Roche Diagnostics Division Analyst Event 2Q15 – Novel CGM to launch “in the next 18 months”; patch pump still in development – July 28, 2015

This afternoon, Roche COO Mr. Roland Diggelman led the company’s 2015 Analyst Event on the Diagnostics Division. Presented at the American Association for Clinical Chemistry conference, the update was headlined by never-before-heard guidance on the timeline for Roche’s novel CGM– “coming to the market in the next 18 months.” We assume this means in the EU, judging from the company’s JPM 2015 commentary that it plans to file the device in the EU before bringing it stateside. This is the most concrete timeline we have heard to date, and it’s encouraging to hear that Roche is still pushing forward on this front – the BGM business is of course incredibly challenging, and as sensors get much smaller, much cheaper, and factory calibrated, we assume glucose monitoring will more meaningfully shift to sensors in the next ten or 15 years.  

However, even the near-term CGM landscape is getting much more competitive, and Roche will have to be very thoughtful about differentiating its offering from established players with more manufacturing, product design, and commercialization experience – see a list below for the key upcoming products on our radar, along with our key questions for Roche.

Mr. Diggelman also acknowledged that work continues on Roche’s patch pump. We have not heard an update on this project in some time, though the fact that work continues certainly suggests internal confidence in the potential. The Solo Micropump was originally acquired when Roche purchased Medingo in 2010 for $160 million; we assume manufacturing and the cost profile have been among the biggest challenges in bringing this product to market.

On the financial front, Mr. Diggelman shared optimistic commentary on the global Diabetes Care business, which is apparently cash generating – “The underlying fundamentals are good … it’s a very good margin business.” Roche has shown a commitment to diabetes technology historically and that does not appear to have changed. The exit of Bayer from the market (selling to Panasonic for ~$1.2 billion, per a June announcement) have led some to speculate that Roche may be following too, and we are glad to see indications that Roche is in it for the long haul.

• Roche will need to differentiate its CGM from increasingly strong competitive offerings:
  
  • Abbott’s FreeStyle Libre continues to see strong uptake in Europe, per the remarks in last week’s 2Q15 call. Though not a true CGM, this is a very formidable competitor as non-CGM users consider their options. 
  • Dexcom will presumably be out with Gen 5 this year in the US, and Gen 6 is slated for an ~1H17 launch (per the 1Q15 call), with potential for factory calibration. EU timelines are less clear, though we assume these products will follow the US launches without too much lag.
  • Medtronic’s Enlite 3 is currently in studies with the MiniMed 640G and 670G, with commercialization expected by April 2016 and April 2017, respectively (though the 640G timing is looking more unlikely, as the pivotal trial is still ongoing); MiniMed Connect is slated for a launch this fall (remote monitoring of pump and CGM data via a keychain device); and the Bluetooth-enabled Guardian Mobile is in a pivotal study.
  • Others? The glucose monitoring field has many earlier-stage players, like Google/Novartis (contact lens), Senseonics and GlySens (implantable), and Sano (patch) – could one of these come to market with a meaningfully differentiated product?
• Mr. Diggelman stressed that Roche continues to implement global restructuring plans aimed at enhancing the long-term profitability of the US business. He did not provide a timeline for completion or details on specific strategy, but we assume the program reflects a mix of “streamlining” strategies designed to respond to US pricing pressures. As a reminder, Roche announced its “Autonomy and Speed” initiative in September 2013 to drive toward broad-scale efficiencies.
• The patch pump business model is challenging, and like the CGM landscape, we worry that Roche will be playing catch-up here too. The main comparator is Insulet, who still expects to submit an FDA 510(k) filing for its next-gen PDM by the end of this year. The landscape is bound to get more competitive with J&J slating a launch of its Calibra Finesse insulin delivery device in 2016. The V-Go is already on the market through a regional rollout (its IPO was postponed in March), Cellnovo's patch pump system launched in the UK and France in 2014 (the company went public in Europe earlier this month), and CeQur has EU and US launches of its PaQ device planned for 2016.
• During Q&A, management shared strong optimism for the expected August 7 launch of the Accu-Chek Connect (BGM and paired smartphone app with a bolus calculator) – we got a detailed preview at Keystone two weeks ago. It will be interesting to see if the launch can provide a boost to Roche’s “struggling” US business. The biggest highlight of the system is undoubtedly the app, which provides the convenience of insulin bolus advice on a smartphone app based on blood glucose results and entered carbohydrates – the first such FDA-approved bolus calculator on a smartphone, a major win for MDI users. We’ll have an even more detailed preview coming soon on this.

Key Questions for Roche’s CGM

• How accurate and reliable will Roche’s first-gen CGM be? Can the company achieve a sub-10% MARD?
• What will the calibration scheme look like? Is factory calibration possible?
• What will competition in CGM look like in 18 months from now? How will Roche differentiate?
• Will the technology have wireless connectivity? Will it send data to an app? To the cloud? How will data downloading work?
• How large will the transmitter be? How will it compare to Abbott’s FreeStyle Libre (the best on-body form factor on the market), and Dexcom/Medtronic’s next-gen transmitters?
• How will Roche’s CGM be priced? Could it be cheaper than existing options?
• How will Roche balance CGM innovation vs. BGM innovation?

Questions and Answers

Q: Can you talk about the Diabetes Care structure? Do you see that market stabilizing? Can you also talk about your CGM strategy?

Why do we remain very committed to it? It’s because we’re talking about 380 million people that have diabetes worldwide. The number is projected to reach 500 million in the near future. Ultimately, the business’s underlying fundamentals are very good, though politically, the segment is difficult. Still, this is a very good margin business. A very good margin business. We have low capital employed, good cash flow, and predictable cash flow. When you add to that our 30% market share, we have a very important role to play going forward. There is still innovation in this business. We have our own CGM sensor program that will be coming to the market in the next 18 months. That’s one area we are interested in. On insulin delivery, we have our patch pump in development, while in glucose monitoring, we have the Connect system.

There is still a lot of innovation happening in this space. We are excited about our Connect system with Bluetooth technology! It’s a smart technology that is going to help patients guide their therapy and keep clinicians connected to care as well. Patients are going to be able to take pictures of the food they are eating. From there, the patient is immediately given direction on how much insulin to take at that point in time. We’re elevating our innovation in this space. [Editor’s Note: We found this comment somewhat misleading, as it implies taking pictures of food will impact the bolus calculator advice. Based on what we’ve seen, it’s a standard bolus calculator that allows patients to append a picture to the entry; it cannot do optical food recognition to our knowledge.]

-- by Varun Iyengar, Adam Brown, and Kelly Close