Abbott 4Q13 Quick Take – Worldwide Diabetes Care falls 4% in 4Q13 and 2% in 2013; no pipeline updates on next-gen sensor – January 22, 2014

Earlier today, Abbott reported 4Q13 and 2013 financial results in a call led by CEO Mr. Miles White. We have enclosed our top five learnings from the call, including a Diabetes Care financial update, thoughts on competitive bidding, and a comparison to J&J’s 4Q13 Diabetes Care sales reported yesterday. While there is no question that this is a very challenging time for all US blood glucose monitoring businesses, Abbott’s US business did not see quite the percentage decline that J&J’s did, and its international performance was more positive, with 5% growth.. The coming year is expected to be challenging globally, with “low double digit” declines in the first half, and “high single digit” declines in the second half, driven by a very depressed US business. The US weakness will be offset, a bit, by double-digit gains in select emerging markets. 

1. Worldwide Diabetes Care totaled $346 million in 4Q13, down 4% year-over-year (YOY) on both a reported and operational basis. Abbott’s small worldwide growth in 3Q13 (0.6% YOY) did not carry over into 4Q13, and management partially attributed the overall decline to competitive bidding in the US. US Diabetes Care sales totaled $129 million, declining 14% YOY – this marks four straight quarters of negative US growth, and the first time Diabetes Care has experienced a double-digit decline in the US since 2009. The competitive landscape is certainly very challenging right now, though we’d note that 4Q13 had a particularly challenging YOY comparison, with revenue growing 10% in 4Q12. Internationally, 4Q13 sales reached $217 million, up 3% YOY as reported and 4% operationally; this is on par with growth from 1Q13 (2% as reported and 3% operationally) and 2Q13 (3% as reported and 4% operationally) – certainly, this area of the business seems at least slightly more predictable, perhaps driven by continued growth in select emerging markets such as Latin America and Russia. Sequentially, global Diabetes Care grew 9%, headlined by a very positive (relatively speaking) 6% sequential growth in the US. International sales revenue grew a strong 10% sequentially, although we do note Abbott’s 4Q international sales are typically greater than the first three quarters of the year.

2. For full-year 2013, worldwide Diabetes Care revenue totaled $1.3 billion, a 2% reported decline and a 0.8% operational decline; 2013 had an easy comparison to 2012, when revenue fell 3%. US sales totaled $518 million, down 9% on a moderate comparison against 2012 (revenue grew 4%); this is the first year since 2009 that full-year US sales have declined. Internationally, Diabetes Care totaled $788 million in 2013, up 4% as reported and 5% operationally.

3. Competitive bidding once again played a major role in 4Q13, with management pointing to “reimbursement reductions and competitive dynamics” as a driver of the sales decline in Diabetes Care. (We assume “competitive dynamics” means that other companies are willing to put prices down more than Abbott though management did not explicitly say this.) Management emphasized that the global sales decline was impacted by the implementation of CMS’ competitive bidding program in the US. As a reminder, this is the second quarter that competitive bidding has been in effect; such pricing pressure is relatively new in the US compared to other countries where profitability has long been low due to access issues. Abbott highlighted that its international sales, which now represent 60% of the company’s total Diabetes Care business, grew 4% operationally in 4Q13, driven by growth in emerging markets. Turning to the future, the company acknowledged that this pressure will continue into 2014, guiding for double digit growth in emerging markets offset by the expected decline in US due to “reimbursement reductions and competitive dynamics.” In addition to competitive bidding in the US, management also commented in Q&A on pricing pressure in Europe, which we know is ongoing – one direction only. (Access is far worse in some EU countries, compared to the US; we feel many European countries are missing the forest for the trees and that the nonexistent access in some countries will come back to haunt these governments.) .

We have been watching how each of the blood glucose monitoring (BGM) companies has responded to the pricing pressures; J&J, who reported 4Q13 financial results yesterday, has reorganized its Diabetes Care business and effectively given its LifeScan sales force to Janssen, manufacturer of SGLT-2 Invokana. The company is continuing to launch new products, most recently with the launch of the LifeScan OneTouch VerioSync a little over one week ago. From today’s call, Abbott sounds very committed to continuing to expand in emerging markets (we are so glad to hear this, as it is such a high-need area), and we also believe that Abbott’s new Flash Glucose Monitoring System (a 14-day, factory-calibrated, subcutaneous sensor intended to replace BGM) will certainly move the company forward.

4. Disappointingly, management did not provide a pipeline update during the call – we had been hoping for news on Abbott’s next generation sensor (the Flash system, mentioned above). However, management confirmed its guidance from its 2Q13 financial update for the sensor’s 2H14 EU launch. We were able to find a company presentation dated August 2013, which places the next generation sensor as a “mid-term” innovation driver; the FreeStyle InsuLinx, FreeStyle Precision Neo, and FreeStyle Precision Pro were all listed as near-term drivers. Management did not mention any of these during the call; the FreeStyle InsuLinx is available in both the US and the EU, while the Freestyle Precision Neo is available in Europe, and the FreeStyle Precision Pro has received FDA clearance. In general, we felt management stayed away from talking about diabetes fairly deliberately (and understandably). We also didn’t hear any updates on the Flash Glucose Monitoring System, Abbott’s 14-day factory calibrated product intended to replace BGM – we’ll be listening closely for this to be sure as the year moves ahead as we understand it to be a very exciting innovation from those who have seen it. We first saw this presented at EASD and again at IDF. The latest accuracy data on Abbott’s sensor was presented at the Diabetes Technology Meeting in October: a MARD of 13.9% in a 62-patient study. This could be a real game-changer, as we have previously reported, and we look forward to more data.

5. Combined 4Q13 revenue for Abbott and J&J totaled $909 million in 4Q13, falling 10% as reported from pooled revenue in 4Q12. For the full year, pooled revenue for Abbott and J&J reached $3.6 billion, declining 8% since 2012 – this analysis certainly doesn’t suggest things are getting better and we would doubt we would see any improvement until at least 3Q14, when competitive bidding will have “annualized” – i.e., been in existence for over a year. While both companies have certainly been hit hard by competitive bidding, Abbott does seem to be faring a bit better in percentage terms. Although J&J began to see US Diabetes Care revenue decline in 4Q12 (falling 11% YOY), Abbott held on longer, with US Diabetes Care revenue actually growing 10% in 4Q12 (and this was not even an easy comparison as 4Q11 growth was 7%!). Significantly, in all quarters of 2013, Abbott saw revenue grow or fall less than J&J in Global, US, and International Diabetes Care. Both companies have spoken to the impact that competitive bidding and pricing pressures will have on revenue in the future; J&J has, of course, a much larger business overall.

• We note that direct comparisons between Abbott and J&J are challenging since each company’s Diabetes Care business includes a fraction of non-BGM revenue (Abbott has continuous glucose monitoring outside of the US and J&J has insulin delivery; the latter is significantly larger but neither company reports these individual segments). Abbott is the second of the Big Four (J&J, Abbott, Bayer, and Roche) BGM companies to report financial results for 4Q13, following J&J by only a day. We’ll round out our Big Four comparison when Roche and Bayer and Roche report 4Q13 results on January 30 and later in February, respectively.

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