Memorandum

Bayer 1Q15 – Future of Diabetes Care business still uncertain; Contour sales see growth against easy comparison; US BGM market “stabilizing” – April 30, 2015

Executive Highlights

  • The future of Bayer’s Diabetes Care business is still uncertain. There was no direct announcement of divesting the segment though management’s vague commentary did not convey certainty on the future either – that said, in diabetes today, that’s fairly unusual.
  • We estimate that “Contour” BGM revenue reached ~€179 million (~$202 million) in 1Q15, growing 23% as reported against an easy comparison to 1Q14 when sales declined ~14% as reported (12% operationally).  Comparisons for competitors have been even easier.
  • The Big Four BGM companies (J&J, Abbott, Roche, and Bayer) brought in pooled worldwide Diabetes Care revenue of ~$1.6 billion in 1Q15, a 6-9% decline YOY after falling ~5-7% YOY in 1Q14. The strengthening US dollar is a major component driving declines.
  • On the drug front, sales for Eylea (aflibercept) reached €253 million (~$285 million) in 1Q15, growing 61% YOY as reported and 55% operationally from a low base. Sequentially, sales grew 16%.

This morning, Bayer CEO Mr. Marjin Dekkers led the company’s 1Q15 financial update. The highlight of the call was veiled commentary on the future of the Diabetes Care business – the tone has not changed much from 4Q14. There was no direct suggestion of divesting the devices segment though commentary did not convey certainty on the future either. Below, we bring you the top Device and Drug highlights from the call and a detailed financial look at combined revenues from the Big Four (all of whom have now reported).

Device Highlights

1. The future of Bayer’s Diabetes Care business is still uncertain. There was no direct announcement of divesting the segment though management commentary did not instill confidence: “I don't really feel like speculating about additional acquisition or divestiture activity for this year at this point. But let's just say that what we have done and what we have underway we're trying to do as well as possible.”

2. Revenue from Bayer’s “Contour product family” totaled €209 million (~$236 million) in 1Q15, growing 23% as reported and 15% operationally year-over-year (YOY). Bayer altered its sales reporting protocol in 1Q15 to include sales of all of the following systems: Contour, Contour TS, Contour Next and Contour Plus (as opposed to the traditional approach, which only reported Contour). This revenue restating makes YOY comparisons difficult; more on this below.

3. We estimate that “Contour” BGM revenue reached ~€179 million (~$202 million) in 1Q15, growing ~20%-25% as reported YOY. We do not think the business is turning the corner considering that the performance comes on a very easy comparison to 1Q14 when sales declined an unprecedented ~14% as reported (12% operationally).

4. By our estimates, global Diabetes Care (Contour, Breeze, Elite) revenue grew ~13-17% YOY. This was driven by an easy comparison to 1Q14 when sales declined ~6%. The call’s commentary did not bring further optimism for the foreseeable future.

5. Bayer management remarked on the “stabilization of the market environment in the US.” Commentary on the challenging stateside market has been a near certainty at Big Four quarterly updates over the past 18 months, and it was notable to hear the tune at least somewhat changing.

6. Management did not share any pipeline updates. We heard no commentary on the company’s recently launched Next Link 2.4 BGM, next-gen Bluetooth-connected BGM, or novel CGM.

Big Four Financial Comparison

7. Combined 1Q15 global revenue for the Big Four (Abbott, Roche, J&J, Bayer) totaled ~$1.6 billion, falling ~6-9% YOY against an easy comparison to pooled revenues in 1Q14 (down between ~5-7% YOY). However, we believe all of the Big Four saw global operational growth in 1Q15.

Drug Highlights

8. Sales for Eylea (aflibercept) reached €253 million (~$285 million) in 1Q15, growing 61% YOY as reported and 55% operationally from a low base. Sequentially, sales grew 16%.

9. Management noted in Q&A that Bayer is preparing a Phase 3 study for its mineralocorticoid receptor (MR) antagonist finerenone in diabetic nephropathy following positive results from the Phase 2b ARTS-DN study presented in March at the World Congress of Nephrology.

10. Sales of Bayer’s alpha-glucosidase inhibitor Glucobay totaled €130 million (~$147 million) in 1Q15, up 28% as reported and 8% operationally YOY. Sequentially, sales were down 2%.

Device Highlights

1. To open our 1Q15 highlights, we raise notable commentary from Q&A on the future of Bayer’s Diabetes Care business – said CEO Mr. Marjin Dekkers: “I don't really feel like speculating about additional acquisition or divestiture activity for this year at this point. But let's just say that what we have done and what we have underway we're trying to do as well as possible.” There was no direct announcement of an impending divestment in today’s call and, broadly speaking, management was cautious in discussing the future of the franchise at Bayer. Overall, we’d term management’s comments as  conservative silence. For now, much of this is speculation and we look for more solid information will come in the near term.

  • As background, we heard at 4Q14 that the future of Bayer’s Diabetes Care devices business was under review and that the company was exploring its options – “Stay tuned on that. It’s hard to give very clear answers on that because it’s a situation in flux.” At the time, management stressed that the Diabetes Care business is a cash-flow generator for Bayer, echoing commentary from 2Q14 when management emphasized that the divestment of the Diabetes Care business was unlikely. We did not hear the same confidence in the business in today’s call. Given the sales declines of the past year, this is perhaps unsurprising.
  • As we understand it, this recent effort was not Bayer’s first attempt to sell its devices division. In 2012, it was similarly reported that the company was attempting to sell its business. Again, reports late in 2014 also suggested that Bayer was exploring the sale of this unit. A deal has been rumored for some time.

2. Revenue from Bayer’s “Contour product family” totaled €209 million (~$236 million) in 1Q15, growing 23% as reported and 15% operationally year-over-year (YOY). Notably, Bayer has traditionally reported revenue for its “Contour” system alone – however, in 1Q15, Bayer changed its sales reporting protocol to include sales of all of the following systems: Contour, Contour TS, Contour Next and Contour Plus.

  • As a consequence of this revenue restating, we do not have historical YOY breakdowns to put this “Contour product family” growth into appropriate context (i.e., 1Q13 to 1Q14 YOY growth for the Contour product family is unknown; we only have YOY growth for “Contour”). That said, we do know from previous updates that the “Contour” business alone has struggled in recent quarters – more on this below. We assume that the “Contour product family” followed this trend as well and assume that the growth numbers for the “product family” come on an easy comparison. We are looking for further details on this front; hopefully more clarity will come in the near term.
  • According to the accompanying slide deck, the “Contour product family” was Bayer’s best-selling Consumer Health segment in 1Q15 (measured as a function of sales – e.g., Contour product family sales totaled more than any other Consumer Health product segment in 1Q15.). We think these sales could have been driven by the January launch of Bayer’s Next Link 2.4 BGM in January, though management did not comment on this front. As a reminder, “Contour” sales alone (excluding the “family of products”) received this best-seller distinction in 1Q14 as well.

3. By our estimates, sales of Bayer’s “Contour” BGM franchise reached ~€179 million (~$202 million) in 1Q15, growing 23% as reported YOY. (Bayer did not report operational growth). This revenue approximation is based on: (i) 1Q14 “Contour” BGM franchise sales of €146 million, which was reported at the 1Q14 financial update; (ii) 1Q14 “Contour product family” sales of €170 million, which was reported in today’s call for the first time; and (iii) 1Q15 “Contour product family” sales of €209 million, which was also reported in today’s call. These figures suggest that the “Contour” franchise alone accounts for ~85% of “Contour product family” sales, resulting in a 1Q15 “Contour” franchise approximation of ~€179 million. See Table 1 for more.

  • We would not read too far into the 23% YOY growth considering that it comes against a very low base – sales declined an unprecedented ~14% YOY as reported in 1Q14 to €146 million, the lowest quarterly revenue total since 1Q10. Indeed, we will have to wait to see if the business is truly recovering. For now, we are curious as to what the rest of 2015 will look like given that sales will continue to be assessed relative to easy comparisons (2Q14: down 16%; 3Q14: down 5%; 4Q14: down 2%).
  • Sequential sales fell 1% to break a string of three consecutive quarters of positive quarter-to-quarter sequential growth. The business has historically tended to tick down in 1Q (negative sequential growth vs. 4Q in each of the past four years), so this pattern is not surprising. Still, we would note that 1Q15’s decline of 1% is the most modest 4Q-1Q drop observed in our sequential financial model for Bayer (which stretches back to 2011).

Table 1: Approximation of “Contour” and “Contour Product Family” Sales – 1Q15 vs. 1Q14

 

“Contour” sales alone

“Contour product family” sales

Proportion of product family sales accounted for by “Contour” alone

1Q14

€146 million

~€170 million**

~85%**

1Q15

€179 million

€209 million

~85%**

** The symbol “~” denotes an approximation based on the other figures in the table, while all other sales numbers were provided by Bayer

Figure 1: Contour Quarterly Sales (1Q11-1Q15)

4. By our estimates, global Diabetes Care (Contour product family + Breeze + Elite) revenue grew ~13-17% YOY in 1Q15 to reach sales of €240-266 million (~$271-300 million). This came on a particularly easy comparison as global revenue declined ~6% in 1Q14 (which included an unprecedented ~40% decline in the US). Notably, this performance was stronger than the company’s guidance at 4Q14 when management anticipated that a weak diabetes care market would drive broader Medical Care shrinkage. We attribute the disparity to the particularly easy US comparison that we think is distorting the financial picture. The call’s commentary did not bring further optimism for the foreseeable future, as the company anticipates continued “weakening” in the diabetes market moving forward.

  • Key Assumptions: Bearing in mind the limited information Bayer provides about its Diabetes Care business, we stress that these numbers are all estimates. Bayer is the only one of the Big Four BGM companies (Abbott, J&J, Roche) that does not report full results for its Diabetes Care business, which makes pooled estimates challenging. As a reminder, we have long estimated that Contour revenue (not the Contour product family) make up ~70% of Bayer’s overall Diabetes Care business.
    • Upper Bound: Considering that Contour revenue makes up ~70% of Bayer’s overall Diabetes Care business, we assume that overall revenue largely follows Contour sales. Bayer management has not remarked on the performance of either the Elite or Breeze franchise in many years, so we emphasize that it is tough to get a read on these businesses. That said, given that management did not highlight the strength of either franchise and that neither is a known driver of Bayer’s growth, we do not think performance would have reached near the levels of Contour (i.e., we are assuming best case scenario of 5% growth). In this hypothetical scenario, global Diabetes Care would grow ~17%.
    • Lower Bound: Considering a hypothetical scenario in which non-Contour revenue declined 7% (consistent with the pooled revenues decline seen for J&J, Roche, and Abbott in 1Q15 – see our Abbott 1Q15 report for more details on combined revenues for these three companies), global Diabetes Care would still grow ~13%.

5. We were interested to hear Bayer management remark on the “stabilization of the [BGM] market environment in the US.” It is tough to read too far into this commentary considering the comparison – US sales declined 40% in 1Q14. (As a reminder, 1Q14 was one of the few calls during which Bayer provided precise global sales numbers.) Management’s tone was certainly less negative on the US business than we’ve heard in the past. Of course, this is not to say that the environment is necessarily easing up – as noted above, management guided for the global diabetes care market to weaken moving forward – but that, perhaps, the internal outlook on the business is beginning to turn the corner. The stance somewhat mirrors what we heard from J&J’s 1Q15 update. Commentary on the “challenging” stateside market has been a near certainty at Big Four quarterly updates over the past 18 months, and it is notable to hear the tune at least somewhat changing.

6. Management did not share any pipeline updates or commentary. We learned at ATTD 2015 that the company’s Next Link 2.4 meter launched in January with Medtronic’s MiniMed 640G system in Australia. The meter is currently available for purchase throughout the EU. The device’s key innovation relative to the first-gen Next Link is the remote bolus feature, a huge convenience win for patients that we think will be well received. In 4Q14, Bayer’s Annual Report (page 59) noted that the company is focused on developing strategic partnerships to expand its market penetration, specifically highlighting the opportunity to collaborate with Medtronic in the US. Though we have not heard much on this front from Bayer, we assume that the partnership with Medtronic has gone well considering the already strong sales of the MiniMed 530G system. As a reminder, the Medtronic 530G and 640G systems are packaged with Bayer’s Contour Next Link and Next Link 2.4 BGMs, respectively. We do not know what kind of royalties Bayer receives on the sales. Longer term fewer strips will be used as factory calibration will emerge at some point.

  • Bayer also shared at ATTD 2015 that the company is working on a next-generation Bluetooth-connected BGM – this was the first we had heard on this front. Representatives provided a rough timeline to commercialization, suggesting a launch is “one to two years away.” We recognize that the challenging market conditions do not lend themselves to innovation and are pleased to see that Bayer is moving ahead on the new product front.
  • We’re still not sure if Bayer continues to work on a novel CGM. It has been over two years since our last update on the product (ATTD 2012).
  • Even in this challenging market, we have been impressed with the commitment to innovation from all of the Big Four. As a reminder, Abbott launched its novel FreeStyle Libre in October 2014 and has seen early sales come in faster than expected. More recently, the company launched its newest BGM, the FreeStyle Precision Neo, in the US. Roche recently received FDA 510(k) clearance for its Accu-Chek Aviva Connect system (standalone meter + smartphone app + web portal) which will launch in the US in 2015. The company also plans to launch its next-gen Accu-Chek Active BGM worldwide by the end of the year. Meanwhile, J&J launched its Animas Vibe insulin pump integrated with Dexcom’s G4 Platinum CGM in the US this January following FDA approval in November 2014.

Table 2: Big Four Near-term Pipeline updates

Company

Device Name

Device Type

Timeline

Abbott

FreeStyle Libre

Flash Glucose Monitoring

October 2014 EU launch

FreeStyle Libre Pro

Professional Flash Glucose Monitoring

April 2015 India launch

Precision Neo

BGM

April 2015 US launch  

Roche

Accu-Chek Connect (standalone meter + smartphone app + web portal)

BGM

 

 

September 2014 launch in SA, Italy, Germany

April 2014 FDA Clearance

Accu-Chek Insight (next-gen pump + BGM system)

 

Pump + BGM System

 

January 2014 EU launch

 

Accu-Chek Aviva Expert (meter + built-in bolus advisor)

 

BGM

 

2Q14 US launch

 

Solo MicroPump

Patch Pump

Still under development

J&J

Calibra Medical’s Finesse (three-day, bolus-only, wearable insulin patch)

Patch-pen

 

 

Launch in ~2016
 

 

Animas Vibe

Pump with Dexcom G4 Platinum integration

Launch in the US

FDA approval in November 2014

Bayer

Next Link 2.4

BGM

January 2015 launch

??

Novel CGM

Last update at ATTD 2012

??

Next-gen Bluetooth-connected BGM

Launch expected in the next “one to two years” per comments at ATTD 2015

 

Big Four Financial Comparison

7. Combined 1Q15 global revenue for the Big Four (Abbott, Roche, J&J, Bayer) totaled ~$1.6 billion, falling ~6-9% YOY against an easy comparison to pooled revenues in 1Q14 (down ~5-7% YOY). Offhand, we were thinking this would be a bit better, though the significant strengthening of the US dollar has driven the decline. Sequentially, global pooled revenues fell a staggering ~13-17% relative to 4Q14 (when sales reached ~$1.8-1.9 billion).

Figure 2: Abbott/J&J/Roche/Bayer Quarterly Global Revenue Comparison (1Q11 – 1Q15) **

**Note: Given the limited information Bayer provides, we have only been able to estimate the company’s Diabetes Care revenue since 4Q12.

  • Pooled declines are the result of international weakness across the Big Four. As noted above, we believe the financials reflect the significant strengthening of the US dollar as opposed to underlying weakness in the business’ fundamentals. J&J, Roche, and Abbott have announced steep YOY reported declines offset by stronger operational performance: for context, J&J sales were down 15% as reported and up 1% operationally YOY; Abbott sales were down 12% as reported and up 1% operationally YOY; and Roche sales were down 10% as reported and up ~5% operationally (we estimate the latter because Roche reports EMEA and RoW separately). As a reminder, Bayer does not break out US or international Diabetes Care sales.
  • We believe all of the Big Four saw global operational growth in 1Q15 – granted, Bayer did not report its operational numbers but we are confident the overall business saw an operational increase considering that “Contour product family” increase 15% operationally (and represents >70% of overall revenue). For context on the others, J&J (up 4% YOY) outperformed Abbott (up 3%) and Roche (up 1% YOY) on an operational basis. It’s possible that the businesses are beginning to turn the corner, though comparisons to 1Q14 have been relatively easy across the board: J&J (down 14%), Abbott (down 10%), and Roche (up 5%). Indeed, one might actually expect greater growth since competitive bidding “anniversaried” over nine months ago. For now, the trend makes us wonder what the rest of the year will look like, especially knowing that revenues will continue to be assessed relative to particularly easy comparisons – a reminder that the full effects of competitive bidding are only going to be known some time down the road.
  • All of the Big Four have roughly maintained their market share from 1Q14. See Table 3 for more.

Table 3: Estimated Market Share Worldwide (by sales) – 1Q15 vs. 1Q14

 

Abbott

J&J

Roche

Bayer

1Q15

~17%

~30-31%

~34-35%

~17-19%

1Q14

~17%

~30%

~35-36%

~17-18%

  • As a reminder, direct comparisons between J&J, Abbott, Roche, and Bayer are difficult because 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. In addition, Roche only reports North America revenue, which bundles US and Canada. Additionally, the values for Bayer Worldwide Diabetes Care stem from our estimations, with assumptions outlined above.

Drug Highlights

8. Sales for Eylea (aflibercept) reached €253 million (~$285 million), growing 61% YOY as reported and 55% operationally from a low base (sales totaled €157 million in 1Q14). Sequentially, 1Q15 sales rose 16% for the second consecutive quarter as revenue continues to trend in a very positive direction. As noted in the 4Q14 call, management characterized Eylea as a strong driver of broader pharmaceutical sales growth; the drug has moved up to #3 on Bayer’s “Best Selling Pharmaceutical Products” list. In terms of the regional split, management attributed growth to strong uptake in Europe and Japan where the drug has been approved for DME. Judging from the commentary, management seems to believe there is upside to Eylea that has yet to be realized.

9. Management noted in Q&A that Bayer is preparing a phase 3 study for its mineralocorticoid receptor (MR) antagonist finerenone in diabetic nephropathy following positive results from the phase 2b ARTS-DN study presented in March at the World Congress of Nephrology. The multicenter, double-blind trial (ClinicalTrials.gov Identifier: NCT01874431) enrolled 821 patients with type 2 diabetes and albuminuria who were randomized to receive one of seven doses of finerenone (ranging from 1.25-20 mg) or placebo once daily for 90 days in addition to standard of care. Results showed dose-dependent reductions in urinary albumin/creatinine ratio (UACR) with finerenone that were statistically significant vs. placebo at the four highest doses (7.5 mg, 10 mg, 15 mg, and 20 mg). The two highest doses (15 mg and 20 mg) led to UACR reductions of 38% and 33%, respectively, from baseline (p<0.0001 for both). All doses of finerenone were well tolerated with no notable safety signals, though there were small increases in serum potassium in the two highest-dose groups compared to placebo. For more on the results, see our detailed coverage of the presentation. As a reminder, Finerenone is also in a phase 2b study as a treatment for chronic heart failure; results from that study will be reported at the 2015 European Society of Cardiology Congress.

  • Diabetic nephropathy is currently an area of great unmet need, and the pipeline of therapies under investigation is fairly crowded. See Table 4 below for an overview of the current competitive landscape.

Table 4: Diabetic Nephropathy Competitive Landscape

Sponsor

Drug Name

Class

Status

Other Remarks

AbbVie

Atrasentan

Endothelin-receptor antagonist

Phase 3

Trial currently recruiting; primary completion expected February 2017 (Identifier: NCT01858532)

J&J

Invokana (canagliflozin)

SGLT-2 inhibitor

Phase 3

Already marketed for type 2 diabetes; CREDENCE diabetic nephropathy trial currently recruiting; primary completion expected February 2019 (Identifier: NCT02065791)

NIH/JDRF/other collaborators

Allopurinol

Xanthine oxidase inhibitor

Phase 3

Marketed for gout; PERL diabetic nephropathy study in type 1 diabetes currently recruiting; primary completion expected December 2018 (Identifier: NCT02017171)

NephroGenex

Pyridorin

Oxidation inhibitor

Phase 3

PIONEER trial currently recruiting; primary completion expected December 2017 (Identifier: NCT02156843)

AZ

Roxadustat

2-OG inhibitor

Phase 3

For anemia in CKD/ESRD

Ardelyx/AZ

Tenapanor (AZD1722)

NHE3 inhibitor

Phase 2

Trial ongoing; primary completion was expected March 2015 (Identifier: NCT01847092)

Bayer

Finerenone

MR (mineralocorticoid receptor) antagonist

Phase 2

Trial completed (Identifier: NCT01874431)

ChemoCentryx

CCX140

CCR2 (chemokine receptor) agonist

Phase 2

Positive topline results reported December 2014; company seeking partner before initiating phase 3

Concert Pharmaceuticals

CTP-499

PDE (phosphodiesterase) inhibitor

Phase 2

Successful end-of-phase 2 meeting in summer 2014; company seeking partner before initiating phase 3

Gilead

GS-4997

ASK-1 inhibitor

Phase 2

Trial currently recruiting; primary completion expected August 2016 (Identifier: NCT02177786)

Kyowa Hakko Kirin

Bardoxolone methyl (RTA 402)

Inhibitor of inflammation

Phase 2

Reata’s phase 3 BEACON trial terminated due to safety concerns; phase 2 trial currently recruiting; primary completion expected December 2017 (Identifier: NCT02316821)

Lilly

LY2392770

TGF-beta monoclonal antibody

Phase 2/discontinued?

Trial completed July 2014 (Identifier: NCT01113801); candidate not listed in Lilly’s pipeline

Lilly

LY3016859

TGF-alpha/epiregulin monoclonal antibody

Phase 2

Trial ongoing; primary completion expected September 2015 (Identifier: NCT01774981)

Pfizer

PF-00489791

PDE5 inhibitor

Phase 2

Trial completed August 2013 (Identifier: NCT01200394)

Pfizer

PF-04634817

CCR2/5 antagonist

Phase 2

Trial completed September 2014; also being investigated for diabetic macular edema (Identifier: NCT01712061)

Vascular Pharma

VPI-2690B

Targets insulin-like growth factor-1 signaling pathway

Phase 2

Trial currently recruiting; primary completion expected August 2017 (Identifier: NCT02251067)

Daiichi Sankyo

CS-3150

Oral MR antagonist

Phase 2

Trial currently recruiting; primary completion expected July 2016 (Identifier: NCT02345057)

Mitsubishi Tanabe Pharma

MT-3995

MR antagonist

Phase 1/2

Multiple studies ongoing

Lilly

Undisclosed small molecule

Undisclosed

Phase 1

 

Lilly

Undisclosed biologic

Undisclosed

Phase 1

 

10. Sales of Bayer’s alpha-glucosidase inhibitor Glucobay totaled €130 million (~$147 million) in 1Q15, up 28% as reported and 8% operationally YOY. Sequential performance for the quarter was down 2% against a fairly tough comparison (30% sequential growth between 3Q14 and 4Q14). These results are consistent with a pattern of alternating sequential growth and decline for the past seven quarters, perhaps due to supplier agreements. At noted in 4Q14, accompanying materials suggested that growth was driven by strong performance in emerging markets, particularly by rising demand in China. The drug remained Bayer’s tenth best-selling pharmaceutical product (measured as a function of sales).

Questions and Answers

Q: Obviously, you get questions on the Diabetes Care business. Any other plans this year to separate or acquire? Any comments in general there will be useful.

A: I don't really feel like speculating about additional acquisition or divestiture activity for this year at this point. But let's just say that what we have done and what we have underway we're trying to do as well as possible.

Q: Are you any closer to finalizing a Phase 3 trial program for finerenone? What is the design and potential timeline for that?

A: We are starting finerenone with two indications: one is diabetic nephropathy and the other is chronic heart failure. On the latter, we are going to report all Phase 2b data later this year at the European Society of Cardiology Congress. On finerenone, we are actually preparing a Phase 3 program in diabetic nephropathy. I hope that answers the question.

-- by Varun Iyengar and Kelly Close