Memorandum

Roche 2Q14 – Global revenue down 10%, North America revenue down 24%; PCSK9 inhibitor discontinued – July 24, 2014

Executive Highlights

  • Worldwide Diabetes Care revenue totaled 602 million CHF (~$677 million), down 10% as reported and 4% operationally year-over-year (YOY) in 2Q14. Sales in North America declined 24%, while sales outside North America declined 6%.
  • Although not mentioned during the call, Roche’s slide deck indicated the phase 2 study of its PCSK9 inhibitor for high cholesterol, RG 7652 (EQUATOR), has been discontinued.

Early this morning, Roche CEO Severin Schwan led the company’s 2Q14 financial update. Below we bring you our top learnings from the call:

Financial Highlights

1. Worldwide Diabetes Care revenue totaled 602 million CHF ($677 million), down 10% as reported and 4% operationally YOY in 2Q14. Bright spots in 1H14 included growth for the Accu-Chek Mobile BGM, up 22%, Insulin Delivery Systems up 6%, and Accu-Chek Aviva/Performa BGM up 2%.

2. Sales in North America reached 110 million CHF (~$124 million) in 2Q14, down 24% YOY as reported.

3. Outside of North America, Diabetes Care revenue totaled 492 million CHF (~554 million), falling 6% as reported (YOY). In Latin America, Asia-Pacific, and Japan (RoW), sales totaled 115 million CHF (~$129 million) down 12% as reported YOY; in Europe, Middle East, and Asia (EMEA), sales of 377 million CHF (~$424 million) fell 4% as reported YOY.

4. Combined revenue for J&J, Abbott, and Roche totaled $1.5 billion in 2Q14, falling 6% on a reported basis YOY from pooled revenue in 2Q13 (~$1.6 billion).

Device Pipeline Updates

5. In the company’s slide deck, Roche maintained the 2014 timeline for the EU launch of the Accu-Chek Connect (BGM with Bluetooth connectively to smart App and cloud).

6. Management did not provide commentary on the Accu-Chek Aviva Expert (meter with built-in bolus advisor) despite the US launch in 2Q14. Similarly, the company did not comment on the Solo MicroPump (Roche’s patch pump), nor Roche’s novel CGM.

Drug Updates

7. Although Roche did not mention any of its cardiometabolic drugs in development, the company’s slide deck suggested that Roche’s phase 2 study of its PCSK9 inhibitor RG 7652 (EQUATOR) has been discontinued.

8. Roche/Genentech’s diabetic macular edema (DME) drug Lucentis (intravitreal ranibizumab) grew a modest 4% on revenue of 421 million CHF (~$464 million) in 2Q14.

There was no diabetes related Q&A.

Financial Highlights

1. Worldwide Diabetes Care revenue totaled 602 million CHF (~$677 million), down 10% as reported and 4% operationally year-over-year (YOY) in 2Q14. This decline was against a relatively easy comparison, as 2Q13 revenue fell 4%. Management remained “positive” regarding this performance, noting the present “challenges” and “volatility” in the diabetes market, particularly in the US – such characterization has unfortunately become a near-certainty on Big Four financial calls over the past year. Sequentially, worldwide Diabetes Care sales increased 12% from 1Q14, consistent with the last eight years we’ve been following Roche. Management noted that Insulin Delivery revenue grew 6% operationally in 2H14 YOY (see below); there was no mention of the performance of the BGM Diabetes Care products. Based on the company’s supplemental slide deck, we estimate that Roche’s BGM business makes up ~92% of its Diabetes Care business, with the remaining ~8% attributable to Insulin Delivery.

  • Management highlighted that the Accu-Chek Aviva/Performa BGM, Accu-Chek Mobile BGM, and Insulin Delivery Systems bolstered Diabetes Care sales in 1H14 (up 2%, 22%, and 6% as reported, respectively). We assume that the modest growth in Insulin Delivery Systems reflected uptake of Roche’s Accu-Chek Insight (next generation insulin pump and BGM system), which was launched in the EU earlier this year; during the company’s 1Q14 financial update, management anticipated an FDA filing in 2014, although we though we heard no updates on this timeline during the call. The growth in Accu-Chek Mobile and Aviva/Performa BGM revenue built on the company’s cautious optimism regarding good uptake in 1Q14.

2. In North America, Diabetes Care sales totaled 110 million CHF (~$124 million), reflecting a 24% decline YOY. This is the second steepest North American decline we have seen since 1Q09, the first being in 4Q13 when sales fell 27%. The steep decline also came on an easy comparison, as sales were down 8% as reported in 2Q13. Roche avoided some of this pressure impact in 1Q14, growing 6% as reported in the US, and we had wondered if sales might continue to trend positively this quarter.  

  • Given that competitive bidding went into effect July 1, 2013, we had been expecting that the Big Four blood glucose monitoring companies (J&J, Abbott, Roche, and Bayer) would experience a “reset” since the program had annualized; unfortunately, from what we have seen thus far with J&J (US sales down 14%), Abbott (US sales down 27%), and now Roche (down 24%), this does not seem to be the case, and we suspect that these companies will continue to experience additional pressures in upcoming quarters. As a reminder, Roche does not break out its US Diabetes Care business from North America, so it is difficult to attribute all decline to pricing pressures in the US, although we are certain they played a large role.

3. Outside of North America, Diabetes Care revenue totaled 492 million CHF (~$554 million), falling 6% as reported YOY – this marked three straight quarters of sales declining outside of North America. This was also an easy comparison to 2Q13, when revenue fell 3% as reported. As in past quarters, Europe, Middle East, and Asia (EMEA) sales were the bulk of the Diabetes Care business (63%) – sales of 377 million CHF (~$424 million) were down 4% as reported YOY. Sales in RoW totaled 115 million CHF (~$129 million), dropping 12% as reported YOY against a particularly easy comparison in 2Q13 (down 10%). This was unlike J&J and Abbott, who both saw modest positive international growth in 2Q14 (2% and 3%, respectively) despite declining revenue in the US.

4. Combined worldwide revenue for J&J, Abbott, and Roche totaled $1.5 billion in 2Q14, falling 6% as reported YOY from pooled revenue in 2Q13 ($1.6 billion). Relative to 2Q13, all three companies experienced declines this quarter – J&J was down 5% worldwide, while Abbott and Roche were down 10% worldwide. 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 continuous glucose monitoring outside of the US). We look forward to adding the last of the Big Four – Bayer – to this comparison when the company reports on July 30.

  • Combined US/North America revenue for J&J, Abbott, and Roche reached $444 million, a 19% decline as reported YOY. Both Roche and Abbott saw declines in the 20%-range, while J&J fared slightly better (down 14%).  
  • Combined international revenues totaled $1.1 billion, up a modest 1% on a reported basis YOY. Abbott and J&J drove international growth, while Roche saw its third straight quarter with declining sales outside of North America.
  • Roche’s global revenues accounted for 44% of the three companies’ pooled revenues. This held steady relative to Roche’s share in 2Q13. Regionally, J&J holds the greatest percentage of revenue in the US at 50%, while Roche holds the greatest share of international revenue at 51%.

Table 1: 2Q14 Diabetes Care Revenue Comparison for J&J, Abbott, and Roche

Company

Worldwide

US

International

 

2Q14 Revenue in Millions

Reported (Operational) Growth from 2Q13

2Q14 Revenue in Millions

Reported (Operational) Growth from 2Q13

2Q14 Revenue in Millions

Reported (Operational) Growth from 2Q13

Roche

$677

-10%

$124

-24%

$554

-6%

J&J

$558

-5% (-5%)

$222

-14%

$336

2% (2%)

Abbott

$294

-10% (-10%)

$98

-27%

$196

3% (2%)

Currency conversion for Roche based on average exchange rate from April 1 – June 30 on oanda.com (e.g., 1.1247 USD per CHF). Different results are possible with different currency conversion. Roche does not report revenues using a US/OUS split; thus, its international sales reflect those outside of North America. Operational growth is not given for Roche’s business outside of North America. Reported growth for Roche is calculated based on CHF.

Device Pipeline Updates

5. Although Roche management did not mention its device pipeline during the call, the accompanying slides maintained the 2014 EU launch timing of the Accu-Chek Connect – this Bluetooth-enabled BGM is expected to have connections to a smartphone app and the cloud. There is no timeline on an FDA submission of the device. We look forward to seeing how it compares to J&J’s Bluetooth-enabled VerioSync and smartphone app.

6. Management did not discuss the Accu-Chek Aviva Expert (meter with built-in bolus advisor) though the device was launched in the US during 2Q14. As a reminder, the device was approved by the FDA in October 2013 and has been available in Europe. We’d note that AADE 2014 will have a product theater solely focused on this new BGM, led by technology expert Dr. Bruce Bode (Atlanta Diabetes Associates, Atlanta, GA). It’s terrific to see Roche’s commitment to pushing this innovative meter with a built-in bolus calculator, as this will fill an unmet need for patients on MDI. As a reminder, the US version of Abbott’s FreeStyle InsuLinx meter only has an insulin logging feature, as Abbott was presumably not able to get the European version’s built-in bolus calculator through the FDA.

  • Management was equally silent regarding Roche’s novel CGM. A poster presented at ADA 2014 compared Roche’s prototype CGM to the Dexcom G4, suggesting that there is still potential interest in moving this device forward. Notably, the mean seven-day MARD was 10.9% for the G4 and 8.6% for the Roche prototype.
  • Similarly, there were no updates on the Solo MicroPump (Roche’s patch pump). The last we heard about the Solo was in 3Q12 when Roche was planning to begin studies in the EU in 2H13; the limited R&D dollars from the BGM business has likely impeded progress on this device. We would be moderately surprised to see the product developed, and the pump is not listed under the company’s 2014 launch goals in 1Q14 or 2Q14 materials. The field of novel insulin delivery devices gets more competitive by the day:
    • Insulet’s second-gen pod is on the market worldwide.
    • Cellnovo has launched in a limited fashion in the EU (UK, France, Netherlands) and is planning to submit to the FDA this year.
    • Medtronic’s MiniMed Flex was announced at its 2014 Analyst Day – specifics were very light on this device, but we understand that it will be a traditional pump that is wearable on the body or in a pocket/waistband.
    • J&J’s Finesse, which is slated to launch within ~22 months. This is the three-day, wearable, bolus-only insulin pump acquired from Calibra Medical.
    • Valeritas’ V-Go, which is on the US market. Per its presentation at JPM 2014, the company intends to go public in 2H14.
    • CeQur’s PaQ, whose insulin delivery device for type 2 diabetes is slated for a focused launch in the EU in 2015.
    • BD is also developing a patch-pen insulin delivery device, which is “at the top” of the company’s “priority list for adjacency moves over the next two to four years.”
    • Debiotech debuted its JewelPump2 at ATTD 2014. The original Jewel pump was in preparation for CE marking as of our last update in March.
    • SFC Fluidics will initially target the type 2 diabetes market with its patch pump using a simplified handheld.
  • Roche presented interim results from a long-term evaluation of its intraperitoneal Accu-Chek DiaPort System. Clinical performance and safety of the device was evaluated in 12 adult patients with type 1 diabetes unsuccessfully treated with continuous subcutaneous insulin infusion (CSII). Patients in the study were implanted with a DiaPort System and followed for 12 months. Preliminary results suggested significantly lower A1c’s and reduced risk of severe hypoglycemia.

Drug Pipeline Updates

7. Roche did not mention any of its cardiometabolic drugs in development, although the company’s slide deck shows that Roche’s phase 2 study of its PCSK9 inhibitor RG 7652 (EQUATOR) has been discontinued. As a reminder, the trial was designed to assess subcutaneous dosing every four weeks with five doses of the drug; internal readouts were expected by the end of 2013, though we have heard of no progress since 2Q13. We wonder if this decision is a response to Amgen’s 1Q14 assertion that its competing PCSK9 inhibitor evolocumab (AMG 145) is back on track for 2014 FDA submission following previous reports at ACC 2014 that the US timing might be delayed. Roche has mentioned previously that the company will not advance the drug without a partner for the candidate; having spent one year searching for a partner, Roche may have concluded that the challenge of competing against Amgen’s product is not one it wants to presently entertain.

  • As a reminder, Roche discontinued its PPAR-alpha/gamma dual agonist aleglitazar due to safety concerns and lack of efficacy in 2013. Results from AleCardio (aleglitazar’s CVOT that was terminated early for futility) presented at ACC 2014 indicated an increased rate of adverse events, including fractures, GI bleeding, renal impairment, and heart failure; in a futility analysis, 55% of planned events accrued predicted 1% chance of success.
  • Roche’s drug pipeline still includes an ongoing phase 1 study of its GLP-1/GIP dual agonist MAR709/RG7697 in type 2 patients. Roche obtained the drug during its 2010 acquisition of Marcadia; the trial (not on ClinicalTrials.gov) has a primary endpoint of safety and PK.

8. Roche/Genentech’s diabetic macular edema (DME) drug Lucentis (intravitreal ranibizumab) experienced 4% growth in sales on revenue of 421 million CHF (~$474 million). Management noted that the market for the drug continues to expand with the aging population of the US, making Lucentis Roche’s fourth-best selling pharma product thus far in 2014. We also note that this growth is from a difficult comparison – revenue grew 18% as reported 2Q13. Roche expressed cautious optimism regarding growth in the remainder of 2H14, citing potential competition in DME drugs. Management was likely referring to Bayer/Regeneron’s anti-VEGF agent, Eylea (currently under FDA review with a decision expected in August) and Alimera’s Iluvien (resubmitted to the FDA for the fourth time in April).

 

-- by Varun Iyengar, Hannah Martin, Adam Brown, and Kelly Close