J&J 4Q13 – Worldwide LifeScan/Animas sales fall 13% in 4Q13 and 12% in 2013; Invokana revenue of ~ $50 million in 4Q13 – January 21, 2014

Executive Highlights

  • Worldwide Diabetes Care (LifeScan/Animas) revenue totaled $563 million in 4Q13, down 13% as reported. For 2013, Diabetes Care sales were $2.3 billion, down 12% as reported.
  • US revenue saw its second steepest decline ever in 4Q13 (down 26% to $219 million), second only to 3Q13; international sales fell 1% in 4Q13.
  • We estimate Invokana sales at $45-$50 million at minimum; J&J said its new SGLT-2 contributed “2% to US pharmaceutical growth” in 4Q13, suggesting revenue could be as high as $75 million for the quarter. If sales were constant in 2014, J&J would see annual revenue of $180-$300 million; we estimate upside for 2014 could be $500 million.
  • Invokana has been approved in the EU; a 1Q14 launch is expected in UK and Germany.

This morning, Johnson and Johnson CEO Alex Gorsky led the company’s 4Q13 and 2013 full-year financial update. We’re bringing you our top five learnings from the call, including both Diabetes Care and Invokana financial updates, as well as comments from management on the future of LifeScan and Animas. We’ll be back soon with our full report, including the device and pharmaceutical pipelines.

1) Worldwide Diabetes Care (LifeScan/Animas) revenue totaled $563 million in 4Q13, declining 13% as reported and declining 12% operationally year-over-year (YOY); for the full year of 2013, Diabetes Care sales totaled $2.3 billion, down 12% as reported and 11% operationally. This marks 4Q13 as the seventh consecutive quarter of revenue decline, with the overall worldwide decline of 13%/12% slightly steeper than in 3Q13 (when quarterly revenue decreased 11% as reported and 11% operationally). Sequentially, worldwide Diabetes Care sales grew 1%. The 4Q13 comparison was a reasonably easy one against an 11% worldwide decline in 4Q12. Looking yearlong, the 2013 comparison was an easy one against a 1% decline in 4Q12.

  • US Diabetes Care 4Q13 revenue dropped a striking 26% YOY, with sales reaching just $219 million. This is the second greatest decline we have seen since beginning to cover J&J in 2002 at Close Concerns and going back to 1998 when Kelly wrote about J&J in her Wall Street equity research years. The revenue for 4Q13 came in slightly behind the nearly 28% drop in 3Q13. For 2013 overall, US Diabetes Care sales reached $998 million (it may have been slightly disappointing not to reach the $1.0 billion mark, as it had in the US the previous eight years), down 24%. Presumably, much of the decline stems from competitive bidding and subsequent pricing pressures seen in the field. Sequentially, US sales declined just under 8% from 3Q13. As in previous quarters, management remarked that this decline related primarily to competitive bidding – our 3Q13 report provides greater detail on the harsh realities BGM companies have faced this past year.
  • Internationally, Diabetes Care fared slightly better, with 4Q13 revenue totaling $344 million, down 1% as reported and flat operationally. For the full year of 2013, international Diabetes Care sales totaled $1.3 billion, up 0.5% as reported and 2% operationally. It was good to see this increase in business, even a slight one. As we understand it, sales were best in Latin America and the Middle East. Sequentially, international revenue increased 8%. Management attributed this international growth to Animas Vibe sales, offset by the lower sales of meters and strips.

2) While J&J again did not break out sales for Invokana (canagliflozin), management did for the first time, provide a hint on Invokana’s financial performance, and it looks quite strong. During the call, management stated that Invokana contributed two percentage points to US pharmaceutical growth (which was 18% in 4Q13) – by our calculations, this comes out to about $45-75 million in Invokana revenue for 4Q13, which would annualize at $180-300 million. 4Q13 was Invokana’s third full quarter on the market, and in today’s increasingly crowded diabetes marketplace, we view this as quite good. For comparison, in Januvia’s third full quarter on the market (3Q07) it netted $171 million in the US, and in its first full year (2007), Januvia’s US revenue totaled $620 million – the diabetes landscape was certainly much less competitive at that time. Invokana continues to hold the leading NBRx (new to brand prescription) share for branded non-insulin type 2 diabetes therapies amongst US endocrinologists at 19% share – this is an increase from 17% at the end of 3Q13 and 15% at the end of 2Q13. J&J’s slides remarked that this is the “most successful launch for an oral type 2 diabetes agent since Januvia.”

3) Management also announced that Invokana has been approved in Europe and is expected to launch in Germany and the UK in 1Q14. While this is certainly a positive, we would not expect that sales in either of these countries to be particularly strong given these payers’ stringent expectations for showing benefit over the standard of care (generics). Germany is an especially difficult market for diabetes right now. BMS/AZ recently withdrew their (soon to be just AZ’s) SGLT-2 inhibitor Forxiga from Germany after failing to reach a pricing agreement (the German Federal Joint Committee ruled earlier in 2013 that Forxiga showed “no added benefit” when compared to SFUs, subjecting the product to reference [generic-level] pricing).

4) Management made a telling comment during today’s call that suggested to us that J&J is allowing itself to keep its LifeScan business (despite the continued struggles in the US BGM market) as a strategic complement to Invokana. In the past, J&J has consistently stated that in order to focus on the most promising opportunities, its “company-wide premise” has been that J&J’s businesses should be the number one or two in the category in which they compete or to have a clear path forward to getting there. However, today was the first time we heard a third possibility – that J&J would also support its existing businesses that complement one of its other businesses. This last option seems to be where LifeScan falls – as a complement that is strategically important to Janssen’s success with Invokana. Given the trouble that J&J has had with its meter business, we think that this speaks to the company’s confidence in Invokana. We have already seen J&J recently reorganize its Diabetes Care business, when the sales force that sells for both LifeScan and Janssen was transferred to Janssen management.

  • The call and supporting materials did not mention the January 14 US launch of the LifeScan OneTouch VerioSync. The product's webpage has a compelling one-minute video outlining the meter's usability and convenience. We especially liked the marketing tagline: “Now you can check your blood sugar results as easily as you check everything else - on your iPhone.” A “limited time offer” is prominently featured in the OneTouch online store, which offers the meter for just $19.99 (!), 30% off the full price of $29.99. As a reminder, the OneTouch Verio Sync allows blood glucose values to be wirelessly sent to the OneTouch Reveal app on an iPhone, iPad, or iPod touch (via Bluetooth). The standalone meter itself contains just one button to turn the device on and off, a black/white screen, and a rechargeable battery - its simplicity certainly plays into the low price for the meter. The device received FDA clearance in February of 2013, marking nearly a full year between approval and launch. For more on the meter, see our report on the FDA clearance and our coverage in the ADA and AADE exhibit halls.

5) During Q&A, management also emphasized its commitment to the Diabetes Care business, although it also remarked that it understands that it may need to continue to evolve. Management commented that the reorganization that resulted from 2013 conditions – particularly pricing pressures and competitive bidding – were “painful,” although necessary. J&J applauded the work done to reorganize and refocus the business, and remarked that the company was “somewhat” encouraged by the growth outside the US in 4Q13. J&J remaining in Diabetes Care seems more like a question of “how” rather than “whether” given its success so far with Invokana and the huge strengths of the LifeScan sales force. We suspect that J&J’s Diabetes Care business may continue to evolve to emphasize the pharmaceutical side of the LifeScan/Janssen partnership more and more going forward.

  • We are encouraged to see continued innovation with the launch of the OneTouch VerioSync, and hope that this transfers over to the insulin delivery side. As of Dexcom’s 3Q13 call, Animas was conducting additional testing on the Vibe to respond to the FDA's questions, with responses expected to be submitted by the end of January. Dexcom management also commented that Dexcom and Animas are working on a “more advanced product than the MiniMed 530G” – we suspect it could be a predictive low glucose suspend device.

Questions and Answers

Q: Diabetes has clearly had a structural change. What’s your thinking on that? If in fact that does go, does that leave a portfolio deficit? Given the diagnostics departure and potentially a diabetes departure, would you like to have another growth engine there?

Secondly, one thing J&J is focusing on the pharmaceutical side is commercial excellence and execution as well as regulatory expertise. You have two great drugs, Invokana and Xarelto, and they don’t have big categories around them. Are there interesting assets out there in those areas (metabolics and cardiovascular) that you might be pursuing?

A: Let me start with diabetes. We remain committed in the diabetes space. The fact that there are over 350 million people with type 2 diabetes around world and there is great unmet medical need in that space, it’s important that we continue to do work there. Over the course of 2013, given some of the changes we saw and some of the >70% reductions in some of the bidding here in US, we had to make necessary changes to our business model, which we did make during the course of the year. Those are always painful, but I would actually applaud the work our teams have done in that area to quickly reorganize and focus their business. We’re so encouraged that even in Q4 of this year we had growth outside the US in our diabetes unit. We also started, with the launch of Invokana this year, a very unique partnership between our LifeScan and Janssen pharmaceutical groups. We jointly focused in endocrinology and feel that this partnership allows us to bring a broader offering to the office – that helped lead to rapid uptake in endocrinology. We actually passed Januvia fairly early on, and we continue to maintain that. Long term, obviously we’ll continue to take a hard look. We’re committed to that business. We think overall diabetes is an interesting space, but we also recognize we’ll need to change the shape and how we function within that as we go forward. That would be my position on diabetes.

Regarding Invokana and Xarelto, we think these are both great products. In fact, rather than products, they’re almost platforms within products. That’s certainly true for a compound like Xarelto and the great job that Paul and his team has done on expanding indications, rapidly getting six indications. The data that they built, the very large clinical trial database, combined with the commercial excellence that Joaquin and his team have provided have done very well. We think there is further opportunity there for growth as well. It’s certainly the same when we look at Invokana. We have combinations that we’ll continue to work on, and there’s still a lot of unmet need, and we’re still very early in the launch process there. We think overall the area of cardiovascular-metabolic disease is an important one and one where we want to continue to play.

Close Concerns’ Questions

What is that status of the FDA review of the Animas Vibe?

Will the launch of the LifeScan OneTouch VerioSync reinvigorate the US Diabetes Care business?

How will AZ’s Farxiga (dapagliflozin) hitting the market impact Invokana sales?

Will J&J ever pursue an Invokana/DPP-4 inhibitor fixed-dose combination?

How will the Diabetes Care continue to evolve? Will Invokana ultimately become the mainstay of J&J’s diabetes business? Will LifeScan play an increasingly peripheral role?

-- by Hannah Martin, Jessica Dong, and Kelly Close