Abbott 2Q12 – Diabetes global revenue down 1.2% as reported and up 3.3% operationally; US sales up 8.6% – July 18, 2012

This morning, Abbott CFO Thomas Freyman led the company’s 2Q12 financial results update. Global Diabetes Care revenue reached $330 million in 2Q12, down 1.2% as reported and up 3.3% operationally from $334 million in 2Q11. The operational growth was in line with the company’s forecast, but reported growth fell short of the anticipated low-single-digit mark due to less favorable currency effects than anticipated. Abbott Diabetes Care international revenue of $186 billion reflected a 7.7% decrease on a reported basis (and 0.3% decrease operationally). Within the US however, Abbott Diabetes care showed impressive growth. Domestic revenue totaled $144 million, an 8.6% increase from $133 million in 2Q11. US growth was 4.3% in 2Q11, which was the lowest single-quarter US growth for Abbott in 2011, but by no means a soft comparison given the pressures on the US BGM market. Management pointed to Abbott’s strategy to drive share gains among insulin-using patients (which included continued rollout of their new FreeStyle InsuLinx blood glucose meter). J&J maintained its clear lead in the US ($337 million), with a lower growth rate (1.2%) in part reflecting the company’s higher base. Given Abbott’s 2Q12 US performance, we expect Abbott to retain the number 2 spot in domestic Diabetes Care revenue, which it assumed from Roche in 1Q12. We look forward to providing additional comparison when Roche (July 26) and Bayer (July 31) report.

No new updates were provided on the diabetes device pipeline, though management indicated that US rollout of the FreeStyle InsuLinx touchscreen meter (FDA-cleared in 1Q12) was a contributor to the strong domestic performance this quarter. On the diagnostics side, in the week before the call Abbott announced that its ARCHITECT A1c assay, a chemiluminescent immunoassay that provides an automated A1c result in 36 minutes, has received CE mark. This assay was developed in collaboration with Axis-Shield, which became a subsidiary of Alere in fall 2011.

On the pharmaceutical front, management said that the outcomes-based phase 3 study of Reata’s potentially disease-modifying therapy for chronic kidney disease (CKD), bardoxolone methyl, is enrolling ahead of schedule toward its target of 2,000, recently raised from 1,600; according to clinicaltrials.gov completion remains expected in June 2013. The status of Abbott’s in-house CKD treatment, atrasentan (ABT-627), is essentially unchanged: three phase 2b studies are slated to complete next summer / early fall. No other updates on the diabetes drug pipeline were provided in the call, but according to clinicaltrials.gov, a new phase 2 study for ABT-639 in diabetic peripheral neuropathy (DPN) was initiated in April 2012. Meanwhile progress continues on the spinoff of Abbott’s research-based pharmaceuticals into a new company, AbbVie. Management said the process would complete by January 1, 2013, effectively in line with the target of year-end from Abbott’s 1Q12 call.

FINANCIALS

• Global Diabetes Care revenue reached $330 million in 2Q12, down 1.2% as reported and up 3.3% operationally from $334 million in 2Q11. This operational result was in line with the low-to-mid-single-digit growth that management projected in the 1Q12 call, but reported growth fell short of the forecast due to currency effects being more negative than expected. The year-over-year comparison was not extremely difficult, given 2Q11 reported growth of 2.7%.

• US revenue totaled $144 million, an 8.6% increase from $133 million in 2Q11. As in 1Q12, when domestic revenue grew by 7.3%, management attributed growth to execution on Abbott’s strategy to drive share gains among insulin-using patients, a strategy that includes continued rollout of their new InsuLinx blood glucose meter. Given this strong year-over-year growth, we would not be surprised if Abbott domestic revenue stays ahead of Roche’s North American revenue for the second quarter in a row1 – we’ll get a clearer read on this question specifically when Roche reports on July 26 and Bayer, the fourth of the Big Four SMBG companies, reports on July 31.

• Ex-US revenue of $186 million decreased 7.7% on a reported basis and 0.3% on an operational basis from $201 million in 2Q11. Growth in emerging markets was not enough to counteract slowness in Europe. J&J noted a similar geographic dynamic (and similar negative foreign exchange impact of roughly 8%), though in J&J’s case the net result was positive.

• Abbott’s margin expansion program is paying off in Diabetes Care, which showed “especially good improvement” in 2Q12. As a reminder, Diabetes Care margin growth was a “contributor” to Abbott’s overall margin improvement of 150 basis points in 1Q12 (with similar1 A different result is possible depending on how currency is convertedmargin improvements as other Abbott businesses). While management did not quantify the improvement seen in 2Q12, any increase is encouraging given the competitive landscape of the blood glucose meter market and the fact that Abbott Diabetes Care was coming from a base of “nice margin expansion” in 2Q11. (This said, in Q&A management acknowledged that the negative effects of foreign exchange have contributed significantly to margin improvements in the first half of 2012.)
• Sequentially, overall revenue was up 3.8%, following a roughly 9% sequential decline in 1Q12 (typical of 4Q-1Q results). For comparison, overall revenue increased sequentially by roughly 3% in 2Q11 and roughly 10% in 2Q10.

• Management guided for 3Q12 Diabetes Care growth decline in the low-single digits on an operational basis and in the mid-single digits as reported, but they projected better growth in 4Q12. Abbott’s original full-year Diabetes Care guidance projected growth in the flat/low-single digit range with operational growth roughly 2.5 percentage points higher. The company currently seems unlikely to meet this expectation, even from an operational perspective, barring a dramatic turnaround in 4Q12. While management did not comment on any full-year adjustments for Diabetes Care, Abbott confirmed its companywide full-year forecast (low-single digits as reported, mid-single digits operationally.)
• Abbott is making progress on separating out its research-based pharmaceuticals division into a new company, AbbVie; management said this transition would be complete by the first day of 2013 (similar to the target of year-end given in the 1Q12 call). As of last month, Abbott filed initial form 10 for AbbVie (and expects to file amendments through 2012) and identified senior management assignments. As previously reported, Richard Gonzalez (currently chief of Abbot’s pharmaceutical division) will serve as chairman and chief executive of AbbVie. William Chase (currently Abbott’s vice president of licensing and acquisitions) will assume the role of chief financial officer and John Leonard will serve as senior vice president of pharmaceutical research and development (the same position he presently holds at Abbott).
• However, in Core Laboratory Diagnostics, global reported sales increased 3.3% (despite over a 5.0% negative impact from foreign exchange) on a reported basis and 8.6% on an operational basis. Continued uptake of Abbot’s ARCHITECT immunoassay system was listed as a key driver in this growth, which is encouraging for Abbott’s new ARCHITECT A1c assay (an Axis-Shield/Abbott collaboration, CE Marked in July).

DEVICE PIPELINE

• The FreeStyle InsuLinx blood glucose meter’s availability in the US contributed to Abbott’s strong domestic performance in 2Q12. The FDA approved the FreeStyle InsuLinx BGM in March 2011 (see our March 12, 2012 Closer Look at http://www.closeconcerns.com/knowledgebase/r/07b9a2d3 for details on the approval and our “Test Drive” review in diatribe #41 at http://www.diatribe.us/issues/41/test-drive.php). As we understand it, the device has been rolled out to endocrinologist offices for the last few months. InEurope (launched May 2011) and in Canada (launched October 2011) the meter includes a built-in bolus calculator, in addition to the insulin-dosing software and touchscreen that are highlights of the US version. We remain curious about the US regulatory timeline for the bolus calculator feature as well as any other plans for future InsuLinx products.
• At ADA, Abbott sponsored a symposium on the FreeStyle InsuLinx, highlighting the clinical value of the FreeStyle Auto-Assist Software and discussing barriers to patient logging and pattern management. Our report can be found here: http://www.closeconcerns.com/knowledgebase/r/c6afb200 (see page 47).
• A UK ease-of-use study on the FreeStyle InsuLinx that was slated to end in April 2012 has not been updated on ClinicalTrials.gov since our 1Q12 report (ID: NCT01432275). See our Abbot 1Q12 report for more details at http://www.closeconcerns.com/knowledgebase/r/0dbd1373.
• Abbott announced on July 10 that its ARCHITECT A1c assay received CE mark. The ARCHITECT assay is a laboratory chemiluminescent immunoassay that provides an automated A1c result in 36 minutes and that operates on the ARCHITECT platform. The product was developed in collaboration with Axis-Shield, a UK-based diagnostics firm that was acquired by Alere last fall.
• No other updates were given on the device pipeline. As in 1Q12, the usability study for FreeStyle InsuLinx in Germany and the Netherlands is ongoing and is estimated to complete in September 2012 (ClinicalTrials.gov ID: NCT01519466). Once again, no updates have been given on a small US feasibility study of the next generation FreeStyle Navigator (Clinicaltrials.Gov ID: NCT01455064, last updated December 2011).

PHARMACEUTICAL PIPELINE

• Management continues to express great enthusiasm for the progress of bardoxolone methyl, Reata’s compound for chronic kidney disease, and its phase 3 study, which is reportedly enrolling ahead of schedule. (As a reminder, a September 2010 deal gives Abbott rights to bardoxolone methyl in all international markets except for Japan, China, Korea, Taiwan, and Southeast Asian countries, while Reata retains US rights.) On April 27, 2012 the ClinicalTrials.gov record for the phase 3 trial (BEACON, ID: NCT01351675) was updated to reflect an increase in target enrollment from 1,600 to 2,000. As BEACON is an event-driven trial (the primary outcome is time to first ESRD – consisting of need for chronic dialysis or renal transplant – or cardiovascular death), the enrollment expansion suggests a lower-than-expected event rate (which would imply better-than-expected efficacy of bardoxolone methyl and/or of standard care). However, presumably thanks to the fast enrollment rate, completion is still projected for June 2013.
  • As a reminder, phase 2b bardoxolone results demonstrated significant gains in estimated glomerular filtration rate (eGFR) after 52 weeks were published in NEJM (Pergola et al., 2011) and indicated that bardoxolone methyl could be the first therapy capable of truly reversing CKD. We are glad to see continued enthusiasm from patients on this drug and that it remains on schedule to come to market as early as 2014. For more background on bardoxolone methyl, see our coverage of Abbott’s 2011 Investor Day at http://www.closeconcerns.com/knowledgebase/r/2a00672f.
• Management also mentioned Abbott’s in-house CKD treatment, atrasentan (ABT- 627), indicating no significant change in status since the 1Q12 report. As previously reported, Abbott’s phase 2 dose-ranging trial showed reduced proteinuria (indicating improvedkidney function) with atrasentan. The oral, once-daily drug remains on track to complete three phase 2b studies next year, one in July 2012, one in August 2012, and one in September 2012 (target recently pushed back from July). All three studies examine patients with diabetic chronic kidney disease who are also taking a RAS inhibitor. In previous quarters, Abbott has characterized atrasentan as complementary to (rather than competitive with) bardoxolone methyl, and its effects appear less dramatic than those of bardoxolone. For more detail on clinical investigation of atrasentan, please see our coverage of Abbott’s 2011 Investor Day at http://www.closeconcerns.com/knowledgebase/r/2a00672f.
• In April Abbott initiated a phase 2 study of ABT-639 for diabetic peripheral neuropathy (DPN), according to ClinicalTrials.gov. The parallel, active-controlled, double-blind trial (target n=48) will examine ABT-639’s pharmacokinetics by measuring spontaneous activity in peripheral c-nociceptors every 10 minutes over three hours and pain intensity every hour for four hours. This study is expected to complete in September 2012 (ID: NCT01589432).
• Another phase 2 study of a diabetic neuropathy treatment (ABT-652) also began in April 2012, but it ended in May 2012 (one year ahead of schedule) after enrolling only one participant. It was designed to be a placebo- and active-controlled, double-blind study examining safety and efficacy of the compound at various doses (6.0-18 mg). The primary outcome was a 24-hour average pain score over 12 weeks (ID: NCT01579279). We speculate that Abbott decided to pursue ABT-652 for a different indication; phase 2 studies are also underway for an indication in osteoarthritis of the knee.
• No update was provided on the phase 1b study of ABT-614 for CKD; the ClinicalTrials.gov posting has not been updated since December 2011 even though the target completion date was February 2012 (ID: NCT01464320). We do not know the drug’s mechanism of action (though a previous phase 1 study was designed to test its binding activity to the dopamine D3 receptor in the brain).

Questions and Answers

[…]

Q: What was the effect of the foreign exchange on the 300-basis-point improvement in gross margins?

A: Similar to the first quarter, it was roughly half the improvement. The rest has been executing on the gross margin improvement initiatives we’ve talked about in detail.

Q: So you would expect gross margins to further improve if currency has gotten worse, correct?

A: Our guidance has factored in current exchange rates. That's typically what we do. We don't try to forecast changes. So I think if rates were to hold at this level, you'd see gross margins in line with our guidance that we provided.

To your point though, if the Euro did weaken quite a bit, you'd probably see a little bit more favorable gross margin, but I'd rather have the sales stability and deliver gross margin improvement through our own initiatives.

Q: If you could comment on what you're seeing in terms of European austerity measures. Looking at your numbers, it would appear that the currency has been the biggest headwind to international sales but is there any way that you could quantify what you're seeing in terms of pricing dynamics and tendering? J&J certainly called that out yesterday on their conference call, and if you're seeing any changes in terms of collectibles in some of the markets or receivables?

A: We saw during the quarter a significant improvement in Southern Europe. These governments are taking their situation seriously. They've implemented austerity measures. And in a couple markets in particular we saw really, really strong payments in the quarter, and so I think we feel very good about our business in Southern Europe and our ability to sustain that.

In terms of Europe generally, I guess it's the mix of our business. Certainly it's not a big growth driver right now, and in certain pockets, in particular our Diabetes Care business, we have felt a little bit of pressure from austerity. But when you look overall at Abbott, it's had a fairly modest impact. I think part of that is due to the quality of our products, the differentiation in the market, and the fundamental demand for them. As we said, a couple of years ago we had a little more price than we typically have, but that has largely normalized this year on the pharmaceutical side of the business. So I'd say that Europe, from a demand perspective, is a relatively modest matter for us at the current time.

[…]

Q: A question on the gross margin. As to the actual operational efficiency gains, can you just give us a bit more color on what divisions or products that's coming from?

A: As we mentioned in our remarks, the three big improvements in the quarter were diagnostics, where we're now above 20%, nutrition, where we saw about a 150 basis point improvement over the prior year and expect again a nice improvement for the full year, and the vascular business, where we saw over 200 basis points of improvement in the quarter.

So those were the three big movers for the efficiency gains. And even though it's a smaller business – not to minimize it – our Diabetes Care business, which is a $1 billion business, is also showing very nice margin improvement and John mentioned that in his remarks as well.

-- by Kira Maker, Jessica Dong, Joseph Shivers, and Kelly Close