Memorandum

Medtronic 2Q18 (F1Q19) – Sales of $572 million grow 27% on easy comparison; over 97,000 active 670G users, peds and CE Mark secured; nearly 50% CGM sales growth – August 21, 2018

Executive Highlights

  • Worldwide Medtronic Diabetes sales totaled $572 million in 2Q18, up 27% YOY as reported (+26% operational) on strong 670G adoption and nearly 50% CGM sales growth. Medtronic did have its easiest YOY comparison in the past decade: sales declined 1% YOY in 2Q17 on the global sensor shortage. 2Q18 sales declined 11% sequentially from the blowout 1Q18 record $645 million in sales – this was slightly surprising, given the launch tailwinds Medtronic has right now (e.g., 670G, Guardian Connect). Management did raise guidance, however: diabetes is expected to grow in the low/mid-teens in FY19, up from the prior low double-digit guidance. The upcoming quarter is expected to grow at ~20% YOY (easy comparison), followed by lower growth. It’s happened in the past that guidance is increased and then later reduced – we’re more interested in sequential growth right now given 670G momentum and we’re “standing aside” to see how sequential growth looks in 3Q18.

  • By geography, US sales of $324 million rose 33% YOY and declined 12% sequentially in 2Q18, driving 66% of the quarter’s YOY growth on strong 670G adoption – this was the US’ strongest share contribution in more than three years. OUS sales of $248 million rose 20% YOY as reported (“high-teens” operationally), with a similar 10% sequential decline from 1Q18.

  • The MiniMed 670G saw several milestones in Q2: (i) >97,000 trained, active users (+38% from 1Q18’s >70,000); (ii) a CE Mark announced in June; (iii) FDA approval for 7-13 year-old patients; and (iv) announcement of the $25,000 670G Outcomes Guarantee for Payers (“strong payer interest”). CEO Omar Ishrak said Medtronic is “now just beginning to commercialize the 670G in international markets”, while the slides more specifically put launch in select EU countries “in late CY18” [calendar year 2018] – we see that as a slight delay compared to June’s update, which said the OUS launch would commence “this fall” in 10 European countries.

  • The Guardian Connect mobile CGM launched in June in the US, marking Medtronic’s first foray into the competitive standalone US CGM market. Mr. Ishrak said in Q&A that it has “launched extremely well.” No metrics were provided, though CGM sales grew at “nearly 50%” (not specified if US or global), presumably helped by this US launch. Our calculations suggest standalone and professional CGM are still a small fraction (<5%) of the Diabetes business, but obviously very high potential.

  • Though not mentioned today, AADE gave us a look at time-in-range goals and health-related items that can be redeemed for points in Inner Circle. Now available for Guardian Connect and MiniMed 670G users, the CGM gamification platform gives users “points” for more time-in-range (70-180 mg/dl) – the lowest tiers are 70%+ time-in-range for 670G users and 60%+ time-in-range in Guardian Connect users. Over 70% time in range is pretty high from our view. In diaTribe in 2017 in CGM and Time-in-Range: What Do Diabetes Experts Think About Goals?”, the highly respected Dr. Roy Beck of the Jaeb Center said “It is important to keep in mind that the population average A1c in people with type 1 diabetes is approximately 8% or higher, and their time-in-range is likely 40%-50%. A goal of 70% time-in-range, or even 60%, is likely unrealistic without drastic changes in their diabetes management approach.” A 7% is, of course, probably close to a 7% A1c for most people. Moreover, although most of the experts stress in that piece that a very important element of “time in range” is time spent in hypoglcyemia, presumably for 670G users, very little of time is spent in hypoglycemia.

Medtronic reported 2Q18 (F1Q19) financial results this morning in a call led by CEO Omar Ishrak. Diabetes is page 11 in the presentation slides (see below), and the call’s major highlights are summarized below (under the slide).

Financial Highlights

1. Global Sales of $572 million grow 27% YOY on easy comparison, driven by US MiniMed 670G uptake (>97,000 users); nearly 50% CGM sales growth

Worldwide Medtronic Diabetes sales totaled $572 million in 2Q18, growing a robust 27% YOY as reported and 26% operationally on strong 670G adoption and nearly 50% CGM sales growth. However, Medtronic had its easiest YOY comparison in the past decade: sales declined 1% YOY in 2Q17 when the global sensor shortage was first announced. 2Q18 sales also declined 11% sequentially from the blowout 1Q18 record $645 million in sales. This sequential downtick, which is very apparent in the graph below, was not acknowledged today and is sort of surprising, given all the tailwinds the company has (e.g., 670G US, OUS, and peds; Guardian Connect US, etc.). Still, management emphasized that it was the Diabetes Group’s best YOY growth in more than a decade, and indeed, it did slightly edge out 1Q18’s 26% YOY growth. Sustained demand for the MiniMed 670G in the US drove the performance, which now has >97,000 active users, up 38% from 1Q18’s >70,000. The US launch of Guardian Connect in June also helped drive “nearly 50%” YOY sales growth in CGM (not further quantified). Notably, the US provided 66% of the quarter’s growth on sales of $324 million, its strongest share contribution in three years – more on that below.

Medtronic Diabetes Quarterly Sales (1Q13-2Q18), millions

  • US sales of $324 million rose 33% YOY and declined 12% sequentially. The YOY comparison was extremely easy in the US (-8% in 2Q17), while the sequential comparison was pretty difficult (1Q18 had record US sales of $370 million). As noted above, Medtronic is seeing nice uptake for the 670G, with over 97,000 trained, active users on the 670G, up 38% from 70,000 trained, active users on the 1Q18 call. Medtronic’s 1Q18 reported “>100,000 systems shipped”; presumably going forward it will only give the active user number. Beyond noting “nearly 50%” CGM sales growth globally, remarks noted that the US launch of Guardian Connect/Sugar.IQ (June) has gone “extremely well,” (presumably from a low base). As expected with a better sensor, Medtronic is seeing “higher CGM sensor attachment and utilization,” which is “creating a consistent, long-term annuity stream” for the diabetes business. The Analyst meeting was far more specific in June, noting ~65% of Medtronic’s US pumpers are getting on CGM (as they renew their pump warranty), nearly double the 35% use of CGM in its US installed base.

  • Outside the US, sales of $248 million increased 20% YOY as reported and grew in the “high-teens” operationally. Sales declined 10% sequentially from the record-high 1Q18. Medtronic saw 17% YOY operational growth in developed markets ($203 million) alongside 21% operational growth in the smaller emerging markets ($45 million). Management noted OUS sales were drive by the MiniMed 640G, CGM adoption, consumables uptake, and patient engagement. Medtronic is “now just beginning to commercialize the 670G in international markets” following CE Mark – more on that below.

2. New divisional reporting: Advanced Insulin Management >25% YOY Growth (670G, CGM); Emerging Technologies >50% YOY Growth (Guardian Connect, innovative care models)

As expected following the June Analyst Meeting, Medtronic now reports Diabetes sub-division growth in two segments – Advanced Insulin Management (AIM) and Emerging Technologies – giving less visibility than the previous three-segment reporting. Emerging Technologies includes a vertical newly named as “Multiple Daily Injection Solutions (MDIS)” and the previous Non-Intensive Diabetes Therapies (type 2; NDT) division. AIM appears similar to the previous Intensive Insulin Management (IIM) division, which includes pumps and closed loop and pump supplies.

  • AIM grew >25% YOY on MiniMed 670G uptake and increased CGM sensor attachment rates. Emerging Technologies grew >50% on Guardian Connect uptake and “patient enrollment in innovative care models” – presumably this refers to Diabeter. Sales were not broken out, but given overall Diabetes growth of 27% as reported roughly backs out to Emerging Technologies at ~5% of the business on sales of ~$30 million, while the AIM division is at ~95% of the business on sales of ~$542 million. This implies Guardian Connect and iPro2 are still a very small part of the overall Medtronic Diabetes business.

  • Medtronic estimates that the global results “led to over 6 points of share gain this quarter in pumps,” which was not further quantified. For context, the 2018 Analyst Meeting (June) estimated Medtronic has ~70% global market share in pumps, which presumably puts its current estimated global pump market share at ~76%. The 1Q18 call quoted a similar six-point gain in market share globally, which seems sort of hard to believe two quarters in a row. Medtronic is cryptic about how it calculates this, and of course, both Tandem and Insulet had very strong 2Q18 US performances. 

  • Medtronic continues to benefit from Animas’ market exit last fall: (i) selling consumable supplies to in-warranty Animas users; (ii) moving out-of-warranty Animas users onto Medtronic pumps (converting “at least at the rate of our share position”); and (iii) an upgrade program to move in-warranty Animas users to Medtronic pumps, through which J&J compensates Medtronic. This is why, of course, Medtronic took over the Animas pumpers last fall – from this vantage point, as we said then, the real risk of giving Animas pumpers a chance to join Tandem was lower than the perceived risk.

3. Growth guidance raise: Diabetes to grow in low/mid-teens in FY19, up from low double-digits; upcoming quarter diabetes growth of ~20%

Management now guides for the Diabetes segment to grow in the low/mid-teens in the 2019 fiscal year (April 28, 2018-April 27, 2019), up from the previous low double digit growth guidance (1Q18). This is more in line with the original JPM plan for “double digit” growth. Medtronic often just does a dance around for guidance – we would not be surprised from this “raise” in guidance today to see the next reporting call move to double digit growth expectations again. While some may have seen sequential growth as disappointing, this may have been offset by increased guidance – from our view, the minute changes quarter to quarter are hard to judge the business by. For the current quarter 3Q18 (F2Q19), Diabetes is still expected to grow ~20% (“plus or minus”), which is arguably conservative – the YOY comparison will still be easy to flat global growth in 3Q17, including a notable 5% decline in the US. Given the tailwinds in the US – 670G pediatrics, Guardian Connect – Medtronic could easily exceed 20% YOY growth. (The competitive counterpoints are Tandem’s Basal-IQ, Dexcom’s G6, Abbott’s 14-Day FreeStyle Libre, and Senseonics’ Eversense.) CEO Omar Ishrak noted Diabetes will see a stronger first half versus second half of this fiscal year (April 28, 2018-April 27, 2019), based on prior year comparisons; indeed, the last two quarters of this fiscal year will face very, very challenging YOY comparisons to 17% growth (4Q17) and 26% growth (1Q18).

  • Noted Mr. Ishrak in Q&A, “We are excited about Diabetes, and we’re excited about a market that we are leading and creating. And this market is going to go through a tremendous amount of change, and we expect to be right in the leadership position in that … Now having said that, we are coming up against some pretty difficult comparisons because, if you recall, we went through a period last year at this time where we had a shortage in our sensors. We overcame that according to our plans. Although we expect Diabetes to maintain a mid-teens growth profile for the year, the present rate is really advantaged by the comparisons that we had over last year. But expect an exciting double-digit growth business certainly for this year and over the long term, a business that will set the standards for growth at Medtronic. And that's what we expect from it.”

MiniMed 670G and Guardian Connect Launch Highlights

1. Over 97,000 active 670G users; CE Mark received, “just beginning” to launch OUS; FDA peds approval in June; “strong payer interest” in performance guarantee

Medtronic’s MiniMed 670G hybrid closed loop saw a number of milestones in the quarter: (i) >97,000 trained, active users; (ii) a CE Mark announced in June; (iii) FDA approval for 7-13 years (June); and (iv) announcement of the $25,000 670G Outcomes Guarantee for Payers (June). Beyond the updated user metric, today’s call added a bit of color on the OUS rollout: CEO Omar Ishrak said Medtronic is “now just beginning to commercialize the 670G in international markets”, while the slide deck more specifically said “Commercial release of 670G in select European countries to commence in late CY18 [calendar year 2018].” What we heard in June was somewhere in the middle of those two: a 670G OUS launch would commence “this fall” in 10 European countries (Belgium, Denmark, Finland, Ireland, Italy, Netherlands, Spain, Sweden, Switzerland, and the UK). Notably, Medtronic obtained CE Mark approval for 7+ years, meaning it will have 670G pediatric approval from the start in Europe. (In the US, 670G approval for 7-13 years just came during ADA, 21 months after initial adults approval.) The 670G EU launch will also bring the improved Guardian Sensor 3 outside the US for the first time; currently, Medtronic uses Enlite Enhanced in the 640G and standalone Guardian Connect mobile CGM. Following 670G’s EU rollout, Medtronic will add Guardian Sensor 3 to Guardian Connect outside the US. This 670G EU launch puts Medtronic ahead of competitors on AID: Diabeloop is planning for a late 2018 EU launch of its hybrid closed loop in only three countries (see ADA 2018); Insulet took over direct Omnipod distribution on July 1, though Dash is not expected in Europe until 2H19 and AID with Omnipod Horizon is further out; and Tandem will make its first EU sales in 2H18 following CE Mark of t:slim X2/G5, but there is no international timing on its AID systems, Basal-IQ or Control-IQ.

  • According to today’s slide deck, there is “strong payer interest” in the 670G Performance Guarantee – this was first announced during ADA’s June Analyst Briefing, and then subsequently announced via company-wide press release later in the month. The program promises that if there is a diabetes-related hospitalization or ER visit for a patient on the 670G, Medtronic will reimburse a payer up to a cap of $25,000 over a four-year period. This is arguably the biggest value- and outcomes-based move we’ve ever seen in pumps and CGM contracting to date, and it certainly signals Medtronic’s confidence in the real-world outcomes on the hybrid closed loop system. Assuming payers go for this attractive deal (what do they have to lose?), Medtronic will also be highly incentivized to keep patients out of the hospital, possibly putting more emphasis on strong upfront training, remote monitoring (not yet available in 670G), and potentially coaching and other outreach.

  • Today’s slide deck also alluded to the one-year outcomes from the preferred pump partnership with UnitedHealthcare, previously shared at the Analyst Day. The slide below is from ADA: compared to MDI users, Medtronic and UHC have seen a 27% reduction in preventable hospitalizations and up to a 14% reduction in total costs for patients on Medtronic pumps. The companies have shared savings, Medtronic’s UHC pump market share has gone from 70% to 92%, and Medtronic’s revenue and profitability have gone up.

2. Guardian Connect has launched “extremely well” in the US (no metrics provided); Sugar.IQ positioned as key differentiator

The Guardian Connect mobile CGM launched in June in the US, marking Medtronic’s first foray into the competitive standalone US CGM market. Said Omar Ishrak in Q&A: “Guardian Sensor has launched extremely well, the Guardian Connect, and I have to add that our sensor is differentiated by the addition of Sugar.IQ, which is a cognitive decision support system that provides insights to the patients.” The launch came as expected following FDA approval in MarchThe company’s major foray into the standalone US CGM market includes the Guardian Connect app on Apple iOS (no receiver), the seven-day wear Guardian Sensor 3 (two fingerstick calibrations/day, adjunctive label, MARD: 9%-10.6%), and the reusable clamshell transmitter that adds Bluetooth. Predictive high/low alerts come up to 60 minutes in advance, a major marketing focus. The Guardian Connect app currently has 3.2/5 stars on iOS (13 ratings), with the few written reviews citing the now-familiar issues with Audio override and connectivity – both encountered in the early days of G5 too. For comparison, users are really tough: the G5 app currently has 3.1/5 stars on iOS (899 reviews), while the G6 app has a more brutal 2.9/5 stars on iOS (110 reviews). We’ve seen this pattern fairly consistently over time – reviews tend to be more negative biased, with those having outstanding experiences less likely to leave reviews vs. those having problems.

  • The IBM-Watson-powered Sugar.IQ companion app is also available on Apple iOS, exclusively for Guardian Connect users in the US. It has a stronger 3.9/5 rating with a small number of reviews (21). The long-awaited app uses artificial intelligence to find patterns in diabetes data related to food, daily routines, and CGM data. Along with no receiver, Sugar.IQ is the most differentiated aspect of Guardian Connect – and this first-gen paves a path to potentially more compelling decision support over time (as shared in the Analyst Meeting).

3. Inner Circle (CGM Gamification) Launched for 670G and Guardian Connect Users: Points awarded for 70%+ and 60%+ TIR, respectively

Though not mentioned on today’s call, Medtronic’s AADE exhibit hall booth gave us a first look at time-in-range goals and health-related items that can be redeemed for points in Inner Circle. This novel CGM gamification and patient engagement program launched before AADE, easily meeting the June Analyst Meeting timing to launch this year. Now available for invited Guardian Connect and MiniMed 670G users, Inner Circle pulls CGM data from CareLink and gives users “points” for more time-in-range (70-180 mg/dl) – the lowest tiers are 70%+ time-in-range for 670G users and 60%+ time-in-range in Guardian Connect users. We were not allowed to take pictures and didn’t get to see the specific items or point values, but we really appreciate that Medtronic is doing something different here with CGM data, investing in its customers’ health success, laser focusing on time-in-range goals, and aligning points redemption with better health. After this brief look, we are more impressed with what we’ve seen so far! The big questions are who it will motivate and how sustainable that motivation will remain over time.

  • Time-in-range of 70-180 (TIR) is framed as a monthly goal within Inner Circle, with points given for reaching different benchmarks: 400 points are given for 670G users that reach 70%-79% TIR, 600 points for 80-89% TIR, and 800 points for 90%+ TIR. For Guardian Connect CGM users, the TIR goal tiers are ten-percentage points lower at each respective point level: 60-69%, 70-79%, and 80%+. Users must have at least 15 days of sensor data to get the points, encouraging consistent CGM wear and at least once-monthly CareLink upload for 670G users. As a mobile CGM, Guardian Connect data flows to CareLink – and therefore Inner Circle – automatically.

    • Medtronic used the 670G pivotal and real-world data from Guardian Connect users to frame these benchmarks. They seem very reasonable and very grounded in actual data – nice! As a reminder, 670G’s pivotal saw 72% time-in-range on average, which means a sizeable portion of the population was both above and below that level. On average, the 72% time-in-range in 670G’s pivotal delivered quite strong A1c (<7%) and hypoglycemia outcomes (<3%) on 670G, so prioritizing 70%+ TIR makes a lot of sense although Dr. Beck’s comment earlier does show how hard this level is to reach on a non-automated system. Guardian Connect is aimed at MDI users, presumably reflected in the slightly lower benchmarks than hybrid closed loop. The Guardian Connect real-world data we saw at ATTD 2018 showed ~61%-62% time in range over a nine-month period in n=258 users. Over 70% TIR has been thrown around as a benchmark ever since the 670G pivotal and subsequent real-world data; conversely, we’ve heard much less benchmark discussion for MDI+CGM users.

  • Points can be redeemed for “health-related items. We didn’t get to see the specific items and associated point values, but obviously these will play a big role in how motivating the program is and the business model economics of the program. We can’t wait to learn more on this front – what will motivate people? What will improve health outcomes? What “health-related items” will Medtronic include?

  • Interestingly, the point distribution within Inner Circle favors the health outcome rather than viewing an article with pump tips or watching an educational video. While the latter are available within Inner Circle (see below), these generate 25 or 50 points– a sliver compared to the 400-800 points for achieving one of the TIR goals noted above. We love this! Medtronic Chief Patient Officer Louis Dias highlighted that a lot of wellness programs focus on doing activities, while this one is focused on outcomes. It’s like value-based care for patient engagement!

    • Points accumulate within Inner Circle quite visibly in the user interface, a smart gamification move. Seeing the points tally up in a very visible on-screen box should be motivating.

    • We do think getting some points for activities like bike riding, running, walking, etc. may be very motivating for some users.

  • How will Medtronic define a $/point value that maps to improved TIR or other health outcomes and/or a business model? For example, how much cost savings would a 10-percentage point improvement in TIR generate? Could Medtronic build a business around improving TIR from 62% to 72%? And if so, what level of point redemption is appropriate for that kind of improvement? And if can’t take this tack, simply encouraging users to upload their data obviously allows Medtronic to acquire more data, build stronger products, and bring more data to payers. Clearly there will be heaps of learning here, so for now we assume the point values/redemption items are guesses and may be conservative.

  • Other questions: What is an acceptable motivating redemption level for points and items? Over what time horizon? What health-related items will be most popular? How sustainable will the engagement be over time – will this have cool factor, but then see people drop off? Will those spending low time-in-range be motivated to get much better, or will this only reinforce those already doing well?

  • Over time, users will be able to set customized challenges – the more ambitious the challenge, the more points will be awarded. While this functionality is not currently available, a user could set a goal to hit a TIR of 75% within two months, up from a current level of 52%. The platform would recognize this is a big jump (a massive one for most) and award even more points accordingly.

  • Inner Circle is actually a mobile-responsive website, not an app. Medtronic decided strategically not to go with an app, in part because it enabled a faster path to launch. The website approach also allows for faster iteration and A/B testing, while still facilitating an app-like experience. The vast majority of early users (number not specified) have used Inner Circle on their phones. Medtronic is also working to make it easy to add an app icon to a user’s own smartphone home screen – clicking on it would open up a web browser and go straight to the Inner Circle website.

  • Inner Circle appears online as a tiled display, including the monthly time-in-range level and goal and separate tiles with articles, videos, surveys, and content. The one piece of content we saw was a “Pump Tricks” PDF. Another tile allowed users to share a tip, which Medtronic will curate and share back within a tile. There is no forum/community at this point – the approach is a one-way, highly curated platform in this first-generation. Over time, Medtronic could obviously build this out and allow users to have friends, give each other kudos (like Fitbit/Strava), etc.

Other Pipeline Highlights

1. Advanced Hybrid Closed Loop: Increased R&D investment in quarter; launch beyond April 2020, per Analyst Meeting

In a question on margins in Q&A, CFO Karen Parkhill shared the following: “We did increase our investment in R&D in the quarter, particularly in CVG and Diabetes. […] In Diabetes, we purposely accelerated our focus on driving an advanced hybrid closed loop system.” This was quite a notable comment, as diabetes rarely comes up in margin questions like this. For context, the June Analyst Meeting framed the auto-bolusing advanced hybrid closed loop (goal of >80% time-in-range) as 2+ years away, meaning a launch beyond April 2020. We wonder how conservative that timing is – could it come to market sooner? Medtronic will presumably need to obtain a non-adjunctive CGM label claim for this system (see next highlight). The NIH-funded FLAIR trial comparing Advanced HCL vs. 670G is expected to start in 4Q18, per our AID competitive landscape.

  • At Keystone, Dr. Fran Kaufman said a feasibility study of the Advanced HCL recently finished, and she shared a number of features and goals for the system:

    • Keeping people in closed loop 100% of the time;

    • >80% time-in-range without changing the hypoglycemia profile in any significant way;

    • Lower target, both overall (currently 120 mg/dl in 670G) and for corrections of elevated glucose (corrections not allowed below 150 mg/dl in 670G);

    • Improving the meal experience (perhaps a simple meal announcement with no carb counting – “it’ll give you a little bolus and you’ll be on your way,” said the lead 670G engineer – sounds like the Beta Bionics iLet system); and

    • Constraints on time in maximum and minimum basal dose extended (in 670G, 4 hours at maximum basal dose or 2.5 hours at no insulin leads to a likely exit from auto mode – right at the times when Auto Mode is most needed!).

  • At ADA, management said the next iteration of 670G will add Bluetooth and a mobile display app, with “eventually smartphone control.” The Analyst Meeting goal was to launch a Bluetooth-enabled 670G between now and April 2020. With Insulet already offering this functionality in Dash and Tandem likely to get there soon with its own mobile app (targeted for 2H18), Medtronic is playing catchup here.

2. ADA Briefing: Non-adjunctive filing “this year”; no-calibration clinical trial this year with planned launch within two years

  • Per ADA, a PMA filing for a non-adjunctive CGM label claim will be filed “this year” – it was unclear in June if this referred to calendar or fiscal year, though the given the current accuracy (MARD 9%-10% on two calibrations/day), we don’t imagine huge issues obtaining this. This claim will be important for marketing against G6 and FreeStyle Libre, as well to obtain Medicare therapeutic CGM reimbursement. Medtronic said in June that an iCGM designation is “absolutely” in its pipeline, though our analysis suggests Guardian Sensor 3 falls a bit short of the special controls.

  • Per ADA, a clinical trial for a Medtronic no-calibration real-time CGM is expected to happen this year with a planned launch within two years. We assume this is the sensor branded “Harmony” at the June Analyst Meeting, which showed encouraging accuracy in an ADA poster. In the n=31 study, accuracy of the fourth-gen sensor and new algorithm was tested for “up to 7 days,” comparing algorithms requiring two fingerstick calibrations per day (current approach), one calibration per day, and zero calibrations. The data were evaluated retrospectively, and 80 sensors were tested in each group. Overall MARD vs. SMBG values was 10.9% with no calibrations, 9.2% with one calibration, and 9.3% with two calibrations. %20/20 was also a solid 87% without calibration, 92% with one calibration, and 91% with two calibrations per day. Day 1 MARD was 12.7% with no calibrations, 11.8% with one calibration, and 12.0% with two calibrations. Mean sensor life was only six days, a clear area for Medtronic to improve on. Still, this accuracy is good enough to move forward in our view.

  • As of ADA, talks were ongoing with the FDA to run a trial for a seven-day wear infusion set, with a goal to start before the end of this fiscal year (by April 2019). Unomedical’s coated Lantern catheter reported seven-day wear results in a poster at ADA. n=16 type 1s wore Unomedical’s novel Lantern catheter set for seven days safely, though with a trend toward reduced insulin action and significantly more hyperglycemia over time. The catheter includes several slits along the side to allow insulin to flow out of multiple places (e.g., for occlusion or kinking), and in new news, a next-gen version of Lantern was tested with a “coating” to suppress the body’s foreign body response over seven days of wear. This still needs a fair amount of R&D.

3. Analyst Meeting Pipeline Summary – 15 Products Slated for Next 2+ Years

  • Within the next year (by April 2019), Medtronic planned at least five main product launches: Guardian Connect and Sugar.IQ in the US (done; see above); the “Inner Circle” program, where CGM users earn “points” for more time-in-range (done; see above); a launch of Sugar.IQ with Hypoglycemia Prediction; and MiniMed 670G OUS launch (coming soon; see above).

  • Within two years (by April 2020), Medtronic aims to launch a “Sugar.IQ Dosing Assistant” and insulin pen dose capture, a Bluetooth-enabled 670G pump and mobile app display; the project Harmony CGM sensor with “adaptive calibrations” and “non-adjunctive” claim; Envision Pro (formerly iPro 3) outside the US; and personalized guidance/intelligent therapy advice for T2D professional CGM. The ADA Briefing said that Envision Pro will be blinded, fully disposable, no-calibration, and Bluetooth-enabled (single-use data transfer, like Libre Pro).

  • Pipeline products 2+ years out include: Medtronic’s disposable, no-calibration, 10-14-day wear CGM; “glucose prediction” for MDI users; an Auto Bolusing Closed Loop (goal of >80% time in range), a combo CGM-insulin set with extended wear, and personalization through AI & Cloud. Also in the longer-term pipeline are “real time coaching” and a real time professional CGM (Envision/iPro 3) for type 2 diabetes.

Questions and Answers

Rick Wise (Stiffel): On diabetes, another outstanding quarter here. Best in the decade, as you say (editor’s note – from a YoY perspective, not sequential). I assume this was 670G driven, but you launched the standalone sensor in mid-June. Do we expect this growth to simply continue with these kind of levels given this kind of performance? But when I reflect on it, it seems still early in the launch of the Guardian Sensor. You highlighted the OUS rollout. Why wouldn’t growth actually accelerate from here in diabetes? And maybe just give us a little color on how widely available the Guardian Sensor is at this point.

Omar Ishrak: First of all, we are excited about Diabetes, and we’re excited about a market that we are leading and creating. And this market is going to go through a tremendous amount of change, and we expect to be right in the leadership position in that.

The Guardian Sensor has launched extremely well, the Guardian Connect, and I have to add that our sensor is differentiated by the addition of Sugar.IQ, which is a cognitive decision support system that provides insights to the patients. But having said that, our position in the hybrid closed loop is something that's really setting the standards as to how patients with type 1 diabetes in particular can manage themselves. And we're only in the beginning of that journey, and we expect that this product will continue to innovate over time. And we will be leading that innovation sort of roadmap.

Now having said that, we are coming up against some pretty difficult comparisons because, if you recall, we went through a period last year at this time where we had a shortage in our sensors. We overcame that according to our plans. Although we expect Diabetes to maintain a mid-teens growth profile for the year, the present rate is really advantaged by the comparisons that we had over last year. But expect an exciting double-digit growth business certainly for this year and over the long term, a business that will set the standards for growth at Medtronic. And that's what we expect from it.

Bob Hopkins (Bank of America): Just wanted to dig a little bit deeper on the margin performance in the quarter. It looks like on an operating margin basis excluding the impact of currency, operating margins were roughly flat YOY on an underlying basis. It looks like you took the opportunity to spend more in R&D given the strength in the overall business. I was wondering if kind of that's the right read or were there other sort of moving pieces in the quarter that impacted underlying operating margins?

Karen Parkhill (CFO): You have the right read, Bob. We did increase our investment in R&D in the quarter, particularly in CVG and Diabetes. […] In Diabetes, we purposely accelerated our focus on driving an advanced hybrid closed loop system. And in fact, our R&D investment by our calculations was 30 basis points higher than Street consensus. […]

Chris Pasquale (Guggenheim): Another very strong diabetes result this quarter. Can you comment on the impact of the Animas wind down and the pace at which that is progressing? You guys are offering some on-warranty patients the opportunity to switch early. Is that accelerating this process to the point where we might see the bulk of that benefit here in the first year versus the three of four years that it would have taken just based on the timing of warranty expirations?

Hooman Hakami (EVP, Diabetes Group): Maybe a little bit of color around just the revenue streams from Animas. The transition actually here is actually going pretty smoothly, and we're really working well together with J&J on this. Now your question is around the end warranty, but let me remind you that there's actually three parts to the dynamic with Animas. They've got, and they had, roughly 90,000 patients in their installed base. The majority of those patients were under warranty, and we’re coming off of warranty at a steady cadence. Now starting this quarter, there are really three ways that we’re driving revenue.

The first is for all the patients that are under warranty and remain under warranty, we’re actually supplying those patients with consumables, and we’re recording that revenue. That revenue actually will start to anniversary in Q3 of this year.

Second, for all the patients that are out of warranty, we're working to convert those patients to Medtronic. That’s going extremely well, and we’re converting them at least at the rate of our share position.

And then the final one that your question touches on, which really was a program that started in Q1 of this year, is where we take certain in-warranty patients who have an Animas pump and we upgrade them to a Medtronic pump, and for those that convert, we get compensated by J&J for that.

And so the way that that is going is actually well. It's ramping up. This was the first quarter where that's actually taking effect, and we expect it to accelerate. But I think you’ve got to offset it with some of the other dynamics that I mentioned like the anniversary of the consumables.

 

--by Adam Brown and Kelly Close