Memorandum

BD 2Q17 (F3Q17) – Global Diabetes Care sales up 3% YOY; MiniMed Pro-set scheduled to resume launch in FY18; No update on type 2 patch pump or smart insulin pen needles – August 3, 2017

Executive Highlights

  • Global Diabetes Care revenue totaled $263 million in F3Q17, rising 2% as reported and 3% operationally year-over-year (YOY). This marks an incredible 32 consecutive quarters (eight full years) of operational growth – the sturdiness of this business sure is impressive! The US performance barely bested that of the international business, rising 4% YOY vs. 1% operational YOY growth abroad. Management cited austerity measures in the UK and resulting payer issues as responsible for a weak international performance, though this was slightly offset by strength in emerging markets. The BD/Medtronic MiniMed Pro infusion set is now scheduled to resume launch in FY18 (October 2017-September 2018). An ongoing clinical trial to optimize user training materials provided in the product packaging is “going exactly as planned.
  • Management did not provide updates on the disposable type 2 patch pump or the smart connected pen attachment introduced at the Analyst Day in November. Both are scheduled for 2H18 launches as of F2Q17 and JPM respectively.

This morning, BD CEO Mr. Vince Forlenza delivered the company’s F3Q17 financial update. See our top financial and pipeline highlights from the call below.

Financial Highlights

1. Global Diabetes Care revenue totaled $263 million in F3Q17, rising 2% as reported and 3% operationally year-over-year (YOY). This performance came on a very difficult YOY comparison to 7% operational growth one year ago, and now marks an incredible 32 consecutive quarters of operational growth.

2. US Diabetes Care sales totaled $132 million in F3Q17, rising 4% YOY against a difficult comparison to F3Q16, when sales climbed 7% YOY. Sequentially, US revenue rose 7% from a slightly weaker F2Q17.

3. International Diabetes Care sales totaled $131 million in F3Q17, falling 1% as reported and growing 1% operationally YOY against a comparison to modest 6% operational growth in F3Q16. Sequentially, sales improved 10% relative to F2Q17, demonstrating a strong rebound to a challenging performance a quarter earlier

Pipeline Highlights

4. Medical Segment President Mr. Thomas Polen mentioned in Q&A that the MiniMed Pro infusion set with FlowSmart technology is now slated for a FY18 launch (October 2017-September 2018). In the meantime, BD is in the process of running a clinical trial to ensure that the training provided in the set’s packaging is optimized for user experience. This is a very wide window and we look forward to greater clarity from BD and Medtronic on this.

5. There was no mention of the disposable type 2 patch pump, slated for a 2H18 launch as of F2Q17. We had hoped to receive an update on the progress of a clinical trial for the pump, originally scheduled to begin this summer. There was also no comment on the smart pen needle project, which was also expected to launch in 2H18, per JPM. Competition for both devices is heating up.

6. BD did not provide updates on an infusion set user preference and claims study and a lipohypertrophy study (both completed, but no results posted).

Financial Highlights

1. Global Diabetes Care Sales Rise 3% YOY to $263 Million; 32 Consecutive Quarters of Operational Growth

Global Diabetes Care sales grew 2% as reported and 3% operationally YOY to $263 million on a difficult comparison (up 7% operationally a year ago). This now marks an incredible 32 consecutive quarters (eight full years!) of operational growth. F2Q17 sales were hurt by earlier-than-expected customer orders in F1Q17 (just barely breaking into positive YOY growth), but as Mr. Forlenza forecasted in F2Q17, growth is back on track. The press release notes that the solid performance in Diabetes Care was a driver of growth in the Medical segment. Sales climbed a strong 8% sequentially. 

  • As a reminder, in its JPM 2017 presentation, BD anticipated that it will continue to grow faster than the expected market growth rate of 4%-5%. BD’s Analyst Day in November forecasted “mid-single digit growth” per year for the next five years, implying sales would go from $1.0 billion now to roughly ~$1.15 billion three years from now (the end of FY19). Year-to-date (nine months), revenue has climbed almost 3%, meaning growth needs to accelerate in Q4 (by our math) to meet this year’s guidance.

Figure 1: Quarterly Global, US, and International Sales (F1Q12-F3Q17)

2. US Diabetes Care Revenue up 4% YOY to $132 Million

US Diabetes Care quarterly revenue totaled $132 million, climbing 4% YOY on a difficult comparison to F3Q16’s 7% growth. Sequentially, sales were up 7% from F2Q16, when the US business saw its first YOY decline in a near-six-year long stretch. We assume stateside growth was driven by pen needles and syringes per usual, but no official comments were provided. These products have served and will continue to serve the company well – injectables aren’t going anywhere soon – but we wonder how BD’s business model might need to evolve, particularly in a future value-based climate and if pumps see significant expansion. As announced in November, the type 2 patch pump, smart pen needle technology, and greater push into digital (~500 programmers in the Medical segment alone) should hopefully accelerate the business’ growth?

3. International Sales of $131 million rise 1% YOY

Relative to an international revenue of $132 million in F3Q16, sales remained fairly flat this quarter, falling 1% as reported and growing 1% operationally YOY to $131 million. This performance comes against an easy comparison of 6% YOY operational growth in F3Q16. CFO Mr. Christopher Reidy mentioned that Diabetes Care revenue reflects strength in emerging markets, partially offset by softness in Europe. He specifically pointed to pressure in the UK due to the impacts of austerity measures and government payers, which he expects to continue. Sequentially, sales grew 10% from a tough F2Q17, the first positive sequential growth following three straight quarter-to-quarter declines. This quarter is the sixth consecutive of low-to-mid single digit growth.

Pipeline Highlights

4. MiniMed Pro-Set Launch to Resume in FY18 (OCt 2017-Sep 2018); Undergoing Clinical Trial to Optimize User Training

During Q&A, Medical Segment President Mr. Thomas Polen shared that a launch of the Medtronic/BD MiniMed Pro-set with FlowSmart will resume in FY18 (a broad window of October 2017-September 2018). In the meantime, a clinical trial to optimize the training materials provided in the set’s packaging is underway and “going exactly as planned.” Medtronic initiated a limited launch in September 2016, but plans for a full launch in January-March 2017 (guidance from BD’s November Analyst Meeting) were foiled due to a higher-than-anticipated rate of complaints associated with kinked cannulas and elevated blood glucose levels (see our coverage of the notification). Adam used the set early in the limited launch (see his test drive here) and had a mostly-positive experience, though did notice some issues with cannula kinking/bending and some needed improvements to the instructions. This saga underlines the importance of performing in-depth of human factors and training studies before launch, and then proceeding with a limited launch to gather real-world feedback. 

  • We wonder if the issues with the MiniMed Pro infusion set launch have impacted BD’s other infusion set projects. JDRF awarded BD a two-year funding commitment in November to develop an extended wear infusion set. BD had planned to use the capital to investigate the mechanical, material, and biological issues associated with extending wear duration to seven days or beyond (currently, the set is limited to three days). Infusion sets are truly the Achilles heel of pump therapy, and while pump occlusion is one reason, there are many other areas for improvement – extended wear, better absorption, less scar tissue, less pain, CGM integration, etc. The Pro-set is a great learning experience and will hopefully allow BD to move faster with subsequent innovations. 
  • Management did not provide any update regarding plans to file the MiniMed Pro infusion set in China. These plans were first mentioned in F3Q15; however, the regulatory process in China is known to be characteristically long and lacking in transparency. Additionally, we imagine the US launch has BD/Medtronic’s full attention.

5. No Updates on Disposable T2 Patch Pump or Smart Pen Needle Technology; Previously Scheduled for 2H18 Launches

There was no mention of the disposable type 2 patch pump, nor the smart pen needle technology, both slated for 2H18 launches (pump update as of F2Q17; pen needle update as of JPM). We had hoped to receive an update on the progress of a clinical trial for the pump – which Mr. Polen introduced at JPM, suggesting it would begin this summer – but it was not mentioned, and we cannot find anything on Clinicaltrials.gov. 

  • BD’s disposable type 2 patch pump may face tough competition from Insulet/Lilly’s U500 and U200 OmniPods, scheduled to launch in 2019 and 2020, respectively. Still, if BD can adhere to the projected 2H18 launch, that should put the company ahead of the U500 by about six months. The Phase 3 Insulet/Lilly U500 clinical study has finished recruiting participants and lists an estimated enrollment of 416 participants. “Good reception” in initial payer discussions and “very good progress on that price development initiative” will benefit BD as it looks to commercialize its own device. We also learned at AACE in May that J&J’s OneTouch Via, a bolus-only patch insulin delivery device, is expected to roll out in a focused US launch in the coming months, tacking onto the already crowded competitive landscape (though the bolus-only nature puts the devices in separate categories). CeQur’s PAQ may also prove to be competition, although news on this front has been relatively quiet: as far as we know, a CE mark has been achieved, but the device has not yet been filed with the FDA – for the latest Cequr data, see our ADA coverage. We’ll be listening for an update on Valeritas’ V-Go device on August 11th.
    • On a related note, Insulet recently announced its international OmniPod distribution agreement with Ypsomed will expire on June 30, 2018. This will give Insulet more control, better margins, and improved sales. As Insulet will take full control of the international territories starting next summer, Ypsomed will simultaneously develop its own patch pump in the “mid-term.” Insulet spoke very positively about this move on today’s call, though the news may give BD an international opportunity as the transition ramps. An Ypsomed product – if it actually launches – would add another product to the EU marketplace (assuming both are leveraged for type 2). We assume this pump will be a global launch, but aren’t sure of the cadence. .
    • Management was confident at JPM that the clinical trial for the type 2 pump will demonstrate higher adherence to insulin therapy than MDI. We can definitely see this being the case if BD comes through on design and user experience.
  • BD’s smart pen attachment, first introduced during its November Analyst Day, fits over the end of insulin or GLP-1 disposable pens and is capable of wireless dose data transmission to a paired smartphone app. While we see this technology substantially improving insulin therapy and potentially integrating with CGM and machine learning, timing, usability, and insight-generation will be important, given the crowded competitive landscape.
    • While BD hasn’t alluded to progress toward or specifics on the smart pen needle technology, the smart pen and insulin dose titration competitive landscapes have advanced meaningfully since F2Q17: We learned from ADA hallway chatter that Novo Nordisk is quietly piloting its connected Echo pen, a device which allows providers to read the insulin dose history via NFC, at 10 clinics in Sweden. Bigfoot also recently acquired Timesulin and partnered with Abbott, giving it all of the requisite pieces to build its auto-titration system for MDI (timing to be discussed with FDA). Companion Medical’s Bluetooth-enabled InPen is also set to launch soon, with FDA clearance in August 2016 and a US launch slated for 2017 – the company is just waiting on partners at this point. Meanwhile, Common Sensing showed very positive data in an important poster at ADA. We can only assume Onduo has work in this field going on behind the scenes as well…

6. No Updates Regarding Completed Clinical Trials on MiniMed Pro User Preference Set and Liphypertrophy

BD did not provide updates on an infusion set user preference and claims study nor a lipohypertrophy study, both of which are marked as completed on CT.gov, but with no results posted. The user preference study (n=75) was last verified in April and investigated whether insulin pump users preferred the BD MiniMed Pro set over their current set with primary outcomes of insertion pain and wear comfort. We expect positive outcomes from this randomized, crossover study, given our own experience inserting the set. We’d of course love to see a study demonstrating superior glycemic control via the dual-ported cannula, although we recognize this is near impossible to measure with an A1c endpoint. Perhaps CGM data could be utilized to show a benefit here, especially on days one and three of wear. The lipohypertrophy study (n=50) was last verified in January, evaluating the effect of optimized injection technique on glycemic control, consumption of insulin, hypoglycemic rates, healthcare costs, and the use of health services in patients with diabetes who have clinical lipohypertrophy. Lipohypertrophy doesn’t receive the attention it deserves, and we’ll look forward to reading the results once they are provided.

Questions and Answers

Q: Do you have a read on whether you see any bounce back in the fourth quarter?

Mr. Christopher Reidy (CFO): We see Diabetes Care rebounding, primarily driven by the US, as we do think that the UK pressure will continue.

Q: What is the status of the diabetes infusion set rollout?

Mr. Thomas Polen (President, Medical segment): On the infusion set, as I think we had shared in the past, we've gotten some complaints during the initial launch. We were in the process of running a clinical trial to confirm that some of the new training tools that we've included in the packaging optimized the patient's ability to start using this set. That clinical trial is going exactly as planned and our guidance assumes we resume the launch in FY 2018.

 

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