Memorandum

BD 2Q18 (F3Q18) – Swatch type 2 patch pump submission expected “later this year” in US, EU; launch by Sept. 2019; sales of $276 million rise 2% YOY, driven by US pen needles – August 2, 2018

Executive Highlights

  • CEO Mr. Vince Forlenza confirmed previous timing for the Swatch type 2 tubeless patch pump, expecting an initial limited launch in “late FY19” (by September 2019). He anticipated submission for regulatory approvals in the US and EU “later this year,” a refreshingly specific update and indicating late-stage development is nearing completion. Mr. Forlenza emphasized Swatch’s “extreme ease of use,” noting that it has been specifically designed with type 2 patients in mind – this was great to hear. Moreover, management said that Swatch’s simplicity allows for reduced cost, enabling Swatch to be “much more at parity” with pen therapy. BD is “gearing up manufacturing” and clearly getting this ready for commercial launch. Intriguing commentary during Q&A noted potential for future Swatch CGM integration (great news!) and for Swatch to expand into other disease states.

  • Global Diabetes Care revenue of $276 million grew 5% as reported YOY (+ 2% operationally) in F3Q18 (2Q18), marking nine consecutive quarters of flat or positive YOY growth. This came on an easy comparison to 2% growth (+3% operationally) in F3Q17 (2Q17). Sales increased 3% sequentially. Growth was driven by the strong US pen needle business, partially offset by timing of tenders in emerging markets. Both US and OUS revenue came in at $138 million, with US sales rising 5% YOY and OUS sales up 5% as reported YOY (flat operationally). US growth came on a moderate comparison to 4% growth in F3Q17 (2Q17), while international growth came on an easy comparison to a 1% decline.

  • While not mentioned during the call, BD initiated the “preview release” of version 1.4 of its Briight app in June. The “personal diabetes assistant” is very cool in concept and has huge investment behind it; capabilities are limited for now to proper injection technique and barriers to insulin, but we do see clear potential.

  • Once again, there was no update on the Medtronic-partnered MiniMed Pro-set. The last update came nearly a year ago, when management anticipated a re-launch in FY18 (i.e., by September 2018). Will this product return to market? Can it compete with Unomedical’s Mio Advance?

BD provided its F3Q18 (2Q18) financial update in a call this morning led by CEO Mr. Vince Forlenza. See below for our top takeaways from the call, as well as relevant Q&A. Get BD’s slide deck here.

Pipeline Highlights

1. Swatch Type 2 Patch Pump “On Track” for Limited Launch in “Late FY19” (by September 2019); US and EU Regulatory Submission “Later this Year”; Cost “More at Parity” with Pen Therapy

During prepared remarks, Mr. Forlenza noted that the Swatch patch pump for type 2s remains “on track” for an initial limited launch in “late FY19” (by September 2019). For the first time, he anticipated regulatory submission in both the US and EU “later this year” – an important update and a clear sign the product is moving as expected to commercialization. Mr. Polen emphasized that Swatch has been specifically designed for type 2 diabetes patients “both from a feature set and extreme ease of use,” asserting that the “extreme simplicity of the user interface on the digital side and on the hardware side” differentiates Swatch from other patch pumps. He maintained that while Swatch lacks the “bells and whistles” that a patient with type 1 diabetes might want, it allows a cost position “very targeted” for type 2 patients. Mr. Polen maintained the expectation that the cost of Swatch will be “much more at parity” with pen therapy than “the premium typically associated with pump therapy.” Not surprisingly, Swatch’s low-cost proposition has garnered “a lot of excitement from payers.” There was no mention of pharmacy distribution for Swatch (shared in the May call), though this is the obvious play given BD’s expertise with pen needles and precedent with Valeritas, increasingly Insulet, and Abbott. Distribution through the pharmacy channel would be a big convenience win for patients/HCPs and potentially further enable lower patient out-of-pocket costs vs. traditional pumps through DME. It’s great to see BD prioritizing low cost in targeting the type 2 segment.

  • In Q&A, Mr. Polen noted that BD is “gearing up manufacturing” for Swatch after moving the production line to the company’s facilities in Ireland. He explained that BD is “building our commercial plans at this point in time.” Mr. Forlenza added in prepared remarks that production preparedness for Swatch remains “on schedule.” Great to see the attention at the top of the company to this critical product for BD!

  • Management maintained that commercializing Swatch in type 1 “would make no sense” given the pump’s type 2 focus. However, Mr. Forlenza hinted at the possibility of “market expansion” into “other drugs for the home” in the “longer term,” noting that BD is “already talking to pharma companies about that.” Indeed, Mr. Polen noted that he “really sees an opportunity to leverage [Swatch] not only through our Diabetes Care business but also through our Pharmaceutical Systems business unit.” In the same response Mr. Polen commented that BD has “already signed our first deals on a B2B basis with that product,” presumably meaning some early studies with Swatch and another pharmaceutical. Insulet has had B2B R&D deals like this for years, but they remain confidential.

    • This is pulling a page from Insulet’s Omnipod Drug Delivery business, which has had the on-market Amgen Neulasta kit (oncology), but has otherwise not given a pipeline update in years. Will BD bring a more compelling offering in drug delivery vs. Omnipod? When Insulet CEO Patrick Sullivan joined the company a few year ago, he was enormously excited about this business; to date, it has not delivered near-term upside (it’s a long road), but steady sales from the Amgen business (~$18 million in 2Q18 sales, down 1% YOY) certainly help the company (we’ve always wondered to what extent there is some flexibility on booking and reporting sales). Depending on the pharma product, margins for the combined drug-device could be very strong.

  • Mr. Polen confirmed during Q&A that BD “would over time certainly look at CGM being integrated” with Swatch. Mr. Polen’s comments were in response to a direct question regarding the potential for Swatch to be used in an automated insulin delivery system. Given management’s earlier comments that Swatch would only ever be marketed for type 2s, this leaves potential for a type 2 specific BD Swatch AID (automated insulin delivery) system. AID systems have to date focused on type 1 (minus a few Cambridge studies), though a type 2-designed system would be highly differentiated and certainly fit nicely in BD’s wheelhouse. Insulet could obviously go this route with Omnipod U200 over time, and Bigfoot’s portfolio approach (see Friends for Life) could certainly cover type 2s too. While the AID competitive landscape is certainly a tough (and increasingly crowded!) space, there are obviously SO many type 2s on MDI who would benefit from insulin automation (and so many on basal who should be on MDI and on no insulin yet who would benefit from MDI) – and for these individuals, we wonder if the business case would be fairly similar to the type 1 opportunity.

  • In his prepared remarks, Mr. Forlenza further explained that “multiple clinical trials have been completed” for Swatch, gathering insights that have proved “critical” for the “initial limited launch and beyond.” In fact, during Q&A, Mr. Polen mentioned that BD “just completed” analysis of an in-human insulin infusion trial, which went “exactly to plan.” He touted the patient-reported “ease of use” and “overall performance” of Swatch, and explained that BD is “right now” preparing to initiate an in-home safety trial using insulin. During the F1Q18 call, we learned that BD will have amassed over 10,000 patient-days of Swatch data by launch, made possible by the company’s decision to “double down” on the patch pump and pause its smart pen program. At the time, Mr. Polen emphasized that funds re-allocated from BD’s smart pen program would go towards adding in Swatch clinical trials due to “some learning that we’ve had particularly in the diabetes space, where we want to do more patient testing prelaunch.” It’s great to see BD focus on real-world experience and human factors, as we assume the “learnings” refer to the user complaints associated with the MiniMed Pro-set with BD FlowSmart technology. We were unable to find any Swatch-related trials on clinicaltrials.gov.

  • If BD sticks with its expected Swatch launch by September 2019, it’s possible it will launch around the same time as Insulet’s U500 Omnipod with Lilly (previously expected in 2019; data at ADA; no update from Insulet today). These products will both be patch pumps for type 2, but they will clearly appeal to different segments of the market: the 300-unit, U100 BD Swatch vs. 200-unit U500 Insulet Omnipod aren’t directly comparable. In other words, BD’s Swatch can support up to 100 units per day of U100 insulin; Insulet’s U500 Omnipod can support up to 70 units per day of U500. From the screens we’ve seen, Insulet has done a terrific job of iterating the design of the U500 Omnipod PDM based on patient input, leveraging the touchscreen Dash PDM, which was cleared by the FDA in June and now in a six-month limited market release. Insulet’s 200-unit U200 is likely the more direct competitor for BD’s Swatch, though today it was delayed to an “end of 2020 or 2021” launch (i.e., 2-3 years away).

  • Other relevant insulin delivery devices – not necessarily direct competitors – include:

    • CeQur’s recently acquired Calibra Finesse (One Touch Via) – US launch in mid-2019;

    • CeQur’s own basal-bolus PAQ device expected to launch in the US by ~2020-202;

    • Valeritas’ currently available V-Go, which also has plans for a 1H19 launch of a connected Bluetooth attachment (V-Go SIM) that sends dosing data to an app;

    • Roche’s type 1-focused Solo patch pump, which received a CE Mark in July and is slated for a controlled EU launch “for the remainder” of 2018 (per Roche’s 2Q18 call). Solo’s sleek form factor could see some demand in type 2s, though the 200-unit reservoir is probably limiting for this market (same as Omnipod, who is pursuing concentrated insulin).

    • Medtronic and Tandem are not focused on larger reservoir pumps for the type 2 market, at least based on their public updates. While we once expected Medtronic to go this route, its type 2 efforts are focused on driving CGM – higher growth and an easier sell on the provider side than pumps.

  • The type 2 pump market as well as the type 2 insulin delivery market more broadly are both underpenetrated and there is certainly room for competition between many less expensive, truly simpler products. What will be the FreeStyle Libre equivalent in type 2 insulin delivery? We’re looking forward to seeing how these players drive innovation and outcomes. If the cost of Swatch is truly on par with that of pen therapy, it may be instrumental in attracting type 2 pen users over to pump therapy. However, it remains to be seen how Swatch and other patch pumps will compare in terms of user preference, cost, and outcomes to connected pen + CGM + dose titration systems being developed by companies such as Bigfoot and Lilly. Competition drives innovation and we’re excited to see BD’s work here.

2. Briight app not mentioned followed preview release in June, full launch in September and likely big focus at AADE

While not mentioned during the call, BD initiated the “preview release” of version 1.4 of its Briight app in June (App Store: 4.2 stars/9 ratings; Google Play: 4.8 stars/16 ratings). The “personal diabetes assistant” is very cool conceptually and has huge investment behind it from BD’s Digital Health team. At this point, Briight is still early and focused on proper injection technique and barriers to insulin. The automated chat interface (“Ask Briight”) is integrated with CalorieKing’s database to identify macronutrient content and has an expanded ability to answer some food questions. Eventually, Briight will potentially play a role in supporting people with type 2 diabetes who use Swatch – the pump handheld will send data to the phone, and Briight will presumably leverage the insulin data, send it to the cloud, and likely include content to teach operation of the patch pump. We’d also speculate the app could be used to control Swatch at some point in the future, rather than a dedicated, wireless handheld controller; no plans have been shared on this front. Per Mr. Polen’s JPM comments, BD anticipated launching Briight with Swatch, though clearly Briight is ahead of things with the quiet release and a full launch in ~September 2018. Integrated with Swatch, the Briight platform could help drive competition with Insulet’s greater focus on apps with Dash and the Lilly U500 and U200 Omnipods.

3. No Mention of Medtronic MiniMed Pro-Set with BD FlowSmart Technology; Last Slated for September 2018 Launch

The Medtronic-partnered MiniMed Pro-set with BD FlowSmart technology was not mentioned during prepared remarks. A question on the Pro-set was bundled in with a question on Swatch, but management only addressed the latter (see below). Last we heard nearly a year ago, the set was slated to launch by September 2018, although it was once again notably absent from the slide listing FY 2018 (October 2017-September 2018) planned product launches. In the best-case scenario, the slide might have only included key initial launches, excluding what is technically classified as a re-launch. At JPM, we heard that a study is still finishing as the company works to aggregate clinical evidence. Mr. Forlenza shared at JPM that BD remains in active dialogue with Medtronic regarding the infusion set, but it is now close to one year since we’ve heard any timing updates. The commercial fate of this set rests in Medtronic’s hands, but with Medtronic working to meet 670G demand in the US (now approved in those down to seven years-old), launch the 670G in 10 EU countries this fall (CE Marked in June), and the very strong Unomedical/Medtronic MiniMed Mio Advance there are definitely questions here on the commercial side too. Mio Advance is very strong competition – the all-in-one, fully disposable insertion set with a hidden needle launched in Europe at ATTD, though no US timing has been shared. How Medtronic will prioritize these two products is unclear, but from our perspective, the insertion experience with Mio Advance is superior to that of the Pro-set. The benefit of the FlowSmart side-ported catheter is harder to quantify at this stage.

  • As a reminder, Medtronic initiated a limited launch of the highly-anticipated Pro-set in September 2016, but due to higher-than-anticipated rates of complaints associated with kinked cannulas and elevated blood glucose levels, decided to pause shipments. Our test-drive of the device early in the limited launch revealed some of these issues, although we noted a mostly-positive experience – particularly a less painful needle and a more user-friendly needle removal process. During the F4Q17 (3Q17) call, we learned that an additional clinical trial had been “conducted to gather further insights and to ensure that patients ultimately realize the full benefits of BD FlowSmart technology.” We’re excited to see this infusion set go back on the market and eagerly await further updates – we also would not be surprised if the product is shelved.

Financial Highlights

1. Global Revenue of $276 Million Up 2% YOY Operationally; 3% Sequential Increase; US Pen Needle Business Drives Growth

Global Diabetes Care revenue of $276 million rose 5% as reported YOY (+2% operationally) on an easy comparison to 2% growth (+3% operationally) in F3Q17 (2Q17). This marks nine consecutive quarters of flat or positive YOY growth, tremendous predictability in the business. Sequentially, sales increased 3%, breaking two consecutive quarters of sequential declines. Prepared remarks cited the strong US pen needle business as a growth contributor, partially offset by timing of tenders in emerging markets. Pen needles will remain the bulk of this business for some time, though we’re optimistic for 2019’s Swatch type 2 patch pump to meaningfully accelerate growth.

  • As demonstrated in the graph below, US and international sales remain neck-and-neck. After international revenue surpassed that of the US in F2Q18 (1Q18) for the first time since F3Q16 (2Q16), the US business closed the narrow $5 million gap, bringing the two geographies to equal revenue.

BD Diabetes Care Quarterly Sales (F1Q12-F3Q18)

2. International Sales of $138 Million Flat YOY; 2% Sequential Increase

International sales of $138 million were flat operationally and rose 5% as reported on an easy comparison to F3Q17 (+1% operationally, -1% decline as reported).This performance marks four straight quarters of flat/positive YOY growth internationally. OUS revenue increased 2% sequentially from a very strong base of $136 million (the highest recorded in our model since $141 million in F1Q15) in F2Q18 (1Q18). International sales drove 54% of 2Q18’s YOY growth – down a bit from the 71% share of global growth in F2Q18 (1Q18) when OUS sales were up 14%.

3. US Revenue of $138 Million Up 5% YOY, Contributing 78% of Overall Q2 Sequential Growth; 5% Sequential Increase

US revenue of $138 million climbed a strong 5% YOY on a moderate comparison to 4% growth in F3Q17 (2Q17). Sales increased 5% sequentially from a base of $131 million in F2Q18 (1Q18), recovering from two consecutive quarters of sequential declines. The US market remains a consistent source of solid revenue for BD, with YOY growth or flat sales reported in nearly all of the past 33 consecutive quarters (~eight years) – a 1% decline in F2Q17 (1Q17) being the lone exception. US sales drove a fairly equal share of YOY growth, coming in at 46% of 2Q18 Diabetes Care growth.

Selected Questions and Answers

Q: On the type 2 diabetes patch pump and the infusion set with Medtronic. These two have significant potential. Can you give us any more in terms of the go-to-market strategy with the type 2 pump? Any details around the product or how it compares to some of the other patch pumps out there? And is there any ability or willingness to take this into the type 1 market?

Mr. Thomas Polen (President, BD): For Swatch, we continue to be very excited about the potential of that product. And we continue to make good progress. We are progressing our clinical trials as we had shared in the past. We’ve just completed the analysis of an in-human insulin infusion trial. And that went exactly to plan for us. It was very positive response from patients on its ease of use and overall performance.

We’re actually preparing to start-up our next in-home safety trial, again using insulin. And we're making good progress overall, gearing up our manufacturing. We've moved that to our Ireland location, which is going to be the permanent manufacturing location. And we're building our commercial plans at this point in time.

[Swatch] has been designed specifically for type 2 patients, both from a feature set and extreme ease-of-use. What really differentiates this product from other types of patch pumps, we think, are the extreme simplicity of the user interface on the digital side and on the hardware side.

We've designed [Swatch] to not necessarily have all the bells and whistles that someone with type 1 would want, but that's also allowed us to have a cost position that is very specifically targeted for type 2 patients. Think about a cost position that's much more at parity with pen therapy than a significant premium that's typically associated with pump therapy. And that's one of the core value propositions that we hear a lot of excitement from payers on as well.

Mr. Alberto Mas (Executive Vice President, BD): We are really advancing very well. Our production preparedness is on track. And we'll be ready to go with a good ramp up for the product from a production perspective. We are expecting to submit our submission for type 2 patch pump later this year, around that time.

Mr. Vince Forlenza (CEO, BD): Going towards type 1 would make no sense with the features that we have. And that's key actually to the regulatory strategy that we have, that this is focused on type 2 patients. But longer term, think about this as maybe with other drugs for the home, not in the short run, but that's where there's possible market expansion. We're already talking to pharma companies about that.

Mr. Polen: We do have our Pharmaceutical Systems business, which does take devices from other business units and applies them for other disease states by selling those to other pharma companies. And so we have signed our first deals on a B2B basis with that product. And we think there's more opportunities there ahead. We really see an opportunity to leverage the platform, not only through our Diabetes Care business, but also through our Pharmaceutical Systems business unit, where we have relationships with essentially all of the top pharma companies.

Q: On the diabetes side, would you ever consider collaborating with a CGM company to automate insulin delivery in intensively managed patients who potentially could be using your pump?

Mr. Polen: Yes, we would over time certainly look at CGM being integrated into the algorithms and collaborating with those types of organizations.

 

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