Roche 1Q13 – Diabetes Care down 4% on a reported and 5% on an operational basis in 1Q13; strong Lucentis uptake for DME – April 12, 2013

Yesterday, Roche CEO Severin Schwan led the company’s 1Q13 results update. Global Diabetes Care revenue of 539 million CHF (~$579 million) in 1Q13 fell 4% on a reported basis and 5% on an operational basis. The comparison was an easy one – 1Q12 sales fell 12% as reported and 7% operationally. Sales in 1Q13 represented the lowest quarterly total in over seven years. By geographic breakdown, sales decline were steepest in North America. Revenue totaled 94 million CHF (~$101 million), down 21% as reported and 22% operationally, despite an easy year-over-year (YOY) comparison: 1Q12 sales fell 11% and 5%, respectively. The EMEA region (Europe, Middle East, and Africa) was the only segment that had positive growth: 3% as reported and 2% operationally. The comparison was easy with sales declines of 17% and 11%, respectively. Management engaged in very candid discussion about its Diabetes Care business and the challenging BGM market place: reimbursement pressure from CMS and pricing pressure from low cost competitors are two of the biggest headwinds.

Turning recent device launches, the company launched the new maltose-independent strips for the Accu- Chek Active meter in the EU this quarter; the next-gen meter itself will be launched in 3Q13. Roche has also launched the next-gen DiaPort to Centers of Excellence in the EU, though the launch was not mentioned on the call. Looking forward, the company intends to launch the Accu-Chek Insight blood glucose monitor and pump system in the EU later this year and file for approval in the US in 2014. As we understand it, the company also intends to file the Accu-Chek Avivia Expert (meter with built-in bolus calculator) in the US this year. Also of note, the company presented never-before-seen data on its prototype CGM system at ATTD: the sensor recorded a mean absolute relative difference of 8.6% compared to the Accu-Chek Aviva meter (n=7,039); more detail below.

Roche did not provide any updates on its diabetes drug pipeline. Turning to ophthalmology, Lucentis’ uptake for DME has been fairly strong since the August 2012 FDA approval for this indication. US Lucentis sales totaled 393 million CHF (~$422 million) in 1Q13, marking Lucentis’ first quarter of positive operational growth (1%) in one year. Roche attributes this to both stabilization of the age- related macular degeneration market (in which Lucentis had been losing share to Bayer/Regeneron’s Eylea over the past year) and strong uptake in diabetic macular edema (DME). Roche announced that, as expected, in February the FDA approved an as-needed (pro re nata, or PRN) dosing indication for Lucentis, which will allow Roche to promote less-than-monthly dosing for AMD. This should also serve to increase uptake amongst patients for whom the high cost of anti-VEGF therapy, or a fear of injections, are barriers to treatment; we are curious if Roche will also seek this indication for DME.

Financial Results

• Roche Diabetes Care revenue totaled 539 million CHF (~$579 million) in 1Q13, down 4% on a reported and 5% on an operational basis from 1Q12. The comparison was an easy one as well, since 1Q12 sales declined by 12% and 7%, respectively. By regional breakdown, the sales decline in North America was by far and away the steepest (down 21% as reported and 22% operationally) and the EMEA was the only region that showed positive year- over-year (YOY) growth (3% reported growth and 2% operational growth). However, the YOY comparison in the EMEA was easiest, as 1Q12 sales in the EMEA declined 17% as reported and 11% operationally. For contrast, North America revenue in 1Q12 fell 11% and 5%, respectively, while RoW revenue grew 2% and 5%, respectively.

EMEA = Europe, Middle East, and Africa. RoW = Latin America, Asia-Pacific, and Japan. Currency conversion based on average exchange rate from January 1 – March 31 on oanda.com: 1.0752 USD per CHF. Roche does not provide operational growth for its regional breakdown in the quarter.

• Global Diabetes Care revenue of 539 million CHF (~$579 million) represented the lowest revenue total since we began tracking Roche’s growth in 1Q05. This also holds true for its North America sales and outside of North America revenue (i.e., combined RoW and EMEA sales), the latter of which shares the status with 1Q12 results.

Currency conversion based on average exchange rate during the period on oanda.com (e.g., 1Q13 rate from January 1 –March 31 on oanda.com was 1.0752 USD per CHF).

• Sequentially, worldwide revenue fell 27% from 3Q12. Given the seasonality in devices, the sequential decline was fairly typical for Roche’s historical first quarter performance – first quarter sequential declines ranged from 11 to 23% between 2008 and 2012. Notably, sequential weakness was most severe in North America, where revenue was down 48%. However, this was in part due to stellar sequential 4Q12 performance, where revenue was up 45% sequentially over 3Q12.

EMEA = Europe, Middle East, and Africa. RoW = Latin America, Asia-Pacific, and Japan.

• Management noted that the company has already seen some impact from CMS’ competitive bidding program, and they expect competitive bidding to affect sales in 2Q12 as well. We suspect this played an important role in the disappointing sequential and YOY performance. As a reminder, the CMS payment reductions that are set to go into effect on July 1. (For our report on CMS’ announcement of new payment amounts for diabetic testing supplies, see http://www.closeconcerns.com/knowledgebase/r/993d586e. CMS also recently announced that 18 suppliers accepted contracts to provide mail-order diabetic testing supplies at competitively bid prices nationwide.)
• On a positive note, management did note strong sales of the Accu-Chek Mobile, as well as strong sales of the Accu-Chek Nano and Accu-Chek Combo (Spirit insulin pump and Aviva meter) in the US – given the low overall US performance in 1Q13, we wonder what product lines brought the overall segment down.
• Increasing pricing pressures coupled with reimbursement cuts and changes were particularly challenging the quarter. Pricing pressure was due to low cost competitors – management noted price pressure of 5-10%, with some providers offering products at 30-40% lower costs. The latter, explained management, applied to only very basic supplies. We wonder if this refers to strips for Roche’s lower cost meters, or perhaps lancets. In contrast to 2012, when reimbursement cuts largely took place in European markets, Roche expects the majority of the reimbursement cuts to transpire in the US on account of CMS’ competitive bidding initiative (in France and Scandinavia, the company has actually been able to increase reimbursement).
• Management’s attitude towards Diabetes Care seemed less optimistic than in recent quarters. The degree to which Medicare cuts affect the overall market and the private sector will likely be a key determining factor in Roche’s future performance. Unfortunately, this seems to be an unknown at the moment. This was in contrast to 4Q12, when management characterized the market as “very attractive” despite its challenges. In 3Q12, management also affirmed belief “in the value of this business in the long term,” and cited “enormous potential.”
• Management provided additional clarity on its ongoing restructuring initiatives: the company has closed one site in Switzerland and plans to close one site in Israel by the end of the year, is making “more selective investments” with “fewer platforms going forward,” and is addressing its cost base in commercial organizations affected by reimbursement cuts. When the company first introduced the restructuring initiative, it intended to streamline the BGM portfolio by increasing production efficiencies (e.g., focusing the BGM business in Indianapolis, IN and the insulin pump business in Mannheim, Germany) and increasing investment in insulin delivery and CGM. We expect the restructuring process will be a dynamic one, and broadly wonder if the site closures and “more selective investments” suggest that the company is taking more extreme measures than initially intended. Certainly, the market forces working against the company have ratcheted up with the Medicare changes.
• In 1Q13, blood glucose revenues fell 5% operationally. As a reminder, trends in BGM and Diabetes Care tend to mirror each other, since BGM consistently accounts for more than 90% of Diabetes Care revenue. (Roche does not break out BGM and insulin delivery revenue numerically, but share can be estimated from graphs provided in the company’s supplemental materials.) Compared to 1Q12, BGM faced a soft YOY comparison, with a 9% operational decline last year.
• Similarly, insulin delivery revenues fell 5% operationally. The comparison was a challenging one, as insulin delivery sales were much stronger this time last year, growing 15% operationally in 1Q12. First quarter insulin delivery sales have been somewhat lumpy in the past few years: double-digit growth in 1Q10, a decline of 11% in 1Q11 (due to the recall of the Accu- Chek FlexLink Plus), a 15% jump in 1Q12, and a 5% drop in 1Q13.

DIAGNOSTICS AND DEVICE PIPELINE

• Roche presented the very first accuracy data on its proprietary CGM in development at this year’s ATTD – MARD for the company’s prototype was 8.6% when compared to Accu-Chek Aviva blood glucose readings (n=7,039). Compared to perchloric acid deproteinization hexokinase reading, the sensors recorded a MARD of 8.1% (n=682). Since it was not the traditional YSI reference method, this comparison was a point of contention at the meeting. The study cohort was comprised of 30 patients with type 1 diabetes. Each patient wore two sensors simultaneously on the abdomen over a seven-day period that consisted of two induced glycemic swings; the study was performed in the in-patient setting. The sensor was initially calibrated two hours after the initial insertion, with two re-calibrations per day. Of the sixty sensors used, 59 lasted for seven days (98%) and of those 59 sensors, 100% of CGM data was captured. Of the 7,039 CGM-BGM paired data points, 85% fell in the Clark Error Grid zone A and 14% fell in zone B. When looking at individual sensor performance, more than 75% of sensors recorded a MARD <10%. The company gave no timeline details for ongoing development. We think it’s tough to weigh in or compare this accuracy to other sensors, since study protocols are so different and its possible to do so many tricky things with the statistics. We look forward to seeing future studies that are larger.
  • For greater study detail, see page 54 or our ATTD full report at: https://closeconcerns.box.com/s/tf5n9kn7dgxz7jdxmmn2.
• Roche plans to launch the Accu-Chek Insight insulin pump and blood glucose monitor system in the EU in 2013. Like the Accu-Chek Combo, the Insight handheld serves both as a blood glucose meter and pump remote controller. As we understand it, Roche anticipates filing the system with the FDA in early 2014.
• Roche launched the new maltose independent strips for the Accu-Chek Active in the EU this quarter; the next-generation Active meter itself will be launched in 3Q13. The Active is a lower cost product for the company, which potentially could be an important factor in a market where 1) strip access, especially for patients with type 2 diabetes, is low; 2) lower cost meters abound, such as Walmart’s Reli-On Prime; and 3) there is limited reimbursement for strips for type 2, especially in Europe.
• Roche recently launched the second-generation DiaPort to Centers of Excellence in the UK; however, the launch was not mentioned on the call or included in supplementary materials. For additional detail on the technical improvements of the second- generation DiaPort, see page 67 of our Diabetes Technology Meeting 2012 full report at http://www.closeconcerns.com/knowledgebase/r/c81dc4ef.
• As we understand it, the company intends to submit the Accu-Chek Aviva Expert (the Aviva meter with a built-in bolus advisor) to the FDA later this year. We sense that the FDA is quite wary of meters with bolus calculators, not least because bolus calculators depend on patients to have comprehensively logged their insulin injections. However, wecertainly think that built-in bolus calculators stand to add value by encouraging more appropriate bolus dosing and imagine that a favorable regulatory process for Roche could pave the way for other submissions by companies with meter featuring a bolus calculator (for example, Abbott’s FreeStyle InsuLinx has a built-in bolus calculator outside the US, while the FreeStyle InsuLinx version in the US is without). We look forward to learning whether the Roche does indeed move forward with the submission and hope that first quarter sales will not delay the process. See page 120 of our ATTD report for our coverage of Roche’s exhibit hall: http://www.closeconcerns.com/knowledgebase/r/c81dc4ef.
• No mention was made of the SOLO Micropump (Medingo’s long awaited patch pump). The last we heard about the pump was in 3Q12: Roche was planning to begin studies in the EU in 2H13, and supplemental material indicated a 2012 launch target. We assume development has been yet again delayed. The pump was not listed under the company’s 2013 launch goals in 4Q12 or 1Q13 material.

CARDIOMETABOLIC DRUG PIPELINE

• Roche did not provide any updates on its diabetes drug pipeline; aleglitazar (Roche’s phase 3 PPAR-alpha/gamma dual-agonist) remains under investigation for three potential indications: 1) cardiovascular (CV) risk reduction post-acute coronary syndrome (ACS) in type 2 diabetes; 2) CV risk reduction in type 2 diabetes and prediabetes; anda general type 2 diabetes indication. As a reminder, Roche expanded aleglitazar’s phase 3program and its potential indications to include the latter two as a result of positive renal safety data from the AleNephro study (see our November 21, 2012 Closer Look at http://www.closeconcerns.com/knowledgebase/r/497d4504 for these data).
  • As a reminder, Roche released details on aleglitazar’s expanded phase 3 program in its 4Q12 financial update. Aleglitazar is currently under investigation in five phase 3 trials, including two cardiovascular outcomes trials (AleCardio and AlePrevent, enrolling a total of more than 26,000 patients) and a set of glycemic control studies (AleGlucose) examining aleglitazar as monotherapy or in combination with metformin and/or sulfonylurea. For details, please see our Roche 4Q12 report at https://closeconcerns.box.com/s/ee99yjgxul1nfgl3x00a.
  • Aleglitazar submission timelines remain the same: filing for a general type 2 diabetes indication in the US and China is planned for 2015 in the US and China; filing for CV risk reduction post-ACS in unspecified regions is expected in 2015; and filing for CV risk reduction in type 2 diabetes/prediabetes is planned for “2016 and beyond.”
  • Roche has yet to release details on clinical trials for CV risk reduction in prediabetes. We hope that Roche’s recognition of prediabetes as a condition needing treatment could begin to move us closer to a paradigm of prediabetes prevention and treatment; we are curious what the FDA will require of the clinical trial program for this indication and whether the FDA will begin formalizing a prediabetes regulatory pathway.
• No updates were provided on the GLP-1/GIP dual agonist MAR709/RG7697. As a reminder, Roche initiated a phase 1 study for the compound in 3Q12. According to Roche, this single-ascending dose trial (n=48) will compare subcutaneous injection of MAR709/RG7697 to placebo with a safety and pharmacokinetic primary endpoints. The trial is not on ClinicalTrials.gov.
  • As a reminder, in 3Q12 Roche dropped the GLP-1/GIP dual agonist MAR701/RG7685 from its pipeline (after it had completed a phase 1 trial in 4Q11) and replaced it with MAR709/RG7697. Roche purchased Marcadia in 2010 for nearly $300 million, and the MAR701/RG7685 candidate was a major part of the deal. To our knowledge, no other GLP-1/GIP dual agonists are currently in clinical development, but GLP-1/glucagon receptor co-agonists include Zealand/BI’s ZP2929 (phase 1 recently initiated), Transition/Lilly’s TT-401 (in preparation for phase 2; results from proof of concept trial expected this month or next), Prolor Biotech’s MOD-6030 (phase 1). Zealand also has a GLP-1/gastrin dual agonist (ZP-0322) in preclinical development.
  • At EASD 2012, Dr. Richard DiMarchi (Indiana University, Bloomington, IN), a co-founder of Marcadia, and Dr. Matthias Tschop (Helmholtz Center, Munich, Germany), both spoke on the promise of glucagon-derived fusion peptides (our coverage can be found on page seven of the EASD report at https://closeconcerns.box.com/s/bs9g1oa0a1nrdkf5bvbh; and page 25 of the EASD report at https://closeconcerns.box.com/s/phnv2z6hpe8x4r81v1kw, respectively).
• Tofogliflozin, Chugai’s SGLT-2 inhibitor, remains in phase 3 in Japan. In late October 2012 Chugai announced that it entered into a license agreement with Sanofi and Kowa to co- develop the compound and allow Sanofi and Kowa to file the drug for marketing authorization under their own brand names with Chugai supplying the product. As a reminder, Chugai is a member of the Roche group – Roche doesn’t own it outright but controls ~60% of Chugai shares. Roche returned the rights to the compound to Chugai in July 2011 (for more details please see our Roche 2Q11 report at http://www.closeconcerns.com/knowledgebase/r/ad1f4c9d).
• Roche/Genentech’s PCSK9 inhibitor RG7652 remains in phase 2 for metabolic diseases, with phase 3-enabling data expected this year. Roche expects to submit the candidate in 2016 or later. Other companies developing PCSK9 inhibitors, which have been trumpeted to potentially be more potent and broadly effective than statins, include Sanofi (SAR236553/REGN 727, phase 3, potentially first to market in 2015), Amgen (AMG 145; phase 3), and Pfizer (PF-04950615; phase 2).

OPHTHALMOLOGY

• US Lucentis (ranibizumab) sales totaled 393 million CHF (~$422 million) in 1Q13, up 1% operationally, marking Lucentis’ first quarter of positive operational growth in one year. This return to growth continues the trend of Lucentis’ sales stabilization since the second half of 2012 when the FDA approved Lucentis for diabetic macular edema (DME) in August. Over 2012, Lucentis had been losing share in the age-related macular degeneration (AMD) market to Bayer/Regeneron's anti-VEGF agent, Eylea (aflibercept); management reported during Q&A that AMD share has now stabilized (~25% Lucentis, ~25% Eylea, ~50% Avastin) and that Lucentis’ DME share continues to grow (currently ~20%). Since Lucentis is currently the only FDA-approved pharmacotherapy for DME, this is not surprising. Notably during Q&A, management remarked that Lucentis’ increasing DME share has not cannibalized sales ofAvastin, suggesting that Lucentis is acting to grow the DME market or that patients are switching from laser therapy (which cannot reverse vision loss, whereas anti-VEGF therapy can)

• Lucentis’ strong DME uptake appears more promising than Roche management initially forecast during its 4Q12 financial update. At that time, management stated that it did not foresee uptake in DME being strong enough to completely offset the “severe” loss of market share in AMD, so Roche expected overall slightly negative growth during 2013. We are glad to see strong uptake amongst DME patients given that the alternatives are laser therapy and off- label Avastin. However, longer-term competition is on the horizon (e.g., Eylea could be approved for DME as early as 2014; details below).
• Roche also announced that in February, as expected, the FDA approved a pro re nata (PRN, or as-needed) dosing indication for Lucentis in AMD (its label had previously called for once-monthly dosing; we are curious whether it will gain the same option for DME), which should also serve to increase uptake amongst patients for whom the high cost of anti-VEGF therapy or fear of injections are barriers to therapy. Lucentis therapy can be quite expensive at ~$2,000 per 0.5 mg injection for AMD and retinal vein occlusion (RVO) and~$1,200 per 0.3 mg injection for DME.
• The Lucentis sustained delivery device for AMD, RVO, and DME (RG3645) remains in phase 1. Management did not provide any updates on this front, but we are eager to follow its progress since decreased injection frequency would certainly make the drug easier to take.
• As a reminder, several other potential DME treatments are available or in development. Lucentis’ high cost and patients’ fear of intraocular injections are substantial barriers for uptake, so there is plenty of room for innovation in the field. The DRCR.net is conducting a trial that will compare the safety and efficacy of three anti-VEGF agents for DME (Lucentis, Avastin [often used off-label in place of Lucentis due to its lower price], and Eylea), similarly to how the CATT trial compared Lucentis and Avastin for AMD. The primary completion date is not until January 2015 (ClinicalTrials.gov ID: NCT01627249), so the actual impact of the trial’s results may be less relevant if indeed Eylea and Lucentis have already been competing on the DME market for some time.
• The DME competitive landscape is also very active and includes several candidates:
  • Bayer/Regeneron’s Eylea (intravitreal aflibercept, another VEGF-A inhibitor) is in four phase 3 studies for a DME indication (not including the DRCR.net trial discussed above), with primary completion dates of May, September, and December 2013 and February 2015 (ClinicalTrial.gov Identifiers: NCT01331681, NCT01512966, NCT01363440, and NCT01783886) – this timeline suggests that the earliest Eylea could be approved for DME would be in 2014 (the trial completing in February 2015 focuses only on East Asia). In AMD, Eylea’s principal benefit over Lucentis seems to be the less-frequent intraocular injection schedule required by its label. Lucentis’ label calls for once-monthly intraocular injections for the first year, whereas Eylea’s label allows for injections every two months after the first three months of monthly injections. However, Novartis management stated at the JP Morgan Healthcare Conference 2013 that it believes European doctors already prescribe Lucentis on an as- needed basis rather than on a strictly monthly basis. If this turns out to be the case in DME, and if the two drugs are equally effective when dosed at the same intervals, then Eylea’s advantage may not hold. For more details, please see our JPM Day #1 report at http://www.closeconcerns.com/knowledgebase/r/5402e69e.
  • 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. Iluvien’s one-time injection administration (lasting up to 36 months) gives it an advantage over currently available anti-VEGF therapies (Lucentis, Avastin, Eylea), which all require initial monthly injections over the first three months (Eylea) or one year (Lucentis and Avastin), as well as more infrequent supplemental injections. However, the disadvantage of steroids is the high frequency of side effects (cataracts, increase in intraocular pressure). An FDA complete response letter in November cited safety and side-effect concerns; Alimera noted that addressing the FDA’s concerns would be financially prohibitive, and we have not heard any updates on the status of resubmission in the US.
  • 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. The phase 2 program includes trials comparing Ozurdex head-to-head with Lucentis(ClinicalTrials.gov Identifier: NCT01492400; primary completion date January 2015) and Avastin (ClinicalTrials.gov Identifier: NCT01571232; primary completion date June 2013). ClinicalTrials.gov lists two phase 3 studies as having completed in mid-2012 – about a year earlier than initially expected (Identifiers: NCT00168389, NCT00168337). The ongoing phase 4 study will investigate a special patient population (n=30) of DME patients requiring pars plana vitrectomy surgery (ClinicalTrials.gov Identifier: NCT01613716; primary completion date September 2013).
  • Ampio announced earlier in January that the FDA accepted the company’s IND for Optina (oral low-dose danazol). The drug reported positive phase 2 results in August, demonstrating that Optina reduced retinal thickness and improved visual acuity in a 12-week phase 2 study (n=32; for details, please see our August 19, 2012 Closer Look at http://www.closeconcerns.com/knowledgebase/r/b4084a42). Ampio held a pre-IND meeting with the FDA in late July during which the FDA agreed that Ampio could develop Optina through the 505(b)2 pathway (the traditional NDA is a 505(b)1), meaning Ampio may incorporate pre-existing data from a reference drug to save time and money in Optina clinical trials. Optina’s oral administration would give it a clear advantage over Lucentis, Avastin, and Eylea, which require regular intravitreal injections. ClinicalTrials.gov lists one phase 3 trial that is currently recruiting, which will compare best corrected visual acuity on Optina vs. placebo after 12 weeks (Identifier: NCT01821677).
  • iCo Therapeutics and JDRF’s iCo-007, an antisense inhibitor of C-raf kinase, is currently in phase 2. iCo recently announced that as of the midpoint of the phase 2 iDEAL study, no patients had experienced drug-related serious adverse events, the trial had exceeded its recruitment requirement, and iCo expects to announce results in 4Q13 (ClinicalTrials.gov Identifier: NCT01565148). For more information on the iCo/JDRF partnership, please see our April 7, 2012 Closer Look at http://www.closeconcerns.com/knowledgebase/r/6d3e2f90.
  • 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. Darapladib’s primary indication will be atherosclerosis, for which it is currently in phase 3 development.
  • 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.

Questions and Answers

Q: On Diagnostics – this is really more about visibility. You expected a soft start, but it was a negative surprise for us. All I know is that this is the first year where we haven't got a guidance for Diagnostics. You don't even expect to beat the competition as you'd guided in all previous years. We have had so many quarters now where you guided towards an improvement in Diabetes Care. What I hear so far basically tells me that you think the other divisions' weakness is a bit of a one-off, and those should improve, but you still have no visibility on Diagnostics. Is that right in Diabetes Care? Or do you actually see something that gives you confidence that Diabetes Care may also turn the corner at some point? And then talking about visibility, I'm aware of the ongoing restructuring, but if you haven't got visibility on how bad Diabetes Care really gets, have you got sufficient visibility that after the sales disappointment today, we can rule out the margin disappointment in July?

A: I think that the challenge continues to be on the reimbursement side and on the pricing side. On the pricing side, it's largely competitors with very low pricing. On the reimbursement side it was, for last year, reimbursement cuts in large European markets, and it looks to be this year the US market with the announced reimbursement cuts for CMS. The reason why this is difficult to assess is that these are the Medicare CMS cuts. So the difficulty will be seeing how it will affect the markets overall, how it will flow into the private market, and we know in the US, for instance, we have the mandatory tender process, so we also have to see how that will be played out by the different players in the market. And so, there are always going to be certain base effects from year-to-year when these cuts materialize.

Q: Back on Diabetes Care; I’m just trying to get a sense of the extent of price pressure. Could you provide potential commentary on the price differential within yourself and the low-cost providers as an indication of how much further we may have to go, and is that the right way of looking at it?

A: Allow me to start on Diabetes Care. We don't expect that we have seen the bottoming out of the price pressure, clearly not. We continue to see different markets moving also into cutting the reimbursement. The difficulty there is the timing of when it comes. We sometimes have very little visibility ahead, making it difficult to judge the impact. Taking you back to last year, when it was announced in Germany, we then revised again and changed. So, this allowed certain exceptions that were changed subsequently.

I mentioned earlier the announcement for CMS for Medicare in the US. It will take effect July 1. It is a cut of 72% on the reimbursement, but how exactly that will work out in the marketplace; how this will flow over into the private sector; how the mandatory tendering process will be played out; how the mail order companies will actually be sustained in this marketplace is all unknown, and this is what makes it difficult to project.

Q: You also flagged the low-cost provider. So, I'm just trying to get a feel of what the price differential was between yourselves and those providers.

A: It's in different ranges. What we see overall is a price pressure roughly around 5% to 10%, but we see low-cost providers coming in with very, very low pricing. In some cases, it can be as low as 30%, 40% lower. But then again, that does not apply across the entire segment. That is only for just very basic supply. So, in other cases where we have the opportunity, we've also seen the ability to drive higher reimbursement. We have several examples here in Europe from this year and last year. For instance, in France, with our Accu-Chek Mobile, also in some countries, in Scandinavia where we're actually able to increase the reimbursement based on the different solutions that we offer with the dealers.

Q: How do you look at the Diagnostics business going forward? You have a portfolio of different businesses. Some are performing very well and are well integrated with other parts of the business, some are relatively separate and perhaps not performing very well. Even if you adjust in short term, there's a risk in the long term that the future is not as bright. How do you assess those businesses? And at what point do you make tough portfolio decisions on these businesses?

A: As you know, the synergies we can achieve as a group by leveraging the capabilities across Diagnostics and Pharma are, of course, very central to our strategy.

Now, in terms of Diabetes Care, we are facing an extremely challenging environment. And I think the answer can only be, on the one hand, to adjust the cost structure to the new realities. And there are a number of ongoing initiatives to tackle this situation. And secondly, in the long term, to build a differentiated portfolio. We have pointed out the early and very good signs with some of the new products we recently introduced in the United States. It's these two avenues which we will pursue as we go forward.

Q: On Lucentis and stabilizing, you’ve been pretty conservative or cautious about the medium to long-term outlook for Lucentis. How’s the changed? And how are you thinking about Allergan’s DARPin? [Editor’s note: DARPin is Allergan’s phase 2 anti-VEGF AMD candidate; it is currently not under investigation for DME]

A: I would love to have a crystal ball on Lucentis. It continues to be a very challenging market. We are encouraged by our continued share uptake in DME, but it’s going to be competitive in the mid-to-longer term for sure. And we’ll have to see how that plays out with cannibalization perhaps of Avastin or by Eylea or Lucentis. As I’ve said at the end of the year, I expected a slight decline in Lucentis for this year. First quarter looks more promising. We’ll have to see how the other quarters move, but I remain that it’s a highly competitive field that’s quite difficult to predict at this stage.

Q: If I could go back to Lucentis for a minute. In the performance in the first quarter, the one thing you didn't talk about is the potential for market expansion given the issues with compounding pharmacies in the U.S. Just wondering how much of that performance should have been driven by the market becoming bigger.

A: Just to give you an idea of where we stand on the share side, in AMD, the share is relatively stable with about 25% Lucentis, 25% Eylea, 50% Avastin. RVO has been also quite stable with Avastin having more than 50%, Lucentis around 30%. DME is really where we're getting the increase. Now, Lucentis has been increasing quite a bit and is now at a share of around over 20%. Surprisingly, we've not seen a big shift on the Avastin side. As I've said before, I think we're very likely to see a federal action here on compounding pharmacies. Our anticipation is that we're more likely to see state-by-state efforts, and it's still early days to see if there'll be further legislation at a state level relative to compounding pharmacies. But at present, what I can say is we're really not – we're not seeing a lot of cannibalization on Lucentis' side.

-- by Jessica Dong, Kira Maker, Adam Brown, and Kelly Close

¹As a reminder, Avastin is a cancer drug that is the parent compound to Lucentis; since the dose of anti-VEGF necessary to treat ocular indications is so much smaller than that that is necessary for cancer treatment, Avastin dosages are often split up in compounding pharmacies and used off-label for intraocular use. While the cost savings are great (Lucentis costs ~$2,000 per 0.5 mg injection compared to ~$50 for Avastin), Avastin’s safety and efficacy in the eye has not been studied as extensively.