J&J 2Q17 – Invokana sales fall 23% YOY to $295 million, driven by 26% YOY drop to $256 million in US; Minimal CANVAS commentary; still evaluating strategic options for Diabetes device business; LifeScan-Animas sales down 10% YOY to low $421M – July 18, 2017

J&J provided its 2Q17 earnings update in a call this morning led by CEO Mr. Alex Gorsky. This report shares a dozen highlights, covering the company’s drug and device products for diabetes (it was a very challenging quarter across the board). Overall, the call is one of the most negative on diabetes we can remember in over 20 years. Although J&J’s CEO Alex Gorsky said that J&J “remains very interested, and wants to make sure patients continue to have options in type 2 diabetes”, it felt like a bit of a specious statement since he said in the same breath that it “also recognize the competitive nature of the category.” Listen to the call’s replay here and view the presentation slides here).

Janssen Highlights

1. Revenue from the SGLT-2 inhibitor Invokana (canagliflozin) franchise fell 23% YOY to $295 million. By geography, US sales fell a drastic 26% YOY to $256 million, while ex-US sales grew 11% YOY to $39 million. As in 1Q17, management attributed the decline to increasing discounts for managed care patients and a higher proportion of prescriptions going to patients on Medicaid. This implies that more patients in-need are accessing Invokana, although information on the product’s volume share within the US type 2 diabetes market or SGLT-2 inhibitor market was noticeably missing. Management also mentioned favorable price adjustments that occurred before 2Q16 across the pharmaceutical portfolio, contributing to a 20% YOY increase in Invokana sales in 2Q16 (to $383 million), and giving 2Q17 a tough comparison. That said, we note that the SGLT-2 inhibitor has now posted <$300 million in global sales for two consecutive quarters, which hasn’t happened since 1Q15. Sequentially, worldwide Invokana revenue was up 4% from $284 million in 1Q17.

2. Quite conspicuously, there was no mention of CANVAS results or of the FDA’s decision to add a new boxed warning for lower limb amputations on canagliflozin medicines (Invokana, Invokamet, and Invokamet XR) during prepared remarks. CANVAS was glaringly absent from the company’s presentation slides, including a slide of important pharmaceutical developments. When pressed during Q&A, Mr. Gorsky acknowledged that the “re-labeling issue” has impacted sales but that there was also good news from CANVAS – yes, we’d certainly call a 14% risk reduction for CV events and a 33% risk reduction for heart failure hospitalization very good news. We’d hoped for more explanation on how J&J will move forward in positioning Invokana’s risk/benefit profile, given the nearly two-fold risk for lower-extremity amputations found in CANVAS alongside the cardioprotective effects. We’re also wondering how investigators plan to manage this safety concern in the ongoing CREDENCE trial. We do understand that management may be waiting for subsequent analyses of CANVAS to further elucidate the amputation signal. On the other hand, we sensed lukewarm confidence in the Invokana business during J&J’s Pharmaceutical Business Review in May, and we would’ve liked to hear more positive commentary from management today as reassurance that the SGLT-2 inhibitor is still a priority within the company’s large pharmaceutical portfolio, particularly given the potency of the class, the cardioprotection, the weight loss, and the fairly strong tolerability profile overall. While much more insight is needed to fully make sense of CANVAS results, we note for now that amputations are far less common than CV disease for people with diabetes, and that amputation data has not been collected in standard manner from CVOT to CVOT.

3. There was no mention of Janssen’s diabetes/obesity pipeline or projects. We’re especially curious about the fate of canagliflozin clinical projects: The SGLT-2 agent has completed a phase 2 trial for type 1 diabetes and a phase 2 study in combination with phentermine for obesity, is being investigated for mechanism of weight loss (the CARAT trial) and effects on diabetic kidney disease (CREDENCE), and management has shown interest in conducting a CVOT for Invokana in prediabetes. As we learned from Janssen’s Dr. James List (Global Therapeutic Head of Cardiovascular and Metabolism) at ADA 2017, the company will have to strategically evaluate which of these studies to pursue in the aftermath of CANVAS. J&J’s diabetes-related pipeline also features a glucagon/GLP-1 dual agonist in phase 1 for type 2 diabetes, obesity, and NASH, a CB1 inverse agonist in phase 1 for NASH, and a PYY agonist for type 2 diabetes and obesity. We’re glad to note the company’s commitment to advancing the next-generation of therapies for diabetes and diabetes-adjacent indications, and we so hope this continues and grows. We’ll be back with a detailed pipeline summary in our J&J 2Q17 full report.

4. Mr. Gorsky briefly touched upon healthcare legislation and the potential Executive Order on pharmaceutical pricing, emphasizing that prescription drugs account for only ~15% of US healthcare spending and that fostering therapeutic innovation is key. He pointed to Janssen’s US Pricing Transparency report published in April.

LifeScan/Animas Business Highlights

5. J&J continues to evaluate “very strategic alternatives” for its diabetes medical device franchise (LifeScan/Animas/Calibra), though no further details were provided. Notably, a diabetes asset impairment of $182 million, mostly related to the Animas business, was listed on the balance sheet – this was not mentioned, but is presumably not a great sign. As a reminder, management announced on the 4Q16 call six months ago that possible operating partnerships, joint ventures, strategic alliances, or sale of the business were on the table – we’re not surprised that this process is still ongoing, since the business is in a tough spot. OneTouch recently revamped its logo and marketing (see the website), progress toward OneTouch Via and WellDoc integration roll outs seem to be ongoing, and we’ve seen OneTouch in recent conference exhibit halls.

6. Global LifeScan/Animas revenue totaled $421 million in 2Q17, down 11% as reported and down 10% operationally year-over-year (YOY) on an easy comparison to 2Q16, when sales fell 4% YOY operationally. 2Q17 now marks 20 of the past 21 quarters with global sales declines. $421 million is also the second lowest quarterly revenue recorded in our LifeScan/Animas model, which goes back to 2005. Sales improved 6% sequentially from a record low 1Q17 ($399 million). As usual, J&J did not actually break out sales figures for the individual franchises.

7. US Diabetes Care sales totaled $160 million in 2Q17, falling 10% YOY against a remarkably easy comparison (sales fell 17% YOY in 2Q16). The quarterly performance is the second lowest ever recorded in our model, just ahead of last quarter’s by a margin of $6 million (4% sequential growth). As with 1Q17, the slide deck cited BGM price declines in the managed care setting and competitive pressure in pump sales – presumably Medtronic and Insulet and Tandem – as negative headwinds stateside. Management didn’t mention the OneTouch Via bolus delivery device during the call, but we wonder if a near-term launch will bolster the struggling franchise.

8. International Diabetes Care revenue totaled $261 million in 2Q17, down 11% as reported and down 10% operationally YOY. 11 out of the past 12 quarters have now seen sales declines outside the US. The drop also came against a moderate comparison, as sales grew 5% as reported and 7% operationally in 2Q16. For the first time in a year, the international business was over $100 million larger than the US business – prior to 2013, there was much more parity between the two geographies. BGM price and pump competitive pressure (particularly in Western Europe and Asia-Pacific) contributed to the international difficulties.

LifeScan/Animas Pipeline Highlights

9. In May, a rep at AACE told us that the OneTouch Via (formerly Calibra Finesse) bolus-only insulin delivery patch device was expected to roll out in a focused US launch in the coming months – a conversation last month at ADA didn’t reveal any launch timing, though the device was on display in the hall and a rep said the launch would be “filled to capacity.” The product’s updated manufacturing process (submitted in November) received FDA 510(k) clearance last month. Said the rep at ADA: “We are focused on ensuring a perfect launch for patients…Our goal is that no patient will start on Via and not continue.” This device, which could be a bright spot for J&Js challenging insulin delivery business, continued to be delayed, first from “early 2017” (ADA 2016), and then from “1H17” (per a November email exchange).

10. There was no mention of the WellDoc BlueStar integration partnership (including a J&J investment) on the call. The technical aspects of the integration went “live” mid-March, three months after receiving FDA clearance in December – this means patients can sync OneTouch Verio Flex BGM data to WellDoc’s BlueStar app.

11. J&J’s OneTouch Vibe Plus insulin pump with Dexcom G5 integration, approved by FDA and Health Canada in December, is “moving toward commercialization” as of ADA last month. Given the turbulent state of the business and impairment loss this quarter, it’s hard to know if this will launch. Tandem expects t:slim X2 with G5 approval this summer, and will likely beat out J&J as the first G5-integrated pump on the market.

12. At Keystone this past week, Dr. Roy Beck stated that Animas’ automated insulin delivery (AID)plans have been put on hold – the company confirmed with us that an IDE for the pivotal trial has not yet been filed. J&J couldn’t speculate on timing; we had last heard (via email on November 30) that launch is expected in late 2018/early 2019, which is still possible if the pivotal happens soon. This product has been enormously delayed and it’s hard to be optimistic at this stage, especially given the highly competitive AID field and tall bar for commercial product success.

Janssen Highlights

1. Invokana Sales Fall Markedly, Down 23% YOY to $295 Million

Revenue from the SGLT-2 inhibitor Invokana (canagliflozin) franchise fell 23% YOY to $295 million (from a base of $383 million in 2Q16). By geography, US sales fell a drastic 26% YOY to $256 million (from a base of $348 million), while ex-US sales grew 11% YOY to $39 million (from a base of $35 million). These numbers encompass revenue from standalone Invokana, fixed-dose combination tablet Invokamet (canagliflozin/metformin), and extended-release Invokamet (canagliflozin/metformin XR). As in 1Q17 (when we thought a 16% YOY decrease in US revenue was surprising), management attributed the decline to increasing discounts for managed care patients and a higher proportion of prescriptions going to patients on Medicaid. This implies that more patients in-need are accessing Invokana, although information on the product’s volume share within the US type 2 diabetes market or SGLT-2 inhibitor market was noticeably missing. In past financial updates, J&J has reported Invokana’s share of total type 2 diabetes prescriptions (TRx) in the US – 6.3% in 2Q16, 6.1% in 4Q16, and 6% in 1Q17. We’d like to believe this remained flat in 2Q17 as well, though we anticipate there was or will be some impact of the boxed warning for lower limb amputations on all canagliflozin-containing medicines, a risk that was confirmed by integrated results from the CANVAS program last month at ADA (much more on this below). According to AZ’s 4Q16 update, Invokana and Lilly/BI’s Jardiance (empagliflozin) both captured ~25% of all SGLT-2 inhibitor prescriptions around the world, while AZ’s Farxiga (dapagliflozin) held 42% TRx. Notably, the CVD-REAL study suggested that Invokana is the market leader by volume in the US (where 76% of patients taking an SGLT-2 inhibitor were taking Invokana), which could mean that pricing pressure in the US has a particularly pronounced impact on the business as a whole. Speaking to the 23% YOY decline in 2Q17, management also mentioned favorable price adjustments that occurred before 2Q16 across the pharmaceutical portfolio, contributing to a 20% YOY increase in Invokana sales in 2Q16 (to $383 million), and giving 2Q17 a tough comparison. That said, we note that the SGLT-2 inhibitor has now posted <$300 million in global sales for two consecutive quarters, which hasn’t happened since 1Q15 when the product was still new-to-market. Sequentially, worldwide Invokana revenue was up 4% from $284 million in 1Q17 against an easy comparison, as sales fell 24% sequentially between 4Q16 and 1Q17. The graph below displays Invokana sales trends since 1Q14: a slow-but-steady rise in revenue from international markets, fluctuating global/US sales since 1Q16.

Figure 1: Invokana Sales (1Q14-2Q17)

2. Management’s Minimal Response to Complicated CANVAS Results

Quite conspicuously, there was no mention of CANVAS results or of the FDA’s decision to add a new boxed warning for lower limb amputations on canagliflozin medicines (Invokana, Invokamet, and Invokamet XR) during prepared remarks. CANVAS was glaringly absent from the company’s presentation slides, including a slide of important pharmaceutical developments (we’d surely expect a CVOT to make this list!). When pressed during Q&A, Mr. Gorsky acknowledged that the “re-labeling issue” has impacted sales but that there was also good news from CANVAS – yes, we’d certainly call a 14% risk reduction for CV events and a 33% risk reduction for heart failure hospitalization very good news. We’d hoped for more explanation on how J&J will move forward in positioning Invokana’s risk/benefit profile, given the nearly two-fold risk for lower-extremity amputations found in CANVAS (HR=1.97, p<0.001) alongside the cardioprotective effects. We’re also wondering how investigators plan to manage this safety concern in the ongoing CREDENCE trial. We do understand that management may be waiting for subsequent analyses of CANVAS to further elucidate the amputation signal. As we learned from Janssen’s Dr. James List and Dr. Robert Cuddihy, the company received final data from CANVAS and CANVAS-R in the nick of time to present at ADA’s Scientific Sessions concurrent with an NEJM publication, and thus investigators have yet to thoroughly probe the safety outcomes data – perhaps this 2Q17 earnings call was simply too soon for management to have an official comment. On the other hand, we sensed lukewarm confidence in the Invokana business during J&J’s Pharmaceutical Business Review in May: Management seemed to divert attention away from the SGLT-2 product, emphasizing that it brings in only ~4% of J&J’s overall pharmaceutical revenue, “a very small piece.” So, we would’ve liked to hear more positive commentary from management today as reassurance that the SGLT-2 inhibitor is still a priority within the company’s large pharmaceutical portfolio, particularly given the potency of the class, the cardioprotection, the weight loss, and the fairly strong tolerability profile overall. While much more insight is needed to fully make sense of CANVAS results, we note for now that amputations are far less common than CV disease for people with diabetes, and that amputation data has not been collected in standard manner from CVOT to CVOT. We’re still in the early days post-CANVAS, and it will take time for prescription volume and sales to reflect the real-world impact of these complex results, but we summarize some of the expert opinions we’ve collected so far:

• Some thought leaders (including Dr. Daniel Drucker) have predicted a gradual attrition away from Invokana onto other SGLT-2 inhibitor products (namely Jardiance, given its demonstrated cardioprotection in the absence of amputation signal). Gradual attrition is a distinct possibility; we are speculating at best at present. Although we do not see a dampening uptake of all SGLT-2 inhibitors, it is unclear whether amputation risk is a class effect as of now since amputations were measured and monitored and reported differently and since CANVAS was longer than other trials. Ideally, future analyses of CANVAS and other canagliflozin clinical trials will shed light on mediating factors so that patients broadly can still reap the glycemic, weight loss, and CV benefits to Invokana – a good parallel example of this is the post-hoc analysis of Novo Nordisk’s SUSTAIN 6 presented at ADA 2017, which found that GLP-1 agonist semaglutide’s apparent retinopathy risk was driven by individuals with a prior history of retinopathy, so careful patient selection for semaglutide should help prevent this risk in the real world. Dr. Bruce Neal (the George Institute for Global Health, Sydney, Australia) told us at ADA that canagliflozin seemed to ~double the lower limb amputation risk for all trial participants, regardless of prior history of amputation, peripheral vascular disease, or other known risk factors. But again, investigators were working on a tight timeline to prepare integrated CANVAS/CANVAS-R results for the early June Scientific Sessions … we eagerly await post-hoc analyses of this CVOT as we have SO many lingering questions, particularly how amputations are adjudicated (see more below).
  
  • The DECLARE CVOT for AZ’s SGLT-2 inhibitor Farxiga is ongoing, but not expected to complete until April 2019, while the VERTIS CV study of Merck/Pfizer’s ertugliflozin isn’t expected to complete until October 2019 (and this SGLT-2 candidate is still under FDA/EMA review).
• A number of leaders have argued that even without the complete picture on canagliflozin’s amputation risk (mechanism, mediating factors, etc.), this safety concern could be well-managed with patient education and proper foot care. In a separate call with us, Janssen’s VP of Medical Affairs for Cardiovascular and Metabolism Dr. Robert Cuddihy underscored that amputations didn’t appear out of nowhere in CANVAS – they were preceded by infection or another warning sign. Indeed, Dr. List positioned this finding as a good reminder of the importance of proper foot care, an all-too-often overlooked aspect of diabetes management. We’d love for J&J to become a leader in expanding understanding of this complication. Currently, we don’t believe patients have much education at all about how to monitor for and minimize this risk, which seems such a disappointing state of affairs.
• Dr. Andrew Boulton (University of Manchester, Manchester, England) explained to us that amputations are a “soft endpoint” in outcomes trials, in that patients/providers can subjectively decide whether or not to amputate. Moreover, lower-extremity amputations were adjudicated prospectively in the CANVAS program but retrospectively in EMPA-REG OUTCOME – the discrepancy introduces a challenge in analyzing these studies side-by-side, and also highlights the need for standardization. These elements of clinical trial design could have a very meaningful impact on results, and HCPs will certainly need more guidance in understanding the implications of each study to inform their diabetes care practice. Dr. Boulton shared his view, that canagliflozin is a powerful agent for type 2 diabetes, but should be used with caution in patients with a history of foot disease or peripheral vascular disease.
• Then there’s the payer perspective – Dr. Anne Peters suggested that prescribing habits may come down to formulary requirements. We certainly see how many of our questions (about how CANVAS vs. EMPA-REG OUTCOME will play out in the real world) depend on how payers absorb and interpret these two CVOTs, and how they now perceive the SGLT-2 class as a whole. We’ll be watching intently for updates on Invokana’s formulary status. Dr. Peters shared her view, that in her personal clinical experience, canagliflozin often shows superior glucose-lowering and weight loss vs. empagliflozin, and she isn’t jumping to switch all of her patients off of Invokana, Invokamet, or Invokamet XR.

3. No Updates on Diabetes Pharmacotherapy Pipeline

There was no mention of Janssen’s diabetes/obesity pipeline or projects. We’re especially curious about the fate of canagliflozin clinical projects: The SGLT-2 agent has completed a phase 2 trial for type 1 diabetes and a phase 2 study in combination with phentermine for obesity, is being investigated for mechanism of weight loss (the CARAT trial) and effects on diabetic kidney disease (CREDENCE), and management has shown interest in conducting a CVOT for Invokana in prediabetes. As we learned from Dr. List at ADA 2017, the company will have to strategically evaluate which of these studies to pursue in the aftermath of CANVAS. CREDENCE is the most advanced of these clinical development projects, and it makes canagliflozin one of only a handful of phase 3 candidates for diabetic nephropathy. Management announced during the recent Pharmaceutical Business Review that the CREDENCE trial is fully-enrolled (n=4,200), with an expected completion date of June 2019 according to ClinicalTrials.gov. AZ recently initiated a renal outcomes trial around Farxiga, Dapa-CKD (expected to complete in November 2020), as did Lilly/BI for Jardiance in chronic kidney disease. If all continues according to plan, CREDENCE will be the first of these outcomes trials to read out – we’re quite excited about this potential renal indication for Invokana, and we imagine this could meaningfully boost uptake. The drug’s prospects in obesity also pique our interest, given that significant weight loss is one of the touted benefits to SGLT-2 inhibitor therapy, though we haven’t heard any follow-up on the canagliflozin/phentermine program since phase 2 results were presented at ADA 2016. Similarly, there have been no updates from J&J on canagliflozin for type 1 diabetes since ADA 2016. Lilly/BI’s empagliflozin and AZ’s dapagliflozin are more advanced on this front, as both SGLT-2 agents are currently in phase 3 toward a type 1 indication. See the table below for a summary of Invokana clinical trials.

• J&J’s diabetes-related pipeline also features a glucagon/GLP-1 dual agonist in phase 1 for type 2 diabetes, obesity, and NASH, a CB1 inverse agonist in phase 1 for NASH, a preclinical glucagon/GLP-1 dual agonist for type 2 diabetes, and a PYY agonist for type 2 diabetes and obesity. While none of these candidates were discussed on the 2Q17 call, we’re glad to note the company’s commitment to advancing the next-generation of therapies for diabetes and diabetes-adjacent indications. We hope this continues and grows. Recent news certainly points in this direction: In June, Janssen and UC San Diego launched a five-year strategic partnership to discover new therapeutic approaches in type 2 diabetes, obesity, NASH, and chronic kidney disease, among other metabolic diseases. We’ve also been pleased to note the company’s sharp emphasis on disease prevention, which includes the Human Microbiome Institute and the Disease Interception Accelerator.

Table 1: Invokana Clinical Trials

Table 2: Janssen Diabetes-Related Pipeline Summary

4. Management’s Stance on Healthcare Reform

Mr. Gorsky briefly touched upon healthcare legislation and the potential Executive Order on pharmaceutical pricing, emphasizing that prescription drugs account for only ~15% of US healthcare spending and that fostering therapeutic innovation is key. Mr. Gorsky joined the call from Washington, DC, where he was planning to meet with leaders later in the day to discuss healthcare reform. He summarized J&J’s position as a manufacturer: The company will support initiatives that expand access to affordable healthcare, will monitor revisions of the proposed Republican bill to repeal and replace the Affordable Care Act (ACA), and will defend the importance of a competitive market and of incentives for innovation and advancement of medicine. He pointed to Janssen’s US Pricing Transparency report published in April, which highlights complexity of the pharmaceutical pricing system and the dramatic difference between list price and the company’s net price. We applaud this effort to bring transparency to the controversial issue of diabetes drug pricing – Novo Nordisk, Lilly, Sanofi, and others have released similar statements – though we see a long road ahead still in unraveling this complexity and reaching a feasible solution.

LifeScan/Animas Highlights

5. “Very Strategic Alternatives” for Diabetes Business Still Being Explored; Impairment Loss of $182M, Mostly Due to Animas

J&J continues to evaluate “very strategic alternatives” for its diabetes medical device franchise (LifeScan/Animas/Calibra), though no further details were provided. Notably, a diabetes asset impairment of $182 million, mostly related to the Animas business, was listed on the balance sheet – this was not mentioned, but is presumably not a great sign. As a reminder, management announced on the 4Q16 call six months ago that possible operating partnerships, joint ventures, strategic alliances, or sale of the business were on the table – we’re not surprised that this process is still ongoing, since the business is in a tough spot. OneTouch recently revamped its logo and marketing (see the website), progress toward OneTouch Via and WellDoc integration roll outs seem to be ongoing, and we’ve seen OneTouch in recent conference exhibit halls. Of course, much more will be needed to revamp the business. Mr. Gorsky emphasized during the 4Q16 call that there is no timeline for a transaction (nor a guarantee that one will happen at all), but the current revenue trajectory makes it seem more likely that a turnaround within J&J’s walls is unlikely. In our 4Q16 report, we review the strengths and weaknesses of the LifeScan, Animas, and Calibra businesses, examine the impact of a transaction on current partners (e.g., Dexcom, WellDoc), and explore potential acquisition and partnership avenues.

• A diabetes asset impairment of $182 million ($125 million non-GAAP), mostly related to the Animas pump business, was listed on the balance sheet. An impairment loss, in this case, could indicate a drop in market price due to decreased investment in the franchise or diminished market valuation – the business has been struggling for quite some time, but this is the first time the accounting team has publicly noted a change in value. Animas must be finding it more difficult to compete with Medtronic, Insulet, and Tandem in the US, and the bar continues to rise for what its automated insulin delivery product must deliver to be differentiated. We’re not sure what this implies for an acquisition.
• The language surrounding the evaluation process seems to have intensified, though we may be reading too deep. CFO Mr. Dominic Caruso’s use of “very” in front of strategic alternatives, together with his prepared comment (“Our ongoing reviews suggest we currently have more opportunity to divest some nonstrategic businesses”) could signify a leaning toward outright sale, rather than any of the less-drastic measures (partnership, joint venture, or strategic alliance). Again, this is purely speculation…
• Some of J&J’s commitment to type 2 diabetes therapies, absent last quarter, returned today. In Q&A, Mr. Gorsky called a spade a spade: “…as we talk about Type 2 diabetes, look, obviously an area where there's a lot of unmet medical need but at the same time, an area where there's a lot of competition among the SGLT2s, let alone others therapeutic options in that category…So this remains an area where we're very interested. We want to make sure the patients continue to have options…But we also recognize the competitive nature of the category.” It was notable that he did not mention type 1 diabetes or devices, so this strikes us as another sign of diminished confidence in the LifeScan/Animas/Calibra businesses.
• J&J’s continued uncertainty of the positioning of diabetes in its business is yet another reminder of this competitive time for device manufacturers – the bar for innovation + great products is higher, business models are changing, and value must be demonstrated. The field is transitioning from a time when diabetes was essentially self-monitored and used a fee-for-service paradigm, to a value-based paradigm that necessitates connectivity, new service models (e.g., subscription bundles, coaching), and a wider distribution networks. Can J&J keep up? And if it can’t, what role does the $1+ billion annual LifeScan/Animas business play in the coming years?

6. Worldwide LifeScan/Animas Sales Decline 10% YOY on Difficult Comparison

Global LifeScan/Animas revenue totaled $421 million in 2Q17, down 11% as reported and down 10% operationally year-over-year (YOY) on an easy comparison to 2Q16, when sales fell 4% YOY operationally. 2Q17 now marks 20 of the past 21 quarters with global sales declines – the only exception was 3Q14, which was flat YOY. $421 million is also the second lowest quarterly revenue recorded in our LifeScan/Animas model, which goes back to 2o05. Sales grew 6% sequentially from a record low 1Q17 ($399 million). As usual, J&J did not actually break out sales figures for the individual franchises.

• For the second quarter in a row, the decline in the Invokana franchise (-23% YOY), was larger than that on the device side (and it was from a higher base). Within the diabetes tech world, it has become almost second nature to talk about pricing pressure and heightened competition, but J&J’s device business seems somewhat more stable than the Invokana franchise, which appeared to be J&J’s saving grace in diabetes in 4Q16 (along with bariatric surgery). It’s also fair to point out the device business has already been hit extremely hard over the last five years. Notably, the Invokana portfolio now faces similar hurdles: pricing pressures (in the form of increasing discounts through the managed care channel and higher proportion of prescriptions to Medicaid beneficiaries) and competitive forces (Lilly/BI’s empagliflozin, AZ’s dapagliflozin).
• Abbott reports July 20 and Roche reports next week. Will they experience comparable US and international challenges? Abbott, of course, has Libre as an increasingly positive offset. Roche is investing more in digital (e.g., acquiring mySugr) and in CGM.

Figure 2: Global, Us, International LifeScan/Animas Quarterly Sales (1Q12-2Q17)

7. US LifeScan-Animas Sales Drop 10% to $160M

US Diabetes Care sales totaled $160 million in 2Q17, falling 10% YOY against a very easy comparison (sales fell 17% YOY in 2Q16). The quarterly performance is the second lowest recorded in our model, edging out last quarter’s by a narrow margin of $6 million (4% sequential growth). Management didn’t mention OneTouch Via during the call, but we wonder if a launch in the near future could help bolster the insulin delivery business.

• As with 1Q17, the slide deck cited BGM price declines in the managed care setting and competitive pressure in pump sales as negative headwinds stateside. Strip prices are getting pushed down from multiple angles – lowering through MCO arrangements, CMS’ competitive bidding, and general competitive forces. Whereas volume effects (higher strip consumption) has offset these effects in the past, at some point new business models are needed to demonstrate higher value (e.g., subscription BGM + digital education and coaching). On the insulin delivery side, we assume competition from Medtronic, Insulet, and (to a lesser extent) Tandem are challenging the Animas business – Medtronic’s MiniMed 670G has launched in a limited fashion to ~1,000 people so far (>20,000 people are in line to get pumps by the fall), Tandem expects approval of its t:slim X2 with G5 integration this summer, and Insulet hopes to roll out the Dash PDM towards the end of the year and into 1Q18.

8. International LifeScan/Animas Sales Decline 10% Operationally to $261M

International Diabetes Care revenue totaled $261 million in 2Q17, down 11% as reported and down 10% operationally YOY. 11 out of the past 12 quarters have now seen negative growth in the International Diabetes Care business. The decline came against a moderate comparison, as sales grew 5% as reported and 7% operationally in 2Q16. For the first time in a year, the international business was over $100 million larger than the US business – prior to 2013, there was much more parity between the two geographies.

• BGM price and pump competitive pressure (particularly in Western Europe and Asia-Pacific) contributed to the international difficulties. Internationally, Medtronic is the chief competition for Animas, as the 640G continues to do very well, though Insulet did see international sales grow 63% to a record-high $25 million in 1Q17.

LifeScan/Animas Pipeline Highlights

9. OneTouch Via Could Undergo US Roll-Out in Coming Months

In May, a rep at AACE told us that the OneTouch Via (formerly Calibra Finesse) bolus-only insulin delivery patch device was expected to roll out in a focused US launch in the coming months – a conversation last month at ADA didn’t reveal any launch timing, though the device was on display in the hall and a rep said that the launch would be filled to capacity. The product’s updated manufacturing process (submitted in November) received FDA 510(k) clearance last month. Said the rep at ADA: “We are focused on ensuring a perfect launch for patients…Our goal is that no patient will start on Via and not continue.” This device could be a bright spot for J&Js challenging insulin delivery business, and we’d guess that the company would be interested in retaining it based on the investment it has already put in. Then again, it could augment the value of a total LifeScan/Animas/Calibra package – who might be interested in acquiring it? See our previous 4Q16 speculation here.

• OneTouch Via launch has been continually delayed, first from “early 2017” (ADA 2016), and then from 1H17 (per a November email exchange). Now that the manufacturing update is FDA cleared, access and reimbursement and marketing are presumably the key steps ahead. We’re not sure, however, if J&J may be holding off on launch until they have a clearer idea of the business’ future. One thing’s for sure: People seem to be excited about the patch device. The ADA booth drew crowds, who were amazed by the patch’s small, discreet form factor, and absence of constraining basal options
• 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.
  
  • A possible criticism against OneTouch Via is it may increase total cost of therapy for MDI users, since patients will need a basal insulin, a rapid-acting insulin, AND OneTouch Via. Assuming outcomes are positive, this study could really help drive reimbursement and marketing. 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 also believe that a one-unit bolus version is in development, which would be smart for appealing to type 1s.
• 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 submission for an updated manufacturing process was only just FDA cleared.

10. WellDoc Integration “Live” – OneTouch Verio Flex Syncs to BlueStar

There was no mention of the WellDoc BlueStar integration partnership (including a J&J investment) on the call. The technical aspects of the integration went “live” mid-March, three months after receiving FDA clearance in December, meaning patients can now sync OneTouch Verio Flex BGM data to WellDoc’s BlueStar software. We’re not sure if this also means that the companies are co-marketing the integrated product, or if that is forthcoming.

• The system integrates the BlueStar mobile app (Android, iOS) with LifeScan’s Bluetooth-enabled OneTouch Verio Flex BGM and paired Reveal app (Android, iOS), though use of the Reveal app will be optional. We assume there is no novel business model at this point- WellDoc sells BlueStar and the J&J meter simply feeds data in. Over time, we imagine the BGM + strips could be bundled with WellDoc’s app prescribed-as-a-drug model; obviously that requires more payer diligence and a pretty drastic change in J&J’s business model. We would assume payers might be quite interested, as this combined product should prove to be more efficacious than BGM alone. Meanwhile, WellDoc has moved ahead on other avenues too: in addition to the prescription-only BlueStar Rx app (510(k) cleared; includes an insulin calculator), there is now a non-prescription version of BlueStar (510(k) cleared, but without an insulin calculator) and the BlueStar C (non-regulated) consumer version, plus a commercial agreement with Samsung. We see encouraging potential for this partnership to boost the efficacy of J&J’s BGM franchise in type 2s with clinically valuable education – particularly as startup competitors mySugr/Roche, One Drop, and Livongo go beyond the BGM to offer bundled coaching/support.

11. OneTouch Vibe Plus pump with G5 Integration “Moving Toward Commercialization” (as of ADA)

J&J’s OneTouch Vibe Plus insulin pump with Dexcom G5 integration, approved by FDA and Health Canada in December, is “moving toward commercialization” as of ADA last month. Given the turbulent state of the business, it’s hard to know if this will launch, and if it does, if it will have the proper marketing behind it. Tandem expects t:slim X2 with G5 approval this summer, and we’d expect it to beat out J&J as the first G5-integrated pump on the market. Animas users would love to see the G5 CGM-integrated pump launch, as it brings a more accurate algorithm than the Vibe G4, remote monitoring from the phone (G5 pairs with two devices), and approval for use down to age two. For DIY Loop users, a Bluetooth-enabled pump might also be a win – the current Loop setup requires a communication bridge (mhz->Bluetooth) to talk to old Medtronic pumps.

• We wish the OneTouch Vibe Plus’ user interface was updated from the previous Vibe or Ping. This puts Animas well behind Tandem’s t:slim X2 and Insulet’s upcoming OmniPod Dash; for some, this is the “cool factor,” but it is increasingly important to make these products as consumer-grade as possible as they try to expand beyond geeky early adopters.

12. Dr. Roy Beck at Keystone: Animas AP Program on Hold; Company Confirms IDE for Pivotal Not Yet Submitted

At Keystone this past week, Dr. Roy Beck stated that Animas’ automated insulin delivery plans have been put on hold, and the company confirmed with us that an IDE for the pivotal trial has not yet been filed. J&J couldn’t speculate on timing; We had last heard (via email on November 30) that launch is expected in late 2018/early 2019. Technically speaking, that timing is possible, though it would require a pivotal to happen soon, a rapid FDA review, and a quick launch thereafter. This product has been enormously delayed and it’s hard to be optimistic at this stage. Rewinding the tape, Animas probably could have been first to market and beat out the 670G, but the company moved too slowly in moving this product from concept feasibility studies.

• The pivotal study was previously expected to begin in 4Q16, though that clearly did not happen. Prior to the email update, Animas had positioned itself to be roughly second to market in the US, though now the timeline is behind Medtronic, Tandem, Bigfoot, Insulet, and Beta Bionics (of course, timelines are always in flux, for both big and small players). Medtronic has initiated launch to 20,000+ Priority Access Program Participants (it’s still rolling out very deliberately), Tandem is aiming for a late 2018 launch of its second-gen with TypeZero, and Insulet and Beta Bionics (insulin only) are looking at possible 2019 launches. See our latest automated insulin delivery competitive landscape here.

Table 3: LifeScan/Animas Pipeline Summary

Questions and Answers

Mr. Mike Weinstein (JP Morgan, New York, NY): I’m hoping you can give an update on the Diabetes business and where that process stands. 

Mr. Dominic Caruso (CFO, J&J): You saw we took an impairment charge – this is largely related to the Animas pump business, not the overall blood glucose monitoring business, which is of course the larger portion of the business. Our efforts to review very strategic alternatives are still progressing, moving along just fine, but nothing to report on that front yet.

Mr. Alex Gorsky (CEO, J&J): Type 2 diabetes is an area with a lot of unmet need, but at the same time, an area where there’s a lot of competition among SGLT-2 inhibitors, let alone other therapeutic options. There’s still a lot of good news about the CANVAS trial when you really look into that data. At the same time, the re-labeling change has had an impact, along with just the overall competitive environment. We remain very interested, and we want to make sure patients continue to have options in type 2 diabetes, but we also recognize the competitive nature of the category.

Q: We continue to see pricing pressure for Xarelto and Invokana, and we understand both drugs are in competitive categories, but is there a light at the end of the tunnel? Do these drugs face less pricing pressure in the latter half of the year?

Mr. Gorsky: I think we see very different stories for Xarelto and Invokana. In the case of Invokana, of course, we’ve seen a significant impact based on the re-labeling issue. Even prior to that, we had seen a lot of competitive pressure around pricing. Given the incidence of type 2 diabetes and the pressure on systems, we feel competition exemplified that. If you look at Xarelto, however, we continue to be encouraged by the ongoing stream of really positive data. We feel optimistic about the future of Xarelto, and while there will undoubtedly be pricing pressure, we think that by continuing to differentiate the brand with strong clinical information, strong value information, we’ll be well-positioned going forward.

Q: I recognize the effects of re-labeling and Medicaid rebates on Invokana sales, but did you find that the total category grew despite these effects? Sometimes they bleed into the entire category.

Mr. Joseph Wolk (VP Investor Relations, J&J): Excluding metformin, by our projections, the type 2 diabetes market grew about 3.5% in the quarter.

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