Bayer 2Q13 – Contour sales up 13% as reported; Big Four BGM Diabetes Care revenue down ~4-5% as reported but up meaningfully vs. 1Q13 – August 1, 2013

Yesterday, Bayer CEO Marjin Dekkers led the company’s 2Q13 financial update. Contour (Bayer’s leading blood glucose monitor [BGM] franchise) revenue reached a record-high quarterly total of €197 million (~$257 million), up 13% as reported and 15% operationally from 2Q12. The comparison was fairly challenging given that Contour revenue in 2Q12 grew 9% and 4%, respectively. Sequentially, Contour sales grew 16% from 1Q13, which was a particularly weak quarter for the company. We roughly estimated that overall Diabetes Care revenue was €263-293 million (~$343-383 million) in 2Q13, up ~8-10% from 2Q12. Bayer highlighted the sales contribution from the US launch of Contour Next (which we assume refers to the launch of the Contour Next meter [April launch] as opposed to the Contour Next platform). Unsurprisingly, management described Diabetes Care as a “mixed picture” because of the pricing and reimbursements pressures in the diabetes market, specifically highlighting Germany. Further, looking to full-year 2013, management expects for the Diabetes Care segment to decline compared to 2012; this is a given due to competitive bidding in the US, and management was not more specific.

Bayer was the last of the Big Four blood glucose monitoring (BGM) companies (with J&J, Abbott, and Roche) to report 2Q13 results. We estimated that combined Diabetes Care revenue in 2Q13 for the Big Four reached ~$2 billion, down ~4-5% as reported from 2Q12 but up significantly from $1.7 billion in 1Q13 (a low point for the field at least figuratively if not quite literally). Our estimates put Bayer’s 2Q13 sales slightly ahead of Abbott’s, pushing Bayer into the third position for global Diabetes Care sales in 2Q13 although the vagaries of reporting make this tricky to call. Bayer does not break out its Diabetes Care revenue (so we assume there is at least a bit more that is not reported though this is hard to call) nor provide geographic split; however, the trend among the Big Four is toward greater challenges in the US market. With the exception of Bayer, each company’s management team has directly mentioned the impact or anticipated impact of CMS’ reimbursement changes for diabetes care supplies during the 2Q13 updates. 3Q13 sales results will be the first to show the impact of the CMS move..

Turning to pharmaceuticals, sales of Bayer’s alpha-glucosidase inhibitor Glucobay (acarbose) totaled €108 million (~$141 million), growing 5% on a reported basis (vs. a tough comparison of 14% a year earlier) and 6% on an operational basis (vs. 3% growth a year ago). As in previous quarters, Glucobay was included in the 2Q13 “best selling pharmaceutical products” list of Bayer products. On the ophthalmology front, aflibercept (currently marketed as Eylea for wet age-related macular degeneration) remains in phase 3 trials for a diabetic macular edema indication.

DIABETES DEVICES

• Contour (Bayer’s lead BGM franchise) sales totaled €197 million (~$257 million) in 2Q13, growing 13% as reported and 15% operationally from 2Q12. The 2Q13 revenue represents a record result for Contour. Further, the year-over-year growth was especially impressive given that 2Q12 sales grew 9% and 4%, respectively, creating relatively challenging comparisons. Management noted that Contour growth was driven by the Contour Next launch in the US (we assume this refers to the April 2013 launch of the Contour Next meter, as opposed to the earlier launch of the Contour Next platform).

Currency conversions are based on average exchange rates from quarter start to end on oanda.com (e.g., 1.3056 USD per EUR in 2Q13).

• Contour sales grew 16% on a reported basis sequentially from 1Q13. For comparison, sequential growth had totaled ~5% in 2Q12 and 2Q11. While 2Q13 has historically represented high sequential growth, we note that in 1Q13 sales declined 12% sequentially, creating an “easier” comparison. This may have been due in part to the seasonality of patients’ insurance structures (e.g., the resetting of deductibles) but presumably it would not have been dramatically different from other years if this were the only element at work).

Currency conversions are based on average exchange rates from quarter start to end on oanda.com (e.g., 1.3056 USD per EUR in 2Q13).

• By our estimates, overall Diabetes Care revenues were €263-293 million (~$343- 383 million) in 2Q13. This represents ~8-10% sales growth from 2Q12. Baring in mind the limited information Bayer provides about its Diabetes Care business, we stress that these numbers are estimations.
• • Assumptions: In the company’s discussion of its Medical Care 2Q13 performance (Diabetes Care is a subset of Medical Care), management remarked that “Higher sales were recorded in the Diabetes Care business, especially for our Contour line.” We assume that the company’s non-Contour meters faired less well and were more likely affected by even bigger pricing pressures – we also anticipate that CMS’ competitive bidding program will be even more negative for these meters since it’s more likely that moreAmericans on Medicare use them (e.g., marketing for Breeze 2 highlights its Ease-of-Use Commendation from the Arthritis Foundation). As such, our Diabetes Care estimate for 2Q13 assumes flat reported growth from 2Q12 for non-Contour products (with the important caveat that 2Q12 itself was an estimate – but we have to start somewhere! As a reminder, Bayer is the only one of the Big Four that does not report revenue results for the full diabetes division quarterly). Flat growth is possibly an overestimation, considering overall blood glucose monitoring trends (pooled 2Q13 revenue for J&J, Abbott, and Roche declined 7% from 2Q12). If we were to apply the 7% year-over-year decline to Bayer’s non-Contour Diabetes Care products, we would roughly estimate 2Q13 Diabetes Care sales of €258-286 million (~$337-374 million), which represents roughly 6-8% growth. We actually believe the non-Contour meters likely dropped well more than 7%, which would but the growth for the business at 5%, best case scenario. We stress that all of this is speculation.
• Bayer was not present in the ADA 2013 exhibit hall, nor was Abbott. Although the Contour line achieved record sales, Bayer mentioned pricing and reimbursement pressures in the Diabetes Care market during Q&A and we assume Bayer’s ADA absence speaks to the ongoing challenges in the market and specifically to lack of confidence on the ROI from the Exhibit Hall. Indeed, looking forward to 2013, supplementary material indicated that Bayer expects a decline in the Diabetes Care segment compared to 2012. This is unsurprising, due to CMS’ payment adjustments for diabetes care products that went into effect on July 1 and to ongoing pricing pressure..
• Diabetes Care revenue totaled ~$2 billion in 2Q13 for the Big Four glucose monitoring (BGM) companies (Bayer, J&J, Abbott, and Roche), down ~4-5% on a reported basis from 2Q12 and up nicely versus $1.7 in 1Q13 for the Big Four group. This is our estimate only for the Big Four and that each company’s Diabetes Care total includes some non-BGM revenue: insulin delivery for Roche and J&J, CGM for Abbott, and A1c testing for Bayer.
• • The 2Q13 decline reflects pricing pressures and reimbursement challenges in blood glucose monitoring. For example, J&J spoke to the “realities of the market”: after describing reimbursement changes from competitive bidding, management said they “are having to adapt our business model to meet that challenge.” Meanwhile, Abbott noted “market pricing and reimbursement pressures” and expected CMS’ payment adjustments for diabetes care supplies to affect 2013 performance overall. Roche also mentioned the impact of competitive bidding and attributed its Diabetes Care decline to changes in reimbursement and price pressures (the latter of which was most strongly felt in Asia Pacific). We will be watching 3Q13 closely since it will show the early impact of lower Medicare payments stemming from competitive bidding, which will have been in effect for a full quarter.
  • For more information on J&J, see our 2Q13 report at http://www.closeconcerns.com/knowledgebase/r/164d9ab5.
  • For more information on Roche, see our 2Q13 report at https://closeconcerns.app.box.com/s/du0csrkmjtazp3iehi69.
  • For more information on Abbott, see our 2Q13 report athttps://closeconcerns.app.box.com/s/8tbuap2ygqzgp6i0ilad.

Bayer revenues are roughly estimated based on Contour results, overall Medical Care growth, and past Diabetes Care performance. Bayer does not provide financial results for Diabetes Care, nor the geographical split so we do not provide an estimate on US/int’l. Currency conversion for Bayer and Roche are based on average exchange rate from April 1 – June 30 on oanda.com (e.g., 1.3056 USD per EUR). Different results are possible with different currency conversions. Roche does not report revenues for an international category. Roche’s growth was determined from EMEA (Europe, Middle East, and Africa) and RoW (Latin America, Asia Pacific, and Japan) breakdown, thus no operational growth is provided.

• At ADA 2013, a Bayer-supported study comparing the accuracy of six blood glucose monitoring systems (BGMS) showed that Contour Next had a significantly lower mean absolute relative difference (MARD) across the entire blood glucose range tested (21- 496 mg/dl) and including modified samples (i.e., by glycolysis or the addition of glucose solution in vitro in order to obtain extreme glucose levels). Roche Accu-Chek Aviva Nano, Abbott FreeStyle Lite, J&J OneTouch Ultra 2, J&J OneTouch Verio Pro, and Nipro Diagnostics’ Truetrack were evaluated in the study. Across the entire blood glucose range excluding modified samples, Contour Next’s MARD remained significantly lower than the other systems tested. When restricting the analysis to blood glucose <70 mg/dl, Contour Next had a significantly lower MARD than all systems when modified samples were included and had a significantly lower MARD than all systems but FreeStyle Lite when modified samples were excluded. One hundred and forty six individuals were included in the study and 538 blood samples were evaluated. For more information, please see page 75 of our ADA full report at http://www.closeconcerns.com/knowledgebase/r/94f937d8.
• Management did not provide any additional device pipeline updates. However, as mentioned above, Bayer highlighted the contribution of Contour Next’s US launch to Contour and Diabetes Care sales. For a better picture of Bayer’s Next line of BGMs, please see the chart below.

• There were no updates on the CGM system that is currently in early clinical development. The last we heard of the system was at ATTD 2012. For more information, please see page 23 of our ATTD 2012 coverage at http://www.closeconcerns.com/knowledgebase/r/e83c9c63.

DIABETES DRUGS

• Sales for Glucobay (acarbose), Bayer’s alpha-glucosidase inhibitor, totaled €108 million (~$141 million) in 2Q13, growing 5% as reported and 6% operationally. In 2Q12, Glucobay grew 14% and 3%, respectively, making for a challenging comparison. Sequentially, Glucobay sales increased 7%. As we’ve come to expect, Glucobay was included under Bayer’s list of “best selling pharmaceutical products” for the company in the quarter. Similar to 1Q13 commentary, management remarked that Glucobay benefited from gains in China.

Conversions based on average exchange rates from quarter start to end on oanda.com (e.g., 1.3056 USD per EUR in 2Q13).

• Regeneron/Bayer’s VEGF Trap-Eye (intravitreal aflibercept) is still in phase 3 development for a diabetic macular edema (DME) indication. The program has four studies: one in the US (VISTA-DME; ClinicalTrials.gov Identifier: NCT01363440); one in Europe and Japan (VIVID-DME; ClinicalTrials.gov Identifier: NCT01512966); one in Japan (VIVID- Japan; ClinicalTrials.gov Identifier: NCT01512966); and one in Russia, China, and other Asian countries (VIVID-EAST; ClinicalTrials.gov Identifier: NCT01783886). The estimated primary completion dates are December 2013, June 2013, September 2013, and February 2015, respectively. All of the studies are enrolled and are currently active, except for NCT01783886, which was activated in February and is still enrolling participants.
  • As a reminder, aflibercept is marketed as Eylea for wet age-related macular degeneration (wAMD). It has been approved in the US since 2011 and in the EU since November 2012. Bayer also reported that as of last week, Eylea had received CHMP recommendation for approval for the treatment of macular edema following central retinal vein occlusion. Eylea also made Bayer’s list of “best selling pharmaceutical products” for the company in 2Q13 and management noted that Eylea “made a pleasing contribution” to sales development in the company’s Pharmaceutical segment.
• Based on the primary completion estimates for Regeneron/Bayer’s phase 3 DME studies, Eylea could only be approved by the FDA as early as 2014. This puts Eylea at least two years behind Roche’s Lucentis (ranibixumab), which secured FDA approval for the 0.3 mg dose for DME in August 2012. During Roche’s 2Q13 call, Roche management forecast that Eylea might not produce significant competitive pressure on Lucentis in the DME market for another two years. A study comparing the efficacy of Eylea, Lucentis, and Avastin¹ in DME may help direct how the market progresses (ClinicalTrials.gov Identifier: NCT01627249). However, this study may have less of an impact since companies may already be competing by the time of the study’s primary completion date in January 2015.
  • For greater detail on Lucentis, see our Roche 2Q13 report at https://closeconcerns.app.box.com/s/du0csrkmjtazp3iehi69.
• The DME competitive landscape is very active and includes several candidates in addition to VEGF Trap-Eye and Lucentis. Alimera Sciences/pSividia’s Iluvien is an implantable device that releases fluocinolone acetonide (a corticosteroid) and received approval for DME in several European countries in 2012 and early 2013. NICE issued a positive appraisal for Iluvien for a subgroup of DME patients unresponsive to other therapies. Allergan’s Ozurdex (dexamethasone intravitreal implant) is in ongoing phase 2 and 4 trials for DME. Dexamethasone is a corticosteroid, like Iluvien, and Ozurdex is already FDA-approved for macular edema following RVO. Ampio announced earlier in January that the FDA accepted the company’s IND for Optina (oral low-dose danazol), and it is currently recruiting for a phase 3 study in DME. iCo Therapeutics and JDRF’s iCo-007, an antisense inhibitor of C-raf kinase, is currently in phase 2. GSK’s darapladib (a Lp-PLA2 inhibitor) completed a phase 2 study for DME in February 2013 (ClinicalTrials.gov Identifier: NCT01506895); results have not been released. Darapladib’s oral administration would give it an advantage over the anti-VEGF treatments, which require injection.
• DME drugs in preclinical development include ActiveSite’s plasma kallikrein inhibitor and KalVista’s plasma kallikrein inhibitor. It is too early to speculate on the clinical success of these candidates, but they would have the significant advantage of being orally administered.
• For greater detail on all of the above-mentioned candidates, please see our Roche 1Q13 report at http://www.closeconcerns.com/knowledgebase/r/f5191b53.

Questions and Answers

Q: Regarding the Consumer Health division and the margin progression there, you attributed that to SG&A in emerging markets. I wonder if you can clarify the trends within the diabetes care segment? And on the assumption the margin declined in that business, could you comment on what drove that given a stable top-line outlook? Could you also comment on whether you have any intentions of putting cost measures through to try and protect the margins? […]

A: The reasons for the declining of the ability is further investments in emerging markets in Consumer Health. But we also see some market-related weakening in Medical Care [editor’s note: the Diabetes Care business is housed within this segment]. You have observed that we have increased our sales in diabetes care, but that's kind of the mixed picture because we have some pricing and reimbursement pressure in this market, especially in euros in Germany, etc., and we also see some healthcare reform impact in our R&I [editor’s note: radiology and imaging, also housed in Medical Care] business. In terms of cost reductions, we have started to do cost reduction efforts, but the full effect is not visible now in the second quarter. […]

Q: Would you be able to share with us an update on market shares in Xarelto and Eylea in the key European territories and Japan, please?

A: As for Eylea, we have seen very nice progression quarter-by-quarter of 49% to €73 million sales now in the second quarter. Where is this coming from? Mainly from Japan, Australia, and Germany. We have now about 56% market share in Japan. These figures are fluctuating now a little bit over the weeks, but they are very high. Lucentis is at a market share of 40% in Japan. In Australia, the market share is around 48% for our product and in Germany the market share is at 22%, also progressing upwards.

-- by Hannah Martin, Kira Maker, Jessica Dong, and Kelly Close

¹ As a reminder, Avastin is a cancer drug that is the parent compound to Lucentis; since the dose of anti-VEGF