Roche 3Q16 – Global sales up 2% YOY on very easy comparison; Pooled “Big Three” BGM revenue falls 1% YOY; Accu-Chek Insight CGM on track for 2016 EU launch – October 21, 2016

Roche CEO Severin Schwan led the company’s 3Q16 financial update on Thursday. Below, we bring you our top financial, pipeline, and drug highlights from the call. There was no relevant Q&A.

Financial Highlights

1. Global Diabetes Care revenue totaled 486 million CHF (~$498 million) in 3Q16, growing 2% as reported YOY against a very easy comparison (sales fell 18% in 3Q15). COO Mr. Ronald Diggelman attributed the “soft” diabetes business to pricing pressure and competitive bidding.

2. In North America, Diabetes Care revenue totaled 70 million CHF (~$72 million), growing modestly YOY (1%) against a weak 3Q15 that saw a decline of 37%. Management said strip sales declined 20% in the first three quarters of 2016 due to competitive bidding. This quarter’s US total is tied for the second lowest in our model (which goes back to 2005).

3. Outside of North America, sales of 416 million CHF (~$426 million) grew 2% YOY against an easy 14% decline in 3Q15. Management commented that "the third quarter was positive in DIabetes Care", particularly with good sales in Latin America.

Pooled Financial Highlights

4. Pooled global revenue for the “Big Three” BGM companies (Roche, J&J, and Abbott) totaled ~$1.2 billion, falling 1% YOY relative to pooled revenue in 3Q15 (~$1.24 billion). This came against an easy comparison, as revenue declined 17% in 3Q15. Unsurprisingly, pooled US revenue fell 4% YOY, while international sales rose 1% against an easy comparison.

Device Pipeline Highlights

5. The slide deck noted that the Accu-Chek Insight CGM is still on track for a limited initial launch in the EU by the end of 2016. The device was in CE Mark approval trials as of EASD last month, where preliminary data suggested an MARD of 10.5%. The initial launch (6-9 months) will be limited to “specialized diabetes centers” in the Netherlands, Norway, Denmark, and Sweden. A larger rollout will occur in 2017.

6. In 3Q16, the FDA approved Roche’s next-gen Accu-Chek Guide BGM system (US launch expected in 2017). The product initially launched in Denmark, Switzerland, Australia, with more countries to follow in 2017.

7. Neither the Senseonics CGM distribution agreement nor the mySugr integration partnership were mentioned. According to Senseonics’ 2Q16 call, a German launch was expected in September, and Italy and Netherlands are to follow early 4Q16.

8. In 3Q16, UK’s Medicines and Healthcare products Regulatory Agency (MHRA) issued two urgent field safety notices relating to the Accu-Chek Insight pump. One related to incorrect cartridge loading leading to leakage, and the other to patients misinterpreting the Key Lock function. Roche responded to both by updating and clarifying instructional materials.

Drug Pipeline Highlights

9. US sales of Lucentis (intravitreal ranibizumab) rose 14% YOY as reported but fell 8% in constant currencies to 373 million CHF (~$382 million).

10. Roche also highlighted the FDA approval earlier this week of a 0.5 mg prefilled syringe to administer Lucentis.

Financial Highlights

1. Global Diabetes Care revenue totaled 486 million CHF (~$498 million) in 3Q16, reflecting 2% reported YOY growth against a very easy comparison (sales fell 18% in 3Q15). The modest YOY growth was to be expected, since 3Q15 saw Roche’s second lowest quarterly revenue in over a decade. Indeed, 3Q16 is only the third quarter in the last 11 years in which revenue has come in under 500 million CHF. Worldwide sales also dropped 12% sequentially from 2Q16.

• Mr. Roland Diggelmann, COO of the Diagnostics Division, said the reasons for the “softness” in Diabetes Care are “well known” at this point: competitive US pricing and the second round of CMS’ competitive bidding process. Mr. Diggelmann sounded frustrated with CMS’ program (understandably), referring to it as the “so-called competitive bidding process.”

Figure 1: Global, North America, International Quarterly Sales (1Q11 – 3Q16)

2. In North America, Diabetes Care revenue totaled 70 million CHF (~$72 million), growing a modest 1% YOY against a weak 3Q15 that saw a major 37% sales decline. Sequentially, sales fell a whopping 26% against a relatively positive 2Q16. This quarter’s US total is tied for the second lowest in our model (which goes back to 2005). Six out of the past seven quarters, and three in a row, have now come in under the 100 million CHF mark. In the first three quarters of 2016, Mr. Diggelmann said that competitive bidding led to a reduction of 20% in strip sales (it was unclear if he was referring to the global business or solely North America).

3. Outside of North America, sales of 416 million CHF (~$426 million) grew 2% YOY against an easy 14% decline in 3Q15. This is the second consecutive quarter of international revenue growth. The alternating up-down sequential pattern that has come to characterize the international business (see Figure 1 above) continued this past quarter (10% sequential drop from 2Q16), but the trend toward positive YOY growth may suggest some stabilization in the business. Management mentioned on the call that they were pleased with third quarter international Diabetes Care sales, particularly in Latin America.

Pooled Financial Highlights

4. Pooled global revenue for the “Big Three” BGM companies (Roche, J&J, and Abbott) totaled ~$1.23 billion, falling 1% YOY relative to pooled revenue in 3Q15 (~$1.24 billion). This came against an easy comparison, as revenue declined 17% in 3Q15. Abbott was the clear bright spot in 3Q16, showing 13% worldwide growth and 21% growth internationally – FreeStyle Libre has impressive momentum and now 200,000+ users in Europe alone. What this means for BGM, however, is that the field is actually doing worse than the pooled 1% growth implies. There is no doubt this market is mature, funds for innovation are much lower, and other headwinds are not in the field’s favor (high frequency testers moving to CGM, non-hypoglycemia-causing type 2 drugs, etc.). We wonder where these three companies’ businesses will be in three years. Abbott will be entrenched with FreeStyle Libre, Roche is moving into CGM, and J&J has the WellDoc partnership and two insulin delivery opportunities (OneTouch Via, automated insulin delivery). Still, BGM is a multi-billon market, so it will be around for some time. What other opportunities for innovation or new business models are possible? 

Figure 2: Worldwide Pooled Roche, Abbott, and J&J Quarterly Sales (1Q11 – 3Q16)

• The US market, where pooled revenue fell 4% to just $359 million, continues to plague all three BGM companies – no doubt a continued byproduct of pricing pressures and CMS’ competitive bidding program. This quarter’s 4% decline also came on an easy comparison to a 20% revenue decline in 3Q15. J&J’s had the roughest 3Q16 in the US, as revenue fell 7% YOY vs. Abbott’s -2% and Roche’s +1% (on an easy comparison). 

Figure 3: US/North American Pooled Roche, Abbott, and J&J Quarterly Sales (1Q11 – 3Q16)

• The Big Three fared better internationally, where revenue of $872 million rose 1% against an easy comparison (sales fell 16% in 3Q15). Sequential pooled revenue fell 11%. J&J drove the decline, with an 11% YOY drop in 3Q16 (driven by a 13% reduction in SMBG sales outside of the US). Roche showed modest 2% growth against an easy comparison. Abbott had a homerun 3Q16, with international sales growing 21% YOY operationally on FreeStyle Libre sales. Pooling just J&J and Roche international sales suggests BGM sales declined 4% YOY outside the US.
  
  • Though Abbott had an impressive quarter internationally, we assume its SMBG business declined outside the US (at least sequentially). On Abbott’s 3Q16 call yesterday, CEO Mr. Miles White shared that over 200,000 patients are now using Libre in the EU, an impressive ~60% sequential increase from >125,000 at the end of 2Q16. The company, however, reported identical, $210 million international revenue in both quarters. With more patients using Libre and the same total international revenue, we assume revenue generated from the BGM portfolio fell sequentially.
• As a reminder, direct BGM comparisons between Roche, Abbott, and J&J are impossible because each company’s Diabetes Care business includes a fraction of non-BGM revenue that is not reported. Roche has insulin delivery and will soon add CGM, J&J has Animas insulin delivery, and Abbott has continuous glucose monitoring (Navigator II, Libre) outside of the US.

Device Pipeline Highlights

5. Mr. Schwan did not mention any of the diabetes device portfolio on the call – the slide deck noted that the Accu-Chek Insight CGM is still on track for a limited initial launch in the EU by the end of the year. The device was in CE Mark approval trials as of EASD last month, where preliminary pivotal trial data showed an MARD of 10.5%. At EASD, we learned that the initial launch will be limited to “specialized diabetes centers” in the Netherlands, Norway, Denmark, and Sweden. This phase will last 6-9 months so that Roche can gather feedback before fully rolling it out in more countries in 2017. 

• We had our first look at the Insight CGM at EASD (see picture below): it consists of a round adhesive, an on-body transmitter that appeared somewhat bulky to us (roughly ~2x the size of Dexcom’s G5), and a slightly intimidating single-use, syringe-like inserter. On the plus side, the preliminary accuracy data (presented at EASD) from 36 patients was encouraging, suggesting overall MARD of 10.5% over seven days with two fingersticks per day (n=6,403 paired fingerstick BGM-CGM points). We also applaud Roche for designing the Bluetooth-enabled transmitter to send data directly to an Android smartphone app – key for staying competitive with Abbott’s LibreLink, Dexcom’s G5, and Medtronic’s upcoming Guardian Connect.
• How does the Insight CGM stack up against the competition? If the accuracy data is observed in real life, Roche will have a seat at the table with other systems: Abbott’s FreeStyle Libre (11.8%, factory calibration), Dexcom’s G5 (9.0%, two calibrations per day), Medtronic’s Guardian (10.5%, two calibrations per day), and Senseonics’ Eversense (8.8%-11.6%, two calibrations per day). Roche’s Insight may lag behind other systems, however, in cost, insertion process, on-body size, and user experience. The transmitter’s Bluetooth connectivity and the Android app are good to see.

6. In 3Q16, the next-gen Accu-Chek Guide BGM system was approved by FDA (US launch expected in 2017) and launched in Denmark, Switzerland, and Australia, with more countries to follow in 2017. The Guide BGM looks similar to the Connect, but offers (i) a spill-resistant strip vial (easy to remove one at a time, less contamination); (ii) a new strip design (large sampling area, next-gen chemistry that is reportedly more accurate); (iii) Bluetooth compatibility with the Accu-Chek Connect smartphone app (Android and iOS, integrated bolus advisor); and (iv) on-board high-low pattern detection (key for staying competitive with LifeScan’s OneTouch Reveal). It looks like a solid incremental improvement over Accu-Chek Connect, but nothing groundbreaking from what we can tell. Of course, funds for innovation are at a premium right now, and the company is smart to use them to invest in CGM.  

7. Neither the Senseonics CGM distribution agreement nor the mySugr integration partnership were mentioned. According to Senseonics’ 2Q16 call, a German launch of the implantable Eversense CGM was expected in September, and Italy and Netherlands are to follow early 4Q16. The mySugr integration directly integrates the Accu-Chek Connect meter, and eventually the Insight CGM, into the popular mySugr Logbook (nearly 800,000 users globally). It launched last April in Germany and Austria. We do not believe it has launched in the US yet.

8. In 3Q16, UK’s Medicines and Healthcare products Regulatory Agency (MHRA) issued two urgent field safety notices relating to the Accu-Chek Insight pump. The first, in August, warned that prefilled NovoRapid PumpCart cartridges can leak when inserted into Insight pumps incorrectly. Roche responded by releasing an updated 17-step training sheet to show how to properly insert the cartridge. In September, another notice warned that the Key Lock function of the pump does not disable Quick Bolus keys – a dangerous misinterpretation that could lead to insulin over-administration. Roche responded by ensuring that the handling instructions will be updated. Both of these issues underscore how important human factors research and clear training materials are. We do hope more companies move to prefilled insulin pump cartridges, since they do seem much safer, less prone to error, and far better for the user than current manual fill processes.

Drug Pipeline Highlights

9. US sales of Lucentis (intravitreal ranibizumab) rose 14% YOY as reported but fell 8% in constant currencies to 373 million CHF (~$382 million). Sequentially, sales grew 7% in 3Q16 against an easy comparison, as revenue declined 2% sequentially from 1Q16 to 2Q16. Notably, the 8% YOY decline in sales is smaller in magnitude than it has been in recent quarters (an 18% YOY drop, operationally, in 3Q15, 17% in 4Q15, 13% in 1Q16, and 25% in 2Q16). Indeed, Roche management emphasized a slowing of within-class competition, which has been a challenge for Lucentis in the past. This competition comes primarily from Bayer/Regeneron’s Eylea (intravitreal afibercept), which holds 40% of all major markets as per Bayer’s 2Q16 update, and from Genentech’s Avastin (bevacizumab), which has been used off-label in diabetic macular edema and diabetic retinopathy due to its significantly lower cost.

10. Roche also highlighted the FDA approval earlier this week of a 0.5 mg prefilled syringe to administer Lucentis. This is the first FDA-approved prefilled syringe for an anti-vascular endothelial growth factor (anti-VEGF) agent, and the company announcement underscored that this ready-to-use option will offer added convenience to patients using Lucentis to treat macular degeneration or macular edema. It’s too soon to say how the prefilled syringe and convenience factor will impact Lucentis sales vs. Eyelea and Avastin, but we’ll be watching closely for this in future quarters.

• The company also highlighted a number of ongoing phase 2 trials for Lucentis. The LADDER study (n=220) compares intravitreal delivery of the drug to delivery via implant. This trial is scheduled to complete in May 2018, with a goal to expand Lucentis’ indication to a port delivery device – we expect additional options for delivery can help with patient and provider acceptance. The BOULEVARD trial will compare intravitreal ranibizumab vs. placebo in treating center-involving diabetic macular edema (a condition in which the central macula is damaged in patients with diabetes). This study is expected to complete in 3Q17 according to ClinicalTrials.gov. There was no mention during Roche’s 3Q16 update of two-year data from the protocol T study, which found no significant difference between Lucentis vs. Eylea in visual outcomes, number of injections, or doctor’s visits. We anticipated this follow-up data might be important in bolstering Lucentis in this competitive landscape. That said, we’re happy to see Roche pursuing additional research to improve delivery of Lucentis, and we’re glad to see the company’s continued commitment to diabetic macular edema and retinopathy, among other vision-related conditions and complications.

-- by Brian Levine, Payal Marathe, Adam Brown, Helen Gao, and Kelly Close