Memorandum

J&J 1Q18 – Invokana falls 13% YOY, 7% sequentially to $248M; No update on LifeScan offer from Platinum; LifeScan-Animas sales of $339M fall 20% operationally YOY – April 17, 2018

    Executive Highlights

    • In 1Q18, Invokana franchise sales of $248 million fell 13% YOY, including a 17% YOY decline in US revenue to $204 million. This marks the fifth consecutive quarter of YOY decline for the Invokana business (globally and in the US). J&J’s presentation attributed this to (i) higher contracting discounts (presumably, larger rebates paid to PBMs/payers including CVS Health in 2018), (ii) increasing utilization in the Medicaid channel, and (iii) share loss to Lilly/BI’s Jardiance and AZ’s Farxiga. Presumably, some of this weakness stems from amputation concerns surrounding Invokana, despite the fact that this risk is not well understood for all patient categories. There was no explicit mention of Invokana during prepared remarks or Q&A; diabetes was not mentioned as a company priority, as it has been in the past. We found this lack of commentary supremely disappointing, especially as J&J’s commitment to diabetes seems increasingly uncertain (that said, we acknowledge that this is a large company with many different business segments to discuss in a limited time).

    • Janssen just published its second annual US Pharmaceutical Transparency Report, highlighting a dramatic gap between the list price of drugs and the realized price. Although the average list price for a Janssen pharmaceutical product grew 8.1% in 2017, the average price realized by the company declined 4.6%. J&J spent ~$15 billion on rebates and discounts in 2017, which reflected ~42% of total pharmaceutical sales. The minimum discount for any Medicaid patient was 23.1%. We’ve written the company to figure out what these numbers are for Invokana, specifically. There is both good news and bad news housed within this report: On the one hand, J&J is among the most generous diabetes manufacturers in patient assistance funding (see “How to Get Diabetes Drugs for Free” at diaTribe.org), but on the other, significant money is being lost to PBMs/payers that could otherwise be invested back into R&D and innovation.

    • Global LifeScan/Animas sales of $339 million declined 9% on an organic basis (excluding Animas, which J&J shut down in October) and 15% YOY as reported – and a -20% operational decrease and 13% sequential increase as reported. This marks the lowest revenue recorded in our model dating back to 2005, and it even came on an easy comparison to a 7% decline in 1Q17. The slide deck cited pump discontinuation (Animas exited in October), continued BGM price declines in the US, and category and weakness in EMEA as drivers of the weak performance. Excluding the Animas pump business, we estimate a ~9% revenue decline for LifeScan BGM only (estimates below).

    • CFO/EVP Mr. Dominic Caruso alluded to Platinum Equity’s ~$2.1 billion offer to acquire LifeScan in his prepared remarks, but no specific updates were given. As of the March news, if the proposed offer is accepted, it would close by the end of 2018 and create a standalone company with current LifeScan President Valerie Asbury continuing to lead the BGM business (they’d be very lucky to have her). The offer was also referenced in the press release and slide deck (page 13). There was no mention of the Calibra business, whose FDA-cleared OneTouch Via mealtime insulin delivery device remains a valuable asset and the only piece of J&J’s diabetes device portfolio to not publicly be placed on the trading or chopping block. It’s not clear if J&J will sell Calibra or actually launch it – it’s probably not an easy asset to sell solo and there are lots of great businesses who could partner with it.

    • J&J’s LifeScan/Animas US sales were just $117 million in 1Q18, down 24% YOY and down 10% sequentially from 4Q17. International revenue fared slightly better, with sales of $222 million declining 9% YOY as reported (-17% operationally) and down 15% sequentially from 4Q17. Considering only LifeScan, we estimate that US sales declined ~19% YOY to $116 million and international declined a more modest ~3% YOY to $221 million in 1Q18.

    J&J reported 1Q18 financial results today in a call led by Mr. Joseph Wolk (VP, Investor Relations, J&J). See the press release here and the slides here. This full report is expanded from the First Look we posted this morning, just after the call wrapped up – those of you with our handy Closer Look app saw this the moment it was published! You can download our app for iPhone here.

    This report is organized into Janssen pharmaceutical highlights (focused on SGLT-2 inhibitor Invokana as well as the new 2017 US Transparency Report), followed LifeScan-Animas device-side highlights. We conclude with relevant Q&A from the call.

    Janssen Highlights

    1. Invokana Sales Drop 13% YOY in Fifth Consecutive Quarter of Decline; Revenue Falls 17% in Challenging US Market; No Commentary from Management on SGLT-2 or Diabetes

    Invokana (canagliflozin) franchise sales of $248 million fell 13% YOY as reported (-14% operationally) from a base of $284 million in 1Q17. Sales of the SGLT-2 inhibitor also declined 7% sequentially from $267 million in 4Q17. These were both very easy comparisons – in 1Q17, J&J’s SGLT-2 revenue dropped 13% YOY, and in 4Q17, fell 28% YOY and was flat sequentially. In fact, 1Q18 marks the fifth consecutive quarter of YOY sales decline for Invokana and Invokamet (canagliflozin/metformin fixed-dose combination): -13% in 1Q17, -23% in 2Q17, -19% in 3Q17, -28% in 4Q17, -13% in 1Q18. These pharmaceutical products were once quite an exciting part of J&J’s pharmaceutical business, leading the SGLT-2 inhibitor market and experiencing strong growth even as J&J’s diabetes devices faced headwinds, but Invokana/Invokamet sales trends took a turn in mid-2016 and global franchise revenue has been dropping since then. The situation is particularly bleak in the US, where Invokana revenue dropped 17% YOY to $204 million in 1Q18 (from $247 million in 1Q17). Sequentially as well, US sales dipped 8% from $221 million in 4Q17. OUS Invokana revenue grew 19% YOY to $44 million, but from a much smaller base of $37 million in 1Q17. Sequentially, OUS sales dipped 4% from $46 million in 4Q17. This follows declining US sales for Invokana throughout 2017 (-17% YOY in 1Q17, -26% YOY in 2Q17, -25% YOY in 3Q17, -34% YOY in 4Q17). To be sure, these geographical trends highlight the persistent challenge of US pricing pressure, which J&J alluded to in presentation slides and which we discuss in more detail below. Ultimately, we expect that the Invokana franchise can return to growth, with support from a CV indication (this is under review at FDA with a decision expected by year-end) and from accumulating exciting data pointing to renal benefit (see press announcement here). That said, 1Q18 was another disappointing quarter for Invokana and Invokamet.

    Invokana Franchise Sales (1Q14-1Q18)

    • The company’s presentation (slide 10) attributed this fifth consecutive quarter of decline in the Invokana business to the same three factors: higher “contracting discounts,” greater segment mix, and share loss.

      • (i) Higher “contracting discounts” presumably references rebates paid to PBMs/payers. Indeed, Lilly/BI’s Jardiance is excluded on the 2018 CVS Health formulary in favor of Invokana, and we suspect that CVS negotiated a larger rebate from J&J vs. Lilly/BI (our speculation). According to J&J’s new US Pharmaceutical Transparency Report, 42% of all drug profits in 2017 were paid back in the form of rebates and patient discounts. We’ve written the company to figure out rebates/discounts on Invokana specifically, but assuming it’s in the ballpark of 42%, favorable formulary positioning won’t necessarily boost J&J’s recorded revenue – it should boost total prescriptions, but volume information was not reported in this 1Q18 update. Lower profitability on diabetes drugs in the US is affecting many companies, and more importantly, this practice of formulary restrictions hurts patients (see ADA’s statement of concern from last summer). Scroll down for a deeper dive on J&J’s latest US transparency report.

      • (ii) Increasing utilization in the Medicaid channel (i.e. greater segment mix) is presumably good news for patients, implying expanded access. We’d love numbers on prescription volume for Invokana and Invokamet (hopefully climbing with this broader access/reimbursement), and we’d be interested in estimates of prescription share within the SGLT-2 market overall. Again, no details on prescription volume were included in J&J’s 1Q18 materials.

      • (iii) Share loss to Lilly/BI (Jardiance) and AZ (Farxiga). Throughout 2017, Jardiance seemed to be “stealing share” from Invokana. As of 4Q17, Jardiance held 42% of the SGLT-2 market by value while Invokana held 16% and Farxiga held 32%. This stands in stark contrast to 4Q16 – one year before – when Invokana was the frontrunner with 44% market share by value vs. Farxiga’s 28% and Jardiance’s 27%. Presumably, some of this weakness stems from amputation concerns surrounding Invokana, despite the fact that this risk is not well understood for all patient categories. In May 2017, FDA added a black box warning for lower limb amputations to all medicines in the Invokana family; canagliflozin was associated with a nearly two-fold risk for amputation in CANVAS. Neither Jardiance nor Farxiga have this warning on their US product labels, which could partly explain the share loss. EMA has extended an amputation warning across the entire class, but the US is a much bigger market for Invokana (it was the first approved SGLT-2 inhibitor stateside). Some experts have endorsed switching patients off Invokana onto another SGLT-2 (Jardiance is often the first choice because of its CV indication): As Dr. Jay Skyler put it at CMHC 2017, “why deal with this concern if you don’t have to?” On the other hand, thought leaders like Dr. Anne Peters have defended Invokana for its greater potency compared to Jardiance in lowering A1c and body weight. There’s also a growing consensus in the diabetes field that amputation risk should be manageable in the real world (base rate is very low) as long as HCPs/patients engage in diligent monitoring of the feet. We agree with this view, although much better education around foot care is needed (see diaTribe.org).

    • There was no out-loud mention of Invokana during prepared remarks or Q&A; diabetes was not mentioned as a company priority, as it has been in the past. We found this lack of commentary supremely disappointing, especially as J&J’s commitment to diabetes seems increasingly uncertain (that said, we acknowledge that this is a large company with many different business segments to discuss in a limited time). During J&J’s Pharmaceutical Business Review Day in May 2017, CEO Mr. Alex Gorsky underscored that Invokana is a “very small piece,” comprising only ~4% of total pharmaceutical sales. During J&J’s 2Q17 update, Mr. Gorsky assured that the company “remains very interested, and wants to make sure patients continue to have options in type 2 diabetes,” but then added, in the same breath, “we also recognize the competitive nature of the category.” These statements don’t exactly inspire confidence in future growth prospects for Invokana, nor do they imply that J&J has a longstanding interest and commitment to helping people with diabetes. This is unfortunate and there are several bright spots worth mentioning:

      • Canagliflozin demonstrated significant cardioprotection in the CANVAS trial and an FDA decision on a new CV indication is expected by 4Q18.

      • CREDENCE will be the first renal outcomes study to report for any SGLT-2 inhibitor (expected to complete in June 2019). A recent post-hoc analysis of CANVAS confirmed significant renal protection with Invokana regardless of a patient’s baseline eGFR (above or below 60 ml/min/1.73m2) – this bodes well for CREDENCE results.

      • From a commercial perspective, being able to promote CV + renal benefit could help the Invokana sales team counteract the adverse impact of the black box warning for amputations. Of course, drugs rarely sell themselves. It will take commitment and investment on J&J’s part to make sure any new CV or renal indication is converted into a meaningful tailwind for the Invokana business.

    • It’s important to contextualize Invokana’s sluggish financial performance against the backdrop of a rapidly growing SGLT-2 class. This market growth (+24% YOY to $3.5 billion in 2017) is driven primarily by Lilly/BI’s Jardiance (sales more than doubled YOY to $1.4 billion in 2017) and to a lesser extent by AZ’s Farxiga (sales climbed 29% YOY to $1.1 billion in 2017). The empa and dapa franchises have had to compensate for declining Invokana sales (down 21% YOY to $1.1 billion in 2017). For much more color and analysis on the SGLT-2 market, see our comprehensive industry roundup for 2017. Notably, a fourth SGLT-2 inhibitor emerged on the commercial scene early this year: Merck/Pfizer’s Steglatro (ertugliflozin) franchise could influence market dynamics as well, especially because it’s priced considerably lower than the other SGLT-2s. It’s also interesting to note the contrast between Invokana’s performance and the strength of J&J’s pharmaceutical business overall. Management emphasized repeatedly on today’s call that global pharmaceutical revenue grew 15% YOY in 1Q18, and we heard distinct enthusiasm for other drugs, but no mention of Invokana.

    • It’s unclear if J&J will move forward with any other clinical development projects for Invokana (besides CREDENCE) at this time. We wouldn’t be surprised if the company was waiting for sales to stabilize or return to growth. The ongoing canagliflozin clinical trials that we’re aware of are summarized in the table below. We do hope to see movement on these projects in the not-too-far future, because like other SGLT-2s, Invokana boasts exciting potential in weight loss, prediabetes, and type 1 diabetes.

    Ongoing Invokana Clinical Trials

    Trial/Indication

    Status

    Timeline

    Diabetic kidney disease (CREDENCE)

    Fully-enrolled

    Expected to complete in June 2019

    Investigating mechanism of weight loss (CARAT trial)

    Recruiting (aiming for 36 participants)

    Expected to complete in July 2018

    CVOT for prediabetes

    Planned as of J&J’s 3Q16 financial update; No mention since then/unclear if still on the docket

    No timing information shared

    Type 1 diabetes

    Phase 2 trial completed; No word on possibility for phase 3

    Phase 2 results presented at ADA 2016

    Canagliflozin/phentermine co-administration for obesity

    Phase 2 trial completed; No word on possibility for phase 3

    Phase 2 results presented at ADA 2016

    2. No Mention of Janssen’s Diabetes Pipeline or Partnerships (Human Microbiome Institute, Disease Interception Accelerator); Just-Launched Phase 2 Trial Investigating GLP-1/Glucagon Dual Agonist in Obesity

    While the call contained no updates on Janssen’s diabetes/obesity pipeline, we note the recent initiation of a phase 2 trial evaluating GLP-1/glucagon dual agonist JNJ-64565111 in obesity. This 26-week study (n=440) was posted to ClinicalTrials.gov at the beginning of April, and it’s expected to complete in March 2019. Three different doses of the GLP-1/glucagon dual agonist will be compared to Novo Nordisk’s Saxenda (high-dose liraglutide for obesity) and to placebo. Co-primary endpoints include percent change in body weight (from baseline to week 26) and adverse events. Secondary endpoints will measure proportion of patients achieving ≥5% weight loss, proportion achieving ≥10% weight loss, and absolute change in body weight. We’re excited to see J&J increase its investment in obesity R&D with this clinical trial; the company has already poured resources into the Janssen Human Microbiome Institute, which is searching for earlier intervention opportunities in treating type 2 diabetes, prediabetes, and gestational diabetes (there’s a core obesity component to the Institute’s work as well). Obesity is clearly an area of high unmet need (only ~2% of 600 million people with obesity worldwide receive any sort of medical care), and GLP-1/glucagon co-agonists are showing promising weight loss efficacy. In addition to Janssen’s phase 2 candidate, Sanofi has a GLP-1/glucagon dual agonist in phase 3 for obesity (studies scheduled to begin later this year). AZ and OPKO Health each have a GLP-1/glucagon dual agonist in phase 2, and Novo Nordisk has a candidate in phase 1. Click here for our GLP-1/glucagon competitive landscape.

    • Additionally, in collaboration with UCSF, JDRF, and others, Janssen’s Disease Interception Accelerator (DIA) initiative is working to identify biomarkers for type 1 diabetes and gestational diabetes. Again, there was no mention of this in any of J&J’s prepared materials, but it is a good sign of the company’s ongoing commitment to diabetes and to metabolic disease more broadly.

    Janssen Diabetes/Obesity Pipeline Summary

    The table below reflects the latest updates, as far as we are aware, on Janssen’s diabetes/obesity pipeline products. Items highlighted in yellow indicate notable changes to the pipeline in 1Q18.

    Candidate

    Indication

    Phase

    Timeline/Notes

    JNJ-64565111 (GLP-1/glucagon dual agonist)

    Obesity, type 2 diabetes, NASH

    Phase 2

    Phase 2 trial in obesity launched April 2018, expected to complete March 2019; Phase 1b study in type 2 diabetes completed February 2018; Phase 1 results presented at ADA 2015; Preclinical data presented on ADA 2016 poster; Licensed from Hanmi November 2015

    JNJ-2463 (CB1 inverse agonist)

    NASH

    Phase 1

    Phase 1 study underway; Collaboration with BirdRock Bio

    JNJ-54728518 (GLP-1/glucagon 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

    3. J&J Publishes New US Pharmaceutical Transparency Report; ~42% of Profits Returned as Discounts (to Patients) or as Rebates (to PBMs/Payers)

    Janssen published its second annual US Pharmaceutical Transparency Report last month (home page here, pricing and patient access section here, full PDF here). Like last year, the report highlights a dramatic gap between the list price of drugs and the revenue collected by the company – in between, J&J loses money to PBMs/payers in the form of rebates, and also loses net profits through patient discount programs. Although the average list price for a Janssen pharmaceutical product grew 8.1% in 2017, the average price realized by the company declined 4.6%. According to the report, J&J spent ~$15 billion on rebates and discounts in 2017, which reflected ~42% of total pharmaceutical sales. We’ve written the company to figure out what these numbers are for Invokana, specifically.

    • First, the bright side: J&J is among the most generous diabetes manufacturers when it comes to patient access funding. In diaTribe’s recent article, “How to Get Diabetes Drugs for Free,” J&J’s Patient Assistance Program (PAP) was one of only two to receive a “stamp of approval” (Merck’s PAP being the other). The new transparency report emphasizes that 610,000 commercially-insured patients were enrolled in Janssen’s CarePath savings program in 2017, and thereby faced lower out-of-pocket costs on their prescriptions. Management consistently cites segment mix as a factor influencing Invokana sales, and higher utilization in the Medicaid channel means that more of our most vulnerable patients are accessing an advanced, highly-effective SGLT-2 inhibitor therapy. Inside the report, J&J explains that the minimum discount for any Medicaid patient for any drug is 23.1%.

    • Now, the bad news: Our sense is that formulary negotiations for diabetes drug classes are more intense than ever. When PBMs/payers view products within the same class as largely interchangeable, they’re inclined to restrict their patients to whichever agent gets them the highest rebate. This is happening at increasing and astonishing frequency in diabetes. ADA issued a statement of concern last summer about the harmful effects of these PBM practices, namely, that patients face restricted choice and interrupted continuity of care. The money that goes into these rebates is money that could otherwise be invested in R&D, fueling further innovation to create more effective and safer therapies.

    • This transparency report serves as another sharp reminder of US pricing pressure and stress on profitability. It underlines one major reason that Invokana is struggling in the US (sales fell 17% YOY in 1Q18) even while OUS revenue rises (+19% YOY in 1Q18). The report doesn’t break down how much of the $15 billion or 42% went to patient discounts vs. rebates – this knowledge will be key as we push for more transparency around PBMs (currently a huge black box), and as policymakers draft new legislation on pharmaceutical pricing (this came up during Q&A). US pricing pressure is not a challenge unique to J&J. Rather, it’s affecting all major manufacturers in diabetes, and yet it’s hard to assess the true size and scope of this problem because every company reports the relevant figures differently. For instance, where J&J listed 42% of profits flowing back out as “rebates and discounts,” Merck mentioned in its 2016 Pricing Action Transparency Report that 41% of total sales go to “rebates, discounts, and returns.” In Lilly’s 2016 Integrated Summary Report, the company listed an average discount of 50% alongside an average list price increase of 14% for the year. While we applaud all of the industry players that have come forward with transparency reports, it’s hard to imagine moving the needle on pricing pressure without some solid data across the board, and this requires consistency in each company’s reporting. We implore diabetes companies to work together on this to the extent possible – US pricing pressure is certainly not diminishing, but neither is the diabetes epidemic, and we need to unravel the complicated scheme of pharmaceutical pricing so that we can get effective drugs into patient hands while also maximizing resources for R&D and innovation.

    LifeScan/Animas Business Highlights

    1. Global LifeScan/Animas Sales Down 20% Operationally YOY to Record Low $339M; LifeScan-only Sales Decline estimated ~9% YOY

    Global LifeScan/Animas sales of $339 million declined 15% YOY as reported (-20% operationally) and 13% sequentially, marking the lowest total revenue recorded in our model dating back to 1Q05. The challenging quarter also came on an easy comparison to 1Q17 when sales of $399 million declined 7% as reported and operationally YOY. Worldwide Diabetes Care revenue has now declined or remained flat YOY every quarter for six straight years. As expected, the slide deck cited pump discontinuation (Animas exited the market in October), BGM price declines in the US, and category and share softness in EMEA as drivers of the weak performance.

    • We estimate that global 1Q18 LifeScan (BGM-only) sales were ~$337 million, assuming that pump revenue has tapered off to 0.5% of overall income (~$1.7 million). As a reminder, residual Animas revenue accounts for provision of pump supplies to remaining customers and some existing international pump sales excluding Canada – as of January, the company anticipates fully exiting the market by September 2019.  For context, we had previously estimated that 1Q17 global LifeScan revenue totaled $371 million, reflecting 93% of total Diabetes Care revenue vs. 7% for Animas. Year-over-year, that means that worldwide LifeScan (BGM-only) revenue declined ~9% YOY as reported on an easy comparison to an estimated ~2% decline in 1Q17. The J&J press release announcing the Platinum offer confirmed that our previous estimates of LifeScan-Animas revenue split were in the ballpark, as 2o17 LifeScan net revenue was ~$1.5 billion. It is difficult to know how the mix of headwinds is impacting sales – e.g., how much is pricing pressure in Medicare vs. private payers vs. reduced fingerstick volume in CGM users vs. competition? And how much relates to decreased investment in the segment?

    Global, US, International Quarterly Sales (1Q12-1Q18)

    2. US LifeScan/Animas Sales Decline 24% YOY to $117M; Lowest US Revenue Since 2005; Est. US LifeScan Sales Fall ~19% YOY

    US Diabetes Care sales dropped a staggering 24% YOY to $117 million, the lowest US revenue recorded in our model, which goes back to 2005. This performance comes on an easy comparison to a 14% decline in 1Q17. US sales have now declined YOY for 12 consecutive quarters (three years). Revenue declined 10% sequentially from a low base of $130 million in 4Q17. From the chart above, it’s remarkable that the US and OUS businesses were about the same size in 2012; now, the OUS business is ~$100 million larger. 

    • We estimate that US LifeScan BGM sales fell ~19% YOY to ~$116 million in 1Q18, assuming pump revenue accounted for ~0.5% of total revenue in both the US and OUS in 1Q18 (for simplicity). This comes on an easy comparison to an estimated ~10% decline in 1Q17. For context, our model estimates US sales of $154 million one year ago (1Q17) were ~93% from LifeScan BGM (~$143 million) and ~7% from Animas (~$11 million). It’s possible that US Animas revenue contributions are lower in 1Q18 than those internationally, since the company is still in the process of discontinuing sales outside of the US.

    3. OUS LifeScan/Animas Sales of $222M Fall 17% Operationally; LifeScan Sales Fall ~3% YOY

    International Diabetes Care sales of $222 million declined 9% YOY as reported (-17% operationally), marking the lowest international LifeScan/Animas revenue recorded since 3Q06 ($258 million). This also came on an easy comparison to 1Q17 when sales of $245 million declined 2% as reported (-1% operationally). International revenue has now declined YOY for all but one of the past 15 quarters – the lone exception was 2Q16, when sales grew 5% on a very easy YOY comparison. 1Q18 international sales fell 15% sequentially from a base of $260 million, albeit on a tough comparison to 10% sequential growth in 4Q17.

    • Observing the same assumptions as above, estimated LifeScan BGM sales fared slightly better outside the US, declining a more modest ~3% YOY as reported to ~$221 million. This comes on a tougher comparison to ~4% growth in 1Q17 (we estimated ~$228 million in 1Q17 BGM revenue, ~93% of revenue).

    LifeScan/Calibra Pipeline Updates

    1. Platinum Equity Transaction Highlighted in Remarks, Slides, and Press Release, But No Update

    Though CFO and EVP Mr. Dominic Caruso alluded to Platinum Equity’s ~$2.1 billion offer to acquire LifeScan during his prepared remarks, no specific updates were given. The potential Platinum transaction was also referenced in the press release and slide deck (slide 13). As of the March news, if the proposed offer is accepted, it would close by the end of 2018 and create a standalone company with Current LifeScan President Valerie Asbury continuing to lead the business. The proposed ~$2.1 billion offer from Platinum represents a somewhat-low 1.4X multiple on LifeScan’s 2017 net revenue of ~$1.5 billion. That said, this is actually a premium on the 1.0X multiple that Panasonic paid for Bayer’s Diabetes Care business three years ago – that was a ~$1.2 billion acquisition on ~$1.2 billion in previous year’s sales. There was no real indication today if this is a done deal, or if J&J is still contemplating the offer or entertaining other bids. In J&J’s hands, LifeScan is truly struggling, so we are cautiously optimistic that a fresh start with solid building blocks – connected BGMs, apps (OneTouch Reveal), copious payer contracts – could lead to a greater investment in digital and outcomes, and eventually a revival of the hurting business. Read our deep dive on the offer here, including thoughts on Platinum Equity, a leading private investment firm with a portfolio of 30+ operating companies and 200+ acquisitions since 1995. The firm specializes in M&A&O – acquiring and operating companies, especially “non-core” divisions from the world’s largest corporations. Platinum seems like a very capable business operator, but less experienced in healthcare than in other industries.

    • Mr. Caruso immediately followed his comments on the possible Platinum deal with mention of a broader “plan to implement a series of actions across our global supply chain” intended to focus resources and increase critical investments. Discussions regarding these “specific future actions are ongoing” (and are expected to generate ~$600-$800 million in annual pre-tax cost savings for the company by 2022), but it was unclear whether Mr. Caruso’s comments pertained to a LifeScan sale or just supply chain improvements. (we assume the latter.) J&J does have a Medical Device and Consumer Business Review Day on May 16, though it’s hard to imagine more than one slide will focus on this transaction.

    • This earnings call was likely Mr. Caruso’s last, as J&J announced in March that he will retire in September. VP of Investor Relations Mr. Joseph Wolk will step into the role effective July 1, 2018. According to the announcement, Mr. Caruso’s decorated 11-year tenure overseeing the finances of the >130,000-employee is the longest of any CFO in J&J’s 132-year history.

    2. Continued Silence on Calibra Medical Business and Promising OneTouch Via Mealtime Insulin Delivery Device

    There was no mention of the Calibra Medical business, whose OneTouch Via mealtime insulin delivery device remains a valuable asset and the only piece of J&J’s diabetes device portfolio to not (publicly) be placed on the trading or chopping block. As a reminder, OneTouch Via – often likened to a “wearable insulin pen” with potential to boost the easy of taking mealtime insulin– received FDA clearance back in September 2017 for an updated manufacturing process, but has yet to roll out. At this stage, it’s still not clear if J&J will sell this asset, shelve it, or actually launch it. Will we hear more on J&J’s strategy and plans for Calibra at the May 16 Medical Device and Consumer Business Review Day?

    • We did learn at EASD that the last patient has completed the major multi-center, crossover clinical trial of OneTouch Via (n=~280) investigating changes in A1c, time-in-range (71-180 mg/dl), and quality of life in type 2s using the device for boluses vs. the Novo Nordisk FlexPen. EASD reps shared that a publication is anticipated this year. Will we see results at ADA in June?

    • While we see OneTouch Via as a very valuable device for many companies – BD, Insulet, Medtronic, Lilly, Novo Nordisk, Sanofi –  the future as a J&J subsidiary seems tenuous at best. In January, Mr. Gorsky noted that at times certain technology may be “better situated in someone else’s hands.” OneTouch Via is not part of the Platinum Equity deal, and we’re not sure if it could be added at this point. J&J maintaining a diabetes device business around just OneTouch Via makes less sense to us, though given pharmacy distribution, perhaps it could be looped in with the Janssen business. We certainly hope to see this come to market, since it is the only device of its kind that we know of – reflecting years and years of investment and millions of dollars. It’s also possible J&J is holding off on a sale until the clinical trial outcomes data comes out, thereby increasing the yield of a transaction.

    • The launch timeline for the OneTouch Via has been meaningfully delayed, first from “early 2017” (ADA 2016), then from 1H17 (per a November email exchange), and lastly in May 2017, when a rep at AACE told us that OneTouch Via was expected to roll out in a focused US launch in the coming months. Presumably J&J didn’t want to invest heavily in ramping manufacturing, marketing, and shipping if it was going to sell the device a number of months later.

    3. No Mention of WellDoc BlueStar-OneTouch Verio Flex Integration; Updates Last Expected Later in 2018

    There were no updates on the OneTouch Verio Flex-WellDoc BlueStar type 2 diabetes management software integration provided on today’s call, despite assurance from both sides in January (J&J; WellDoc) of continued commitment to the project. Per the January email correspondence with J&J, more news on the ongoing collaboration is expected “later in 2018.” This project will likely transition over to Platinum, so we’d expect to hear nothing about it until that time. The technical integration consisting of Bluetooth connectivity between the WellDoc BlueStar app and J&J’s Bluetooth-enabled OneTouch Verio Flex meter officially went live mid-March in 2017 (three months post FDA clearance) but we most recently heard at ADA that it hasn’t quite rolled out to patients yet. There’s definite potential here to enhance traditional BGM and scale BlueStar’s education, feedback, bolus calculator, upcoming basal insulin titration via Voluntis, and provider relations, not to mention make a dent in type 2 diabetes healthcare expenditure – a Truven (IBM Watson) modeling analysis estimated that BlueStar could cut type 2 costs by $254-$271/user/month. WellDoc CEO Mr. Kevin McRaith was adamant that the partnership is progressing despite the likely possibility that J&J will sell the business. Meanwhile, WellDoc is moving ahead on other fronts, including launching a major consumer-facing 12-week diabetes program with Samsung Health last month.

    Select Questions and Answers

    Mr. Josh Jennings: I was hoping to just follow up with a high-level question on the medical device business. It seems as if the recent strategy has been to prune lower growth and lower margin business units with some tuck-ins. Is that how we should think about the strategy going forward? Continue with internal R&D and continued pruning?

    Mr. Dominic Caruso (CFO & EVP, J&J): We do have the areas [in the medical device business] where we need to improve and we'll improve in those areas through a number of factors as we've always done at Johnson & Johnson over the years: a good mix of internal innovation and acquisitions and new technologies. I don't think that's ever been an issue for us. We've always been able to do that. And we'll talk more about it on May 16 when you'll get to hear from the leaders of the business who are responsible for their business both on what's happened in the market and with our products, and the enthusiasm they have for the launch of new products and new areas that we're getting into.

    Q: Next week, I believe President Trump is going to talk more broadly about his views on pharmaceutical pricing in the US. Can you comment on that?

    Mr. Joaquin Duato (EVP & Chairman, Pharmaceuticals, J&J): As you mentioned, we expect that there’s going to be an announcement on pricing by President Trump. That announcement should resemble the drug pricing policies included in the President’s budget and in the Council of Economic Advisers Report. Those policies were generally seeking to increase competition and reduce out-of-pocket costs for patients, while also recognizing the value of innovation. We understand that the announcement will include a request for information from the public on drug price issues, and we’re looking forward to participating there.

     

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