Memorandum

J&J Pharmaceutical Business Review – Lukewarm confidence in Invokana in the wake of amputation warning, uncertainty surrounding CANVAS results; New pipeline products for diabetes/obesity/NASH; Sharp focus on disease prevention – May 17, 2017

Executive Highlights

  • J&J’s Pharmaceutical Business Review took place this morning in New Brunswick, NJ, and featured lots of talk on the SGLT-2 inhibitor Invokana (canagliflozin) franchise. Management addressed yesterday’s FDA decision to add safety warnings for increased risk of leg and foot amputations to the labels of all canagliflozin medicines. To balance this negative news, management pointed to upcoming CANVAS results at ADA 2017 as a highlight for the franchise, although no topline data suggesting Invokana’s CV benefits has been released. In light of the new boxed safety warnings, positive CANVAS results are now more important than ever for J&J’s SGLT-2 inhibitor business.
  • On the pipeline front, we heard about two exciting new candidates – a CB1 receptor agonist for NASH and a once-weekly PYY agonist for type 2 diabetes and obesity. Management also expressed high confidence in its phase 1 Hanmi-partnered GLP-1/glucagon dual agonist for type 2 diabetes, obesity, and NASH.

J&J hosted its biannual Pharmaceutical Business Review today, in a meeting led by CEO Mr. Alex Gorsky. We heard updates on the SGLT-2 inhibitor Invokana franchise as well as the company’s diabetes/obesity pipeline – plus, confirmation that J&J is still evaluating options and considering divestment of its consumer device diabetes business. See below for our top six highlights from the day, followed by pipeline tables and relevant Q&A.

Top Six Highlights

1. Yesterday’s FDA decision to add safety warnings for increased risk of leg and foot amputations to the labels of Invokana (canagliflozin), Invokamet (canagliflozin/metformin), and Invokamet XR (canagliflozin/metformin extended-release) cast a negative tone over discussions of Janssen’s SGLT-2 inhibitor franchise. That said, management maintained that the risk/benefit ratio for Invokana is still favorable. Dr. James List, Head of Cardiovascular/Metabolism for J&J, emphasized that Invokana continues to lead the SGLT-2 inhibitor class by value, that it has an advantage in its first-to-market status in the US, and that the product is now available in >75 countries. He pointed to upcoming CANVAS results – to be presented at ADA 2017 – as a bright spot for the franchise and also announced that the CREDENCE trial of canagliflozin for diabetic nephropathy is now fully-enrolled.

2. Management confirmed that the company is still evaluating options and considering divestment of its consumer device diabetes business, first announced during J&J’s 4Q16 update. During Q&A, management underscored that Invokana only comprises 4% of Janssen’s overall pharmaceutical business, which makes it a “very small piece” from a profitability perspective. In discussing the pipeline, management did acknowledge that diabetes and obesity are massive public health problems with great need for advanced treatments, and yet J&J’s commitment to its existing diabetes products came across as rather lukewarm. This matches a theme we picked up on during the company’s 1Q17 earnings call, when there was a noticeable lack of reassurance regarding J&J’s commitment to diabetes.

3. Management expressed a good deal of confidence in its Hanmi-partnered, phase 1 GLP-1/glucagon dual agonist for type 2 diabetes. The company also has plans to investigate the agent in obesity and NASH.

4. Janssen has added a CB1 receptor agonist for NASH to its phase 1 pipeline, a potential first-in-class molecule. With this addition, Janssen joins the recent wave of companies recognizing the still-untapped potential of this therapeutic area (where to-date, no drugs are FDA-approved).

5. The company’s presentation slides listed a new once-weekly PYY agonist for type 2 diabetes and obesity, though the pipeline product was not mentioned during prepared remarks or Q&A.

6. Management emphasized a sharp focus on preventing diseases as well as treating them, which was music to our ears. While no prevention efforts specific to diabetes/obesity were discussed today, we hope that the company’s firm stance on prevention bodes well for the Janssen Human Microbiome Institute, the Disease Interception Accelerator, and maybe even for an investigation of Invokana’s CV effects among people with prediabetes.

Top Six Highlights

1. SGLT-2 Inhibitor Invokana Faces Safety Woes; CANVAS Results Will Likely Be Telling for the Business

Yesterday’s FDA decision to add safety warnings for increased risk of leg and foot amputations to the labels of Invokana (canagliflozin), Invokamet (canagliflozin/metformin), and Invokamet XR (canagliflozin/metformin extended-release) cast a negative tone over discussions of Janssen’s SGLT-2 inhibitor franchise. That said, management maintained that the risk/benefit ratio for Invokana is still favorable. The overarching message from management was that this slight signal for lower limb amputations is not new, and thus the label change won’t necessarily have a dramatic impact on prescriptions and sales of medicines containing canagliflozin. Indeed, the FDA launched its safety investigation a full year ago, in May 2016, based on interim data from CANVAS and CANVAS-R. The decision to require official boxed warnings for leg and foot amputations is based on full results from these two outcomes trials, which will be presented in a few short weeks at ADA 2017. In our view, management’s positive outlook for Invokana sales in the face of these serious safety issues seems a bit too optimistic – while it’s true that these concerns were raised a year ago, busy HCPs rely on product labels to inform their diabetes practice, so we doubt this boxed warning will go unnoticed. Notably, neither of Invokana’s main in-class competitors – Lilly/BI’s Jardiance (empagliflozin) and AZ’s Farxiga (dapagliflozin) – are not being investigated by the FDA for heightened risk of lower limb amputations, which puts J&J’s SGLT-2 inhibitor franchise at a further disadvantage. Additionally, Invokana is the only SGLT-2 inhibitor with a warning for bone fracture risk and only Invokana and Farxiga have warnings for acute kidney injury. Jardiance, on the other hand, has largely remained warning-free with the notable exception of a warning for increased DKA risk that applies to all three agents in the class (a risk that is better understood and thus more manageable than these other safety warnings, in our view). While Invokana sales still comprise the lion’s share of SGLT-2 inhibitor revenue (due to its first-to-market status in the US), we see Jardiance acquiring more and more share moving forward given its comparatively lower number of safety signals, not to mention its new indication for the reduction of cardiovascular death. Invokana sales fell 13% YOY to $284 million in 1Q17, which marked the lowest quarterly revenue for the franchise in two years (since 1Q15). This was especially disappointing considering that the underlying class grew 18% YOY to $715 million in 1Q17 and Jardiance revenue alone nearly doubled to an estimated $224 million. Reported revenue for 2Q17 will shed some light on how the label warning is influencing Invokana volume and sales, and to this end, we look forward to J&J’s next quarterly financial update on July 18. For now, Dr. James List, Head of Cardiovascular/Metabolism for J&J, emphasized that Invokana continues to lead the SGLT-2 inhibitor class by value, that it has an advantage in its first-to-market status in the US, and that the product is now available in >75 countries. Dr. List also remarked during Q&A that Invokana is the only SGLT-2 inhibitor with comparative data vs. Merck’s DPP-4 inhibitor Januvia (sitagliptin), showing superiority. He pointed to upcoming CANVAS results as a bright spot for the franchise, and also announced that the CREDENCE trial of canagliflozin for diabetic nephropathy is now fully-enrolled.

  • Dr. List suggested that the CANVAS program will contribute important findings to the diabetes field, since these outcomes trials are “larger, longer, and broader” than EMPA-REG OUTCOME. CANVAS and CANVAS-R together enrolled 10,142 patients with type 2 diabetes vs. 7,000 in EMPA-REG OUTCOME, and together accumulated 31 million data points over six years. Also in contrast to EMPA-REG OUTCOME, CANVAS includes a subset of participants without established CV disease at baseline, which allows for a broader analysis of canagliflozin’s effects in primary as well as secondary CV prevention. We suspect all the KOLs agree about the tremendous implications of CANVAS. If results are positive (and we so hope they are), Invokana will be the second SGLT-2 inhibitor to demonstrate a CV benefit after Jardiance, which would support a cardioprotective class effect. Data showing positive effects in primary CV prevention could be truly disruptive for diabetes care, making a compelling case for earlier treatment with an SGLT-2 inhibitor. Thought leaders, including Yale University’s Dr. Silvio Inzucchi, have pointed to primary CV prevention as one of the “next steps” for SGLT-2 inhibitors in the wake of EMPA-REG OUTCOME. Our enthusiasm for CANVAS has been tempered, however, by the fact that J&J has not released any topline data from the study, which is customary for most CVOTs, regardless of whether they demonstrate CV superiority or non-inferiority. Thus, in the past, we’ve known that certain drugs have demonstrated CV superiority to placebo months in advance (including LEADER for Novo Nordisk’s GLP-1 agonist Victoza, SUSTAIN 6 for Novo Nordisk’s GLP-1 agonist semaglutide, and of course, EMPA-REG OUTCOME) and the main questions for the full results are the magnitude of risk reduction and secondary endpoint data. We also heard speculation from Dr. David Nathan at ENDO 2017 that CANVAS results may in fact show neutral CV effects (due possibly to its comparatively lower-risk participant population), and we wonder if this is the reason for management’s strange silence on the CVOT in contrast to earlier optimism. Even though the trial was mentioned several times during today’s Pharmaceutical Business Review, and even though Dr. List positioned the CANVAS program as a sign of J&J’s commitment to diabetes, management didn’t match the confidence it had during the company’s 3Q16 update, at which point the company confidently stated, “We have very strong reason to suspect that the combination of CANVAS and CANVAS-R will give data very similar to what was reported with EMPA-REG OUTCOME.” Regardless of whether the trial demonstrates superiority or non-inferiority, the size and length of the trial will offer valuable clinical evidence and information of canagliflozin and for SGLT-2 inhibitors as a whole. We hope the results will also shed more light on the nature of the numerous safety signals observed for canagliflozin and generate potential strategies to mitigate these risks. At this point, there’s little to do but wait (eagerly, impatiently) for full CANVAS results to be presented on Monday at ADA 2017.
  • In light of the new boxed safety warning for canagliflozin products, we imagine that positive data from CANVAS could be especially crucial in making sure Invokana is a long-term contender on the commercial market for SGLT-2 inhibitors, since the franchise already seems to be losing share to Lilly/BI’s Jardiance which is indicated for the reduction of CV death. Neither Jardiance nor Farxiga are under FDA scrutiny for lower limb amputations. In general, we imagine that empagliflozin may increasingly become the SGLT-2 inhibitor of choice for many patients/providers, given its CV mortality indication and its lack of safety warnings for lower limb amputations, bone fractures, or acute renal failure.
  • Dr. List announced that the CREDENCE trial is now fully-enrolled (n=4,200). He explained how Invokana appears to stabilize glomerular filtration rate in the kidneys, which could yield some renal-protective effects. We’re pleased to see this program progressing on schedule, as diabetic nephropathy remains a therapeutic area of high unmet need. As per our competitive landscape, Invokana is one of the most advanced pipeline candidates for the treatment of diabetic nephropathy, though AZ’s SGLT-2 inhibitor Farxiga (dapagliflozin) is also in phase 3 for this indication – the Dapa-CKD study was initiated in 1Q17 and is expected to complete in November 2020. CREDENCE is expected to complete in June 2019. While Jardiance demonstrated an impressive renal benefit in EMPA-REG OUTCOME, Lilly management has stated that it will likely have to conduct a dedicated renal outcomes trial before pursuing a label claim of renal protection from the FDA. We see that as unlikely in the near-term, given the immense resources that are currently being devoted to not one but two massive heart failure outcomes trials for Jardiance, as well as the resources for the marketing of the several new diabetes products that Lilly has launched in the last few years.

2. Management Shows Signs of Wavering Commitment to Existing Diabetes Products

Management confirmed that the company is still evaluating options and considering divestment of its consumer device diabetes business, first announced during J&J’s 4Q16 update. During Q&A, management underscored that Invokana only comprises 4% of Janssen’s overall pharmaceutical business, which makes it a “very small piece” from a profitability perspective. In discussing the pipeline, management did acknowledge that diabetes and obesity are massive public health problems with great need for advanced treatments, and yet J&J’s commitment to its existing diabetes products came across as rather lukewarm, which is enormously disappointing, particularly given CEO Alex Gorsky’s firm commitment that he expressed to J&J being very committed to people with diabetes globally even as he discussed “strategic options” associated with LifeScan and Animas. This matches a theme we picked up on during the company’s 1Q17 earnings call, when there was a noticeable lack of reassurance regarding J&J’s commitment to diabetes: Invokana sales did fall 13% YOY in 1Q17, and management didn’t share anything on CANVAS high level results. While they also provided no concrete updates on possible partnerships, joint ventures, alliances, or sale of LifeScan, Animas, and Calibra Medical, we’re not particularly surprised that nothing is yet finalized on the consumer device side of J&J Diabetes, given the challenging state of the business and the (probably) finite number of realistic buyers. We were disappointed to hear management’s take that Invokana may be less of a priority on the pharma side from a profitability perspective. Given the size of J&J’s overall business, which spans multiple therapeutic areas, we understand and appreciate the need to allocate resources, but we very much hope for continued investment in Invokana and J&J’s commitment to changing public health for people with diabetes globally (not just for patients that bring J&J greater than average profitability). In addition to CANVAS and CREDENCE, management previously announced plans for a prediabetes CVOT of Invokana during the company’s 3Q16 update, and we’d love to see this clinical project progress, though we have not heard any updates since. Although such a trial would be very large, lengthy, and costly, it could be enormously impactful. We hope that various investigators are also looking at the potential for a global trial where several different branded SGLT-2s would be included and perhaps some GLP-1 and some combinations. Yes, it’s expensive, but it’s nothing compared to what is being spent on heart attacks, strokes, and dialysis. On the bright side, we were glad to learn details about some recent additions to Janssen’s diabetes-related pharmaceutical pipeline, which points to the company’s sustained interest in diabetes as well as diabetes-adjacent indications such as obesity and NASH.

3. Forging Ahead with GLP-1/Glucagon Dual Agonist Candidate

Management expressed a good deal of confidence in its Hanmi-partnered, phase 1 GLP-1/glucagon dual agonist for type 2 diabetes, referring to this drug class as the next, novel approach for treating diabetes and related conditions. In line with this, the company also has plans to investigate the agent in obesity and NASH. Obesity especially is an increasingly common potential indication for these agents in the competitive landscape – OPKO Health has two GLP-1/glucagon dual agonists in trials for obesity, Novo Nordisk has a dual agonist and a GLP-1/GIP/glucagon tri-agonist in phase 1 for obesity, and Lilly has a phase 1 once-weekly dual GLP-1/glucagon in development for NASH (and type 2 diabetes). J&J management explained how glucagon analogs have been shown to decrease appetite and increase total energy expenditure, while GLP-1 agonists decrease appetite and increase pancreatic beta cell function. The optimal ratio of glucagon agonism and GLP-1 agonism would have several important effects: lowering A1c, promoting weight loss, sustaining beta cells, improving liver fat content, and more. High confidence in this target is what prompted J&J to enter into an early strategic licensing partnership with Hanmi for JNJ-5111/HM12525A, and this positive outlook clearly continues today. No specific timing was shared for clinical studies of the drug candidate in type 2 diabetes, obesity, or NASH, but we’ll certainly have our ears peeled for updates going forward. We have heard very few updates on this candidate since the partnership and we were very pleased to hear management highlight it as a key opportunity today. We, too, are quite excited about the potential for this emerging therapy class, and we look keenly forward to more data on J&J/Hanmi’s candidate. Though not mentioned during Pharmaceutical Business Review day, J&J also has another GLP-1/glucagon dual agonist candidate, JNJ-54728518, in preclinical development.

4. J&J Increases Investment in NASH with CB1 Receptor Agonist

Janssen has added a CB1 receptor agonist for NASH to its phase 1 pipeline, joining the recent wave of companies recognizing the still-untapped potential of this therapeutic area (where to-date, no drugs are FDA-approved). The candidate, JNJ-2463, will be developed in collaboration with BirdRock Bio. Management highlighted the agent as a potential first-in-class molecule, as no other CB1 receptor agonists are currently in development for the treatment of NASH. We’re thrilled to note J&J’s official entry into this therapeutic area, both with planned studies of its Hanmi-partnered GLP-1/glucagon dual agonist in NASH and with this new pipeline product. NASH remains an area of critically high unmet need, affecting upwards of one billion people worldwide and presenting often as a comorbidity of type 2 diabetes. With extensive background and tremendous expertise in the clinical and commercial development of pharmaceutical products, we’re hopeful that J&J will be able to make a splash in NASH. See our updated competitive landscape for more.

5. Once-Weekly PYY Agonist for Type 2 diabetes and Obesity Added to Pipeline

The company’s presentation slides listed a new once-weekly PYY agonist for type 2 diabetes and obesity, though the pipeline product was not mentioned during prepared remarks or Q&A. No information on phase or timing of clinical studies was shared. Still, we see this is as an exciting step forward for J&J’s diabetes/obesity pipeline, as PYY has shown to be a promising target for appetite control and weight loss. Moreover, a once-weekly formulation would offer patient convenience and ease of dosing. Novo Nordisk also has a PYY analog in its phase 1 pipeline under development for both type 2 diabetes and obesity, being investigated as a standalone therapy as well as in combination with once-weekly GLP-1 agonist semaglutide. We hope to hear more from J&J management on its PYY program during future updates. See our pipeline summary table below for a complete picture of J&J’s diabetes- and obesity-related products in development (some of which were not mentioned today).

6. Management Emphasizes Company Commitment to Prevention

Management emphasized a sharp focus on preventing diseases as well as treating them, which was technically music to our ears though we wonder how seriously to take it given that no prevention efforts specific to diabetes/obesity were discussed today. Still, the leadership on this front is incredible at J&J, particularly including Dr. James List, and we hope that the company’s firm stance on prevention bodes well for the Janssen Human Microbiome Institute, the Disease Interception Accelerator, and maybe even for an investigation of Invokana’s CV effects among people with prediabetes. Most recently, the Janssen Human Microbiome Institute teamed up with DayTwo Ltd., the Weizmann Institute of Science, and Caelus Health Focus to carry forward an initiative on advancing translational research of the gut microbiome, especially as it relates to metabolic disorders like type 2 diabetes, prediabetes, and gestational diabetes. Microbiome research remains in early stages when it comes to informing diabetes therapies and prevention tactics, but there’s certainly a lot of promise in this area of investigation and we’re happy to see Janssen take active part. Previously, the company announced type 1 diabetes as the first focus of its Disease Interception Accelerator, the goal being to find ways to intervene earlier in the course of disease to prevent diabetes complications and improve patient quality of life. We’re thrilled about this project as well, and we hope to learn more details soon on how this prevention research is progressing. Lastly, J&J management first mentioned a planned prediabetes CVOT for Invokana during the company’s 3Q16 earnings call. This would be a tremendous move for SGLT-2 inhibitors, as such a trial would evaluate their impact in a primary CV prevention population and would also investigate the potential of canagliflozin for type 2 diabetes prevention. We’ve love to see a company invest in pursuing a prediabetes indication for a drug, and the pronounced weight loss benefit of Invokana and the entire SGLT-2 inhibitor class piques our interest about use of these agents in prediabetes. There are currently no medications approved for diabetes prevention in prediabetes (since prediabetes has yet to be defined as a disease in and of itself), though some providers are putting pressure on the FDA to expand metformin’s label toward this end. We expect the recent boxed warning for lower limb amputations may be a challenge to further R&D investment in Invokana, but we’re maintaining optimism at least until CANVAS results shed more light on the drug’s CV and long-term safety effects.

Table 1: Invokana Clinical Trials

Trial/Indication

Status

Timeline

Cardiovascular (CANVAS) and renal outcomes (CANVAS-R) data

Completed

Full dataset to be presented at ADA 2017

Diabetic kidney disease (CREDENCE trial)

Ongoing; Now fully-enrolled

Expected to complete in June 2019

Investigating mechanism of weight loss (CARAT trial)

Ongoing

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

Table 2: Janssen Diabetes/Obesity Pipeline Candidates

Candidate

Indication

Phase

Timeline/Notes

JNJ-5111/ HM12525A (glucagon/GLP-1 dual agonist)

Type 2 diabetes, obesity, NASH

Phase 1

Preclinical data presented on ADA 2016 poster; Licensed from Hanmi in 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

Questions and Answers

Q: Obviously, the diabetes market has become much more challenged in the last year. SGLT-2 inhibitors have started to feel that. Invokana has its own issues, including a now-disadvantaged label. What are your thoughts on this, and has your outlook changed at all?

A: The issue that came up yesterday – we highlighted this slight safety signal already to regulators and prescribers a year ago. It was only yesterday that the label was updated, but the FDA had already issued a safety letter last year. This isn’t new, per se. We continue to believe that the risk/benefit ratio for Invokana is very good – this was a slight increase in amputations in a very large study, which we knew was out there and which prescribers knew was out there. From a business perspective, yesterday’s news is a headwind. But we remain confident. Invokana is the only SGLT-2 inhibitor that has comparative data vs. Merck’s DPP-4 inhibitor Januvia (sitagliptin), showing superiority. We’re confident in our development plan. Keep in mind – in our overall pharmaceutical business, Invokana is a very small piece of it, holding only about 4% of the overall business. It’s significantly less impactful from a profitability perspective. So while we remain confident in Invokana, there are other drugs in our portfolio that are going to deliver the decade of performance growth we envision.

Q: You mentioned price growth flattening for prescription drugs in the US – what do you anticipate going forward? How will you offset that flattening?

A: Our growth has been based on volume, not on price. This trend will continue going forward. Given the circumstances, there are more forces on pharmaceutical pricing in the US. We see more introduction of biosimilars. So yes, you may expect to see pricing in the US market to slow down.

Q: Do you have any comment on rising out-of-pocket costs for patients?

A: Out-of-pocket costs are an issue, and this is something we’ll work on with this current administration.

-- by Payal Marathe, Helen Gao, and Kelly Close