Memorandum

Roche 2Q18 – Global Diabetes Care sales flat YOY; Solo patch pump controlled EU launch “for remainder of the year”; Lucentis up 27% YOY – July 27, 2018

Executive Highlights

  • Global Diabetes Care sales of 513 million CHF (~$537 million) were flat YOY on an easy comparison to a 7% decline in 2Q17. Sales increased 7% sequentially from a low base of 478 million CHF (~$490 million) in 1Q18, breaking three straight quarters of sequential declines. Notably, management noted the introduction of Accu-Chek Guide and Accu-Chek Instant BGM systems, as well as increasing testing volumes, as growth drivers – we were a bit surprised by the latter since some high frequency testers have been moving to CGM. North America was the only geography to report positive growth YOY, rising 1% to 70 million CHF (~$73 million) on a very easy comparison to a 27% decline in 2Q17. Sequentially, North America sales increased a strong 25%. International sales of 443 million CHF (~$464 million) declined 1% YOY on an easy comparison (-3% YOY in 2Q17). International revenue increased 5% sequentially. Roche’s Worldwide BGM-only 1H18 sales increased 1% YOY to ~895 CHF million (~$938 million) on an easy comparison to a 3% decline in 1H17.

  • Following Monday’s CE Mark announcement, Roche Diagnostics CEO Mr. Roland Diggelmann confirmed plans for a controlled EU launch of the Solo tubeless patch pump “for the remainder of the year,” followed by a broader launch in 2019 and filing for FDA approval “in the future.” This has certainly been a long time coming (Roche acquired Solo from Medingo in 2010) so we’ll be eager to see if the pilot launch expands to full commercial scale and how quickly. See below for updated pictures of Solo and new details regarding the pump’s feature set.

  • Pooled global sales for Roche, Abbott (including Libre), and J&J rose 7% YOY to $1.36 billion on an easy comparison to 4% declines in 2Q17. Pooled revenue increased 9% sequentially from a low base of $1.25 billion in 1Q18. Abbott drove pooled growth, reporting incredible 40% YOY global growth (+34% operationally) in 2Q18. Abbott remains well ahead of J&J in diabetes revenue and is rapidly approaching Roche – just $68 million in quarterly revenue separated the two in 2Q18.

  • Strong Lucentis sales of 425 million CHF (~$445 million) increased 27% YOY and 8% sequentially. Roche Pharmaceuticals CEO Mr. Daniel O’Day expressed excitement regarding the positive Phase 2 LADDER study (n=220) results announced earlier today: the majority of patients with the implanted version of Lucentis (for age-related macular degeneration) went six months or longer between the initial implant and first required refill. Patients in the high dose implant group achieved similar vision outcomes as monthly injections. Mr. O’Day characterized the device as “a real game changer in this field.” A Phase 3 study is slated to enroll its first patients in 2H18.

Roche reported its 2Q18 financial update in a call led by CEO Dr. Severin Schwan yesterday morning. There were a few diabetes mentions, mainly surrounding Monday’s CE Mark announcement of Roche’s Solo patch pump and subsequent launch plans (controlled EU launch in 2018, followed by broader commercialization in 2019 and FDA filing “in the future”). Get the full investor update and slide deck here. Below, we bring you top financial, pipeline, and therapy highlights from the call, as well as pooled “Big Three” (Abbott, J&J, Roche) analysis and selected Q&A.  

Financial Highlights

1. Global Diabetes Care Revenue Flat YOY on Easy Comparison; Positive Growth in North America Only; 1H18 BGM-Only Sales up 1% YOY

Global Diabetes Care revenue of 513 million CHF (~$537 million) was flat YOY on an easy comparison to a 7% decline in 2Q17. This performance comes on the very low end of 1Q expectations for <5% growth for the remainder of 2018. Sales increased a solid 7% sequentially, albeit from a low base of 478 million CHF (~$490 million), breaking three straight quarters of sequential declines. As noted in the investor update and by Roche Diagnostics CEO Mr. Roland Diggelmann during his prepared remarks, Diabetes Care growth was driven by the new Accu-Chek Guide and Accu-Chek Instant BGM systems, as well as increasing testing volumes. The Accu-Chek Guide and Simple Pay Savings Program launched in the US last May with very strong cash pricing for accurate strips. Since then, the launch has expanded to at least five other countries. We also wonder if the traction has been helped by the mySugr unlimited strips bundle in the US. The pared down Accu-Chek Instant bG system was listed as a key 2017 launch in the 4Q17 slide deck, and the Accu-Chek Instant S launched in India in March. Despite the continued pricing and reimbursement pressures referenced in the slide deck (presumably a reference to CMS’ competitive bidding and other pricing and competitive pressures in BGM), Diabetes Care contributed 16% of total 1H18 diagnostic division sales.

Figure 1. Global, North America, International Quarterly Sales (1Q11-2Q18)

  • 1H18 BGM sales of ~895 CHF million (~$938 million) rose 1% operationally, contributing ~90% of total 1H18 Diabetes Care revenue. 1H18 revenue for Roche’s “Other” products (mostly pumps) also rose 1%; based on the graphic, that implies pumps are doing ~$50 million per quarter and ~$100 million for the half-year – more than we would guess. Both gains came on very easy comparisons to 3% and 9% declines, respectively, in 1H17. As Roche begins the controlled launch of Solo and continues to shift towards a digital ecosystem approach, we wonder how much longer it will separate sales out like this. We suspect it will put all pump sales together but maybe we’ll be surprised!

Figure 2. 1H18 BGM and “Other” (Mostly Pumps) Sales

2. North America Revenue up 1% YOY on Very Easy Comparison; 25% Sequential Increase

North America Diabetes Care sales of 70 million CHF (~$73 million) rose 1% YOY on a very easy comparison to a staggering 27% YOY decline in 2Q17. North America was the only geography in 2Q18 to see positive YOY growth, marking two consecutive quarters of YOY increases and potentially a slight recovery in the tough US market. Sequentially, sales rose a strong 25% on a fairly easy comparison to 1Q18. We wonder if Accu-Chek Guide sales were particularly meaningful here, either standalone or as part of the mySugr unlimited strips Bundle. To date, no metrics have ever been shared on uptake of the unlimited strips, Accu-Chek Guide BGM, and coaching model, though we imagine for high-frequency testers, it’s attractive and much less hassle than ordering prescriptions and running them through insurance. As a reminder, Roche discontinued new pump sales in the US as of the beginning of 2017, meaning this growth came from BGM.

3. International Sales Down 1% YOY; 5% Sequential Increase

International Diabetes Care revenue of 443 million CHF (~$464 million) declined 1% YOY on an easy comparison to 3% YOY declines in 2Q17. This performance breaks three consecutive quarters of positive YOY growth for OUS sales. Sequentially, revenue increased 5%, aligning with Roche’s typical seasonal trend of 2Q and 4Q sequential growth interspersed with 1Q and 3Q declines (dating back to 2007). We assume the upcoming controlled EU launch of Roche’s Solo patch pump won’t have a material impact on sales until at least 2019. If high European demand for Insulet’s Omnipod is any indication, Solo could be a big product for Roche over time, especially if manufacturing can scale and Roche delivers on simple training and use.

Pooled Financial Highlights

1. Pooled Global Sales for Roche, Abbott, J&J Rise 7% YOY to $1.4 Billion, Driven by Strong FreeStyle Libre Performance

Pooled global sales for Roche, Abbott (including FreeStyle Libre), and J&J totaled $1.36 billion, up a robust 7% YOY on an easy comparison to a 4% decline in 2Q17. Pooled revenue increased 9% sequentially, albeit from a low base of $1.25 billion in 1Q18. This performance marks four consecutive quarters of YOY growth for these three companies, largely reflecting accelerating FreeStyle Libre sales. Indeed, we estimated that global 2Q18 FreeStyle Libre sales of ~$260 million accounted for more than half of Abbott’s total Diabetes Care revenue (56%). Abbott drove pooled growth on the heels of a remarkable 40% YOY gain (+34% operationally) in 2Q18. Meanwhile, J&J LifeScan/Animas dragged down pooled performance, with global revenue declining 16% YOY (-18% operationally) in 2Q18. (Of course, J&J no longer has any benefit from Animas revenue since it exited the market in October, although some sales remain internationally (excluding Canada).) Roche was in the middle of these two companies, with sales flat YOY. Excluding Abbott sales, pooled J&J and Roche revenue of $893 million declined 5% YOY on a very easy comparison (-10% in 2Q17), obviously driven by J&J and tempered by Roche. Estimating BGM-only revenue alone (excluding our guess at FreeStyle Libre CGM and Roche pumps), pooled sales of ~$1 billion declined a significant ~18% YOY. Longtime watchers of the traditional BGM market would hardly be able to believe that the “big 3” were down to $4 billion globally annually.

  • Abbott remains well ahead of J&J in diabetes revenue (after pulling ahead for the first time in 4Q17) and is rapidly approaching Roche – just $68 million in quarterly revenue separated the two in 2Q18. Given Roche’s 1Q predictions for <5% YOY growth for the remainder of 2018, and Abbott CEO Mr. Miles’s White expectations for 2018 FreeStyle Libre sales of at least $1 billion in 2018, this margin will only become narrower or cease sometime this year or next. The launch of Roche’s Solo patch pump will bring more revenue over time, but we don’t imagine anything significant near-term. With Senseonics, mySugr, automated insulin delivery, and visions of a digital ecosystem, Roche certainly has some important irons in the fire; still, it’s going to take some radical execution and outstanding innovation to push this business into 5%-10%+ growth. Meanwhile, FreeStyle Libre is gaining serious ground with over 800,000 worldwide users, a very strong US launch, and a pediatric indication filed with the FDA. J&J has given up, exiting the pump market last October, accepting the $2.1 billion sale of LifeScan to Platinum Equity in June, and selling Calibra (OneTouch Via) to CeQur earlier this month. We’ll be adjusting this pooled analysis going forward to better reflect BGM-only vs CGM-only.

  • Pooled J&J, Abbott, and Roche BGM trends are less and less useful, given differences between the three companies. FreeStyle Libre likely has now surpassed Abbott’s BGM business, and we’ll soon public visibility on J&J once it moves over to Platinum. Roche is really going to be the best read on global BGM over the next couple of years; to the extent it focuses on CGM (Senseonics) and AID, that may change too … of course, as standard of care continues to move toward CGM (slowly), keeping track of “BGM only” will be less important.

Figure 3. Worldwide Pooled Roche, Abbott, and J&J Quarterly Diabetes Device Sales (1Q12-2Q18)

Device Pipeline Highlights

1. Controlled EU Launch of Solo Patch Pump “For Remainder of the Year,” Broader 2019 Launch, FDA Filing “in the Future”

Following the Solo tubeless patch pump’s CE Mark announced on Monday, Mr. Diggelmann confirmed a controlled EU launch “for the remainder of the year,” followed by further launches in 2019 and filing for FDA approval “in the future.” The company was more specific on Monday, noting the pilot launch would start “in the coming weeks” in Austria, Poland, Switzerland, and the UK, to be followed by a “second commercialization phase” in 2019. Solo was once again listed in the slide deck under key 2018 launches – this time, with an accompanying check next to CE Mark. We’ll be eager to see if the pilot launch expands to full commercial scale and how quickly – as a reminder, Roche launched its own Insight CGM in several EU countries (the Netherlands, Norway, Denmark, and Sweden) but ultimately opted to shelve the product and distribute Senseonics’ Eversense instead. In prepared remarks, Mr. Diggelmann referred to Solo as “a new approach in taking discrete and tube-free insulin pump therapy” that “really enables [patients] to manage the disease” and will “continue to help [Roche] move into the digital and entire management of the disease.” The product has had so many delays since the acquisition from Medingo in 2010 that we weren’t sure what to expect.  We’re glad to see stronger signals that Roche will invest seriously in this product. As a reminder, the company paid $160 million for the product in 2010 plus up to $40 million in milestones.

  • In our communication with Roche management earlier this week, we learned that the company “will soon be engaging FDA” to determine the most expeditious path to get Solo to the US market. Representatives at ATTD anticipated a US solo launch at least two years after the complete EU launch, which would put US timing at ~2021-2022. This would be a notable re-entry back into the US following Roche’s exit from the US pump market in early 2017.

  • Mr. Diggelmann also noted that “user friendliness is very high on the list” for Solo’s feature set, highlighting “convenience” in the “modular design,” ability to detach and re-attach the pump, and the ability to bolus directly from the pump. Roche clearly gets it that to be successful, reducing friction in diabetes care and making things eaiser for patients and HCPs is critical. The Solo includes a semi-disposable on-body patch (as opposed to the Omnipod which is fully disposable), a redesigned touchscreen wireless handheld, and Bluetooth communication. The pump base includes the electronics and lasts 120 days, while the 200-unit reservoir and the infusion assembly are replaced every two to three days. An insertion device is used to attach the adhesive/pump holder (cradle to the body). The on-body patch does require five separate parts in total (including the inserter), and is therefore more complicated to prepare than the tubeless Omnipod; that said, the design could make it easier to scale and provide better margins (i.e., the electronics aren't freshly thrown out every two to three days). The touchscreen handheld includes an integrated Accu-Chek Aviva BGM, a bolus calculator, and looks more modern since we last saw it in 2010. Notably, as Mr. Diggelmann pointed out, patients will be able to bolus from the handheld OR directly on the pump, a nice win from an ease of use and discretion perspective, not to mention a competitive advantage over Omnipod, which requires the PDM for bolus. It does not appear that Solo has a paired smartphone app, through presumably this could be added over time to upload data and eventually to control the pump. The user manual is on the FCC website. Read Monday’s deep dive on Solo for more feature details and screenshots.

  • Overall, Solo gives Roche a true tubeless patch pump to compete with Insulet’s Omnipod in Europe, which comes at a key time: Insulet just took over direct EU distribution from Ypsomed in early July. Although Solo is more complicated to assemble than the all-in-one Omnipod, the semi-disposable design should be better for profit margins (i.e., electronics are not thrown out every 2-3 days). This also brings another full-featured truly tubeless patch pump to the category, a clear growth driver for the field – we estimate Insulet drove ~86% of the pump field’s growth in 2017. Of course, Roche will also need to differentiate from the more established Omnipod. To this end, Roche representatives at ATTD suggested Solo will eventually be controlled via an app directly on user’s smartphones, a trend we hope to see every single pump company move to over time. SOOIL’s Dana pump is the only option currently on the market with this feature approved (DIY users in Europe and Asia like it, but the company’s footprint is not that big in the major EU markets from what we can tell).

  • Automated insulin delivery plans for Solo also have not been disclosed, but clearly a combination with Senseonics CGM seems possible in future generations. An EU pivotal trial will begin testing patients in Europe in 3Q18 with Senseonics’ 180-day CGM, TypeZero’s algorithm, and Roche’s tubed Insight pump (per our updated AID landscape). Will we see a Roche Solo/Senseonics/TypeZero hybrid closed loop? And if so, could this leverage the same pivotal study using the tubed Insight pump? Roche was also the first company to publicly disclose participating in JDRF’s initiative to accelerate “Open Protocol” AID systems at ATTD, leaving a possibility Solo could eventually come to market as an “open protocol” pump. The pressure will be on to get an AID version of Solo on the market to compete with Medtronic’s 670G (launching this fall in 10 EU countries). Startup Diabeloop also plans to launch by end of the year in three EU countries, though is using the less proven Cellnovo and/or Kaleido pumps.

  • Given all the buzz surrounding interoperable automated insulin delivery components, we wonder if Roche might eventually pursue a De Novo “integrated pump” (iPump) classification for Solo in the US, similar to FDA’s recently created integrated CGM (iCGM) pathway. To be clear, the hypothetical iPump pathway has not yet been created, although at ADA SOOIL’s Justin Walker “guaranteed” the launch of an open protocol smartphone-controlled iPump in the US by ADA 2019. This has not been confirmed.

  • In late March, Roche posted a multi-site, randomized controlled participant-reported outcomes study for the Solo (n=180 pump-naïve adults with type 1) on clinicaltrials.gov, currently listed as “recruiting.” The study compares MDI vs. Solo, plus a separate arm providing comparison to Insulet’s Omnipod. It’s a pretty bold move to include a direct comparison to a competitor as established and well-received as Insulet – we applaud Roche’s confidence and transparency. It’s also great to see the focus on user experience, and hopefully the feedback will be incorporated before expanding the launch. The launch of Medtronic’s MiniMed Pro-set with BD FlowSmart technology – paused due to a higher-than-anticipated rate of complaints – serves as a recent reminder of how important human factors and training are. The study is slated to end in July 2019.

  • The type 2 pump market is extremely underpenetrated and could be a possible avenue for Roche to explore with Solo. Can costs get low enough? Following CeQur’s acquisition of Calibra Finesse (One Touch Via) from J&J, the highly anticipated, bolus-only, disposable insulin patch device is slated for a US launch in mid-2019. CeQur’s own basal-bolus PAQ device is expected to launch in the US in ~2020-2021. Meanwhile, BD’s swatch type 2 patch pump and Insulet/Lilly’s U500 Omnipod (both with connectivity) are expected to launch by “September 2019” (BD) and in “2019” (Insulet) in the US. Valeritas announced in April that V-Go SIM (Simple Insulin Management), its durable accessory for the V-Go patch insulin delivery device, will launch in 1H19 in the US, providing one-way Bluetooth communication and Glooko integration. The slim-looking Solo pump in the type 2 sector has potential, though at 200 units over three days of wear, it probably needs an expanded reservoir, work with concentrated insulin, and certainly lower costs.

2. mySugr Partnership with Care Innovations Highlighted in Press Announcement; 1.4 million mySugr Users Worldwide

The press release highlighted mySugr’s expanded access in the US and Canada by way of Roche’s recent partnership with telehealth platform Care Innovations. Care Innovations uses telehealth offerings (e.g., live video chat, remote monitoring) to connect people with chronic diseases with care teams, and will offer mySugr to payers, health networks, and clinics through its platform. This seems like an important step on mySugr’s path to become more of a virtual diabetes clinic that manages broader populations, leveraging its mobile app, connected BGM, coaching, and now telemedicine. mySugr CEO Frank Westermann shared that “Care Innovations’ payer customer base covers 67 million lives” and the integration is slated to go live “very soon,” at least in 2H18. Ultimately, the partnership aims to combine mySugr’s diabetes population health management expertise with Care Innovations’ chronic care management expertise. It’s a bit difficult to understand what the “product” looks like here, though we’ve heard some payers want a one-stop-shop to manage diabetes and comorbidities – mySugr’s inclusion in Care Innovations’ panel could be appealing. We’re glad to see Roche continuing to invest in mySugr – at ATTD, Roche Global Head of Diabetes Care Mr. Marcel Gmünder called the app “our main interface and basis for interaction with patient,” while Roche VP Mr. Tim Jürgens called it the “leading management platform.”

  • mySugr, which Roche acquired last June for ~$80 million, now has 1.4 million users, over half of which have type 2 diabetes. The company has contracted with six German payers (private and public) amounting to 15 million covered lives. The first US payer contract is still in the works, meaning this is taking longer than expected from January’s goal to have the first on board in 1H17. In all deals thus far, mySugr is contracted in a per-member per-month manner, though we hope to see the company move to outcomes-based contracting. At ATTD, the company outlined how it intends to market the mySugr Bundle, sharing a slide depicting Medtronic, Dexcom, Abbott, and Roche devices along with insights for population management.

  • There was no mention of mySugr’s professional platform, which was first introduced at ATTD by Mr. Jürgens. The platform is slated to boast features including: (i) pattern detection; (ii) “meaningful” graphs (data download for different devices; Ambulatory Glucose Profile); (iii) connectivity (one single hub for all devices); (iv) communication (more intensive monitoring of patients between face-to-face visits); and (v) population management (patients prioritized based on critical situation; real-time tracking of test strip consumption). At the time, Mr. Jürgens said the platform was to launch later in 2018, but we haven’t heard an update since. This strikes us as a competitor to Glooko – what might Roche add?

3. No Updates on Senseonics/Roche/TypeZero iDCL Pivotal Trial, Set to Begin in 3Q18 in EU

There were no updates regarding the EU pivotal trial for the Roche-Senseonics-TypeZero 180-day hybrid closed loop system. At ADA, we learned that the NIH-funded iDCL Protocol 2 pivotal trial is slated to begin testing patients in Europe in 3Q18, in line with expectations (Senseonics 4Q17) to initiate the study in 2H18. We were unable to find the trial on ClinicalTrials.gov.

Drug Pipeline Highlights

1. Lucentis Sales Up 27% YOY on Easy Comparison to 4% Declines; 8% Sequential Increase

Lucentis sales of 425 million CHF (~$445 million) increased an impressive 27% YOY on an easy comparison to (-4% in 2Q17). Revenue rose 8% sequentially from a base of 393 million CHF (~$403 million) in 1Q18. Roche Pharmaceuticals CEO Mr. Daniel O’Day cited the launch of the Lucentis prefilled syringe at the beginning of 2018 as “a competitive advantage,” noting market share gains “in every line of therapy for Lucentis.” He remarked that similar momentum is expected into 2H18. Still, Mr. O’Day remained a bit cautious when asked about the future of Lucentis during Q&A; he acknowledged that Lucentis will “clearly be a growth product for us in 2018,” but referenced “very clear competition in this field” as preventing guidance for 2019. To this end, he mentioned in the same response that he expects the competition to have a prefilled syringe “in the beginning of next year.” Lucentis was once again included in a slide of top 20 pharmaceutical division products for 1H18 and was featured in a slide of “new products off to a very good start.” Lucentis was also included on a slide listing major granted and pending 2018 approvals.

2. Positive Phase II LADDER Results; New Port Delivery System as “Real Game Changer”

Mr. O’Day expressed excitement regarding the positive Phase II LADDER study (n=220) results announced earlier today investigating the new port delivery system with Lucentis in age-related macular degeneration. A slide was dedicated to the results (see below) which were presented at the 36th Annual Meeting of the American Society of Retina Specialists (ASRS), in line with 1Q’s expected 2H18 readout. Mr. O’Day described the device as “about the size of a piece of rice” and boasted that more than 80% of patients had a greater-than-six-month time to visit refill. He characterized the device as “a real game changer in this field.” Vision outcomes in the high dose port delivery system group were similar to monthly ranibizumab eye injections and were maintained throughout the study period. More information regarding the new port delivery system will be shared at the company’s virtual pipeline event on September 13.

  • Two pivotal studies of Lucentis are slated to begin later in 2018: (i) a Phase III study (ARCHWAY) based off LADDER II results (Mr. O’Day expects the first patients to be enrolled in 2H18); and (ii) two Phase III studies based off of BOULEVARD II results investigating the anti-VEGF/Ang-2 bispecific antibody with dual mechanism of action (RG7716). Per the slide deck, Lucentis is also involved in two Phase II studies investigating the anti-VEGF/Ang2 biospecific antibody, both of which have completed recruitment.

3. Two Studies Investigating Roche’s FGF21 Candidate; Phase Ib Study Adds NASH Participants

The slide deck noted two studies investigating Roche’s FGF21 candidate RG7992: One Phase Ia study in obesity (n=79 adults with overweight/obesity and no type 2 diabetes, but suspected insulin resistance) was completed in March 2017, while another (Phase Ib) is still recruiting in type 2 diabetes (n=140) and is expected to complete in June, 2019. Just today, the Phase Ib study was updated on ClinicalTrials.gov to also include patients with NASH. It’s unclear whether Roche will pursue a diabetes indication, an obesity indication, a NASH indication, or some combination of the three for this candidate (RG7992). Given that Lilly and Pfizer both discontinued FGF21 analogs in development for type 2 diabetes due to lackluster glucose-lowering results, we’re inclined to have more confidence in the weight loss prospects of this therapeutic target for now. Novo Nordisk also has an FGF21 analog in phase 1 for obesity.

Selected Q&A

Q: So just on Lucentis, should we be looking at this as a growth product going forward? You previously tempered our expectations for the product and now it's outperforming, so should we actually look at Lucentis as a growth product for you?

Mr. Daniel O’Day (CEO, Roche Pharmaceuticals): Clearly Lucentis was a growth product in the first half of the year. And you're right, I think we kind of underestimated the competitive dynamics of the prefilled syringe and a few other things that are going on out there in the market. To be candid with you, we do expect the competition to also have a prefilled syringe in the beginning of next year. And as we've seen in this market, you can have an advantage for a period of time and then you can move back to equilibrium. I don't think I'm ready yet to guide on 2019 with Lucentis. Clearly, it will be a growth product for us in 2018. And you know, because of the very clear competition in this field, our desire is to really move the entire field. And this is where the two shots on goal, both the port delivery, and the biospecific antibody, we think we'll be able to get out of this tit for tat over time, and that's with a what we're looking forward to.

 

-- by Maeve Serino, Adam Brown, and Kelly Close