Medtronic 4Q16 (F3Q17) – Record-high global, US sales on 630G uptake and priority access program for 670G; Spring US launch for 670G on track – February 22, 2017

Medtronic reported 4Q16 (F3Q17) financial results this morning in a call led by CEO Omar Ishrak, including an accompanying slide deck (Diabetes is slide 12, pasted below). Worldwide and US sales hit a record-high on strong uptake of the MiniMed 630 and accompanying 670G Priority Access Program. The hybrid closed loop remains on track to launch in the US this “Spring,” which was good to hear (“there is no deviation from this”). Read our highlights below, followed by a financial and pipeline summaries.

Financial Highlights

1. Worldwide Diabetes revenue hit a record-high $501 million in 4Q16, growing 6% year-over-year (YOY) as reported and 7% operationally. $500 million was a big milestone to hit – the previous high was $496 million in 1Q16. Both came against tough comparisons to growth in 4Q15, when sales grew 6% as reported and 11% operationally. Sales grew 8% sequentially in 4Q16 from a very slow 3Q16. Management cited strong uptake of the MiniMed 630G in the US (launched in September), and expects to maintain mid- to high-single digit growth in the upcoming quarter. Double-digit growth is still expected in FY18 (May 2017-April 2018) once the 670G fully launches. Notably, despite complaints from some in the diabetes community about the United Healthcare exclusive arrangements, Medtronic Diabetes President Hooman Hakami went out of his way during Q&A to say this was going very well and they could not be happier. 

2. US Diabetes had a very strong quarter, with record-high sales of $310 million rising 6% YOY and an impressive 14% sequentially from a low base in 3Q16. The US provided 63% of 4Q16 growth, the highest seen in a year following three straight quarters with no growth. The slide deck and Q&A noted “excellent feedback” on the 630G and “strong” patient participation in the 670G Priority Access Program.

3. International sales of $191 million grew 6% YOY as reported, including a strong 9% operationally in developed markets ($152 million) and 5% operationally in emerging markets ($39 million). The 640G continues to do very well outside the US. Sales grew 0.5% sequentially.

4. The intensive insulin management division grew in the low double-digits operationally, with low double-digit growth in the US (630G) and high-single digit growth OUS (640G). Medtronic reported a “substantial sequential improvement in CGM retention rates,” though we’re not sure what is driving that – the improved Enlite 3 CGM is not yet available in the US or globally.

5. The Diabetes Service and Solutions division grew in the low-single digits operationally, including low-single digit US declines (pricing, challenging prior year comparisons) offset by double-digit international growth (strong growth in consumables; Diabeter clinic revenue). The US decline reinforces the challenges in this market, and suggests the small limited launch of the MiniMed Pro-set with BD did not drive growth in the quarter. Global expansion plans for Diabeter clinics are moving forward (per the slide deck), but were not mentioned.

6. The non-intensive diabetes therapies division grew in the high-teens operationally, led by the sales of the iPro2 Professional CGM. This marked the lowest growth for this division since segment performance started reading out six quarters ago – presumably the higher base is the cause for some of this and we note high teens growth is still very high. iPro2 also launched in China during the quarter – there is certainly big upside there.

Pipeline Highlights

7. Medtronic still expects a “Spring” US launch of the MiniMed 670G following FDA approval last fall. Per JPM, this will include a “customer training launch” by end of April. Management confirmed with us the full launch will indeed happen “later in the Spring,” on the early side of the JPM timing for a “H1FY18” (May-October) launch. Medtronic has confirmed “early coverage” with many commercial payers, and UnitedHealthcare has given the 670G a “positive coverage decision.” In Q&A, Diabetes President Hooman Hakami said payer coverage, training, and the priority access program are key reasons driving the staggered rollout – we are glad to hear that the launch will be carefully orchestrated, as we believe it will likely be a very demanding group of patients who are the “early adopters.” CEO Omar Ishrak remains enthusiastic, characterizing this as “revolutionary in the treatment of type 1 diabetes.” Per JPM, a 670G international launch is expected in May-October of this year.

8. Medtronic’s standalone mobile CGM, Guardian Connect, underwent “pilot launches in major European markets” and remains under FDA review. US approval is expected around roughly April-May, and per JPM, a US launch is expected in May-October. It will be interesting to see how Medtronic does with this – it has never had a CGM with which to court patients on MDI, as Dexcom has done for ages.

9. Medtronic is preparing for a “limited preview” of the Sugar.IQ app with IBM Watson – per its ATTD presentation last week, this is expected on February 28. Medtronic’s JPM presentation called for a full launch in May-October, behind the initial plan to launch by the end of 2016. We assume it will launch in tandem with Guardian Connect. We remain optimistic about this app’s potential to give patients meaningful insight, though sustaining engagement is the major question (e.g., will patients log their food, continue to open the app, etc.?).

10. Medtronic presented notable data on its “Turning Point Program” in an ATTD poster, demonstrating a 2% A1c reduction from a 10.1% baseline in a 50-patient pilot (n=35 completers). Turning Point uses a 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. This was not mentioned on the call, but according to the slide deck, the Turning Point integration with IBM Watson is “now live,” adding further predictive analytics (e.g., risk of a hospital readmission). This type 2-focused program falls in Medtronic’s Diabetes Service & Solutions segment. Watch this inspiring video and view the poster here.

11. Medtronic announced a professional CGM partnership with Fitbit in December, starting with the iPro2 myLog app. This brings greater context to blinded CGM data, allowing patients to manually log fingersticks, food, and exercise (plus auto-sync with a Fitbit tracker). There were no updates on how this is going.

12. The MiniMed Pro-set with partner BD was not mentioned on the call or in supporting materials. Initial shipments of the set stopped last month following the limited launch that began in late September, due to a higher than anticipated rate of complaints associated with insertion. We assume BD’s prior guidance for a full launch in by ~March may be delayed.

F3Q17 Diabetes Slide Summary

F3Q17 Worldwide, US, International Sales

Pipeline Summary

Pump, Automated Insulin Delivery, and Infusion Sets

CGM Sensor Pipeline (Personal and Professional)

Data Analytics and Connectivity Pipeline

Questions and Answers

Q: A lot of moving pieces in the diabetes market right now and Hooman, I'd love to get your thoughts on the market overall, especially given J&J's recent announcement. And then we're trying to connect the dots in terms of how we should think of the ramp of your business. You've talked about Spring launch for 670G, but you've talked about that being a controlled launch. You've got the priority access program. I'm just wondering how that all works as we think about the launch cycle of that device? And then last, how should we think about the contribution from the UNH relationship?

Hooman Hakami: As far as the market overall, as you pointed out it's a dynamic market, and certainly over the last 90 days, a significant number of competitive announcements.

If you take a look at that market and you look at our positioning in that market, we feel great about where we are. We've got the 630G in the US. We've got 670Gs that we're going to launch in the spring, number one. Number two, we have a standalone sensor that we anticipate getting approval on towards the end of this fiscal year, beginning of next fiscal year, which will signal our entry into that market.

And then on top of that, our international growth continues to be good. So you put all of those pieces together on top of the work that we're doing in value-based health care and type 2, we really like how we're positioned in the marketplace overall.

Now in terms of the 670G specifically, you pointed it out. The launch is Spring, as planned. Absolutely no deviation from that. It is going to be a staggered launch, as we've talked about before, and the reason we're doing the staggered launch is to make sure that we're rolling this out in a methodical way so that we do the right thing for patients and physicians, and make sure they get the proper training.

And then also it's staggered because we do have a priority access program. We want to make sure that the participants in the priority access program are first in line for this new technology, our employees as well, and then as we conclude with payers and manufacturing capacity we'll open it up and really get to full capacity.

And then on UnitedHealthcare, that relationship continues to go well. We're very pleased with how that has gone. It really was our first step into value-based health care with a payer, and we were thrilled to be able to do it with United. And we've been able to have ongoing discussions about how we can continue to broaden that partnership.

I'm not going to comment on specifics related to other payers, but I would say as other payers look forward, they're also looking to ensure that they are driving not only cost but also outcomes. And that's going to continue to be very important.

Q: A follow on the 670G launch: how as a patient do you get in to the priority access program? How does that work? And given the four-year cycle around pumps, how many patients in your installed base, broad numbers, do you expect will be in that priority access program? When are you going to hit full launch on 670G? Is that by year end? Is it further out than that?

Hooman Hakami: Let me provide some additional background. Back in August, we received approval from the FDA for the 630G product. Literally less than a month later, we received approval for the 670G product, which was far faster than what we had anticipated, and if you remember, we had submitted the 670G to the FDA in June of last year, so a far accelerated timeline by the FDA for the 670G approval. So literally in less than a month we had two products approved right on top of each other.

We created the priority access program so that patients who purchase the 630G would be first in line for the 670G once it was released in the spring, and so that's really how you get on the priority access program.

As far as the uptake question, we don't disclose the actual number of participants that have chosen to enter into the priority access program. But I think as Omar talked about in the commentary, we're very pleased with our US results as we really start to get into the swing of things here. We’re in the first full quarter with the priority access program, and the uptake continues to be great.

There's a number of things that need to happen in order for us to really get the full launch, not the least of which is payer coverage which we're actively working, and it's hard to estimate how that's going to go. But those are the kind of things we're working on in order to ramp up as fast as we can.

-- by Adam Brown and Kelly Close