Memorandum

Roche 1Q17 – Global Diabetes Care Revenue grows 1%, North America up 2% from record low base; no CGM update; Pooled “Big 3” revenue up 2% YOY; Lucentis sales up 10% YOY to $390M – April 27, 2017

Executive Highlights

  • Global Diabetes Care revenue totaled 447 million CHF (~$445 million), growing 1% YOY as reported against an easy YOY comparison. The North American business saw revenues of 49 million CHF rise 2% YOY from a record low 48 million CHF (a “solid” and “encouraging” quarter, per management). Sales in the rest of the world totaled 398 million CHF (~$396 million), rising 1% YOY. 
  • Pooled “Big Three” revenue (Roche, J&J, and Abbott) totaled ~$1.1 billion for the quarter, growing 2% YOY –subtracting out our estimate of EU Libre sales (~$100 million) translates to a decline of up to 8% in pooled Big Three BGM sales. Unsurprisingly, US weakness drove the pooled declines (7% decline YOY), while pooled revenue grew 5% internationally thanks to continued uptake of Libre overseas.
  • The slide deck confirmed that the Accu-Check Instant bG system launched in the EU, but did not mention the Insight CGM (limited launch in EU) or Guide BGM system (launched in 3Q16 OUS and in the US in 1Q17). The integration with mySugr is now available in the US, and notably, uses the Accu-Chek Guide BGM (free meter for patients) – this was not mentioned on the call or in the supporting materials, but is a major win.
  • Lucentis was a highlight of the call, most certainly due to the recent FDA approval of an expanded indication – Lucentis is now the first-in-class therapy indicated to treat all forms of diabetic retinopathy, with or without diabetic macular edema (DME). Sales of the product totaled 392 million CHF (~$390 million) in 1Q17, up 10% YOY and 19% sequentially, which we attribute in part to the launch of a pre-filled Lucentis syringe in 3Q16.

Roche CEO Severin Schwan led the company’s 1Q17 financial update this morning. Below, we bring you our top financial, pipeline, and therapy highlights from the call, followed by relevant Q&A.

Financial Highlights

1. Global Diabetes Care revenue totaled 447 million CHF (~$445 million) in 1Q17, reflecting 1% YOY growth against a very easy comparison (down 13% in 1Q16). Minimal growth was seen in both North America and the rest of the world (against low bases), but any growth has been good growth for the diabetes segment, which has experienced declines in 22 of the last 29 quarters. In constant currencies, BGM sales grew 1% YOY, while the other product lines of the Diabetes Unit (mainly insulin pumps) fell 7% YOY.

2. In North America, Diabetes Care revenue totaled 49 million CHF (~$49 million), growing 2% YOY against an extremely easy 4Q15 comparison, when sales dropped a staggering 49% and hit a record-low. Sequentially, sales fell 33% against the backdrop of 4% sequential growth from 3Q16 to 4Q16. Diagnostics Division CEO Mr. Diggelmann called the performance in the US “solid” and “encouraging” despite a challenging environment. This was a pretty optimistic take, as things don’t seem to be rebounding dramatically.

3. Outside of North America, sales of 398 million CHF (~$396 million) grew 1% YOY against an easy YOY comparison (4% decline in 1Q16). While the performance represents positive growth, it is still just the second time in our model that revenue has come in under the 400 million CHF mark. Sales expanded in Latin America, were stable in the EMEA and North America regions, and declined in Asia-Pacific and Japan.

Pooled Financial Highlights

4. Pooled global revenue for the “Big Three” BGM companies (Roche, J&J, and Abbott) totaled ~$1.14 billion, growing 2% YOY relative to pooled revenue in 4Q16 (~$1.12 billion). This came against a very easy comparison, as revenue declined ~13% a year ago.

Device Pipeline Highlights

5. The slide deck indicated that the Accu-Chek bG Instant System launched in the EU. We’re not sure what the US plans are for the Instant, but Roche told us the initial launch countries are Greece, Romania, and South Africa.

6. There was no mention in prepared remarks, Q&A, or the slide of the Accu-Chek Insight CGM, which launched in a controlled fashion in the Netherlands, Norway, Denmark, and Sweden toward the end of 2016. Dr. Irl Hirsch alluded to the device at ENDO 2017, suggesting that Roche will start pivotal trials (presumably US) this summer, but we have not verified with the company.

7. The Accu-Chek Guide BGM, which has been slated for a 1Q17 US rollout, was not mentioned on the call or in the supplementary materials.  We believe it has launched quietly in the US, since the Accu-Chek US website does show it, and it is available through the mySugr Logbook integration. In 3Q16, the next-gen BGM launched in Denmark, Switzerland, and Australia, and we were told at ATTD 2017 that Germany, Italy, and the US were to follow in 1Q17.

8. Neither the expanded Senseonics CGM distribution agreement nor the mySugr integration partnership were mentioned on the call. The mySugr-Roche Accu-Chek integration is now available in the US version of the popular Logbook app – notably, it uses the newer Accu-Chek Guide BGM and is very seamless. See screenshots below. The integration launched last April in Germany and Austria with Accu-Chek Connect.

Therapy Highlights

9. US sales of Lucentis rose 10% YOY and 19% sequentially to 392 million CHF (~$390 million), albeit against easy comparisons – revenue fell 10% YOY in 1Q16 and dropped 12% sequentially in 4Q16. The expedited FDA approval of an expanded label for Lucentis, now indicated for the treatment of diabetic retinopathy independent of macular edema, was a major focus of the call. Launch of this broader indication will hopefully spur further growth for the Lucentis franchise in 2017, though it’s too soon to tell exactly how it will impact volume and sales.

10. On the pipeline front, Roche’s presentation slides featured a new phase 1 candidate for type 2 diabetes: RG7992 is an anti-FGFR1/KLB antibody designed to mimic the effects of hormone FGF21 (fibroblast growth factor 21).

 

Financial Highlights

1. Global Diabetes Care Grows 1% YOY; BGM up 1%, Pumps Down 7%

Global Diabetes Care revenue totaled 447 million CHF (~$445 million) in 1Q17, growing 1% YOY against a very easy comparison (down 13% in 1Q16). Minimal growth was seen in both North America and the rest of the world (against low bases), but any growth has been good growth for the diabetes segment, which has experienced declines in 22 of the last 29 quarters. In accordance with the pronounced seasonality of the diabetes business – sequential growth in Q2 and Q4, with sequential declines in Q1 and Q3 – worldwide sales fell 16% sequentially from 4Q16 (last quarter, revenue outside of North America topped this quarter’s total revenue).

Figure 1: Global, North America, International Quarterly Sales (1Q11 – 1Q17)

  • In constant currencies, BGM sales grew 1% YOY, while the other product lines of the Diabetes Unit fell 7% YOY (mainly insulin pumps, though the Accu-Chek Insight CGM underwent a limited EU launch toward the end of 2016). The slow EU rollouts of the Accu-Chek Guide (+ Australia) and the Accu-Chek Instant BGM systems presumably offset negative headwinds from pricing and competitive pressures. It is no surprise that the pump business fell, as the company discontinued new pump sales in the US as of the beginning of 2017, and strong competitive pressures loom internationally (largely from Medtronic’s MiniMed 640G and Insulet’s OmniPod). The figure below depicts the easy nature of this quarter’s comparison – the business rose only slightly after plummeting 64 million CHF (13%) between 1Q15 and 1Q16.

2. North American Revenue Grows 2% on Very Easy Comparison (-49% in 1Q16)

In North America, Diabetes Care revenue totaled 49 million CHF (~$49 million), growing 2% YOY against an extremely easy 4Q15 comparison (staggering 49% sales decline to record low 48 million CHF). Sequentially, sales fell 33% against the backdrop of 4% sequential growth from 3Q16 to 4Q16. This is the second quarter to come in under the 50 million CHF mark, and the fifth in a row under 100 million CHF. Still, Diagnostics Division CEO Mr. Diggelmann called the performance in the US “solid” and “encouraging” despite a challenging environment – this was very optimistic, as sales don’t seem to be rebounding significantly quite yet. As a reminder, Roche stopped selling new pumps in the US as of January 1, though that probably wasn’t responsible for most of the challenges, as the quarter was on par with Q1 a year ago. Perhaps we’ll have a better idea about the impact following the 2Q17 call.

  • For the first time in a number of calls, Mr. Diggelmann didn’t explicitly delve into the effects of competitive bidding. Last quarter, he called the US performance “very slow,” before adding “I should remind you that this is of course due to reimbursement cuts introduced as long as three years ago, which still have an impact on new contracts and are translating over to the private side.” Two quarters ago, he frustratingly referred to the CMS program as the “so-called competitive bidding process.” We assume the effects carried over to this quarter, but perhaps the business has bottomed out, especially with the Accu-Chek Guide’s market entrance (or on the horizon).

3. Revenue Outside of North America Up 1%, but Under 400 million CHF for Second Time

Outside of North America, sales of 398 million CHF (~$396 million) grew 1% YOY against an easy YOY comparison (4% decline in 1Q16). While the performance represents positive growth, it is still just the second time in our model that revenue has come in under the 400 million CHF mark (the other being 1Q16). The alternating up-down sequential pattern that has come to characterize the international business (see Figure 1 above) continued this past quarter (falling 13% from 4Q16 following 10% sequential growth in the previous quarter). At a geographic level, total Diabetes Care sales expanded in Latin America, were stable in the EMEA and North America regions, and declined in Asia-Pacific and Japan.

Pooled Financial Highlights

4. Pooled “Big Three” Revenue for the Quarter Falls Reaches $1.1 billion on 2% YOY Growth

Pooled global revenue for the “Big Three” BGM companies (Roche, J&J, and Abbott) totaled ~$1.14 billion, growing 2% YOY relative to pooled revenue in 4Q16 (~$1.12 billion). This came against a very easy comparison, as revenue declined ~13% a year ago. Abbott continues to be the lone standout of the group in terms of growth (albeit from a lower sales base); this quarter, Abbott’s sales of $292 million rose a strong 20% as reported and 23% operationally year-over-year (YOY). Then again, its international business (+29%) drove top-line growth, clearly on the strength of FreeStyle Libre, making the comparison to J&J and Roche BGM tenuous (Roche also has CGM and insulin delivery and J&J also has insulin delivery). With estimated Libre sales excluded, Abbott’s global sales may have fallen between 3% (conservative) and 23% (maximum). Translating to pooled sales, excluding Libre, the pooled BGM calculation could’ve fallen between 3% and 8%. Abbott is clearly investing heavily in FreeStyle Libre, Roche is moving into CGM (though there were no Insight updates on this call), and J&J is still evaluating various strategic options for its struggling LifeScan/Animas business. As seen in Figure 3 below, pooled Big 3 revenues have now plummeted nearly 30% since 1Q12. At Clinical DTM, Dr. David Klonoff predicted that BGM will still be widely used for at least the next 10 years, which seems reasonable to us – the diffusion of innovations in healthcare is slow (even something as transformative as CGM). The question, of course, is how the BGM companies will need to innovate in products and business models to deliver much more value and better outcomes at lower costs.

Figure 3: Worldwide Pooled Roche, Abbott, and J&J Quarterly Sales (1Q12 – 1Q17)

  • In the US market, pooled revenue fell 7% to just $278 million on a very easy comparison (-28% in 1Q16). Surprisingly, J&J LifeScan was the only company to point to pricing pressures as a headwind, though we imagine all three were negatively impacted – Abbott and Roche understandably emphasized YOY growth. J&J had the most difficult 1Q17 in the US, as sales fell 14% YOY, while Roche sales grew 2%, and Abbott sales grew 8%. Roche sales do encompass all of North America, but we have included the figure in our US calculation because individual country revenues are not reported.
  • The Big Three fared better internationally, where revenue of $858 million grew 5% against an easy comparison (sales fell 6% in 1Q16). Sequentially, pooled revenue fell 10%. Pooled revenue hasn’t broken the $1 billion quarterly mark in over two years and fell below $860 million for just the second time in our model. J&J’s international revenue fell 1% YOY, Roche’s grew 1%, and Abbott’s shot up 29%. If estimated maximum Libre sales of ~$100 million are excluded from the pooled international calculation, then revenue fell 8% YOY. Similarly, pooling just J&J and Roche international sales suggests BGM sales declined 1% YOY outside of the US.

Device Pipeline Highlights

5. Accu-Chek bG Instant System Launches in EU

The slide deck noted that the Accu-Chek bG Instant System launched in the EU. We’re not sure what the US plans are for the Instant, but Roche told us the initial launch countries are Greece, Romania, and South Africa. Roche is positioning the meter as an “effortless, accurate and affordable bG system for EU price-sensitive markets.” We got to see it in person at ATTD 2017, where a rep told us the device has a streamlined feature set including a target range indicator, Bluetooth connectivity, and just a single button, and that it may be better for patients who don’t need all of the whistles and bells offered by the Guide, but just a quick indication of blood sugar. We appreciate that the company is making more options available, especially with price point in mind.

6. No Mention of Accu-Chek Insight CGM

There was no mention in prepared remarks, Q&A, or the slide of the Accu-Chek Insight CGM, which launched in a controlled fashion in the Netherlands, Norway, Denmark, and Sweden toward the end of 2016. Reps at EASD told us that this phase will last 6-9 months so that Roche can gather feedback before fully rolling it out in more countries in 2017. Dr. Irl Hirsch alluded to the device at ENDO 2017, suggesting that Roche will start pivotal trials (presumably for the US) this summer. We have not verified with the company, but we believe a US commercialization would be a smart way to shore up the diabetes business in a high growth area. At ATTD, we also learned that Roche will perform experiments to examine the sensor’s stability over 14-15 days (it is currently intended for seven-day wear with two calibrations per day).  

  • In the CE Mark approval trial (n=36; details shared at DTM), the sensor performed with strong reported accuracy (overall MARD: 10.6%) and time lag (mean lag post-processing: 5.5 minutes). See our EASD coverage for a deeper dive into the CGM – how does it stack up to other options? – along with pictures.

7. No Word on Accu-Chek Guide BGM US Launch

The Accu-Chek Guide BGM, which has been slated for a 1Q17 US rollout, was not mentioned on the call or in the supplementary materials. We believe it has launched quietly in the US, since the Accu-Chek US website does show it, and it is available through the mySugr partnership. In 3Q16, the next-gen system launched in Denmark, Switzerland, and Australia, and we were told at ATTD 2017 that Germany, Italy, and the US were to follow in 1Q17. Diagnostics Division CEO Mr. Diggelmann expressed hope last quarter that the Guide will “protect and safeguard this franchise.”

  • Roche also announced in February that it has signed an “exclusive” agreement with Medtronic to develop a dedicated Bluetooth-enabled blood glucose meter that will communicate with Medtronic's future Bluetooth-enabled insulin pumps. The meter will be based on Roche's new Accu-Chek Guide platform and sold under the name “Accu-Chek Guide Link.” The deal is exclusive and covers all markets where future Bluetooth-enabled Medtronic pumps will be sold – a major win for Roche BGM business moving forward!
  • The Guide BGM looks similar to the Accu-Chek Connect, but does offer several advantages: (i) a spill-resistant strip vial (easy to remove one at a time, less contamination); (ii) a new strip design (large sampling area, next-gen chemistry that is reportedly more accurate); (iii) Bluetooth compatibility with the Accu-Chek Connect smartphone app (Android and iOS, integrated bolus advisor); and (iv) on-board high-low pattern detection (key for staying competitive with LifeScan’s OneTouch Reveal). It looks like a solid incremental improvement over Accu-Chek Connect, but nothing groundbreaking from what we can tell. Can it save the franchise, particularly in the battered US market? Of course, funds for innovation are at a premium right now, and the company is smart to use them to invest in CGM. 

8. Senseonics Distribution Agreement/mySugr Integration Partnership Not Mentioned On Call

Neither the expanded Senseonics CGM distribution agreement nor the mySugr integration partnership were mentioned on the call. The mySugr integration has launched in the US Logbook app with Accu-Chek Guide (see picture below). A small popup in the app indicates the meter is available, and entering a little bit of information generates an automated paper that patients can bring to the pharmacy and get a free meter. We love this, and a clear win for both companies, as we noted in our initial report on the partnership. mySugr Logbook has nearly 980,000 users globally, and this integration launched last April in Germany and Austria with the Accu-Chek Connect meter.

  • Per the updated agreement with Senseonics (announced in December), Roche will distribute the implantable CGM in all of Europe, the Middle East, and Africa, excluding Scandinavia (where Rubin Medical is the distribution partner), Finland, and Israel. Senseonics reports next week, and we’ll be interested to see how uptake is going in the early days – the company predicted $6-$7 million in FY17 revenue in February

Therapy Highlights

9. Lucentis Sales Grow 10% YOY to $390 Million; Management Spotlights FDA Approval of Expanded Indication for Retionpathy without DME

US sales of Lucentis (intravitreal ranibizumab) rose 10% YOY as reported (9% in constant currencies) and 19% sequentially to 392 million CHF (~$390 million), albeit against easy comparisons – revenue fell 10% YOY in 1Q16 and dropped 12% sequentially in 4Q16. The expedited FDA approval of an expanded label for Lucentis, now indicated for the treatment of diabetic retinopathy independent of diabetic macular edema (DME), was a major focus of the call. The FDA’s decision came only six months after Roche filed a Supplemental New Drug Application in October 2016 (accelerated from the standard 10-12 month review process), and with this approval, Lucentis becomes the first-in-class medicine for all forms of diabetic retinopathy, with or without DME. This was very exciting news, certainly for Roche (and Genentech, which manufactures the product) and for patients as well, given that retinopathy persists as an area of high unmet need. The expanded indication was announced just last week, and thus wouldn’t have affected 1Q17 sales. The 10% YOY growth is thus likely due, at least in part, to the launch of a 0.5 mg pre-filled syringe for Lucentis in 3Q16, which offers greater patient convenience with a ready-to-use option vs. monthly intravitreal injections administered by a healthcare provider. Launch of the broader indication will hopefully spur further growth for the Lucentis franchise in 2017, though it’s too soon to tell exactly how it will impact volume and sales. In the past, in-class competition from Bayer/Regeneron’s Eylea (intravitreal aflibercept) and Genentech’s Avastin (bevacizumab) has been cited by Roche management as a commercial challenge. We imagine that Lucentis’ first-in-class status for all forms of retinopathy will play to its advantage going forward, and perhaps this competitive edge will even be strong enough to compensate for the relatively higher list price of Lucentis vs. Avastin. We’re also keen to compare recorded Lucentis sales between Novartis and Roche in future quarters – Novartis markets the drug ex-US, where it isn’t yet approved for all forms of diabetic retinopathy independent of DME, so it will be interesting to discern how the expanded indication impacts US sales specifically. Earlier this week, Novartis provided its 1Q17 earnings update and reported a 2% YOY decline in ex-US Lucentis revenue to $445 million.

  • The company’s presentation slides mentioned the phase 2 LADDER study (n=220) comparing intravitreal ranibizumab vs. delivery of the agent via implant. According to ClinicalTrials.gov, the trial is expected to complete in May 2018. We’re pleased to see Roche’s continued clinical development of Lucentis, and in our view, a mode of delivery more convenient and patient-friendly than intravitreal injection could go a long way in improving the commercial product. Many patients may prefer an implanted delivery device over monthly intravitreal injections administered by a healthcare provider, which is not only uncomfortable but comes with the hassle of making regular office appointments and paying multiple co-pays out of pocket. The launch of a pre-filled syringe for Lucentis in 3Q16 was one step toward better patient quality of life, and we hope to see Roche take many more steps in the near future.
  • There was no mention of the phase 2 BOULEVARD trial investigating Lucentis vs. placebo in patients with center-involving DME, or of the protocol T study comparing Lucentis head-to-head with Bayer’s Eylea. Two-year data from protocol T found no significant difference in visual outcomes, number of injections needed, or doctor’s visits in Lucentis-treated vs. Eylea-treated patients with DME. We imagine that follow-up data showing an advantage to Lucentis could meaningfully boost volume and revenue, but Roche management has been silent about the trial since two-year data was published mid-2016. The BOULEVARD trial is expected to complete in October 2017 according to ClinicalTrials.gov.

10. Roche Adds FGF21 Analog RG7992 to its Diabetes Pharmaceutical Pipeline

On the pipeline front, Roche’s presentation slides featured a new phase 1 candidate for metabolic: RG7992 is an anti-FGFR1/KLB antibody designed to mimic the effects of hormone FGF21 (fibroblast growth factor 21). A phase 1a, placebo-controlled study is now fully recruited (n=79) with an aim to investigate safety and tolerability of a single-ascending dose of the agent in healthy volunteers. A phase 1b study was also initiated in 1Q17, and this trial will enroll 120 patients with type 2 diabetes and obesity to evaluate safety, tolerability, and PK profile of the agent. No timing for expected completion of these phase 1 trials was shared, and we couldn’t find ClinicalTrials.gov pages for either of them. It’s unclear at this point if Roche will pursue a type 2 diabetes or an obesity indication for this candidate – or both. Novo Nordisk is currently investigating a phase 1 FGF21 analog (NN9499) for obesity while BMS recently presented phase 2 data for a pegylated FGF21 analog (BMS-986036) as a NASH treatment at EASL 2017. On the other hand, FGF21 has been of interest as a therapeutic target for type 2 diabetes for some time – indeed, BMS originally acquired its candidate for a possible type 2 diabetes indication before pivoting away from this disease area. That said, both Lilly and Pfizer’s FGF21 candidates were discontinued due to lackluster glucose-lowering results in type 2 diabetes and we see more promise for this class in obesity or NASH, especially given the increasingly high bar for new diabetes drugs. Still, we’re excited to see Roche expanding its pharmaceutical investments in diabetes and metabolic disease, and we look forward to following this drug candidate closely.

-- by Brian Levine, Payal Marathe, Adam Brown, Helen Gao, and Kelly Close