Memorandum

Medtronic 1Q18 (F4Q18) – Record sales of $645 million rise 21% YOY; Guardian Connect broad launch in F1Q19 (2Q18); Capacity to meet global sensor demand; 70,000 active 670G users, 100,000 shipped – May 24, 2018

Executive Highlights

  • Medtronic Diabetes’ global sales hit a record-high $645 million in F4Q18 (1Q18), increasing 26% YOY as reported and 21% operationally. Sales grew 10% sequentially from the previous record high in 4Q17. This is easily the biggest YOY reported gain in our model, which goes back to 2005 – the next highest was 22% growth in 1Q08! US sales of $370 million rose 22% YOY, hitting an all-time high – this was Medtronic’s strongest US growth since at least 2005, per our model. Outside the US, record sales of $229 million increased a robust 32% YOY as reported, including 17% operational growth in developed markets ($218 million) and 34% growth in emerging markets ($57 million). Management conservatively guided for “low double digit” YOY growth for all of FY19 – relative to easy YOY comparisons for the next two quarters, we’d guess Medtronic will achieve at least mid-teens diabetes growth and perhaps higher.

  • As anticipated, Medtronic now has CGM sensor manufacturing capacity to meet expected global demand. Notably, there were no sensor back orders at the end of the quarter. The Guardian Sensor 3 sensor gets high marks compared to the old one, and though the CGM has saw drawbacks compared to Dexcom’s G6, the automated insulin delivery with 670G, especially at night, is a big advantage for now.

  • The standalone, Bluetooth-enabled, Guardian Connect mobile CGM is expected to start a “broad launch” in the first quarter of Medtronic’s fiscal year (~May-July). The sensor was FDA-approved in March after a ~two-year review. This could possibly be in reference to the limited launch (previously guided for ~May-July), or it could mean a broader rollout is now happening earlier than anticipated. We are likely in for a large Guardian Connect presence at ADA. For those of us that remember the Medtronic Gold – this is a whole new product and it looked and sounded pretty good when we heard about it at the great “Innovators’” meeting last weekend at Stanford, organized by Divya Gopisetty and Urvi Patel.

  • 70,000+ patients have been trained and are actively using the MiniMed 670G in the US. Overall, 100,000+ systems have been shipped, a five-fold increase over the figure shared in 3Q17. The slides say “moving towards … launching 670G in new geographies,” leaving CE Mark status ambiguous. Per last quarter’s call, upon approval, the hybrid closed loop will launch in “select OUS geographies.” 640G received approval and has launched in Japan. Medtronic has a lot of runway outside the US with these products, and will again beat other systems to market OUS.

  • Per ATTD, 670G pediatric data (7-13 years old) has been submitted to the FDA. This was not mentioned today, so there is no launch timing to report. A 2-6 year old study was expected to wrap up soon, per ATTD.

  • According to Mr. Ishrak, Medtronic now holds a 70% share of the pump market (presumably by pumper, not revenue, though who knows how they are counting stats like this – it’s always a bit vague). Ultimately, it is probably under-appreciated the extent to which Medtronic is seeing a greater revenue contribution from CGM as customers move from standalone to far more profitable sensor-enabled pumps with accurate sensors that are now being purchased and used.

  • Encouraging news - Medtronic is leveraging the Diabeter model to type 2 clinics in the US. There were no additional details provided, but we love the idea of bringing the tech-integrated care model from Diabeter to the US and to type 2s – how ready are US payers to jump on board? The care is said to be stellar, though expansion progress has been very, very slow since the clinic was acquired three years ago.

  • Medtronic’s 2018 Institutional Investor and Analyst Meeting will be held on June 5 from 8 am-2 pm EDT. We expect to hear plentiful updates on the diabetes portfolio, and we’ll be tuning into the webcast for all the updates.

Medtronic reported record-high 1Q18 (F4Q18) financial results this morning in a call led by CEO Omar Ishrak. It was the second consecutive quarter of record diabetes sales on the back of the broadening MiniMed 670G launch, an expected change from the prior two quarters. Diabetes is page 12 in the presentation slides (see below), and the call’s major highlights are summarized below.

Financial Highlights

1. Record-High Global Sales of $645 Million Rise 26% YOY; US rises 22% YOY to $370 million; OUS rises 32% YOY to $275 million

Worldwide Medtronic Diabetes sales hit a record-high for the second consecutive quarter, totaling $645 million, reflecting 26% YOY growth as reported and 21% operationally. This is easily the biggest YOY reported gain in our model, which goes back to 2005 – the next highest was 22% growth in 1Q08! Such robust growth is not all that surprising given (i) the company’s expanding 670G/640G sales; (ii) OUS Guardian Connect CGM distribution; and (iii) an easy comparison to 3% reported and 4% operational growth in 1Q17. Sales grew 10% sequentially following a record 26% quarter-to-quarter gain in 4Q17. The graph below certainly tells a tale of accelerated Medtronic growth in the past two quarters. The record-high sales tally beats last-quarter’s previous record of $584 million – the previous record was $512 million in 1Q17. The execution, both on the financial and sensor manufacturing fronts, is on par with 4Q17 commentary. For the second consecutive quarter, the US and OUS businesses provided near-identical shares of quarterly performance – both saw absolute growth of $66-$67 million, contributing equally to overall Medtronic YOY growth. The graph below, however, suggests the OUS business is on quite an uptick, while the US business leveled off a bit from 4Q17. Mr. Mike Weinstein – on his first call wearing the industry hat as Medtronic SVP of Strategy after over two decades at JP Morgan (freshly announced on May 7) – commentated that Diabetes “obviously had a fantastic quarter,” outperforming the Street’s models, “and Guardian standalone hasn’t launched yet in the US.” Wow, is Medtronic lucky to get him.

  • US sales of $370 million rose 22% YOY and 4% sequentially, hitting an all-time high for the second consecutive quarter (beating record sales of $355 million in 4Q17). The US business has added $112 million over the past two quarters – about time following the MiniMed 670G’s initial FDA approval 20 months ago! US growth came on an easy 3% YOY comparison for Medtronic. With sensor capacity issues finally resolved, the 670G launch opening up, and US approval of the Guardian Connect, growth should remain at this level or perhaps accelerate in the coming quarters. 22% is the strongest US growth dating back to at least 2005 (yeah, no kidding), reflecting the 70,000+ active 670G/Guardian Sensor 3 user base – with a strong CGM sensor now, Medtronic can obviously capture much more revenue from customers as sensor utilization likely improves. Medtronic is now confident that it has the manufacturing capacity to meet expected global demand for sensors. As with the previous quarter, the J&J Animas exit bolstered sales with strength in consumables. Based on a 6% reported uptick in pump market share to 70%, we’d guess Medtronic is also benefitting from the transition of Animas patients who are also upgrading to the 670G – of course this is how Medtronic planned and designed the way it said “yes” to J&J. Read more on the 670G launch below.

  • Outside the US, record sales of $275 million increased a whopping 32% YOY as reported and 20% sequentially. Medtronic saw 17% operational growth in developed markets ($218 million) alongside very robust 34% operational growth in the smaller emerging markets ($57 million)- the latter was standout since Medtronic has been reporting this segment for a few years now. In addition to continued strength of the 640G system (including launch in Japan), the slide noted that Medtronic is “moving toward” servicing OUS Animas customers and launching 670G in new geographies. This is probably in places like Australia and the UK. We’re not sure how many of the 90,000 Animas pumpers were US-based vs. international, but there is obviously a huge opportunity in consumables and pumps from this cohort and other companies (Dexcom, Insulet, Tandem) will have to fight for these customers. In February, the slide said that Medtronic is “working to obtain CE Mark for 670G” – it’s unclear if this has been obtained, as there was no CE Mark update in this call. It’s possible the regulatory process continues to drag on (now we’re at 20 months after FDA approved 670G), or if 1Q18 saw a positive CE mark approval decision The 3Q17 update last fall called for a 670G OUS launch by this April (a deadline that was obviously missed), but JPM timing earlier this year suggested a broader window extending out to April 2019 (“FY18/FY19”). It’s always a dance with Medtronic, as its launch timing often fluctuates between fiscal and calendar years, and it often subtly revises the timelines along the way. If the 640G is any indication, 670G should do very well outside the US. There are lots of complaints in areas where it is not yet approved and it is beyond frustrating to the global patient community that so many of the same trials need to be done in different geographies for different regulatory bodies – it seems like a racket.

2. Intensive Insulin – “High Twenties” Growth; Service/Solutions – Low-Double Digit Growth; Non-Intensive – Declines in the Low Twenties

  • The intensive insulin management (IIM) division grew in the “high-twenties” operationally, further improving on growth in the high teens in the previous quarter. As expected, sales were again driven by the MiniMed 670G/Guardian Sensor 3 launch in the US. Outside the US, IIM delivered “mid-twenties” operational growth on the continued strength of the MiniMed 640G system – the multi-year sustained 640G adoption represents a very positive sign for 670G, once it receives a CE Mark and launches in various new international geographies. (It also suggests Tandem’s upcoming Basal.IQ (PLGS) system should do very well, even though it lacks hyperglycemia mitigation.) Based on the strength of the 6-series and presumably old Animas pumpers, IIM market share grew “six points” from 4Q17 to “70% of all durable and consumable pumps globally” – it’s unclear if this figure refers to users or revenue share. Mr. Ishrak also noted that “sensor attachment rates” are increasing as the customer base shifts from standalone pumps to sensor-augmented systems, increasing the revenue from CGM. Medtronic recently told us that CGM contributes ~25% of all revenue, though it appears that this percentage is on the rise, a positive sign for Medtronic as it moves to become a CGM company (CGM-driven pumps + standalone CGM businesses) where there is more global runway than in pumps.

  • Sales in the Diabetes Service and Solutions (DSS) division grew in the “low-double digits” operationally, with growth in consumables benefitting from customer base growth and improved patient utilization. The slide noted US growth in consumables driven by new pump patients and the Animas exit; there was no mention of the infusion set pricing pressures alluded to in previous quarters. Guardian Connect, the standalone mobile CGM, also falls in this division – the big news from the quarter is of course that FDA has approved the system (with no receiver, to boot!) and the paired Sugar.IQ pattern recognition app. We think the product’s success will rest on Medtronic’s reach into HCPs, payer relationships, and the value-add of Sugar.IQ; on features, it has some catching up to do relative to Dexcom’s G6 and Abbott’s FreeStyle Libre. The slide deck guides for a US launch in F1Q19 (~May-July), and also notes that easing of sensor supply constraints enabled broader promotion of the system in Europe. Broadly, there has been strong utilization. Finally, a quarter after it was announced that the Netherlands Diabeter clinic has expanded coverage to type 1 adults, the slide shared that Medtronic is leveraging the Diabeter model in US type 2 clinics. Wow is this fantastic – we’ve heard  highly, highly respected business minds talk about visiting Diabeter and being pretty blown away. We doubt the Diabeter model is generating significant revenue at the moment (only caring for ~2,500 patients as of February), but we’re delighted to hear the advanced integrated care model is making its way onto US soil and boy do the outcomes sound good.

  • Sales in the non-intensive diabetes therapies (NDT) division declined in the “low twenties” operationally, marking four straight quarters with a sales decline. The press release noted a commercial focus on the MiniMed 670G launch and “competitive pressures” – presumably the latter refers to Abbott’s FreeStyle Libre Pro CGM, which is a stronger product than iPro2. On the bright side: (i) preliminary results from the Portuguese ADJUST study of iPro2 in 102 people with insulin-treated type 2 diabetes and A1c ≥7.5% are very promising; (ii) Medtronic is working on tying iPro2 data with photo-based meal logging in a custom version of the Nutrino app (very positive for driving behavior change around food); and (iii) the next-gen iPro3 is slated to launch by April 2019, per JPM. Now that the sensor manufacturing constraints are easing, we’ll be interested to see if the professional CGM business returns to growth. It was notable that this business division did not have any highlights in the slide deck. This is such an obvious area that should do well, but competition is pretty fierce – including from pharma as they move into tech (particularly Lilly and Sanofi/Verily) – and we don’t see so many Medtronic resources going here at the moment.

3. Low Double-Digit Diabetes Growth Expected in FY19; Robust Growth Expected in F1Q19 on 670G

Management now guides for the Diabetes segment to grow in the low-double digits for the 2019 fiscal year (April 28, 2018-April 27, 2019), slightly tempering expectations shared at JPM for “double digit” growth. In the upcoming quarter (2Q18), “robust sales” are expected from Diabetes on continued 670G strength. This is very doable given this quarter’s performance, the impending US launch of Guardian Connect, and two very easy comparisons up ahead (-1% YOY in 2Q17; -2% YOY in 3Q17). With that in mind, this tempering of guidance feels extremely conservative – we again expect Medtronic to show 20%+ YOY growth. For instance, even if sales decline 10% sequentially from this quarter, Medtronic would post 29% YOY growth in the upcoming quarter 2Q18. Here are a few factors we’ll be looking at:

  • Continued strength of the US 670G launch: How much runway is there for the system, beyond the 100,000 systems that have been shipped? (Heaps, we think.) Will Tandem’s Basal-IQ (PLGS – Summer 2018 launch, with an expected hybrid closed loop upgrade in 1H19) and Insulet’s Omnipod Dash (limited market release in 2H18) offer more competition for 670G? We think so, especially because both Insulet and Tandem are still seeing strong patient and sales growth – even with 670G’s launch expanding. We’d guess the vast majority of initial 670G customers are upgrades from Medtronic or Animas, rather than MDI market expansion or stolen share.

  • Guardian Connect US launch and adoption: How will the mobile CGM compete with Abbott and Dexcom (and Senseonics, if and when that comes on the market)? Will Sugar.IQ be a compelling differentiator for the product? Based on what we’ve seen, we do think it’ll be pretty cool. However, the adjunctive labeling (not for insulin dosing) and two fingerstick calibrations per day are definite drawback relative to Libre and G6.

  • 670G launching outside the US: Is the successful MiniMed 640G uptake a good indicator of 670G adoption? (We’d say they are pretty different systems, and both are launching with AID competitors.) Does Diabeloop offer any serious near-term competition (hybrid closed loop launch expected in 2018 in France, the Netherlands, and Sweden)?

  • Medtronic successfully turning itself into a CGM-first company, rather than a pump company that happens to sell CGM as an add-on. Omar Ishrak noted on the call that the customer base continues to shift from standalone pumps to sensor-augmented pumps. We’d add that the future of the business – and the bold goal to serve 20 million patients by 2020 – rests heavily on Medtronic’s ability to drive real-time CGM into broader populations and professional CGM into type 2 diabetes and primary care. We’ll be interested to see how Medtronic positions this goal at the upcoming analyst day – it has not been a focus in recent remarks, presumably because it is harder than expected to expand its user base this substantially.

  • How big is Medtronic’s foray into the Diabeter model at US type 2 clinics? How many clinics are involved? How much revenue will Medtronic be able to generate per patient, and how soon? How ready are payers to engage in shared savings or value-based care?

670G: US Launch, Pediatric Submission, and OUS Timing

1. 70,000+ Trained & Using 670G in the US; 100,000 670Gs Shipped; Capacity to Meet Global Demand for Sensors (No Back Orders at Quarter’s End)

Over 70,000 patients have been trained on and are actively using the MiniMed 670G in the US, though we’ve confirmed that the company has shipped over 100,000 systems. This is up five-fold from the last two updates: “over 20,000” patients, shared on both the November (3Q17) and February (4Q17) calls (though there was a January update suggesting ~35,000 Priority Access Program orders had been fulfilled). That so many systems have been shipped is a sure sign that CGM manufacturing constraints seem to be fixed, and Mr. Ishrak’s comments today confirmed that the company has “capacity to meet expected global demand going forward” – the slide deck adds that sensor capacity expansion efforts are complete and there were no sensor back orders at the end of 1Q18. Notably, Medtronic’s 670G installed base alone (once all these 100,000 patients are trained) is now larger than both Tandem’s active installed base (63,000+, per 1Q18) and Insulet’s US installed base (~77,000-80,000 users, per 4Q17). We’re not sure how many of these 100,000 systems are from Medtronic’s existing user base, pumpers from other countries, and market expansion from MDIs.

  • We estimate there are now likely over 1 million people on CGM globally, based on user base estimates from Abbott, Dexcom, and Medtronic. There are 650,000+ FreeStyle Libre users globally (Abbott 1Q18), 270,000+ Dexcom users globally (Dexcom at JPM), and likely well over 100,000 Medtronic CGM users globally (given the 670G uptake in the US plus international adoption of 640G/Enlite Enhanced). This also means our 4Q17 Roundup estimate of 0.8-1 million CGM users globally was probably quite conservative.

    • CGM adoption could reach ~1.5 million users by the end of 2018, given: (i) Abbott’s projection for >1 million FreeStyle Libre users by year-end; (ii) Dexcom’s guidance for >325,000 users by year-end (>20% growth); (iii) Medtronic’s continued uptake.; and (iv) Senseonics’ broader international sales and US entry.

  • At AACE, we were introduced to a very cool new provider-facing app – MiniMed Outcomes – that allows them to compare the CareLink outcomes data of their 670G user cohort with that of the entire national user base. Dr. Bergenstal displayed outcomes from his IDC clinic (n=138) side by side with all patients uploading data to CareLink so far (n=40,824). Fascinatingly, though patients at Park Nicollet have access to Dr. Bergenstal’s team of 670G experts (who helped conduct the three-month US pivotal study), their time spent in auto mode and outcomes therein are not noticeably different from the national cohort. In the overall, ~41,000 strong group of 670G patients who have uploaded to CareLink, people spend ~76% of time in auto mode, and while in auto mode, time “71-180” mg/dl is ~72%, time ≤70 mg/dl is ~2%, and time >180 mg/dl is ~26%. In the Park Nicollet group, people spend 78% of their time in auto mode, and while in auto mode, time 71-180 mg/dl is ~75%, time ≤70 mg/dl is ~3%, and time >180 mg/dl is ~23%. We continue to be impressed that real world results so-closely resemble those from the pivotal – with the clear room for improvement on time in auto mode, which is currently hovering around ~18 hours per day.

2. Moving Toward Servicing OUS Animas Customers + Launching 670G in New Geographies (No CE Mark Update); 640G Launches in Japan

Per the slide deck, Medtronic is currently “moving towards servicing OUS Animas customers and launching 670G in new geographies.” The slide deck accompanying the previous February call said Medtronic is currently “working to obtain CE mark for 670G” and that upon approval, the hybrid closed loop will launch in “select OUS geographies.” CE Marking wasn’t mentioned at all on the call or in any of the supplementary materials – this could mean it is still in progress, or that it has been obtained but the product hasn’t launched. Now that sensor supply constraints have eased, regulatory and reimbursement are presumably the gating factors. JPM timing in January suggested a 670G OUS launch would come by April 2019 (“FY18/FY19”) – a pushback well beyond the initial plan for a “summer 2017” approval. At this point, the delay between US approval and OUS market entry is >1.5 years, a testament to the forward-thinking FDA device division.

  • Regarding Animas, we’re not sure how many of the ~90,000 users were international, though we imagine a good portion will either contribute to Medtronic consumables revenue (remaining on Animas for now) and/or switch to Medtronic pumps. It will be interesting to monitor how many international customers go to Medtronic products vs. switching to Insulet, Tandem (when it launches OUS later this year), Roche, Diabeloop, Ypsomed, or SOOIL.

  • MiniMed 640G has launched in Japan, according to the slide deck. If adoption in the EU is any sign, the PLGS system will do very well in Japan. We assume 670G is at least a year behind in this market, but aren’t sure.

  • Call for Action 2018 circulated at ATTD 2018, petitioning for accelerated availability of closed loop systems in the EU. Nearly 900 attendees signed it, including our team. We’ll be interested to see if this moves the regulatory needle in the EU – the MiniMed 670G was in the CE Mark process as of February, and there’s clearly some frustration at the lack of hybrid closed loop devices on the EU market.

  • We’re not sure how much is actually regulatory hold-up here, as CE Mark is historically easy to obtain. DreaMed secured a CE Mark back in 2015 (!) for its overnight MD-Logic closed-loop algorithm in early 2016.

3. 670G Pediatric (7-13 years) Indication Submitted to FDA; 2-6 Year-Old study wrapping up soon

Though not mentioned on today’s call, we learned at ATTD that Medtronic has submitted 670G pediatric data (7-13 years old) to the FDA. Compared to a two-week open-loop run-in period in the 7-13 pivotal trial, 670G drove a 0.4% reduction in A1c in the pediatric population (baseline: 7.9%); time-in-range (71-180 mg/dl) improved from 56% to 65% (a strong +2 hours/day); time <70 mg/dl declined from 4.7% to 3.0% (-24 mins/day); and time >180 mg/dl improved from 39% to 32% (-1.7 hours/day). We’d guess a pediatric launch this year is possible, depending on how long the FDA review goes. Dr. Fran Kaufman said in February that a seven-site, n=50, three-month study in 2-6 year olds is also in the process of wrapping up. Overall, this likely means Medtronic will be out with a pediatric indication before other companies are out with a competitive commercial hybrid closed loop for adults – a big advantage and one we think parents may be quick to jump on. Interestingly, the real-world 670G data mentioned also presented at ATTD (~14,000 patients) included nearly 500 7-13 year old users that are already using the system as part of the US commercial launch – presumably off label. This age group’s real-world Auto Mode time-in-range (~65%) was identical to the pivotal, and still a clear area for improvement. (These off-label prescriptions are likely for those close to the age cutoff and on more than eight units of insulin/day.)

CGM, Infusion Set, and Other Pipeline Highlights

1. Guardian Connect Standalone Mobile CGM Approved in March, US Broad Launch to Start in F1Q19 (by July 28, 2018); Broader Guardian Connect Promotion in EU

Following FDA approval of the standalone, Bluetooth-enabled, Guardian Connect mobile CGM and Sugar.IQ pattern recognition app in March, Mr. Ishrak said that the company intends to start a broad launch “in the first quarter” (F1Q19, i.e., April 28-July 28). This actually made it sound like the full launch will begin in early/mid-summer, whereas previous guidance dictated a limited launch in May-July would precede broader availability in August-October. We wonder if Medtronic has moved up the launch, or if the commentary was simply less specific. It’s also possible availability has been accelerated in light of Dexcom’s June 4 G6 launch shipping target and Senseonics’ optimism that it’ll have a big presence at ADA – it’s one thing to be able to say at ADA that “we have a sensor FDA approved,” and it’s another thing to say “we have an FDA-approved sensor that’s now in XX thousand people’s hands.” It could also be that the qualifier “start” before “broad launch” actually signifies a limited launch.

  • Remarks from IBM Watson’s Dr. Jianying Hu at the Digital Diabetes Congress implied that the goal is to get at least 25,000 patients on the standalone Guardian Connect sensor by the end of 2018. She didn’t say this directly – as she may not have insight into Medtronic’s business plan – but she did share the goal of having 25,000 Sugar.IQ users by the end of the year in the interest of aggregating larger data sets to inform future app iterations. Medtronic has previously said that there will be five generations of the pattern recognition app: The next one will be capable of predicting hypoglycemia with machine learning, and a later generation will automatically and dynamically adjust models in relation to patient behavior. “Unlike predicting a hurricane,” she said, “in our case, the output of the model changes the behavior of the subject, and therefore the model’s assumptions, so you need to constantly adapt the model in a personalized way. We’re also working on this.”

  • Guardian Connect is certainly a major US launch for Medtronic, but how will patients choose between Dexcom, Abbott, and Senseonics? Will Sugar.IQ be a big enough differentiator to overcome Guardian Connect’s adjunctive claim, a still-clunky reusable clamshell transmitter (requiring lots of tape), no Android app, and at least two fingerstick calibrations per day? How soon will these be updated so that Medtronic sensors are more competitive in and of themselves?

  • Management is “excited about [Medtronic’s] entry into the $1 billion standalone CGM market.” Approval certainly comes at a convenient time for Medtronic, now that sensor manufacturing is up to speed and it has been able to promote Guardian Connect more broadly in Europe.

2. Mio Advance Not Mentioned; Hidden-Needle, Auto-Inserter Launched in UK, Italy, Netherlands; Launch Previously Expected in Canada, Hong Kong in 1Q18

The call did not mention Unomedical’s Mio Advance insertion set. At ATTD in February, the set debuted in Medtronic’s booth and workshop, touting a limited launch in the UK, Italy and the Netherlands in F3Q18 (4Q17). Canada, Hong Kong and certain Europe/Middle East/Africa launches were expected in this quarter (F4Q18; 1Q18), with availability in other countries expected later in 2018. No timing was shared in the call, and there is no US timing to report;  we’d hope to see a stateside launch fall in the countries slated for later this year. The all-in-one, hidden-needle, fully disposable inserter is a big upgrade in our view – see a video demo here. The Unomedical rep told us it’s been the “best feedback ever” about an infusion set, a major win and certainly strong competition to BD’s FlowSmart set. The initial Mio Advance launch with Medtronic does not appear to be an exclusive partnership (like BD’s FlowSmart set), though Unomedical has not developed a version for Tandem’s t:lock at this point. However, the set’s website does indicate a luer lock version is available, meaning Roche pumpers could theoretically use it.

  • The MiniMed Mio Advance is ready-to-use upon unwrapping, inserts with the single push of a button, and can even be inserted one-handed for difficult-to-reach areas. It looks particularly great for pediatric patients and elderly patients who may struggle to insert their infusion sets independently. Given the enthusiasm for Dexcom’s G6 applicator, we expect big patient enthusiasm for this device. It is only compatible with 6mm teflon tubing to date (other variations are on the horizon).

  • This set represents a big threat to BD’s FlowSmart set (“MiniMed Pro-set”), which has yet to relaunch following issues in the limited launch late in 2016. There was no update on BD’s 1Q18 call, and per the last update in August, the set was slated to launch by September 2018. We think the Unomedical Mio Advance significantly beats BD’s FlowSmart set on the insertion front. That said, the actual product performance and reliability (e.g., kinking, flow reliability) remains to be compared between the sets. BD’s set could theoretically have an advantage here, given the extra side hole for insulin to flow.

Value-Based Healthcare Highlights

The Diabetes slide alluded to “capitalizing on VBHC (value-based healthcare) trends and intriguingly, bringing the Diabeter model to US type 2 diabetes clinics. The call did not share timing or further details, but the type 2 Diabeter mention is exciting – Diabeter’s integrated, tech-enabled care has been specialized in type 1 diabetes thus far. Following Medtronic’s acquisition of the clinic three years ago, this is the first time we can recall a mention to expand it to type 2 diabetes – this is obviously much higher potential and much higher need, given the fragmented care many patients receive.

  • JDRF’s Dr. Aaron Kowalski succinctly described Diabeter’s model – what he called “the future” – at a recent JDRF event: “Henk Veeze had this idea to go to the payers. He said, ‘I want reimbursement for XX% less than you pay per year, wherever and whatever you’re paying. For example, I’ll take 75% of what you’re paying, and then get out of my way. He then completely flipped the model. Right now in the US, the people coming into the office are people like me. I take up 30 minutes, and I really just need a prescription for my insulin. But the people who need the most care don’t get seen at all, and then they rack up expensive bills. The Diabeter model is the opposite – for the people doing well, they never come to the office. It’s all electronic. The people who want a sensor get a sensor. The people who need psychosocial care get it. What if we could change the way we manage people with diabetes?” Helmsley Charitable Trust trustee Mr. David Panzirer commented at the same event, “I went to that Diabeter clinic. We compared/contrasted it to a city clinic in Amsterdam run by Dr. Hans DeVries. This Diabeter clinic, which is now owned by Medtronic, receives 2-3 times the amount of reimbursement of the city clinic that is a 40-minute train ride away. When patients do better at Diabeter, they get more reimbursement. That is a model we need to follow here in the US. Let’s go at-risk.” We look forward to hearing more about Medtronic’s attempts to bring this model to US payers – how quickly they intend to scale, how much they can get paid, and what kind of outcomes they can deliver.

    • “Virtual diabetes clinics” are taking many different forms from different players, but it seems like an inevitable trend to manage the avalanche of type 2 diabetes: get more continuous care and feedback to patients, pay for care services rather than products, and direct HCP resources to segments of the population that most need them. Specifically, Sanofi/Verily are going in this direction with Onduo; Dexcom and UnitedHealthcare and Fitbit are doing it in a ~10,000-person pilot; Virta has physicians in house to manage medications and scale low-carb, high-fat (ketogenic) diets; and One Drop, mySugr/Roche, and Livongo are expanding their own coaching offerings. The big questions, in our view, are about how to best deploy connected devices, what role in-house coaches and healthcare providers play, and which consumer/payer business models will generate the most value.

  • A February WSJ article by highly-respected writer Peter Loftus (“Medtronic Moves to a New Health-Care Model: Pay Only if It Works”) mentions diabetes a couple times, including news that Medtronic is “exploring contracts with insurers” that would link 670G reimbursement to hypoglycemia prevention. There was no news on this front, but it could obviously give Medtronic a leg-up on the competition, especially Tandem and Insulet in the US.

  • Last quarter, the diabetes slide noted: (i) the United Healthcare value-based agreement is “progressing well” (no details on what diabetes outcomes are tracked in the preferred pump provider arrangement); (ii) Medtronic has completed phase I of the VBHC program with Aetna (focused on MDIs transitioning to pumps – if they don’t achieve an A1c benefit, Aetna gets a rebate – we would have loved to have seen “time in range” assessed but the MDI patients probably do not have that data); (iii) Medtronic has secured three contracts with accountable care organizations (ACOS) for the iPro2 professional CGM; and (iv) Medtronic has an early framework for VBHC in type 2. A bullet point also noted diabetes discussions around value-based relationships are also in progress with “multiple payers.” There were a number of broader mentions of VBHC in other Medtronic divisions on the call, learning that could translate over to diabetes too – see the quote below.

    • “We continue to make progress in creating new value-based business models that directly link our therapies to improving outcomes. With our direct related value-based health care arrangements, we now have over 1,100 hospitals under contract, covering over 30% of our US CRHF implantables revenue, helping to drive sequential market share gains in ICDs and CRT. This is one of the reasons why our performance in CRHF has been better than the Street was expecting six to nine months back. The other reason is innovation, where we lead the development of several important and often disruptive technologies such as Micra.” – Mr. Ishrak

Pipeline Summary

Pump, Automated Insulin Delivery, and Infusion Sets

Pump/Infusion Set Pipeline Product

 

Latest Timeline

MiniMed 670G with Guardian Sensor 3

Hybrid closed loop

US: >70,000 US users on hybrid closed loop. 100,000 systems shipped in total (AACE 2018).

Pediatric (7-13 years) submitted to FDA in January 2018, 2-6 year old study wrapping up as of February 2018

OUS: Moving toward launching 670G in new geographies; CE Mark process underway as of February 2018, unclear if it has been obtained

1,500-patient Outcomes RCT currently recruiting.

Mio Advance infusion set (Unomedical)

Launched in UK, Italy and the Netherlands as of ATTD 2018; Canada, Hong Kong and certain EMEA launches were expected in 1Q18, but not commented on today

US timing unknown

MiniMed Pro-set Infusion Set with BD’s FlowSmart technology

No update on BD’s 1Q18 call; Per the last update in August, the set was slated to launch by September 2018.

Future Bluetooth-enabled pumps incorporating Roche Accu-Chek Guide Link BGM

No official timing shared by Medtronic. A prior Roche webinar suggested that this could launch in mid-2018, but Medtronic has never confirmed this.

Advanced/Enhanced Hybrid Closed Loop and New Insulin Delivery System (formerly called “690G”)

Incorporating DreaMed MD-Logic algorithm to add automatic correction boluses

Launch after April 2019. NIH funded IDC/Schneider Children’s Hospital study to start later in 2018, per ATTD 2018 update. Feasibility study shared at ATTD 2017.

CGM Sensor Pipeline (Personal and Professional)

CGM Pipeline Product

Latest Timeline

Guardian Connect standalone mobile CGM

Bluetooth-enabled transmitter, Enlite 2 (OUS) or Guardian Sensor 3 (US).

FDA approved in March 2018 with Sugar.IQ app; Launch expected in ~May-July 2018 (F1Q19).

Available outside the US (EMEA, APAC).

iPro 3 Professional CGM
“Single-use,” blinded, MARD of ~11%.

Launch in FY19 (May 2018-April 2019), per JPM 2018

Next-gen sensor (flat square-patch design)

After April 2019, per JPM 2018

Data Analytics and Connectivity Pipeline

Data/Connectivity Pipeline Product

Latest Timeline

IBM Watson app, Sugar.IQ Gen 1 (“Personal Diabetes Assistant”)

Analyzes retrospective data: “How have I been doing?”

Approved in tandem with Guardian Connect CGM, to launch in the US with Connect (see above). First data from “limited learning launch” presented at ADA and subsequently at DTM.

Next-gen CareLink

After April 2019, per JPM 2018

Fitbit partnership for professional CGM

myLog mobile app launched in December 2016 to capture exercise, food, fingerstick data while wearing iPro2.

Turning Point Program with IBM Watson

Bluetooth-enabled BGM, a patient mobile app, a one-on-one health coach, clinical decision support for PCPs, and optional iPro2 to help patients with uncontrolled diabetes.

Went live in F3Q17. Initial pilot data reported at ATTD demonstrated 2.0% A1c reduction from a 10.1% baseline in n=35 completers (view the poster here).

mySugr-CareLink integration for pump/CGM data management

Partnership announced in a mySugr industry update in November, but no launch timing shared.

Selected Q&A

Q: Just to give us confidence in your guidance for fiscal year 2019, what are the product launches that you're most excited about for fiscal 2019?

Mr. Omar Ishrak (CEO): … Diabetes is the other one. I mean, we're just starting there to get the full benefit of the 670G in the US, and we're extremely excited about what we see. But equally, we've got penetration of the 670G into global markets on the back of a 640G which is already very successful. And then the Guardian Connect is a whole big opportunity which I mentioned, which also is a big area for us.

Q: Two of the businesses that stood out were Diabetes and Spinal Cord Stem. And, Omar, you touched on this just briefly in the last question, but you have new product launches there. Maybe you could give a little more color into what you're seeing and the dynamics with the product launches? And how you think that's impacting the market?

Mr. Hooman Hakami: I think the quarter was really strong. We had some great balanced performance across businesses, across geographies. I'd say there were really two main drivers. The first is strong global pump growth, and Omar just touched on this a second ago. We had continued strong uptake of the 640G in markets outside the United States, but in particular Europe, and then we have seen continued strong performance out of the 670G in the US. And this is really encouraging because in many ways we are just getting started here. So you look at those dynamics. All of those things lead to six points of share gain for us across both consumable and durable pumps this past quarter, which we're obviously really excited about.

The second big driver for us was the pull-through of sensors. This is as we sell more integrated systems, we're seeing more sensor pull-through. So both the 640G, the 670G are driven by sophisticated algorithms where the pump and the sensor work together to keep a patient in control. As we sell more of these systems, the more sensors we pull-through. So those two dynamics were really the catalyst for us this quarter, and then looking forward we expect both of these things to continue and for us starting to capitalize on a stand-alone CGM market that we're just starting to get into.

 

-- by Brian Levine, Adam Brown, and Kelly Close