J&J Medical Devices & Diagnostic Day – Finesse patch-pen to launch within next 24 months; pump business down 3% in 2013 – May 23, 2014

J&J CFO Mr. Dominic Caruso led the company’s Medical Devices & Diagnostics Day yesterday, while Ms. Ashley McEvoy (Chair of Diabetes Care and Vision Care) spearheaded the company’s Diabetes/Vision Care discussion. Below, we feature our top eight takeaways from the call’s updates in insulin delivery and BGM, following by a pipeline summary and Q&A. To see the slides that were presented, click here (Diabetes/Vision Care) and here (general overview).

Insulin Delivery Updates

1. J&J plans to launch Calibra’s three-day, wearable, bolus-only Finesse insulin patch in the next 24 months.

2. We got a long awaited updated on J&J’s Animas Vibe; the company plans to bring the Animas Vibe to the US later this year. J&J received questions from the FDA and responded to those “recently this year.” Patients have been waiting for this for some time and will be glad to hear the update.

3. J&J’s insulin pump sales fell 3% operationally year-over-year (YOY) in 2013. The company estimates it was tied as the third largest supplier of insulin pumps in 2013.

BGM Updates

4. J&J’s device pipeline listed two unspecified BGM filings – one in 2014 and one in 2015. The OneTouch VerioSync marks the beginning of J&J’s “multi-generational digital strategy.”

5. J&J’s worldwide BGM sales fell 12.2% operationally year-over-year (YOY) in 2013. The company estimates the 2013 worldwide BGM market was $8.8 billion, projected to decline at a compound annual growth rate of 3% from 2013-2018. We think the success of Abbott’s new flash glucose monitoring system could have bigger implications for the field.

6. J&J signed an agreement with Nova Biomedical Corporation to deliver point-of-care glucose testing in China. In non-device related news, we also learned the company recently filed Invokana (canagliflozin) for approval in China.

Diabetes Care Strategy

7. J&J outlined a “patient journey” vision for Diabetes Care, which is intended to address the spectrum of diabetes care from lifestyle modification to oral therapy to simple/complex insulin delivery.

8. Management outlined similarities between Vision Care and Diabetes, calling them “hybrid businesses, which are actually medical devices, sold as prescriptions in many parts of the world that consumers buy.”

Insulin Delivery Updates

1. Notably, J&J plans to launch Calibra’s three-day, wearable, bolus-only Finesse insulin patch in the next 24 months. This represented the first launch timing we have heard since J&J acquired the company in July 2012, and an update from the last Medical Device business update in January 2013, which called for more clinical trials to begin in 2013. It was great to hear some expectations around launch timing, though moderately disappointing to hear how long this product is taking, given that it is already FDA approved. The slide sharing the launch timeline called the Finesse a “disruptive innovation positioned between injections and durable pumps.” During the presentation, management commented that it is “aggressively” looking to “enhance the value proposition for the adoption curve and looking to scale up manufacturing to meet the demand.” The latter is of course a major barrier in the patch pump field and one that must be done right. We will be interested to see how J&J positions this device – type 2s on basal insulin are the most obvious candidates, though we also wonder if the Finesse would appeal to type 1s on MDI.

• During Q&A, management commented that the Finesse is part of a “multigenerational plan,” which the company plans to share at a later date. This was a response to a question about adding a basal rate to the device. This would align with the company’s “Patient Journey” Diabetes strategy (see below) – a comprehensive product offering that follows type 2s through their disease progression from lifestyle modification to oral therapy to insulin delivery. Another patch device that adds basal rates (like Valeritas’ V-Go and CeQur’s PaQ) would fit nicely between the Finesse and full-featured Animas pumps.
• As background, J&J acquired Calibra Medical in July 2012; the Finesse is a very slim, bolus-only pump (2 inches long, 1 inch wide, and 0.25 thick). Although we expected trials in 2013 based on the January 2013 Medical Device Business Review, this presentation did not provide any details on such trials.
• Simple patch delivery devices that might compete with the Finesse include Valeritas’ V-Go and CeQur’s PaQ. Valeritas’ V-Go is on the US market and the company intends to go public in the second half of 2014. Meanwhile, CeQur’s PaQ insulin delivery device for type 2 diabetes is slated for a focused launch in the EU in 2015. BD is also developing a patch-pen insulin delivery device, which is “at the top” of the company’s “priority list for adjacency moves over the next two to four years.” We recently wrote about SFC Fluidics, which will initially target the type 2 diabetes market with its patch pump using a simplified handheld. More full-featured patch pumps on the market/in development include Insulet’s OmniPod, Cellnovo, Debiotech’s Jewel, and potentially Medtronic.

2. Management commented on the Animas Vibe, remarking that the device has led the market outside the US and J&J does intend to bring it to the US. J&J received questions from the FDA and responded to those “recently this year”; J&J is “hopeful and ready to launch when we get the word.” As a reminder, this product was submitted to the FDA in 1Q13, meaning it has been under review for over a year; Dexcom’s JPM 2014 presentation called for a Vibe launch in 2014, though Dexcom’s last two calls have not provided an updated launch timeline.

• Ms. McEvoy commented during Q&A that not having the Vibe in the US had been a “sore spot” for competition. However, she did highlight the Vibe as the single product from an “innovation perspective” that could really impact growth rates of the business. Although additional commentary on the pump business was limited, the slide deck did contain an appendix with additional information, including that the company plans to expand the Animas Vibe in “selected key markets,” which we assume includes the US.
• J&J outlined its desire to lead in disruptive insulin delivery innovation –we hope this hints toward J&J working on the automated insulin delivery front. The company has a collaboration with JDRF and a hypoglycemia-hyperglycemia mitigation system has been on the radar for some time. We couldn’t help but recall remarks from Dexcom’s 3Q13 call, where Mr. Steve Pacelli said that Dexcom and Animas were working on a “more advanced product than the MiniMed 530G” – he could not give details, though based on a ClinicalTrials.gov posting, we suspect it could be a predictive low glucose suspend device.  
• Management described the pumping business as adding “strategic value and access to endocrinologists,” and called the segment part of the company’s core business. We assume this ties in with the company’s larger J&J Diabetes Care plan, which includes LifeScan BGM, Janssen’s Invokana, and the Calibra patch-pen.
• J&J’s device pipeline listed an unspecified insulin pump filing in 2014. The slide vaguely footnoted “filings/approvals for US, EU, and/or Japan,” meaning there is not much to go on in terms of geography. Though J&J has not updated its device pipeline in several quarters, we wonder if this filing is the OneTouch Ping Verio Insulin Pump/Meter Remote, for which a US submission was previously expected in 2013.

3. J&J’s Diabetes Care slide deck reported that insulin pump sales fell 3.4% operationally year-over-year (YOY) in 2013. J&J does not typically break out pump and BGM sales, so this granularity was certainly appreciated. Given this 2013 decline in the pump business, the 12.2% BGM decline in 2013 (see below), and the overall 11.2% decline in the Diabetes Care business, we believe that J&J’s pump business makes up ~11% of the company’s Diabetes Care business. That translates into 2013 sales of ~$254 million in 2013. J&J’s slides said the company was tied as the third largest supplier of insulin pumps in 2013, which potentially places it behind Medtronic and Roche and tied with Insulet. (Roche does not break out sales in its insulin delivery business; Insulet’s 2013 total revenue was $247 million, though that also includes Neighborhood Diabetes; we assume J&J is including Neighborhood in its calculations).  

• In 2013, J&J estimates the insulin pump market totaled $1.9 billion in 2013 – the company projects a compound annual growth rate of 5% from 2013-2018, which would bring the total Worldwide market to ~$2.5 billion in 2018.

Blood Glucose Monitorig (BGM) Updates

4. J&J’s device pipeline listed two unspecified BGM filings – one in 2014 and one in 2015. The slide vaguely footnoted “filings/approvals for US, EU, and/or Japan,” meaning there is not much to go on in terms of geography. The filings could refer to a Next Generation OneTouch UltraVue Verio submission in Japan, and the company’s Next Generation Glucose Testing Platform. According to the slides, J&J plans to focus on markets with the greatest growth potential, with a goal to “deliver [an] insight-driven, highly competitive global portfolio.” We assume that a focus on global potential could refer to both emerging and developed markets – including China and Japan. See #6 below for details on the new deal with Nova Biomedical in China, along with the J&J’s market leadership in Japan.

• Highlighting the OneTouch VerioSync, launched in the US in January, management remarked that this device is the beginning of a “multi-generational digital strategy,” which will ensure that there is mobile connectivity for the patients with chronic care needs. With burgeoning interest in mHealth and connectivity, and the historical hassles of downloading BGM data, we think there is lots of room to grow in this area – ultimately, glucose monitoring systems (whether BGM or CGM) should provide patients and providers with a mindlessly easy way to download, visualize, interpret, and share data.
• Management commented that SMBG is a “very large category” and J&J expects it will remain the standard of care – we wonder if this is a reference to continuous glucose monitoring or perhaps Abbott’s Flash Glucose Monitoring system. We imagine CGM could eventually emerge as standard of care for all type 1 patients, though cost will need to come down significantly for this to happen. Additionally, obtaining an insulin dosing claim and reduced/factory calibration may also prove key.

5. J&J’s Diabetes Care slide deck reported that its Worldwide BGM sales fell 12.2% operationally year-over-year (YOY) in 2013. This placed J&J second only to Roche for sales worldwide; the latter led the market by ~4 points of the market share – according to our estimates, J&J revenue reached $2.3 billion in 2013, while Roche revenue reached $2.7 billion. However, management highlighted that J&J and Roche were actually tied for first in terms of volume of product. Looking to the US and international split of the Diabetes Care business, J&J highlighted that 57% of its sales are generated OUS, with 20% of 2013 sales coming from emerging markets. For contrast, Abbott management commented during its 1Q14 update that international revenue generated ~65% of the company’s sales. Turning to the future, management commented in its appendix that it expects

• In 2013, J&J estimates the worldwide BGM market totaled $8.8 billion– the company projects a compound annual growth rate of -3% from 2013-2018, which would bring the total Worldwide market to ~$7.6 billion in 2018.
• Management commented that the SMBG market creates a “stronghold” for the overall Diabetes Care market, which we assume means both its pump business as well as its SGLT-2 inhibitor Invokana. J&J also commented that the company will “go where there growth is” while maintaining a healthy core. We noted that all of the “growth” opportunities listed on the slide were Visual Care products, with Diabetes Care (BGM and pumps) firmly making up the core.
• On competitive bidding, management commented that although SMBG has experienced “disruption” in the US, J&J expects that by 2018, the company will return to low single-digit growth in value and 5% growth in volume. However, management acknowledged that J&J does expect a dip in SMBG for the next several years.
• See Tables 1 and 2 for our estimates of the Big Four BGM (Abbott, J&J, Roche, and Bayer) companies for 2013 full-year revenue. We would emphasize that direct comparison between J&J, Abbott, Roche, and Bayer is difficult because each company’s Diabetes Care business includes a fraction of non-BGM revenue. J&J and Roche have global insulin delivery, Abbott has continuous glucose monitoring outside of the US, and Bayer had A1c. In addition, Roche only reports North America revenue, so the US number includes sales from Canada.

Table 1: 2013 Big Four Diabetes Care Revenue Comparison

Currency conversion for Roche based on average exchange rate on oanda.com (e.g., 1.1068 USD per Euro for October 1 – December 30; 1.0790 USD per Euro for January 1, 2013 – December 30, 2013). Different results are possible with different currency conversion. Roche does not report revenues for an international category, and the international value we report includes the company’s EMEA and RoW categories; as such, operational growth is not available. We also note that Roche’s US value is slightly inflated, as it includes revenue from Canada (“North America” sales). Reported growth for Roche is calculated based on CHF.

Currency Conversion for Bayer is based on average exchange rate on oanda.com (e.g., 1.3609 USD per Euro for October 1 – December 30; 1.3280 USD per Euro for January 1, 2013 – December 30, 2013). Different results are possible with different currency conversion. Bayer does not breakout US and International revenue.

Table 2: Estimated Big Four Worldwide Market Share by Sales for 4Q13 and 2013

6. Internationally, J&J recently signed an agreement with Nova Biomedical Corporation to deliver point-of-care glucose testing in China using OneTouch products. This agreement will also expand into other emerging markets. With 60% of the Chinese market in point-of-care and hospital testing, this partnership greatly expands J&J’s reach in China, where it has already begun to expand by partnering with its own consumer sector for retail and over-the-counter sales.

• Almost in passing, J&J commented that the company recently filed Invokana (canagliflozin) for approval in China.
• In Japan, J&J holds the third position in overall SMBG, and the first among multi-national brands. According to the slide deck, OneTouch UltraVue meters have addressed specific needs in the market, although no granularity was given on the nature of these needs. J&J experienced 10% growth in BGM in Japan in 2013. Management noted that the company hopes to expand into the OneTouch VerioVue meter within the next 18 months.

Diabetes Care Strategy

7. On slide 17 of the Diabetes Care deck, management outlined the company’s “patient journey” vision for Diabetes Care. J&J’s product portfolio is intended to address the spectrum of diabetes care – the flow chart demonstrated how someone with type 2 diabetes would progress from the company’s prediabetes behavior modification app (the “7-minute workout”) to the oral therapy Invokana to the Calibra disposable insulin delivery patch to Animas’ full-featured insulin pump therapy. Ms. McEvoy commented that the latter was also to be used by patients with type 1 diabetes who need more intensive insulin control. Across the top of the flow chart arches blood glucose monitoring, implying it is to be used in each stage of diabetes.

• We thought incorporating BGM across the top of the flow chart was a clever way of incorporating J&J’s struggling BGM business as a “complement” to the company’s other businesses. Acting as a “complement” to one of J&J’s other businesses was recently added in 4Q13 as an acceptable reason to retain a business (previously, J&J had said that it’s business should be the number one or two in the category in which they compete or to have a clear path forward to getting there).
• As a reminder, J&J recently reorganized its Diabetes Care business in November 2013, which included changes such as transferring sales forces from LifeScan management to Janssen management (although sales forces continued to work for both), consolidation of company sites (two Pennsylvania sites will be consolidated into a single headquarters facility in Chesterbrook, PA, and the Milpitas site will be consolidated into the Fremont site by the middle of 2014), and notably, combining Animas and LifeScan leadership under Ms. Ashley McEvoy, who thus became the company chair of both Diabetes Care and Vision Care. Additionally, and perhaps most significantly, financial and operational reporting have been split: financial reporting still flows through Medical Devices and Diagnostics , while operational reporting will be housed under the “Consumer” Area run by Ms. Sandi Peterson, the previous head of Bayer Diabetes Care. This split continues to strike us as odd and managerially challenging – we see no benefits to separating financial reporting and strategy/operations, which seems like a management and accountability nightmare although perhaps this was the result of negotiation between leaders (perhaps neither wanted both managerial and financial responsibility given the challenges – this is difficult to speculate on of course). Certainly, it provides more leeway and potential for accepting less responsibility for results in J&J’s struggling BGM business.

8. Notably, the company presentations didn’t attempt to separate the Vision Care and Diabetes Care presentations, instead presenting both categories as “hybrid businesses, which are actually medical devices, sold as prescriptions in many parts of the world that consumers buy.” As noted above, when J&J recently reorganized its Diabetes Care business, Ms. Ashley McEvoy became chair of both Diabetes Care and Vision Care. Ms. McEvoy presented both businesses simultaneously, highlighting the similarities in the consumerism of both “medically directed, consumer chosen health care solutions.” Some parallels that Ms. McEvoy drew include: (i) the chronic, progressive nature of the disease; (ii) significant unmet need; (iii) long-term healthcare professional management of patients; (iv) patient choice of product for daily use (which must meet lifestyle demands); (v) many out-of-pocket, cash payment markets; and (vi) strong brand loyalty. Management commented that its unique understanding of this space would allow it to have a competitive advantage against other companies. We admire J&J for drawing these parallels and certainly appreciate some of the similarities between the two product areas. Even so, of course, selling contact lenses (the company’s primary vision care product) is fairly different from selling insulin pumps and BGM products.

• Ms. McEvoy also commented on the Diabetes Care reorganization, remarking that after the company re-engineered its entire business due to Competitive Bidding, J&J is currently experiencing market share momentum and has leadership with sustainable double-digit performance going forward. Having always been a leader in the US SMBG business, Ms. McEvoy highlighted that J&J moved swiftly to re-organize Diabetes Care as a way of “moving with the market” when competitive bidding proved challenging. This was certainly a proactive way of framing the move, though we saw it occurring more out of necessity than by choice (J&J’s US Diabetes Care has fallen over 19% since 1Q13).

Questions and Answers

Q: Could you provide timing on the Animas Vibe launch in the US? More broadly, how large do you think that business can get? Lastly, could you provide some specifics on Calibra Medical?

A: In terms of timing, we did file in the US last year and received questions and responded to those recently this year. We are hopeful and ready to launch when we get the word. About the largeness of the category, when we look at the insulin pump market, which is at about $2 billion with 5% growth, we don’t think that technology is going to be supplanted, but that it is the standard of care. There is tremendous patient value for type 1 patients who rely on this device for lifesaving effect and J&J is uniquely suited because of our leadership in BGM and as well as our recent launch of a very successful drug. For your last question on Calibra, we have been actively strengthening our value proposition. When we launch, we want to maximize the area under the curve, penetration, and access. And we want to make sure from a manufacturing point of view that in a scale-up, we can meet demands. We are looking at a 24-month launch window.

Q: I’m interested in the bundling approach to diabetes in terms exercise, Invokana, etc., all the way down to insulin pump therapy. Is Diabetes Care actually using the pharma sales force? In other words, are there examples of the device business/diabetes solutions business having opportunities to leverage sales force from your biopharm group? Are there real opportunities or is this just an example of J&J having a portfolio of products?

A: What we’ve uncovered is really value for patients and healthcare providers. I can share two examples. For many years our BGM and pump teams have been working closely on patient education, on congresses for clinical understanding of diseases with thought leaders, and when we launched Invokana all that really came into the fold for a comprehensive education curriculum. When you get to the HCPs in the US, we did join our LifeScan sales force with the Janssen sales force that is calling on high decile general practitioners and endocrinologists as well now also selling Invokana.

Q: Going back to the Animas Vibe and its upcoming US approval, I understand that Calibra handles the convenience element of bolus administration. Can you talk about plans post-approval that would address convenience on the basal side?

A: Our first indication is for bolus delivery for mealtime. In addition to the discretion, which addresses the inconvenience factor, the real standard is accuracy and that’s really the speck that we have to hit. We’re engaged in a multigenerational plan, which I’ll share more on at a later date that can take that expectation to other forms of delivery.

Q: Competitive bidding has obviously weighed significantly on pricing. Can you give us your outlook on how long this pricing pressure will continue from competitive bidding and what will stop the bleeding? You alluded to making changes in your business in response to this, could you share these changes?

A: The BGM market, particularly in the US, went through a sizable price disruption. Are we always looking to price challenges? Yes, but to the degree that we don’t foresee that size of disruption happening. Being the market leader in the US, we had to significantly move with market. We’ve reengineered our business and made sure we have competitive technologies. Again, looking at enterprise leverage, we’ve partnered with Janssen and been able to offer superior valued to endocrinologists and general practitioners. We’ve really revisited all aspects of business to ensure we have a sustainable value proposition. A year later, we do; we have nice momentum. You’ll see pricing dilution happening in smaller amounts happening all over the world, but it’s about having a strong business model and portfolio.

Q: Over the next two years, what are the two products that you’re most excited about from an innovation perspective that could really impact growth rates of your business?

A: If I look within the diabetes space, obviously I want to get our Animas Vibe business into the US, as it’s been a sore spot for us on competitiveness.

Q: It wasn’t surprising that emerging markets was a big theme today, but surprisingly, Japan was a big theme in every presentation today. We think of Japan as a developed market rather than emerging. Why is Japan getting an increased role at this analyst day? Some might speculate that it’s an inroad to China, can you help us understand what your strategic thinking is behind Japan?

A: I would add for Japan, there is still high patient need. Diabetes is unfortunately still very prevalent. J&J has strong strategic foothold in Japan and this benefits all businesses.

Q: On the diabetes pricing environment, your international and US business were the same just a few years ago, but now international business is much larger, and the reasons are quite obvious. You are seeing increased pricing pressure internationally, and though these are structurally different markets, is there concern that what happened in the US will happen internationally?

A: I think we’ve been experiencing very slight pricing pressure in all of EMEA, which is our largest region within the SMBG marketplace, to the point of low single-digit negatives – we’ve been managing that for years. So no, we don’t expect significant disruption like in the US, and we can manage that through improving our portfolio and operating model.

Device Pipeline Summary

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