J&J 4Q16 – Considering partnerships, JVs, or divestment of LifeScan, Animas, Calibra; LifeScan-Animas sales down 4% YOY to $462M; Invokana sales flat YOY at $371M – January 24, 2017

1. J&J is Exploring Partnerships, JVs, Alliances, or Sale of LifeScan, Animas, Calibra Businesses

The slide deck noted that J&J is “seeking strategic options for Diabetes” (LifeScan, Animas, and Calibra Medical), including forming operating partnerships, joint ventures or strategic alliances, a sale of the businesses, or other alternatives. Mr. Gorsky emphasized that there is no definitive timeline for this evaluation and there is no guarantee that there will be any transaction (the presumption seemed to be that everyone would want some sort of transaction), but the fact that J&J is moving forward with this and announced it reflects the struggling BGM and insulin pump business facing tremendous competition and pricing pressures as well as the movement to CGM from BGM for the most profitable patients (high frequency testers). Without offering specific numbers, CFO Mr. Dominic Caruso acknowledged that, unsurprisingly, profitability has declined. We expected this, of course, with Medicare (and other payer) pricing pressure in the US, but J&J has never announced specifics on profitability. This discussion is not foreign to a company the size of J&J, which divested eight businesses from its portfolio in 2016 alone. Mr. Gorsky repeatedly highlighted that the company is still committed to diabetes, including the Janssen Invokana franchise and bariatric surgery, and also repeatedly thanked the devices team from diabetes, which was very apt given so much strength from a number of very talented managers and teams.

• Worldwide VP of Insulin Delivery Mr. Wilson stated in a conversation with us this afternoon that in this period of strategic exploration, nothing changes in the way J&J is manufacturing and delivering products. He specifically confirmed that the OneTouch Via still has an intended 1H17 focused US launch, which was great to hear – patients have been waiting for this product for a long time and we believe there is enormous upside here to help improve delivery of insulin, one of the world’s most dangerous drugs. 
• On one hand, each of J&J’s device businesses has several strengths and potential to turn around, given the right focus and investment. LifeScan is a long trusted BGM brand with tremendous global scale and manufacturing, in-house expertise, upside with the WellDoc integration, and continued volume growth (see below). Animas has the first Dexcom G5 integration approved, a years-in-the-making pipeline to automate insulin delivery, and well over 100,000 users (One Touch Ping has 114,000+ users alone, per 3Q16). Last and perhaps most exciting, Calibra Medical has the long-awaited OneTouch Via bolus-only insulin delivery device, which is now slated for a focused launch in the US in 1H17. These are incredibly valuable assets that could be leveraged and improved and help many people with diabetes dose insulin more safely, optimize medication, and get better feedback on their food, exercise, and diabetes care. In going through the exercise below, we believe all three segments are potential acquisition targets and it will be interesting to see if they are positioned only as a bundle or separately. 
• On the other hand, there are some important headwinds for all three businesses. BGM has a very negative growth trend that does not seem to be abating, particularly with downward pricing pressure driven by Medicare – this has been incredibly short-sited in our view. Broader use of sensors by patients who have made the highest profits for LifeScan are also a concern (see below), and although top manufacturer Dexcom is a partner, J&J doesn’t own any CGM assets. The pump landscape has never been more competitive, and Animas has moved slowly toward automation and a modern user experience. Meanwhile, One Touch Via (Calibra’s Finesse) has taken years to come to market and will soon see competition from new and existing type 2-focused insulin delivery devices (BD, CeQur, Insulet, and Valeritas). Some also argue that OneTouch Via could net increase costs for payers, since MDIs will need the device, rapid-acting insulin, AND basal insulin – naysayers may be proven wrong once outcomes are available from the ongoing study in type 2s (finishing this fall). We strongly believe that the Via has high potential to improve long-term outcomes though this data must be developed.
  
  • J&J seems to be acknowledging, with this move, that CGM is becoming standard of care. Abbott, Dexcom, and Medtronic are all contributing to this, at least in type 1s and previous high-frequency testers. Dexcom’s non-adjunctive indication (US, EU), combined with Abbott’s factory-calibrated FreeStyle Libre, definitely reduce the need for users to check blood glucose frequently with a BGM. Meanwhile, Medtronic’s more accurate upcoming Guardian Sensor 3 is much better and we expect that on average, it may also reduce SMBG use for 670G or Guardian Mobile users in the US (once launched). Plus, we expect to see CGM move into a broader population beyond pumpers in the coming years. Dexcom’s new patients are now ~60% from MDI, and today alone, two major RCTs were published in JAMA showing the benefits of CGM in MDI users: Dexcom’s DIaMonD study and the GOLD study in Sweden. This is a very big deal for the field and for Dexcom, given how payers are likely to view this (positively). Plus, with professional CGM products like Abbott’s FreeStyle Libre Pro and Medtronic’s greater focus with Qualcomm and Henry Schein, we wonder if type 2s checking 1-2 times per day might get more value from professional CGM a few times per year. Of course, Abbott and Dexcom/Verily also plan to drive real-time sensor penetration into type 2 with their easier-to-use, less expensive devices. Overall, it’s important to note that CGM is still highly underpenetrated even in high-frequency users, so BGM will be here to stay for some years; still, the headwinds will not be easy in the next 5-10 years and the patients that do stay on BGM are likely to be far less profitable patients compared to those leaving CGM that used 6-8 strips a day or more. 

What is the Impact on Current J&J LifeScan/Animas Partners?

Who Might Acquire or Partner with J&J’s LifeScan, Animas, and/or Calibra Businesses?

• What about a partnership/joint venture? This seems less likely, and more apt to be just corporate jargon, but we could imagine several approaches to a partnership or JV, assuming there is (i) mutual alignment and synergy – what is to be gained on both sides?; (ii) focus on improved access, cost, and affordability; (iii) novel diabetes care delivery models or services; and/or (iv) opening new markets, particularly in the developing world, where so much more focus on diabetes is needed. There are already many BGM and insulin delivery companies out there selling hardware, so a two-company partnership could add further decision making complexity in a healthcare environment that increasingly demands launching, learning, and iterating quickly. One option is for J&J and a partner to tap into the global population of people with diabetes who have little to no access to strips or care (let alone a CGM or pump) – what could be done with the existing J&J assets for this group of individuals?  How could J&J drive 80% of the value of expensive systems with 20% of the costs? What an idea! The diabetes community would certainly rally around this though Mr. Gorsky’s words about focusing on “shareholder value” might make this very challenging. Still, what commitment to diabetes this would show! Given that the price for the business might be very low, perhaps a public / private partnership could be put together. A dream at best, we imagine.
• These are challenging times for some pump and BGM manufacturers – will others consider partnering/divesting? Roche recently halted new pump sales in the US and BGM continues to see pressure (though Roche and Abbott have yet to report this quarter; both have of course invested in continuous sensors). Automated insulin delivery definitely offers upside for pump manufacturers, though likely adoption isn’t clear and value will absolutely need to be demonstrated. Ironically, this is more than possible with CGM and time-in-zone, though time-in-zone still needs to be proven in reducing long-term outcomes. We’d love to see all of industry along with NIH invest in such a study. 

2. Worldwide LifeScan/Animas Sales Decline 4% YOY in 4Q16, Down 7% in 2016

Global LifeScan/Animas sales saw continued challenges. Sales were $462 million in 4Q16, declining 4% as reported and 3% operationally year-over-year (YOY) on an easy comparison to 4Q15. $462 million is the third lowest quarterly revenue recorded in our LifeScan/Animas model, which goes back to 2o05 (the only lower totals were 1Q16 and 3Q16). Of more concern, 4Q16 now marks 18 of the past 19 quarters with global sales declines (3Q14 was the lone exception and that was an easy comparison). Sequential sales grew 8% against a decade-low $427 million in 3Q16.

• For 2016, worldwide sales totaled $1.8 billion, down 7% as reported and 6% operationally; this was against an easy comparison to a 10% reported decline in 2015. The figure below captures just how tough the devices 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 five years ago, 2016 sales were down ~34%. On the other hand, the business is arguably stabilizing relative to the declines seen in 2012-2014. 

Figure 1: Global, Us, International Quarterly Sales (1Q12-4Q16)

Figure 2: Global, US, International Full-Year Sales (2007-2016)

3. US LifeScan-Animas Sales Fall 5% in 4Q16, 11% in 2016

US Diabetes Care sales totaled $191 million in 4Q16, falling 5% YOY as reported against an easy comparison (sales fell 2% YOY in 4Q15). The quarterly performance ties last quarter for the third lowest US revenue ever recorded in our J&J model – only outperforming revenue from 1Q16 ($180 million) and 2Q16 ($177 million) – and the fifth-ever quarterly revenue to dip below $200 million. For context, US LifeScan/Animas sales peaked at $362 million in 4Q07, nearly double 4Q16’s sales – a testament to the impact of competitive bidding and other headwinds in BGM.

• For the full year, US sales declined 11% YOY to reach just $739 million, despite an easy comparison to 2015 when sales fell 4%. This is the first time in our model, which goes back to 2005, where J&J has seen either the US or international LifeScan/Animas business fall below $830 million – and it dipped nearly $100 million below that. No single quarter in the past year broke the $200 million mark.
• Unsurprisingly, the slide deck noted that US BGM sales were impacted by “negative price and rebates offset by higher strip consumption” – that implies volume growth remains strong, even as pricing declines. US revenue declined 5% YOY, and we have to assume profitability is falling at that rate or higher. On the insulin delivery side, sales were “lower” due to competitive pressures – no surprise there, given the fall launches of Medtronic’s MiniMed 630G and Tandem’s t:slim X2, strong momentum for Insulet, and the upcoming MiniMed 670G launch in the Spring.
• Abbott reports January 25 and Roche reports next week.  Will they experience comparable US and international challenges? Abbott, of course, has Libre as some offset. 

4. International LifeScan/Animas Sales Decline 1% Operationally in 4Q16, Down 2% in 2016

International Diabetes Care revenue totaled $271 million in 4Q16, down 3% as reported and 1% operationally YOY. The decline came against a fairly neutral comparison to 4Q15, when sales fell a significant 10% as reported, but grew 5% operationally. Still, nine out of the past ten quarters have seen negative reported growth in the International Diabetes Care business. Sequentially, sales outside of the US grew 15% against the lowest base ever recorded in our model ($236 million in 3Q16). The international Diabetes Care segment seems to follow a recurring pattern of sequential growth in Q2 and Q4, with declines in Q1 and Q3. However, this micro-trend comes against the backdrop of consistent negative YOY growth:

• International sales in 2016 fell 4% as reported and 2% operationally to reach $1.1 billion, marking the lowest annual international revenue since 2006 ($940 million). This was despite a fairly easy comparison to 2015, when sales fell 14% as reported and grew 1% operationally. 
• The accompanying slide deck notes that BGM sales outside of the US suffered from Algerian import restrictions and insulin delivery experienced softness in consumables. The consumables softness is odd – while we were expecting this result from the new Medtronic /BD set, delays with that product make it unlikely that this is the reason for the weakness. We wonder what else is driving that, unless patients are now getting sets through a different source outside the US or are switching to different pumps – distributors may be buying fewer sets from Animas. 

LifeScan/Animas Pipeline Highlights

5. No Update on OneTouch Vibe Plus/Dexcom G5 Launch; Approved in US, Canada in December

In December, FDA and Health Canada approved J&J’s OneTouch Vibe Plus insulin pump with Dexcom G5 integration. The company is “evaluating launch timing,” and given today’s commentary on the business, we’ll be interested to see if this launches this year. The CGM-integrated pump is approved down to age two, represents the first approved G5 pump integration, and will allow patients to view CGM data on either the Dexcom G5 app or pump screen. We’re not sure if J&J has its own smartphone app, or if the Dexcom app will show insulin on board from the pump. OneTouch Vibe Plus will now have Bluetooth built in (to communicate with G5), which could potentially allow for remote upgrade capabilities; we’re not positive about the latter, since Tandem’s Device Updater is a web interface and required a separate submission. We learned in a conversation with J&J that this product was submitted to FDA in June – that reflects a ~ six to seven month review, or three times faster than the Vibe with G4’s ~20 month review – and closer to the impressive three-month review for the 670G. This pump is an important update for J&J, who brings its CGM integration up to speed with Dexcom’s latest transmitter, builds Bluetooth into the pump, could possibly beat Tandem’s t:slim X2 with G5 integration to market (FDA submission was expected by the end of 2016), and completes a key stepping stone on the way to the hypoglycemia-hyperglycemia minimizer. Last we heard, the pivotal was under discussion with FDA; launch expected in late 2018-early 2019. We are disappointed to see the OneTouch Vibe Plus’ user interface has not been updated much from the previous Vibe, which does put Animas well behind Tandem’s t:slim X2 and Insulet’s upcoming OmniPod Dash on this front; for some, this is the “cool factor”.

6. OneTouch Via Focused US Launch in 1H17; New Manufacturing Process Re-Submitted in November

We learned in a December email exchange with J&J that its OneTouch Via (formerly called the Calibra Finesse) bolus-only insulin delivery patch device is expected to undergo a “focused” US launch in 1H17. This is back from guidance at ADA 2016 that called for a launch in select markets outside the US by late 4Q16, followed by a US launch in early 2017. The device was resubmitted to FDA in November for new 510(k) clearance of an updated manufacturing process. While still relatively on pace for US launch, work to automate the production process and scale manufacturing capabilities has presumably pushed international timing back. We are not sure how broad the “focused” launch will be, but we expect a limited roll out to learn from early adopters, make sure manufacturing and access is in place, etc. BD/Medtronic’s MiniMed Pro-set certainly benefitted significantly from a limited US launch, which ultimately uncovered some issues with cannula kinking and training; see our coverage here. Adam and Kelly are eager to try OneTouch Via – the slim on-body form factor seems very appealing, particularly from patients who have otherwise refused to use prandial insulin.

• According to the clinicaltrials.gov page, the OneTouch Via’s 24-week clinical trial (n=280) is ongoing and should complete by October 2017. The study randomizes type 2s not achieving glycemic target (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. This study should be a positive for reimbursement and marketing, though is not a gating factor to launch, as we understand it. We can’t wait to see the results of this trial – we imagine the insulin manufacturers would be interested also, now that the Via may be available to acquire.
• 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. We understand that a one-unit bolus version is in development – this seems very smart, as many type 1s will be very interested though many would also like a half unit bolus version.
• 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 initial FDA clearance way back in 2010 for type 1 and type 2 diabetes, though an updated manufacturing clearance is pending. 

7. No Update on Animas Automated Insulin Delivery Pivotal; Launch Last Expected in late 2018-early 2019

Animas’ automated insulin delivery plans were not mentioned – we last heard (via email on November 30) that the company is still working with the FDA to plan a pivotal trial, and a launch is expected in late 2018/early 2019. The study was previously expected to begin in 4Q16 (per July’s Keystone conference), though that did not happen. Prior to the email update, Animas had positioned itself to be second to market in the US, though now its timeline is behind Medtronic, Tandem, Bigfoot, and Beta Bionics (of course, timelines are always in flux, for both big and small players). On the bright side, the approval of the “OneTouch Vibe Plus” pump with Dexcom G5 integration is a key step on the way to an automated product. The approval encompasses children as young as two years old, which puts Animas in good position to have a market advantage in pediatrics when it’s Hypoglycemia-Hyperglycemia Minimizer does hit the market. Medtronic’s MiniMed 670G pivotal only went down to 14 years, and Medtronic is currently enrolling for a pediatric study in 7-13 year olds that will wrap up in June, which it hopes will expand the FDA label for the 670G. The 670G is contraindicated in children under the age of seven due to the system’s design and daily insulin requirements. As a reminder, Medtronic pushed back the full launch timing of the 670G to May-October of this year, meaning a late 2018 launch for Animas (on the early side) could put it only a year behind Medtronic. First to market is an advantage in some respects though in others, learning from the first mover is also an advantage!

8. No Update on WellDoc BlueStar Integration; Previously Slated for 1Q17 US Launch

Neither prepared remarks nor Q&A mentioned the WellDoc BlueStar integration partnership (including a J&J investment), which received FDA clearance in December and is slated to launch in 1Q17. The system will integrate the BlueStar mobile app (Android, iOS) with LifeScan’s OneTouch Verio Flex BGM and paired Reveal app (Android, iOS), though use of the Reveal app will be optional. It’s still not clear what the business model will look like (e.g., traditional BGM vs. WellDoc’s prescribed-as-a-drug model vs. something else?), though talks are ongoing with payers, whom we would assume would be quite interested. We’re not sure if today’s comments on the Diabetes Care business impact this near-term launch, but we assume not. We did learn that there will be a prescription-only BlueStar app, as well as a non-prescription version (without an insulin calculator; also 1Q17 launch), each of which will wirelessly receive blood glucose values from the Verio Flex meter (via Bluetooth), saving users manual BG entry, a big deal. 

LifeScan/Animas Pipeline Summary