J&J Medical Device Business Review – Finesse renamed OneTouch Via, launch in next 12 months (filing in 2H16); automated insulin delivery launch by November 2017 – May 18, 2016

J&J held a very informative Medical Device Business review this morning, with diabetes discussion led by Ashley McEvoy (Company Group Chairman, Vision Care and Diabetes Care). See the diabetes slides here (25-39), the full five-hour webcast here, and the top highlights below followed by Q&A.

Pipeline Highlights

1. J&J has renamed Calibra’s Finesse the “OneTouch Via.” We really like that name. Launch is expected in the “next 12 months,” slightly back of the previous goal to launch in 2016. Unexpectedly, a regulatory filing will now come in 2H16. J&J is working on design validation and building global scale, suggesting the manufacturing may be a gating factor to launch. OneTouch Via was pegged as a ~$1 billion global opportunity, and was one of only two upcoming diabetes pipeline projects. J&J avoided the terms “patch” or “pump,” calling the Via a “discreet, wearable, on-demand, mealtime insulin delivery solution” – like FreeStyle Libre, the goal is to create a new category. We like that and also see it as a solution for snacks and unexplained high blood glucose!

2. A launch of the long-awaited automated insulin delivery device with Dexcom CGM is expected in the next 18 months. The pivotal is being planned and expected to start before the end of 2016. This is the most specific launch timing ever given, implying a US launch before November 2017 (closely following Medtronic’s MiniMed 670G). We saw the first-ever picture of the planned commercial device, which re-orients the Vibe pump body vertically. The display had a bright green screen (presumably to indicate in-range) with the current CGM value and trend arrow.

3. In the broader overview of “healthcare technology,” Group Worldwide Chairman Sandi Peterson alluded to an end-to-end diabetes ecosystem, showing the WellDoc, Tidepool, and Apple HealthKit logos – this was excellent to hear, even if there were no specifics. Notably, J&J as a company has 450 app releases a year (!), valuable experience as diabetes apps proliferate.

Financial and Business Highlights

4. Management was optimistic on the BGM business, calling it a “volume play” for J&J and citing success in 2015: (i) J&J is #1 in BGM volume globally, growing 4% last year vs. 2% for the entire category; (ii) in the US, J&J has a “17-point market share spread,” and volume grew 9% last year in the US (vs. 3% for the category); and (iii) Verio was the fastest growing BGM (volume) in 2015. A slide suggested the estimated ~$7.5 billion BGM field will see a 3% sales decline (CAGR) from 2015-2020, bringing the field to ~$6.0 billion. That was a bit sobering to see since there are well over a million net new patients in the US alone each year.

 5. Animas pumps saw high 31% sales growth in 2015 on the strength of the Vibe and from a relatively low base. J&J estimates it is #2 worldwide in insulin pumps, with an ~11% market share that grew two points in 2015. In Q&A, management did not seem terribly concerned about the recent UHC decision to only cover Medtronic pumps, sharing a commitment to fight for patients that want Animas pumps.

6. The call unveiled a new green OneTouch logo that we have not seen before, and it seems like the OneTouch brand will now house Animas and LifeScan products going forward. We like the move to green, which has more personality than the previous black logo and emphasizes the color for in-range blood glucose values.

7. Similar to past analyst days, management highlighted the ability to treat a spectrum from prediabetes (Seven-Minute workout app), to early type 2 (BGM and Invokana), to insulin users (OneTouch Via and Animas pumps), to bariatric surgery device innovation.

8. J&J’s Vision Care business is working on smart contact lenses. There was no mention of glucose monitoring, but like Novartis/Verily, J&J is pursuing an accommodating lens for presbyopia. A subsequent slide mentioned an unmet need in diabetic retinopathy, leaving room for another application. A smart, glucose-sensing contact lens could be a very logical foray for J&J, and would keep it competitive if Novartis/Verily actually come to market with a glucose-sensing lens (to date, Novartis comments have focused more on presbyopia than diabetes).

Pipeline Highlights

1. J&J has renamed Calibra’s Finesse the “OneTouch Via.” Launch is expected in the “next 12 months,” slightly back of the previous goal to launch in 2016. Unexpectedly, a regulatory filing will now come in 2H16. The latter came as a surprise to us, as the Calibra Finesse, bolus-only device received FDA clearance back in 2010 for type 1 and type 2 diabetes (subsequently updated in 2012). Management said it is working on design validation and building global scale, suggesting the manufacturing process may be the gating factor to launch. This will be a 510(k) as far as we know, and given the previous clearances, should hopefully offer a speedy review.

• OneTouch Via was pegged as a ~$1 billion global opportunity (!), and in Q&A, management shared a ton of excitement for potential in BOTH type 1 and type 2. This product has moved very slowly since J&J acquired the device from Calibra Medical in July 2012, though there is no question that the company is all-in at this point. Via was highlighted as one of only two upcoming diabetes device innovations (the other being automated insulin delivery; see below).

• Management alluded to two OneTouch Via pipeline products in Q&A: a smart version with connectivity and a larger reservoir version. These have never before been mentioned but both are very logical expansions (to which we would also add a one-unit version for type 1 and non-insulin drug delivery). Valeritas also has a connected V-Go in its pipeline, per the update from earlier this month.
  
  • As a reminder, the Finesse is a three-day, extremely slim profile (2 inches long, 1 inch wide, and 0.25 thick), bolus-only wearable insulin delivery device. It holds 200 units and will deliver a two-unit bolus per click at launch. The device is entirely mechanical (no electronics), meaning costs should be very low and manufacturability should be high. The slim profile is unparalleled among currently available insulin delivery devices.
• Management hopes the ongoing OneTouch Via outcomes study (n=312) will be done in time for filing (expected completion in December). This could help with reimbursement in a big way if outcomes are positive. According to clinicaltrials.gov, J&J is still “currently recruiting” for the 24-week clinical trial (n=312), which still has a December 2016 primary completion date. That timing suggests: (i) the trial will actually finish earlier than December (in time for a 2H16 filing); (ii) the 2H16 filing might come very late in the year; or (iii) J&J will submit this data during the review process. The study will randomize people with type 2 diabetes not achieving glycemic targets (A1c 7.5-10%) to either OneTouch Via 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.
• J&J is cautiously avoiding the terms “patch” or “pump,” calling the Via a “discreet, wearable, on-demand, mealtime insulin delivery solution” – like FreeStyle Libre, the clear goal is to create a new category. We think this is very smart, given the goals to appeal far more broadly then traditional pumps. For payers, the clear value proposition is better insulin adherence, fewer missed doses, much more discretion enabled, and a lower cost. The slide cited 2010 Diabetes Care data that 57% of type 2s skip mealtime insulin doses on a consistent basis – much of this is due to stigma.
• Management did not discuss the reason for renaming Finesse, but we have a few hypotheses: (i) “Via” more closely aligns with “Vibe,” making the insulin delivery portfolio naming more consistent; (ii) the word “Via” harkens to a new “route” of insulin delivery (e.g., “on demand”); or (iii) other factors, such as trademarking, international nuances, etc.

2. A launch of the long-awaited automated insulin delivery device with Dexcom CGM is expected in the next 18 months. The clinical trial protocol is in progress and expected to start before the end of the year. This is the most specific launch timing ever given, and we’re glad to hear the pivotal timing remained consistent with the March and May updates. The timing implies a US launch before November 2017, meaning it could closely follow Medtronic’s MiniMed 670G (FDA submission before the end of June; launch expected by April 2017). Still, there is definitely some serious ambition here: 18 months to a launch includes planning the pivotal trial (still in progress), running the trial (presumably a three-month trial + time for recruitment), submitting to FDA (we assume at least a 12 month review), and securing approval – not a given considering the pace at which this project has moved since the JDRF partnership was signed in 2010. Comments confirmed this device will minimize both hypoglycemia and hyperglycemia, countering our worry that it would only be a predictive suspend device (per data from ADA 2014). See our updated automated insulin delivery landscape here.

• Slides showed the first-ever picture of the planned commercial device, which re-orients the Vibe pump vertically. The display showed a bright green screen (presumably to indicate in-range) with the current CGM value and trend arrow. The vertical orientation follows the MiniMed 670G, though this home screen looks simpler and far more glanceable – of course, it’s hard to know until we see the device in more detail. We hope to hear more details on this long-awaited product at J&J’s ADA 2016 symposium.

3. In the broader overview of “healthcare technology,” Group Worldwide Chairman Sandi Peterson alluded to an end-to-end diabetes ecosystem, showing the WellDoc, Tidepool, and Apple HealthKit logos – this was excellent to see, though she did not comment on these further (nor did the deeper diabetes discussion). The slide showed a variety of touch-points to interact with patients, including behavior modification, on meter messaging (e.g., WellDoc/Verio partnership), and payer/pharmacist interactions. These were not further detailed.

• Ms. Peterson made it clear that J&J has a pulse on the digital side of healthcare, including artificial intelligence, cloud computing, apps, analytics, 3D printing. How J&J will leverage these capabilities in diabetes remains to be seen, though we do expect more investment in apps and software going forward.
• Notably, J&J as a company has 450 app releases a year (!), valuable experience as diabetes apps continue to improve, collect more data passively, and arm patients with better insights. We think the new Reveal app for the OneTouch Verio Flex made some key improvements (HealthKit integration, Android), and we see high upside for the WellDoc partnership to make this data more meaningful. J&J’s work with Tidepool has been very under the radar since the partnership was announced in August 2015. Looking ahead, we expect J&J’s automated insulin delivery system will add Bluetooth into the pump (to connect to Dexcom G5 or G6), potentially enabling a paired smartphone app to monitor the system’s status without having to pull out the pump.

Financial and Business Highlights

4. Management was impressively optimistic on the BGM business, calling it a “volume play” for J&J and citing success in 2015: (i) J&J is #1 in BGM volume globally, growing 4% last year vs. 2% for the entire category; (ii) in the US, J&J has a “17-point market share spread,” and volume grew 9% last year in the US (vs. 3% for the category); and (iii) Verio was the fastest growing BGM in terms of volume in 2015. Management only lightly alluded to pricing pressures, though the slide suggested the estimated ~$7.5 billion BGM field will see a 3% sales decline (CAGR) from 2015-2020 (bringing the field to ~$6.0 billion). As a reminder, J&J’s 2015 sales declined 4% operationally in 2015, which was only shown on an appendix slide. Still, remarks highlighted the capital efficiency of the business, suggesting it is still profitable at high volumes, even as the pricing pressures continue. The sources for these estimates were “2015 data, IMS Health, and proprietary third-party research.”

• J&J’s BGM strategy has focused on simplifying the portfolio: from five strip platforms down to two, from 14 meters to three (One Touch Verio, Verio Flex, and VerioIQ), and moving patients from the legacy Ultra strips to the newer Verio strips.
• Management estimates that over 80 million patients globally are using BGM. We had not ever heard this stat before, but it seems reasonable: 80+ million using BGM of the ~220 million diagnosed with diabetes globally (i.e., 36% penetration in diagnosed patients; ~220 million diagnosed = 415 million with diabetes worldwide, and only ~53% diagnosed).
• J&J called the ~$7.5 billion BGM field “foundational,” while CGM was characterized as a “high growth” platform (20% CAGR expected from 2015-2020). The slide estimated CGM as a “~$1.0 billion” field in 2015, which struck us as a bit high – our 2015 roundup estimated CGM sales at ~$744 million (up 41% YOY) based on: (i) Dexcom’s reported sales; and (ii) 20% of Medtronic Diabetes sales (confirmed with Medtronic’s PR team. Perhaps J&J was including an estimate for Abbott Navigator and FreeStyle Libre sales.

• Management alluded to the partnership with Dexcom a few times, and said two things need to happen for CGM to become standard-of-care: (i) more evidence; (ii) lower cost. To hedge worries about CGM cannibalizing J&J’s BGM business, management added that episodic blood glucose is still “extremely affordable.” BGM is here to stay for some time, though the trends are not in J&J’s favor mid- to long-term: (i) sensors will become lower cost (e.g., FreeStyle Libre, Dexcom/Verily, many startups); (ii) more high-frequency testers will move to sensors as the technology gets easier to use and cheaper; (iii) Dexcom and Abbott already have insulin dosing claims in Europe, and Dexcom could get one in the US following its July 21 FDA meeting; and (iv) automated insulin delivery will further reduce the number of fingersticks patients need to take.

5. Animas pumps saw impressive 31% sales growth in 2015 on the strength of Vibe sales. J&J estimates it is #2 worldwide in insulin pumps, with an ~11% market share that grew two points in 2015. “We’re very bullish,” said management. As a reminder, the Vibe launched in the US in January 2015 and did see good growth throughout the year; J&J’s 1Q16 update, on the other hand, cited competitive pumps that slowed sales (presumably Tandem’s t:slim G4 and Insulet OmniPod, which both had solid 1Q16 sales growth).

• J&J estimates the pump market was ~$1.05 billion in 2015, including $1 billion in durable sales and ~$50 million in patch pump sales. The slide broke out another ~$1 billion for consumable sales, which comprise “about half” of Animas’ sales and grew double digits in 2015. Expected 2015-2020 growth (CAGR) estimates were as follows: +8% for durable pumps, +50% for wearable patch pumps, and +8% for “universal” consumables (we assume infusion sets; a separate category called “proprietary” consumables did not cite sales or growth expectations). The ~$3 billion pen and syringe business was called high volume, expected to grow +3% from 2015-2020. See the slide above. Our 2015 roundup put the pump field at ~$2.2 billion (+1% growth), which included both durable and consumable sales. Our Roche and J&J estimates are guesses, and actual Animas sales were probably higher than what we estimated for 2015 (~$200 million).
• In Q&A, management did not seem terribly concerned about the recent UHC decision to only cover Medtronic pumps. When pressed, management shared a commitment to fight for patients that want Animas pumps. The initial answer to this question was factually incorrect, suggesting current Animas patients won’t be affected by the decision (they will be starting July 1, once their warranties expire and UHC only cover Medtronic pumps). Management did correctly point out that the decision only affects adults (18+ years), an advantage for Animas, who is historically strong in pediatrics (and now approved down to age two). Analyst Mike Weinstein pressed management further, who replied, “What we hope to do is work with HCPs, providers, and payers – when patients really want our product, we want them to get it. It’s certainly not a done deal that we will keep those patients, but it’s our commitment to certainly try. Brand selection and HCP endorsement is going to help us a lot.” We’re not sure how this will work in practice, but look forward to seeing if Animas can overturn the policy on a case-by-case basis.

6. The call unveiled a new green OneTouch logo that we have not seen before, and it seems like the OneTouch brand will now house Animas and LifeScan products going forward. The move makes sense, as three different brands is confusing, and J&J can presumably maximize marketing dollars and brand building with one consistent family name. OneTouch also implies ease of use, a clear goal for any diabetes device company. We like the move to green, which has more personality than the previous black logo and emphasizes the color for in-range blood glucose values. The “Animas Vibe” is now characterized with a sub-slogan – “part of the OneTouch family” – though the name has otherwise not changed. The OneTouch website has not been updated with the new logo yet.

7. Similar to past analyst days, management highlighted the ability to treat a spectrum from prediabetes (Seven-Minute workout app), to early type 2 (BGM and Invokana), to insulin users (OneTouch Via and Animas pumps), to bariatric surgery device innovation. The slide overlapped the portfolio with “integrated, connected patient engagement,” which is more of a theory than something J&J has right now – these products are pretty siloed, particularly because the Seven-Minute Workout app is a free consumer app for exercise (not a formal prediabetes program), BGM and insulin delivery sit under consumer medical devices, Invokana is under Janssen, and bariatric surgery falls under Ethicon. The arrow also implied patients advance along the continuum, which is not true for most type 1s or type 2s (most end at insulin, not bariatric surgery). Still, J&J could certainly do more to integrate these products, and perhaps payers would purchase a bundled suite of services from J&J. The breadth and diversity of the portfolio is certainly impressive and unique from any other company in diabetes.

8. Outside of diabetes, J&J’s Vision Care business is also working on smart contact lenses. There was no mention of glucose monitoring, but like Novartis/Verily, J&J is working on an accommodating lens for presbyopia. A subsequent Vision Care slide mentioned an unmet need in diabetic retinopathy, leaving room for another diabetes application. A smart, glucose-sensing contact lens could be a very logical foray for J&J, combining its BGM expertise with its status as the world leader in contact lenses. Could it move in this direction or partner? What is the IP landscape on this front?

Questions and Answers

Q: How do you get payers to pay for Via? What data will you need? And what is your reaction to UNH selecting Medtronic as its preferred provider for insulin pumps?

A: One Touch Via is such a unique product and a really unique opportunity. There are current codes that are sufficient for reimbursement. We think Via offers an opportunity, to insurers to improve compliance to mealtime and snacking dosing. Today, we are in clinical trials to prove just that, and we’re also working with payers to figure out how to use Via as a vehicle to improve compliance and improve patient outcomes. We’re working through that to hopefully differentiate, and we’ll update you.

On UNH, there are a couple things to think about. First, and most comforting, is that our current patient base is not affected. We intend to keep them very happy. They love our brand. [Editor’s Note: This is not correct, as we understand it. Current Animas patients will be affected starting in July once their pump warranty expires; UNH will only cover Medtronic pumps, meaning if a patient wants Animas, they will presumably need to appeal the policy. See our coverage here.]

The other aspect is that this affects patients over the age 18, so it doesn’t address pediatrics. We have the most competitive indication for pediatrics, going down to age two years. We have a great opportunity to compete. If we pause and think about pumps in general, they are really personal, and people wear a pump 24/7. Pumps are also a system of products, with unique features and benefits, and people should be able to choose the pump and system that meets their needs. Our brands in OneTouch have a lot of unique advantages. Our intent is to ensure that for any HCP or patient that wants our pump, we will work tirelessly to ensure they have access.

Q: On Via, you plan to file in 2H16. Will you have data showing clinical events, reductions in adverse events, and reduced costs? And to clarify, on UNH, as I understand it, as patients come up for renewal on their four-year warranties, they will have to switch to Medtronic or pay out of pocket.

A: We are in a clinical trial with Via to show improved adherence. We want to help people not skip their mealtime doses. We do hope it will show that improved compliance enhances patient outcomes. We hope to have that by the time we file. We’re in middle, but I hope to have that.

With UNH, pumps are approved for four years. As those pumps go through the new cycle, they will be considering the new guidelines as an option. Patient choice and HCP prescribing has a lot to do in terms of choice. What we hope to do is work with HCPs, providers, and payers – when patients really want our product, we want them to get it. It’s certainly not a done deal that we will keep those patients, but it’s our commitment to certainly try. Brand selection and HCP endorsement is going to help us a lot.

Q: In 2015, you had dramatic success in durable pumps and took share. The 1Q16 commentary was the opposite – you cited competitive pressures. What changed from 2015 strengths to 1Q softness? What gives you confidence that in the next five years, you will double the business?

A: 1Q was a tough quarter. There was some competitive launch activity that has given some momentum to the competition. We needed to think about how to focus on execution. We have developed strong strategies to win in the market, near-term and dial up the competitiveness. We will be targeting the right physicians, and dial up the features of our pump, more importantly. We’ve got very unique attributes in the Vibe, and we will highlight those. Those advantages include the precision and accuracy of the pump, benefits that people love so much. It’s also waterproof and we have the partnership with Dexcom. So it’s about those attributes of the pump in the short-term. We are dialing up innovation for a faster growing category. For longer term, new innovation will keep us competitive. The next-gen pump is going to meet the unmet needs that are not available in the marketplace today. That should really help us be very competitive long-term, and really grow that volume.

Q: You said OneTouch Via is a $1 billion category opportunity. How does that breakdown to products on the market vs. pure expansion?

A: This is a new market creation opportunity that this mealtime insulin, on-the-go, anytime, anywhere delivery device should create. There are 57%-60% skipping mealtime or snack time insulin dosing – this is an enormous market opportunity. That figure is limited to expansion with OneTouch Via: the opportunity we can create globally with the launch of that product.

We think of durable pumps for people with type 1 diabetes. There is low penetration, with ~30% of people with type 1 diabetes using durable pump. OneTouch Via will be for type 1 or type 2 insulin using patients. That’s the MDI market and people on pens, from what we’ve found in our patient experience data. Dr. Brian Levy, one of our endocrinologists, is the doing clinical data and experience studies, and patients really prefer this wearable, discreet, on-demand mealtime delivery device as a superior experience for them.

Q: For OneTouch Via, which patient populations are you targeting? What is your go-to-market strategy?

A: It’s too early for a go-to-market strategy. We’ll bring more on that when we’re closer. For the patient population, it is largely type 2, but people with type 1 diabetes will want this product too – even those on pumps. It is such a unique market creation opportunity: a discreet, bolus only, device for better managing diabetes. So it is largely type 2, but we’re going to see type 1s and type 2s are both interested.

OneTouch Via is disposable, three-day wearable. The first-gen is two unit delivery, and we’re looking at a smarter devices and those with a larger reservoir. This is just the first-gen we plan to launch.

Q: The US strip and meter industry really took a hit in the first quarter. What triggered the decline, and what changes that trend. Of the businesses highlighted this morning, diabetes is clearly the most challenging for you guys. When do you expect this business to grow, and is it primarily dependent on Via and the new predictive pump?

A: Yes, the US business has seen pricing declines. What we’ve been focusing our energy on, and we enjoy the leadership position, is making sure we have a very efficient, scalable model. It’s a capital efficient business for us, with lots of volume and lots of patients, and it’s still the standard of care. So it’s making sure that we’re using the #1 doctor recommended brand to get into patients’ arms. We’ve done a lot of reengineering to meet those volume needs and to really diversify and expand into some of the faster growing areas to expand. Insulin delivery is one, and then we have the new creation of a market segment with OneTouch Via. Consumables play a nice role, because they are half of our pump business.

In terms of volume growth, we are very healthy in the US, growing twice the category. And innovation like Verio, Verio Flex, have been wonderful additions to engage patients and HCPs. We’re seeing very, very healthy volume growth and expect that to continue.

-- by Adam Brown and Kelly Close