Roche 1Q15 - Global sales lowest in a decade, 11% decline in North America; Accu-Chek Aviva Connect BGM receives FDA clearance - April 23, 2015

Early Wednesday morning, Roche CEO Mr. Severin Schwan led the company’s 1Q15 financial update. Below, we have for you our top highlights from the update followed by Q&A.

Financial Highlights

1. Global Diabetes Care revenue totaled 507 million CHF (~$539 million) in 1Q15, declining 6% as reported and growing 1% operationally year-over-year (YOY). Sequentially, worldwide sales fell 21% from 4Q14. This is the lowest quarterly revenue ever in our Roche model, which stretches back to 2004.  

2. In North America, Diabetes Care revenue totaled 94 million CHF (~$100 million) in 1Q15, declining 6% as reported and down 11% operationally. This came against a very tough comparison (especially for the BGM industry) as sales grew 6% as reported and a striking 13% operationally YOY in 1Q14.

3. Outside North America, Diabetes Care sales totaled 413 million CHF (~$439 million) in 1Q15, falling 6% as reported YOY against an easy comparison (down 2%) in 1Q14. This was spilt into: (i) sales in EMEA, which totaled 304 million CHF (~$319 million), down 11% as reported and flat operationally, and; (ii) sales in RoW, which totaled 102 million CHF (~$115 million), up 12% as reported and 17% operationally.

4. Combined global 1Q15 revenue for J&J, Roche, and Abbott totaled ~$1.3 billion, falling 7% YOY relative to pooled revenue in 1Q14. Notably, US sales of ~$414 million actually grew 3% YOY (vs. an easy comparison to 1Q14, when sales were down 22%). Sequentially, global pooled revenues fell a staggering 18% relative to 4Q14, while US/North America sales declined 6%.

Device Pipeline Highlights

5. Roche has received FDA 510(k) clearance for its Accu-Chek Aviva Connect system (standalone meter + smartphone app + web portal). The system was submitted to the FDA in February 2015, reflecting a lightning fast FDA review of ~1 month. A US launch is slated for 2015.

6. Supplementary materials highlighted the 2015 worldwide launch of the Accu-Chek Active BGM. We’re not sure if the meter has been filed with the Agency.

7. There were no additional pipeline updates. Management did not comment on the development of Roche’s novel CGM or on the Solo MicroPump (Roche’s patch pump).

Drug Pipeline Highlights

8. US sales of Lucentis (intravitreal ranibizumab) declined 3% YOY as reported and 9% in constant currencies to 394 million CHF (~$414 million) in 1Q15. Management highlighted the drug’s recent approval for diabetic retinopathy, which we expect may boost sales to some extent in the coming quarters.

9. Roche’s GLP-1/GIP dual agonist RG7696 remains in phase 2 for type 2 diabetes; trial completion is expected in September.

Financial Highlights

1. Global Diabetes Care revenue totaled 507 million CHF (~$539 million) in 1Q15, declining 6% as reported and growing 1% operationally year-over-year (YOY). This is the lowest global revenue ever recorded in our Roche model, which stretches back to 2004. The  6% reported decline in 1Q15 came against flat performance in 1Q14. Operationally, the comparison was tougher (especially for the BGM business) to 1Q14, when sales grew 5%. This did mark the fifth consecutive quarter in which operational growth has been neutral or positive, indicating that the underlying business is growing very slightly in the face of a strengthening dollar. As a reminder, Roche was the only one of the Big Four BGM companies (J&J, Abbott, Bayer) that did not experience a double-digit YOY decline during some quarter in 2014. On the other hand, the company has not had a quarter with YOY growth above 3% since 1Q10, so a breakout quarter seems unlikely in the near-term future without a significant new product introduction or strategic change. Sequentially, worldwide sales fell 21% from 4Q14, in line with the ~17-26% sequential declines from 4Q to 1Q we’ve seen in the past three years.  

Figure 1: Global, North America, International Quarterly Sales (1Q11 – 1Q15)

• Management was vague but slightly positive in commenting on the Diabetes Care segment: “The business has developed well, that’s all I can say.” Indeed, Roche’s performance was described in the context of a “continuously challenging market,” particularly in the US – such commentary has been consistent in Big Four quarterly updates for over a year since competitive bidding “anniversaried” in July 2014. The chart above makes the challenging environment pretty clear, especially the dip in sales this quarter.
• Global Diabetes Care performance continues to be carried by positive growth for the Accu-Chek Aviva/Performa franchise and Insulin Delivery systems (up 2% and 10% operationally in 1Q15, respectively); these products were similarly characterized as drivers of growth throughout 2014. On pumps, we assume that the modest growth in Insulin Delivery reflects uptake of Roche’s Accu-Chek Insight (next generation insulin pump and BGM system), which launched in the EU in January 2014. Management did not comment on either franchise during its prepared remarks or Q&A.

2. In North America, Diabetes Care revenue totaled 94 million CHF (~$100 million) in 1Q15, declining 6% as reported and down 11% operationally. This came against a tough comparison (again, especially for the BGM industry) as sales grew 6% as reported and 13% operationally YOY in 1Q14. In its prepared remarks, management did not comment at all on the North American business – the silence has been characteristic of recent Roche updates and is not surprising considering the consistent challenges. In the past 28 quarters (since 1Q08), Roche has recorded only four quarters of positive YOY reported growth in North America. Sequentially, sales fell 23% relative to 4Q14 – this is typical of the business’ seasonality, and actually the “best” sequential performance from 4Q to 1Q that Roche has seen since 4Q09-1Q10.

• As the chart above makes clear, the US business is by no means rebounding.  Pricing pressures stemming from competitive bidding continue to exert their impact. From what we have heard at past updates, it appears that even at these lower revenue numbers, the business is still profitable and cash-generating, suggesting that the “new normal” may be viable. However, the impact on R&D moving forward is certainly not positive.
• It appears that Roche is positioning the future of the US business less optimistically relative to J&J (who reported April 14) and Abbott (who reported April 22). We found it notable that neither of Roche’s rivals directly mentioned the continued impacts of pricing pressures, while Roche still highlighted the “challenging” market. Of course, these characterizations do tend to change quarter-to-quarter and Roche has been more optimistic in the past – still, we find it interesting to think about how management teams are positioning their businesses (more aggressively vs. more conservatively).

3. Outside North America, Diabetes Care sales totaled 413 million CHF (~$439 million) in 1Q15, falling 6% as reported YOY against an easy comparison (down 2%) in 1Q14. The performance breaks a string of two consecutive quarters of YOY growth for the business – the first time we had seen this pattern since 2010 (1Q – 2Q). Sequentially, sales declined a staggering 25% – this was not surprising given the high base as revenue tied an all-time high in 4Q14 (549 million CHF). As a reminder, Roche breaks out its non-North America revenue into two groups – Europe, Middle East, and Africa (EMEA) and Latin America, Asia-Pacific, and Japan (RoW). Sales were split roughly 67/33 between the two for sales outside of North America.

• Sales in EMEA totaled 304 million CHF (~$319 million), down 11% as reported but flat operationally. For comparison, sales fell 1% as reported and grew 1% operationally in 1Q15. Certainly, the financials reflect the significant strengthening of the US dollar (negative 11% currency impact) vs. major underlying weakness in the business’ fundamentals; that said, EMEA is a market with lots of upside, so flat growth is disappointing. The launch of the Accu-Chek Connect System in South Africa, Italy, and Germany in September 2014 likely helped. Notably, sequential sales in the region fell 26% relative to 4Q14.
• Sales in RoW totaled 102 million CHF (~$115 million), up 12% as reported and 17% operationally. For comparison, sales fell 5% as reported but grew 10% operationally in 1Q14. We are not entirely sure what is driving this growth, as Roche rarely comments on the Diabetes franchise outside the US. Per a follow-up conversation with the company, we believe the strength reflects both BGM and insulin delivery uptake in relatively underpenetrated regions where Roche has a growing presence – Roche’s slide deck indicated 11% Diagnostic segment growth in Latin American and 16% growth in Asia Pacific (not diabetes specific). Sequentially, sales fell 22% – again, not surprisingly given that 4Q14 marked the third-highest revenue total for the region since Roche began reporting the figure in 2010 (behind only 4Q11 [142 million CHF] and 2Q12 [144 million CHF]).

4. Combined global revenue for J&J, Roche, and Abbott totaled ~$1.3 billion, falling 7% relative to pooled revenue in 1Q15 (~$1.4 billion); offhand, we were hoping this would be a bit better, though the decline has been driven by the significant strengthening of the US dollar as opposed to US weakness – see below. The performance does come against an easy comparison as combined revenue declined 7% a year ago. Sequentially, global pooled revenues fell a staggering 18% relative to 4Q14 (when sales reached ~$1.5 billion). For context, J&J, Roche, and Abbott all fell 6% YOY, breaking a streak of three consecutive quarters in which Abbott had the weakest performance. On an operational basis, J&J (up 4% YOY) outperformed Abbott and Roche (up 1% YOY). 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 FGM outside of the US). We look forward to adding the last of the Big Four – Bayer – to this comparison when the company reports on April 30.

Figure 2: Abbott/J&J/Roche Quarterly Global Revenue Comparison (1Q11 – 4Q14)

• A comparison of Abbott/J&J/Roche quarterly global sales illustrates unique revenue trends for each company. Roche is the most cyclical of the three with sales that vary distinctly with quarters (high in 2Q and 4Q; low in 1Q and 3Q). J&J revenue has declined substantially since 2011 (more of its business is from the US, and its stateside business has been harder hit), while Abbott sales have been surprisingly steady (two-thirds of its sales are OUS).
• Notably, pooled declines were not driven by US weakness, where combined sales of ~$414 million actually grew 3% YOY – of course, this comes against a strikingly easy comparison to pooled sales in 1Q14 (down 22%) so the numbers are tough to read into. However, 1Q15 does mark the first quarter that pooled revenues have grown since 4Q11, making us wonder what the rest of 2015 will look like. That said, we also know that revenues will continue to be assessed relative to particularly easy comparisons in 2014 – a reminder that the full effects of competitive bidding are only going to be known some time down the road.
  
  • Sequentially, pooled US revenues fell 6% relative to 4Q14 ($440 million). Ultimately, the US continues to be a challenging region for growth despite the fact that we are well past the annualization of competitive bidding –the big question is when the market will bottom out (or if it already has).

Figure 3: Abbott/J&J/Roche Quarterly US/North America Revenue Comparison (1Q11 – 4Q14)

• A comparison of Abbott/J&J/Roche quarterly US sales illustrates how significantly J&J’s US business has suffered in the past four years; we would note that declines began even before the implementation of competitive bidding. Abbott and Roche have suffered more modest declines.
• Pooled declines were driven by international weakness, where combined sales of ~$876 million declined 12% YOY. This came against a modest comparison (for the BGM industry) as sales grew 2% in 1Q14. Sequentially, pooled international revenues fell a staggering 23% relative to 4Q14 (~$1.1 billion). As noted above, these negative trends seem to reflect the significant strengthening of the US dollar as opposed to underlying weakness in any of the business’ fundamentals. J&J, Roche, and Abbott have announced steep YOY reported declines in 1Q15 offset by stronger operational performance: for context, J&J sales were down 15% as reported and up 1% operationally YOY in 1Q15 while Roche sales were down 10% as reported and up ~5% operationally (we estimate the latter because Roche reports EMEA and RoW separately).

Figure 4: Abbott/J&J/Roche Quarterly International Revenue Comparison (1Q11 – 4Q14)

• A comparison of Abbott/J&J/Roche quarterly international sales illustrates how much more stable this environment has been relative to the US/North America businesses. The seasonality of Roche’s business is again apparent here (high in 2Q and 4Q; low in 1Q and 3Q). Broadly speaking, quarterly sales across all three businesses have dropped slightly (~$50 million) over the past four years.
• Roche’s global revenues accounted for the majority (42%) of the three companies’ pooled revenues; this held steady relative to Roche’s share in 1Q14 (43%). Abbott and J&J revenues also held relatively constant at 21% (vs. 20%) and 38% (vs. 37%), respectively. (We note that the numbers do not add to 100% due to rounding.) Regionally, J&J holds the greatest percentage of revenue in the US at 51% (vs. 48% in 1Q14), while Roche holds the greatest share of international revenue at 50% (vs. 49% in 1Q14). Overall, we are impressed with how steady market share has been.

Device Pipeline Highlights

5. Though it was not mentioned during the update, Roche recently received FDA 510(k) clearance for its Accu-Chek Aviva Connect system (standalone meter + smartphone app + web portal). From the filing, the system seems to have been submitted to the FDA in February 2015, reflecting an impressively fast FDA review of just ~1 month. Notably, we have seen the length of previous FDA reviews vary from four months (iHealth Smart-Gluco Monitoring System) to 15 months (Philosys Gmate Smart) for similar smartphone/cloud-connected BGM. What appears to be record fast-processing time speaks to the FDA’s increasingly open approach to connected devices. Given the challenging BGM market, it is great to see Roche’s continued commitment to innovation. We applaud the company for really pushing the envelope on this front with three product launches in the past 12 months – very impressive, particularly given the pressure in the sector.

• Roche’s supplementary materials (slide 162) suggest that the Connect will launch in the US in 2015. This is consistent with guidance shared at the company’s 4Q14 call. We will await more specifics on timing in coming months. The Connect system was originally launched in South Africa, Italy, and Germany in September 2014.

6. Just as they did in 4Q14, Roche’s supplementary materials (slide 162) also highlighted the 2015 launch of the Accu-Chek Active BGM (worldwide). As a reminder, 4Q14 marked the first time we had heard of the next-gen Active BGM. Once again, the slide deck provided few details on timeline or meter features (as is standard nowadays, the strips are no-coding). The first-gen Active BGM was launched in the EU in 2Q13 but never made it to the US market. Our search of the FDA database seemed to indicate that the meter has yet to be filed with the Agency; this would have to happen soon if a US launch is to be included in the 2015 “worldwide” launch.

7. There were no additional pipeline updates. Management did not comment on the development of Roche’s novel CGM, though at JPM 2015, acknowledged that the project is moving forward (“we feel we are in the race”). While hesitant to provide a strict timeline, we heard confirmation at JPM that commercialization is more than 12 months away. Roche plans to file the device in the EU before bringing it stateside (~18 months later), so we assume US commercialization would not occur before late-2017 at the earliest.

• Similarly, there were no updates on the Solo MicroPump (Roche’s patch pump). We have heard that there continues to be work at Roche on this front – it’s just not public. The patch pump business model is challenging, and we applaud Roche for persevering in the business; the landscape is bound to get more competitive, as well, with J&J slating a launch of its Calibra Finesse insulin delivery device in (potentially) mid/late 2016 – read our J&J 1Q15 report for additional details.
• After launching three products in 2014, we assume the cadence of Roche’s efforts may slow down in 2015 – understandably! This is a challenging BGM market and declining revenues do not bode well for R&D or new product launches.

Drug Pipeline Highlights

8. US sales of Lucentis (intravitreal ranibizumab) declined 3% YOY as reported and 9% in constant currencies to 394 million CHF (~$414 million) in 1Q15. Sequentially, sales declined 10% as reported. Management reiterated commentary from Roche’s 4Q14 update regarding the increased competition for Lucentis in diabetic macular edema (DME); the company also suggested that while the product’s overall market (which includes age-related macular degeneration as well as DME) has continued to expand, fewer patients have been switching from Avastin to branded medications than in past quarters. On the positive side, management highlighted Lucentis’ recent approval for diabetic retinopathy in patients with DME; that rollout is ongoing, and we expect the new indication will have a positive impact on sales in the next few quarters. The company suggested that the broad population of patients (those with both proliferative and non-proliferative retinopathy) enrolled in the diabetic retinopathy trials could be a useful differentiating factor for Lucentis; Bayer/Regeneron’s Eylea (intravitreal aflibercept), which received a diabetic retinopathy indication earlier this month, was only investigated in patients with non-proliferative retinopathy. As a reminder, Lucentis is marketed by Genentech in the US and by Novartis ex-US – see our Novartis 1Q15 report for an update on the drug’s international performance.

9. Roche’s GLP-1/GIP dual agonist RG7696 remains in phase 2 for type 2 diabetes. A phase 2 trial (n=105; ClinicalTrials.gov Identifier: NCT02205528) of the compound is currently recruiting participants. The 12-week study randomized patients with type 2 diabetes on background metformin to receive daily injections of RG7697, Novo Nordisk’s Victoza (liraglutide), or placebo. The RG7696 and placebo groups are double-blinded while the Victoza group is open-label. The primary endpoint is change in A1c from baseline at eight weeks; secondary endpoints include change in A1c, body weight, and fasting and post-prandial glucose at 12 weeks. Roche’s pipeline indicates that the first patient was dosed in 3Q14, and the trial is expected to complete in September.

Questions and Answers

Q: On slide 45, is there a reason you are treating Diabetes Care in a separate way than the rest of the Diagnostics business?

A: There is no specific reason for it. I think Roland has talked about the sales for Diabetes Care shown there. It was about plus 1% and that's what we're mirroring there. So I think there is no specific reason for the different treatment. The business has developed well, that's all I can say.

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