Bayer 1Q14 – US revenue down ~40%, Contour sales down 14% YOY; new molecule for diabetic nephropathy; Big Four down 5-7% – April 28, 2014

Early this morning, Bayer CEO Mr. Marjin Dekkers led the company’s 1Q14 financial update. The company’s Diabetes Care business was mentioned briefly during prepared remarks – management noted that the business was “hampered” by reimbursement pressure and price declines. In a surprise showing of granularity, Q&A revealed that worldwide Diabetes Care declined ~6% and the US business fell ~40%. Bayer hasn’t broken out US results since 2008 and we appreciated the specificity.

We’re bringing you our top five learnings from the call, followed by Q&A.

1. By our estimates, Diabetes Care (Contour, Breeze, Elite) revenue reached between €212-227 million (~$290-$311 million), a ~ 6-10% decline as reported. The US business fell ~40%, the steepest decline we have seen across the Big Four BGM companies. Since Bayer did not report its US business results in 1Q13 (or any of the last 20 quarters), we are not sure if this was a challenging or easy comparison. In 1Q13, globally, we estimate that Bayer’s blood glucose monitoring business fell ~4% as reported.

2. Combined 1Q14 worldwide Diabetes Care revenue for the Big Four totaled ~$1.68-1.71 billion, representing a decline between 5-7% from pooled revenue of ~$1.81-1.82 billion in 1Q13. Roche fared by far the best, with global revenue remaining flat as reported and down 5% operationally and J&J fared the worst, with global revenue down 15% as reported and 14% operationally – both were driven by US/North America growth, with Roche’s North America revenue increasing 6% as reported and 13% operationally, and J&J’s US business dropping a steep 32%.

3. Finerenone, an MR antagonist, is newly listed as in phase 2 trials for diabetic nephropathy.

4. Sales for Glucobay (acarbose), Bayer’s alpha-glucosidase inhibitor, totaled €102 million (~$140 million) in 1Q14, up 1% as reported and 4% operationally YOY. Glucobay had “significant growth in demand, especially in China,”

5. Bayer submitted Eylea in Japan for a diabetic macular edema (DME) indication. Additionally, the FDA accepted the Biologics License Application (BLA) for a DME indication in December, likely placing a decision in August 2014.

Top Five Highlights

1. For the first time since 2008, we heard details on Bayer’s overall Diabetes Care business (Contour, Breeze, Elite): down ~6% for global Diabetes Care and ~40% in the US business (it was not clear if this was reported or operational). By our estimates, Diabetes Care sales reached between €212-227 million (~$290-$311 million). The ~40% US decline is the steepest drop in US sales we have seen across the Big Four blood glucose monitoring companies (Abbott, J&J, Roche, and Bayer). However, we would note that since Bayer has not provided overall growth breakdowns of its Diabetes Care business since 2008 (only Contour breakdowns), there is a chance that the company has faced similar declines in previous quarters.

• Sales Figure Assumptions: Management commented during Q&A that the global Diabetes Care business dropped 6%. The company did not indicate whether or not this was operationally or as reported; in the best case scenario, this is as reported, and overall diabetes care only dropped ~6% - which we used to calculate our upper-bound revenue ($311 million). In the worst case scenario, we estimate sales dropped 10% - this is benchmarked against the worst-case historical discrepancy between Contour’s reported and operational growth within the past year (a 4% difference).
• Revenue from Contour (Bayer’s lead BGM franchise) totaled €146 million ($200 million) in 1Q14, down 14% YOY as reported and 12% operationally. This was a moderately challenging comparison (in the current BGM environment) given that revenue grew 2% as reported and 3% operationally in 1Q13. Sequentially, revenue fell 18% from 4Q13. Contour revenue declined for the third quarter in a row, a trend we have not seen since we began recording Contour revenue in 2008.
• Management once again emphasized that its Diabetes Care business has been “hampered” by reimbursement pressure and price declines, “especially in the US.” The company also noted that it expects to see a little more shrinkage in the Medical Care market, in part due to the continued weakening of the Diabetes Care market. The marked 40% drop in the US Diabetes Care business indicates the challenges that the entire diabetes market is facing – see below for a review of the Big Four.  
  
  • During Q&A, a speaker asked about Bayer’s Diabetes Care strategy and what the company needs to see before it “disposes of” the business. Management responded that within the past year, the company has significantly reorganized its Diabetes Care business. The company did not speak to the Diabetes Care strategy moving forward, and also did not mention performance standards against which Bayer is measuring Diabetes Care. However, in response to this question, management did comment on the toll that competitive bidding has taken, lowering prices not only in the mail-order channel but also in retail due to “price-equalization.”

Table 1: Contour Revenue (1Q13-1Q14)

Currency conversions are based on average exchange rates from start to end of the quarter or year on oanda.com (e.g., 1.3702 USD per EUR in 1Q14).

2. Combined 1Q14 worldwide Diabetes Care revenue for the Big Four totaled ~$1.68-1.71 billion, representing a decline ~5-7% from pooled revenue in 1Q13. Roche fared by far the best, overall, with revenue remaining flat as reported and growing 5% operationally. This result was driven by the US/North America, where sales grew a surprising 6% compared to a 2% decline internationally. By contrast, J&J revenue declined 15% overall, led by a striking 32% decline in US sales. Bayer and Abbott were also dragged down by sluggish performance in the US, where sales declined 40% and 28%, respectively. Overall, it was perhaps the gloomiest quarter in the history of US BGM.   

• Among the Big Four, we estimate that Roche had the highest market share by sales in 1Q14 (~35-36%), followed by J&J (~30%), Abbott (~17%), and Bayer (~17-18%). Bayer and Abbott maintained their tie for last, in 1Q14 the company dropped into a solid last place, while Roche lost ~1% (gained by J&J). Please see Table 3 for additional details.

Table 2: 1Q14 Big Four Diabetes Care Revenue Comparison

Currency conversion for Roche based on average exchange rate on oanda.com (e.g., 1.1200 USD per CHF for January 1 – March 31). 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 inflated, as it includes revenue from Canada (“North America” sales). Reported growth for Roche is calculated based on CHF.

Currency Conversion for Bayer is based on average exchange rate on oanda.com (e.g., 1.3702 USD per Euro for January 1 – March 31). Different results are possible with different currency conversion. We emphasize that US and International Bayer Diabetes Care revenue are estimations based on management remarks during Q&A.

Table 3: Estimated Big Four Worldwide Market Share by Sales for 1Q14

• We note that direct comparison between J&J, Abbott, Roche, and Bayer is difficult because J&J’s, Abbott’s, and Roche’s Diabetes Care business all include a fraction of non-BGM revenue. J&J and Roche have global insulin delivery, and Abbott has continuous glucose monitoring outside of the US. Bayer recently sold its A1c Now business to Polymer Technology System in December.

3. Although not mentioned during the call, Bayer listed finerenone, an MR antagonist (mineralocorticoid receptor antagonist) in its pipeline as currently in phase 2 trials for diabetic nephropathy. We could not find a trial on ClinicalTrials.gov for diabetic nephropathy; however, we were able to find one examining different oral doses in subjects with worsening chronic heart failure and left ventricular systolic dysfunction, either with or without type 2 diabetes (ClincalTrials.gov Identifier: NCT01807221). The trial is currently recruiting, with a primary outcome measure as a reduction in prohormone B-type natriuretic peptide.

• AbbVie, Lilly, Pfizer, Concert Pharmaceuticals, and Vascular Pharma are also investigating treatments for diabetic nephropathy in phases 1, 2, and 3 (See Table 4 below for details).
  
  • On April 25, Concert Pharmaceuticals announced positive 48-week results from its phase 2 clinical trial of its diabetic nephropathy candidate, CTP-499. The amount of urinary albumin to creatinine ratio (UACR), the trial’s primary endpoint, was not significantly altered for those taking CTP-499; however, there was a favorable trend toward a smaller ratio observed at 48 weeks. Additionally, although also not significant, participants taking CTP-499 experienced a slow down in the increase of serum creatinine, which was one of the study’s secondary endpoints (serum creatinine is a marker of impaired kidney function). Patients on CTP-499 experienced a significant reduction in two fibrotic biomarkers evaluated in the study (fibrosis is believed to be a final common pathway for kidney failure due to diabetic kidney disease): 52% decrease in urinary fibronectin (p=0.008) and 18% decrease in plasma collagen IV (p=0.02). The most common adverse event reported was mild to moderate nausea, with no reported serious adverse events related to the drug.
  • The trial was a double-blinded, randomized, placebo-controlled study (n=151). Participants on CTP-499 took 600 mg twice daily. Part one of the study lasted 24 weeks, and participants that completed part one were eligible to continue to study for 24 weeks (86% participated in part two). All participants that completed part two were eligible to continue the study for up to 48 weeks of open-label treatment – this is currently ongoing.

Table 4: Comparison of Diabetic Nephropathy Candidates

4. Sales for Glucobay (acarbose), Bayer’s alpha-glucosidase inhibitor, totaled €102 million (~$140 million) in 1Q14, up 1% as reported and 4% operationally YOY. Sequentially, Glucobay revenue declined 9%. Despite this decline, Glucobay still made its way to Bayer’s “Best Selling Pharmaceutical Products” list. In the company’s financial briefing, management highlighted that Glucobay had “significant growth in demand, especially in China,” similar to comments made in 4Q13.

Table 5: Glucobay Revenue (1Q13-1Q14)

5. Bayer’s financial materials highlighted the submission of its application to the Japanese Ministry of Health for a diabetic macular edema (DME) indication of  Regeneron/Bayer’s Eylea (VEGF Trap-Eye; intravitreal afibercept); we also wrote about this in our 4Q13 financial report (the application was submitted at the beginning of March, right after the company’s 4Q13 and year-end financial update). Bayer also emphasized Eylea’s driving power for the company’s pharmaceutical sector, with particularly strong sales in Japan, France, and Germany. As a reminder, Eylea is currently marketed for wet age-related macular degeneration (wAMD); the drug has been approved in the US since 2011 and in the EU since November 2012.

• Additionally, in December, the FDA accepted the Biologics License Application (BLA) for a DME indication, likely placing a decision in August 2014. This submission comes about one year ahead of the previously announced schedule, putting Eylea almost a year and a half behind the release of Novartis’ Lucentis (ranibixumab), which secured FDA approval for a 0.3 mg dose for DME in August 2012. Additionally, the company also submitted to the EMA in November.
• Although Eylea is still in phase 3 trials for a DME indication, two studies (VIVD-DME and VISTA-DME) have shown positive results for the use of Eylea with DME. Patients treated monthly or bi-monthly with Eylea 2 mg (after five initial injections) achieved greater improvements in best-corrected visual acuity from baseline compared to photocoagulation after one year (VIVID-DME) and two years (VISTA-DME).
• Regeneron/Bayer’s phase 3 program includes four studies: (i) VISTA-DME in the US (ClinicalTrials.gov Identifier: NCT01363440), which is ongoing but not recruiting participants; primary completion date was January 2013; (ii) VIVID-DME in Europe and Japan (ClinicalTrials.gov Identifier: NCT01331681), which is currently ongoing but not recruiting participants; primary completion date was June 2013; (iii) VIVID-Japan in Japan (ClinicalTrials.gov Identifier: NCT01512966), which has been completed; no results have been posted; and (iv) VIVID-EAST in Russia, China, and other Asian countries (ClinicalTrials.gov Identifier: NCT01783886), which is currently recruiting patients; primary completion date is July 2015.

Questions and Answers

Q: The Diabetes Care business is basically a drag that we have been seeing for some time, yet other companies are improving. What do you need to see before you decide to actually dispose of this business? Or what is the turnaround strategy for Diabetes Care?

A: Yes, Diabetes Care has become a tougher business, no doubt, but most specifically in the U.S. I think you're fully aware of what happened last year with national competitive bidding that lowered reimbursement not only for what was the intention initially, the mail-order channel, but also causing drastic price cuts in the retail, due to retail price equalization. So as a consequence of this tremendous price pressure on the Diabetes business, you see a 6% decline for the overall global business, and a much more significant decline in the U.S., about 40%. However, we restructured our business a great deal last year in order to help partially protect our margin.

Q: Can you give us a little bit more background on Eylea into where you are gaining sales in Europe and whether there is any use in DME or AMD (macular degeneration), and how you see the pricing?

A: We have sales coming from the UK and to a very large extent from Germany. Also, Eylea’s launch in France has been very successful. I'll give you market share for wet AMD: Germany has grown during the quarter from 28 points to almost 29 points, the UK has gained about 4.4 points, and France has gained more than 6 or 7 points in terms of market share. So it's going very well in Europe.

Q: In light of the LCZ696 news in heart failure [delayed cardiovascular death and reduced heart failure hospitalizations] from your competitor, Novartis, how does that data impact your program around the MR antagonist? Does it mean that the program is accelerating?

A: Last month we saw the data from the LCZ Novartis products in CHF (congestive heart failure), and it’s important data to take into account while we’re designing the future phase 3 program for finerenone in CHF. We don't have the full understanding of the data, which have yet to be published. We’re not going to start phase 3 before mid-2015 so we’ll have all the elements needed to incorporate those very important [LCZ] results in our drug development profile. We also still see a lot of value of the HTC platform in that indication.

--by Hannah Martin, Adam Brown, Jenny Tan, and Kelly Close