Memorandum

Abbott 2Q17 – CEO Miles White: “I just don’t know” when FDA will approve Libre; serious Bigfoot partnership excitement; Global sales grow 21%, with blowout record international sales up 25% on Libre strength – July 20, 2017

Executive Highlights

  • Abbott CEO Mr. Miles White commented that the company and FDA have had a positive ongoing dialogue regarding FreeStyle Libre, but he can’t predict when approval might happen. The sensor was submitted in 3Q16, so it’s coming up on a one year review. A question from analyst Mike Weinstein implied factory calibration and accuracy are the sticking points. The last guidance in 4Q16 projected a 2H17 approval; there was no update today.
  • On a more positive note, Mr. White was very, very excited about the new Bigfoot partnership, specifically citing the “fairly clever” service model, value proposition (“compelling”), ease, simplicity, and affordability. This will combine Bigfoot’s automated insulin delivery systems for pumps and MDI with a next-gen Libre that includes continuous communication and remains factory calibrated. A pivotal for the pump-based system will occur in 2018, per the partnership announcement.
  • Unlike in the previous four quarters, there was no update on international FreeStyle Libre user base, though the Bigfoot announcement a week ago shared that there were 300,000+ global users, with approvals in 37 countries. 1Q17 did see Libre approvals in Canada and Mexico, as well as national reimbursement obtained in Switzerland and France – over half of Libre sales are now to patients with full or partial reimbursement! 
  • Abbott’s Global Diabetes Care sales totaled $336 million in 2Q17, rising an impressive 15% as reported and 21% operationally year-over-year (YOY) on an easy comparison to 3% growth in 2Q16. The international business largely drove growth, with record-high revenue of $255 million up an impressive 25% operationally on the strength of FreeStyle Libre. Wow! US sales grew to $81 million, up 8% YOY against a very easy comparison to 2Q16. We wonder how much revenue Libre Pro is contributing stateside. Management projects another quarter of double-digit growth for 3Q17!

Early this morning, Abbott CEO Mr. Miles White led the company’s 2Q17 financial update, sharing continued momentum for the diabetes business. Below, we bring you our top pipeline and financial highlights from the call followed by a very interesting Q&A with Mr. White. 

Pipeline and Business Highlights

1. Mr. White sounded slightly frustrated during Q&A as he explained that he can’t predict timing for FDA approval of the FreeStyle Libre consumer version (real-time). Analyst Mike Weinstein implied further accuracy trials have been done for the FDA. The product was submitted in 3Q16 for both adjunctive and non-adjunctive claims, so it’s coming up on a one-year review. The last guidance provided on the 4Q16 call expected a 2H17 launch, though there was no update today.

2. Mr. White had VERY positive things to say about the agreement with Bigfoot to develop and commercialize a next-gen FreeStyle Libre sensor in Bigfoot’s automated insulin delivery systems for both pumps and MDI auto-titration (announced a week ago). It will add continuous communication and remain factory calibrated. He acknowledged that he probably sounded like a brochure as he delivered a 450-word answer (below in Q&A) with serious enthusiasm for Bigfoot’s “fairly clever” monthly subscription service model, value proposition (“compelling”), and potential to simplify diabetes management. What great visibility! A pivotal for the pump-based system will occur in 2018, per the partnership announcement.

3. Unlike in the past four quarters, Mr. White didn’t provide a FreeStyle Libre user base update, but as of the Bigfoot announcement last week, there were over 300,000 global users, up from “about 300,000” patients three months ago (approved in 37 countries, including EU + Australia, Israel, Brazil, Argentina, Mexico, Canada). FreeStyle Libre continues to achieve national reimbursement status, most recently in Switzerland, and half of all Libre sales are now to patients who have at least partial reimbursement – wow!

4. Our team recently covered three FreeStyle Libre studies at ADA (back-to-back-to-back late-breakers) and compelling real-world data at ATTD, and there are still a number of studies listed on ClinicalTrials.gov. At ADA, posters detailed Libre Pro efficacy in an Indian clinic, Libre Pro economics, and the SELFY study of Libre consumer in children with type 1

Financial Highlights

5. Abbott’s Global Diabetes Care business had another phenomenal quarter on Libre momentum, with revenue of $336 million growing 15% as reported and 21% operationally year-over-year (YOY). This comes against the backdrop of a modest comparison (3% operational growth in 2Q16). Management expects double-digit growth to continue in the quarter ahead, on par with previous expectations for “pretty heavy double-digit growth out of Libre for the foreseeable future.”

6. International Diabetes Care revenue totaled $255 million in 2Q17 – the highest our model has ever seen – growing a strong 25% operationally (18% as reported). As expected, continued consumer uptake of FreeStyle Libre drove the quarter’s success. The performance reflects strong 15% growth from 1Q17, and a significant $32 million margin over the previous international record 4Q16 ($223 million).

7. US Diabetes Care sales climbed 8% YOY for 2Q17, totaling $81 million. This is the second quarter of positive growth following a drought of seven, but came on a very easy comparison to 1Q16, when sales plummeted 22% YOY to $73 million (the second-lowest total in over a decade). Revenue also grew 5% sequentially from $75 million in 1Q17.

Pooled Abbott and J&J Financial Highlights

8. J&J and Abbott pooled global revenue reached ~$757 million, flat YOY relative to 2Q16 on a modest comparison (-2% one year ago). Pooled 2Q17 sales of ~$241 million fell 4% in the US, whereas pooled international sales of ~$516 million grew 2% YOY on the strength of Abbott’s FreeStyle Libre. Global J&J and Abbott sales grew 10% sequentially.

Pipeline Highlights

1. CEO Mr. White on FreeStyle Libre Consumer FDA Review: “Good Active Dialogue…I Just Wouldn’t Forecast It, I Just Don’t Know”

Mr. White explained during Q&A that he can’t predict timing for FDA approval of the FreeStyle Libre consumer version (real-time). At this point, we’re not sure if Abbott will hit the last guidance from the 4Q16 call, which called for a 2H17 launch. Mr. White cautioned several times against trying to “predict the FDA.” Based on a question from JPM’s Mr. Mike Weinstein, it sounded like the FDA is hung up on factory calibration and that Abbott has even had to complete additional accuracy trials – this was news to us! Mr. White responded that there has been a lot of positive conversation back and forth with the Agency, but coming up on a year of review, he still has no semblance of whether approval might come at year-end or beyond. We couldn’t help but notice that his tone has been slightly dampened from last quarter, when he told the whole story with five words: “Submitted. Waiting. Excited. Anticipating. Impatient.” He is surely still excited, but his comments more starkly reflect impatience at this point. As a reminder, Libre consumer was submitted to FDA for both an adjunctive claim and a non-adjunctive (replacement) claim in 3Q16.

  • Following the Bigfoot announcement, a theory we pondered is whether the FDA is currently reviewing the next-gen FreeStyle Libre CGM (with real-time communication), not the flash version already available in Europe. This could explain why the company insists on referring to the device as a “flash glucose monitor” outside of the US and a continuous glucose monitor stateside. This is total speculation, but it wouldn’t be too surprising for Abbott to launch a traditional CGM here in the US, since there is reimbursement for the category here and it will need to compete more directly with Dexcom and Medtronic. At the same time, it’s very early to speculate as Abbott hasn’t said outright that the next-gen sensor will even be marketed as a standalone product, and Mr. White probably wouldn’t be as impatient with a lengthy review for a sensor with new functionality.
  • We assume FDA is thinking hard about the factory calibration and accuracy, performance in hypoglycemia (noted on the Libre Pro label), and non-adjunctive vs. adjunctive use. Mr. White emphasized in Q&A that the factory calibration approach is proprietary, but it sounded like Abbott is confident in this part of the submission. Of course, Libre also has a ton going for it to support safety – in addition to two six-month RCTs, real-world data from 55,000+ users in Europe, and 300,000+ users globally, the factory calibration actually takes out a major driver of CGM inaccuracy (inaccurate fingerstick calibration, especially dangerous false highs from dirty hands).

2. Sky-High Enthusiasm for New Bigfoot Partnership

Mr. White had highly positive things to say about the exclusive agreement with Bigfoot to develop and commercialize a next-gen FreeStyle Libre sensor in Bigfoot’s automated insulin delivery systems for both pumps and MDI auto-titration (announced a week ago). He acknowledged that he probably sounded like a brochure as he delivered an amazingly positive 450-word answer (below) with ample enthusiasm for Bigfoot’s “fairly clever” monthly subscription service model, “compelling” value proposition, and potential to augment pump penetration in type 1s and make insulin far easier and safer. The service model, in his view, is part of strategic pivot in the market for pumpers and MDIs alike, focused on simplicity, ease, and affordability. The FreeStyle Libre franchise had existing partners in mySugr and Glooko/Diasend, but this agreement clearly launches it into a sphere where it will directly inform the automated titration and delivery of insulin therapy – we wonder if Abbott will aim to forge similar deals with other companies in the near future (Abbott can partner with others, but Bigfoot is exclusively tied to using FreeStyle Libre).

  • Per the partnership announcement, Bigfoot anticipates a US pivotal trial in 2018 incorporating the next-gen FreeStyle Libre into its pump+smartphone app automated system, while timing on MDI auto-titration with next-gen FreeStyle Libre and the Bigfoot/Timesulin dose capture device for pen users (Bigfoot acquired Timesulin last month) still needs to be discussed with the FDA. Notably, assuming it secures approval, Bigfoot will likely have the first closed-loop system driven by a factory-calibrated sensor. We see high potential for Bigfoot’s offerings to meaningfully improve diabetes care delivery and shake up business models, and Libre’s exclusive inclusion in these bundles gives Abbott a very exciting additional revenue stream. See our in-depth write-up on the deal from a week ago!
  • In Mr. White’s Q&A response, Libre has many applications beyond how it’s used today, and the Bigfoot approach is just one of them. As shared in our Bigfoot report, the company continues to view FreeStyle Libre as a platform that is relevant to many different applications for many different types of patients. No specifics were granted, though we imagine that integration into additional sensor-augmented pumps, patch delivery devices, smart pens, insulin dose titration, and behavior change programs are logical next steps. There’s never been a more exciting time with so many digital and device partnership opportunities for the Abbott Diabetes Care business!
  • As expected, Abbott will not be looking to own a pump. One analyst asked a leading question implying (to us) that Abbott may have an interest in acquiring Bigfoot (or a different pump company) outright, but Mr. White assured him that’s not in the roadmap. At this point, it seems that Abbott will be happy to leverage FreeStyle Libre as a component in as many capacities as possible, not limiting itself to a system with an integrated pump and sensor under one roof.
  • All of Mr. White’s comments came “from a distance,” as he admitted he has spoken to the Bigfoot team himself. His commitment to and enthusiasm for the diabetes segment is apparent from the way he discusses Libre and this latest partnership. Then again, he oversees a multi-billion-dollar company, and with extremely capable Medical Device EVP Mr. Robert Ford and Diabetes Care President Mr. Jared Watkin on his side incredible brilliance and negotiations.

3. No Update on FreeStyle Libre User Base; Approval in Canada + Mexico; Impressive Reimbursement Momentum

Unlike in the past four quarters, Mr. White didn’t provide a FreeStyle Libre user base update. As of the Bigfoot announcement last week, there were 300,000+ FreeStyle Libre users, up from “about 300,000” as of three months ago, 250,000+ EU patients in 4Q16, and more than twice the number indicated just a year ago. The sensor is now approved in 37 countries, including EU, Australia, Israel, Brazil, Argentina, Mexico, and Canada. In 1Q17, the update came in Q&A after an analyst asked directly – no one asked this time around – and international revenue did reach an all-time high of $255 million. On the other hand, in 1Q17, the company switched from reporting total EU users to worldwide users, which may have hinted that EU growth slowed (we’re not sure – this is obviously to be expected, from an increasingly higher base). We’ll be fascinated to watch how the growth changes and whether FreeStyle Libre will need additional indications/form factors to penetrate an even wider audience. For now, assuming that Abbott has retained the 300,000+ users from 1Q17 and each is using two sensors per month (at $60/sensor), then Libre revenue of roughly $100 million is now ~40% of total international sales. Of course, that may not be the right actual price everywhere, so this is an estimate and speculation only.

  • FreeStyle Libre continues to receive national reimbursement status, most recently in Switzerland. Switzerland joins France (obtained in May), Belgium, Austria, and Luxembourg (as far as we know) as the other countries in which the sensor is fully covered for people with diabetes on insulin. Partial reimbursement has also been provided by a number of entities in Germany, Sweden, Italy and the Middle East; in total, at least 13 countries have granted total or partial reimbursement. As expected, other national and regional negotiations are underway in Europe. Notably, half of all Libre sales are to patients who have at least partial reimbursement – wow!
    • Abbott makes a very strong case for reimbursement: (i) strong hypoglycemia data from REPLACE and IMPACT; (ii) 300,000+ users worldwide; (iii) real-world data presented at ATTD suggesting that increased scanning translates to lower A1c and less time in hypoglycemia; and (iv) a cost-effective and desirable form factor relative to current CGM – although of course, all the manufacturers are continuing to work on form factor and we expect all to improve, particularly Dexcom given its partnership with Verily (the first launch in 2018 is expected to be smaller than Libre).
  • FreeStyle Libre was recently approved in Canada and Mexico for non-adjunctive use – the Canadian approval was listed as an important product milestone for the quarter alongside an insertable cardiac monitor and an MRI-compatible cardiac resynchronization therapy defibrillator. Talk about good company! The sensor is expected to be available in both markets in late 3Q17 (September-October). Abbott will leverage a DTC, no-prescription model in both geographies, though two small private payers are on board in Canada (including Manulife). Once Libre launces in Canada and Mexico, it will be available in 37 countries (assuming there are no other launches before September) – the US is the only region in North America whose regulatory body hasn’t yet approved the system.
    • According to the IDF’s 2015 Diabetes Atlas, Abbott’s addressable market for FreeStyle Libre could have increased by as much as ~14 million patients (diagnosed in Mexico and Canada) – we especially hope the device will take hold in Mexico, where an expected ~16% of the adult population has diabetes.

4. Recent and Future FreeStyle Libre Data (From ADA, ATTD, and Looking Ahead)

Our team recently covered three FreeStyle Libre studies at ADA (back-to-back-to-back late-breakers) and compelling real-world data at ATTD, and there are still a number of studies listed on ClinicalTrials.gov. At ADA: (i) 108-LB indicated that use of FreeStyle Libre Pro in an Indian clinic (n=425) resulted in a 0.37% drop in A1c at six months (p<0.0001), while a matched control group dropped 0.11% (p=0.07); (ii) In 109-LB,  Abbott’s Dr. Shensheng Yu estimated that the Libre Pro’s inexpensive setup - $65 for the reusable reader, $10 for cable and adapter, and $60 per 14-day sensor – allows for ~18 individuals to experience professional CGM for the same cost that it takes to simply set up clinics on one of the other systems (Medtronic iPro2; Dexcom G4); and (iii) in the SELFY study of children with type 1 diabetes ages 4-17 years-old, using Libre resulted in several glycemic and extra-glycemic benefits, including increased time in range, decreased glucose variability, reduced A1c (-0.4%),  improved patient and parent satisfaction, and nearly-eliminated fingerstick. At February’s ATTD, Dr. Ramzi Ajjan presented compelling real-world data from >55,000 FreeStyle Libre users suggesting that, when they scanned at higher frequencies, their A1cs were lower and they spent less time in hypoglycemia. At ADA, Dr. Ajjan supplemented the ATTD figures with new cuts showing increased time in range and decreased time in hyperglycemia from increased scanning, and even a country-by-country breakdown! It was a wealth of data to behold! The evidence supporting the clinical and health economics benefits of FreeStyle Libre (pro and consumer version) has grown steadily since the REPLACE and IMPACT RCTs, quelling the concerns of many payers and regulators.

  • There are a number of FreeStyle Libre studies on ClinicalTrials.gov, including a 1,100-patient observational quality of life study in Belgium (investigator-initiated), a 100-patient quality of life study in type 2s (investigator-initiated), a completed Abbott-sponsored trial in 83 pregnant women, and a 76-patient Abbott-sponsored pediatric glycemic control (time-in-range) study. See the table below for an overview, which only includes studies in ClinicalTrials.gov when searching for “FreeStyle Libre."

Trial

Trial Population

Primary Outcome(s)

Status

Flash Glucose Monitoring Study for Diabetes (FUTURE)

1100 patients (ages 18+) using FGM after entering in the new diabetes reimbursement program in Belgium

Quality of life

Recruiting participants

Effect on QOL in Type 2 Diabetes Patients (NCT02809365)

 

100 type 2 diabetes patients (ages 30-80) treated with MDI (≥2 injections/day); A1c between 7.5% and 10%

Treatment satisfaction as measured by DTSQ (Diabetes Treatment Satisfaction Questionnaire)

Not yet open for recruitment

Accuracy study investigating FreeStyle Libre in pregnant women with type 1, type 2, or gestational diabetes (NCT02665455).

83 pregnant women (age 18+) with type 1, type 2, or gestational diabetes

Point accuracy judged using the Clarke Error Grid

Complete; no results posted yet

Evaluation of the Accuracy and Precision of Flash Glucose Monitoring Sensors in Different Sites

(OUT OF SIGHT)

20 type 1s (18 years and up)

MARD between Libre measurements for the three insertion sites (back of arm, abdomen, upper thigh) and paired SMBG measurements

 

Currently recruiting participants; completion slated for August 2017

An evaluation of the FreeStyle FGM system (NCT02824549)

50 children (ages 4-18) with type 1 diabetes

Usability of the system

Currently recruiting participants; completion slated for December 2017.

An accuracy study of FreeStyle Libre in type 1 patients in the UK (NCT02734745)

48 adults with type 1 diabetes

Accuracy – MARD vs.  YSI during CRC visit and vs. glucometer during home setting

 

Recruiting participants; completion slated for September 2017

 

Financial Highlights

5. Global Diabetes Revenue Up 21% YOY; Double Digit Growth Projected for 3Q17

Abbott’s Global Diabetes Care business had another phenomenal quarter on Libre momentum, with revenue of $336 million growing 15% as reported and 21% operationally year-over-year (YOY). This comes against the backdrop of a modest comparison (3% operational growth in 2Q16). Since Libre took off in Europe, this is the fifth straight quarter of positive YOY growth, a stretch preceded by 10 quarterly declines. It is also the highest quarterly revenue recorded since 4Q13 and the second straight quarter of 20+% growth! Management forecasted more double-digit sales growth over the next three months, on par with 3Q16 expectations for “pretty heavy double-digit growth out of Libre for the foreseeable future.” In this era, it’s so great to see a big BGM player feature its Diabetes Care business so prominently, in its press release, prepared remarks, and Q&A, as opposed to de-emphasizing what are usually challenging sales figures . If you look at the graph below starting from 1Q16, the OUS line looks like the kind of growth you’d expect out of a startup, not a seasoned organization!

Figure 1: Global, US, and International Quarterly Sales (1Q12-2Q17)

6. Libre Drives Strong 25% YOY International Growth to Record $255M

International Diabetes Care revenue totaled $255 million in 2Q17 – the highest our model has ever seen – growing a strong 25% operationally (18% as reported). As expected, continued consumer uptake of FreeStyle Libre drove the quarter’s success. The performance reflects strong 15% growth from 1Q17, and a $32 million margin over the previous international record 4Q16 ($223 million). Revenue did come in past the $200 million mark in 2Q16 and has stayed there, which will make for more difficult YOY comparisons in the upcoming quarters – though we haven’t seen the law of large numbers begin to kick in yet!

7. Us Diabetes Care Grows 8% against Easy Comparison

US Diabetes Care sales climbed 8% YOY for 2Q17, totaling $81 million. This is the second quarter of positive growth following a drought of seven, but came on a very easy comparison to 1Q16, when sales plummeted 22% YOY to $73 million (the second-lowest total in over a decade). Revenue grew 5% sequentially from $75 million in 1Q17. We’re not sure how much of this quarter’s revenue can be attributed to Libre Pro sales, but we suspect it’s likely small given the legacy BGM business and the slow pace to change clinical practice. However, we did hear tremendous enthusiasm for the product at ADA from the highly-respected Dr. Daniel Einhorn (“This technology is so good and has had such enormous impact on my practice and my patients, I couldn’t resist [speaking here today]”), as well as at ENDO 2017.

Pooled Abbott and J&J Financial Highlights

8. Pooled J&J and Abbott Revenue flat YOY at $757M – US Drives Weakness, with Abbott Pushing Int’l Sales to 2% YOY Growth

J&J and Abbott pooled global revenue reached ~$757 million, flat YOY relative to 2Q16 on a modest comparison (-2% one year ago) – obviously it was a tale of two companies. Pooled 2Q17 sales of ~$241 million fell 4% in the US, whereas pooled international sales of ~$516 million grew 2% YOY on the strength of Abbott’s FreeStyle Libre. Global J&J and Abbott sales grew 10% sequentially. Libre has further separated these two business trajectories: LifeScan/Animas fell 10% YOY to $421 million in 2Q17, while Abbott’s sales rose 21%.

  • As a reminder, direct BGM comparisons between Abbott and J&J are impossible because each company’s Diabetes Care business includes a fraction of non-traditional “BGM” revenue that is not reported. J&J has Animas insulin delivery and Abbott has continuous sensors (Navigator II, Libre) outside of the US and Libre Pro in the US.

Selected Questions and Answers

Mr. Mike Weinstein (JP Morgan, New York, NY): One quick follow-up on Libre – you didn't give us much of an update on the US. I know inter-quarter, Miles we had talked about this, you started a couple of trials to confirm the accuracy of Libre for the FDA. Does that mean that approval is likely more like year-end or early next year? And do you have any sense whether the FDA has gotten comfortable with the idea of a factory-calibrated device?

A: Well, there's been a lot of conversation back and forth with the FDA. We've explained to the FDA how our factory calibration is done. And I think that conversation has gone well. I never want to predict the FDA. I think we have what we consider to be a fairly proprietary process for this factory calibration so it's not something we're anxious to share widely. And it's unique. So I guess I'm not surprised that it needed further discussion, but I think that's gone well. I don't know that I can predict at all, Mike, when the FDA will come to a conclusion of its process. It was submitted almost a year ago so we're coming up on a date here, an annualized date. But, you know, I don't have any evidence that says, gee, it's going to be year-end or longer. So I don't know that I could – I certainly wouldn't say that because that may not be true so I don't have that kind of an indication and I'd say, look, there's good active ongoing dialogue back and forth. That's always a good sign. It's the right kind of dialogue. I just wouldn't forecast it. I just – I don't know.

Q: Just thinking about the strategic importance of the Bigfoot announcement, I don't want to make too much of a single announcement, but is this just a natural extension of building the brand and the reach of Libre and CGMs? Or does it suggest an interest in pumping? Or maybe, said another way, do you think to win in Diabetes going forward, you need to have an integrated pump and sensor under one roof? Thanks so much.

A: Okay. Thanks. No. I'll tell you, in the grand scheme of things with Diabetes Care, I don't think we need to have a pump. But I think there's a strategic change happening, or that will happen over the next couple of years, in the market particularly for type one diabetics and for multiple daily injectors, which could be type twos that are insulin-dependent.

And what's interesting about Bigfoot is they are taking a different approach to the ease and the integration of what those multiple daily injectors have as solutions to manage their disease separate from pumping. And it's a fairly clever service and approach that I think will create not just an alternative that makes the management of the disease or management of someone's insulin easier, but I think the value proposition of it is going to be pretty compelling. And I think that will change the competitive dynamics in that realm that is pumping. I mean, the penetration of pumps or pumping relative to the market size of multiple daily injectors is really quite small. You'd say, wow, there's a lot of potential for further penetration.

The question is the value proposition. A lot of times the reason it hasn't penetrated further is it might be too costly or viewed that way, and I think what Bigfoot is doing, if I could comment on it from a distance, because I've never had a conversation with them myself, is they've come up with a pretty unique value proposition that not only is good from the standpoint of the patient or even the payer, but also just in general in the cost of managing the disease for a diabetic. I think it's a pretty interesting use of technology to make it simpler, easier, and affordable.

Now I probably sound like a brochure for them. I think it's – I just think that their approach is interesting. And in our case, the technology that is Libre is a component of that and a fairly compelling piece of it that expands the use of Libre beyond what Libre can even do today. And then beyond that, there are other expansions and improvements to Libre that aren't just in that segment.

But I think that the sensor technology and the nature of the way Libre works has a lot of applications beyond how it's used today, and the Bigfoot approach is just one of those. And I think it's a pretty unique, compelling idea that puts Libre as a part of the competition in that sort of pumping or multiple daily injector world that, you know, it's a great opportunity for us and I think it further enhances the management of the disease for patients.

 

-- by Brian Levine, Adam Brown, and Kelly Close