Abbott 4Q17 – Record global sales rise 28%, driven by 36% OUS growth; Libre adding 50,000 users per quarter; US Libre ‘18 sales est. reiterated: $50-$100M; Libre peds trial recruiting – January 25, 2018

Abbott reported its 4Q17 earnings in a call led by CEO Mr. Miles White yesterday. We bring you our full report with a detailed analysis on the highlights relevant to diabetes. Read on for FreeStyle Libre user base and revenue updates, 2017 full-year results, and more. Download the earnings infographic here (with FreeStyle Libre’s US launch and Medicare coverage heavily featured).

Financial Highlights

1. Record Q4 Sales of $413 million Rise 28%; Full-Year Global Sales Up 23% to $1.4 Billion

Abbott’s Global Diabetes Care business pulled off another incredibly strong quarter, with record sales of $413 million up 33% as reported and 28% operationally YOY. On a sequential basis, revenue climbed a strong 11% on the tail of 15% sequential growth in 2Q and 11% sequential growth in 3Q – lots of momentum for the business entering 2018. The YOY performance came against a modest comparison to 4Q16, when sales rose 4% as reported YOY (+6% operationally). The international business contributed ~95% of the Diabetes business’ overall growth in 4Q17. Outside of the US, Abbott has had several quarters to ramp Libre sales, marketing, and distribution. Now that FreeStyle Libre has launched and received Medicare reimbursement in the US (in addition to what seems to be favorable commercial coverage), it’s possible the share of growth will begin to tilt more in the US’s favor. One indicator that this process has already commenced is on a sequential growth basis: the Q3-Q4 gain outside of the US was ~80% of overall sequential gains, while the US accounted for ~20% - higher than the YOY growth split. We’d expect to see bigger US growth in 1Q18 and beyond, as the consumer launch ramps in the US.

Figure 1. Global, US, and International Quarterly Sales (1Q12-4Q17)

• 2017 was a blowout year for Abbott Diabetes Care, with full-year global sales of $1.4 billion up 24% as reported (+23% operationally). The international business drove 97% of 2017 growth, a testament to continued momentum for FreeStyle Libre. The YOY gains came against a relatively easy comparison to 2016, when sales of $1.1 billion rose 2% as reported (+4% operationally). This performance marks the largest full-year growth ever recorded in our Abbott model, dating back to 2003. It’s also two years of consecutive growth – something unheard of a few years ago for the Big Four.  

Figure 2. Global, US, and International Annual Sales (2003-2017)

• During his prepared remarks, Mr. White noted that FreeStyle Libre was a major contributor to overall strong growth in the medical device segment thanks to regulatory approval in the US and Canada, CMS reimbursement earlier this month (both updates were also highlighted in the press release and earnings infographic), as well as national reimbursement in the UK, France, and Japan (which came earlier in 2017). Given Mr. White’s comments that there aren’t many users in the US yet – and the modest US growth – we assume that most new customers and sales came from the latter three large markets now with national reimbursement.                                                                                                              

2. International Revenue Rises 36% to $321 Million, Driven by Strong Libre Sales; $1.1 Billion Full-Year Sales Up 31%

International sales of $321 million, driven by FreeStyle Libre, continue to ramp, increasing a remarkable 44% as reported and 36% operationally – this came against quite a tough comparison to 16% operational growth in 4Q16. Revenue also rose 11% sequentially from a strong base of $289 million in 3Q17. This performance marks an impressive eight consecutive quarters of YOY growth and three consecutive quarters of sequential growth. As of earlier this month, FreeStyle Libre is fully or partially reimbursed in 21 countries (including the US), a definite lift to OUS sales. The trend line in the graph above says it all.

• International sales in 2017 were outstanding, totaling $1.1 billion (equivalent to the 2016 global total!) and increasing 32% as reported and 31% operationally – the second graph above, showing Abbott’s sales over the past 13 years, really puts the trajectory into perspective. This performance also came against a tough comparison to 2016, when sales rose 13% as reported and 16% operationally. Beginning in 1Q16, the graph of the international Diabetes segment’s top-line looks much more like a startup than a $1 billion business – very impressive.

3. US Sales Rise 6% YOY to $92 Million; 2017 Sales of $322 Million Rise 2%; Acceleration Seems Very Likely in 2018

US revenue of $92 million increased relatively modestly, up 6% YOY and 10% sequentially. The YOY US comparison was also quite easy to 4Q16, when sales declined 14% – we might have expected more US acceleration following the late November launch of FreeStyle Libre (both from sales of the consumer version and a likely “halo effect” encouraging use of the professional FreeStyle Libre Pro). Of course, the pharmacy launch only had a month during 4Q17 and we’d guess real acceleration will come in 1Q18 and beyond – indeed management again endorsed an estimate for 2018 US FreeStyle Libre revenue of ~$50-$100 million. See more on that below. US sales have risen sequentially for the past three consecutive quarters, which could indicate some uptake of FreeStyle Libre Pro. There aren’t specifics on how FreeStyle Libre Pro sales are going in the US, which has not been on the market for over a year since the 3Q16 US launch. We’d guess the Pro ramp will be much slower than for the consumer real-time version – convincing HCPs takes time, and intermittent sensor volume is far smaller than 24/7 real-time use.

• 2017 US sales totaled $332 million, up 2% on an easy comparison to a YOY decline of 18% in 2016. 2018 should be a totally different year for Abbott’s US business, and given the easy comparison 2017, growth in the 15%-range or perhaps even higher seems possible (our speculation). 1Q18 should be quite telling. In the second half of 2018, Dexcom’s expected launch of a no-calibration G6 could provide strong competition. Medtronic’s Guardian Connect standalone CGM is also expected by this April. Read more on US competitive dynamics in CGM in our 2017+2018 Reflections.

FreeStyle Libre User Base, Expected US Revenue, & Pipeline

1. FreeStyle Libre is gaining ~50,000 users per quarter = ~450,000 WW users; Could pass 0.5 million users by end of 1Q18 at current rate

FreeStyle Libre continues to gain ~50,000 users per quarter, according to Mr. White, putting the number of global users in the ballpark of ~450,000. [Jaws dropped and models were furiously updated, only to be returned to their original state, when Mr. White initially commented by mistake that FreeStyle Libre is gaining approximately 50,000 users per month.] Our estimate of ~450,000 users is admittedly rough, based only off Mr. White’s remark and October’s update indicating were over 400,000 FreeStyle Libre customers worldwide. Assuming $120/month pricing and 90% utilization over the three-month quarter, global FreeStyle Libre revenue comes out to approximately ~$146 million, or 45% of international revenue (35% of global revenue). Mr. White added that growth is accelerating – partially thanks to the “several hundred million dollars” invested in expansion – and that new users are still primarily coming from Europe. “It’s not a niche product, it’s a mass-market product. There are tens of millions of type 1s, and frankly, the same for type 2s trying not to be type 1s, and I’m one of them.” It’s not entirely clear what the CEO meant by this, though we take the remark to mean type 2s not on insulin are interested in Libre because it can help ensure they don’t become insulin-dependent. We are very interested in type 2s on SFUs in particular gaining access to Libre given how much this could help them. Figure 3 below depicts the striking growth pattern since Abbott began to report user base in 2Q16, and Table 1 includes our revenue estimates over time.

• Given the headwinds faced in BGM (not discussed on the call), we assume pretty much all of the sequential US and international growth can be attributed to FreeStyle Libre; since the US geography contributed to ~20% of overall sequential growth, it’s possible that 20% of the 50,000 new Libre users, or 10,000 customers, came from the US. This is probably an overestimate since (i) Mr. White said that current figure “doesn’t even reflect much US yet,”; (ii) Libre was only available in US pharmacies for just over a month; and (iii) it’s hard to know if Libre’s share of sequential growth could be as high in the US as it is overseas. Still, we sensed pent up US patient excitement for the 10-day, slim, factory-calibrated sensor. If our estimation is in the right ballpark, then Abbott only generated ~$1 million in US FreeStyle Libre sensor sales in December – 10,000 people at ~$36 per sensor [wholesale acquisition cost] with 90% utilization for one month. For context, reader in the US have a wholesale acquisition price of $70, meaning 10,000 readers would net Abbott ~$0.7 million or less (depending on its contracts). During the Q&A session, VP of Investor Relations Mr. Scott Leinenweber noted that FreeStyle Libre uptake in the US is “tracking right with our expectations” and described US sales as “modest.” But, given the probability of market expansion, the potential is enormous. 

Figure 3. FreeStyle Libre User Base Estimates (2Q16-4Q17)

Table 1: FreeStyle Libre User Base and Estimated Quarterly Revenue

Note: the below are possibly overestimate of sales, depending on the net revenue Abbott actually receives in different countries.

*Abbott’s 2Q17 call did not give an update on the size of the FreeStyle Libre user base. However, the 1Q17 update shared that there were “about 300,000” global Libre users. Subsequently, September’s FDA approval shared there were 400,000+ global Libre users. We felt the midpoint of the two was a reasonable assumption for 2Q17’s base.

• For comparison, Dexcom ended 2017 with over 270,000 users on full-year sales of ~$715 million (+25% YOY), per CEO Kevin Sayer’s JPM remarks. 2018 Dexcom revenue is expected to land in the range $830-$850 million. Abbott will ride international FreeStyle Libre momentum (+reimbursement) and enters the US market with favorable pricing and Medicare coverage, not to mention commercial coverage. Meanwhile Dexcom will continue to boost G5 sales through marketing, deeper Medicare penetration, an integration with Tandem (PLGS coming this summer), launch in Japan/Korea, and a number of compelling pilots (e.g., Onduo, UnitedHealthcare), and anticipates that a no-calibration G6 could launch 2H18.
• A recent update on Abbott’s US website shared that “most commercially insured patients pay no more than $75 per month” (<$2.50/day) for FreeStyle Libre at major retail pharmacies. Abbott has not shared what US commercial contracts it has in place, but we’d hope to hear updates as the year progresses. At this point, starting on Libre is less expensive than Dexcom on a cash-pay basis; for those with reimbursement, Dexcom might be cheaper, but it obviously will depend on plans and coinsurance. See our more nuanced pricing analysis between the two here.
• We’re also looking forward to watching how quickly G5 and FreeStyle Libre expand into the Medicare population eligible for CGM coverage. We estimate the Medicare market could hit >$1 billion-plus in sales, assuming penetration reaches >25% on a potential estimated market of ~1 million intensive insulin users.

2. Reiterated Estimate for ~$50-$100 Million in 2018 US FreeStyle Libre Sales

Mr. White said he still considers JPM analyst Mike Weinstein’s October prediction of $50-$100 million for 2018 US FreeStyle Libre sales to be a “good range of estimate.” Mr. Leinenweber reiterated later in Q&A that $50-$100 million is “still where we sit today.” After the 3Q17 call, we estimated that $50-$100 million in revenue would represent a strong launch, with ~80,000-150,000 US patients getting on Libre within 12 months and using three sensors per month. This assumes an average per-patient US Libre revenue of ~$650 in 2018. Since management endorsed the same revenue estimate today as they did on the 3Q17 call, it seems that they had fully expected Medicare reimbursement to come through early in 2018. CMS’s lofty pricing for FreeStyle Libre (~$8/day, ~$250/month, the same as G5), means that our user base estimate (which assumed pricing of $120/month plus a 30% discount to payers: ~$250/quarter per patient) may have been on the high side. Indeed, in the Medicare market, Abbott will receive more than double the revenue per-patient than what it will get in the commercial market.. For comparison, if the international growth rate holds through the next year, 2018 OUS Libre sensor revenue could approach roughly $750 million on a user base of 650,000.

• FreeStyle Libre hit major US pharmacies in November with ambitious pricing: Libre’s end-user cash price at pharmacies (Walgreens, CVS) is ~$4-$5/day for sensors or ~$129-$159/month; readers are $84.99-$96.99. Abbott’s “net price” for sensors is <$3.60/day – that’s roughly 38%-50% less than Dexcom’s ~$5-$7/day net pricing (assuming 10-14 day wear). Read our detailed analysis for more on FreeStyle Libre pricing in the US.

3. Excitement for FreeStyle Libre “Enhancements,” But No Specifics on Peds, Next-Gen, LibreLink App in US

Mr. White said of Libre, “we’ve got a series of enhancements and approvals and additions to it coming that only make it better.” While he didn’t dive into specifics, our minds go to: Pediatric approval in the US; LibreLink and LinkUp clearance in the US so users can swipe over the device with their phones and share data with caregivers and providers; a LibreLink workaround for iOS devices that don’t have NFC; and the net-gen continuous communication Libre that will be used in Bigfoot’s systems (and perhaps launched as a standalone CGM).

• LibreLink, FreeStyle Libre’s Android reader app, was not included in the initial FDA submission, and Abbott has not commented on submission or launch timing. Dexcom is far ahead of Medtronic and Abbott on this front, with direct-to-Apple-Watch communication under FDA review, smartphone apps for iOS and Android already out in the US and globally, and soon-to-launch Fitbit Ionic integration. Now that FreeStyle Libre has CMS reimbursement, it will be interesting to see how Abbott approaches approval for LibreLink and LibreLinkUp in the US. Current CMS reimbursement stipulations prevent use of the smartphone app for viewing data. Could Abbott built WiFi or cellular into the receiver? Will Abbott work with CMS to identify a workaround? While we can’t imagine it will be too long until we see LibreLink and LibreLinkUp approved and implemented in the commercial pathway, we wonder if combined pressure from Abbott, Dexcom, and the patient community will be sufficient to reverse this notoriously frustrating Medicare coverage criteria.

4. Mr. White’s Continued Enthusiasm: “Libre Is a Tremendous Opportunity. It’s a Mass-Market Product”

Once again, Mr. White seemed to have a swagger when referring to the medical device business, and especially FreeStyle Libre, which he seemed to save as best for last whenever possible. Mr. White mentioned that he wears FreeStyle Libre – we think it’s so important for companies to become intimately familiar with the devices they deliver and love this dedication and candor from Mr. White. Not only does it inspire confidence in the usability and accuracy of the device, it also sends a powerful statement helping to reduce stigma and demonstrate the benefits of CGM for a broader, more diverse population. On a related note, we recently learned that Mr. White is on McDonalds’ Board of Directors – what could CGM show about the glycemic impact of different foods offered at McDonalds? Could it help McDonalds’ actually make its food and beverages healthier and friendlier for people with diabetes? See below for some of our favorite quotes from him during the Q&A session.

• “As I said, it’s not a niche product, it’s a mass-market product. There are tens of millions of type 1s, and frankly, the same for type 2s trying not to be type 1s, and I’m one of them. So I wear the product. I live the product. I know the product. I think this product has a long track road ahead of it.”
• “And then I finally come to Libre. I enjoy the fact that every time something is announced with Libre it’s a surprise because everyone has such low expectations for it. And I think we’re going to continue to surprise people in that category. We’re investing several hundred million dollars in expansion. This is a big product.”
•  “The Libre is a tremendous opportunity. It’s a mass market product. A medical device is usually a niche therapy and this one is not. The pace of scale and magnitude of opportunity with Libre is more like tech than it is med-tech. That’s an interesting challenge for us. We have such a strong cash flow that we can afford the kind of investment. As challenges go, that’s a nice challenge, you don’t lose sleep over those.”
• “I look at diagnostics and devices and they’ve both got a tremendous bunch of new product launches that will sustain growth for a number of years. And they're not flash in the pan product launches. These are going to sustain growth over a number of years. Because these are big and broad product launches…These were big launches. The product approvals that I forecasted to you in July and October all happened…We got all those product approvals, and those launches are all out of the blocks and going well.”

Other Pipeline Highlights

1. No Mention of Bigfoot Partnership; Pivotal Trial for Loop Still Expected for 2018, Commercial Launch Slated for 2020

There was no mention of the Bigfoot partnership to automate insulin delivery with a pump (Loop) and via MDI auto-titration (Inject). The system will use a second-gen continuous-communication Libre. As of a December interview with Bigfoot CEO Mr. Jeffrey Brewer, the automated insulin delivery (“Loop”) pivotal trial is still expected to begin in 2018, with a planned PMA submission at the “end of 2019” and 2020 commercial launch. Regulatory approval of “Inject,” the MDI auto-titration system with insulin pen dose capture, is expected “in the same timeframe” as that of Loop, placing launch around ~2020 (though it still has to undergo “at least one” feasibility trial before entering a pivotal). Execution will be critical if these ambitious timelines are to be met, and there is no information on Abbott’s next-gen Libre – how far along it is, what other product features it will have, etc. Bigfoot’s virtual vClinic, capable of running the equivalent of a three-month pivotal trial (200 subjects, 100 days) in “less than a minute” may help shave off time and cost, assuming FDA is on board (recent draft guidance from CDRH is encouraging). Bigfoot recently raised $37 million in the first tranche of Series B financing, though Mr. Brewer expects that it will require “more than $200 million” to bring Bigfoot’s two systems to market. We wonder if Abbott would actually invest in Bigfoot, in addition to supply the sensor.

• We also learned at DTM in November that the Bigfoot algorithm starts with a single basal rate, carb ratio, and insulin sensitivity factor, and then proceeds to adjust basal rates, carb ratios, insulin sensitivity factors, and glucose targets on a remarkable hour-to-hour (!) basis. Results from the 48-hour feasibility trial (n=20) presented at DTM demonstrated 65% time-in-range, 0.9% of time <70 mg/dl, and no hypoglycemia requiring assistance, aligning well with other AID trials. Assuming Bigfoot’s system secures approval as planned, Bigfoot would likely enter a crowded hybrid closed loop market in the US behind Medtronic and possibly behind Tandem, Insulet, and Beta Bionics. Assuming Dexcom gets G6 approved in a no-calibration setup, Dexcom-integrated systems will be more competitive with the Bigfoot-Libre system. Libre’s inclusion in Bigfoot’s AID and auto-titration bundles was a smart move for both companies – assuming both sides can execute, as we’ve also heard nothing on Abbott’s second-gen sensor progress – and promises an additional revenue stream for Abbott down the line.

2. FreeStyle Libre Trials: New US Pediatric Accuracy Study (4-17 Years, n=100), Completion in July 2018

There are at least 24 studies on “FreeStyle Libre” or “Flash Glucose Monitoring” on ClinicalTrials.gov, up from 19 studies in 3Q17. Of particular note, a non-randomized, single-arm study will evaluate the safety and effectiveness of FreeStyle Libre in pediatric populations (4-17 years-old). Recruitment is open to both type 1 and 2 patients (n=100) and will be conducted at up to six sites in the US; thus far, only Sansum is listed. Completion is slated for July 2018. It’s possible this study will serve as the basis for a pediatric FDA submission, in which case Abbott  likely won’t launch in peds until late 2018 at the very earliest. See the table below for a topline overview of key trials we’ve noticed.

Pooled Abbott and J&J Financial Highlights

1. Pooled Quarterly Revenue for J&J and Abbott Reaches $803 Million, up 4% on Easy Comparison (-1% in 4Q16); Pooled Sales Fell 5% Discounting Est. FreeStyle Libre Revenue

Pooled global revenue for J&J and Abbott reached $803 million in 4Q17, rising 4% YOY on an easy comparison (-1% in 4Q16). 4Q results could not have been more different for the two companies: Abbott reported 33% growth while J&J saw a 16% decrease in LifeScan/Animas sales and is considering sale of LifeScan following Animas’s exit. Neither company separates out BGM sales from other portfolio components, so an exact comparison between the two is impossible. As FreeStyle Libre continues to gain traction, this pooled analysis will only prove less useful. For now, we continue to pool the companies here to provide a high-level perspective on glucose monitoring including SMBG and CGM, with minor Animas revenue for J&J. That said, excluding our estimate for FreeStyle Libre sensor revenue, pooled global Abbott and J&J Diabetes sales declined 5% from ~$692 million to ~$658 million.

• Pooled sales in the US fell 20% to $222 million against an easy comparison (-8%) in 4Q16, driven by the steep declines reported by J&J. Not surprisingly, international pooled revenue was dragged into the positive by FreeStyle Libre sales, rising 18% to $581 million on a moderate comparison to 4% growth in 4Q16. Excluding estimated FreeStyle Libre sensor revenue, pooled international sales fell 17% YOY.
• On a yearly basis, pooled global sales of $3.0 billion rose 3% on an easy comparison (-4%) in 2016. Aligning with quarterly pooled revenue trends, international sales drove the overall growth, rising 12% to $2.1 billion on a moderate comparison (+3%) to 2016. Rapidly rising FreeStyle Libre sales clearly were the major contributor: excluding estimated FreeStyle Libre revenue, pooled international revenue fell 14%. US pooled results fell 11% to $944 million on an easy comparison (-13%) in 2016.

Selected Questions and Answers

Mr. Michael Weinstein (JP Morgan): Could you speak specifically to a couple product launches? One of them I think everybody would like to hear about is Libre.

Mr. Miles White (CEO, Abbott): I look at Diagnostics and Devices, and they've both got just a tremendous bunch of new product launches, and they're not flash in the pan product launches. These are going to sustain growth over a number of years, because these are big and broad product launches. The product approvals, particularly in the U.S., that I forecasted to you in both July and October, all happened. And there was some skepticism about that because of the situation in Sylmar, but frankly, our team has done a terrific job in Sylmar and terrific job communicating with our U.S. regulators. And we got all those product approvals, and those launches are all out of the blocks and going well. I look into 2018 and it all feels remarkably strong and sustainable, and I think that's terrific.

And then I come to Libre, which I enjoy the fact that every time something is announced with Libre, it's a surprise to somebody because everybody seems to have such low expectations for it. And I think we're going to continue to surprise people in that category. We're investing several-hundred-million-dollars in expansion. This is a big product. I think you estimated at one point $50 million to $100 million in the U.S. this year. I think that's a good range of estimate. But frankly, it's going strong. We're adding probably 50,000 customers a month [editor’s note: Mr. White later corrected to 50,000 customers per quarter] right now, and that's increasing. And that was primarily Europe; that doesn't even reflect much U.S. yet.

So, as we came out of the fourth quarter, the growth rate of that product is just tremendous, and we've got a series of enhancements and approvals and additions to it coming that only make it better. And as I said, it's not a niche product. It's a mass-market product. There are tens of millions of people with type 1 diabetes and, frankly, the same in type 2s trying not to be type 1s, and I'm one of them. So, I wear the product. I live the product. I know the product. And I think this product has a long track road ahead of it.

Mr. Matthew Taylor (Barclays Capital, Inc.): This is probably the most pleased I've heard you sound in a while in how things are going, and the results kind of speak for themselves. But I know you're never satisfied. What areas would you point us to where things aren't going well that you want to improve, and how do you think about dropping all this good growth on the top line through to the bottom line versus investing in all the things that you have to invest in now?

Mr. White: I think our challenges are how to keep the pedal down on that growth, because all of these businesses have opportunities at the same time, and some of it's some fairly significant scale-up. Libre is a tremendous opportunity. It's a mass-market product, and it's unlike any other medical device. Medical devices by nature is sort of niche therapy. This one's not. This one has a totally different rhythm to it. The pace of scale and the magnitude of opportunity is more like tech than it is med tech. And that's an interesting challenge for us. It's a positive challenge. It's a good challenge. And fortunately, we've got such strong cash flow, we can afford the capital investment that we want to spend while we're paying down our debt and paying our dividends and so forth. I mean, as challenges go, that's a pretty nice set of challenges. You don't lose sleep on those.

Mr. Robert Adam Hopkins (Bank of America Merrill Lynch): I assume right now, the majority of [the FreeStyle Libre user base] is outside the United States. Can you give us a sense as to the pace of your sign-ups in the US and what you’re thinking for 2018 from a patient perspective for Libre in the US?

Mr. Scott Leinenweber (VP Investor Relations, Abbott): We launched pretty much right at the end of the year. Obviously, there's very modest sales in the fourth quarter there. Without giving the number, I would say the sign-ups are basically tracking right with our expectations. I think Miles mentioned a quarter or so back when asked what a reasonable estimate for year-one sales would be. And it was agreed upon it'd probably in the $50 million to $100 million range, and that's still where we sit today.

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