Roche 4Q13 – Worldwide Diabetes Care down 7%; 2014 EU launch for Bluetooth BGM with smartphone app – January 30, 2014

Earlier today, Roche CEO Severin Schwan led the company’s 4Q13 and full-year financial results call. We bring you our top five learnings from the call, including Diabetes Care financial updates, device pipeline updates, and a comparison to J&J and Abbott’s 4Q13 results (reported last week). Like all the big players in BGM, Roche’s US Diabetes Care business has been hit hard by competitive bidding, with North America’s decline of 27% on par with J&J’s 26% decline. While no pipeline updates were given during the call, we were excited to see a new device launch planned for 2014 in the EU: the Accu-Chek Connect, a meter that connects wirelessly via Bluetooth to a smartphone app and the cloud. While no details were shared, it will be interesting to see how it compares to J&J LifeScan’s OneTouch VerioSync (launched in mid-January in the US).

Top Five Highlights

1. Roche worldwide Diabetes Care sales totaled 678 million CHF (~$750 million) in 4Q13, down 7% as reported and 4% operationally year-over-year (YOY) in 4Q13. Sequentially, worldwide Diabetes Care revenue grew 18%; this was a relatively easy comparison, as 3Q13 sales dropped 14% sequentially. For the full year, worldwide Diabetes Care revenue reached 2.5 billion CHF (~$2.7 billion), falling 4% as reported and 3% operationally YOY. Management remarked that although there was a 1-2% increase in BGM strip volumes and meters, this growth was offset by continued pricing pressures in BGM sector. As a bright spot, management noted that they are seeing uptake of products by frequent testers – for example, the Accu-Chek Mobile grew 41% in 2013.  Though presumably from a low base, it is exciting to see growth in this area.

• In North America, Diabetes Care sales totaled 132 million CHF (~$146 million) in 4Q13, down 27% as reported (for context, J&J’s US business declined 26% in 4Q13). This is the second steepest decline we have seen for reported North American growth since we have been tracking Roche (the greatest decline came in six years ago in 1Q08). Notably, this was a challenging comparison, as revenue grew 7% in 4Q12 at a time when competitive bidding was not in effect. For the year, Roche Diabetes Care in North America totaled 482 million CHF (~$520 million), down 17% as reported and 15% operationally. As a reminder, Roche does not break out its US Diabetes Care business from North America. Roche reported that the US made up 20% of total sales in 2013, down from 23% in 2012 (with the extra three percent moving to Europe, the Middle East, and Africa [EMEA]). This has certainly dropped over the years. Sequentially, North American revenue grew 18%, a turn in the right direction; we do note that this was an easy sequential comparison, as revenue dropped 22% in 3Q13. Roche management attributed the 15% decline in North America to the “massive reimbursement cuts” on strips due to competitive bidding.
• Diabetes Care revenue outside of North America totaled 546 million CHF (~$604 million), down 1% as reported. For the full year, Diabetes Care revenue outside of North America totaled 2.0 billion CHF (~$2.1 billion), also down 1% as reported. Roche breaks out its international revenue into two groups: EMEA and Latin America, Asia-Pacific, and Japan (RoW). In 4Q13, EMEA sales totaled 408 million CHF (~$452 million), down 2% as reported from 4Q12. RoW revenue totaled 138 million CHF (~$153 million), up 3% from 4Q12 – this was against an easy comparison to 4Q12, when revenue fell 6%. For the full year, revenue in EMEA totaled 1.5 billion CHF (~$1.6 billion) growing 1% operationally and remaining flat as reported; Diabetes Care revenue in RoW totaled 493 million CHF (~$532 million), down 5% as reported but up 3% operationally. Sequentially, revenue outside of North America grew 18% against an easy comparison (a similar pattern to worldwide and North America sequential growth).
• Roche has said that it has been reorganizing its Diabetes Care business since 2012, and will continue to do so into 2014; Roche’s supplementary materials highlighted that in September 2013, the company announced its “Autonomy and Speed” initiative, aimed at focusing on Diabetes specific requirements and speeding up processes and decision-making to drive efficiencies. We are certainly looking forward to learning more. Certainly, competitive bidding and pricing pressures have forced companies to adapt – we will likely see the total impact on the product development side only some years from now.

2. Although Roche management did not mention its device pipeline during the call, the accompanying slides highlighted 2014 EU launches of the Accu-Chek Insight and Accu-Chek Connect. This is the first that we have heard of a timeline for the launch of Accu-Chek Connect – according to the slide deck, the meter will have Bluetooth connectivity to a smartphone app and the cloud. Management commented that Roche is first devloping an Android app and will later develop apps for additional mobile platforms. The launch of the Accu-Chek Connect will begin in 2H14 in the EU, however, management did not provide a timeline for FDA submission. We are excited to see Roche innovating on this front, right on the heels of J&J’s mid-January launch of the Bluetooth-connected OneTouch VerioSync meter. Regarding the Accu-Chek Insight (next-gen pump + meter remote), the company plans to first launch in Austria in March; this new 2014 launch timeline is a delay from previous comments that guided for a 4Q13 launch. As of 3Q13, Roche also anticipated filing the Accu-Chek Insight with the FDA later in 2014.

• We did not hear any updates on the Accu-Chek Aviva Expert (meter with built-in bolus advisor), the Solo Micropump (Roche’s patch pump), or Roche’s CGM. Regarding the latter, we heard accuracy and precision data at both ADA as well as at the Diabetes Technology Meeting in October (MARD: 8.6% for Roche vs. 10.9% for Dexcom); we hope to hear more about this technology at the upcoming ATTD conference in Vienna.

3. Roche also did not mention any of its remaining cardiometabolic drugs in development (which include a phase 1 GLP-1/GIP dual agonist and a PCSK9 inhibitor). Management listed the discontinuation of its PPAR-alpha/gamma dual agonist aleglitazar as a “key” 2013 event in one supplementary document – aleglitazar data have not been released yet, but it was discontinued due to lack of efficacy and increased rates of adverse events including fractures, GI bleeding, renal impairment, and heart failure. According to Roche’s pipeline, the company’s GLP-1/GIP dual agonist MAR709/RG7697 remains in a phase 1 study with a primary endpoint of safety and PK (not on ClinicalTrials.gov). Roche’s PCSK9 inhibitor RG7652 remains in a phase 2 trial (EQUATOR) for subcutaneous dosing every four weeks with five doses of the drug; internal readouts were expected by the end of 2013, and no data have been released publicly yet. We have not heard news of a partner for this drug, and management has said before that Roche will not advance the candidate without a partner. As a reminder, Roche discontinued it/Chugai’s SGLT-2 inhibitor tofogliflozin in 2Q13 for unspecified reasons.

4. Combined 4Q13 worldwide revenue for J&J, Abbott, and Roche totaled $1.7 billion in 4Q13, falling 7% as reported from pooled revenue in 4Q12. For the full year, pooled sales for J&J, Abbott, and Roche totaled $6.3 billion in 2013, down 6% as reported from 2012. Although this is not as steep a decline as when calculating pooled revenue for only J&J and Abbott, this is not an indication that things are getting easier for the big four glucose companies, and we don’t expect to see improvements until 3Q14 when competitive bidding will have been in effect for over a year. Roche’s Diabetes Care business has struggled for a few years, with only three quarters of positive growth since 1Q11. Although Roche does not break out its operational growth by region every quarter, we believe that performance is on par with how J&J is doing internationally – relatively flat for Ex-North America revenue for the full year 2013. Both J&J and Roche, however, have maintained their commitment to the Diabetes Care business. Roche management remarked that although they continue to readjust and restructure the Diabetes Care business, the business is “good in fundamentals.”

• Between these three companies, Roche had a 45% share of revenue in 4Q13, while J&J held 34% and Abbott held 21%. For the full year, Roche contributed 42% to the pooled revenue, J&J 37%, and Abbott 21%. Compared to 4Q12, Abbott has remained relatively stable in contribution (20%), J&J has declined 2% (from 36%), and Roche has increased 1% (from 27%; values do not sum to 100% due to rounding). This is similar to full year results, with Abbott remaining stable, J&J declining 2% (from 39%), and Roche increasing 1% (from 41%).
• We note that direct comparison between Roche, Abbott, and J&J is challenging since each company’s Diabetes Care business includes a fraction of non-BGM revenue (J&J and Roche have global insulin delivery and Abbott has continuous glucose monitoring outside of the US). We look forward to adding Bayer to this comparison when the company reports on February 28 – Bayer is the last of the Big Four (J&J, Abbott, Roche, and Bayer) BGM companies to report.

Currency conversion for Roche based on average exchange rate from October 1 – December 30 on oanda.com (e.g., 1.1068 USD per CHF). Different results are possible with different currency conversion. Roche does not report revenues for an international category and the international value we report includes the company’s EMEA and RoW categories; as such, operational growth is not available. We also note that Roche’s US value is slightly distorted as Roche reports only North America sales. Reported growth for Roche is calculated based on CHF.

5. Roche/Genentech’s diabetic macular edema (DME) drug Lucentis (intravitreal ranibizumab) continues to drive pharma sales, with sales in 4Q13 totaling 438 million CHF (~$484 million), up 22% operationally YOY. Management called Lucentis’ 2013 performance “much better than expected” with 15% operational growth in the US – Roche initially did not expect much growth for Lucentis in 2013 due to competition from Bayer/Regeneron’s Eylea (intravitreal aflibercept, another VEGF inhibitor), but Lucentis’ August 2012 US approval for DME appears to have expanded the VEGF inhibitor market and given it a significant boost (Eylea is not yet approved for DME in the US). Once again, Lucentis was listed on Roche’s top 20 global products. Turning to 2014, management remarked that they believe Eylea could bring competition to the DME drug arena in the second half of 2014 (at the beginning of November, Regeneron/Bayer submitted Eylea to the FDA for a DME indication).  

--by Hannah Martin, Adam Brown, Jessica Dong, and Kelly Close