Roche 3Q14 – Global Diabetes Care up 1%, down 2% in North America; Accu-Chek Connect launches in EU; GLP-1/GIP dual agonist in phase 2 – October 16, 2014

Early this morning, Roche CEO Mr. Severin Schwan led the company’s 3Q14 financial update. Overall, the Diabetes Care business seems to be stabilizing in the US, in line with what J&J reported on Tuesday – albeit both off very easy comparisons. It’s notable to see that three products have launched in 2014, despite pricing pressures and a continued “volatile” market. Below, we bring you the top financial and R&D highlights from the call. There was no relevant Q&A.

Financial and Strategic Highlights

1. Worldwide Diabetes Care revenue totaled 581 million CHF (~$636 million), up 1% as reported and 4% operationally year-over-year (YOY) against a neutral comparison (flat growth in 3Q13); performance was carried by the Accu-Chek Aviva/Performa, Mobile, and Insulin Delivery systems.

2. In North America, Diabetes Care sales reached 110 million CHF (~$120 million), falling 2% as reported basis YOY. We are cautiously optimistic that declines are starting to taper a bit, in line with J&J’s 3Q14 report on Tuesday. Of course, this is largely because competitive bidding declines have been “anniversaried” and because pricing pressures from other payers were largely in place

3. Outside North America, Diabetes Care sales reached 471 million CHF (~$516 million), up 2% as reported YOY, against a somewhat challenging comparison (up 2% in 3Q13). Growth was likely carried by the launch of the Accu-Chek Insight (next generation insulin pump and BGM system) in the EU.

4. Management continues to implement global restructuring plans as part of the “Autonomy and Speed” initiative; per the 2Q14 media briefing, Roche Diabetes Care had incurred 78 million CHF (~$88 million) in various costs associated with the initiative (IT-related, consultancy, etc.) in 2014 alone.

5. Combined global revenue for J&J (who reported October 14) and Roche totaled ~$1.2 billion, up 2% as reported from pooled revenue (~$1.2 billion) in 3Q13.

Device Pipeline Highlights

6. The Accu-Chek Connect system (meter + smartphone app + web portal) was soft launched in South Africa, Italy, and Germany in September. A US launch is planned for 2015.

7. With the launch of two other devices earlier this year – the Accu-Chek Aviva Expert (meter with built-in bolus advisor) in the US and Accu-Chek Insight in the EU (next gen insulin pump with BGM remote) – Roche is doing an admirable job of getting pipeline products into the market, given how challenging the market is.

8. Once again, there were no updates on the development of either Roche’s novel CGM or the Solo MicroPump (we had assumed the latter was dead though recently learned that is not the case – Roche's work on this front is just not public). 

Drug Pipeline Highlights

9. Roche’s slide deck indicated that the first phase 2 trial for the company’s GLP-1/GIP dual agonist RG7697 is currently recruiting (ClinicalTrials.gov Identifier: NCT02205528). This was quite surprising in one respect, since we thought Roche/Genentech was completely out of the diabetes drug side – then again, if this is the old Marcadia compound (or follow up), we’re glad to finally see it moving forward.

10. Sales of Roche’s diabetic macular edema (DME) drug Lucentis (intravitreal ranibizumab) grew 5% year over year to 432 million CHF (~$454 million) in 3Q14. As a reminder, the drug recently received FDA Priority Review status for a diabetic retinopathy indication – this will be closely watched.

Financial Highlights

1. Worldwide Diabetes Care revenue totaled 581 million CHF (~$636 million), up 1% as reported and 4% operationally year-over-year (YOY). This marks the first quarter of positive growth in global Diabetes Care since 2Q12, though we’d note that this was not a particularly challenging comparison as revenue was flat in 3Q13. We see the YOY growth as an encouraging sign that the business is stabilizing following a 10% drop in global revenue in 2Q14 despite a sequential decline of 3% (revenue rose 12% in 2Q14). Management, too, appeared encouraged by the gains, commenting on the “solid” growth in light of a "challenging environment and pricing pressures” – such characterizations continue to be a near-certainty in Big Four financial calls. Briefing materials also remarked on declining sales for products approaching the late stage of their life cycle that continue to impact overall performance. No further specifics were shared. The company has launched three new products this year, the Accu-Chek Insight, Expert, and Connect (see R&D highlights below).

Table 1: Roche Diabetes Care revenue by region

EMEA = Europe, Middle East, and Africa. RoW = Latin America, Asia-Pacific, and Japan. Currency conversion based on average exchange rate from July 1 – September 30 on oanda.com: 1.0948 USD per CHF. Roche does not provide operational growth for its regional breakdown in the quarter.

• Global Diabetes Care performance continues to be carried by positive growth for the Accu-Chek Aviva/Performa, Accu-Chek Mobile, and Insulin Delivery systems (up 6%, 22%, and 5% year-to-date, respectively); these products were similarly characterized as drivers of growth in 2Q14. Management expressed optimism regarding the Accu-Chek Mobile, in particular, highlighting the promise of this “differentiated” product. We are curious regarding the geographic revenue breakdown for the Mobile, especially the split between smaller growing markets and larger established ones. Turning to 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 was launched in the EU earlier this year. 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.
• The accompanying slide deck illustrated that Diabetes Care (22%) has accounted for the second-largest portion of Roche Diagnostics revenue behind Professional Diagnostics (56%) in 2014. This has certainly declined over the past six years – as recently as 2008, it was nearly one third of the diagnostics business.

Table 2: Annual Proportion of Roche Diagnostic Revenue Comprised by Diabetes Care Sales

2. In North America, Diabetes Care sales reached 110 million CHF (~$120 million), a decline of 2% on a reported basis YOY. This was against a somewhat easy comparison as Diabetes Care revenue fell 10% in 3Q13 (We’d note that this was not as easy as the J&J US comparison, where US growth fell nearly 30% in 3Q13 – See below for a comparison of J&J and Roche results). North America has consistently been a challenging region – in the past 27 quarters (since 1Q08), Roche has recorded only five quarters of positive year-over-year reported growth in North America. Sequential growth was flat vs. sales in 2Q14, improving on five straight years of negative sequential growth between 2Q and 3Q. In addition, this now marks two straight quarters of flat/positive sequential growth in North America, a pattern we have not seen in six years. At a high level, the North America business seems to be on a more positive trajectory.

• Clearly, as it is well past four quarters after the declines associated with competitive bidding, we see less intense weakness in the US – that said, Roche’s financials are obscured by the fact that: i) the company does not break out its US Diabetes Care business from North America; and ii) North American sales have apparently been impacted by non-BGM revenue streams of late. On the latter, we learned via the 2Q14 media briefing (page 31) that revenue in North America was challenged by “lower pump sales in the US and changes in the number of reimbursed strips in Canada.” Management was silent on both these fronts in this morning’s earning call, leaving it unclear whether this quarter saw recovery of pump revenue in North America and in the US – we doubt this is the case. We assume it has at least partially rebounded, as North American sales fell a striking 24% in 2Q14 against an easy comparison to an 8% decline in revenue in 2Q13.

3. Outside of North America, Diabetes Care sales reached 471 million CHF (~$516 million), up 2% as reported YOY; this came against an easy comparison of 2% growth in 3Q13. The positive growth outside North America turned around three consecutive quarters of negative growth. 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 in EMEA totaled 347 million CHF (~$380 million), up 2% as reported, against a challenging comparison to 9% growth in 3Q13. Sales in RoW totaled 124 million CHF (~$136 million), up 1% as reported, against an easy comparison to a 5% decline in sales in 3Q13. Management did not comment on the performance of either international business, though we assume that growth can be partially attributed to the launch of the Accu-Chek Insight in the EU in January.

4. Management continues to implement global restructuring plans that are geared toward driving efficiencies in Diabetes Care; as a reminder, Roche announced the “Autonomy and Speed” initiative in September 2013 in the hopes of addressing the long-term profitability of the business. We assume that the program reflects a mix of cost cutting and strategies originally designed to respond to CMS’ competitive bidding program. According to the 2Q14 media briefing (page 17), Roche Diabetes Care had incurred 78 million CHF (~$88 million) in various costs associated with the initiative (IT-related, consultancy, etc.) in 2014 alone. Management did not provide granularity on costs accumulated in 3Q14 nor did they provide a timeline for completion. Clearly, competitive bidding and pricing pressures have forced other members of the Big Four to adapt as well (see below) – we will likely see the total impact on the product development side only some years from now.

• As a reminder, Abbott and J&J have also announced plans to adapt their Diabetes Care businesses. Specifically, J&J reorganized its Diabetes Care business in December 2013. The re-organization involved the movement of sales forces from LifeScan to Janssen, bringing Animas and LifeScan together under the same worldwide president, and as we understand it, the departure of some key employees. The main facility in Milpitas, California, was also closed. Abbott, on the other hand, plans to run its business for cash in the near term in the US and focus on the EU as a growth driver for newer products (e.g.,  Freestyle Libre, which launched at EASD 2014).  

5. Combined global revenue for J&J (who reported on Tuesday) and Roche totaled ~$1.2 billion in 3Q14, up 2% as reported from pooled revenue in 3Q13. It was notable to see that J&J performed comparably to Roche considering the relative size discrepancy in their US/North America businesses: J&J’s US Diabetes Care business is ~44% of its global revenue, while Roche’s North America business is only ~19% of its revenue. According to our model’s estimates, Roche has outperformed J&J in every quarter since 2Q12 (with 2Q14 being the sole exception) (see below). The more comparable growth in global revenue likely speaks to the diminishing declines associated with competitive bidding in the US. Indeed, pooled J&J US and Roche North America sales were down only 3% relative to 3Q13, while sequential pooled revenue grew 5%, carried by J&J’s 10% sequential gain in the US in 3Q14. Notably, this is the second consecutive quarter in which pooled US revenues have grown sequentially; you have to go back to 3Q11/4Q11 for the last time we witnessed such sequential growth.

• We will add the remaining members of the Big Four BGM companies (Abbott and Bayer) to our full analysis when each company reports, on October 22 and October 30, respectively. Read our full J&J 3Q14 report for additional commentary on J&J’s BGM and Invokana financials and pipeline updates.

Table 3: 3Q14 Diabetes Care Revenue Comparison for J&J and Roche

Currency conversion for Roche is based on the average exchange rate on oanda.com (e.g., 1.0948 USD per CHF for July 1 – September 30). Different results are possible with different currency conversion. Roche does not report revenues for an international category, and the international value we report includes the company’s EMEA and RoW categories; as such, operational growth is not available. We also note that Roche’s US value is slightly inflated, as it includes revenue from Canada (“North America” sales). Reported growth for Roche is calculated based on CHF

Table 4: Comparison of J&J and Roche Worldwide Quarterly Performance (YOY)

Device Pipeline Highlights

6. The Accu-Chek Connect system (standalone meter + smartphone app + web portal) was launched in South Africa, Italy, and Germany in September. The meter wirelessly sends results via Bluetooth to a smartphone app and subsequently to a web-based portal. The Connect has similar bolus advisor software to the Accu-Chek Aviva and Performa meters. Management highlighted “discrete and easy handling” and an “intuitive display” – we look forward to testing the system for ourselves. The meter is available in local pharmacies with pricing and reimbursement “comparable" to other Accu-Chek systems.

• Management revealed that the Connect system is slated for a 2015 US launch – however, the company did not provide a timeline for an FDA 510(k) submission. We have seen the length of FDA reviews vary from four months (iHealth Smart-Gluco Monitoring System) to 15 months (Philosys Gmate Smart) for similar smartphone/cloud-connected BGM, meaning a submission in the near-term is likely necessary to ensure a 2015 launch.
• The Accu-Chek Connect builds on a trend of smartphone/cloud-connected meters – see our Appendix for a list of those we are aware of (we acknowledge there are likely others in development). We believe much of the diabetes device industry is moving in this direction, and it will only be a matter of time before most devices (BGM, CGM, pumps) are cloud/smartphone app connected.

7. With the launch of two other devices earlier this year – the Accu-Chek Aviva Expert (meter with built-in bolus advisor) in the US and the Accu-Chek Insight (next gen insulin pump and BGM remote) – Roche seems to be getting new products to market at a nice cadence. Notably, the Expert is the only commercialized standalone blood glucose meter with a built-in insulin calculator in the US (launched during 2Q14). As a remind, 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. We hope to hear more on the topic of meter built-in bolus calculators at the November 13 FDA Public Meeting on Bolus Calculators and Device Interoperability.

• Though the Expert was not mentioned in this morning’s call, it was valuable to see the device highlighted in a product theater at AADE 2014. Technology expert Dr. Bruce Bode (Atlanta Diabetes Associates, Atlanta, GA) emphasized that the Expert fills an unmet need for: (i) patients starting bolus insulin (i.e., new onset type 1 diabetes patients); (ii) patients failing basal insulin therapy and who are not at goal on MDI; and (iii) patients considering pump therapy (to verify that they can do multiple tests per day and calculate carbohydrate doses).
• Management did highlight the January launch of the Accu-Chek Insight (“a great system”) during their prepared remarks, though did not update the US timeline. During the company’s 1Q14 financial update, management anticipated an FDA filing in 2014. As a reminder, in November 2013, Novo Nordisk and Roche announced a partnership to make pre-filled NovoRapid (Novolog) cartridges for the Accu-Chek Insight; these were slated to launch in European countries during 2014 and 2015, though it is not clear if this option is available.

8. Management did not comment on the development of Roche’s novel CGM. We believe that an update could be provided in a few weeks at the 2014 Diabetes Technology Meeting, where Dr. Matthias Axel Schweitzer (Chief Medical Officer, Roche Diagnostics GmbH, Mannheim, Germany) is scheduled to speak during a session on New Technologies in CGM. As a reminder, a poster presented at ADA 2014 compared Roche’s prototype CGM to the Dexcom G4 Platinum, suggesting that there is still potential interest in moving this device forward. The mean seven-day MARD was 10.9% for the G4 Platinum and 8.6% for the Roche prototype.

• Similarly, there were no updates on the Solo MicroPump (Roche’s patch pump). In previous quarters, we had assumed the project was dead (largely because the last public update we had heard about the Solo was in 3Q12 when Roche was planning to begin studies in the EU in 2H13), but recently learned that is not the case. 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. We will be staying very tuned for an update. 

Drug Pipeline Highlights

9. Though it was not mentioned during the call, Roche’s slide deck indicated that the first phase 2 trial for its GLP-1/GIP dual agonist RG7697 (MAR709/RO6811135) is currently recruiting. The trial (ClinicalTrials.gov Identifier: NCT02205528) aims to enroll 105 patients with type 2 diabetes on background metformin who will be randomized to receive daily injections of RG7697, Novo Nordisk’s Victoza (liraglutide), or placebo for 12 weeks. The RG7697 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, and secondary endpoints include change in A1c, body weight, and fasting and postprandial glucose at 12 weeks. The study has an estimated primary completion date of August 2015. As a reminder, Roche obtained RG7697 during its 2010 acquisition of Marcadia and three phase 1 trials of the drug (ClinicalTrials.gov Identifiers: NCT01802853, NCT01676584, and NCT01789788) were completed in 2012 and 2013.

10. Sales of Roche (Genentech)/Novartis’ diabetic macular edema (DME) drug Lucentis (intravitreal ranibizumab) grew 5% year over year to 432 million CHF (~$454 million) in 3Q14. Management said that the approval of a DME indication for Bayer/Regeneron’s Eylea (intravitreal aflibercept) in July by the FDA had not significantly impacted Lucentis sales thus far but that the company does anticipate increased competition in 4Q14. However, the DME indication accounts for only ~15% of Lucentis sales, and management expressed confidence that the more stable market for age-related macular degeneration (which accounts for ~60%) of sales) would blunt much of the impact on growth. Management also commented that there appears to be a trend toward fewer patients converting from Genentech’s Avastin (bevacizumab) to either Lucentis or Eylea – Avastin is not approved to treat DME, but off-label use has been fairly common given the drug’s significantly lower price. As a reminder, Lucentis is marketed by Genentech in the US and by Novartis internationally.

• Management also highlighted the recent news that Lucentis has received Priority Review status from the FDA for a diabetic retinopathy indication. If approved, Lucentis would be the first treatment available to patients with existing diabetic retinopathy; the FDA confirmed action date is February 6, 2015. As a reminder, the phase 3 RISE (ClinicalTrials.gov Identifier: NCT00473382) and RIDE (NCT00473382) clinical trials demonstrated meaningful improvements in vision over 24 months with Lucentis compared to placebo in patients with diabetic retinopathy, and the benefits were maintained through year three of treatment. We believe this expanded indication would be a huge win for patients with retinopathy and would also certainly help counteract any negative impact on Lucentis sales due to increased competition.

Close Concerns Questions

Q: When will the Accu-Chek Insight and Accu-Chek Connect be submitted to the FDA?

Q: Have Novo Nordisk and Roche launched the prefilled NovoRapid cartridges for the Accu-Chek Insight?

Q: Will financials for Abbott and Bayer also reflect a tapering of declines associated with competitive bidding?

Appendix: Smartphone/cloud-connected meter market

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