Roche 2Q13 – Worldwide Diabetes Care down 4% as reported, down 8% in North America; SGLT-2 inhibitor tofogliflozin discontinued; comments on aleglitazar’s discontinuation; Lucentis trending towards recovery – July 30, 2013

Late last week, Roche CEO Severin Schwan led the company’s 2Q13 financial update. Global Diabetes Care sales totaled 666 million CHF (~$706 million) in 2Q13, down 4% on both a reported and an operational basis from 2Q12. In comparison, 2Q12 growth was 3% by both metrics. Management attributed the decline to price pressures (particularly in Asia Pacific) and changes in reimbursement, highlighting CMS’ competitive bidding program. As expected, sales decline was steepest in North America. Sales totaled 144 million CHF (~$153 million), down 8% on a reported basis from 2Q12. The comparison was challenging, however, as 2Q12 sales grew 8%. Sales in the EMEA (Europe, Middle East, and Africa) totaled 392 million CHF (~$416 million), down 1% on a reported basis. For comparison, EMEA sales declined 4% as reported in 2Q12. RoW sales (Latin America, Asia Pacific, and Japan) totaled 130 million CHF (~$138 million) in 2Q13, down 10% as reported on a challenging year-over- year comparison. In 2Q12, sales were up 18% as reported. Management spoke to Roche’s restructuring initiatives in its Diabetes Care business, highlighting the company’s focus on reducing its cost base whilst continuing to focus innovation on insulin delivery and continuous glucose monitoring. At ADA this year, Roche previewed preliminary data on its proprietary sensor under development. The system demonstrated an aggregate mean absolute relative difference of 9.2% when compared to SMBG; study design and methodology prevents direct comparison with other CGM systems.

Three of the Big Four blood glucose monitoring competitors have reported 2Q13 results to date (J&J, Abbott, and Roche) and each have described a challenging Diabetes Care market. Combined revenue in 2Q13 for these three players was $1.6 billion, down ~7% from 2Q12. On July 31, Bayer will be the last of the Big Four to report.

Roche’s cardiometabolic drug pipeline is quickly dwindling with the discontinuation of both the PPAR alpha/gamma dual-agonist aleglitazar and the SGLT-2 inhibitor tofogliflozin. As previously announced aleglitazar’s trials were halted due to a lack of cardiovascular (CV) benefit and unspecified safety signals. As management stated on the call, CV benefit was indeed a very ambitious goal to set out to achieve, and it appears that Roche/Genentech pulled out all the stops to adequately power aleglitazar’s two phase 3 CVOTs (which were set to enroll >26,000 patients). Without being able to claim CV benefit, aleglitazar’s profile would have been much less attractive than the original vision; the bar is very high to develop a diabetes drug today, particularly as there are compounds without the baggage associated with past PPARs; in today’s diabetes market, there are, of course, other drugs are available that do not cause weight gain, edema, and bone fractures. While aleglitazar’s broad phase 3 side effect profile was unknown, phase 2 SYNCHRONY results did suggest weight gain and edema (though potentially less than pioglitazone) and decreased renal function. Management did not elaborate on tofogliflozin’s discontinuation. In other updates, Roche added a new small molecule to phase 1 (RG7410) for metabolic diseases and announced that it is looking for a partner for its phase 2 PCSK9 inhibitor, RG7652; management said it will not advance the candidate without one. Perhaps this is not surprising, given there are two competitive compounds from Sanofi and Amgen already in phase 3 and others being aggressively developed. Roche did not provide new updates on its sole other diabetes drug candidate, MAR709/RG7697, the phase 1 GLP-1/GIP dual agonist.

Finally, with regards to ophthalmology, Lucentis is outperforming management’s expectations with 18% operational growth in 1Q13. This is likely due to strong uptake in diabetic macular edema (DME; as a reminder, the FDA approved Lucentis for DME in August 2012) and improved uptake in wet age- related macular degeneration (wAMD) after Lucentis received approval for a PRN (as-needed) dosing indication in February.

FINANCIAL RESULTS

• Roche Diabetes Care sales totaled 666 million CHF (~$706 million), down 4% as reported and 4% operationally from 2Q12. For comparison, 2Q12 sales grew 3% and 3%, respectively. Sales decline was steepest in North America, down 8% as reported from 2Q12 when sales declined 3% by the same metric. For the EMEA region (Europe, Middle East, Africa) sales decreased 1% as reported compared to 2Q12 when revenue decreased 4% on a reported basis. RoW sales (Latin America, Asia-Pacific, and Japan) declined 10% as reported in 2Q13 on a challenging comparison: in 2Q12 sales grew 18%.
  • Management described continued price pressure in blood glucose monitoring and reimbursement changes in 2Q13 that impacted Diabetes Care performance. Management specifically highlighted price pressure in the Asia- Pacific region and CMS’ decision to adjust payment amounts for Medicare patients. On a more positive note, however, management emphasized the strong growth of Accu-Chek Mobile blood glucose system and Accu-Chek Performa blood glucose meter, up 45% and 16%, respectively (we assume growth reported was year-over-year in 2Q13 as opposed to 1H13).

EMEA = Europe, Middle East, and Africa. RoW = Latin America, Asia-Pacific, and Japan. Currency conversion based on average exchange rate from April 1 – June 30 on oanda.com: 1.0606 USD per CHF. Roche does not provide operational growth for its regional breakdown in the quarter.

Currency conversion based on average exchange rate during the period on oanda.com (e.g., 1Q13 rate from April 1 – June 30 on oanda.com was 1.0606 USD per CHF).

• North America Diabetes Care revenue totaled 144 million CHF (~$153 million) in 2Q13, representing an 8% reported decline from 2Q12. The comparison was challenging with 2Q12 sales growing 8% on a reported basis. As expected, management drew attention to the sales impact of CMS’ reimbursement adjustments, which the company had expected per comments made in Roche’s 1Q13 update call (see our report at http://www.closeconcerns.com/knowledgebase/r/f5191b53). Given that payment reductions went into effect on July 1 (the first day of 3Q13), we expect to hear continued discussion on the impact of this program going forward. However, we also note that in the company’s recent history, North America has consistently been a challenging region. Since 1Q08, Roche has recorded only three quarters of positive year-over-year reported growth in North America, perhaps not so surprising given the ongoing pricing pressure for some time.

Currency conversion based on average exchange rate during the period on oanda.com (e.g., 2Q13 rate from April 1 – June 30 on oanda.com was 1.0606 USD per CHF).

• Sales outside of North America totaled 522 million CHF ($554 million) in 2Q13, declining 3% on a reported basis from 2Q12. The comparison was fairly easy, as 2Q12 sales grew 1%. As mentioned above, management noted pricing pressures in Asia Pacific.

Currency conversion for Roche based on average exchange rate during the period on oanda.com (e.g., 2Q13 rate from April 1 – June 30 on oanda.com was 1.0606 USD per CHF). Different results are possible with different currency conversion. Roche does not report revenues for an international category. Growth was determined from EMEA and RoW breakdown.

• Sequentially, global sales grew 24% from 1Q13. Sequential growth from 1Q to 2Q is common for Roche; the company has recorded positive 1Q to 2Q growth since we began tracking sequential performance in 2005. We note that weaker 1Q performances are typical due to the seasonality of patients’ insurance. Sequential growth in North America was stark in 2Q13, up 53% from 1Q13; however, the growth was due in part to a particularly severe sequential decline in 1Q13 of 48%.

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

• Management described ongoing structural changes to its Diabetes Care business and continued investment in insulin delivery and continuous glucose monitoring systems. Broadly speaking, Roche continues to focus on reducing its cost base, integrating R&D, integrating or reducing the number of platforms, and addressing the commercial organizations in markets with reimbursement cuts (in 1Q13 management referred specifically to addressing the cost base of these organizations). We are hopeful that these changes can help temper the challenges brought on by pricing pressure and CMS’ competitive bidding program; however, we are concerned that the changes suggest trends towards decreased investment in blood glucose monitoring innovation.
• In 1H13, blood glucose monitoring (BGM) sales fell 5% operationally from 1H12. The comparison was not particularly challenging, as 1H12 blood glucose monitoring sales declined 3% operationally. As a reminder, Roche’s Diabetes Care business is comprised of both BGM and insulin delivery. Roche does not provide a BGM/ insulin delivery split on a quarterly basis (it gives only cumulative yearly data); however, blood glucose monitoring typically represents over 90% of the company’s Diabetes Care business and we expect that BGM sales’ trends roughly mirror overall Diabetes Care trends in the quarter.
• Insulin delivery sales fell 1% operationally in 1H13 on a challenging comparison. In 1H12, insulin delivery sales grew 12%.
• Combined 2Q13 revenue for J&J, Abbott, and Roche totaled $1.6 billion, down ~7% as reported from the pooled revenues in 2Q12. We note that in the companies’ 2Q13 updates, their respective management teams each spoke to challenges related to CMS’ competitive bidding program. The sales impact is easily seen in the ~16% year-over-year reported decline in the companies’ pooled 2Q13 US sales (Roche reports only North America sales, so the number includes Roche sales from Canada).
  • 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 July 31 – Bayer is the last of the Big Four BGM companies to report (comprised of J&J, Abbott, Roche, and Bayer).
    • For greater detail on J&J’s 2Q13 performance, see our report athttp://www.closeconcerns.com/knowledgebase/r/164d9ab5.
    • For greater detail on Abbott’s 2Q13 performance, see our report athttps://closeconcerns.app.box.com/s/8tbuap2ygqzgp6i0ilad.

Currency conversion for Roche based on average exchange rate from April 1 – June 30 on oanda.com (e.g., 1.0606 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.

DEVICE PIPELINE

• The Accu-Chek Insight insulin pump and blood glucose monitoring system remains on track for EU launch in 2013. Like the Accu-Chek Combo (Spirit insulin pump and Aviva meter), the Insight handheld serves both as a blood glucose meter and pump remote controller. Roche anticipates filing the Accu-Chek Insight with the FDA in H1 2014.
• As we understand it, Roche has filed the Accu-Chek Aviva Expert (the Aviva meter with a built-in bolus advisor) with the FDA. We will be very interested to see how (and if!) this meter progresses through the FDA – broadly speaking, our sense is that the agency is somewhat wary of meters with bolus calculators. As a reminder, the US version of Abbott’s FreeStyle InsuLinx does not contain a built-in bolus calculator, while the International version does. We suspect this was a strategic move on Abbott’s part to get the product to market faster in the US. Certainly, adding a bolus calculator into a meter adds additional risks for patients above and beyond a simple meter alone; however, we think it’s an overall win for patients, mainly because those on MDI are currently stuck with mental math to calculate their insulin doses (or at best, a mobile app that does not talk to their meter). We look forward to better understanding the FDA’s perspective on this front, and will be particularly interested to see how fast the Aviva Expert progresses through the 510(k) process.
  • For additional information on the FDA clearance of Abbott’s FreeStyle InsuLinx, see our report at http://www.closeconcerns.com/knowledgebase/r/07b9a2d3.
• At ADA this year, Roche presented data on the accuracy and precision of its CGM sensor. People with type 1 diabetes (n=30) each wore two sensors for seven days, calibrating each sensor twice daily. Every day, subjects performed self-monitoring of blood glucose (SMBG) tests at each of several time points: bedtime, 3 am, before each meal, and one, two, and threehours after each meal. Also, on days two and three, patients ate a high-glycemic-index breakfast with a delayed insulin bolus in order to cause large glucose excursions; reference measurements were taken every hour for five hours after this meal. Sensor accuracy was measured in mean absolute relative deviation (MARD) between CGM and SMBG values. The aggregate mean MARD was 9.2% overall (n=6,801 paired measurements), 12.3% in hypoglycemia (≤70 mg/dl), 9.1% in euglycemia (71-180 mg/dl), and 8.5% in hyperglycemia (>180 mg/dl). Researchers also measured the agreement between sensors, as described by precision absolute relative difference (PARD). The aggregate mean PARD was 7.5% overall (n=281,394 paired measurements), 12.4% in hypoglycemia, 7.4% in euglycemia, and 6.4% in hyperglycemia. While the data seems promising, the study design prevents a direct comparison to pivotal trials of available CGM systems (e.g., the Roche sensor accuracy was compared to measurements with the same meter used for calibration, rather than a separate reference point). To read more about this study, please see page 66 of our ADA 2013 full report at http://www.closeconcerns.com/knowledgebase/r/94f937d8.
• Supplementary material highlighted that Roche launched the new maltose independent strips for the Accu-Chek Active in the EU earlier this year. For greater detail on the launch, see our 1Q13 report: http://www.closeconcerns.com/knowledgebase/r/f5191b53.
• Once again, the company made no mention of the Solo Micropump (Medingo’s long awaited patch pump). The last we heard about the pump was in 3Q12 when Roche was planning to begin studies in the EU in 2H13; however, the continued exclusion of the Solo from the company’s pipeline discussions is not surprising given the fact that there are fewer R&D dollars coming from BGM sales than once would have been thought to develop this product. The field is becoming very competitive and trying to develop this as a profitable product given that it would now compete against a new and improved Insulet pod wouldn’t be for the faint of heart. We would be surprised at this point to see the product developed, but to reiterate, the company has given no updates on this front for some time.

CARDIOMETABOLIC DRUG PIPELINE

• Roche's diabetes pipeline is rapidly shrinking, with both aleglitazar and tofogliflozin being discontinued since Roche's last financial update. During the call, management touched briefly on the previously announced decision to halt aleglitazar trials. As a reminder, Roche terminated the trials due to unspecified safety signals observed during a regular safety review and lack of CV benefit (for details in our initial coverage of this news, please see our July 10, 2013 Closer Look at http://www.closeconcerns.com/knowledgebase/r/22838b02). Management expressed its disappointment, but also noted that CV protection was a very ambitious goal to set out to achieve.
  • As a reminder, aleglitazar was Roche’s phase 3 PPAR-alpha/gamma dual agonist that had been 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; and 3) a general type 2 diabetes indication. Aleglitazar’s two CVOTs (AleCardio and AlePrevent) had planned to enroll an astounding total of more than 26,000 patients. Roche expanded aleglitazar’s phase 3 program and its potential indications to include the latter two as a result of encouraging 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).
  • While aleglitazar’s discontinuation is disappointing on a number of levels as it could have been the only type 2 diabetes drug to show CV benefit and thefirst drug with an indication that included prediabetes, it seems a prudent decision for Roche. Without the CV risk reduction claim, the candidate’s risk/benefit profile would have been far weaker than if it had one, and it would have been very challenging to compete in this competitive landscape – that said, whether a CV risk reduction would have emerged over a longer time period remains a question. Like other PPAR agonists, aleglitazar was associated with weight gain and edema. Moreover, and worryingly, aleglitazar was associated with a worse increase in serum creatinine than pioglitazone in aleglitazar’s phase 2 SYNCHRONY study – aleglitazar’s phase 3 AleNephro study demonstrated that this manifested as a ~15% reduction in eGFR associated with aleglitazar; even though AleNephro was touted as a success because it demonstrated the eGFR decline was reversible within eight weeks of treatment discontinuation, if the drug were to be an effective long-term treatment for a chronic disease such as diabetes or CVD, treatment discontinuation would not have been an option for patients seeking lasting glucose control and CV risk reduction. Coupled with the weak relative reputation that the TZD class now has versus incretins in the minds of many clinicians and patients (weight gain at this stage for any new compound is a very challenging side effect to battle), aleglitazar would have had to fight a strong uphill battle.
• Roche also announced during the call that the phase 3 SGLT-2 inhibitor tofogliflozin, which Chugai had been developing, has been discontinued for unspecified reasons. For background, Chugai is a member of the Roche group (Roche does not own it outright but is the majority shareholder), and Roche returned rights to tofogliflozin to Chugai in July 2011 (for more details please see our Roche 2Q11 report at http://www.closeconcerns.com/knowledgebase/r/ad1f4c9d). 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.
• Roche added a new small molecule to phase 1 (RG7410) for "metabolic diseases." It is currently in an ongoing phase 1 safety trial (n=24) investigating a single dose of RG7410 (initiated in July 2013), though it is not yet listed on ClinicalTrials.gov.
• Roche did not provide new updates on its sole other diabetes drug candidate, the GLP-1/GIP dual agonist MAR709/RG7697. The phase 1 multiple-ascending dose study continues with no timeline updates. According to Roche’s supplemental materials, this trial (n=48 people with type 2 diabetes) is comparing subcutaneous RG7697 with placebo. The primary endpoint is safety and PK. The study is not yet listed on ClinicalTrials.gov. As a reminder, in 3Q12 Roche dropped a different 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 (phase 2-ready), Prolor Biotech’s MOD-6030 (phase 1). Zealand also has a GLP-1/gastrin dual agonist (ZP0322) in preclinical development.
• Finally, Roche announced that it is looking for a partner for its phase 2 PCSK9 inhibitor (RG7652, under investigation for metabolic diseases) and will not advance the candidate without one. Public presentation of phase 1 data and internal readouts of phase 2 data are expected in 2013. The phase 2 EQUATOR trial (n=224) is investigating subcutaneous dosing every four weeks for five different doses of RG7652 vs. placebo. The primary endpoint isabsolute change from baseline in LDL cholesterol. 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), Pfizer (PF-04950615, phase 2 and PF-05335810, phase 1), and Lilly (LY3015014, phase 2).

OPHTHALMOLOGY

• Roche/Genentech's diabetic macular edema (DME) drug Lucentis (intravitreal ranibizumab) continues to trend toward recovery. Sales in 2Q13 totaled 427 million CHF ($453 million), up 19% as reported and 18% operationally (its second quarter in a row of positive growth after one year of declining or flat growth). During Q&A, management remarked that it was "positively surprised" with Lucentis' performance. The performance was driven by a stabilizing share in wetAMD, where previously another anti-VEGF agent (Bayer's Eylea) had been eroding Lucentis' share. In DME, management estimated in Q&A that Lucentis has about one quarter of the market share (and a strong opportunity for continued penetration), with the rest belonging to surgical procedures and off-label use of Avastin. As a reminder, Novartis holds rights to Lucentis outside the US (see our Novartis 2Q13 report at http://www.closeconcerns.com/knowledgebase/r/25397297 for details on Lucentis' international performance).

• 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). However, during Q&A, Roche management forecast that Eylea might not produce significant competitive pressure on Lucentis for another two years.
• Lucentis’ approval for a pro re nata (PRN, or as-needed) dosing indication for wet AMD in February has likely positively affected uptake. The label had previously called for once-monthly dosing – we are curious whether Lucentis will gain the same option for DME. A PRN indication may be increasing 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 mginjection 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.
• The DME competitive landscape is 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. 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. NICE issued a positive appraisal for Iluvien for a subgroup of DME patients unresponsive to other therapies. 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. Ampio announced earlier in January that the FDA accepted the company’s IND for Optina (oral low-dose danazol), and it is currently recruiting for a phase 3 study in DME. iCo Therapeutics and JDRF’s iCo-007, an antisense inhibitor of C-raf kinase, is currently in phase 2. 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.
• 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.
• For greater detail on all of the above-mentioned candidates, please see our Roche 1Q13 report at http://www.closeconcerns.com/knowledgebase/r/f5191b53.

QUESTIONS AND ANSWERS

Q: On Lucentis, it was an excellent result to see that the market is stabilizing. What do you think will happen once you see the DME data for Eylea? Do you think you will end up seeing more declines through 2014 for the Lucentis franchise?

A: On Lucentis. I think your specific question was relative to DME for Eylea. First of all, we do not expect that for a couple of years to really impact the marketplace there. Currently, in the DME setting, we have continued penetration of Lucentis in DME, and we think that this will continue for the foreseeable future.

Q: With aleglitazar termination and some products being chosen for out-license, could you give us an idea how you're thinking of reallocating or reducing the R&D spending because of those decisions going forward in the second half of 2013 and 2014?

A: It is correct that on the one hand, we have savings because we do not continue with the trials. But on the other hand, we have obligations to terminate all these trials. There won't be a material impact for the second half, so the net effect of that will not be material.

As far as next year is concerned, aleglitazar is one of the opportunities in our rich pipeline. A lot will depend on how the various compounds move on in our pipeline. You've seen we expect many read outs to come for the next month. Depending on the data we will see, this will, of course, very much determine our investments into late stage R&D. So we will give you a better indication at the end of the year when we give the guidance for 2014.

Q: … Alan, if you can talk a bit about kind of the margin progression for the first half. Obviously, Pharmaceuticals is kind of doing very well, and Diagnostics is improving. But I would love to get a sense for where you see you are from a restructuring perspective in the Diagnostics side, and how much opportunity there is to get more?

A:…First of all, I am very happy with the margin progression that we have made in the first half. And let me outline once again that the margin improvement was certainly driven as well by the past service income. So take that our, I think all margins have improved, including Diagnostics …

-- by Hannah Martin, Jessica Dong, Kira Maker, and Kelly Close