J&J 2Q12 – Diabetes Care global revenue up 2.9% operationally; LifeScan acquires Calibra Medical, significantly expanding insulin delivery potential – July 17, 2012

Executive Highlights

  • Diabetes Care (LifeScan/Animas) revenue totaled $673 million, down 1.2% as reported and up 2.9% operationally from $681 million in 2Q11, with 0.4% sequential growth.
  • J&J LifeScan just expanded its insulin-delivery business with the recent acquisition of Calibra Medical, which closed Friday, July 13.

This morning, new J&J CEO Alex Gorsky led the company’s 2Q12 financial results update, his first such call since succeeding Bill Weldon as CEO. Diabetes Care (LifeScan/Animas) totaled $673 million, down 1.2% as reported and up 2.9% operationally from 2Q11, with 0.4% sequential growth. Although this growth may sound tepid, $673 million represents J&J’s second-highest revenue achieved ever, with the highest exactly one year ago, in 2Q11, making for a very challenging comparison in 2Q12. As in 1Q12, LifeScan was mentioned as a primary contributor to operational growth, implying that Animas sales were relatively weaker in 2Q12. US Diabetes Care and International Diabetes Care had almost the same revenue, at $337 million and $336 million, respectively – US revenue rose 1.2% and declined 4.3% sequentially. Management cited softness in mail order sales and an inventory contraction at the retail level as impacting 2Q12 US growth. Ex-US revenue fell 3.4% decline as reported – but a 3.6% operational increase, indicating solid underlying performance masked by the relative strength of the US dollar. Management reported “strong” sales in emerging markets that were partially offset by lowered sales in some developed markets, likely Europe if we had to guess.

On an extremely exciting note, we learned after the call that J&J LifeScan has just acquired Calibra Medical, maker of the Finesse bolus-only insulin delivery system, for an undisclosed amount. The acquisition closed last Friday. No details on the commercialization strategy are available, but we think this is a very smart acquisition: the Finesse fits perfectly into J&J’s vision of a world without limits for people with diabetes. The device – a “patch-pen” that only delivers bolus insulin through on-unit buttons is very simple, convenient, and offers patients who have suboptimal or zero mealtime/snack insulindelivery a very viable alternative to improving their diabetes management. The Finesse is small, is expected to be used with basal insulin, and will be available through pharmacies once it is commercialized. With no official announcement from J&J (given the huge size of J&J, presumably this acquisition isn’t sizable enough to require disclosure through a press release), we would guess it will not be available for some time. That said, the most recent generation was approved last April. We believe ultimately the device will offer a very useful alternative for type 2 patients who should be on prandial insulin; many such patients want insulin use to be easy and more discrete and we think this is a terrific alternative that will expand the market for prandial insulin. We also believe the Finesse will be used not only for just insulin, but potentially for Symlin, GLP-1, and other hormones in development. While we think Finesse will expand the market of type 1 patients who do not want a traditional pump but are drawn to the size and discretion of the Finesse, it is really the type 2 patients in whom we see the upside, since our guess is type 2 patients who do not take mealtime insulin but are not at goal will see more improvement from a move to Finesse. Our report offers more thoughts on the deal’s rationale and implications.

Elsewhere in device pipeline news, the only new product mentioned specifically on the call was the OneTouch SelectSimple blood glucose monitor for emerging markets, and supplemental information suggested no major changes to the device pipeline. The OneTouch Verio IQ pattern-recognition meter began a European launch in May 2012 after a voluntary recall in February 2012, and it is now available in France, Italy, Germany, Canada, and the US; see our test drive on the current OneTouch Verio IQ at Notably, we are very optimistic about the next-gen Verio IQ, which remains slated for launch later in 2012 and which we think will be called “Verio Sync” based on IP filings. Management continues to expect pre-market approval (PMA) filing to the FDA for the Animas Vibe pump/CGM in 2012 (we anticipate an updated timeline during Dexcom’s 2Q12 results call). As for J&J’s hypoglycemia-hyperglycemia minimizing (HHM) system, encouraging results were presented at ADA, and (though not mentioned on the call) recruitment recently began for a follow-up inpatient feasibility study ( ID: NCT01638299).

On the drug front, canagliflozin, J&J/Mitsubishi Tanabe’s oral once-daily SGLT-2 inhibitor, was submitted to the FDA and EMA in May and June, respectively, as scheduled. These submissions make canagliflozin the closest SGLT-2 inhibitor to market in the US, given that BMS/AZ received a complete response letter for dapagliflozin in January (though dapagliflozin is still further ahead in Europe, where the CHMP gave a positive recommendation toward approval in April). Data presented at ADA regarding canagliflozin was overall very positive, with the highest dose showing A1c reductions slightly larger than expected, at roughly 1.2% from a ~8.5% baseline. So far we have seen no indication of the cancer signals that has significantly slowed dapagliflozin’s regulatory process in the US, but of course we will have to wait for the FDA advisory committee to see all the clinical data on this. Notably, from what we learned at Keystone 2012 (see our day #2 report), it sounds like FDA is requiring a pre- approval cancer trial for dapagliflozin, which puts J&J in a frontrunner position. Elsewhere in the drug pipeline, the sNDA for Nucynta ER, submitted in October 2011 for chronic pain associated with diabetic peripheral neuropathy, remains under review. We tentatively anticipate approval later this year based on positive data released thus far (including top-line phase 3 data announced in May). No updates were provided on other drugs in the cardiometabolic pipeline. On the type 1 diabetes side, in early July J&J Janssen announced that it has licensed a portfolio of small molecules and biologics designed to stimulate beta cell regeneration from Evotec AG and Harvard – an encouraging sign of J&J’s commitment to the field, albeit still in early stages.


  • Worldwide revenue for J&J Diabetes Care (LifeScan/Animas) totaled $673 million, down 1.2% as reported and up 2.9% operationally from $681 million in 2Q11. While management did not provide details on the revenue split between LifeScan and Animas, J&J listed LifeScan as a primary contributor to total Medical Devices and Diagnostics operational growth. Given that worldwide MD&D increased operationally by 3.4%, we estimate that LifeScan’s operational growth likely exceeded 3.4%. Correspondingly, we estimate that Animas growth likely falls more than 0.5% below the mean operational growth for Diabetes Care (2.9%), especially considering LifeScan’s larger sales platform.

2Q12 Revenue in millions

Reported/Operational Growth from 2Q11

J&J Diabetes Care


-1.2% / 2.9%



1.2% / 1.2%



-3.4% / 4.6%

  • Overall Diabetes Care revenue increased 0.4% sequentially, reflecting a 4.3% US decline from 1Q12 and a 5.7% growth ex-US. For comparison, in 2Q11, overall revenue increased 6.9% sequentially, following a fairly weak 1Q11.

2Q12 Revenue in Millions

Reported Growth from 1Q12

J&J Diabetes Care









  • US Diabetes Care revenue of $337 million rose 1.2% from $333 million in 2Q11. J&J cited continued softness in mail order sales and an inventory contraction at the retail level as impacting 2Q12 growth, presumably primarily in the US. Revenue for 2Q12 declined sequentially by 4.3% from 1Q12 revenue of $352 million – the historically highest single-quarter US revenue for J&J since 4Q07. This sequential decline was in stark contrast to the 7.1% sequential increase between 1Q11 and 2Q11 – again, the weakness of 1Q11 was a significant factor.
  • Ex-US Diabetes Care revenue reached $336 million, reflecting 3.4% year-over-year decrease as reported but a 4.6% increase operationally from $348 million in 2Q11. Reported revenue increased 5.7% sequentially from 1Q12 ($318 million, which had been a five quarter low). In comparison, revenue increased 6.7% sequentially from 1Q11 to 2Q11. J&J described “strong” sales results in emerging markets that were partially offset by lower sales in some developed markets. Revenue in 2Q12 was nearly identical in the US vs. internationally. We note that in the previous four quarters, US revenue was higher twice (3Q11 and 1Q12) and ex-US revenue was higher twice (2Q11 and 4Q11), with the difference ranging from $10 million to $34 million.
  • We wonder what the impact is internally of the US and International Diabetes Care revenue being so “close” is. In 2Q12, the US edged out International by just $1 million ($337 million to $336 million); the US had slightly higher revenue than International in 1Q12 as well, but had lower revenue than International in three of four quarters last year. We imagine there is some friendly competition inside… .


  • We learned after J&J’s conference call that LifeScan has just acquired Calibra Medical, the makers of Finesse, the three-day-wear insulin delivery system typically used to bolus short-acting insulin. The deal closed last Friday, July 13. Overall, we think the deal is a very smart one for J&J. First, we believe the system can help patients who are not on mealtime insulin or are not adhering to optimal mealtime insulin regimens. This is very strategic for LifeScan given its focus on insulin users. The biggest benefits of the Calibra system are simplicity and discretion, from our view – as such, this product will be a great “sell” for LifeScan and Animas sales reps to be able to make to HCPs (we assume both will be trained on it and educate HCPS on it). Indeed, in the increasingly competitive BGM and pump worlds in particular, Calibra, when commercialized, will provide an additional alternative for reps to offer. Given that according to Diabetes Care, ~45% of type 2 patients in the US are not at their glycemic goals ( and that less than 30% are on any insulin according to the CDC, including a far lower percentage on mealtime insulin, we applaud J&J foracquiring this additional option for patients. The device can and should be able to help many of them optimize their diabetes care by starting on and dosing mealtime insulin more easily. We do note that although we think that the majority of Finesse users will be type 2, we can also imagine type 1 patients who have decided not to pump to go the Finesse route rather than a traditional pen or syringe. Of course, type 1s on the Finesse would still need to use a long-acting basal insulin, as the device is only capable of bolus insulin delivery.
  • Calibra received its first FDA clearance for the Finesse in early 2010 (see our March 13, 2010, Closer Look report at, and in April 2012 the FDA cleared an updated version with an expanded indication ( The previous label specified that the Finesse was for dosing insulin – the new label’s reference to “clinician-prescribed medications” is broader, and we believe paves the way for Symlin and GLP-1 and perhaps even a stable glucagon, eventually, to be delivered through Finesse. (While this would require stability testing at a minimum, we believe there would be significant interest in this area from CDEs and patients in particular who find Symlin very useful – patients could take Symlin far more physiologically merely by a few more discrete button presses per day.) The new clearance also allows 72 hours of dosing, building on the 48-72 hours clearance that Calibra gained in June 2010. Another difference is the new generation’s “Dose Count Card,” which is used by the patient to record date, time, and dosage. We are not sure how this Dose Count Card is integrated into the Finesse but would assume that this tool is fairly low-tech in keeping with the Finesse’s simple ethos.
    • As a reminder, the device is entirely mechanical – insulin delivery is driven by the mechanical force of a button press. There is no handheld controller, display, or batteries, so simplicity appears to be a major advantage. The Finesse delivers bolus infusions at preset doses of one and two units, with a total reservoir capacity of 200 insulin units over a three-day wear. The Finesse also tells patients when the reservoir is empty (the two buttons become unable to squeeze), so the chance that patients go without bolus insulin due to lack of awareness of insulin depletion is virtually impossible.
    • One of the most positive features of the Finesse is its small size: approximately 2” long, 1” wide, and only 1⁄4” thick. The Finesse has a 27-gauge needle, which Calibra has said is designed to make insertion effectively painless; this has been supported by a small number of patients with whom we have conferred who have used it. Calibra’s device leaves a flexible plastic cannula in the patient after insertion.
    • The sleek design offers a number of primary advantages: 1) discreteness – the device boluses through clothing; 2) size – roughly 2” long, 1” wide, and ” thick; and 3) simplicity – requiring no handheld controller, display, batteries, or memory. We expect the new generation could be less expensive to manufacture; the design is similar (there are not really any improvements we can imagine) though the filling process is simpler as we understand it. We believe that there is movement to make the product available in half-unit and five-unit doses as well as the currently-planned one- and two-unit doses.
  • This acquisition makes very good strategic sense to us:
    • J&J already focuses LifeScan on insulin-using patients and the Calibra Finesse offering should help attract a wider group of insulin-using patients, most of whom will likely be higher-frequency glucose testing users when they move to MDI with the Finesse from basal-only. We think lots of cross-selling is possible since itshould be just as easy to train reps on the Finesse insulin delivery device as it is to train them on various OneTouch meters. As such, current non-insulin-using OneTouch users may be attracted to this new insulin delivery system and may therefore opt to start mealtime insulin earlier than they otherwise would. Similarly, we think brand new insulin users will be attracted to this offering and through cross-selling may start using OneTouch test strips. Additionally, J&J LifeScan to date has focused its OneTouch and Verio IQ products on simplicity and ease of use, and Calibra’s Finesse provides a nice extension of J&J's leadership in this regard.
    • With Finesse, J&J can help doctors improve diabetes management of patients. Some doctors, especially PCPs, are known to avoid prescribing mealtime insulin to type 2 patients that could benefit from mealtime insulin. Given the simplicity and discreteness of the Finesse, doctors may be more receptive to prescribing mealtime insulin.
    • With Finesse, J&J can help patients find more appealing options of taking insulin. Many doctors who try to persuade type 2 patients to go on insulin fail, because they are unable to present pens and syringes and traditional pumps as attractive options. This is by no means true in all cases, but it is true in some cases. Some patients will be more drawn to the simplicity and discretion of Finesse and may thus be more apt to go onto mealtime insulin sooner. In addition to being helpful in raising interest among type 2 patients to start on mealtime insulin, we also think the diabetes management will improve for such patients because they will be likely to use Finesse not only for meals but also for snacks. Given the “grazing” culture in the US in particular, the Finesse could be particularly helpful for patients who aren’t willing, due to privacy, to pull out a syringe or pen every time they eat a carb or two.
    • J&J has some great marketing opportunities through the pharmacy channel. As we understand it, the plan is for patients to get the Finesse insulin delivery devices at the same pharmacies where they pick up blood glucose strips. Cross selling opportunities will be sure to be presented to patients if they are buying one product but not the other.
    • This deal is especially important for Animas, which hasn't to date had a widely-used insulin delivery option for type 2 patients. Indeed, we would also assume some patients may progress from Calibra to Animas pumps over time. As a reminder, Calibra’s Finesse doesn't provide basal insulin, and some may want all insulin delivered through a pump as their comfort level with pumps increase. In this way, Calibra’s Finesse could function as a sort of training wheels for patients skeptical of traditional pumps. This product could also prompt higher interest in other pumps for type 2, which could help Medtronic, Insulet, and Valeritas; overall, as patients and providers become more used to a “pump-like” product, we believe the entire market will grow.
    • On an exciting note, the latest approval of the Finesse sounds like it could allow easy delivery of other hormones such as Symlin and GLP-1, and J&J would be able to help current and new patients by offering additional delivery options for these hormones that are gaining increased attention across the diabetes landscape. Longer-term, a more stable glucagon could even be delivered through the Finesse. We imagine more testing would need to be provided and that such use would be through a “next-generation” model though technically, doctors could certainly prescribe Symlin use off-label once the current-generation Finesse is launched.
    • This acquisition could ultimately provide J&J with higher margins for insulin delivery. In particular, due to the simplicity, we assume that customer service needs may be lower; to boot, there will not be costs associated with sending people new pumps in the sense that traditional pump companies bear this cost (when a patient needs a new Animas pump, the company sends a new pump out, often at a high cost – this would never cost as much with Finesse). While we have no information on gross margins or operational costs, we imagine that since the second-generation has been approved, there has been some improvement on this front.
  • We have a variety of questions remain regarding the Calibra acquisition, which to our knowledge hasn't been formally announced:
    • 1. We would like to know more about reimbursement prospects. In thinking through the reimbursement prospects, we imagine that reimbursement for Calibra’s Finesse won’t be initially straightforward, as it is another product for patients to buy who otherwise would only buy pens or syringes. We would imagine reimbursement could certainly be reached if pricing is reasonable compared to pens/syringes and if adherence looks good. Payors should be keen to improve diabetes management for type 2 patients and insulin adherence has long been a problem. Adherence should be higher with the Finesse than with syringes or pens, since it is easier to push a button discreetly than to pull out a pen or syringe and bottle of insulin. While payors haven’t traditionally been keen to pay for convenience, in this case, they would be paying for more frequent insulin use, which we would imagine would translate to better diabetes management, though of course this is speculation at this point. Still, while adherence trials have been challenging to execute traditionally, we would think the discretion provided by the product in particular would foster improved adherence and results – this is particularly true since those who “should” be on mealtime insulin but are not, or those who are not optimally taking mealtime insulin, usually have higher A1cs.
    • 2. We would like to know more about commercialization plans and pricing – given that the product is approved, we hope to see it commercialized in the near future, although we certainly understand that there are no guarantees on this front, and presumably since there was no announcement about this acquisition, we assume that the product will not be available anytime soon – though we would certainly hope to see it in 2013-2014 time frame, given the high potential to improve insulin delivery.
    • 3. We would like to know more about plans for future generations. It is certainly a win for J&J that the current product has no regulatory risk and given the strength of J&J’s Diabetes Care R&D, we believe they may be able to improve the product further – while nothing comes to mind in terms of product improvements for patients, perhaps there could be improvements on the cost front – that is another area, of course, where there is little information.
    • 4. It is early to speculate what the impact on the competitive landscape will be. By and large, we believe that this will increase demand for mealtime insulin and that longer-term, it could increase demand for other hormones that do not currently have optimal delivery systems. We also believe this will expand the market for more advanced insulin delivery devices (a sort of “training wheels effect” as MDI users get more accustomed to a “pump-like” device) and that if reimbursement becomes available, it would reduce demand at least slightly for pens and syringes
    • 5. We wonder how the acquisition will play out internally given Animas’ established insulin delivery business. At first blush, we don’t see this cannibalizing traditional Animas pump sales, as the Calibra Finesse is an entirely different product aimed at a different target market.
    • 6. We would like to know more about patient impressions of the technology. We do note that no clinical performance data were required for or included in Calibra’s 510(k) submissions and we are very interested in seeing clinical data associated with Finesse as it emerges. At the 10th annual Diabetes Technology Meeting (DTM) in November 2010, Calibra presented encouraging data from a 12-week crossover trial comparing the Finesse to pens or syringes. The feasibility study’s 38 patients (26 type 1, 12 type 2) preferred the Finesse to pens/syringes at a statistically significant ratio of 3:1, and the Finesse was associated with a statistically non-significant trend toward lower mean blood glucose. This early data is positive, though we’d like to see longer and larger studies conducted, especially in a broader swath of patients with type 2 diabetes.
    • 7. International regulatory plans are unknown at this point. Given the tight reimbursement in Europe and the low penetration of pumps globally, we expect international sales would be much more challenging than sales in the US.
    • 8. As a postscript, deal terms were not announced and we do not expect to learn more on this front.
  • Back on the J&J device pipeline, at this stage of its ongoing global launch, the Verio IQ is available in France, Italy, Germany, Canada, and the US. As a reminder, as of J&J’s 1Q12 results call in April, the Verio IQ had launched only in Canada (September 2011) and the US (January 2012); launches elsewhere had been temporarily stymied by a voluntary February recall due to a software bug with the meter’s settings. At ADA, we learned about the development of an iPhone application to work with the Verio platform (although details were not disclosed due to the system’s current 510(k) status) and remain interested to see how the meter and app will work together pending approval.
  • J&J continues to promote its OneTouch SelectSimple blood glucose monitor for emerging markets. The no-button, language-less meter debuted in India in September 2011 (see the September 12, 2011 Closer Look at and since then has been launched in China (December 2011), South Korea, Vietnam, the Philippines, Malaysia, Thailand, Indonesia, and Singapore. Management commented that training and educating physicians about the right diabetes treatment paradigm was part of their long-term strategy in emerging markets. Additionally, during Q&A they alluded to long-term opportunity in bringing simplified approaches – designed for diabetes care in emerging markets – to developed markets. (We are interested to learn whether this involves adapting specific features of the OneTouch SelectSimple for developed markets.) They indicated that J&J has already seen benefits from making diabetes care more user-friendly in the developed world (e.g., through Verio IQ).
  • Data presented at ADA on J&J’s hypoglycemia-hyperglycemia minimizing (HHM) system, which uses a OneTouch Ping pump, a Dexcom Seven Plus CGM, and HHM algorithm, were positive overall. The study was a nonrandomized, uncontrolled, inpatient feasibility study in 13 patients, testing the HHM system over a 20-hour period. Despite two high- carb meals and intentional under- and over-bolusing, the system kept patients in zone (70-180 mg/dl) nearly 70% of the time, with only 0.2% of the time spent in hypoglycemia. The HHM algorithm took preemptive control the vast majority of the time when below-zone excursions werepredicted based on the algorithm’s target zone of 90-140 mg/dl (nine out of nine times going by glucose as measured by CGM, and five out of six times going by glucose as measured by YSI). For more details on the algorithm and trial result, please see our ADA 2012 device report, page 70-73 ( While J&J management made no reference to HHM during the call, we note that a follow-up, ~30-hour feasibility trial in adults with type 1 diabetes (n=30) has begun recruiting on (NCT01638299).
  • Management continues to anticipate filing pre-market approval (PMA) with the FDA for the Animas Vibe in 2012. As a reminder, the Animas Vibe is an integrated insulin pump/CGM using Dexcom’s fourth generation sensor. The companies have previously indicated that J&J would be able file a PMA for the Animas Vibe 100 days after the Gen 4 submission, which occurred at the end of 1Q12. However, during Dexcom’s 1Q12 results call, management expressed concern that filing the supplemental Animas PMA would slow the approval process for the Gen 4. We can expect an updated timeline on Animas filing in Dexcom’s 2Q12 call in early August.
  • We are curious about the launch timeline on Cellnovo’s cloud-connected pump (which uses OneTouch Vita test strips). In February 2012 Cellnovo entered a large usability study and, as we understood it, was targeting UK market launch in April or May of 2012. However, we haven’t heard study results or an updated timeline from Cellnovo since.
  • The remainder of the J&J pipeline is in line with 1Q12 expectations: 1) The third- generation OneTouch Verio (region unspecified; possible name “OneTouch Verio Sync” based on intellectual property filings) and the next-generation OneTouch Ping pump/meter (US; now listed as “OneTouch Ping Verio,” indicating that the product will use Verio test strips) both remain on track for submission in 2012; 2) J&J anticipates submission of the Next Generation Platform Version 1 (we assume this is a new BGM platform) in 2013 or later; 2) A next generation POC testing system is approved in the EU with version 1.5 submission planned in 2013 or later (for the EU and Japan); and 3) J&J continues to list an unspecified metabolic surgery product for 2012 submission. For additional detail, see our 1Q12 report (


  • Canagliflozin, J&J/Mitsubishi Tanabe’s oral once-daily SGLT-2 inhibitor, was submitted for approval to the FDA and EMA in May and June, respectively (for details on the FDA submission please see our May 31, 2012 Closer Look at This was on schedule with assurances provided earlier in the year that canagliflozin would be submitted during 2Q12. Meanwhile, a fixed-dose combination product with metformin remains in phase 3 studies. Management expressed excitement for canagliflozin but did not give any updates on regulatory prospects or potential commercialization strategies,
  • Data presented at ADA regarding canagliflozin was overall very positive, with the highest dose showing A1c reductions slightly higher than expected, at about 1.2% from a ~8.5% baseline. Notably, poster 50-LB highlighted superior A1c reductions with canagliflozin over sitagliptin (Merck’s DPP-4 inhibitor, Januvia) with similar rates of hypoglycemia and urinary tract infection (but greater risk of genital mycotic infection). Unlike BMS/AZ’s dapagliflozin, canagliflozin did not seem to increase breast or bladder cancer risk based on the data presented so far, a relief to many who were concerned about a potential cancer issue for the SGLT-2 class as a whole. For more detail, please see our ADA 2012 report on non-incretin oral therapies here:
  • Canagliflozin looks like the frontrunner to be the first in class SGLT-2 inhibitor in the US and BMS/AZ’s dapagliflozin seems closest to market in Europe. BMS/AZ received a complete response letter from the FDA in January for its SGLT-2 inhibitor, dapagliflozin (for more detail please see our January 19, 2012 Closer Look here:, but received a positive recommendation from the CHMP on granting market authorization in Europe (please see our April 23, 2012 Closer Look here: If approved in Europe, dapagliflozin (Forxiga) would be the first SGLT-2 inhibitor on the market. We have heard no updates on the status of re-submitting dapagliflozin to the FDA. Dapagliflozin’s malignancy profile showed increased bladder cancer risk (though not statistically significant). From our understanding at Keystone 2012, given the biological plausibility of bladder cancer with an SGLT-2 inhibitor, the FDA called for a large-scale 16,000 patient cancer study lasting three to five years to show no effect. Thus if canagliflozin is approved on its first filing, it will be the first SGLT-2 inhibitor available in the US (for additional commentary, please see page 13 of our Keystone 2012 Day #2 Highlights at
  • On May 17, J&J released top-line phase 3 data indicating that Nucynta ER (tapentadol extended release, 100-250 mg twice daily) was more effective than placebo in relieving chronic pain due to diabetic peripheral neuropathy (DPN). The study randomized adults with DPN (n=459) to receive one or more doses of Nucynta ER during a three-week titration period and then either maintain their individually optimized dose or switch to placebo for 12 weeks ( identifier: NCT01041859). At the end of this 12-week period, Nucynta ER was found superior to placebo in reducing mean pain intensity (least-squares mean difference of 0.95 on an 11-point scale; p<0.001). Side effects included nausea (21.2%) and vomiting (12.7%). As a reminder, in October 2011 J&J submitted an sNDA for Nucynta for management of neuropathic pain associated with DPN. The company’s 2Q12 update did not include any news on Nucynta, but we remain tentatively optimistic for mid-2012 approval given the positive phase 3 results in DPN, the typical 10-month review cycle, and the drug’s past regulatory success (Nucynta ER was approved in August 2011 for the management of moderate to severe chronic pain in adults when a continuous opioid analgesic is needed for an extended period of time). For more background on Nucynta ER, see the November 13, 2011 Closer Look at
  • No updates were provided on other drugs in the cardiometabolic pipeline. These include J&J’s MTP inhibitor (JNJ-16269110, phase 2 as of last update in May 2011; no ongoing studies listed on, an insulin sensitizer (which we suspect is JNJ-41443532 and was in phase 2 as of May 2011; also no ongoing studies listed on, and various preclinical candidates developed through J&J’s partnership with Metabolex and its own discovery program. For more details on these candidates, see our coverage of J&J’s most recent Pharma Day in the May 26, 2011 Closer Look at
  • In early July, J&J Janssen announced that it licensed a portfolio of small molecules and biologics designed to stimulate beta cell regeneration from Evotec AG and Harvard. These candidates were developed based on the research of Harvard professor Dr. Douglas Melton and have been further analyzed since 2011 under the aegis of the CureBeta program, a collaboration of Evotec, Harvard, and the Howard Hughes Medical Institute. We are eager to hear more about J&J’s interest in expanding R&D efforts into the area of diabetes cure research. Most beta cell regeneration investigations are still very early-stage (for more detail on this announcement and a brief overview of the field, please see our July 17, 2012 Closer Look here: As a reminder, J&J made a foray into type 1 diabetes prevention research in 2010 when it licensed rights from Diamyd for the development of a GAD65 vaccine,but after disappointing phase 3 results in June 2011, J&J returned the rights to Diamyd (see our J&J 2Q11 report for more details:

Questions and Answers

Q: You talked about a bunch of items in your prepared comments, and I think probably the one that got our attention was your comments about the goal of accelerating J&J's sales and earnings growth over the next several years, not necessarily a short-term goal, but a longer-term goal. And within that, you talked about innovation, globalization, and other initiatives to try and accomplishment that.

Can you just talk a little bit about the portfolio today in that context? You talked about being more disciplined on strategic decisions regarding what goes into the portfolio and what comes out.

Do you have the portfolio and do you have the R&D pipeline today to drive that acceleration, and what do you think you need to do strategically to make that growth acceleration happen?

A: As I commented earlier, overall, we believe that our diversified portfolio does better position us for the healthcare market that we're likely to experience ahead. Let's start with our pharmaceutical group. I believe that the transformation that has occurred over the past several years, when you consider the fact that we went through a very significant period of generic entries and patent expirations, and you look at not only the major changes that we made in our organization, but also if you look at the focus that Paul, Joaquin, and their teams have put on specific therapeutic areas and the success rates that we've had with our clinical development programs and getting new products to the market, we think it's really significant, and it's positioned us very well.

And we think by being focused in these areas, not only does it give us an advantage in terms of our scientific insights in clinical development, but it also enables us to leverage our commercial organization and really be focused on the right customers. So while we're very pleased with the uptake that we're seeing across that portfolio right now with products like Zytiga, Xarelto, Incivo, Stelara, and Simponi, we're also investing for the future. And we're excited about some of the new compounds that we have, whether it's canagliflozin, bapineuzumab, or things further out such as ibrutinib as well TMC435. And we're continuing to invest even longer-term, as you heard in our announcement this week, with our new cyclic peptide in heart failure, recognizing that it's earlier. So I think, there, we've got a strong portfolio, very differentiated drugs that the market's demanding; but clearly, we're also investing for the future.


So we think that all of our segments of our business have good inline opportunities. We think there are exciting opportunities coming in each of their pipelines. But we also realize that given some of the changes in the market, that we're likely going to have to be even more disciplined, more selective and decisive going forward. And I think evidence of that is the decision that we made in the drug-eluting stent market that we alluded to earlier. We think that was the right call. And by the way, as Louise mentioned earlier, if you look at what we're doing with Biosense Webster right now and the progress that we're making, we're pleased with that.


Q: If you look at where Europe's heading, I think you were flat when you take out Synthes, roughly. It looks like it's a little worse than it's been. Where do we think we are today, and can you align the costs with some of the pressures you're seeing in Europe? I was wondering if any segments are being hurt more than others in Europe, broadly, as well.

A: Your observation is right, that overall we're generally – I think we're up about 1.5%. And, again, there's puts and takes across that. But what we're seeing is obviously some additional pressure with price as well as volumes, and price being regulated mostly to tendering in some of the contract things that we would see in our pharmaceutical group. What we're seeing is consistent with around 2011, with perhaps slightly more in southern Europe. If you look at MD&D, we're also seeing pressures, some in price but some just in extended queues, longer wait times for certain procedures. And so we're watching it very closely. We have not seen a dramatic change over what we saw in 2011, but obviously, we still think that there are a lot of macroeconomic conditions and dynamics that may impact that going forward.

Q: And pharma, on the pricing side, has that also been more of an impact?

A: Again, we're seeing some impact in pharma on the pricing side, mostly related to tenders and other austerity measures, but not to a significantly greater degree than what we have commented around 2011 so far this year.

Q: When you look at the operating margin leverage both this quarter and the back half, can you roughly say how much of that might be due to local currency and the lower costs from the FX as an offset to the top line?

A: Yes, I think that one of the things to bear in mind is we typically hedge our foreign currency commitments out about 18 months, so our operations ex-translation are not significantly impacted by changes in foreign currency. So really what you're looking at is sort of a reasonably equal mix of changes in simply translating the top line and the expenses from the local currencies to the U.S. dollars, so I don't think there's a pronounced difference between those two factors.


Q: As far as acquisitions go, what healthcare assets that exist today make strategic sense for J&J?

A: We're always looking for areas where we think there's a lot of unmet medical need. There could be a new technology, or a new platform that makes a big difference and that we think offers real growth opportunity. The other areas are where there's an obvious complement to maybe something that we already have. And then sometimes it could be for vertical integration, where we want to be able to become more effective and more efficient about what we're doing. So those are some of the strategic drivers that we look at, but obviously it's always done in the context of what the competitive environment is and other dynamics.


Q: A question on the hospital purchasing environment. In your prepared comments, you said utilization was stable, but it appears that ObamaCare is here to stay, and this is going to add increased cost to hospitals. What’s your sense as you talk to hospital executives – CEOs, CFOs – on the capital expenditure side? Is this something that's going to slow in the near term, or are we thinking about big-ticket items that may get pushed off as the implementation of healthcare reform goes forward?

A: Overall obviously we think that there are going to be opportunities as well as challenges associated with healthcare reform and how it ultimately gets rolled out. Certainly, if we look at some of the data – for example, in the first quarter of this year, hospital admissions are up just about 2.0%. We saw some surgical procedures up around 4.0%, lab procedures up at around 3.0%, and ortho procedures up around 3.0%, offset with office visits down about 3.0%. The caveat is that this is first-quarter data, that’s the most recent data that we have. We believe that the hospitals are going to be looking for ways to become more efficient and more effective across the board. That's what we hear from our customers, and again, that's here in the United States as well as abroad.

The offset, of course, in the United States is the increased volumes the hospitals will be getting from newly covered patients that will be coming into the system under healthcare reform. But, we would expect there to be additional challenges in the pricing environment, and therefore all the more important – to my earlier statements – as we look at our portfolio and as we look at our capabilities, having a broad base, having offerings that go beyond the product, building on our relationships, and building on our scale are going to be more and more important.


Q: You mentioned emerging markets and the breadth of products and technology that you can bring to those markets. I'm wondering how do you expect to match some of the economic parameters of these emerging economies with some of the advanced top-tier products and brands you deliver in developed markets?

A: Most importantly, the customer in those emerging markets is the government. And what we've found is that the government is very interested, as they're building their healthcare systems in the developing markets, of not just replicating what's been done in the developed markets, but looking for ways to expand access and also to expand and accelerate their access to some of the new technologies in a cost-effective way.

What we're doing is, first of all, making sure that we're trying to work closely with them. And again, this is where I think our breadth, depth and scale is very important. If you look at our share position in a lot of those emerging markets, it remains very strong and competitive. Second, it entails new offerings, and that's why we put R&D centers in many of these locations and why we continue to invest in them. We're pleased with the rollout of products such as absorbable suture, linear cutters, and staplers that I would say are very high quality yet more appropriate for those particular markets, both in terms of their actual construction as well as their pricing model.

The other area that we're focusing on is training and education, and in many of those areas, it's a case of trying to get more physicians trained on things like minimally invasive surgery, the right treatment paradigms for diabetes, and cardiovascular procedures. So we're working closely – again, in many cases, directly with the governments to help them train their physicians.

That's why we think there is a significant opportunity.

Q: A subject that's emerged over the past several years, specifically for the US, is the more challenging pricing and regulatory environment. You speak about innovation. We know that is important for J&J and for the industry. Particularly in medical technology and medical devices, what does that mean going forward? Are you placing longer-duration bets on earlier-stage technologies, or do the shorter-term opportunities become tougher? Help us understand what the path for innovations is for devices going forward in the U.S.

A: It's going to take a combination. It really starts with innovation, but different kinds of innovation. In some areas, it's going to mean better technology that delivers better results for patients. So some examples I would have is what we're doing with Biosense Webster and the great progress that they've made with so many of their products and the treatment of A-fib. We're also excited about a higher technology play in something like the Fibrin Pad.

But we also think it's going to be important in how we relate with our customers. I'm talking innovating with the way that we work with them, that we partner with them, that we truly leverage our overall portfolio in working together. And obviously it may include new services, new approaches, and new partnerships as they try to not only manage their increased patient volume, but also try to manage their costs going forward.

We also see an opportunity longer-term to take some of these simplified approaches that we would develop in developing markets and basically bring them back to developed markets. We're already seeing some signs of that with things that we're doing in the diabetes space. So we think even in the developed markets, people are going to be looking for very effective but lower-cost opportunities.


Q: In light of the continued pricing pressure in Europe, do you have concerns that things may get more challenging on the price front?

A: We do expect continued pricing pressure. As mentioned earlier, you see some of that particularly in southern Europe. We still have other tenderings in Europe. We’re seeing that in some of the US markets, particularly those that might be things like diabetes, based upon some of the contacting. We’re also seeing more in spine. In other areas, it’s been pretty consistent with what we’ve seen in earlier trends.

-- by Kira Maker, Jessica Dong, Joseph Shivers, Adam Brown, and Kelly Close