Memorandum

BD 3Q18 (F4Q18) – MiniMed Pro-Set with FlowSmart discontinued; “Swatch” type 2 patch pump US & EU launch now in “late calendar 2019;” Record revenue of $285 million up 2% YOY – November 6, 2018

Executive Highlights

  • CEO Mr. Vince Forlenza announced BD’s decision to discontinue its Medtronic-partnered MiniMed Pro-set with BD FlowSmart technology. In Q&A, President/COO Mr. Tom Polen noted that “the latest product redesign for FlowSmart didn’t deliver the level of differentiation that we were seeking.” We imagine that it would have taken a lot for Medtronic to be eager to share set profits; it’s too bad that this product took so many time and investment funds from major foundations and a lot of wasting patients’ time who took part in the experiment. BD will redirect investments towards other “more attractive opportunities,” including the Swatch type 2 patch pump (we’ve heard about this for awhile and it hasn’t previously been characterized as a substitute – BD has been planning on doing this anyway). We aren’t surprised to see this news, as the set has been meaningfully delayed from the limited launch in September 2016 that resulted in higher-than-expected rates of kinking (Adam included). This was a tough but necessary move, as the set investment costs are sunk and BD can make a bigger difference for patients by focusing on the type 2 patch pump and digital health, rather than competing with Unomedical and having little control over commercialization with exclusive partner Medtronic.

  • BD is “on track” to submit regulatory approvals for the Swatch type 2 patch pump in the US and EU “in the coming months,” aligning with F3Q18 timing expecting submission “later this year.” However, the anticipated initial limited launch is now slated for “late calendar 2019” – on the later side of the previous “late FY19” (by September 2019). Management continues to remain optimistic regarding Swatch, citing positive patient and physician feedback “at or above our expectations.”

  • Global Diabetes Care revenue totaled a record $285 million, up 1% YOY as reported (+2% YOY operationally) on a tough comparison to 6% operational growth in F4Q17 (3Q17). Growth was once again driven by the strong US pen needle business, partially offset by a tough comparison to the prior year. Sequentially, sales rose 3%. By geography, record-high US revenue of $149 million rose 1% YOY, while international sales of $135 million declined 1% YOY as reported (+2% operationally).

BD provided its F4Q18 (3Q18) financial update in call this morning led by CEO Mr. Vince Forlenza. See below for our top takeaways from the call, as well as relevant Q&A. Get BD’s slide deck here.

Pipeline Highlights

1. Medtronic-Partnered MiniMed Pro-Set with BD FlowSmart Technology Discontinued; Investments Redirected Towards “More Attractive Opportunities” Including Type 2 Patch Pump

CEO Mr. Vince Forlenza announced during prepared remarks that BD has decided to discontinue the long-awaited Medtronic-partnered MiniMed Pro-set with BD FlowSmart technology “following our assessment of strategic options.” President and newly minted COO Mr. Tom Polen explained during Q&A that “the latest product redesign for FlowSmart didn’t deliver the level of differentiation that we were seeking.” BD plans to redirect its investments “into more attractive opportunities,” including the “Swatch” type 2 patch pump. While we are somewhat disappointed by the news, we are actually relieved that BD made this tough strategic decision – it was hard to imagine significant sales/profitability success competing in the tough infusion set business with an exclusive partner (Medtronic) and a problematic set design. The set has been meaningfully delayed since a limited launch in September 2016 resulted in a significant number of user complaints (especially related to kinking on insertion) and the set subsequently pulled off the market.

Adam was part of the original limited launch and you can read his test drive from October 2016 here. In addition, BD withdrew a user experience study listed on ClinicalTrials.gov over a year ago. Mr. Polen said in Q&A that part of the decision to not relaunch was partially related to the economics, which is not surprising – Medtronic is the exclusive partner, leaving BD with little leverage. Plus, BD does not have the insulin infusion set manufacturing scale of Unomedical, leaving even less room for profit margins. The set probably cannot get a premium without evidence (hard to collect), leaving profit margins even more squeezed for both Medtronic and BD. We also wonder if there was an element of reprioritization on Medtronic’s part, especially with the very strong Unomedical/Medtronic MiniMed Mio Advance set rolling out. Mio Advance is tough competition, as it offers a much better insertion user experience than Pro-set (all-in-one, fully disposable, completely hidden needle). Mio Advance launched in Europe at ATTD, and received FDA 510(k) clearance in March. No US timing has been shared, but as of ATTD, “other countries” were expected “later in 2018” – the set launched in Canada in May and was reportedly well-received. It’s possible that Mr. Polen was referencing potential competition from the Mio Advance when he noted in response to a question regarding the Pro-set discontinuation: “Certainly, the type 1 insulin pump market has continued to evolve over the last few years.”

  • Capillary Medical (“kink-proof” SteadiSet infusion set), Unomedical (Lantern Catheter), and Medtronic (sensor-infusion set with extended wear) are still looking to drive innovation in infusion sets and catheters. BD’s experience shows just how difficult it is for even the most experienced medical devices companies to get the financial and technical details in line here. Unomedical basically has a monopoly on this market, and there’s no question that BD entering the game has pushed Unomedical to innovate faster. Still, this are strikingly few companies in this area and that gives us great pause, given the need for better user experiences and extended wear.

  • As a reminder, Medtronic initiated a limited launch of the highly-anticipated Pro-set in September 2016, but due to higher-than-anticipated rates of complaints associated with kinked cannulas and elevated blood glucose levels, decided to pause shipments. During the 3Q17 call, we learned that an additional clinical trial had been “conducted to gather further insights and to ensure that patients ultimately realize the full benefits of BD FlowSmart technology.” While we would have been very excited to see this product come to market, we suspect that studies showing continued human factors difficulties and/or marginal glycemic benefit turned Pro-set into a sunk cost. The side-port catheter technology was an awesome idea, though it may have been hard to prove benefit. Meanwhile, the user experience on Pro-set is was not markedly better than current sets – and worse than Mio Advance – though the needle design/pain was a notable improvement. We wonder what patents BD has on the set. Unomedical’s Lantern catheter and coated lantern catheter (for extended wear) has a more ambitious slit design – read more here.

2. “Swatch” Type 2 Patch Pump to be Submitted for Regulatory Approval in “Next Few Months” in US and EU; Initial Limited Launch Pushed to “Late Calendar 2019”

Per Mr. Forlenza’s prepared remarks, BD is “on track” to submit regulatory approvals for the Swatch type 2 patch pump in the US and the EU “in the coming months,” aligning with F3Q18 timing expecting submission “later this year.” The initial limited launch is now anticipated for “late calendar 2019” – potentially pushed back slightly from previous expectations for “late FY19” (by September 2019). The type 2 patch pump was listed on a slide (#22) of FY 2019 planned product launches, but with “CY19” noted alongside – there is a lot of juggling here on the timing. While Mr. Forlenza shared this launch timing in reference to both the US and the EU, a response from Executive Vice President Mr. Alberto Mas during Q&A indicated that this timing may only be for the US (see below for transcript; we suspect he simply omitted EU notified bodies in his off-the-cuff response). During Q&A, Mr. Mas also shared that the company is “making good progress on the [Swatch] program,” referencing clinical trials and “interactions with our customers,” though we have yet to see any data or studies listed on ClinicalTrials.gov. Last we heard on the August call, “multiple clinical trials have been completed,” including an in-human insulin infusion trial, which went “exactly to plan.” In response to a different question on Swatch and the Pro-set discontinuation, Mr. Polen remarked that “we continue to get additional patient and physician feedback all at or above our expectations.” We’re glad to see that BD is incorporating patient input throughout the design and testing process, especially since Insulet will be very tough competition here in this growing market.

  • Management noted during Q&A that the Swatch production lines are “getting up to speed” and that BD is “working on our evidence generation programs as well.” The continued investment here is notable, and it’s clear the next phase of BD Diabetes is riding strongly on success here. Per the 4Q17 call, BD will have amassed over 10,000 patient-days of Swatch data by launch, made possible by the company’s decision to “double down” on the patch pump and pause its smart pen program. This latest decision to discontinue the MiniMed Pro-set and redirect investments in part to Swatch bodes well for more investment and focus on the product.

  • If BD maintains its expected Swatch launch in late 2019, it’s possible it will enter the market around the same time as Insulet’s U500 Omnipod with Lilly. On the recent Insulet 3Q18 call earlier this month, we learned that Insulet is “still working” with Lilly to submit the U500 Omnipod to the FDA. The most recent timing shared several quarters ago called for a 2019 launch of U500 Omnipod, which is still doable but starting to feel like a stretch. (We could imagine quite a prolonged FDA review for this product too.) While both products will be patch pumps for type 2, they will clearly appeal to different segments of the market – the 300-unit, U100 BD Swatch vs. 200-unit U500 Insulet Omnipod aren’t directly comparable. Insulet’s 200-unit U200 is likely the more direct competitor for BD’s Swatch, although it is not expected to launch until 2020-2021. Other relevant insulin delivery devices include: (i) CeQur’s recently acquired bolus-only Calibra Finesse (US launch expected mid-2019 under a new name); (ii) CeQur’s own basal-bolus PAQ device (US launch expected 2020-2021); (iii) Valeritas currently available V-Go (plans for 1H19 launch of connected Bluetooth dose capture attachment); (iv) Roche’s type 1-focused Solo patch pump (CE Marked July, controlled EU launch underway); and (v) a connected, pre-filled type 2 patch pump from Verily/Sensile Medical/Sanofi (launch timing never shared).

  • The type 2 pump market is still wide open and there is certainly room for competition between user-friendly, low-cost options – the latter being the name of the game here. On the F3Q18 (2Q18) call, Mr. Polen underscored that the cost of Swatch will be “much more at parity” with pen therapy than “the premium typically associated with pump therapy.” He also emphasized that Swatch has been specifically designed for type 2 diabetes patients with a focus on “extreme simplicity of the user interface on the digital side and on the hardware side.” If the cost of Swatch is truly on par with that of pen therapy, and BD delivers on user experience, we can see Swatch attracting many type 2 pen users to pump therapy – a clear win for the field. While there was no mention on today’s call, Mr. Polen also confirmed during the F3Q18 call that BD “would over time certainly look at CGM being integrated” with Swatch, opening up the potential for a type 2 specific automated insulin delivery (AID) system. We wonder how patients, providers, and payers might view such an option as compared to connected pen + CGM + dose titration systems being developed by companies such as Bigfoot and Lilly.

3. No Mention of Briight App; Close to 20,000 Users as of August

There was no mention of BD’s “Diabetes Personal Assistant” app, Briight, released at ADA. As of AADE in August, Briight was close to reaching 20,000 users with a very impressive 1,000 “active users” being added each week. Currently, Briight has 21 ratings on Android with 4.5/stars (“10,000+” downloads) and 11 ratings on Apple iOS with 4.4/5 stars. BD just released updates yesterday, including the ability to log insulin and blood glucose values by voice – nice!  Additional educational content surrounding health insurance, activity, and food choices have been added to the app too. Eventually, Briight should potentially play a role in supporting people with type 2 diabetes who use Swatch. The app may be used to display insulin data, provide pump instruction, and possibly even control Swatch at some point in the future.

Financial Highlights

1. Record Global Revenue of $285 Million up 2% YOY Operationally; 3% Sequential Increase; US Pen Needle Business Drives Growth

Global Diabetes Care revenue hit a record $285 million, up 1% YOY as reported and 2% YOY operationally on a tough comparison to 6% operational growth in F4Q17 (3Q17). This performance marks 10 consecutive quarters (~two years) of positive or flat YOY growth. CFO Mr. Christopher Reidy said Diabetes Care growth was driven by strengthened pen needle business in the US, partially offset by a tough comparison to the prior year (F4Q17 set the previous record revenue at $283 million). Sequentially, sales climbed 3% from a strong base of $276 million in F3Q18 (2Q18). BD’s pen needle business generates steady, predictable revenue, although clearly it will take something like the Swatch type 2 patch pump to accelerate growth.

  • As depicted below, sales in the US and international geographies remain quite close. Both segments are remarkably consistent and together have given BD Diabetes a rock-steady, growing business for a number of years. Dexcom also reported earlier today, and it’s striking that the CGM player’s quarterly sales – $267 million – are now almost as large as BD’s quarterly sales. Wow!

BD Diabetes Care Quarterly Sales (F1Q12-F4Q18)

2. Record US Revenue of $149 million up 1% YOY; 8% Sequential Increase

Record high US revenue of $149 million rose 1% YOY on a very tough comparison to 9% growth in F4Q17 (3Q17). This performance marks positive or flat YOY growth in nearly all of the past 34 quarters (~eight years) – a 1% decline in F2Q17 (1Q17) being the lone exception. Sequentially, sales increased an impressive 8% from a strong base of $138 million in F3Q18 (2Q18).

3. International Sales of $135 Million up 2% Operationally; Down 2% Sequentially

International sales of $135 million declined 1% YOY as reported (+2% operationally) on a moderate comparison to 4% operational growth in F4Q17 (3Q17). This performance breaks four consecutive quarters of positive YOY growth internationally as reported. Sales fell 2% sequentially from a very high base of $138 million in F3Q18 (2Q18) – the highest in our model since sales of $141 million in F1Q15 (4Q14).

Selected Questions and Answers

Q: You mentioned status on the type 2 patch pump. Can you tell us a little bit more detail as to the initial strategy for rollout and the end of 2019?

Mr. Alberto Mas (Executive Vice President, BD): Yeah, on the type 2 patch pump, we continue to be very excited about the potential of the product. We are making good progress on the program. We are learning through our clinical trials and interactions with our customers. And we expect to be preparing for submission in the next few months both in the US and Europe. Our production lines are getting up to speed, and we are working our evidence generation programs as well. The program is progressing well, and we're expecting, depending on obviously the FDA approval process and timing, we expect towards the end of the calendar year to be able to launch in the US. So good news to report there.

Q: I know you discontinued the [MiniMed Pro-set with BD FlowSmart technology.] How did you frame that opportunity relative to the patch pump?

Mr. Tom Polen (President, COO, BD): To speak to FlowSmart a little bit more, certainly the type 1 insulin pump market has continued to evolve over the last few years. The latest product redesign for FlowSmart didn't deliver the level of differentiation that we were seeking. We could have continued to invest in FlowSmart. But given the economics of that as more of an OEM (original equipment manufacturer; i.e., making it for Medtronic) product and the number of more attractive investment opportunities we now have in our R&D pipeline, as part of our portfolio process we made a decision to stop that product and redirect the investments into more attractive opportunities both within Diabetes Care and outside of Diabetes Care. And certainly within Diabetes Care, the number one product there that we're investing behind and put some further funding behind is Swatch, and as you heard from Alberto, we continue to be very positive outlook on that product. It's gone through and continues to go through clinical trials. We continue to get additional patient and physician feedback on it which is all at or above our expectations. And so we're doubling down on the final stage of bringing this to market this year.

 

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