Memorandum

J&J 2Q16 – 20% YOY growth for Invokana and Invokamet with sales reaching $383 million; Invokana remains frontrunner in SGLT-2 inhibitor prescriptions; Record-low US LifeScan/Animas sales; No commentary on AP or OneTouch Via – July 19, 2016

Executive Highlights

  • Invokana (canagliflozin) and Invokamet (canagliflozin/metformin) posted $383 million in sales in 2Q16, rising 20% year -over -year (YOY) as reported (21% operationally) from 2Q15 and a very strong 18% sequentially from 1Q16.
  • Management highlighted an expanded indication for Invokamet, promising phase 2 weight loss data for Invokana in combination with phentermine, and other opportunities for continued growth despite formulary competition from Lilly/ BI’s Jardiance (empagliflozin).
  • Global LifeScan/Animas sales reached $471 million, (down 5% year-over-year as reported and 4% operationally). Although US sales fell 17% to just $177 million, on the heels of recent Medicare pricing decisions taking US pricing further downward, the quarter showed positive growth overall, driven by the strong performance of the international business.

J&J provided its 2Q16 update this morning in a call led by CEO Mr. Alex Gorsky, CFO Mr. Dominic Caruso, and VP of Investor Relations Ms. Louise Mehrotra (who announced her retirement last month after more than 30 years with J&J – Kelly knew here when she covered J&J when she was on Wall Street SO long ago!). Below we include our top ten highlights from the call, followed by relevant Q&A.

Janssen Highlights

1. Sales of SGLT-2 inhibitor Invokana (canagliflozin) and Invokamet (canagliflozin/metformin) rose 20% year-over-year (YOY) as reported (21% operationally) to $383 million. Sales rose 18% sequentially as reported. Total prescription (TRx) share for Invokana/Invokamet in the US type 2 diabetes market was 6.3% in 2Q16, up slightly from 6.1% in 1Q16.

2. When pressed during Q&A, management touched on the potential impact for Invokana and Invokamet of a label update for Lilly/ BI’s Jardiance (empagliflozin) based on the EMPA-REG OUTCOME results, emphasizing that Invokana remains the number one prescribed SGLT-2 inhibitor in the US. We think J&J has been particularly savvy on the formulary front in the US.

3. Management highlighted the FDA’s recent approval of an expanded indication for Invokamet to allow its use as a first-line treatment – this was a big deal! - as well as phase 2 data on the use of canagliflozin/phentermine for obesity presented at ADA 2016.

4. Management did not comment on the ongoing safety review of Invokana, which was initiated in response to an observed increase in lower limb amputations in the ongoing CANVAS cardiovascular outcomes trial.

LifeScan/Animas Highlights

5. Global LifeScan/Animas revenue totaled $471 million in 2Q16, down 5% year-over-year (YOY) as reported and 4% operationally YOY on an easy comparison to 2Q15 (when sales fell 12% as reported and 2% operationally). This marks 16 of the past 17 quarters with global sales declines while sequential sales grew 10% against a very low base ($429 million in 1Q16 marked the lowest sales in a decade).

6. US Diabetes Care sales totaled $177 million in 2Q16, dropping 17% YOY against an easy comparison (sales fell 4% YOY in 2Q15). This was the lowest US revenue ever recorded in our J&J model and the third-ever quarterly revenue to dip below $200 million (only sales of $198 million in 1Q14 and $180 million last quarter came in under this milestone). The field continues to be battered, and recent Medicare pricing reductions have only served to squeeze this market further.

7. International Diabetes Care revenue totaled $294 million in 2Q16, up 5% as reported and 7% operationally YOY against an easy comparison (down 17% as reported and down 1% operationally in 2Q15). Management cited continued uptake of the Animas Vibe and SMBG strength in emerging markets (albeit from a low base) as drivers of the strong performance. Sequential sales grew 18% on a very low base.

8. Animas’ automated insulin delivery plans were not mentioned, despite the fact that the company shared new details on its planned pivotal study at last week’s Keystone conference. The single-arm trial will begin in 4Q16 and will test the hypoglycemia-hyperglycemia minimizer with Dexcom’s G5 CGM in 200 adults, adolescents, and pediatrics. Per an ADA update, Animas hopes to launch the product between November 2017-May 2018 – this would be a very positive window if it can be achieved.

9. J&J did not comment on its OneTouch Via (formerly Calibra Finesse) bolus-only insulin delivery patch device. Guidance from ADA 2016 called for the device to be commercially available in select markets outside the US by late 4Q16 and in the US soon thereafter in early 2017. We’re very enthusiastic about the potential for this device given its potential to address many concerns patients have such as discretion. In our view, the US in particular could do so much better on helping patients go on to insulin (type 2 patients and gestational patients) or intensify basal and mealtime insulin.

10. Neither prepared remarks nor Q&A mentioned the Bluetooth-enabled OneTouch Verio Flex BGM that launched in the US in 1Q16. The WellDoc BlueStar integration partnership, signed in March 2016, also was not mentioned – we see that as a key pipeline project to enhance patient feedback and make glucose data more actionable.

Janssen Highlights

1. Sales of SGLT-2 inhibitor Invokana (canagliflozin) and Invokamet (canagliflozin/metformin) rose 20% year-over-year (YOY) as reported (21% operationally) to $383 million. Sequentially, sales rose 18% against as easy comparison, as Invokana experienced its first-ever sequential decline in 1Q16. Management attributed that decline partly to increased competition for formulary positioning during its 1Q16 update, and we’re curious what factors contributed to the strong rebound in Invokana sales in 2Q16 – increased volume was likely a factor based on the TRx numbers (see below). As in past quarters, a large majority of the revenue (91%) came from the US, where sales grew 15% YOY operationally and as reported to $348 million (rising 17% sequentially from 1Q16). Ex-US sales grew 21% YOY as reported and 25% sequentially to $35 million. Management emphasized that Invokana continues to lead its class in terms of new and total prescriptions.

  • Total prescription (TRx) share for Invokana/Invokamet in the US type 2 diabetes market was 6.3% in 2Q16, up slightly from 6.1% in 1Q16. Management cited this increase in TRx as a key driver of YOY growth. However, this slight increase also follows a sequential decline in TRx last quarter, from 6.5% in 4Q15 to 6.1% in 1Q16. TRx share was ~11.5% among endocrinologists and ~5.5% in primary care, comparable to 1Q16. Management expressed confidence in Invokana’s demonstrated clinical profile and strong access across managed care – nearly 70% preferred for commercial plans and 90% for Medicare Part D. Despite the slowdown in sales from last quarter, management stated that it sees many opportunities to continue growing Invokana sales.

FIGURE 1: INVOKANA SALES (1Q14-2Q16)

2. When pressed during Q&A, management touched on the potential impact for Invokana and Invokamet of a label update for Lilly/BI’s Jardiance (empagliflozin) based on the EMPA-REG OUTCOME results, emphasizing that Invokana remains the number one prescribed SGLT-2 inhibitor in the US. Although the company noted in its 1Q16 update that one possible cause of the sequential decline in sales from 4Q15 was greater competition for formulary positioning, management remarked during the 2Q16 call that the company has not seen excessive formulary competition thus far. This may change depending on the FDA’s decision regarding a proposed label change for Jardiance to reflect reduced risk of cardiovascular death. An FDA Advisory Committee voted 12-11 in favor of an update at last month’s meeting, although some committee members expressed reservations about using results for a secondary endpoint of a safety study to support a label claim of cardiovascular benefit. Jardiance has experienced steady increases in new-to-brand market share (NBRx) since the announcement of the EMPA-REG OUTCOME results – NBRx for Jardiance was 28% as of Lilly’s 1Q16 update, nearly double its NBRx of 15% in 1Q15. Lilly management has frequently referred to a label update for Jardiance reflecting these results as another expected inflection point for Jardiance sales. In its 1Q16 update, Lilly management expressed strong confidence that the EMPA-REG OUTCOME results would result in an indication update for the product, though the FDA Advisory Committee vote ended up being one of the closest in recent memory. An expanded indication for Jardiance would likely provide a competitive edge for the product, particularly in payer negotiations, since results from the CANVAS CVOT for Invokana are not expected until 2017. On the other hand, we’ve seen an increase in sales for the SGLT-2 inhibitor class as a whole, including Invokana and Invokamet, since the release of the EMPA-REG OUTCOME results and it is possible that a label update for Jardiance could have a similar impact. In fact, J&J management emphasized in Q&A that Invokana remains the leader in terms of both TRx and NBRx in the SGLT-2 inhibitor class and that there have been 9-10 million prescriptions for the product since its launch in early 2014. We’re looking forward to 2Q16 updates from Lilly on July 26 and AstraZeneca on July 28, which will hopefully shed more light on the SGLT-2 inhibitor competitive landscape.

3. Management highlighted the FDA’s recent approval of an expanded indication for Invokamet to allow its use as a first-line treatment, as well as phase 2 data on the use of canagliflozin/phentermine for obesity presented at ADA 2016. The expanded indication for Invokamet means the drug can now be prescribed as a first-line therapy for treatment-naïve patients with type 2 diabetes. While management did not elaborate on how this FDA decision has impacted revenue, we expect that the additional indication may have played a role in the rebound in sales and TRx for both Invokamet and Invokana from 1Q16 to 2Q16. The indication will likely encourage greater use of SGLT-2 inhibitor/metformin combination therapy earlier on in the progression of diabetes, if not immediately following diagnosis. The phase 2 data on Invokana/phentermine for chronic weight management was presented in a late-breaking poster at ADA. We expect that obesity may be one of the areas in which management sees continued opportunities for Invokana to grow, though the market for new obesity drugs has been quite challenging in the past few years. Management also briefly mentioned the phase 2 data presented at ADA 2016 demonstrating markedly reduced glycemic variability with Invokana in type 1 diabetes. J&J’s supplementary materials also shared that the phase 3 trial for Invokana in diabetic nephropathy is ongoing and that the company is still waiting on FDA approval of extended release Invokamet, submitted in 3Q15. Assuming a standard 12-month review cycle, we expect a decision before the end of 2016. While not mentioned during the call, Janssen has a number of additional ongoing efforts in diabetes and obesity:

  • Type 1 diabetes: Janssen has been active in the beta cell replacement therapy field, through subsidiary BetaLogics and an option to license/acquire ViaCyte’s VC-01 cell replacement therapy.
  • Type 2 diabetes: Janssen presented preclinical data at ADA 2016 suggesting a range of metabolic benefits for its phase 1 long-acting once-weekly GLP-1/glucagon dual agonist HM12525A, licensed from Hanmi last November. The company also introduced a new preclinical GLP-1/glucagon dual agonist, JNJ-54728518, in another poster at ADA 2016. Janssen also has an ongoing collaboration with Intrexon to develop oral biologics for type 2 diabetes, obesity, and other metabolic disorders.
  • Obesity and prediabetes: A trial investigating Invokana’s effects on body weight and metabolism in patients with type 2 diabetes and a BMI ≥25 kg/m2 is expected to complete in 2017. We were also intrigued to hear Janssen mention the possibility of a prediabetes indication for Invokana in its Pharmaceutical Business Review last year but have not heard any updates since then.

4. Management did not comment on the ongoing safety review of Invokana, which was initiated in response to an observed increase in lower limb amputations in interim data of the CANVAS cardiovascular outcomes trial. The only mention of CANVAS during the call was a comment that results are expected in approximately one year. The initial EMA notice stated that the incidence of lower limb amputations (mostly affecting the toes) in CANVAS is currently 7/1,000 patient-years with the 100 mg dose of Invokana and 5/1,000 patient-years with the 300 mg dose vs. 3/1,000 patient-years with placebo after an average of 4.5 years of follow-up. No significant difference in amputations has been found in the CANVAS-R renal outcomes trial (incidence of 7/1,000 patient-years with Invokana vs. 5/1,000 patient-years with placebo). As we noted in our 1Q16 report, patients requiring amputations were mostly high-morbidity cases, and there is no mechanistic evidence to date that suggests that SGLT-2 inhibitors would increase amputation risk. We’ll be watching closely for new information from the safety review. Increased amputation risk is definitely cause for concern, but we think the level of possible increased risk shown so far for Invokana, along with the DKA risk for SGLT-2 inhibitors in type 2 diabetes, will both be manageable with diligent patient education.

LifeScan/Animas Highlights

5. Global LifeScan/Animas revenue totaled $471 million in 2Q16, down 5% as reported and 4% operationally year-over-year (YOY) on a relatively easy comparison to 2Q15 (when sales fell 12% as reported and 2% operationally). It goes without saying that this has been a very tough business for J&J, and this is the sixth consecutive quarter in which global sales have come in under $500 million – a pattern we have never before seen in our model. Further, 2Q16 now marks 16 of the past 17 quarters with global sales declines (3Q14 was the lone exception and that was an easy comparison). Part of this has been currency-driven though the relatively small impact this quarter (negative 1%) suggests the underlying business is still having a tough time. Sequential sales grew 10% against a very low base ($429 million in 1Q16 marked the lowest sales in a decade).

Figure 2: Global, Us, International Quarterly Sales (1Q12 – 2Q16)

6. US Diabetes Care sales totaled just $177 million in 2Q16, dropping a striking 17% YOY against an easy comparison (sales fell 4% YOY in 2Q15). The quarterly performance marks the lowest US revenue ever recorded in our J&J model – narrowly topped by revenue from 1Q16 ($180 million) – and the third-ever quarterly revenue to dip below $200 million. For context, we would point out that US LifeScan/Animas sales peaked at $362 million in 4Q07, more than double this quarter’s sales – that’s a striking testament to how devastating the impacts of competitive bidding have been! Sequentially, sales fell 2% against a low base ($180 million in 1Q16).

  • The accompanying slide deck attributed the steep US decline to negative impacts from the second round of CMS’s competitive bidding program, which has established lower new payment amounts for mail order and retail blood glucose strips– $8.32 per 50-count box ($0.17 per strip), down 20% from the current allowable payment of $10.41 ($0.21 per strip), and a striking 76% reduction from the pre-competitive bidding price (~$35). The pricing pressure has hurt LifeScan in a major way and projects to diminish sales for the next year at least (when new prices will “anniversary”). That too, we’d note that the impact on patients cannot be understated either. We recently heard from the ADA’s Dr. Des Schatz at Keystone 2016 who lamented that the program’s lack of an effective education arm is leaving healthcare providers and patients clueless about how to obtain strips and leading some to quit testing their blood sugar altogether. We hope to see some improvement in the system given that between Dr. Schatz’s testimony and documented disrupted access (and resulting increased mortality!), the program does seem to be hurting patients more than it helps at this point.
  • The Vibe did secure FDA pediatric approval in 4Q15 (down to age two) though it doesn’t appear this is driving growth in a significant way. Perhaps pediatric patients and their families are electing to go with the MiniMed 530G/Connect (remote monitoring) or Insulet OmniPod (tubeless) or the Dexcom G5 standalone CGM. As a reminder, the Vibe cannot be used for remote monitoring, as the pump does not contain any Bluetooth or smartphone connectivity. While it’s possible to use a G4 Share receiver with the Vibe, it requires separate calibration and really negates the value of integration.
  • We are eager for the remaining Big Four blood glucose monitoring companies (Abbott [July 20], Roche [July 21], 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 US challenges. For the latest on competitive bidding, see our detailed report here.

7. International Diabetes Care revenue totaled $294 million in 2Q16, up 5% as reported and 7% operationally YOY. We would point out the easy comparison (sales fell 17% as reported and down 1% operationally in 2Q15) though the positive performance does hint at some stabilization in a challenging marketplace and breaks a streak of seven consecutive quarters with negative reported international growth. Management cited continued uptake of the Animas Vibe and SMBG strength in emerging markets as drivers of the strong performance – this is the first time we can recall the latter being highlighted by J&J and hints, perhaps, that the company is looking to compensate for US SMBG declines by expanding its geographic base. This is our speculation at this point, and we’d love more color on how management is thinking about the future.

  • Sequentially, OUS sales grew 18% against a very low base (international sales of $249 million in 1Q16 were the lowest in nearly a decade). We will be watching closely to see what sales do in 3Q16 given that the international segment tends to decline between Q2 to Q3 (per the past five years).

8. Animas’ automated insulin delivery plans were not mentioned, despite the fact that the company shared new details on its planned pivotal study at last week’s Keystone conference. The single-arm trial will begin in 4Q16 and will test the hypoglycemia-hyperglycemia minimizer with Dexcom’s G5 CGM in 200 adults, adolescents, and pediatrics. The trial will include a several-day in-clinic assessment, followed by a three-month home portion, and will take place at 25-30 centers in the US. We were particularly intrigued to hear that the trial will include children as young as two years old given the Medtronic’s MiniMed 670G pivotal only went down to 14 years (though it has started follow-up studies in younger ages). This may position Animas to have the early market advantage in this age group, and though Medtronic has started pediatric studies, it’s unclear if these will be included in the initial FDA label for the 670G. We got a first glimpse of the device at the Medical Device Business review in May, which aggressively slated launch by November 2017. Per the update we received at ADA, Animas now hopes to deliver the product to market between November 2017-May 2018. For more details on Animas’ AID plans, please see our detailed coverage from Keystone.

9. J&J also did not comment on its OneTouch Via (formerly Calibra Finesse) bolus-only insulin delivery patch device. Guidance from ADA 2016 called for the “discreet, wearable, on-demand, mealtime insulin delivery device” to be commercially available in select markets outside the US by late 4Q16 and we hope this has not change. As we understand it, a launch in the US will follow soon thereafter in early 2017. For clarity, we’d note that this timeline is an update from the Medical Device Business review that originally called for a launch within the next 12 months (by May 2017). According to clinicaltrials.gov, J&J is still recruiting for the 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 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. The trial will begin in August and primary completion is slated for December 2016.

  • Per the Medical Device Business Review, there are two OneTouch Via products in the pipeline: a smart version with connectivity and a version with a larger reservoir. These both seem like logical expansions to improve the convenience factor of the device.
  • As a reminder, the OneTouch Via is a three-day, very slim profile (2 inches long, 1 inch wide, and 0.25 thick), bolus-only delivery device. J&J acquired the device from Calibra Medical in July 2012 and it secured FDA clearance way back in 2010 for type 1 and type 2 diabetes. The clearance was updated in 2012. We’re not sure if J&J has made any modifications that require an additional submission – the FDA database does not list any new clearances.

10. Neither prepared remarks nor Q&A mentioned the Bluetooth-enabled OneTouch Verio Flex BGM that launched in the US in 1Q16. The WellDoc BlueStar integration partnership, signed in March 2016 (including a J&J investment), also was not mentioned. The Verio BGM pairs with the updated OneTouch Reveal app and is currently priced at $19.99. Aside from Bluetooth connectivity, the Flex’s key feature is an arrow that points to a color and adds context to glucose readouts – blue for hypoglycemia, green for in-range, red for hyperglycemia. The Flex replaces LifeScan’s former Bluetooth-connected OneTouch Verio Sync BGM, which has now been discontinued. For more on the OneTouch Verio Flex BGM, please see our detailed coverage.

  • We also didn’t hear an update on the very key partnership with WellDoc to build BlueStar into the Verio BGM and Reveal app. This deal was signed in March 2016 (including a J&J investment) and we see this as a critical pipeline project to enhance patient feedback and make glucose data far more actionable. There was no timing to report in march, but we assumed a launch in various phases could evolve over the next year. Discussions are ongoing regarding the regulatory path; presumably a side-by-side app integration won’t be too difficult, while a single integrated app or BGM will have FDA oversight. More details here.

LifeScan/Animas Pipeline Summary

Pipeline Product

Timeline

OneTouch Via insulin delivery device (acquired from Calibra Medical)

Last update in Medical Device Business Review suggested a launch by May 2017; Regulatory filing expected in 2H16; A1c and treatment satisfaction trial to begin next month

 Automated Insulin Delivery (Hypoglycemia-Hyperglycemia Minimizer)

Pivotal study to begin in 4Q16 (see Keystone highlight); Launch expected between November 2017-May 2018

WellDoc Partnership to integrate BlueStar into Verio BGM and Reveal App

Signed in March 2016. We assume launch could happen in various phases over the next year.

OneTouch Ping Verio Insulin Pump with Remote Meter

No recent updates

Next Generation OneTouch UltraVue Verio

No recent updates

Next Generation Glucose Testing Platform

No recent updates

 

Questions and Answers

Q: What are your expectations for the SGLT-2 class? I’m sure you paid attention to the FDA Advisory Committee on Jardiance – what will a label update for Jardiance mean for Invokana going forward?

A: First of all, we’re pleased with the continued performance of Invokana. It remains the number one SGLT-2 inhibitor in the US, both in terms of new and total scripts. I think we’ve got between nine and 10 million prescriptions that have already gone out since launch. That being said, we still think there are good opportunities for growth in Invokana. It has demonstrated a very strong clinical profile and strong access across managed care. We’re confident that the experience healthcare providers have had with it, combined with its profile, is going to help Invokana continue to grow. Regarding broader issues surrounding the class – look, we think it’s really good, frankly, for type 2 patients, that news is coming out about CV benefits. Regardless of the eventual decision by the FDA on potential claims for other agents, we’re looking forward to seeing the results of our CANVAS program, coming out in about a year. We’ll have to see if ongoing CV outcomes trials validate some of the perceptions of key opinion leaders regarding the CV effects of SGLT-2 inhibitors across the drug class. But overall, we think it’s good news for patients.

Q: US medical device growth decelerated from first quarter levels. International growth accelerated. There was quite a big difference in growth in these two geographies. It sounds like this is more a function of selling days, with no real change in the operating environment. Is that a fair characterization?

A: When we're talking about the Medical Device business, obviously there are some dynamics in diabetes and some dynamics that we've talked about earlier with Vision Care with customer loyalty programs. So if you look at the hospital-based medical device business and you exclude the impact of acquisitions and divestitures, that growth did accelerate. So second quarter growth at about 4.7% and first quarter growth at about 4.2%. So on the base Hospital Medical Device business, overall we're seeing accelerated growth. (Editor’s note – we continue to be confused by the reporting structure of diabetes devices – it is not clear whether the financials mirror the reporting structure, which is part of Consumer, not Medical Devices.)

 

-- by Brian Levine, Payal Marathe, Helen Gao, Varun Iyengar, Emily Regier, Adam Brown, and Kelly Close