J&J 4Q12 and Medical Devices Business Review – Worldwide Diabetes Care revenue down 1.4% for the year and 3.9% in 4Q12 – January 23, 2013

Johnson and Johnson CFO Dominic Caruso led the company’s 4Q12 financial results update yesterday. Shortly following the call, J&J held its Medical Devices & Diagnostics (MD&D) Business Review. Our report below draws from commentary in both.

Worldwide revenue for 4Q12 totaled $644 million, down 4% on a reported basis. The quarter’s decline marked the third consecutive quarter of negative growth, which reflects in part the ever-increasing pricing pressures companies continue to face in the BGM arena as well as increased competition. Sequentially, sales rose 2% from 3Q12; this was a fairly “easy” comparison since sales fell 6.5% sequentially in 3Q12. Worldwide revenue for 2012 totaled $2.616 billion, down 1% as reported from 2011. This represented flat growth in the US and a 3% decline internationally. The flat performance in the US for all of 2012 can be linked to much stronger growth earlier in the year – an impressive 13% in 1Q12 vs. an 11% decline in 4Q12. Given the increased focus on value from payors, it sounds like the company has pursued larger partnerships with Kaiser and Aetna to demonstrate outcomes. This is a very smart tactic and kudos for the company being able to do this (most BGM companies would be thrilled to do so, even if the deals they cut are better than average) given that European pressure on patients to use less BGM continues and US pricing pressures stand to increase further when national competitive bidding results for mail-order strips are applied to retail (the American Taxpayer Relief Act). It’s widely viewed that maintaining higher reimbursement levels from private payors could become more challenging when this comes into effect on July 1, although we think private payers already have a pretty good deal, so we’re not sure how much room there is to move there. J&J believes it holds the number two position in the global glucose monitoring market and the number three spot in the insulin delivery market (IMS Drug Distribution Data, 3Q12).

Turning to the pipeline, management gave the most detail we’ve heard yet on the Calibra Medical acquisition (which, to be clear, has not been much), noting that LifeScan and Animas will provide “significant” commercial leverage to drive awareness of Calibra’s Finesse (a wearable, bolus-only “patch-pen”). Though it is already FDA approved, more clinical trials are expected to begin in 2013. Management also believes the Calibra device could serve as a precursor to insulin pump therapy in some patients. We also strongly believe the product’s ease of use and slim profile will encourage more patients and providers to initiate insulin therapy sooner, and better adhere to insulin therapy once prescribed; the company will also benefit from its hundreds of sales reps who can discuss the benefits of this as they talk about blood glucose monitoring – a perfect match given their focus on insulin users. On a disappointment note, J&J’s updated diabetes care pipeline showed three delays from the original end of 2012 targets: FDA submission of the Animas Vibe/Dexcom CGM pump (now 2013+), version three of the OneTouch Verio BGM (2013+), and the OneTouch Ping Verio pump/remote (2013+).

Management expressed optimism that the FDA will approve the SGLT-2 inhibitor Invokana (canagliflozin) following the FDA Endocrinologic and Metabolic Drugs Advisory Committee’s 10-5 affirmative vote earlier this month, stating that “when” item> is approved, it has the potential to be the first choice after metformin. While the label is sure to restrict use in patients with moderate and severe renal function, we think it will be a very good choice for those that cannot take metformin (22% of patients according to Dr. Eric Topol of Scripps) and that it could be helpful for those that cannot reach optimal glucose control on DPP-4 inhibitors. According to the call’s supporting materials, canagliflozin’s expected PDUFA date is in 1Q13 and from speaking with J&J representatives at the FDA meeting earlier this month, we believe it may be on or around March 31 (for more details please see our report at https://closeconcerns.box.com/s/efga4as47nd9jtgj1ej2) and the expected EMA decision date is in 3Q13 . These timelines are consistent with standard 10-month and 12-month US and European review cycles, respectively (J&J submitted canagliflozin on May 31, 2012 in the US and on June 26, 2012 in Europe). As a reminder, and as management reiterated on the call, J&J submitted its canagliflozin/immediate- release (IR) metformin fixed-dose combination (FDC) to the FDA in December. According to supplemental materials, an extended-release version is in phase 3 trials. No other updates were provided on J&J’s diabetes pipeline.

FINANCIALS

• In 4Q12, worldwide revenue for Diabetes Care totaled $644 million, down 3.9% as reported and down 2.6% operationally from sales of $670 million in 4Q11. Revenue was comprised of $295 million in US sales, down nearly 11%, and $349 million in international sales, up nearly 3% on a reported basis and up 5% on an operating basis. We look forward to weighing J&J’s sales against the other big four blood glucose monitor competitors’ – Abbott reported 4Q12 results today, with global sales up 4%, and Roche will report on January 30 and Bayer later this quarter (not yet announced).

• The quarter’s worldwide reported decline of 3.9% was the third straight quarter with negative growth and the global sales for 2012 matched exactly the global sales in 2010. The result speaks to the continued challenges in the blood glucose monitoring market, especially pressure in Europe to user fewer strips and increased pricing pressure here in the US. We look forward to watching J&J’s new product approvals, after FDA has delayed so much in previous years; the OneTouch VerioSync BGM is now expected to emerge in 2013 and we’ll see how J&J markets this “smart” product in the midst of all the pricing pressure. It’s won some early good reviews, however, and this platform appears to be well regarded so far from the “power users”. On the pump side, it will be a major win for J&J if they can get the Animas Vibe insulin pump with integrated Dexcom G4 Platinum CGM approved anytime soon; we believe a number of patients have been putting off pump purchases, waiting for this product, and this will likely onlycontinue given the success with the G4 that Dexcom is enjoying. dQ&A data continues to show that patients care about integrated BGM and pumps – contact Richard.wood@d-q&a com for more on this.

• The 10.6% reported decline in US sales this quarter represented the first time US sales dipped below $300 million since the first quarter of 2010. This was the second quarter in a row of a US decline; prior to 3Q12, the company had not experienced negative US growth since 3Q09. Management attributed the company’s US performance to the impact of mail order, lower price, and private label competitors. We anticipate that the impact of mail order will only magnify, given the provision in the American Taxpayer Relief Act that requires payments established under the national mail order competitive bidding program for diabetic supplies to be applied to the non-mail order arena; pricing is set to go into effect July 1. Further, we suspect that insulin delivery sales were and will be impacted by individuals delaying new pump purchases in anticipation of the integrated Animas Vibe/Dexcom G4 Platinum pump in the US.

• International Diabetes Care revenues of $349 million rose 2.6% on a reported basis and up 5.2% on an operational basis from $340 million in 4Q11. This represented the second best quarter of operational growth in the past year. Using the same language as in the company’s 3Q12 earnings call, management commented that strong sales in emerging markets were partially offset by lower sales in some of the developed markets. We suspect that emerging market growth was driven by the SelectSimple OneTouch meter. The company reported that the meter is now available in eight countries and that further expansion is underway.

• Based on 3Q12 IMS Drug Distribution Data, J&J estimates that it holds the number two position in the global glucose monitoring market (32% share by volume). As we understand it, Roche secured the number one ranking in glucose monitoring.
• The same data suggests J&J holds the number three spot in the global insulin delivery market (13% share by revenue). In insulin delivery, Medtronic was the market leader followed by Insulet.
• Worldwide revenue for J&J Diabetes Care reached $2,616 million in 2012, reflecting a 1.4% reported decline and a 1.4% operational increase from $2,652 million in 2011. J&J Diabetes Care achieved flat growth in the US, reflecting an up and down year stateside (13% positive growth in 1Q12 vs. an 11% decline in 4Q12).
  • Management commented that 50% of Verio sales were to “new or competitive users.” While some Verio IQ sales surely cannibalized that of other LifeScan products, we suspect the 2012 US launch of this platform played an important role in keeping growth flat in the US for all of 2012.

• The 1.4% worldwide revenue decline in 2012 follows two years of positive growth. Since we started tracking growth in 2004, 2009 is the only other year that recorded negative sales growth. The 2012 decline does not come unexpectedly, given the austere European medical environment that persisted through 2012, taken together with growing pricing pressure in the US from low cost competitors and the Centers for Medicaid and Medicare Services (CMS) competitive bidding program. We also note that 2012 had a challenging year-over-year comparison, following 2011 growth of 7.4%.

• Worldwide Diabetes Care revenue grew 2.4% sequentially from sales of $629 million in 3Q12. While a slight uptick, sales of durable medical equipment typically see a surge in 4Q due to patients’ insurance coverage policies (during the first quarter, deductibles are reset and flexible spending accounts are often unfunded). Overall growth reflected a 9.9% decline in the US and 15.8% growth internationally.

DIAGNOSTICS AND DEVICES PIPELINE

• Management characterized Calibra Medical as a “strategic fit” within the LifeScan and Animas businesses. Management believes both business segments can help drive awareness of Calibra’s product and promote its trials, especially by leveraging relationships with patients and providers. Further, the company anticipates that the Calibra Finesse can serve as a precursor to insulin pump therapy for some patients, certainly synergistic with the Animas business. This approach also speaks to the more integrated business strategy that J&J seems to be adopting in diabetes care, having recently combined the LifeScan and Animas sales teams in the US.
  • Clinical studies of the Calibra Finesse are slated to initiate in 2013 (they have not yet been posted to ClincialTrials.gov). We are curious what these studies will investigate, but suspect the data could be used for a myriad of purposes: 1) to focus on healthcare economics – the studies for people going on the device who should but are not yet on insulin will likely be quite convincing from an A1c perspective; 2) to further support reimbursement coverage by showing greater adherence to insulin use; 3) to gain a better understanding of how users interact with the device; and 4) to support ex-US regulatory submission. As a reminder, the FDA originally approved the Finesse in early 2010, and an updated version was approved in April 2012.
  • As a reminder, Calibra Medical’s Finesse “patch-pen” is used for bolusing short-acting insulin, is entirely mechanical (on-device buttons), is very small (2” long, 1” wide, and only 1/4” thick), and is mostly targeted at type 2s. See our J&J 2Q12 report at http://www.closeconcerns.com/knowledgebase/r/155a6576 for an extensive review of Calibra’s Finesse and why we think the deal makes strong strategic sense.
• Said management, “In the current economic climate, payers are demanding demonstration of the value and impact of glucose monitoring. So in response, we’re proactively partnering with payors on a variety of programs to improve care and demonstrate outcomes.” This is a smart and necessary approach in our view – Medicare reimbursement for strips is going down significantly (as a reminder, they at one point paid the highest price for strips), so it will be important for companies that market higher-cost/more-featured meters to demonstrate their clinical values to private payors. That said, we suspect a “two-tier” system will emerge. Management spoke to its partnerships with Kaiser and Aetna – although the payors likely have a great “deal” on strips, they are certainly valuable partners given their high numbers of people with diabetes and their increased levels of focus on this population. As to the latter, interestingly, J&J said it has implemented a text message system that alerts providers to patients who have elevated blood glucose levels. Turning to Aetna, J&J is exploring educational tools targeted at patients with high A1cs. We love seeing the focus on more integrated approaches – especially those that can truly improve patient outcomes and adherence – and J&J is certainlywell-positioned to offer a growing suite of solutions beyond glucose monitoring (i.e., insulin delivery through Animas and Calibra and its SGLT-2 inhibitor Invokana).
• “The challenge is to move beyond reporting results to delivering meaningful insights that are actionable.” To this end, we note the importance of designing systems that encourage data downloading and remove patient hassle from this process. We will be interested to learn how patients interact with the OneTouch VerioSync, which offers wireless communication with an iPhone app in addition to the pattern-recognition of the Verio platform. The device is still pending 510(k) clearance, and we last saw a poster advertising it in the LifeScan exhibit hall booth at AADE 2012 in August. We salute J&J for taking on the daunting task of simplifying data downloading, albeit from a low base since so few patients download currently:
  • In the Helmsley Charitable Trust’s T1D Exchange, a fairly high 68% of the registry’s 26,000+ patients never download their blood glucose meter at home – we assume they primarily have their healthcare team do this in the office. The story is slightly better for CGM, but still disappointing: 43% of users never download their CGM, and 35% download less than once per month. This translates into just 10% of patients that download their blood glucose meters at least once a month, and only 22% of CGM users download once per month.
  • In the dQ&A patient panel (a panel of nearly 10,000 patients surveyed quarterly – dQ&A is Close Concerns’ sister company), 75% of type 2s (n=1,165) and 45% of type 1s (n=907) never download their meters at home. Further, only 37% of type 1s report being satisfied with data downloading. This downloading data is from the 3Q10 panel tracker – for more information, please contact Richard Wood at richard.wood@d-qa.com. To read more of our recent thoughts on this front (please see our coverage of Glooko’s 510(k) clearance last week at http://www.closeconcerns.com/knowledgebase/r/3879a77e.
  • We hope that efforts are underway to make data actionable for patients who fall outside of the high-tech/early-adopter demographic, as often these are the individuals who stand to benefit the most. This is a complicated, multi-faceted problem, since companies must not only make downloading as absolutely painless as possible, but the software must produce actionable insights that help patients with their day-to-day diabetes management. The fewer cords, buttons, and installations that are required, the better. Of course, the more ambitious the insights, the more subject they are to regulatory holdups. We have high hopes for the Helmsley Charitable Trust’s efforts in conjunction with the International Diabetes Center – for more information, see our report on the expert panel at http://www.closeconcerns.com/knowledgebase/r/1e0d0724.
• J&J’s updated diabetes care pipeline shows three delays from 3Q12 targets, including submission of the Animas Vibe with integrated Dexcom G4 CGM. Management commented that in markets where the Vibe is available, the company has seen 35% to 50% average sales growth compared to markets where the product has not yet launched – we assume this refers to insulin pump sales. More broadly, as R&D budgets are often carved as a percentage of revenue, we wonder if some of the delays are, in part, a reflection of the challenging BGM market. J&J does not disclose R&D budgets specific to individual businesses, so it is difficult to discern whether the Diabetes Care R&D budget has changed appreciably over the company’s recent history. Products in the company’s pipeline are noted as listed on the medical device pipeline slide deck (i.e., name, countries).

• LifeScan’s is no longer conducting phase 4 trials investigating clinical outcomes with the Verio IQ blood glucose meter, according to ClinicalTrials.gov. The US study is now listed as terminated (Identifier: NCT01627899) and the EU study is listed as withdrawn prior to enrollment (Identifier: NCT01631643). This was disappointing to learn in light of management’s comments on the need to demonstrate the value and impact of glucose monitoring to payors. Both studies had intended to assess change in A1c from baseline to week 24, which seemed to us an opportunity for J&J to bring a convincing dossier to payors.

PHARMACEUTICALS PIPELINE

• Management reiterated the FDA Endocrinologic and Metabolic Drugs Advisory Committee’s (EMDAC) January 10 vote to recommend Invokana (canagliflozin) for approval, placing emphasis on the drug’s positive effects on blood pressure, weight, and lack of hypoglycemia without mentioning the numerous safety and risk/benefit concerns that the Advisory Committee raised. Namely, many panelists concluded that the drug may not be safe for patients with moderate renal impairment and that longer-term cardiovascular data must be collected to investigate a potential signal for stroke and the effects of elevated LDL cholesterol on outcomes. Additionally, there was some discussion around the drug’s effects on bone mineral density at the Advisory Committee meeting (for more details please see our report at http://www.closeconcerns.com/knowledgebase/r/aa7bbddc). Additionally, we spoke to cardiologist and EMDAC panelist Dr. Sanjay Kaul (Cedars-Sinai Medical Center, Los Angeles, CA) who noted that this case acted as a test of the FDA’s 2008 cardiovascular guidance for diabetes drugs and also that SGLT-2 inhibitors may prove to be especially valuable for people with type 1 diabetes due to the low hypoglycemia and weight gain associated with the class and the lack of other oral options for this group of patients. For more details, you can read our interview with him at http://www.closeconcerns.com/knowledgebase/r/24a3594d.
• J&J expects a decision from the FDA on canagliflozin in 1Q13 and a decision in Europe in 3Q13. From speaking with J&J representatives at the FDA Advisory Committee meeting, we believe the US PDUFA date may be on or around March 31. The PDUFA date is consistent with the standard 10-month FDA review cycle (J&J submitted canagliflozin to the FDA on May 31, 2012), and the European timeline estimate is consistent with a standard ~12-month European review cycle (J&J submitted canagliflozin to the EMA on June 26, 2012). The standard European review process generally consists of 120 days for primary evaluation, up to three months for the applicant to respond to the CHMP’s list of questions, 90 days for secondary evaluation and a CHMP recommendation, and 67 days for the EMA and European Commission to form a final decision.
• Management stated that canagliflozin has the potential to be the first choice after metformin, and we believe this will depend on how the assessment of tolerability and safety emerges. For some, particularly those who have failed metformin and have high A1cs, we believe doctors and nurses may recommend SGLT-2s for their patients with particularly high A1cs who have normal renal function. For those with only moderate or with severe renal function problems, we believe it is unlikely they will ever be prescribed this SGLT-2 inhibitor. For those with mild renal function issues, this population is an open question – it depends how doctors weigh the tradeoff of more frequent renal function monitoring vs. the benefits of the drug. Overall, for patients with A1cs that DPP-4 inhibitors still have a major advantage in the treatment paradigm due to canagliflozin’s potential safety concerns and the potential tolerability issues and potential perceived “hassle” associated with the drug (from both patients and providers). This is yet to be determined, though there is certainly a major population that could benefit from the new mechanism. We’ve very optimistic down the road about fixed dose combinations, both with metformin but even more so with other compounds. Given the strong safety database now associated with DPP-4 inhibitors, their incredibly strong tolerability record to date, and the high prescriber familiarity associated with the class, DPP-4 inhibitors as a class will undoubtedly remain quite strong; that said, there are also plenty of people who cannot reach optimal control with DPP-4 inhibitors and they seem a terrific target for canagliflozin, depending on their renal health profile. It is difficult to say at this point since canagliflozin does not yet have FDA approval, but we imagine the initial label might exclude people with moderate renal impairment (eGFR <60 ml/min/1.73 m²), people with elevated cardiovascular risk, and people with low bone mineral density. Based on the discussion at the Advisory Committee meeting, it seems virtually certain that there would be restrictions in the renal impairment population. This, combined with the uncertainty (at least for now) around cardiovascular safety and the SGLT-2 inhibitor class-effect of increasing genitourinary infections, we think some physicians will be reluctant to prescribe canagliflozin initially, although with the drive to individualize therapy, this does seem like a very good choice for those with no impaired renal function who can’t otherwise reach their A1c target with either metformin or DPP-4 inhibitors alone. We do think many patients may find canagliflozin more tolerable than GLP-1 agonists, particularly those patients whose doctors don’t yet know how to prescribe and use GLP-1 agonists that well (which require injection and are often associated with nausea). We do believe the unique mechanism will be of big interest to healthcare providers and patients (that are educated) alike.
• More broadly, given their mechanism of action, SGLT-2 inhibitors could also have potential for use in patients with type 1 diabetes; if found to be safe and effective in clinical trials and approved by regulatory agencies for type 1 diabetes, SGLT-2 inhibitors would be a welcome addition to the treatment armamentarium for this population that currently has no oral options.
• Management reiterated that J&J submitted its fixed-dose combination (FDC) canagliflozin/immediate-release (IR) metformin to the FDA in December 2012. Supplemental materials to the call indicated that this FDC is in phase 3 development in Europe and that an FDC with canagliflozin/extended-release (XR) metformin is in phase 3 development in both the US and Europe. The IR FDC was submitted under PDUFA V (which will be in effect for the FDA’s fiscal 2013-2017), suggesting that J&J should expect a 12-month review cycle with a potential decision in December 2013 if there are no delays in the regulatory process. For our initial report on the FDC’s submission, please see our December 13, 2012 Closer Look at http://www.closeconcerns.com/knowledgebase/r/5506e200.
• J&J provided no other updates on its diabetes pipeline. To our knowledge, J&J’s pipeline includes an MTP inhibitor last known to be in phase 2 (JNJ-16269110; no active trials onClinicalTrials.gov), an insulin sensitizer (which we suspect is JNJ-41443532 and was in phase 2 as of May 2011; also no ongoing studies listed on ClinicalTrials.gov), as well as various preclinical candidates developed through J&J’s partnership with Metabolex, created through its own discovery program, or licensed from Evotec AG and Harvard. As a reminder, J&J also entered into a partnership with NGM Biopharmaceuticals earlier this month to develop treatments for type 2 diabetes that mimic the glucoregulatory effects of metabolic surgery.

Questions and Answers

Q: Going back to comments you made earlier about Washington and not knowing which way the wind blows there, and I think we all would agree, what is your view of the dual- eligibles [patients eligible for both Medicare and Medicaid]? And do you think there's a resolution in the near term?

A: Our approach all along with healthcare reform has been to stay focused on solutions that, number one, improve or provide access for people who are either un- or under-insured in this country. And we think it's unacceptable there's such a high number, so we've tried to work very closely with our trade organizations and with governments to make sure that patients can get access. So we think that's important, number one. Number two, specifically as it relates to dual-eligibles, we tried to work with our trade partners in pharma and with the government in good faith towards the additional ACA, and we think that, by and large, the program-run Medicare Part A has been very successful. We just need to be aware that as we make commitments, and as we create programs, that we do so in a way that leads to a consistent approach, and number two, that ensures we continue to reward innovation. By only focusing on costs, we will not cure Alzheimer's or take care of diabetes in a way that we should. And so that's why we're very anxious to work with a lot of other partners on coming up with a way to preserve this underlying encouragement and motivator for innovation.

Close Concerns Questions:

1. If canagliflozin’s label includes restrictions for people with renal impairment or high cardiovascular risk, what patient group will J&J target for first choice after metformin? How will it address the hassle with additional genitourinary side effects and how will it track over time the “lifetime” risk of the genitourinary side effects?
2. When does J&J have plans to initiate trials of canagliflozin in patients with type 1 diabetes?
3. Does the canagliflozin/metformin FDC have to go through full FDA and European review cycles if canagliflozin is approved?
4. If canagliflozin is approved in the US, should we expect a launch in 2Q13? How will it be priced?Will it be more expensive than current second-line options?
5. If other SGLT-2 inhibitors make it to the US market (e.g., dapagliflozin and empagliflozin), how will J&J differentiate canagliflozin? If canagliflozin is approved in Europe, how will J&J aim to differentiate it from dapagliflozin, which is already approved?

-- by Jessica Dong, Kira Maker, Adam Brown, Vincent Wu, and Kelly Close