Abbott 2Q14 – Flash Glucose Monitoring to be named FreeStyle Libre, launch in 2H14; US sales down 27%, international up 3% – July 16, 2014

Abbott reported 2Q14 results this morning in a call led by CEO Miles White. Below, we enclose the top financial and R&D highlights from the call.

Financial Highlights

1. Worldwide Diabetes Care revenue totaled $294 million in 2Q14, down 10% as reported and operationally year-over-year (YOY).

2. US Diabetes Care sales totaled $98 million in 2Q14, a 27% YOY decline and a 1% sequential rise. This marked the sixth consecutive quarter with negative sales growth and now two straight quarters of US sales under $100 million (you have to go back a decade in our financial model for Abbott, to see quarterly revenues under $100 million).

3. Internationally, Diabetes Care revenue totaled $196 million, up a steady 3% as reported and 2% operationally.

4. Notably, management commented that the US business still has a healthy gross margin, remains profitable, and is cash generating; moving forward, the business will be run for cash. The EU was characterized as a growth driver for newer products that “frankly really matter and make a significant difference,” such as the FreeStyle Libre.

5. Combined 2Q14 revenue for J&J (reported yesterday) and Abbott totaled $852 million, down 7% YOY on a reported basis from the companies’ pooled revenue in 2Q13 ($915 million). Pooled US revenue for J&J and Abbott totaled $320 million in 2Q14, down 23% from 2Q13 though sequentially pooled revenue rose 11%. At this point, competitive bidding has annualized, so it was surprising to continue to see such sharp declines. This reiterated to us that the marketplace challenges in the US have not abated; that said, we imagine Abbott’s business could also have been considerably higher revenues at much lower margins and we heard clearly the company is distinctly disinterested in such a model.

R&D, Pipeline, and Strategic Highlights

6. Abbott announced the name of the first product in the company’s new Flash Glucose Monitoring category – FreeStyle Libre – this means “the state of being free”, which is pretty vivid and makes a very lasting impression.

7. An EU launch is now expected in 2H14, slightly behind previous guidance for “late summer” (which itself was probably a typo in 1Q14 – we think timing has stayed on track). Abbott will host a symposium on the technology at EASD 2014, which will be webcast.  Notably, we learned in Q&A that FreeStyle Libre will be followed by other versions of the product for various segments of the market.

8. Outside of the FreeStyle Libre, management did not provide additional pipeline updates.

9. According to a July 2 SEC filing by Dexcom, Abbott and Dexcom entered an agreement that settled all pending patent infringements, which Abbott had brought on against Dexcom.  

10. Highly respected Robert Ford is now head of Abbott Diabetes Care following a long partnership as the #2 at the company after Heather Mason.

Financial Highlights

1. Worldwide Diabetes Care revenue totaled $294 million in 2Q14, down 10% as reported and operationally year-over-year (YOY). This was in line with management’s guidance from 1Q14, when the company remarked that it expected “low double-digit decline” operationally in the second half of the year. This marks two straight quarters where worldwide quarterly revenue has fallen below $300 million – prior to this year, the last single quarter of sales under $300 million came in 2010, and last time we saw two straight quarters of sub-$300 million was in 2006-2007. Because of the low base in 1Q14, sales grew 4% sequentially. Looking forward, management tempered its guidance slightly, guiding for mid to high single digit operational decline in 3Q14.

2. US Diabetes Care sales totaled $98 million in 2Q14, a 27% YOY decline and a 1% sequential rise. This marked the sixth consecutive quarter with negative sales growth and now two straight quarters of US sales under $100 million – our financial model for Abbott, which goes back to 2003, hasn’t seen quarterly sales under $100 million in over a decade. The challenging growth this quarter was also against a relatively easy comparison, as revenue dropped 6% in 2Q13. Sequentially, sales grew 1%, but given the extremely low base in 1Q14 (US Diabetes Care in 1Q14 was the lowest total revenue since before 2004), we were a bit surprised that sequential growth was not stronger. Notably, sequential growth has been consistently positive in 2Q since 2009. This underscores just how difficult the US BGM environment is right now. All this said, we did get some clues about the business from management’s remarks and big picture, between the lines, we believe management was effectively noting that it will not reduce margins precipitously simply for greater revenue.

• Touching on the low revenue, management commented that US sales continue to be impacted by carryover from competitive bidding, which was implemented on July 1, 2013. Given management’s comments during Q&A on the continued pressures in the US, it seems as though Abbott does not feel that the pressures are abating. In contrast, J&J’s 2Q14 update yesterday was perhaps ever slightly more optimistic, commenting that it was seeing “improving performance” and would be “lapping” competitive bidding soon, now that the program annualized (it began in July 2013). The numbers are negative at both companies and we would guess there is a larger focus on keeping margins higher at Abbott.

3. Looking internationally, Diabetes Care revenue totaled $196 million, up a steady 3% as reported and 2% operationally. The comparison was moderately challenging (in this BGM environment!), with revenue in 2Q13 growing 2% as reported and 4% operationally. Sequentially, international revenue increased 5%. Unsurprisingly, management commented that it expects to focus on driving growth internationally, and we assume this will focus on the 2H14 launch of FreeStyle Libre. Abbott did not provide as much detail as it has in the past few quarters on its international market – based on this quarter’s sales, 66% of Abbott’s Diabetes Care business is international, up from 59% in 2Q13 and 51% in 2005. This is similar to J&J’s track, where in 2003, international sales represented 42% of sales and that has increased to 60%-62% in 1H14.

4. During Q&A, we garnered additional detail on Abbott’s Diabetes Care strategy, which will include a transition of the core business. Management commented that the US business still has a healthy gross margin, remains profitable, and is cash generating – moving forward, the business will be run for cash. As expected, the company also pointed to competitive bidding pressures, commenting that these pressures were put on the older legacy of strategy market channel products – overall, this painted a rather stagnant view of the US market, which does not sound like it will include much innovation near-term. The EU, on the other hand, was characterized as a growth driver for newer products that “frankly really matter and make a significant difference,” such as the FreeStyle Libre. When the US eventually has access to this technology, management commented the product will become part of the core base business, and it will eventually move further toward Flash Glucose Monitoring products that offering a “different proposition” to the patient.  We’re glad to hear that Abbott plans to make the Flash Glucose Monitoring system a key part of its global Diabetes Care strategy, as its previous US exit from CGM was widely disappointing for patients (although this was characterized as temporary, we believe the sensor business is what Abbott Diabetes Care will focus on).

• Abbott is not the first of the Big Four blood glucose monitoring companies (the others including J&J, Bayer, and Roche) to adapt its Diabetes Care strategy – 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.

5. Combined revenue for J&J (who reported July 15) and Abbott totaled $852 million in 2Q14, down 7% YOY on a reported basis from the companies’ pooled revenue in 2Q13 ($915 million). Sequentially, revenue increased an encouraging 7% from 1Q14, when revenue for J&J and Abbott totaled $795 million. J&J outperformed Abbott globally (-5% vs. -10%), unsurprising given Abbott’s steep 27% decline in the US in 2Q14. Although J&J had a higher total revenue in 2Q14, Abbott and J&J saw comparably modest growth in 2Q14, with sales growing 2.5% and 1.8%, respectively. We will add Roche and Bayer to our full analysis when each company reports, on July 24 and July 30, respectively. Read our full J&J 2Q14 report for additional commentary on J&J’s BGM and Invokana financials and pipeline updates.

• Pooled J&J and Abbott US revenue totaled $320 million in 2Q14, down 23% from 2Q13. Sequentially, pooled revenue grew 11%, mostly carried by J&J’s 16% sequential gain in the US in 2Q14. Both J&J and Abbott spoke to pricing pressures and competitive bidding in their respective calls. We were somewhat surprised to see the continued drop in sales, given that competitive bidding has annualized at this point – this indicates that the challenges have not bottomed out at this point. As we’ve noted in the past, Abbott has taken the approach to innovate its way out of the competitive bidding debacle with FreeStyle Libre. Meanwhile, J&J has focused on pushing Invokana with LifeScan/Animas sales reps (though the VerioSync is still an encouraging innovation).

R&D and Pipeline Updates

6. Abbott announced the name of the first product in the company’s new Flash Glucose Monitoring category – FreeStyle Libre. The name is brilliant marketing – meaning the “state of being free” – and fits perfectly with some of the product’s other marketing (e.g., “The future will be bloodless”).

7. The launch of FreeStyle Libre is expected in “the second half of this year,” a technical step back from the 1Q14 call’s guidance for “late summer” although we felt that guidance had been a bit misplaced (Abbott Diabetes Care management had never called for that timeline and it was given once by Abbott’s CEO, who was probably just rounding). To be clear, this timing is still in line with the original 2H14 timeline. Management called the device a “significant growth driver” that will be “very well received” and “very innovative” for the EU – while the growth has yet to be established at launch and after, we also believe that it is quite innovative and should prompt growth. While management did not provide any concrete guidance for bringing the Libre to the US, the company did remark during Q&A that the product “will come to the US and will be a global product.” We imagine the delay relates to regulatory and pricing issues.

• In Q&A, management commented that the FreeStyle Libre will be followed by other versions of the product for various segments of the market. We assume the initial focus with FreeStyle Libre will be on type 2 diabetes (see the study below), though we certainly expect demand by some type 1 patients (those who do not like BGM or CGM in particular) and we expect future iterations will be targeted at type 1 patients. In the version of FreeStyle Libre we have seen, we believe that the device could be very attractive for patients with type 2 (and type 1 not on CGM) diabetes who are looking for a low-hassle and discrete option for obtaining more complete glucose information. Bigger picture, we could see Flash Glucose Monitoring being popular among all patients needing help with identifying glucose patterns and medication titration; we do think many type 1s rely on CGM alarms and would not want to change to FreeStyle Libre – we can, scarily, think of some type A type 1s who would want both (CGM for alarms, Flash Libre for the rest of monitoring). .
• Abbott will host a symposium “Ambulatory Glucose Profile (AGP) and New Sensor Technology” at EASD 2014, featuring the new FreeStyle Libre – notably, it will be webcast for those not attending (you can sign up to watch here – this is unprecedented by our memory and we like the idea of many people being able to access early information). Dr. Irl Hirsch (University of Washington, Seattle, WA) will present on the clinical value of sensor-based glucose monitoring, Dr. Ramzi Ajjan (University of Leeds, Leeds, UK) will present on clinical case studies of type 1 and type 2 diabetes from the SIGN study (we assume these were the studies of FreeStyle Libre that were mentioned at ATTD; see below), Dr. Stefano Genovese (IRCCS MultiMedica, Sesto San Giovanni, Italy) on the clinical use of Flash Glucose Monitoring, and Mr. Jared Watkin (Divisional Vice President, R&D, Abbott Diabetes Care, San Francisco, CA) with a Flash Glucose Monitoring update. The latter has provided the biggest news at Abbott’s most recent symposiums (ATTD 2014, IDF 2013, EASD 2013), and we expect this iteration will be no exception.  
• Although not mentioned during the call, a trial posted on ClinicalTrials.gov (Identifier: NCT02082184) is evaluating the FreeStyle Libre in patients with type 2 diabetes. The study, An Evaluation of a Novel Glucose Sensing Technology in Type 2 Diabetes (REPLACE – aptly titled! The marketing team doesn’t miss a freaking beat) is a randomized, parallel assignment study evaluating the impact of the FreeStyle Libre on A1c vs. self-monitoring blood glucose (with an Abbott meter) in patients with type 2 diabetes using insulin. The primary endpoint of the study is A1c at six months, and the estimated enrollment is 210, with a primary completion date slated for November 2014 – we would expect to see results at ATTD 2015. The trial is currently recruiting patients in 26 locations in the UK, Germany, and France – regrettably (and predictably) this study is restricted to the EU.
• As a reminder, Abbott’s Flash Glucose Monitoring concept was first introduced at EASD 2013. The idea is to overcome some of the limitations of both BGM (pain, inconsistent and hard to interpret data) and CGM (alarm fatigue, which has come down on its own over time, and cost) – the factory calibrated, 14-day subcutaneous sensor is expected to have an insulin dosing claim, and for the most part, patients will not need to use any test strips – if it works as advertised, and is approved and reimbursed, it could the transform glucose monitoring in our view. The system’s sensor patch is the size of a two-euro coin, water resistant, readable through clothing, and take less than one second to transmit data from the sensor patch to the touchscreen reader device. The most recent updates we heard were at ATTD 2014, where Abbott’s Mr. Jared Watkin updated attendees on the expected 2014 studies: an accuracy trial to support CE Mark approval and two European trials to demonstrate improved glycemic control (one in type 1 and the other in type 2). Also at ATTD 2014, Mr. Watkin provided data from a six-lot factory calibration study with six patients with diabetes, each of whom wore three sensors for five days. The overall MARD (vs. FreeStyle Precision fingersticks) using a lot-specific pre-determined (prospective) factory calibration was a solid 11%.

8. Outside of commentary on FreeStyle Libre, management did not provide additional pipeline updates, including Abbott’s FreeStyle InsuLinx, FreeStyle Precision Neo, and FreeStyle Precision Pro. During the company’s prepared remarks, management did note that it had launched its new Architect Clinical Chemistry Hemoglobin A1c test in April, which we learned had received 510(k) clearance during Abbott’s 1Q14 financial update. The Architect A1c test also obtained a CE Mark in May and is available in parts of Europe, Asia, Latin America, and Africa.

9. According to a July 2 SEC filing by Dexcom, Abbott and Dexcom entered an agreement that settled all pending patent infringements, which Abbott had brought on against Dexcom. Big picture, Dexcom and Abbott agreed not to sue the other over continuous glucose monitoring infringements and not to challenge the patent or patent applications from the other company until March 31, 2021. Dexcom received limited licenses from Abbott for the patents that Abbott accused Dexcom of infringing; reciprocally, Dexcom granted limited licenses of certain patients to Abbott for those filed before January 1, 2005. There is no additional information at this time – we wonder if the suit has to do with the technology or approach in Abbott’s Flash Glucose Monitoring. As we understand it, the settlement is quite agreeable for both parties and will allow both to focus on expanding sensor technology. This was great to see for patients, as the outcome of many patent battles is usually wasted dollars, less competition, and ultimately, less innovation for patients.

10. Abbott Diabetes Care has a new head, Robert Ford. Ford is very well respected throughout the field and has significant experience in bringing new products to market. He takes the place of Heather Mason who has moved on to head up nutritionals.

Questions and Answers

Q: Since the diabetes business has struggled due to the impact of competitive bidding, could you talk about your strategy for that? Besides working on coming up with a novel product for Europe later this year, what is the plan for the US business going forward? Is it to largely run that business as a bigger business and try to just maximize profitability?

A: For a transition period, that's probably accurate. The business has done a great job of managing its costs and expenses. We still have a very healthy gross margin, and so it's sort of a tale of two businesses, particularly in the US. Because it remains profitable and cash generating, you've got this older legacy circumstance of strategy market channel products that clearly is under pressure from competitive bidding and what CMS has done.

And then you have new, innovative products that really matter and will make a significant difference for patients, like Libre. Libre is coming to Europe first, and we believe it will be a significant growth driver and will eventually be a global product. So this a transition of the core base business as we grow the more innovative future product and future forms of that products – while Libre is launching as a single product, we actually have a product line coming up. That will continue to drive the business and have a very different proposition for the patient.

Q: What will the family of products for Libre look like beyond the initial Flash version? What sort of timeframe and regulatory requirements do you anticipate for those products?

A: It’s a little premature for us to forecast that. Also, I would only say that it’s not a one-off product; there will be other versions of it over time. Our first priority is to launch this first one; I think it will be very well-received and innovative. We will then follow that with other versions for various segments in the markets.

Appendix Diabetes Device Pipeline

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