Memorandum

Abbott 4Q15 – Global sales up 2% operationally; completed “significant” FreeStyle Libre manufacturing expansion; US launch of FreeStyle Libre (consumer version) in late 2016? – January 28, 2016

Executive Highlights

  • Global Diabetes Care sales totaled $297 million in 4Q15, declining 5% as reported and growing 2% operationally year-over-year (YOY). US sales declined 7% YOY, while international sales fell 4% as reported but grew a robust 8% operationally YOY on sales of FreeStyle Libre in the EU (major currency impacts).
  • Pooled global revenue for J&J, Roche (who reported earlier today), and Abbott totaled ~$1.4 billion, falling 10% relative to pooled revenue in 4Q14 (~$1.5 billion). Abbott had the strongest operational performance in the quarter (up 2% YOY) vs. J&J (down 2%) and Roche (down 3%).
  • FreeStyle Libre (consumer version) is “optimistically” expected to come to the US near the end of 2016. Notably, this is the first timeline we have heard on this front. There is still no timing on an FDA submission though a filing would have to be forthcoming to meet this guidance. We believe FreeStyle Libre Pro (retrospective, blinded) is still slated for a ~mid-2016 US launch.
  • Abbott recently completed a “significant expansion” of its manufacturing capacity for FreeStyle Libre to meet global demand, and the next wave of capacity expansion is already underway. This has been a long time coming since the fall 2014 launch.

Early this morning, Abbott CEO Mr. Miles White led the company’s 4Q15 financial update. Below, we bring you our top financial and pipeline highlights from the call, followed by Q&A.

Financial Highlights

1. Global Diabetes Care sales totaled $297 million in 4Q15, declining 5% as reported and growing 2% operationally year-over-year (YOY). For the full year, sales totaled $1.1 billion, declining 6% as reported and growing 3% operationally YOY. Management shared strikingly positive guidance for both 1Q16 and FY2016 – mid-single digit operational growth for the quarter and “double-digit operational growth” for the year, driven by sales of FreeStyle Libre

2. US Diabetes Care sales declined 7% YOY, totaling just $101 million in 4Q15. Sales have now declined in eleven of the past twelve quarters. For the full year, sales fell 3% YOY to reach just $394 million, marking the lowest annual total in the past decade. The grim financial picture does not seem to be changing for any BGM company in the US.

3. International Diabetes Care revenue totaled $196 million, falling 4% as reported but growing 8% operationally YOY on sales of FreeStyle Libre in the EU. For the full year, sales declined 8% as reported and grew 6% operationally to reach $723 million. As we’ve seen for the past year, the reported financials reflect the significant strengthening of the US dollar. We continue to wait for a breakout of FreeStyle Libre sales – could this happen in the coming quarters now that manufacturing capacity has been expanded?

4. Pooled global revenue for J&J, Roche (who reported earlier today), and Abbott totaled ~$1.4 billion, falling 10% relative to pooled revenue in 4Q14 (~$1.5 billion). Abbott had the strongest operational performance in the quarter (up 2% YOY) vs. J&J (down 2%) and Roche (down 3%).

Device Pipeline Highlights

5. Mr. White shared that FreeStyle Libre (consumer version) could launch in the US “toward the end of this year.” Notably, this is the first timeline we have heard on this front. There is still no timing on an FDA submission though a filing would have to be forthcoming to meet this guidance. What has taken Abbott so long? Mr. White alluded to more nuanced regulatory conversations with the FDA and we wonder whether Abbott is getting hung up on the factory-calibration claim. We believe FreeStyle Libre Pro (retrospective, blinded) is still slated for a ~mid-2016 US launch (submitted to FDA in 2Q15).

6. Abbott recently completed a “significant expansion” of its manufacturing capacity for FreeStyle Libre to meet EU demand. This has been a pressing need since the product launched in fall 2014, and we’ll be interested to see how much it opens the floodgates. We were also glad to hear the next wave of capacity expansion is already underway! Mr. White again shared a great deal of optimism for the product, articulating the goal to bring it “into a number of new markets in 2016.” He added in Q&A, “The value proposition for this product on top of the medical proposition is fabulous. I have great expectations for it, and I'm excited about it.”

7. Abbott has officially completed its two six-month outcomes studies that could support reimbursement of FreeStyle Libre: REPLACE (n=210 type 2s on MDI, A1c>7.5%) and IMPACT (n=225 type 1s on MDI or pumps, A1c <7.5%). Both studies are now listed as “completed.” We’ll see results from REPLACE next week at ATTD, and IMPACT at ADA 2016.

8. Though it was not mentioned on the call, Abbott initiated a new study (FLIPS) earlier this week investigating FreeStyle Libre in pregnant women with type 1, type 2, or gestational diabetes.

9. There were no updates on LibreLink – the free Android app for scanning FreeStyle Libre sensors without the need for a separate reader – that launched by invitation only in November 2015 in Sweden. We assume the plan is still to make it more widely available in the EU in 2016. Presumably the capacity expansion is partially gating the wider rollout, since LibreLink makes it cheaper and more convenient to use FreeStyle Libre.

10. There were no additional pipeline updates on FreeStyle Libre or other Abbott meters.

                                            

Financial Highlights

1. Global Diabetes Care sales totaled $297 million in 4Q15, declining 5% as reported and growing 2% operationally year-over-year (YOY). It is tough to read into this “growth” considering the easy comparison to 4Q14 when sales fell 10% as reported and 6% operationally YOY. This was the ninth consecutive quarter of reported declines (since 4Q14) and fourth consecutive quarter of sales below $300 million (a trend not seen since 2006). Sequential sales did grow 8% vs. sales in 3Q15, consistent with the positive sequential growth seen from 3Q to 4Q in six of the past seven years.

Figure 1: Global, US, International Quarterly Sales (1Q12 – 4Q15)

  • For the full year, global Diabetes Care sales totaled $1.1 billion, declining 6% as reported and growing 3% operationally YOY. The performance came against an easy comparison as sales declined 9% as reported and 8% operationally for the full year 2014. In reported revenue, the annual performance marks the lowest annual total since 2005 (when sales totaled $1.1 billion) and, disappointingly, a fourth consecutive year of declines. For perspective, the business peaked in 2011 when sales reached $1.4 billion on the strength of international sales.

Figure 2: Global, US, International Annual Sales (2003 – 2015)

  • We would point out that the US business has driven global sales declines over the past four years. OUS sales have remained relatively steady since 2008. Two-thirds of Abbott’s business does come from outside the US, which has helped buoy the pooled global number.
  • Management shared strikingly positive guidance for both 1Q16 and FY2016 – mid-single digit operational growth for the quarter and “double-digit operational growth” for the year – driven by sales of FreeStyle Libre. It is terrific to see this optimism and speaks to the internal confidence in the new product. Said CEO Mr. Miles White in Q&A: “The value proposition for this product on top of the medical proposition is fabulous. I have great expectations for it, and I'm excited about it.” It sounds like sales will be buoyed both by expansion to new markets and a new capacity to meet demand, though Mr. White did not share specifics.
    • On a related note, management shared pessimism on currency headwinds forecasting that the impact of foreign exchange would be even more significant in 2016 vs. 2015: “The impact on the bottom line will be more pronounced due to the mix currency movements and certain time effects.” We found this particularly notable considering that most people – from C-level execs to analysts on other calls – seem to be taking a measured, wait and see approach for now. Abbott was far more pessimistic, and it sounds like management is preparing for a future in which it balances transitory dynamic currency effects with investments to drive sustainable long-term growth. Moving forward, we might expect to see even greater disparities between reported vs. operational performance, and will continue to look to the latter to get a true read on the business’ performance.

2. US Diabetes Care sales declined 7% YOY, totaling just $101 million in 4Q15. This came on an especially easy comparison to a sales decline of 16% in 4Q14. Sales have now declined in eleven of the past twelve quarters (1Q15 was the exception when sales grew 5%) and it goes without saying that the US has been an incredibly challenging region for Abbott and all the Big Four BGM players. [For context, US sales are now 33% lower than they were when they peaked in 4Q12.] On a positive note, quarterly sequential sales did grow 3% to break the $100 million plateau for the first time in 2015 – this was somewhat of a milestone given that sales had never fallen sub-$100 million in the past decade prior to 1Q14. Still, the performance came against a low base of $98 million 3Q15, the third-lowest ever for the business.

  • For the full year, US Diabetes Care sales fell 3% YOY to reach just $394 million. The weakness is somewhat disappointing considering the comparison, a staggering sales decline of 22% in 2014 – indeed, we were hoping things might be a bit better, though the decline on such an easy comparison speaks to the way pricing pressures have devastated the US market. This marks, by far, the lowest full year total in the past decade, as sales had not dipped below $400 million since 2004 ($378 million). Management understandably did not attempt to forecast the US business in its prepared remarks or Q&A. FreeStyle Libre would certainly be a catalyst if it makes it to the US market.

3. International Diabetes Care revenue totaled $196 million, falling 4% reported but growing 8% operationally YOY. The comparison was relatively easy with revenue in 4Q14 falling 5% as reported but growing 1% operationally. As we’ve seen for some time, the reported financials reflect the significant strengthening of the US dollar (negative 12% currency impact), and management emphasized that currency impacts are diluting international performance across all of Abbott’s businesses. Sequential growth of 11% appeared to be a silver lining on the surface, though there is a more nuanced story: (i) the quarter marks the first 4Q under $200 million in sales since 2008; and (ii) 3Q-4Q has seen sequential OUS growth in each of the past seven years.

  • For the full year, International Diabetes Care declined 8% as reported and grew 6% operationally to reach $723 million. This came against a challenging comparison (for this industry) as sales were flat as reported and grew 2% operationally for the full year 2014. The reported revenue marks the lowest annual total since 2007, though we’d again attribute this largely to currency headwinds. As a whole, we see the operational performance as encouraging, and it should presumably rise given the  FreeStyle Libre capacity expansion and plans to launch in new markets – see below.

4. Pooled global revenue for J&J, Roche (who reported earlier today), and Abbott totaled ~$1.4 billion, falling 10% relative to pooled revenue in 4Q14 (~$1.5 billion). This comes against an easy comparison, as combined revenue declined 8% a year ago. While some of the weakness comes from currency headwinds, it cannot explain the entire drop – YOY pooled sales for the three companies have now fallen for 15 (!) consecutive quarters, going far beyond the recent strengthening of the dollar. Pooled sales broken out by region (see below) support this explanation, as both US and international markets have seen declines. On a sequential basis, pooled sales grew 11%, though this growth is a regular cyclical pattern between 3Q and 4Q.

  • Pooled declines in 4Q15 were driven in large part by international weakness, where combined sales of ~$953 million fell ~12% YOY against an easy comparison to pooled sales in 4Q14 ($1.1 billion). Depressed revenues as a result of foreign exchange have characterized the business for several quarters now, and the big question is when the market will bottom out. Pooled sales grew 10% sequentially (again, this growth is cyclical).
  • US sales were not much better as combined sales of ~$425 million fell 3% YOY against an easy comparison to pooled revenue in 4Q14 (down 11%). Sequentially, pooled sales grew 13% relative to 3Q15 (again, this growth is cyclical).
  • Abbott had the strongest operational performance in the quarter (up 2% YOY) vs. J&J (down 2%) and Roche (down 3%). As a note, it is difficult to make direct comparisons between J&J, Abbott, and Roche, given that each company’s Diabetes Care business includes a fraction of non-BGM revenue. J&J and Roche have global insulin delivery and Abbott has CGM and FreeStyle Libre outside of the US. We look forward to adding the last of the Big Four – Bayer/Panasonic [Ascensia]– to this comparison when the company reports (Date TBD – we are in conversations with management).

Figure 3: Pooled AbboTt, J&J, and Roche Quarterly Sales (1Q12 – 4Q15)

Device Pipeline Highlights

5. In the call’s biggest news, Mr. White shared that FreeStyle Libre (consumer version) could launch in the US “toward the end of this year.” This is the BIG news we’ve been waiting for (the pivotal study wrapped up in March 2015) and is the first timeline we’ve heard on this front! Considering how Abbott has played its card close to its chest, it’s tough not to get excited – indeed, we assume there must be a great deal of internal confidence in this timeline, especially for management to share the news publically. Granted, Mr. White was quick to hedge the guidance conceding that he does not know the launch date in any certain terms. There is still no timing on an FDA submission and we assume a filing is forthcoming to meet this guidance. We had previously assumed that Abbott would wait for the lower-risk Pro version to be approved before submitting the consumer version, so we are assuming that either: (i) Libre Pro is close to approval (see below for more); or (ii) Abbott plans to pursue two PMA applications at the same time.

  • What has taken Abbott so long? Mr. White alluded to more nuanced regulatory conversations with the FDA and we wonder whether Abbott is getting hung up on the factory-calibrated claim. Said Mr. White: “…the diabetic community in the United States wants this product. But it’s a regulatory pacing issue. It wasn't so in Europe.” For context, Dexcom is still in discussions with the FDA about obtaining an insulin-dosing claim. Obviously, such a claim is mission critical for FreeStyle Libre’s major marketing message – “No fingersticks!” – and requiring patients to enter calibrations or confirm readings with fingersticks would be a major setback. At JPM 2016, Dexcom management said, ““We will undoubtedly be the first company to have this [insulin dosing] label. And we want to set the bar high. You’ve got to have a sensor that performs as well as ours does.” We interpreted that as a competitive barrier to entry, and we wonder how the Dexcom-FDA discussions will now affect Abbott’s work to bring the real-time consumer FreeStyle Libre to the US.
  • Though it was not mentioned on the call, we believe FreeStyle Libre Pro (retrospective, blinded) is still slated for a ~mid-2016 US launch. The company’s US pilot study of the Pro – which began recruiting type 2 participants in April (n=132) – did wrap up in August and results have not yet been posted. As a reminder, the blinded Pro version was submitted to FDA in 2Q15.

6. Abbott has completed a “significant” capacity expansion to meet current global demand for FreeStyle Libre (which we learned at JPM 2016), and more notably, the next wave of capacity expansion is already underway. This has been a long time coming since the product launched in fall 2014 to overwhelming EU demand, and the expansion will undoubtedly please many EU patients anxiously waiting to get on the system. We continue to hope for specifics on present sales and trajectory, though Abbott has yet to disclose them now ~1.5 years post-launch. Presumably sales will be disclosed once supply has been unconstrained and they reach a material level – will we hear them sometime in 2016?

  • Mr. White shared a great deal of optimism on FreeStyle Libre: “The value proposition of this product on top of the medical proposition is just fabulous. I mean I have great expectations for it.” He further articulated that the company’s goal is to bring the technology “into a number of new markets in 2016, targeting the multi-billion dollar global blood glucose monitoring market.” There were no specifics, though the commentary hinted at a very determined, global strategy in the coming twelve months.
  • The executive level enthusiasm and sky-high expectations for FreeStyle Libre continue to be striking. Of course, this isn’t new news but it’s remarkable to see just how much excitement the franchise continues to generate (even after a year on the market!). The product is on Abbott CEO Miles White’s radar in a big way, and judging from the way it was discussed, FreeStyle Libre is clearly a source of pride for the company (as it should be, given the tremendous achievements on factory calibration, accuracy, cost, and on-body form factor). As Mr. White shared in Q&A: “This product has been exceptionally well received in Europe, spectacularly well received I should say. Consumers and users and people with diabetes have just given us an overwhelmingly positive response.”

7. Abbott has officially completed its two six-month outcomes studies that could support reimbursement of FreeStyle Libre: REPLACE (n=210 type 2s on MDI, A1c>7.5%) and IMPACT (n=225 type 1s on MDI or pumps, A1c <7.5%). Both studies are now listed as “completed,” and the REPLACE study in type 2 will report next week at ATTD (see our preview here). As a reminder, the goal of the type 2 study is to show a change in A1c at six months (in patients with a high A1c >7.5%), while the type 1 study seeks to reduce time spent in hypoglycemia at six months.

  • Abbott will also present pediatric accuracy data on FreeStyle Libre at ATTD 2016. While we assume many pediatric patients are using the system off label in Europe, it will be excellent for Abbott to get the official label. Abbott VP Mr. Jared Watkins called a pediatric claim “a priority” at EASD 2014, so this has been in the works for some time.

8. Though it was not mentioned on the call, Abbott initiated a new study (FLIPS) earlier this week investigating FreeStyle Libre in pregnant women with type 1, type 2, or gestational diabetes. The study is not yet open for recruitment but will enroll approximately 80 participants who will wear FreeStyle Libre for 14 days at home. The primary endpoint is point accuracy judged using the Clarke Error Grid, and study completion is slated for September 2016. We appreciate Abbott’s strong push to emphasize the utility of Libre across various age groups (pediatrics, adults), diabetes types (type 1, type 2, gestational), and CGM varieties (consumer, professional). Expanding the footprint in alternative populations is critical as Abbott faces increasing sensor competition from Dexcom and Medtronic.

9. There were no updates on LibreLink – the free Android app for scanning FreeStyle Libre sensors without the need for a separate reader – that launched by invitation only in November 2015 in Sweden. At the time, further EU expansion was expected in 2016, and we assume that is still the case. The website http://www.librelink.com/ is up, though the link to the Android app store is still not live – we assume Abbott is proceeding with a very slow rollout. The launch marks Abbott’s first foray into connected glucose monitoring devices, matches the no-receiver-needed marketing of Dexcom’s G5, and improves the Libre user experience and cost profile. We also wonder how Abbott will expand LibreLink and enhance its connectivity moving forward. Will the technology be expanded beyond Android devices to reach Apple devices? Abbott has told us it will indeed develop an Apple app, and we look forward to seeing what that product looks like and when it comes to market. Could Abbott build Bluetooth into the Libre sensor, facilitating continuous data streaming to a phone?

  • Following Dexcom’s partnership with Verily and Medtronic’s partnership with IBM Watson, we’re curious what Abbott has in mind for further improving FreeStyle Libre’s form factor, cost, or data analytics. Dexcom and Medtronic are both innovating on the data front through their respective partnerships, and we wonder what Abbott can do to make Libre glucose data more actionable for patients and providers. How could AGP be augmented to provide more pattern recognition or clinical decision support? Dexcom is also working hard with Verily to improve the on-body form factor, and we wonder if Abbott is planning to make FreeStyle Libre even smaller or less obtrusive – while FreeStyle Libre has major on-body size and cost advantages now, if Dexcom and Verily come to market as intended (disposable, bandage-like CGM the size of a penny), it will represent very compelling competition. On the cost front, could Abbott further drive down FreeStyle Libre sensor costs as volumes grow? How low can the cost of sensors go from the current ~120 euros per month (four euros per day)? And from a payer perspective, could LibreLink facilitate continuous population-level data in type 2s, bringing potential for prioritized care or even new business models?

10. There were no additional pipeline updates on FreeStyle Libre or other Abbott meters. Abbott’s newest BGM (the FreeStyle Precision Neo) launched in April 2015. Management has alluded in the past to expanding the Flash Glucose Monitoring category to other areas, and the Pro version is the first of these. We wonder if a continuous version of FreeStyle Libre will ever be developed, though that could increase the cost, potentially increase the on-body size, and go against some of the principles that governed the original design of FreeStyle Libre. A tough call, and obviously, more SKUs add manufacturing complexity and could reduce margins. 

Questions and Answers

Q: What is the US timing on FreeStyle Libre?

A: Well, I think it depends on what timeframe you're asking about. We’re bringing both the consumer and professional versions to market. Right now, I want the fastest regulatory path possible. This product has been exceptionally well received in Europe, spectacularly well received I should say. Consumers and users and people with diabetes have just given us an overwhelmingly positive response. So that's good. We're in the process of releasing all of our new capacity, and we’ve got the next wave of capacity expansion underway.

It's one of those great challenges where I'd say that the diabetic community in the United States wants this product. It’s a regulatory pacing issue. It wasn't so in Europe. But I'm in a hurry to get Libre to market because we know the value of the product. We know the reception of the product. We know what the physician community reception of the product is. We know all of that. The value proposition of this product on top of the medical proposition is just fabulous. I mean I have great expectations for it. I'm excited about it, and there are sort of two dimensions of that: One is having enough capacity – which we’ll have for a while – and two is how fast we can go with the regulatory process.

Q: Any sense on when the first product could hit market in the US?

A: I'm one of those superstitious people that no matter what I tell you, I'm going to be wrong. And so I don’t want to jinx anything. So I would just say, I would optimistically hope toward the end of this year, but I don’t know.

-- by Ava Runge, Varun Iyengar, Adam Brown, and Kelly Close