Roche 1Q12 – Diabetes Care sales fall 7% operationally; no major updates to cardiometabolic and ophthalmologic pipelines – April 12, 2012

This morning, Roche CEO Severin Schwan led the company’s 1Q12 results call. Roche Diabetes Care had one of its weakest topline quarters in recent memory, with worldwide 1Q12 revenue of 564 million CHF (~$611 million) reflecting year-over-year declines both in Swiss francs (down 12%) and holding currency effects constant (down 7%). Sequentially, Diabetes Care revenue fell nearly 25%. Blood glucose monitoring – which accounts for over 90% of Diabetes Care sales – fell 9% operationally compared to 1Q11. Insulin delivery revenue grew 15% operationally – a relative bright spot, though the comparison was soft (revenue declined 11% operationally in 1Q11). The decline was sharpest in Europe, the Middle East, and Africa (down 11%), which management attributed largely to bleak reimbursement, presumably in Europe where they have traditionally. A one-time example (but representative of the climate) was Poland’s decision to remove major companies’ SMBG products from its national formulary, with reimbursement restored (and at a much lower-than-previous rate) only in March. Roche Diabetes Care revenues in “RoW” – Latin America, Asia Pacific, and Japan –were almost as high as in N. America in 4Q12, and “RoW” may soon become a bigger geographic region than N. America.

Management hopes 2Q12 launches of the recently FDA-cleared Accu-Chek Nano SmartView no-coding meter in the US and the CE marked Accu-Chek Mobile “strip-free” meter in the EU will help. Launches during 2012 are also still planned for the Accu-Chek Combo pump/meter in the US and the SOLO Micropump in the EU. However, given reimbursement uncertainties (and, less-emphasized, stiff competition from the rest of the Big 4, Sanofi when it launches, and “store-brand” manufacturers), management shied away from forecasting positive full-year growth. Indeed, their point of strongest assurance was that growth by the end of the year would be better than in 1Q12 – based on this, of course, it’s difficult to know whether positive growth is expected. We will see how the other three major BGM companies when they report (J&J, Abbott, and Bayer on April 17, 18, and 26, respectively). Roche’s market leadership in Europe presumably makes it the company hardest-hit by austerity measures there.

During the call, no new updates were provided regarding the company’s cardiometabolic and ophthalmologic pipelines. Aleglitazar, the company’s dual PPAR gamma/alpha agonist for CV risk reduction in type 2 diabetes, continues to be examined in two phase 3 trials (AleNEPHRO and AleCARDIO). A phase 2 study for Roche’s 11B-HSD inhibitor (RG4929) is ongoing, with data expected in 2Q12. A phase 1 study for the GLP-1/GIP dual agonist (MAR701/RG7685; acquired from Marcadia in December 2010) was completed in 4Q11, and a “follow-up” study is currently in preparation (Roche had previously indicated a phase 2 trial would initiate in 4Q11). Genentech is currently conducting a phase 1 study for a yet specified monoclonal antibody for metabolic disease (RG7652). Finally, Roche submitted a supplemental Biologics Application (sBLA) for Lucentis (ranibizumab) for the treatment of diabetic macular edema in October 2011. A decision from the FDA is expected around August 2012.

DIAGNOSTICS AND DEVICES

• Roche Diabetes Care revenue totaled 564 million CHF (~$611 million) in 1Q12, down 12% on a reported basis and down 7% operationally from 643 million (~$683 million) in 1Q11. The year-over-year comparison was actually an easy one overall (1% worldwide operational growth in 1Q11), especially in North America (13% operational decline) and EMEA (3% operational growth), which further reinforces the challenges in blood glucose monitoring for Roche globally, in our view. The “RoW” comparison (Latin America, Asia-Pacific, and Japan) was much more challenging (18% operational growth in 1Q11), and although Roche’s growth rate in some of the less established markets may be slowing somewhat, “RoW” provided some relative strength in the quarter. The “RoW” base has grown considerably over time – notably, RoW revenue was only 8 million CHF (~$9 million) smaller than North American revenue for Roche in the quarter. For North America to be Roche’s smallest region would be quite a significant shift, though that seems to be where the trend is pointing; given that growth is better there, on balance, it’s good to see continued positive growth, even if it is lower as the base grows.

*Roche Investor materials referred to this percentage decline as 11%; our calculations give 12%. 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: 1.0835 USD per CHF.

• Management attributed Roche’s sluggish recent performance largely to reimbursement difficulties in Europe – we would certainly agree and note that Roche is probably being hit the hardest by the European woes of the “Big 4” as they have dominated that market historically. Management mentioned that Roche looks forward to help from the US launch of the Accu-Chek Nano SmartView meter in 2Q12; we do not believe that they anticipate a turnaround in Europe, and we believe it’s probably more important to ask whether the latest decisions there will be seen elsewhere or whether they will actually be contained. For example, France (traditionally a country where diabetes reimbursement was more positive) and Germany were highlighted as difficult spots for reimbursement of strips for patients with type 2 diabetes, and management noted that for two months the Polish government stopped reimbursement for all major the major manufacturers’ testing supplies. Polish reimbursement resumed in March at a lower rate than previously – as we understand it, a significantly lower rate; in Q&A, management said this was “tens of millions of Swiss Francs in impact” – so hardly insignificant and presumably the new reimbursement rates do not bode well for growth, not only in Poland, but likely elsewhere as well. Finland was mentioned as a rare haven of positive change (although it’s a relative small market), and hopes are high for US launch of the Nano SmartView (though we note that differentiating the meter could be difficult in the highly competitive US market, particularly this year with so many new product launches from larger companies like Abbott, J&J, and Sanofi). When asked during Q&A whether Diabetes Care was on target for positive full-year growth, management was “firm” only in forecasting that growth would improve by the end of the year. We understood this forecast to mean, rephrased that sales in 4Q12 will at worst decline by less than 7% operationally. This seems a rather bleak target when framed thusly,but realistic in a world of dwindling reimbursement in a region where Roche has had so much historical strength.
• Sequentially, worldwide revenue declined 24% – a poor showing even in the context of the 4Q-1Q decline that is typical of the industry. Recent 4Q-1Q declines have been less severe, at 16%, 13%, and 11% in 2010-11, 2009-10, and 2008-09, historically. We note that Roche’s unusually high 4Q11 sequential growth (21%) was inflated by a weakening of the Swiss franc during 4Q11, so the 1Q12 slump would seem to be ‘real’ and not just a rebound effect. Notably, sequential weakness was actually most severe in North America, where revenue was down 32%; EMEA and RoW weren’t much better, down 21% and 22%, 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: 1.0835 USD per CHF.

• Roche’s blood glucose monitoring revenue fell 9% operationally in 1Q12. As a reminder, trends in BGM and Diabetes Care always 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.)
• First-quarter insulin delivery sales were up 15% operationally in a soft year-over- year comparison. In 1Q11, insulin delivery revenue fell 11% operationally (albeit from a strong 1Q10 in which insulin delivery revenue grew 23% operationally).
• Roche’s device pipeline has not significantly changed since the company’s 4Q11 presentation. As a reminder, the company now provides targets for product launches by year rather than by half-year. The 2012 list includes the next-generation Accu-Chek Mobile (a no-strip meter with an integrated lancet) in the EU; the Accu-Chek Combo (integration of the Accu-Check Spirit insulin pump with the Accu-Chek Aviva meter) in the US; the SOLO Micropump (Medingo’s long-awaited patch pump) in the EU (specifically, the Netherlands in mid-2012 and Germany in 4Q12 with wider launch to follow, per previously stated company plans); and the Accu-Chek Nano SmartView (a sleek, backlit meter that does not require coding) in the US. As a reminder, Roche announced FDA clearance of the Nano SmartView in January, and the company plans to launch in the second quarter of the year (ideally, the rollout will coincide with the ADA in early June). Roche has not yet announced regulatory green lights for the SOLO or the Accu-Chek Combo, but supplementary materials indicated that 2Q12 is also the EU launch target for the Accu-Chek Mobile, which has received CE mark. The near-term launch is definitely a positive in our view, and this would make for a brighter EASD in the fall, though again, the austere environment in Europe certainly colors the environment overall no matter what the product offerings. For a deeper dive on the company’s device pipeline, see our Roche 4Q11 coverage at http://www.closeconcerns.com/knowledgebase/r/997711ea.

Cardiometabolic Pipeline

• There were no significant updates to Roche’s cardiometabolic pipeline during 1Q12. As a reminder, aleglitazar (a dual PPAR gamma/alpha agonist) is currently being examined in two phase 3 studies (a two-and-a-half-year CV outcomes study in people with type 2 diabetes [AleCARDIO] and a one-year study in people with type 2 diabetes and renal impairment [AleNEPHRO]) – data is expected on AleNEPHRO in the second half of 2012. Due to the cardiovascular outcomes study, filing is not expected until 2015. For more details on aleglitazar, please see the July 25, 2011 Closer Look at https://closeconcerns.box.net/shared/st85i0pb88zn1lgqa08c. Chugai (a member of the Roche group – Roche doesn’t own it outright, but controls about 60% of Chugai shares) is developing tofogliflozin (a SGLT-2 inhibitor) in phase 3 studies in Japan. Roche returned the rights to the compound to Chugai in July 2011 (for more details, please see the July 25, 2011 Closer Look at https://closeconcerns.box.net/shared/st85i0pb88zn1lgqa08c). To our understanding, the company continues to search for a partner to help fund phase 3 development in the US and EU – undoubtedly it will be difficult to do so, at best, before there is greater clarity from FDA surrounding the SGLT-2 inhibitor class. A phase 2 study for Roche’s 11B-HSD inhibitor (RG4929) is still underway with data expected in 2Q12 – presumably data would come at ADA, and we look very forward to this. The primary endpoint of the trial is change in liver fat content. Previously, positive phase 2 data was reported for Incyte’s 11B-HSD inhibitor (INCB13739; see our Discovery on Target 2010 Day # 2 report at https://closeconcerns.box.com/s/2e75e393dc07e946bf87). However, the drug is no longer listed in the company’s pipeline. Other companies developing 11B-HSD inhibitors include BMS (metabolics, unnamed, discovery through phase 2) and Boehringer Ingleheim (type 2 diabetes, unnamed, phase 1). Notably, Amgen was developing an 11B-HSD inhibitor (AMG221) in its phase 1 program as of its 4Q11 update. However, the candidate is not currently listed in the company’s pipeline (updated February 20, 2012). A phase 1 study for Roche’s GLP- 1/GIP dual agonist (MAR701/RG7685; acquired from Marcadia in December 2010) was completed in 4Q11. To our understanding, results from the study have not yet been reported. Roche previously guided for a phase 2 trial to initiate in 4Q11, but the call’s accompanying materials indicate that a “follow-up” study is currently in preparation. We are paying a close eye on this as Roche paid a high price for Marcadia given its early stage (about $300 million plus significant potential milestone payments) and we are eager to see whether the purchase will be deemed a successful one. Finally, Genentech is developing a monoclonal antibody (RG7652) for the treatment of metabolic diseases in a phase 1 study (initiated in 3Q11); we’re glad to see the pipeline is moving at the early stages as well; it has been challenging to bounce back after the taspoglutide disappointment in 2010 that resulted in suspended trials for the phase 3 GLP-1 compound. We believe there are likely multiple preclinical and early stage compounds possible to advance in diabetes for Roche, but they do not give much information for compounds at such early stages.

OPHTHAMOLOGY

• Roche filed a supplemental Biologics Application (sBLA) for Lucentis (ranibizumab) in October 2011 for the treatment of diabetic macular edema (DME). We imagine that there are high hopes that an approval for this indication could help improve this business, which has deteriorated significantly over the last year. Roche is facing an increasingly competitive environment for Lucentis; while in 1Q11, growth had risen 35% to 391 Swiss francs (~$425 million), sales of 385 million Swiss Francs (~$425 million) in 1Q12 were flat in local currency, following declining growth rates of 29%, 17%, and 13% in the last three quarters of 2011). This trajectory would suggest the business would decline starting in 2Q12; better regulatory news from the US may certainly help further out. Given the FDA’s standard review timeline for ansBLA of 10 months, a decision from the agency is expected in August 2012 (for more details on the Lucentis DME development program, please see the April 8, 2011 Closer Look at https://closeconcerns.box.net/shared/5zhhgccvbjdma4oqj9eg). As a reminder, in early 2011, Lucentis gained approval for the treatment of DME in the EU and Canada (see the January 7, 2011 Closer Look at https://closeconcerns.box.net/shared/e1qzkx2y4my0lx7tn4us) and the company is certainly hoping for such an approval in the US. Currently, in the US, Lucentis is approved for the treatment of wet age-related macular degeneration (AMD) and macular edema following retinal vein occlusion (RVO). For additional information on Lucentis as a treatment for wet AMD and RVO, please see our Roche 3Q11 report at http://www.closeconcerns.com/knowledgebase/r/e45c61cf and our Roche 4Q11 report at http://www.closeconcerns.com/knowledgebase/r/997711ea. Roche is currently developing a sustained release version of Lucentis for the treatment of AMD, RVO, and DME in phase 1 studies.
• Several other companies are also developing late-stage candidates for DME:
  • Regeneron and partner Bayer are currently conducting three phase 3 studies examining Eylea (intravitreal aflibercept, also known as VEGF Trap-Eye) as a treatment for DME (clinicaltrials.gov identifiers: NCT01331681 [pivotal studyin international countries], NCT01512966 [Japanese safety study], NCT01363440 [pivotal study in the US]). The trials have estimated primary completion dates of May 2013, September 2013, and December 2013, suggesting that DME approval is unlikely until at least 2014. Similar to Lucentis, Eylea works to block the action of VEGF-A (for more information on Eylea, please the see the April 8, 2011 Closer Look at https://closeconcerns.box.net/shared/5zhhgccvbjdma4oqj9eg).
  • Last November, Alimera Sciences/pSivida announced a second FDA complete response letter for its DME therapy Iluvien, an implantable device that releases the corticosteroid fluocinolone acetonide. The agency raised concerns about the risk-benefit ratio seen in Iluvien’s pivotal clinical trial program for DME (FAME). Side effects observed in the trial included cataracts and elevated intraocular pressure. The complete response letter asks the company to conduct two additional clinical trials to demonstrate that the product is safe and effective. At the time of the letter, Alimera management said they hope to gain more clarity on these trials in a private meeting with the FDA; they noted that repeating trials of FAME’s scope or cost (roughly $75 million) would be prohibitive. In the EU, Alimera announced in February that a positive outcome from the Decentralized Procedure (DCP) for Iluvien had been reached. The regulatory process has now entered into national phase of the DCP, in which individual countries grant national licenses.
  • Lilly’s Arxxant (ruboxistaurin), an oral small molecule PKC-beta inhibitor, is listed as “lost through attrition” on the company’s pipeline, which was last updated in January 2012. As a reminder, in 2006 the FDA requested additional data on the drug, and the company previously targeted late 2011/early 2012 for the end of this trial (clinicaltrials.gov identifier: NCT00133952). Pending the results, Lilly planned to either ask the agency to reconsider the Arxxant new drug application (NDA) or withdraw its submission. While we have not heard any updates on this since Lilly’s 2Q11 call (see the July 22 Closer Look at bit.ly/A8hQsI), the pipeline classification sounds quite negative.
  • In July 2011, Pfizer withdrew its European application for a DME indication for Macugen (pegaptanib), which is currently approved for wet AMD in the EU and US (see the November 1, 2011 Closer Look at http://www.closeconcerns.com/knowledgebase/r/4dafd9d8). In its letter to the regulatory authorities, Pfizer cited the CHMP’s unfavorable preliminaryassessment of risk-benefit ratio as the reason for withdrawal. Macugen is a selective VEGF antagonist. As of its 3Q11 update, Pfizer had also dropped development of its phase 2 DME treatment PF-04523655. In March, Quark Pharmaceuticals (Pfizer’s partner on PF-04523655) announced premature termination of a two-year trial with laser treatment as a comparator, due to efficacy that didn’t project to be competitive with Lucentis. Quark subsequently started a new trial that included higher doses and a direct comparison to / combination with Lucentis; clinicaltrials.gov indicates that the trial remains ongoing with a primary completion date of May 2014 (NCT01445899, last updated October 2011; not in collaboration with Pfizer).
  • iCo Therapeutics and partner JDRF recently initiated recruitment for a phase 2 trial (iDEAL) examining iCo-007 as a treatment for DME. iCo-007 is an antisense inhibitor of C-raf kinase, an intermediate signaling molecule within pathways that regulate new blood vessel growth and vascular permeability, key factors involved in the pathology of DME. For more information, please see the April 6, 2012 Closer Look at http://www.closeconcerns.com/knowledgebase/r/6d3e2f90.
  • JDRF also recently entered into a collaboration with KalVista to conduct late-stage preclinical research on KalVista’s plasma kallikrein inhibitors for the treatment of DME. For more information on this collaboration, please see the January 18, 2012 Closer Look at bit.ly/I0L5sQ.

Questions and Answers

Q: Your Diabetes Care business was weak across the board, and the explanations get changed every quarter. Could you give us a rough idea of how big Poland in this within your EMA sales contribution? Additionally, if I look at the US quarterly progression, the fourth quarter was very good because you had some product launches in September, but now it's been very weak again. So it almost looks like you had pipeline filling in the fourth quarter that's now destocking. So is there any reason we should be concerned that these new products that were launched in September in the US are not living up to expectations?

A: On Diabetes Care, relative to the reimbursement changes in Europe, there are really two factors we're seeing at play here. One is that in the third and fourth quarter last year, there were some changes with type 2 diabetes reimbursement in key European markets, such as France and Germany. I think those changes came to a more full effect in the first quarter even though the change occurred earlier. The changes came to a more full effect in terms of inventories in the first quarter. I think that's why we're seeing a bigger impact now in the first quarter.

Poland is tens of millions of Swiss francs in impact. So, it is material and it was not just for us, it was for all the major players. They literally stopped reimbursement of all products on January 1st. They’ve just now reinstituted, albeit at a lower prices, reimbursements in late March. So, that's I think affecting predominantly our European sales. By the way, Roche is overweight in comparison to our competitors here because of our overall presence and strength in Europe.

In the United States, we have a situation where we got the Accu-Chek Nano approval in January. But because of the time it takes to get a product into the channel and into the trade and into the pharmacy, we really won't see an impact until the second quarter.

So what you saw, I think, between the fourth quarter last year and the first quarter this year is just continued competitiveness erosion without having being able to really launch the new products fully into the marketplace.

Q: With Diabetes Care, if we've got the European reimbursement effect, presumably that will last for the whole year, maybe not for Poland, but let's say that's small. Are we looking at negative growth for 2012 in Diabetes Care, or can we rely on the Accu-Chek launches to get us to positive territory?

A: I think it is a bit hard to predict the market environment moving forward. I mentioned some negative effects in countries like Germany and France on segments of reimbursement and obviously, Poland. There are also positive effects in countries like Finland. And also, for instance, New Zealand had announced a desire to significantly change their reimbursement. Because of the challenges associated with switching patients in Diabetes Care, that's currently under review right now. It really is a changing marketplace. We expect the launch of the new products, particularly Accu-Chek Mobile, to be able to offset some of the reimbursement changes going on in the marketplace. There should also be some uptake in growth in the US. I think it's a little difficult to give you an absolute prediction for the year-end other than that we would be firm on the fact that we believe that the overall Diabetes Care growth will improve between now and the end of the year and that it won't significantly affect our ability to meet our overall commitment on the Diagnostics side to grow faster than the market.

Q: For Lucentis, I thought that the majority of Lucentis in the US is currently being used on PRN. So how are you really going to be able to use this data to defend the franchise? And then, if I look at what Regeneron is saying on Eylea, there seems to be a disconnect between their volume comments and yours. I'm trying to figure out where the difference is, but I’m interested in your thoughts.

A: For Lucentis volume, I'm not sure what you are referring to by volume. Maybe you are referring to share and what has been commented on by Regeneron with regards to patient share. I wouldn't want to comment on share of volume of competitive products. You'd have to ask them what they are referring to. What I've given you is new patient share for the first quarter. Sometimes people look at intent to treat share or intent to treat by physicians. If we look at this data ourselves, if we go to physicians and ask them their intent, their intent to use Eylea is higher than the share you've seen in the first quarter. Now our job is to try and influence that and demonstrate to physicians that they don't need to change their behavior. That's what we intend to do, and that's why the PRN data will certainly be helpful. Our sales force will able to actively promote the use of PRN and demonstrate the fact that Lucentis can be used on a PRN basis. Basically, this leads to six injections a year on average, which is sort of equivalent to the Eylea regimen. Finally, we also have the DME indication that I mentioned earlier in the presentation, which should have an impact in the second half of this year as we launch it.

--by Joseph Shivers, Ben Kozak, and Kelly Close