BD F3Q14 – Sales rise 4% on pen needle growth; CGM program discontinued; infusion set, type 2 insulin delivery are priorities – July 31, 2014

Early this morning, BD CEO Mr. Vincent Forlenza led the company’s F3Q14 financial update. Below are the top financial and pipeline highlights from the call.

Financial Highlights

1. Worldwide Diabetes Care revenue totaled $258 million, up 4% as reported and operationally, year-over-year (YOY). This is the lowest growth seen since 1Q10, although it was against a challenging comparison of 7% reported growth (9% operational) in F3Q13.

2. US Diabetes Care sales of $118 million grew a modest 1% YOY and were flat sequentially.

3. International Diabetes Care revenue of $140 million grew 6% reported and operationally YOY. This result was a near record high, second only to F1Q14’s $142 million.

4. According to management, growth in Diabetes Care stemmed from the continued strength of pen needles. There was no additional granularity on the market penetration of these products.

Pipeline Highlights

5. BD revealed that it has discontinued its novel CGM program. Management stated that the technology revealed some issues in human testing. We believe it was wise to exit

6. The company’s pipeline will focus on its insulin infusion set and type 2 insulin delivery opportunities. The infusion set remains on schedule for development in the next “24-36 months.”

7. BD’s trial investigating glycemic control in obese patients using three different pen needles has reported results on ClinicalTrials.gov (Identifier NCT01231984); there was no clinical difference in A1c lowering.

8. BD did not address the progress of its Simplist Prefilled Injectable for the use of Metoclopramide injection in the treatment of diabetic gastric stasis symptoms; launch was announced in F1Q14 financial call.

Financial Highlights

1. Worldwide Diabetes Care revenue of $258 million grew 4% as reported and operationally year-over-year (YOY). This is BD’s lowest worldwide growth seen since F2Q10. Management attributed this slowdown in revenue to an “unfavorable comparison,” since global sales rose 7% as reported (9% operationally) in F3Q13 due to a tender order; the company expects that sales should normalize in F4Q14. Sequentially, worldwide revenue rose 3% as reported, in line with what we typically see in BD’s sales from 1Q to 2Q.

2. US Diabetes Care sales of $118 million grew 1% as reported and were flat sequentially. This represents the second lowest growth seen in the US since F2Q10, when revenue declined 5%. As noted above, the comparison was challenging, and indeed, the $118 million was BD’s second highest US quarterly sales ever.

3. International Diabetes Care revenue totaled $140 million, up 6% as reported and operationally YOY. This marks seven straight quarters of international growth exceeding 5%.  The growth was also impressive considering the challenging comparison to an 8% increase in reported revenue YOY in F3Q13. 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.

4. Similar to previous quarters, management attributed the strong Diabetes Care growth to the “continued strength of pen needles.” The call provided no specifics on market growth. BD has two flagship products in this area, the Nano with EasyFlow technology and the AutoShield Duo. Unlike in F2Q14 – when management commented that Nano growth was above >50% in the US and >25% worldwide.

• Novo Nordisk’s NovoFine Plus 4 mm pen launched in the US in late January of this year, which we assume will be highly competitive with BD’s Nano. We last heard news regarding the NovoFine at the 2014 Clinical Diabetes Technology Meeting, where it was lauded for its user-friendly interface that shows patients their last dose and when they took it. It is unclear whether and how much the launch of Novo Nordisk’s product has cut into BD’s US pen needle revenue.

R&D Pipeline Highlights

5. BD is ending its continuous glucose monitoring program, in which it was partnered with JDRF and the Helmsley Charitable Trust (announced at ADA 2012). The development was noted in passing during prepared financial remarks – management noted that investors would see “a pre-tax charge of $9 million… resulting from our decision to end the continuous glucose monitoring program or CGM.” In Q&A, management implied that the discontinuation was related to the core CGM technology (optical based, glucose binding protein) and some issues emerged in human testing. Management did not provide any granularity on what these deficits might have been, but was clear that the decision was not related to the partnership itself. As a reminder, BD had been working with JDRF on both a standalone CGM and a combined insulin infusion set/CGM (announced in June 2013). Notably, we were glad to hear management call its relationship with JDRF “important” and the company is “enthused” to continue working with the organization on improved standalone infusion sets (see below); we assume the combined CGM/infusion set project will now end.

• Overall, the news was not surprising to hear in light of the technical challenges they announced today and in terms of the overall speed of the program to date (not much movement in two years), and considering how far (very!) Medtronic and Dexcom have moved with their sensors. In addition to the technical problems, we imagine BD was looking at the competitive landscape and wondering if its sensor would be differentiated enough to compete with Medtronic and Dexcom’s deep pipelines, particularly as the field moves to automated insulin delivery. CGM penetration remains at around 10% in the US, and many have argued that closed-loop systems will be the killer app for CGM. Of course, such devices would also directly compete with BD’s pen needle business. With all that in mind, it would have been fairly brave to move forward with the project.
• At the 2014 JP Morgan Healthcare Conference, management sounded optimistic on the project, noting that there had been some “very good early data” from the device – it was accurate, had limited drift, reduced calibration, and reduced warm-up time. BD was in the process of “miniaturizing” the product and collecting additional data (study to have been completed in fall 2014), with results expected in early 2015.
• Despite the decision to end the program, the company did not indicate significant interest in pursuing M&A for the Diabetes Care business. Management feels “comfortable internally” in terms of growing the existing portfolio, and feels that “good progress” is underway on the other programs. “But like each one of our businesses,” said management, “we are challenged with developing solutions for the customer.” This statement rings incredibly true in diabetes, and there are certainly many problems to overcome, particularly related to insulin delivery.

6. The insulin infusion set and type 2 insulin delivery opportunities will be the focus of the Diabetes Care R&D pipeline. This sentiment does not come as a surprise; we heard similar comments at BD’s F1Q14 and F2Q14 earnings calls, and the development of insulin delivery sets has been a focus of BD for some time now. The insulin infusion set – also developed in collaboration with the JDRF – remains on schedule for development in the next “24-36 months” (estimates from F2Q14 put development at two to four years). This was a fairly wide timeline considering this partnership with JDRF was initially announced in 2010. Still, we are more optimistic about it, considering it falls more squarely in BD’s area of expertise.

• Management reserved in commenting on its patch-pump/pen technology, remarking only that the company is looking at “type 2 opportunities for insulin delivery.” We first heard about the potential for a BD patch pump/pen at January’s JP Morgan Healthcare Conference, where management said that BD 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. Of note, we wonder whether the discontinuation of CGM research will be used to accelerate patch-pump/pen technology in order to take advantage of a presently underpenetrated market.

Table 1: Type 2 Insulin Delivery Device Competitive Landscape

• There was no mention of the BD’s microneedle insulin delivery technology, though positive data was recently shown 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.

7. BD’s trial investigating glycemic control in obese patients using three different pen needles has reported results on ClinicalTrials.gov (Identifier: NCT01231984). The purpose of this study was to evaluate whether the Ultra-Fine Nano 4 mm x 32 gauge pen needle provides equivalent glucose control as the Ultra-Fine 8mm x 31 gauge and the Ultra-Fine 12.7 mm x 29 gauge pen needles in obese subjects (BMI >30 kg/m²; n=293) with type 1 and type 2 diabetes requiring insulin. Results posted on ClinicalTrials.gov indicate that there was no clinically significant difference between the three pen needles, in terms of A1c. The finding was encouraging, given the lower pain level with the smaller needles.

8. During the company’s F1Q14 financial update, BD announced FDA approval of its BD Simplist Prefilled Injectable for the use of Metoclopramide injection, USP 10mg/2ml, in the treatment of diabetic gastric stasis symptoms. Management mentioned this device during prepared remarks, although only to confirm that the company still plans to seek approval for four drugs (no specific compounds or indications mentioned and no timeline was provided). The Simplist system has already received FDA approval for three drugs unrelated to diabetes (Morphine Sulfate injection was noted by management to have the highest value proposition and the lead portfolio candidate). We do not expect another indication for a diabetes-related drug in the near future.

Questions and Answers

Q: We talk about the strip meter business with Nova Biomedical and, obviously, the CGM initiative you announced this morning. You clearly want to get bigger in diabetes, but some of these partnership models, to be frank, haven't really worked well for the company. Do you think in light of some of these partnership models these last 5-10 years, your view on how to get bigger in diabetes changes at all?

A: I don’t think this is an issue of it being a partnership model. This was an issue of technology that we had brought into the company a long time ago. The fact that we partnered on the development was really not the issue. The issue was whether the technology would work. And when we got into some human testing, we saw some issues, and so there was some technological failure. It had nothing to do with our partnerships. We think that the partnerships we’ve put in place, like with the JDRF, are very important and we’re very enthused with the partnership that we have in the insulin infusion area. I would agree with you that we're working hard to expand the product portfolio, and this gave us the opportunity to reinforce some of the other programs in Diabetes Care. I think we are optimistic about the other programs and we'll be moving ahead with them.

Q: Do you think you’re any more likely to pursue M&A in the Diabetes Care business? Is this more likely eternally or are you confident internally in growing the portfolio?

A: We are still comfortable internally that we can grow the portfolio, and we're making good progress on our other programs. But like each one of our businesses are challenged with developing solutions for the customer - whether it's Diabetes Care, or Diagnostics or Medical Surgical, as you have seen what we have done across the portfolio. Diabetes Care would also fall under that grouping.

Q: Can you talk through where exactly you are with some of these other opportunities in the Diabetes Care pipeline? I know you talked about the infusion products. What would be the expected timeline by which you may have some new announcements to make within Diabetes?

A: We’re focused on two programs. The first is insulin infusion, and we’re not ready yet to talk about the exact timeline. But it's certainly within the business-planning window over the next 24 months to 36 months that we expect to make significant progress on insulin infusion. And then as we've mentioned before, we are looking internally at type 2 opportunities for insulin delivery. And it's really just too early for us to start talking about that, but those are – in terms of portfolio management – the two priorities with Diabetes Care.

Q: We’re seeing more consolidation across device landscape. Where does this focus on scale play a role in industry in your view? We're seeing more consolidation, particularly across the medical device landscape.

A: We are not a believer in scale for scale's sake. Our strategy is really focused on creating complete solutions for the customer and driving value that way. We think that that aligns much more with the basic customer needs, and how buying processes are evolving. So we really think strategically around each one of these business units, and how they can build out solutions. Working across business units to create more complete solutions is the second element of our strategy that we are developing. All of that lines up with more with our plug-in M&A strategy, and so, that's really the core of what we are trying to do. Certainly, there are people who are playing this out differently in terms of more and more breadth, but that's not what we are attempting. We’re focused on value to customer. That aligns more with customer needs. We think strategically about each business unit. M&A strategy is the core of what we’re trying to do.

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