Medtronic 3Q16 (F2Q17) – Sales drop 3% in US as patients await 670G in Spring 2017; 640G drives 12% INTL growth; new 670G upgrade program for competitive pumps – November 22, 2016

4. Two new upgrade programs are available for the MiniMed 630G/670G: (i) the aggressive Switch2System program will allow patients on in-warranty Animas, Insulet, Roche, and Tandem pumps to get the 630G for a total cash price of ~$1,260-$1,510 (with an old pump trade in); and (ii) the Pathway program for current Revel/530G pumpers will allow them to go straight to the 670G for $599 or $3,100 out of pocket (assuming the old pump is traded in). These were not mentioned on the call, but we’ve confirmed the details (see below) with Medtronic’s team. Both come in addition to the already-announced priority access program for current pumpers to get the 630G for $599/$3,100 (assuming old pump trade in) and then upgrade to the 670G for an additional $0-$299 (plus “first-in-line” access). It is positive to see some upgrade path for the new hybrid closed loop, but we do not expect an overwhelming number to take advantage, given the significant upfront cost. We continue to expect the durable pump business model to change dramatically, since the current hardware-driven, large-upfront-cost model prevents patients from accessing the latest technology. An increasing number of diabetes technology companies are offering over-the-air or online software updates, including Dexcom’s G4/G5, Tandem’s t:slim X2, Livongo’s new meter, and Bigfoot’s planned smartlooop system.

• Medtronic’s Switch2System program is offering patients on in-warranty competitive pumps – Animas, Insulet, Roche, Tandem – the ability to upgrade to the MiniMed 630G system out of pocket, and thus be first in line to get on the MiniMed 670G hybrid closed loop (launching in the US in Spring 2017). Insulet users will need to pay $999 out of pocket (if they send their OmniPod PDM to Medtronic), while Tandem, Animas, and Roche users would pay $749 out of pocket (if their old pump is sent to Medtronic). Those desiring to move to the 630G must also pay $511 for the transmitter, bringing the total cash price upgrade to $1,260-$1,510. Not sending the old pump in to Medtronic raises the price to $1,760 total – very expensive, but still far less than the full $7,899 price tag of the MiniMed 630G. Medtronic is also offering a $200 transmitter credit for current Dexcom users that want to switch over, meaning an Animas Vibe or t:slim G4 user could pay as low as $1,060 to get the 630G. The subsequent upgrade from the 630G to the 670G is free if the former is acquired by December 31; otherwise it is another $299 in 2017. (Medicare, Medicaid, Kaiser, TRICARE, CareCentrix, and distributor partners have exclusions.) 

• Medtronic’s Pathway program will allow MiniMed 530G/Revel users to get straight on the 670G (skipping the interim 630G) for $599 or $3,100 out of pocket, depending on whether the 530G was purchased after or before May 1, 2016 (including a $400 trade in credit). What is most notable about this plan is that the majority of Medtronic pumpers (pre-May 1, 2016 buyers) will actually pay more ($3,100) than non-Medtronic pumpers to get on the MiniMed 670G – clearly Medtronic is playing very tough competitive ball here.
• Medtronic previously announced a priority access program for 630G users to get on the 670G for $0-$299. Patients will pay $0 out of pocket for a 630G -> 670G upgrade, assuming the 630G is purchased by December 31. These patients also get “priority access” and “first-in-line” status to get on the 670G. (Subject to terms listed in our previous report.) The price is $299 out of pocket for a 630G -> 670G upgrade if the 630G is purchased in 2017. Similar to the above, the price for current in-warranty Medtronic 530G and Revel pumpers to get on the 630G is expensive – $599 or $3,100 out of pocket, depending on whether the pump was purchased after or before May 1, 2016 (including a $400 old pump trade in credit).

5. All three Diabetes business units reported their lowest operational growth since Medtronic began reporting each division’s performance five quarters ago:

• “Mid-single digits” growth in the Intensive Insulin Management division was driven by mid-teens international growth (“strong” 640G sales in Europe and Asia Pacific) offset by low-single digit declines in the US (MiniMed 630G and 670G timing and some deferred revenue for the MiniMed 630G->670G Priority Access Program). Growth has steadily declined from double-digit gains one year ago to mid-single digits this quarter.
• “Low-single digits” growth in the Diabetes Service & Solutions division was driven by growth in consumables, Diabeter clinics in Europe (a fifth clinic opened in the Netherlands), and MiniMed Connect. Sales were offset “by the impact of buying patterns” (presumably for consumables) due to the MiniMed 630 and 670G approvals. Medtronic has consistently seen high-single digit growth in this division over the past year, and with the BD set limited launching in September, the slower growth was surprising to see.
• High 30% growth in the Non-Intensive Diabetes Therapies division was driven by “strong” iPro2 sales to PCPs (with partner Henry Schein) and “strong” sales following a direct-to-consumer campaign for the i-Port Advance injection port device. We wonder if this division will see upcoming pressure as Abbott launches the much better FreeStyle Libre Pro professional CGM sensor in the US.

Table 3: Operational Sales Growth by Diabetes Division

* YOY growth comparison excludes the extra selling week in F1Q16

Pipeline Highlights

6. The MiniMed 670G/Guardian Sensor 3 hybrid closed loop is still expected to ship in the US in “Spring 2017,” and management confirmed it will be towards the end of the fiscal year (i.e., by April 2017). This is the same timing shared when the product was approved in September following an unprecedented ~three-month FDA review. Read the FDA summary of safety/effectiveness data here (75 pages), or the very detailed breakdown in our previous report. The labeling is still not posted yet on the product’s FDA page. Based on the wording in Medtronic’s September press release, it sounds like launch might be carefully controlled at first: “Medtronic will begin commercial release of the MiniMed 670G system in the spring of 2017 with system availability increasing over time” and “As the company moves toward initial commercial release and subsequently to full production...” This was not further commented on today, though management did allude to an eventual “full scale” launch in Q&A. We wonder how high demand will be at launch and how Medtronic will prevent patient frustration for those dying to get on the system.

• The 670G is FDA approved for people with type 1 diabetes 14+ years, though a pediatric study in 7-13 olds is enrolling to expand the indication. The primary completion for the study has been pushed back to “May 2017” from the previous “December 2016.” The 670G is contraindicated in <7 year olds and those on <8 units of insulin per day, a win for Insulet in particular. As part of this approval, the FDA is requiring a post-market study, which is presumably the ~1,000-patient study Medtronic’s Dr. Fran Kaufman first discussed at ATTD.
• The seven-day-wear Guardian 3 CGM sensor (formerly called “Enlite 3”) has a labeled overall MARD of 10.6% on two calibrations per day (see page 45 here). The summary data shows a slightly improved MARD of 9.6% with 3-4 calibrations per day, and the FDA actually says four calibrations per day “are recommended.” As expected following FDA’s June AP Webinar, it does not have an insulin-dosing label claim – it only modulates basal insulin delivery.
• We assume international approval is still expected in Summer 2017, but it was not commented on today. The JPM 2015 timeline shared plans to launch the 670G outside the US by April 2018, timing Medtronic should easily beat if it is approved by next summer.

How much demand could the MiniMed 670G see at launch and from which market segments?

Here are some ideas:

Other 670G Questions

• What will reimbursement look like? Medtronic told us the 670G will be commercially available at currently offered Medtronic pump system pricing. For context, the retail price of the newly launched MiniMed 630G is $7,899 for the pump, transmitter, and meter. Other business models and payer relationships are certainly possible (e.g., one monthly subscription price, service models, etc.), though it will probably not be easy for a company like Medtronic to quickly change its business model. We wonder how it might evolve in the next year, three years, and five years as clear value becomes a more important part of every product launch.
• Will Medtronic be able to manage expectations? The terminology is a fascinating part of this approval – Medtronic is being careful, noting the 670G “automate(s) basal insulin delivery,” is a “hybrid closed loop” system, and the “latest innovation in Medtronic's phased approach toward developing a fully automated, closed loop system.” FDA’s Dr. Stayce Beck was also careful in the FDA call to explain what the 670G can and cannot do, and where it falls on the spectrum of improvements: “It is important to understand that this device is not automatic. There is still a need for user interaction ... This is a breakthrough for people with diabetes, but it is in no way a cure – it does not take everything away. But it is a step in the right direction.” Still, many continue to worry about expectations, particularly in early adopters wearing it during the day (“Basal modulation is SO slow and conservative! I can do so much better on my own.”).
• Will patients be ready to turn closed-loop control over to a first-gen system, particularly at night? The MiniMed 670G shines at night, and we believe even early adopters will see better control overnight using the system – even the best-controlled patients cannot be automation overnight. That said, some are concerned about alarms and user interface hassles, so we’ll be interested to monitor real-world experience once it launches. Will the 670G actually improve sleep quality for parents and adults with diabetes?
• Is the Guardian Sensor 3 accurate enough for dosing insulin? The new sensor has an MARD of 10.6%, much-improved relative to Medtronic’s original Enlite sensor and putting it closer to Dexcom’s G5 (MARD of 9% on two calibrations per day) and in the ballpark of Abbott’s factory calibrated FreeStyle Libre (MARD of ~11%, but no calibration needed). The FDA approval letter is very clear on the adjunctive labeling – patients are NOT advised to make treatment decisions (e.g., bolus) based on Guardian CGM values. As a reminder, the 670G only modulates basal insulin delivery, and even that has a cap on maximum delivery per hour. We wonder if this will be an advantage for Dexcom CGM-driven systems, as G5/G6 will presumably have an insulin-dosing label claim by the time those systems launch (e.g., the Tandem/TypeZero system will issue automatic correction boluses).
• Will other automated insulin delivery devices have this quick of an FDA review? Drs. Stayce Beck and Courtney Lias have been clear that the Agency wants to see many AID devices on the market: According to the summary of safety and effectiveness data, the FDA granted the MiniMed 670G Priority Review on July 13 “because the device is a novel technology and availability is in patients’ best interest.” Medtronic clearly had a phenomenally productive dialogue with the Agency: the Approval Letter shows that the PMA was actually amended seven times (!) following the June submission – that’s more than once every two weeks during the course of the three-month review. It’s hard to know whether other companies will receive a priority review, but most seem to be banking on reviews less than a year based on recent updates.
• Will other companies need to do an ~1,000-patient outcomes study, as Medtronic plans to do? Many have wondered if other companies will also need to do such a large post-market trial – we’ll have to wait and see, as Tandem, Animas, Insulet, and others have not talked about this publicly. The FDA has said it is flexible and we assume companies will be able to choose how much data collection they want to do pre-market vs. post-market. Medtronic chose the fastest pre-market path and has opted to stack most of the data post-market. It will be interesting to see what other companies do, as they are now playing catch-up and the pressure is on to get products to market quickly.

7. The MiniMed 630G began shipping in September in the US and was just approved in Canada (launching in early 2017). We continue to view this as an incremental product launch on the way to the MiniMed 670G. Management suggested as much today, noting that most patients will wait for the 670G instead of getting the 630G. As a reminder, the 630G retains the 530G/Enlite’s threshold suspend feature (now called SmartGuard technology), but puts it on the company’s new pump platform (640G, 670G) – adding a color screen, waterproof, remote bolusing from the Contour Next Link meter, greater alarm customization, and more (see a detailed overview of features here). As a reminder, the 630G will NOT be software update-able to the 640G or 670G algorithm, and upgrading from a current Medtronic pump will cost either $599 or $3,100 out of pocket (including the $400 trade in exchange credit for the old pump). The 630G is not compatible with MiniMed Connect, meaning those desiring pump and CGM remote monitoring have to stick with the 530G for now. In the US, the 630G is only approved for 16+ year olds, given Enlite’s current labeling

8 The Bluetooth-enabled Guardian Connect mobile CGM launched in October (earlier than previously expected) in select countries outside the US with the Enhanced Enlite sensor (we assume mostly Europe). A US launch with the new the Guardian Sensor 3 is still expected by April 2017 (“later this fiscal year”); the product remains under FDA review following the March submission. Guardian Connect received a CE Mark in July and the October launch came on the earlier side of the ~Nov 2016-Jan 2017 expectation. This product is a key competitive answer to Dexcom’s G5 and Abbott’s LibreLink, plus an important Medtronic move to bring CGM into MDIs (especially with the Sugar.IQ app launching soon; see below).

9. The new app with IBM Watson, Sugar.IQ, was not mentioned in prepared remarks, but was demoed in September at Health 2.0. A limited launch commenced in 100 MiniMed Connect users, and a broader launch was expected “later this year” (i.e., in the next 39 days). We’re not sure if the latter is still the case. Sugar.IQ is not currently listed on the Apple app store, but Medtronic told us it will be free at launch and only available to Apple iOS users initially. Sugar.IQ identifies patterns based on retrospective CGM and pump data – “[At 7 AM] Planning your day? I see you tend to go low on Saturdays between 12 PM and 3 PM.” The app also includes a food diary, enabling users to log meals and receive actionable insights – “Having Tuna salad? Be aware that you tend to go low when you eat this meal.” We had a chance to play with the app in September and were impressed with the first-gen insights (particularly meal-related) and believe many CGM users will find it useful. Engagement is the biggest question – will Sugar.IQ see sustained use (particularly meal logging, which relies on mostly manual entry via the underlying Nutrino platform)? We think it has strong potential to change patient behavior, better inform diabetes decisions, close the behavior loop with CGM data, and better pair cause and effect – assuming use is sustained (never a given). With five Sugar.IQ generations on the roadmap and a large team working on this at both companies, the first-gen app will only improve from here. Read our very detailed coverage here for more background; the two most compelling screenshots are shown below. We believe as the diabetes community moves toward a great culture of accountability, the use of apps like this will increase. 

10. Medtronic launched an Android version of MiniMed Connect for $99 in late October and has seen “solid initial uptake.” The app has 3.0/5 stars and 35 reviews on the Google Play store (1,000-5,000 downloads). The MiniMed Connect keychain uploader device is initially compatible with Samsung Galaxy and Note devices and LG’s G4/G5. It only works with 530G/Revel pumps and not the 630G or 670G – we hope the latter changes in the short-term (with a new version of MiniMed Connect) or long-term (with Bluetooth built right into the pump).

• MiniMed Connect Android edges out Dexcom’s Android G5 in the US, which is expected to launch later this year or early in 2017 (FDA filing in 3Q16). Dexcom’s Android G5 launched “in several key markets internationally” earlier in 3Q16; MiniMed Connect is not available outside the US to our knowledge.
• In addition to broadening compatibility, the launch gives Medtronic and partner Samsung valuable experience as they build Android versions of the Guardian Connect mobile CGM (under FDA review for Apple’s iOS) and the beta-launched Sugar.IQ app with IBM Watson.
• A retrospective CareLink analysis (n=2,794) shared last month suggested that MiniMed Connect significantly reduces serious hypoglycemia events by 5% (>20 minutes at <50 mg/dl) and hyperglycemia events by 19% (>20 minutes at >300 mg/dl) per patient per year.

11. A limited launch of the MiniMed Pro-set with BD’s FlowSmart technology commenced in September, but was not mentioned in prepared remarks or the slide deck. The limited launch is now closed, and a full launch is expected in January-March, per BD’s Analyst Day last week. Read our early test drive here. The Pro-set is no longer linked or listed on the Medtronic Diabetes infusion set page or infusion set store page, confirming that the initial limited launch has been fulfilled (feedback from at least 1,000 users in the US and France). The previous link to go straight to the MiniMed Pro-set page also brings up an error message.

12. Medtronic had two important data strides in the quarter: the launch of compatibility with Glooko and a new pump/CGM integration partnership with mySugr (coming soon):

• Glooko: Medtronic users simply link their Glooko and CareLink accounts once, and then the data will flow automatically. We’re glad to see a tight cloud-cloud integration for MiniMed Connect users, which enables automatic mobile data upload to CareLink once a day, and then data automatically sent to Glooko’s Android and iOS apps – on-the-go smartphone viewing is key, particularly for HCP appointments. Those without MiniMed Connect will still need to upload to the CareLink web-based platform using a computer, but this should become a thing of the past once Medtronic adds Bluetooth to its pumps (in the pipeline, but no timing has ever been shared). The integration is a long time coming – Medtronic invested in Glooko in March 2015, and at ADA, the integration was expected to launch in July. Glooko ran a long beta program to identify edge cases and bugs, which resulted in a delay, but surely a more seamless integration. Glooko’s website does not mention the 630G or upcoming 670G in its “Compatibility” section, and the help page only says 530G and Paradigm pumps are supported at this time. We assume that will change.  
• mySugr: The companies signed a worldwide partnership (announced in a mySugr industry update earlier this month) to “soon” integrate pump and CGM data automatically into the mySugr app. The tight integration will allow users to connect their CareLink and mySugr accounts (cloud-to-cloud), meaning the data will flow automatically in both directions (mySugr ->CareLink and CareLink -> mySugr). This adds to a growing list of data partnerships for Medtronic and a clear vote of confidence in mySugr (who also has partnerships with Abbott’s FreeStyle Libre, Dexcom’s G4/G5, Roche’s Accu-Chek Connect, and the Profil Institute). mySugr did not initially focus on sensor data with its app, though that is changing in the latest versions, which do a good job of integrating lots of data from HealthKit automatically (e.g., Dexcom CGM, carb information, exercise) and sensor data from Abbott’s FreeStyle LibreLink Android app.

Pipeline Summary

Pump, Automated Insulin Delivery, and Infusion Sets

CGM Sensor Pipeline (Personal and Professional)

Data Analytics and Connectivity Pipeline