Memorandum

Roche 1Q16 – Diabetes Care sees record low US and WW quarterly sales; EU launch of Accu-Chek Insight CGM still expected in 2016 – April 19, 2016

Executive Highlights

  • Global Diabetes Care revenue totaled 443 million CHF (~$446 million) in 1Q16, declining 13% as reported and 11% operationally year-over-year (YOY). In North America, revenue plummeted to 48 million CHF (~$48 million), falling 49% as reported YOY. The performance marks all-time lows for both regions.
  • Pooled global revenue for J&J and Roche reached ~$875 million, falling 14% relative to pooled revenue in 1Q15 (~$1.0 billion). Pooled declines were driven by US weakness where combined sales of ~$228 million fell a striking ~27% YOY against an easy comparison to sales in 1Q15 (sales grew 2%).
  • Roche confirmed the 2016 EU launch timeline for its novel CGM, though there were no updates on commercialization, accuracy, or form factor. Management also alluded to a pump slated for launch “in 2017.” We are not sure what management was referring to: A sensor augmented pump with the new CGM? The Solo MicroPump (Roche’s patch pump acquired from Medingo in 2010)? Automated insulin delivery?

This morning, Roche CEO Mr. Severin Schwan led the company’s 1Q16 financial update. Below, we share our top highlights followed by Q&A.

Financial Highlights

1. Global Diabetes Care revenue totaled 443 million CHF (~$446 million) in 1Q16, declining 13% as reported and 11% operationally year-over-year (YOY). Sequentially, worldwide sales fell 26% from 4Q15. This is the lowest global revenue ever recorded in our Roche model (which stretches back to 2004) by a good margin – the previous low was 476 million CHF in 3Q15.

2. In North America, Diabetes Care revenue plummeted to just 48 million CHF (~$48 million), falling 49% as reported YOY. As it was with global sales, the performance marks an all-time low by a significant margin – the previous low was 69 million CHF in 3Q15 – and came against an easy comparison (sales declined 6% as reported YOY in 1Q15).

3. Outside North America, Diabetes Care sales totaled 395 million CHF (~$398 million) in 1Q16, declining 4% as reported YOY after falling 6% YOY in 1Q15. The performance marks five consecutive quarters of YOY declines. Though this is not promising, we assume at least some of this weakness is currency driven.

Pooled Financial Highlights

4. Pooled global revenue for J&J and Roche reached ~$875 million, falling 14% relative to pooled revenue in 1Q15 (~$1.0 billion). Pooled declines were driven in large part by US weakness where combined sales of ~$228 million fell a striking ~27% YOY against a relatively easy comparison to pooled sales in 1Q15 (sales grew 2%).

Pipeline Highlights

5. Reiterating commentary from 4Q15, management confirmed the 2016 EU launch timeline for its novel CGM – the “Accu-Chek Insight CGM” – though there were no updates on commercialization, accuracy, or form factor. The number of required calibrations, on-body size, length of wear, connectivity, and pricing strategy also remain outstanding questions, and it’ll be critical to see how Roche differentiates its sensor from competitive offerings in Europe (Abbott, Dexcom, Medtronic, Senseonics, etc.).

6. During Q&A, COO Mr. Roland Diggelman alluded to a Roche insulin delivery device slated for launch “in 2017.” This is the first we have heard of plans to launch a device on this timeline, and the company has not clarified what Mr. Diggelman was referring to: A sensor augmented pump? The long-awaited Solo MicroPump patch acquired from Medingo in 2010? A simple patch device to compete with CeQur and J&J and Valeritas? Automated insulin delivery? We speculate below.

7. Though it was not mentioned during the update, Roche and mySugr announced yesterday a global partnership to directly integrate the Bluetooth-enabled Accu-Chek Connect meter into the mySugr Logbook. The integration went live yesterday in Germany and Austria and will come to the US soon. Patients get the Connect meter for free and access to mySugr Pro. We see a lot of upside for both parties and for patients and dive into some details below and more in yesterday’s report.

8. Roche’s supplementary materials continued to project a 2016 EU launch for the Accu-Chek Guide (a next-gen BGM system with smartphone connectivity). Last quarter (4Q15) was the first time we heard of this new BGM, which will pair with the bolus advisor on the Accu-Chek Connect app.

Drug Highlights

9. US sales of Lucentis (intravitreal ranibizumab) declined 10% YOY as reported and 13% in constant currencies to 355 million CHF (~$357 million) in 1Q16.

10. Management highlighted new results from the protocol T study showing no significant difference in visual outcomes between Lucentis and Bayer/Regeneron’s Eylea (intravitreal aflibercept) after two years.

Financial Highlights

1. Global Diabetes Care revenue totaled 443 million CHF (~$446 million) in 1Q16, declining 13% as reported and 11% operationally year-over-year (YOY). This is the lowest global revenue ever recorded in our Roche model by a good margin – the previous low was 476 million CHF in 3Q15. The reported decline in 1Q16 also came against a 6% decline in 1Q15, though the operational comparison was slightly tougher (in this environment) with sales growing 1% a year ago. A deeper look at the numbers continues to paint a bleak picture: this is the first year in our Roche model that 1Q sales have not broken 500 million CHF.  The segment peaked at sales of 904 million CHF in 2007, a testament to just how challenging this business has been.

  • Sequentially, worldwide sales fell 26% from 4Q15. This business tends to be quite seasonal (see Figure 1 below), so the performance is not surprising considering the ~17-26% sequential declines from 4Q to 1Q we’ve seen over the past five years.

Figure 1: Global, North America, International Quarterly Sales (1Q12 – 1Q16)

  • Despite the tough financial performance, management maintained a surprisingly optimistic attitude for the future. The company is still focused on innovation and management believes it can manage its short-term costs by addressing inefficiencies. As a reminder, Roche has been implementing “global restructuring plans” aimed at enhancing the long-term profitability of the global business for the greater part of two years. The company has not provided a timeline for completion nor has it provided details on specific strategy, so we’re not sure what concrete changes have been made. The disappointing financial performance does raise concerns about the business’ viability, though it sounds like Roche is taking a measured, wait-and-see attitude (at least publicly). We’re not how long this can continue.

2. In North America, Diabetes Care revenue plummeted to just 48 million CHF (~$48 million), falling 49% as reported YOY. As it was with global sales, the performance marks an all-time low by a significant margin – the previous low was 69 million CHF in 3Q15 – and came against an easy comparison (sales declined 6% as reported in 1Q15). The North America region has been tremendously challenging for Roche – YOY sales have now declined in seven of the past eight quarters (4Q15 was the exception with flat growth), and Roche has recorded only one quarter of positive YOY reported growth in North America in the past 13 quarters (since 1Q13).

  • Management commented briefly on the North American business during the call, alluding to a challenging market “as a consequence of reimbursement cuts.” CMS recently announced results from the second round of its competitive bidding program, establishing new payment amounts for mail order and retail blood glucose strips – $8.32 per 50-count box ($0.17 per strip), down 20% from the current allowable payment of $10.41 ($0.21 per strip). As we understand it, this pricing adjustment has further destabilized the US market and management noted that a number of strip contracts were not extended or renewed at the lower price. It’s not clear to us whether quality SMBG manufacturers are going to be able to operate at a profit in the US, and if these prices stick, we have to believe that innovation and patient safety are at risk. See our April 2016 competitive bidding update for more details.
  • On a smaller note, management acknowledged that reimbursement cuts in Ontario, Canada have also played a role in the North American declines. We’re not sure about the relative size these cuts, though management did sound less concerned vs. the US situation.

3. Outside North America, Diabetes Care sales totaled 395 million CHF (~$398 million) in 1Q16, declining 4% as reported YOY after falling of 6% YOY in 1Q15. The performance marks five consecutive quarters of YOY declines following a string of two straight quarters of YOY growth for the business. Though this is not promising, we assume some of this weakness is currency driven – see below. It is tough to say for sure since Roche does not report operational sales for the overall international business. Sequentially, sales fell an expected 17% against a high base in 4Q15 (474 million CHF – the business typically peaks in 4Q). As a reminder, Roche breaks out its non-North America revenue into two groups – Europe, Middle East, and Africa (EMEA) and Latin America, Asia-Pacific, and Japan (RoW):

  • Sales in EMEA totaled 285 million CHF (~$287 million), falling 6% as reported and operationally YOY in 1Q16. For comparison, sales fell 11% but were flat operationally YOY in 1Q15. It’s particularly notable not to see any currency impact here after the significant strengthening of the US dollar was such a storyline in 2015. It’s difficult to say whether the lessening impact of foreign exchange has been a trend for Roche over the past 12 months (or if this is a one-time occurrence), since Roche only reports quarterly operational performance for 1Q every year. Sales fell 20% sequentially.
  • Sales in RoW totaled 110 million CHF (~$111 million), growing 1% as reported and 11% operationally in 1Q16. For comparison, RoW sales grew 12% as reported and 17% operationally in 1Q15. Management did not comment on the RoW Diabetes franchise performance in the call though presumably the positive movement reflects some growth in underpenetrated markets. Roche’s 1Q16 slide deck alluded to 21% Diagnostic segment growth in Latin American and 16% growth in Asia Pacific (not diabetes specific) in 1Q16. Sales fell 6% sequentially.

4. Pooled global revenue for J&J and Roche reached ~$875 million, falling 14% relative to pooled revenue in 1Q15 (~$1.0 billion). This comes against an easy comparison as combined revenue declined 9% a year ago. While some of the weakness comes from currency headwinds, it cannot explain the entire drop since the US market is driving the declines – see below.

  • Pooled declines in 1Q16 were driven in large part by US weakness. Combined sales of ~$228 million fell a striking ~27% YOY against a relatively easy comparison to pooled sales in 1Q15 (sales grew 2%). Unsurprisingly, the performance marks an all-time low for J&J and Roche pooled quarterly sales by a significant margin – the previous low was $277 million in 3Q15. Sales fell 16% sequentially.
  • Pooled international sales also declined as combined sales of $647 million fell 8% in 1Q16 against an easy comparison to pooled revenue in 1Q15 (down 13%). Depressed revenues as a result of foreign exchange have characterized both businesses for several quarters now, and the big question remains: When will the market bottom out? Pooled sales fell 14% sequentially.

Figure 2: Pooled J&J And Roche Quarterly Sales (1Q12– 1Q16)

  • We are eager for the remaining member of the “Big Three” blood glucose monitoring companies (Abbott) to report tomorrow, particularly to see whether the company experienced similar global and stateside challenges. AS a reminder, Bayer’s BGM business was spun out to privately-held Ascensia.

Pipeline Highlights

5. Reiterating commentary from 4Q15, management confirmed the 2016 EU launch timeline for its novel CGM – the “Accu-Chek Insight CGM” – though there were no updates on commercialization, accuracy, or form factor. We found it encouraging that supplementary materials characterized the CGM as a “key” 2016 launch and even more promising that Mr. Diggelman expressed confidence in the timeline during Q&A. Roche shared a similar timeline at JPM 2016 and the overall transparency suggests internal confidence in this launch. We’re not sure if it has been submitted for approval.

  • At the Diabetes UK Professional Conference 2016, Roche reps in the exhibit hall shared confidence that the sensor’s accuracy is “on par” with Dexcom’s G5. Roche has not shared any information on accuracy to date (an EU pivotal trial is underway) though this commentary would imply at a MARD of ~9%. Is it possible for Roche’s first-gen CGM? Roche is certainly behind in the CGM game and this kind of step-change in first-gen accuracy would be very impressive as the company aims to stay competitive with the next-gen innovation happening at Abbott (FreeStyle Libre), Dexcom (G5, G6), and Medtronic (Enlite 3, Enlite 4). The number of required calibrations, on-body size, length of wear, connectivity, and pricing strategy remain big questions for Roche’s CGM, though its experience in manufacturing strips is certainly an asset.

6. During Q&A, COO Mr. Roland Diggelman referred to a Roche insulin delivery device that is slated for launch “in 2017.” This is the first we have heard of such plans, though we are not sure which device Mr. Diggelman was referring to. We speculate below:

  • Next-gen Accu-Chek Insight? Roche currently markets the “Accu-Chek Insight” in the EU as an insulin pump system alone (launched in January 2014). We wonder whether the 2017 timeline represents Roche’s goal for bringing such a product to the US market. Recent commentary has hinted that Roche’s offering may actually be a sensor-integrated pump with its new CGM, though we’re waiting for confirmation on this front.
  • Solo MicroPump: At the Diabetes UK Professional Conference 2016, Roche reps mentioned that Roche’s patch pump was on track to launch “before our novel CGM” – this would put an EU launch in 2016. We had been surprised at this timing considering how little we have heard about this project to date – indeed, we still have zero details on the form factor, pricing, or performance since Roche acquired it from Medingo in 2010! We wonder whether Mr. Diggelman’s remarks today may have been alluding to Roche’s actual plans on this front.
  • Simple insulin patch delivery device? Could Roche launch a featured-down insulin device to compete with CeQur’s PAQ or J&J’s Finesse or Valeritas’ V-Go? For more on the simple patch pump market, please see our most recent competitive landscape of the field here.
  • Automated Insulin Delivery? It is possible that Mr. Diggelman’s commentary alluded to closed-loop work and an intermediate device (e.g., hypoglycemia/hyperglycemia minimizer) that Roche hopes to commercialize by 2017. The company has been very, very stealth on this front though we assume automating insulin delivery is still on Roche’s radar. The last we heard of these plans came at JPM 2015.

7. Though it was not mentioned during the update, Roche and mySugr announced yesterday a global partnership to directly integrate the Bluetooth-enabled Accu-Chek Connect meter into the mySugr Logbook. The integration will give patients free access to: (i) an Accu-Chek Connect meter ordered directly from the mySugr app and shipped within a couple weeks (normally $19.99); and (ii) the pro-version of the mySugr Logbook app (offering more functionality for $2.99 per month, including a bolus calculator in Europe). The integration went live yesterday in Germany and Austria and will come to the US soon. Roche and mySugr will jointly market the product through their respective marketing and communication channels.

  • We had a chance to test out the integration over the weekend and were highly impressed with how tight it is on the connectivity and ordering fronts. The Accu-Chek meter automatically uploads results directly into the mySugr app via Bluetooth, just like it would for Roche’s proprietary Connect app – this doesn’t use HealthKit as an intermediary, a clear sign that Roche is committed to sustaining the great mySugr user experience. The mySugr app must be open on the phone for meter readings to transfer via Bluetooth, though it can be running in the background and the phone can be locked. We found the Bluetooth pairing process easier than with Roche’s own app (~20 seconds – seriously fast). If the phone is out of range following a test, the meter will backfill all the missing data into mySugr the next time it is in range.

mySugr gets...

Roche gets...

- Major vote of confidence and statement from leading BGM player (including a dedicated press release)

- Direct meter-app integration (not via HealthKit)

- Global partnership (not just one country)

- Less manual entry – BG results automatically imported into mySugr

- Co-promotion from Roche’s large established sales force – expand awareness and uptake

- Giving mySugr users more value: free Accu-Chek Connect meter, free Pro version of the app (bolus calculator in EU, useful search feature, reports, ability to add photos, reminders, access to other mySugr apps).

- Non-exclusive agreement – mySugr has already integrated some BGMs (iHealth globally, iBGStar and GL50evo in Europe) and can still add others

- World-class design, user experience, and data analysis in mySugr app, more fun to use than Roche’s own Connect app

- Direct integration with the most popular diabetes app (600,000+ registered users, 51 countries, 12 languages)

- Potential to sell more strips to high frequency testers

- Enhances BGM, offering more value in mySugr app: estimated A1c, easier food and insulin tracking, bolus calculator in EU, etc. Plus, access to other mySugr ecosystem apps:

- Leverage external software/app innovation to someone who knows it better

- Staying competitive with J&J’s Verio + WellDoc BlueStar integration

- New service-focused business models?

  • This news continues two positive trends we’ve seen over the past few months: (i) BGM companies recognizing they need outstanding software to enhance the value of their hardware; and (ii) down-featuring hardware and up-featuring paired apps to offer more value for users and better economics for companies. This was an especially critical deal for Roche to sign, given J&J’s recent partnership to integrate WellDoc’s BlueStar software. We’re glad to see more established diabetes companies leveraging external innovation, particularly in BGM where the business has so many threats: declining margins, competition for high-frequency testers from CGM, type 2 therapies that don’t cause hypoglycemia. Can these promising software partnerships meaningfully enhance the value of traditional BGM? Can they enable new business and reimbursement models in diabetes? We are optimistic, as both put the patient experience first – offering more actionable data and real-time feedback, adding more value for less money, and providing the kinds of digital user experiences that patients have become accustomed to.
  • Read our detailed report from yesterday here.

8. Roche’s supplementary materials continued to project a 2016 EU launch for the Accu-Chek Guide (a next-gen BGM system with smartphone connectivity). We first heard of this new BGM in 4Q15. The slide deck provided few details on the specific timeline or meter features though management has informed us that the device will talk to the Accu-Chek Connect app (Android and iOS) and integrated bolus advisor. In terms of new innovation, the next-gen device will be based on a new strip platform that management noted should prove more accurate.

Drug Highlights

9. US sales of Lucentis (intravitreal ranibizumab) declined 10% YOY as reported and 13% in constant currencies to 355 million CHF (~$357 million) in 1Q16. Sequentially, sales declined 6% as reported against a tough comparison (16% sequential growth in 4Q15). Management described the decline as expected during prepared remarks and noted that it was not as steep as the declines seen in recent quarters (sales declined 14% YOY as reported in 4Q15 and 24% in 3Q15). Roche’s presentation slides cited continued within-class competition in diabetic macular edema (DME) and wet age-related macular degeneration as a key challenge for Lucentis – this has been the case for several quarters.

10. Management highlighted new results from the protocol T study showing no significant difference in visual outcomes between Lucentis and Bayer/Regeneron’s Eylea (intravitreal aflibercept) after two years. One-year results from this study (an NIH-funded trial comparing Lucentis, Eylea, and Avastin [bevacizumab]) demonstrated greater gains in visual acuity with Eylea vs. Lucentis in patients with worse than ~20/50 vision at baseline. These results have likely contributed to the significantly stronger growth for Eylea compared to Lucentis over the past year. However, Eylea’s advantage over Lucentis in this group had disappeared after two years, though Eylea still produced a significantly greater benefit compared to Avastin. We will be very curious to see whether these results help Lucentis make inroads against Eylea over the next year.

 

-- by Varun Iyengar, Emily Regier, Adam Brown, and Kelly Close