts rather than its own. OUS, full-year Invokana sales totaled $167 million (+25% YOY) and quarterly sales totaled $46 million (+24% YOY), which confirms that the US market is driving Invokana’s disappointing decline and the market outside the US is strong. Otherwise, international revenue from the SGLT-2 product has been on a steady rise throughout 2017 (+32% YOY in 1Q17, +11% YOY in 2Q17, +32% in 3Q17). This is also shown on the graph below. We wonder how much of this difference between US and ex-US performance has to do with the black box warning for amputations: FDA added this to all Invokana, Invokamet, and Invokamet XR labels in May 2017, while the EMA has an amputation warning extending to the entire SGLT-2 class. This is only our speculation for now but we imagine it is driving a significant part of the decline, which we view as unfortunate since we think the black box should only affect patients who truly have major risks. J&J management said nothing of the black box warning during prepared remarks or Q&A on today’s call.

  • In fact, the only mention of diabetes during prepared remarks was a short explanation of Invokana’s sluggish US sales, lasting <10 seconds total. Management did not comment further on the sNDA for Invokana’s CV indication (filed in October 2017 based on positive CANVAS results), on the black box warning for amputations, or on Invokana’s favorable formulary positioning within CVS Health in 2018. The black box warning has been a major cause for waning sales in 2017, but exclusive positioning over Lilly/BI’s Jardiance (empagliflozin) for the ~25-27 million patients covered under the CVS Health national formulary is a potential tailwind for 2018. An FDA decision on the CV indication is anticipated in 3Q18 or 4Q18, and a label update highlighting cardioprotection could boost prescriptions in 2019 and beyond – this is especially important for Invokana considering Jardiance is already indicated for the reduction of CV death, based on EMPA-REG OUTCOME results. The DECLARE CVOT for AZ’s Farxiga (dapagliflozin) is expected to wrap up, and to report at least topline results, in 2H18. So far, the majority of evidence points to CV benefit as a class effect for SGLT-2 inhibitors, and DECLARE will lend valuable insight to this end.
  • The minimal commentary on Invokana, not even pointing to potential bright spots (e.g. CV indication, the CVS Health formulary, CREDENCE results in 2019), was depressing overall. J&J’s commitment to diabetes as a therapeutic area is increasingly uncertain. During last year’s Pharmaceutical Business Review Day, Mr. Gorsky underscored that Invokana is a “very small piece,” comprising only ~4% of total pharmaceutical sales. During J&J’s 2Q17 update, he assured that the company “remains very interested, and wants to make sure patients continue to have options in type 2 diabetes,” but then added, in the same breath, “we also recognize the competitive nature of the category.” This lukewarm commentary seems to have dwindled to no commentary at all. We understand that we’re talking about a very large company with many areas to cover on an earnings call – perhaps the relative silence on diabetes isn’t significant. But with J&J looking to exit diabetes devices entirely, we might hope to see signs of strengthened commitment to its SGLT-2 business even though they are two completely different businesses. Although Invokana was once a more golden child at Janssen, the product has also come up against substantial commercial obstacles in 2017. To be sure, we still see potential for Invokana to return to volume/sales growth, particularly if the CV label update is approved and if CREDENCE results are positive for canagliflozin in diabetes-related kidney disease (more on this below). This therapy, like other SGLT-2 inhibitors, stands to help so many patients achieve superior glucose-lowering and weight loss, while also offering CV and renal benefit in a convenient oral pill. Despite the heightened risk for lower limb amputations in CANVAS, several thought leaders have emphasized that the base rate of amputations (even in a diabetes patient population) is very low, and that this risk is very manageable with careful monitoring of the feet. According to some experts, Invokana achieves greater A1c reductions and weight loss vs. Jardiance in their clinical practice – this is anecdotal, but still valuable insight that shows why J&J should continue to invest in Invokana’s commercial success. Mr. Gorsky said on on today’s call that patients are “at top of mind” for the company – we certainly hope this is true.

Figure 1. Invokana Sales (1Q14-4Q17)

2. SGLT-2 Inhibitor Market Trends: Invokana Losing Share to Jardiance, Class Could Reach ~$3.5 Billion in 2017, New Market Entry in Merck/Pfizer’s Steglatro

Based on recent trends, we expect that the 1% share loss management mentioned was lost to Lilly/BI’s Jardiance although it is impossible to know. As the SGLT-2 inhibitor market grows ~20%-35% YOY each quarter (most recently, in 3Q17, pooled class sales rose 35% YOY and 9% sequentially to $935 million), Jardiance appears to be “stealing share” from Invokana and driving impressive overall growth despite a weak commercial performance from J&J’s SGLT-2 products. For example, Jardiance revenue more than doubled YOY in 3Q17 to $385 million, while Invokana revenue took a 19% YOY dive to $265 million. Meanwhile, AZ’s Farxiga business is growing on pace with the entire class, up 30% YOY in 3Q17 ($285 million), and is sustaining its share of the market by volume. Notably, 3Q17 was the first quarter in which both Jardiance and Farxiga surpassed Invokana in total sales. We’ll be eager to assess the field for 4Q17 and 2017 overall after all SGLT-2 companies report full-year earnings (Lilly’s 4Q17 call is scheduled for January 31, AZ’s for February 2). As of 3Q17, SGLT-2s as a group (J&J, Lilly/BI, AZ) had grown 25% YOY to $2.5 billion year-to-date (YTD), compared to $2 billion in 1Q16 + 2Q16 + 3Q16 sales. We estimate the market could easily hit ~$3.5 billion in 2017, compared to $2.9 billion in 2016 (and for additional context, $2 billion in 2015, $800 million in 2014, and $93 million in 2013). This growth would be driven primarily by Jardiance (through both Lilly and BI, though BI’s revenue will be hard to assess) and somewhat by Farxiga, and would be tempered by Invokana’s sluggish financial performance this year.

  • A fourth SGLT-2 inhibitor, Merck/Pfizer’s Steglatro (ertugliflozin), will be launched in the US in 1Q18, alongside combination products Steglujan (ertugliflozin/DPP-4 inhibitor sitagliptin) and Segluromet (ertugliflozin/metformin). This could very well shake up market dynamics, if not in 2018 due to payer contracts already being negotiated prior to ertugliflozin’s late December FDA approval, then in 2019: List prices for Steglatro ($8.94/day) and Steglujan ($17.45/day) are considerably lower than average list prices for competitors (~$17/day and ~$22/day, respectively). We imagine this could boost early uptake, as it’s appealing to patients/HCPs and also gives Merck/Pfizer an edge in payer negotiations for 2019.

3. No Updates on CREDENCE (Invokana in DKD) or Other Clinical Programs for Canagliflozin (Type 1, Prediabetes CVOT)

There was no mention of ongoing clinical trials for Invokana, including the CREDENCE study in diabetes-related kidney disease, expected to complete June 2019. On J&J’s 3Q17 call, management highlighted CREDENCE as an upcoming bright spot for the Invokana business, as this will be the first complete trial of an SGLT-2 inhibitor in patients with impaired renal function. We are still looking very forward to this readout, and we don’t put any judgment on the fact that management didn’t mention it specifically (if they had, analysts might criticize them for this given there is “no news,” although this would have served as a signal to their commitment in diabetes). AZ’s Dapa-CKD study for Farxiga (dapagliflozin) is expected to complete in November 2020, and Lilly/BI’s study of Jardiance in CKD is planned for 2018 but has yet to begin, so J&J is a frontrunner in this area. Positive CREDENCE results would underscore Invokana’s renal benefits (also seen in CANVAS – a 40% relative risk reduction for the composite renal outcome) and could expand the patient population who can take the SGLT-2 inhibitor to include those with lower eGFR. Canagliflozin is currently contraindicated for people with eGFR <45 ml/min/1.73m2, and the higher 300 mg dose is contraindicated for eGFR <60 ml/min/1.73m2. As the renowned Dr. David Fitchett explained at ESC 2017, patients with impaired kidney function may actually benefit the most from SGLT-2 therapy, in terms of cardio and renal protection. The contraindications for lower eGFR apply across the class, but these were instituted because of a presumed loss of efficacy (since the mechanism of action relies on the kidneys), not because of any specific safety concerns. Outcomes data ­– first from CREDENCE, then from Dapa-CKD and Lilly/BI’s trial – will provide a more definitive answer. We’re hearing enthusiasm from thought leaders that SGLT-2s could be the next wave of treatment for DKD and nephropathy, and we see this as an exciting opportunity for J&J. Will the company capitalize on CREDENCE (hopefully, alongside a new CV indication) to return Invokana to growth?

  • The fate of other clinical development projects around canagliflozin is unknown. These programs (summarized in the table below) are all presumably still on the docket, but as we learned from Janssen’s Dr. James List at ADA 2017, the company will carefully evaluate next steps in light of the CANVAS amputation signal. Our hope is that amputation-related concerns are put to bed with a combination of RCT data, real-world evidence, and a dissemination of best practices for foot care in diabetes, and that J&J then picks up where it left off investigating Invokana in people with prediabetes, type 1 diabetes, etc. That’s not to say there isn’t a real risk associated with the canagliflozin molecule, but additional research could identify rules for proper patient selection (this has already started with a post-hoc safety analysis presented at EASD 2017), and widespread education could allow patients to benefit from Invokana’s glucose-lowering, weight loss, cardioprotection, and renal protection while mitigating amputation risk. J&J could do a tremendous public health good in leading this movement for better foot care in diabetes – as a sidenote, see diaTribe’s recent piece on ideal footcare.
  • A phase 2 trial of Invokana in type 1 diabetes was presented at ADA 2016. It’s unclear how quickly Janssen will move forward with phase 3 (if at all). The company will likely decide its future investment once it gets a better view of how global regulatory agencies are responding to the desire of many people with type 1 to have access to SGLT-2 therapy. Moreover, we imagine this program may not progress until Invokana sales in the type 2 population have stabilized or returned to growth.

Table 1. Invokana Clinical Trials

Trial/Indication

Status

Timeline

Diabetic kidney disease (CREDENCE)

Ongoing; Fully-enrolled

Expected to complete in June 2019

Investigating mechanism of weight loss (CARAT trial)

Ongoing; Recruiting (aiming for 36 participants)

Expected to complete in July 2018

CVOT for prediabetes

Planned as of J&J’s 3Q16 financial update

No timing information shared

Type 1 diabetes

Phase 2 trial completed

Phase 2 results presented at ADA 2016

Canagliflozin/phentermine co-administration for obesity

Phase 2 trial completed

Phase 2 results presented at ADA 2016

4. No Movement in Janssen’s Early-Stage Diabetes/Obesity Pipeline

There were no updates on Janssen’s diabetes/obesity pipeline, which includes (i) a phase 1 GLP-1/glucagon dual agonist for type 2 diabetes, obesity, and NASH, (ii) a CB1 inverse agonist for NASH, (iii) a preclinical GLP-1/glucagon dual agonist for type 2, and (iv) a PYY agonist for type 2 diabetes and obesity (phase not listed). Despite wavering confidence from management in Invokana/LifeScan, we should note that the company has shown commitment to diabetes, obesity, and metabolic disease through other partnerships and research endeavors. In collaboration with UCSF, JDRF, and others, Janssen’s Disease Interception Accelerator (DIA) initiative is working to identify biomarkers for type 1 diabetes and gestational diabetes. The Janssen Human Microbiome Institute is also searching for earlier opportunities for intervention in type 2 diabetes, prediabetes, and gestational diabetes. 

Table 2. Janssen Diabetes/Obesity Pipeline Summary

Candidate

Indication

Phase

Timeline/Notes

JNJ-64565111 (glucagon/GLP-1 dual agonist)

Type 2 diabetes, obesity, NASH

Phase 1

Phase 1b study in type 2 diabetes initiated August 2017, expected to complete January 2018; Phase 1 results presented at ADA 2015; Preclinical data presented on ADA 2016 poster; Licensed from Hanmi November 2015

JNJ-2463 (CB1 inverse agonist)

NASH

Phase 1

Phase 1 study underway; Collaboration with BirdRock Bio

JNJ-54728518 (glucagon/GLP-1 dual agonist)

Type 2 diabetes

Preclinical

Data presented on ADA 2016 poster showing efficacy vs. Novo Nordisk’s Victoza (liraglutide)

JNJ-9321 (once-weekly PYY agonist)

Type 2 diabetes, obesity

Not listed

No timing information shared

LifeScan/Animas Business Highlights

1. CFO Dominic Caruso on the Future of LifeScan: Deciding If “The Business Is Better In Someone Else’s Hands;” Animas to Exit Global Market by Sept. 2019; Diabetes Asset Impairment of $35M

Amidst swirling rumors of the bidding intention of a handful of Chinese companies and our small expectations for an update on this call, management remained characteristically vague when discussing the fate of the LifeScan/Calibra businesses during Q&A, indicating a public decision has yet to be made. In response to a question from JP Morgan’s Michael Weinstein regarding the future of the “residual” Diabetes Care business and other assets, CFO Mr. Dominic Caruso would only comment: “We’re always, constantly looking at our business and making the determination of whether the business is sometimes better in someone else’s hands or we can get better value for our shareholders through a divestiture. So, we have considered other assets in that regard. We haven’t disclosed what those assets are for obvious reasons. We’ll continue to update our estimates as we move forward with those potential transactions.” At JPM earlier this month, Mr. Gorsky called Diabetes Care a “slower moving business” and implied that SMBG and insulin pumps fall into the category of “areas where we don’t think we can make a meaningful difference … That doesn’t mean it’s a bad business, and it doesn’t mean it can’t be successful, but perhaps it would not be a priority in our hands.” Basically, Mr. Gorsky implied that J&J is committed to “profitable” diabetes patients, but there are not too many of those anymore under the traditional BGM business model – very frequent testers are largely ones with resources who are moving to CGM. In addition, formularies are more “strict” today and so even if patients are drawn to using LifeScan in the US (previously the most profitable market), many do not have the choice. A potential bright spot for the BGM field may come with new business models – e.g., payer contracts for unlimited strips and coaching and digital decision support. Those Roche/mySugr, Livongo, and One Drop are showing some traction, that feels like a pretty radical change for J&J to undertake at this stage. With the Animas exit announced in October and management’s continued lukewarm assessments, the future of LifeScan as a business within J&J seems less and less likely. See our roundup of potential LifeScan buyers and partners that we put together a year ago.

  • The slide deck details softness due to “insulin pump discontinuation in US and Canada,” indicating that sales have proceeded outside of these geographies. This is in line with expectations from the October announcement, which said that “a decision and timing to exit … is subject to completing consultation with relevant works councils” – in these regions, Animas will continue to sell pumps and operate as usual. Indeed, we were in Australia recently and heard many conversations regarding “everything’s fine here with Animas! There is no closure.” However, the company told us in a follow-up email that the goal is to transition all patients globally to another insulin delivery system – Medtronic is still the partner of choice, even outside of the US – and exit the market by September 2019. To that end, Animas has completed consultation with relevant works councils outside of the US and Canada and begun the process of discontinuing sales of pumps in Europe, New Zealand, and Australia. The company reiterated that the decision to exit won’t impact supplies and services to existing patients, though new Animas Vibe pumps will not be placed in European markets (with the exception of supply contracts and warranties). Encouragingly, “Animas has communicated and will continue to communicate in the coming weeks with patients, healthcare providers and other agencies to outline how this decision impacts them and next steps” and timing will depend on the country. We still would’ve loved to see Animas devote resources toward ensuring that patients can transition to the insulin delivery system that they feel best suits their clinical and lifestyle needs.
  • The balance sheet reported a diabetes asset impairment of $35 million (-$116 million non-GAAP). Management didn’t comment on the figure, so it is unclear whether the loss was accrued mostly to Animas (as a $182 million loss was in 2Q17) or to LifeScan. We are inclined to think it pertains more to Animas, as the rumors of a China-based company acquisition valued LifeScan at $3-$4 billion, roughly 2x LifeScan’s 2017 revenue of $1.6 billion (a very low revenue multiple – contact us for historical M&A multiples if you’d like more information on this). We had very much hoped that J&J would commit further to broader pump education for Animas users and invest in giving them choices in the era (now) in which everyone does not have access to the MiniMed 670G. While we understand very well the very positive data associated with Medtronic’s newest pumps and sensors, for those previously on Animas and Dexcom, this is not only a disruption to their diabetes management but a definite “hit” on patient confidence regarding something as important as an insulin pump. (dQ&A has several hundred Animas users and multiple data points on this front – contact Richard Wood for information on patient opinions.) 

2. Global LifeScan/Animas Sales of $390M Down 19% YOY Operationally; 2017 Revenue Declines 11% to $1.6B

In the first full quarter following Animas’ disappointing closure (in the US and Canada, so far), global LifeScan/Animas sales of $390 million declined 16% as reported and 19% operationally YOY. Sales were down 4% sequentially. The performance comes on an easy comparison to 4Q16, when worldwide sales of $462 million dropped 4% as reported and 3% operationally. $390 million marks the lowest global revenue recorded in our model dating back to 2005 – the second quarterly total below $400 million in that window – and worldwide Diabetes Care revenue has now declined or remained flat YOY for nearly six years (23 consecutive quarters). Sales declined 4% sequentially relative to 3Q17, when global revenue totaled $405 million. As we’ve come to expect, the slide deck notes BGM price declines in the US, as well as US/Canada pump discontinuation and “share softness” in EMEA as main contributors to the poor Diabetes Care performance. There were no references to Diabetes in the press release apart from a mention of strong worldwide Medical Device sales (+5.7% YOY operationally) partially offset by declines in Diabetes Care.

  • On an annual basis, 2017 worldwide sales totaled $1.6 billion, down 10% as reported and 11% operationally against an easy comparison to 2016 when sales declined 7% as reported and 6% operationally. This full-year performance is the lowest recorded in our model since 2005, marking six consecutive years of full-year declines.
  • The $130 million gap between international and US Diabetes Care sales is the largest ever in our model. The disparity is likely related to the US/Canada discontinuation of Animas pump sales, though US BGM headwinds could also be greater than those experienced internationally. See below for quarterly and full-year trends of global, US, and international Diabetes Care sales over the past five years.

Figure 1. Global, US, International Quarterly Sales (1Q12-4Q17)

Figure 2. Global, US, International Full Year Sales (2005-2017)

 

3. US LifeScan/Animas Sales Decline 32% YOY to $130M; Lowest US Revenue Since 2005; 2017 Sales of $612M Drop 17%

US Diabetes Care revenue totaled $130 million, down a staggering 32% YOY against an easy comparison to 4Q16, when sales declined 5%. Sales of $130 million are the lowest recorded in our model going back to 2005, marking 11 consecutive quarters of YOY declines. US sales dropped 23% sequentially relative to 3Q17, marking the largest US sequential decline ever recorded in our model. Given the Animas exit, we’re not surprised to see such dramatic declines, though J&J has never broken out Diabetes sales by business segment, so it is hard to know how much of the drop is because of the Animas exit vs. ongoing LifeScan business weakness. If we estimate that Animas brought in ~$20 million in 4Q16 revenue and just ~$3 million this quarter (speculation), then the US BGM business would have fallen ~10%.

  • 2017 US revenue was $612 million, declining 17% against an easy comparison to 2016, when full-year sales of $739 million fell 11%. This performance marks the lowest full-year US Diabetes Care sales recorded in our model and five consecutive years of revenue declines.
  • As an aside, we are fairly surprised to see Medicare CGM pricing (~$8/day) as high as it is, particularly for FreeStyle Libre, given the competitive bidding-driven decimation of the BGM field and that the “retail cost” for Libre in pharmacies is lower than what CMS is now paying. While some may see value associated with Dexcom and Abbott as surprising to see and so much higher than SMBG, given that Medicare decimated SMBG pricing, we have not been surprised due to the value of CGM. While we were very happy to see Abbott get this reimbursement as early as it did, we believe these government payments could well change over time. The government at this time is investing far more in patients with CGM vs. those on BGM – while patients must be taking mealtime insulin currently to qualify for CGM, we believe this could also change over time. At minimum, those of SFUs should also be included given the high association with hypoglcyemia.

4. OUS LifeScan/Animas Sales of $260M Drop 9% YOY in Constant Currencies; 2017 Revenue Falls 6% to $1.0B

International Diabetes Care sales totaled $260 million, declining 4% as reported and 9% operationally YOY on a relatively easy comparison to 4Q16, when sales dropped 3% as reported and 1% operationally YOY. International sales have now declined or remained flat YOY for the past 14 consecutive quarters, except for 2Q16, when sales increased 5% as reported and 7% operationally. In one bright spot for Diabetes Care, international revenue increased 10% sequentially from 3Q17, though on an easy comparison to a 9% decline the previous quarter. Presumably some international markets are still benefitting from Animas revenue, with the exception of Canada.

  • International 2017 revenue totaled $1.0 billion, declining 5% as reported and 6% operationally despite an easy comparison in 2016, when sales of $1.1 billion fell 4% as reported 2% operationally. $1.0 billion is the lowest international full-year revenue reported since 2007 and marks four consecutive years of declines.

LifeScan/Calibra Pipeline Highlights

1. Silence on Promising OneTouch Via Continues; Q&A Mention of Investigation Into “Strategic Options for Diabetes”

We’ve yet to hear an updated launch timeline for the OneTouch Via bolus-only insulin patch delivery device. The J&J booth at EASD in September 2017 displayed the device, but reps were unable to provide any launch information. This was wholly unsurprising, given the uncertainty of the Calibra business – it wouldn’t make sense to ramp up production, marketing, and distribution, just to exit the area within the next few months. As a reminder, OneTouch Via received FDA clearance in September 2017 for an updated manufacturing process, but has yet to rollout in the US. We did learn at EASD that the last patient has completed the major multi-center, crossover clinical trial (n=~280) investigating changes in A1c, time in range (71-180 mg/dl), and patient-reported quality of life in type 2 patients using the OneTouch Via for boluses vs. the Novo Nordisk FlexPen. Per EASD, a publication is anticipated this year. (Could we see results at ADA?) Will J&J actually see this through to a full commercial launch, or will it sell this promising device?

  • The launch timeline for the OneTouch Via has been delayed substantially, first from “early 2017” (ADA 2016), then from 1H17 (per a November email exchange), and lastly in May 2017, when a rep at AACE told us that OneTouch Via was expected to roll out in a focused US launch in the coming months.
  • While we still see OneTouch Via as a very promising and highly-anticipated product, the future of Calibra in J&J’s hands seems quite tenuous. During the Q&A session, management maintained that it is “actively looking for strategic options for Diabetes,” with Mr. Gorsky noting that at times certain technology may be “better situated in someone else’s hands.” Hopefully we’ll be able to receive updates at the upcoming ATTD meeting in February (see our pre-preview) – this is a very valuable technology and patients deserve it to be properly launched.

2. Continued Commitment to WellDoc BlueStar-OneTouch Verio Flex Integration; Update Coming Later in 2018

There was no mention of the WellDoc BlueStar integration partnership on today’s call, but the company assured us via email of its “continued commitment” to the project to provide innovative digital products for patients and their care teams. More news on the ongoing collaboration will reportedly follow “later in 2018.”  Representatives at EASD were unable to provide updates, and we most recently heard at ADA that it hasn’t quite rolled out to patients yet. The technical integration consisting of Bluetooth connectivity between the BlueStar app and J&J’s OneTouch Verio Flex meter officially went live mid-March in 2017, three months following FDA clearance. There’s a lot of potential here to enhance traditional BGM and scale BlueStar’s education, feedback, bolus calculator, upcoming basal insulin titration via Voluntis, and provider relations. 

Selected Questions & Answers

Mr. Michael Weinstein (JP Morgan): The other income guidance of $1.7 billion to $2 billion of gains seems to imply an asset sale beyond what you've already disclosed to the street. Recognizing that the business that you've commented on, but haven't yet executed on, is the residual Diabetes business, is there something that you haven't yet disclosed to the street that's contemplated in that guidance?

Mr. Dominic Caruso (CFO & EVP, J&J): We're always constantly looking at our business and making the determination of whether the business is sometimes better in someone else's hands, or we can get better value for our shareholders through a divestiture. So, we have considered other assets in that regard. We haven't disclosed what those assets are for obvious reasons, and we'll obviously continue to update our estimates as we move forward with those potential transactions.

Mr. Bob Hopkins (Bank of America, Merrill Lynch): We're starting 2018 and you're once again emphasizing portfolio management in Devices as a core strategy. And I'm just curious, is that emphasis on portfolio management – are you referencing there the decision you will make this year on diabetes?

Mr. Alex Gorsky (CEO, J&J): For 2018, yes, we've mentioned that we're actively looking at strategic options for Diabetes. There are also other areas where if they have not met our criteria in terms of us feeling as though we've got the right competitive position, the right technology going forward, or it's not complementary to one of our existing platforms, that it's not that it's a bad business or a bad technology, but perhaps it's better situated in someone else's hands.

Mr. Glenn Novarro (RBC Capital Markets, LLC): There's been a major debate on whether Amazon will start disturbing drugs and/or distribute devices and supplies. Is this having any impact on how you guys are starting to think about how you distribute drugs and devices?

Mr. Alex Gorsky (CEO, J&J): We're always considering what could be the impact of new entrants, new competitors, or disruptions in any of our channels. To be clear, we're already a partner with Amazon, particularly in our Consumer segment, where we sell directly through Amazon as well as through the e-commerce channels of some of our major retailers that we work with as well as our own. We're watching closely in areas such as the Medical Device space and the Pharmaceutical space and we'll respond accordingly. I think ultimately, it's going to depend on their ability to meet all the regulatory requirements to make sure that customers are getting good transparency around pricing and service levels and we'll respond accordingly.

 

-- by Payal Marathe, Maeve Serino, Brian Levine, Adam Brown, and Kelly Close