Memorandum

J&J announces reorganization of Diabetes Care business – December 3, 2013

Executive Highlights

  • J&J is restructuring its Diabetes Care business to reflect changes in the marketplace, particularly the success of Invokana and the Animas Vibe.
  • Reps that have been marketing both Invokana and LifeScan products will be transferred from LifeScan management to Janssen management, a big move in our view. Animas reps will return to Animas. Significant cuts (well into the double digits) cuts were made as well, presumably as a direct result of competitive bidding and associated pricing pressures.
  • Animas and LifeScan will have the same worldwide president. Previously, the two branches had been under common leadership at the company group chair level but each had its own president.

J&J recently disclosed its plans to reorganize its Diabetes Care business – this has been driven by Medicare changes (competitive bidding) and increased price competition. One goal, as J&J said, is to restructure the business to reflect sales strategies that have recently been successful – Invokana in the US, being sold by LifeScan and other reps, is one example. The marketing of the Animas Vibe in Europe has also been quite successful though Vibe sales aren’t reported separately. As part of the move, the sales forces that have been marketing both Invokana and LifeScan products will now be transferred from LifeScan management to Janssen management. LifeScan will retain marketing, channel, and payor teams. This makes sense because presumably LifeScan will concentrate on high level deals with major retailers, while the majority of the field contacts will go to Janssen. Although the sales force that will now “live” at Janssen will continue to sell both blood glucose meters and Invokana, we believe the individual successes of the reps will hinge on Invokana sales. This is now the much more profitable sale and we do believe this is a very valuable sales force because they learned so much about diabetes and diabetes patients at LifeScan (“Live Life Without Limits” campaign back in the day and other very strong campaigns since then, though ones that have struggled in the new glucose monitoring pricing environment). By contrast, Animas sales forces that were being used by Janssen to market Invokana will return to selling only Animas pumps, presumably in time for the Vibe launch in the US. As a reminder, the Vibe was recently approved in Canada and was submitted to the FDA in 1Q13. We imagine this planning may always have been in the works on Animas, given the sense that the FDA approval will come relatively soon. Overall, as noted, the reorganization is mostly motivated by the volatile SMBG business, which faces increasing pricing and reimbursement pressures – in the US alone, J&J’s sales fell 28% in 3Q13, and we don’t expect the pressure to subside. It’s hard to say what ultimate impact this reorganization will have on J&J but presumably cuts were substantial (in the double digits), given that J&J doesn’t tend to allow any P&L to drag down corporate results. In an additional twist, as we understand it, the Animas and LifeScan organizations will now report to Sandy Peterson, who runs Consumer (and previously ran Bayer Diabetes) although the financial results will be “owned” through the traditional Medical Devices and Diagnostics. We imagine this was an acceptable trade between Medical Devices and Diagnostics and Consumer, neither of which presumably wanted both management/execution and financial results. We haven’t seen before an arrangement like this (and admittedly we do not understand it fully). 

Additionally, the global leadership of J&J’s Diabetes Care is changing, with Animas and LifeScan coming under the same worldwide president, the highly regarded Ms. Val Asbury, the previous head of LifeScan North America. The two branches had previously been under common leadership at the Company Group Chair level under Michael Paul, who is moving to a “big data” role. Global diabetes Care will now report to Ms. Ashley McEvoy, who will now be company group chair of both Diabetes Care and Vision Care. She, in turn, report to Ms. Peterson, group worldwide chair of Consumer, beginning January 1, 2014. It will be interesting to see what changes Ms. Peterson advocates directly or through Ms. Asbury and Ms. McEvoy or to see if she takes more of a back-seat approach.  We would guess having control of LifeScan and Animas though not technically responsible for the financials would be a bit of a relief in this volatile pricing environment; we will continue to watch and report on this arrangement and on LifeScan/Animas. We continue to believe the sales force is a big coup for Janssen.

  • The LifeScan/Animas company reorganization also includes the consolidation of company sites. Two Pennsylvania branches have merged into a single headquarters facility in Chesterbrook, PA (except for Animas manufacturing); and the Milpitas, CA, site will consolidate into the Fremont site by the middle of 2014. While there will be some job transfers within and across sites, there will also be some job eliminations; while we don’t know specifics, we understand the impact is at least in the “double-digits” (meaning at least 10% cuts).
  • J&J management has noted that having representatives sell both Invokana and SMBG products has been a significant success although all the previous Animas reps are returning to Animas-only sales – just in time, we assume, for the integrated VIBE launch. There was talk for some time about combining LifeScan and Animas reps but presumably a pilot program indicated this was not the right approach. As we understand it, Animas reps did not like marketing a pharma product (even a first-in-class one like Janssen’s SGLT-2 Invokana). HCPs like to minimize the number of representatives they see, management acknowledged – certainly, sales representatives who know diabetes and consumers so well from LifeScan would do very well, presumably, for Invokana. We assume with the VIBE launch, HCPs will start seeing Animas reps again more frequently.
  • We believe LifeScan will move to concentrate on high level deals with major retailers and as a result have more flexibility to reduce field contacts (i.e., number of LifeScan representatives). This makes more sense as reps are also not as welcome at HCP offices and as patient decisions on strip choice, etc. has increasingly more to do with their formularies, and as the formularies are more limited (less choice). The combined Janssen force will concentrate on drugs with devices far down the call list; although it is still part of the call list, if the rep cannot sell Invokana, he or she will probably have a lower chance of success overall.  
  • Ms. Ashley McEvoy will step into Mr. Michel Paul’s role of company group chair of Diabetes Care, adding this to her role of company group chair of Vision Care, which she has held since January 2012. This seems a lot for one person to take on although we’re sure there are some synergies and some learnings to be applied from Vision Care to Diabetes Care. As well, Ms. McEvoy has previously held the position of worldwide president of J&J’s Ethicon Products. Mr. Paul is moving into a “big data” corporate role at J&J – we do not have more information on this front.
  • LifeScan/Animas financial results will still flow through to MD&D (Medical Devices and Diagnostics), though the operational reporting will now be housed under the “Consumer” Area run by Ms. Sandi Peterson, the previous head of Bayer Diabetes Care. Ms. Peterson currently has a number of responsibilities at J&J, including leading the consumer group of companies. We see Ms. Peterson’s role as one of the top three operational jobs at J&J – the others are held by the head of Pharma and the head of Medical Devices & Diagnostics. She also has responsibility for J&J’s supply team, Health and Wellness, and information technology. Prior to joining the J&J team in December 2012, Ms. Sandi Peterson worked as chair and CEO at Bayer CropScience AG in Germany and was, as noted, previously head of Bayer Diabetes in New York.
  • Although competitive bidding has taken a toll on both J&J and Abbott, they are responding in different ways. J&J is investing more in already developed market areas, whereas Abbott is forging ahead in new areas, such as with its Flash Glucose Monitoring (see page four). We are curious whether Bayer or Roche will attempt to claim a bigger fraction of the SMBG market cutting prices (even though we recognize the risks). We certainly hope not since we would like to see more funds go into R&D to make sure glucose monitoring continues to drive forward.
  • Mr. Tom West will continue to run Calibra; although we haven’t heard much on this, we understand that trials are to begin soon. We do not know how the commercialization will go for this but assume it would be another great tool in the Animas toolbox as well as for reps selling both Invokana and LifeScan. Mr. West will also continue to run business development; we think he advises a lot of J&J, and is not limited to M&A inside MD&D. We assume he would be advising all heads at J&J on this front – MD&D, Pharma, and Consumer.
  • Although the Milpitas, CA, branch is relocating to nearby Fremont, CA, management was quick to note that the consolidation will not affect the operation of the J&J Diabetes Institute, currently based in Milpitas. Because the Diabetes Institute, known as JJDI, has been educating HCPs in host facilities close to the health centers, the center in Milpitas is already less essential than it previously was, management said. However, we assume the base still serves various behind-the-scenes functions that could be affected by this closing, or if other areas of the program will be affected by J&J’s financial stress (i.e., fewer courses).
    • As a reminder, J&J’s Diabetes Institute has traditionally educated HCPs on diabetes and the treatment of diabetes through a number of different programs, including in-person training/education, distance learning modules, webinars, peer-to-peer exchanges, summaries of recent journal articles on diabetes care, and other resources.  
    • The Silicon Valley real estate is no doubt extremely valuable and will be sold or leased at a big profit.
  • J&J has also altered the geographic regions that report SMBG, with three regions now: 1) the Americas; 2) Europe, Africa, and the Middle East; and 3) Asia Pacific. Currently, Latin America is broken out from the Americas but this will no longer be the case going forward. Latin America is a growth area and should help the reporting results for the Americas.
  • Separately, LifeScan faced an additional blow recently when a Federal Circuit Court ruled that Shasta Technologies has the right to manufacture its FDA approved GenStrip, which works in OneTouch Ultra, Ultra2, and UltraMini meters. This competitor, who promises to sell strips at 50% of the cost (we assume this is full retail price!), could hurt J&J’s SMBG business more than competitive bidding already has; since strip revenue makes up a substantial amount of R&D, facing more challenges in this area does not bode well for J&J. Although Shasta has won this round, we note that J&J remains dedicated to pursuing the case. We’ll be following up on this case in a subsequent report.

 

Close Concerns’ Questions

Q: What will be the role of each Diabetes Care branch? Will one be strictly in charge of only managing finances? How much will these two branches interact?

Q: What is the degree of job loss? Will there be further consolidations in the future?

 

--by Hannah Martin, Adam Brown, and Kelly Close