BD F4Q14 – First $1 billion year for BD Diabetes Care; FDA clearance for infusion set expected by September 2015 – November 5, 2014

Early Tuesday morning, BD CEO Mr. Vincent Forlenza led the company’s F4Q14 financial update. The Diabetes Care division continues to demonstrate strong and steady growth, with three of the past four quarters growing >8%. Below, we have enclosed our top four financial and pipeline highlights from the call.

Financial Highlights

1. Worldwide Diabetes Care revenue totaled $264 million, growing 8% as reported and operationally year-over-year (YOY) against a challenging comparison. For the fiscal year 2014, global Diabetes Care revenue broke $1.0 billion for the first time, representing 7% reported and 8% operational growth.

2. F4Q14 US Diabetes Care sales grew 8% YOY to reach a record-high $123 million. The performance came against a relatively easy comparison, as sales were flat in F4Q13. For the fiscal year, US Diabetes Care sales grew 7% to reach $481 million.

3. International Diabetes Care revenue of $141 million grew 8% as reported and operationally YOY against a particularly challenging comparison to F4Q13, when sales grew 9% as reported and 11% operationally. For the fiscal year, international Diabetes Care revenue totaled $557 million, growing 7% as reported and 8% operationally YOY.

4. BD announced a reorganization of the company from a three-segment to a two-segment structure consisting of a Medical division (of which Diabetes Care is a part) and a Life Sciences division. The organization will likely not impact Diabetes Care meaningfully, since the new Life Sciences division simply consolidates two previously separate divisions (Diagnostics and Biologics).

Pipeline Highlights

5. Management expects to receive FDA clearance of its first-generation insulin infusion set – developed in collaboration with the JDRF – in the second half of FY2015 (March-September 2015).

6. BD’s new pen needle product, the AutoShield Duo (US launch on August 6), was mentioned very briefly (one sentence!) in the company’s prepared remarks as a driver of US growth.

7. A new study on ClinicalTrials.gov (Identifier: NCT02271594) will investigate the impact of optimized injection technique on lipohypertrophy in type 1 and type 2 insulin-treated patients.

8. Management did not comment on the development of its patch pump/pen technology or other opportunities for type 2 insulin delivery. These have been mentioned in other calls this year, and we assume BD is still working internally on this front.

Financial Highlights

1. F4Q14 worldwide Diabetes Care revenue grew 8% as reported and operationally year-over-year (YOY) to reach $264 million. This was tied for BD’s highest quarterly sales ever (F1Q14). Additionally, the performance was notable considering that sales rose a solid 5% as reported and 6% operationally in F4Q13. Overall, the business continues to trend in a very positive direction, and the growth marks 22 consecutive quarters of positive YOY performance. Sequentially, revenue grew 2% against a challenging comparison to the second-highest worldwide quarterly sales ever recorded for the business ($258 million in F3Q14). Management attributed the growth partially to the continued strength of pen needles sales (BD’s flagships products in this business are the AutoShield Duo and Ultra-fine Nano) – this has been a common refrain in recent financial updates (F2Q14, F3Q14), and we are not surprised to hear that the segment continues to thrive. During Q&A, management also credited some “one-time activity” for the strong performance, though did not elaborate on this front.

• For the fiscal year, global Diabetes Care revenue reached $1.0 billion, growing 7% as reported and 8% operationally YOY against a particularly challenging comparison to FY2013 (sales rose 6% as reported and 8% operationally). Overall, the fiscal performance marks the first time Diabetes Care sales have eclipsed the $1 billion mark. We’d also note that fiscal growth has never declined for BD’s Diabetes Care segment, a great sign that the business is steadily expanding and should continue to do so in the future – the GLP-1 agonist segment will only grow larger, and the population of patients on insulin is not showing major signs of abating.

Table 1. Worldwide Diabetes Care Sales

• During Q&A, management characterized Diabetes Care growth as “strong” and “sustainable,” though it is forecasting for more conservative 4.5-5% growth moving forward. This guidance is on par with the company’s expectations for the Medical division as a whole (Diabetes Care, Medical Surgical Systems, and Pharmaceutical Systems). As a reminder, Diabetes Care exceeded management guidance for the Medical division in FY2013 – BD had anticipated moderate 5-6% growth in the segment, though it actually grew 8% operationally.  

2. US Diabetes Care sales of $123 million grew 8% as reported YOY in F4Q14. The performance came on a relatively easy comparison to F4Q13, when sales were flat operationally); however, $123 million was record-high quarterly revenue, just edging out the $122 million totaled in F1Q14. On an even more positive note, the US business has not seen a YOY decline in 18 quarters (since F2Q10). Sequentially, US revenue grew 4% against a challenging base (sales totaled $118 million in F3Q14, the second-highest ever recorded for the business).

• Management again credited the strong performance of pen needles for the growth, specifically highlighting the Ultra-fine Nano and recently launched AutoShield Duo (US launch in August 2014 – see below).
• For the fiscal year, US Diabetes Care sales totaled $481 million, growing 7% as reported YOY against a challenging comparison to FY13 (sales grew 4% as reported). Much like global growth, stateside fiscal growth has never declined for BD’s Diabetes Care segment. Now with the recent launch of the Duo, we expect we will see positive growth is sustained over the coming fiscal year.

Table 2: US Diabetes Care Sales

3. International Diabetes Care revenue totaled $141 million, growing 8% as reported and operationally YOY against a particularly challenging comparison to F4Q13 (sales grew 6% as reported and operationally). This marks 20 straight quarters of positive international growth and eight consecutive quarters of growth exceeding 5%. The strong performance also represented the second highest quarterly sales ever, finishing just behind F1Q14’s record-high sales of $142 million. Sequentially, sales grew 1% against a challenging comparison to near-record-high revenue of $140 million in F3Q14).

• For the fiscal year, international Diabetes Care sales of $557 million grew 7% as reported and 8% operationally YOY. Although management did not mention drivers of growth for Diabetes Care specifically, the company did note that emerging markets were a driver of growth in BD’s Medical segment (of which Diabetes Care is a part). We mention this because in F2Q14, management specifically noted that emerging markets were a driver of growth for Diabetes Care.

Table 3. International Diabetes Care Sales

4. BD announced a reorganization of the company into a two-segment structure consisting of a Medical division (of which Diabetes Care is a part) and a Life Sciences division. For context, BD was previously divided into three segments: Medical (of which Diabetes Care was a part), Diagnostics, and Biologics. It appears that the latter two have now been consolidated under Life Sciences, which will be headed by Ms. Linda Tharby (BD’s former President of Diabetes Care). Mr. Tom Polen has been “promoted” to Segment President of BD Medical (though as we understand it, this is largely the same role he has played for the past year as group president of “medical surgical systems & pre-analytical and pharmaceutical systems”). The impetus for the decision was discussed on a high level (i.e., the desire to “bolster leadership structure and ensure future success”), and Diabetes Care was not mentioned specifically. According to management, the new organization is more reflective of company strategy and will enable BD to focus on growth. We do not think that there are significant implications for the diabetes business – if anything, the fact that reorganization did not touch the Medical division speaks to the company’s satisfaction with the business.

Pipeline Highlights

5. BD expects to receive FDA clearance of its first-generation insulin infusion set in the second half of FY2015 (March-September 2015). Management noted that it is “very excited about this product,” and indeed, it has moved significantly faster than the company has guided for on other calls this year – F2Q14 put development at “two to four years,” though this was updated in F3Q14 to “24-36 months.” The product has yet to be submitted to the FDA, though we would assume this is coming in the near term.

• We wonder if the CGM program’s discontinuation (announced in F3Q14) has helped accelerate this project. Management did note that the process of establishing certain intangibles (e.g., manufacturing equipment) has proceeded particularly smoothly for the insulin infusion set, so the rapid development could be solely a process of those factors as well.
• During Q&A, management called the investment in insulin infusion sets a “logical” add-on to the company’s existing Diabetes Care portfolio. BD is cautiously optimistic that the product can be a driver of growth for the business and sees opportunities to take the product to market both directly and through partnerships. Updates are not expected until after FDA clearance. We’d note that BD has yet to reveal plans regarding a CE Mark submission of the device.
• Notably, management said it plans to take the product to market both direct and through partnerships. We imagine BD could sell this on its own and partner with insulin pump companies. To date, Unomedical has dominated the infusion set market, and it will interesting to see how existing pump players react to BD’s entry. We assume BD will come with strong marketing and strong data to back up its product, which should be favorable going into partnership discussions. Of course, it may be that some companies have exclusive deals with Unomedical. Lots to speculate on here...
• As we understand it, the first-generation infusion set does not include microneedles. At ATTD 2014. McVey et al. shared new three-day data on an insulin pump infusion set using BD’s intradermal microneedles. The intradermal bolus infusion had a significantly shorter Tmax than subcutaneous infusion (by 20 minutes). We have not heard an update on this technology since JPM in January; we will continue to assume, for now, that BD plans to incorporate the microneedle into its second-generation insulin infusion set.
• As a reminder, the infusion set partnership with JDRF was initially announced in 2010. We continue to have high hopes for this program, considering BD’s expertise in insulin delivery (especially gathering excellent data), and JDRF’s strong guidance. Infusion sets continue to be an area with significant potential for innovation, as there have been no truly meaningful advances in many years.

6. BD’s new pen needle product, the AutoShield Duo (US launch in August), received one sentence in the company’s prepared remarks as a driver of US growth. We were pleased to hear of the early success of the product, and hope more granularity on penetration and expectations emerge over time. As a reminder, BD announced the launch of the Duo – the first and only patented dual front and back-end shielded pen needle – on August 6. (We got our first look at the product at AADE 2014.) The design (5 mm, 30 gauge) ensures that the needle is never exposed (or visible) in order to provide greater safety both before and after injection and to reduce injection-related anxiety. The device features audible (a “click”), visual (a red indicator), and tactile cues that mark a successful injection. In our view, the focus on convenience makes the product an especially attractive option for younger and elderly insulin users, though it’s hard to imagine a patient who would not benefit from the increased safety.

7. A new ClinicalTrials.gov study (Identifier: NCT02271594) will investigate the impact of optimized injection technique on lipohypertrophy in type 1 and type 2 insulin-treated patients. Patients (estimated enrollment = 190) will be randomized to receive intensive education (n~95) or standard of care (n~95). The intervention cohort will receive education detailing the value of rotating injection sites; patients will also be instructed to switch to BD’s Ultra-Fine Nano 4 mm x 32 gauge pen needles. An initial appointment will be supplemented with frequent follow-up to reinforce this training. Standard of care treatment will consist of “customary” lipohypertrophy education with follow-ups only at three and six months (and no encouragement to switch to the Ultra-fine Nano pen needle). Endpoints will be assessed at six months and will include measures of glycemic control (A1c and number of blood glucose measurements in target range), hypoglycemia rates, insulin consumption, and healthcare costs. As of the latest update (October 21), the study has not yet opened for participant recruitment. The study’s start date is scheduled for December 2014; estimated study completion and primary completion are September 2015.

• We’d note that BD’s marketing campaign at AADE 2014 focused nearly exclusively on lipohypertrophy awareness. The company’s exhibit hall booth featured multiple posters that highlighted the underappreciated importance of rotating insulin injection sites (98% of people with lipohypertrophy do not rotate or rotate incorrectly). Indeed, one poster noted that rotation is “just as important as insulin, diet, and exercise,” while a separate corner of the booth shared clinical findings that proper rotation can reduce A1c up to 0.58%. Signage highlighted that appropriate rotation can allow patients to use up to 15 fewer units of insulin/day. Notably, the booth also highlighted the importance of using a shorter, 4 mm needle; this was the first time we had seen BD exclusively promote the 4 mm needle (often they also highlight the 6 mm and 8 mm versions), as reps were adamant that the shorter option is plenty long enough to penetrate skin (~2 mm depth) and is short enough to avoid reaching muscle. We salute BD for conducting impressive research to substantiate this marketing claims – the fact that shorter needles are effective for a broad array of patients is a scientific and clinical win, as well as a business win for BD.

8. Deviating from recent financial updates, BD did not comment on the development of its patch pump/pen technology or other opportunities for type 2 insulin delivery. As a reminder, we first heard about the potential for a BD patch pump/pen at January’s JP Morgan Healthcare Conference, and management further said that the company has “no interest” in moving into the higher-end pump market (i.e., competing with traditional pumps from Medtronic and Animas). Our understanding is that the company is looking to develop a smaller, patch delivery device that would target MDI users. We certainly support this effort as there is a clear lack of simple, discreet insulin delivery options on the market – Valeritas’ V-Go is the only one presently available, though others are coming.

Table 4: Patch Pump Delivery Device Competitive Landscape

Questions and Answers

Q: Could you provide some background on the diabetes franchise? I'm trying to get a better handle on the underlying growth and sustainability.

A: You saw it was another strong quarter for Diabetes Care. I’ll let Tom take this.

A: As you mentioned, a strong year for diabetes driven by new product launches, specifically the Nano pen needle, which continues to have very strong adoption around the world. Regarding underlying growth, in Q4, we did have a very strong quarter at 8.1% growth. Q4 was favorably impacted by a prior year comparison, and we do believe that the growth rate is a little bit above the underlying growth of the business given that the Medical segment growth guidance for 2015 is in the 4.5-5% range. We certainly see Diabetes Care on the upper side of that, as one of the higher growth businesses within the segment, and we see that sustaining going forward, just not at that rate that you are seeing in Q4, due to some one-time activity there.

Q: The infusion set development looks like it's a little bit ahead of where the guidance was for the launch. Can you talk about what changed there? Also, can you comment on the market opportunity and how fast you expect to penetrate the market?

A: The projected timeline is very close to what we were thinking. Nothing significant changed. We're making good progress on getting the manufacturing equipment installed and what-not. That’s probably the biggest thing. Tom, anything else that you would say on that?

A: No, I think we will continue to update, post-approval, and provide more information on our launch timing. We're very excited about the product. This is a logical adjacency to our core diabetes pen and syringe business and adds another growth driver to that segment. We do see the opportunity to take that product to market, both direct and through partnerships. I think that's all we'd comment on at this point in time.

-- by Varun Iyengar, Adam Brown, and Kelly Close