Medtronic 4Q18 (F3Q19) – US sales decline 2% on tough comp, buoyed by 14% OUS gain; FDA Breakthrough Device designation for “Personalized Closed Loop” – February 19, 2019

Executive Highlights

  • Worldwide Medtronic Diabetes sales of $610 million grew a lighter 5% year-over-year as reported and 7% operationally in 4Q18, with US challenges buoyed by OUS growth. This was Medtronic’s toughest YOY comparison in 11 years, as global sales rose 17% YOY in 4Q17 (when CGM manufacturing capacity could finally meet 670G demand and fill backorders). The US had its roughest quarter in a year: 4Q18 sales of $348 million declined 2% YOY and rose 4% sequentially. Beyond a tough YOY comparison (+15% in 4Q17), US sales were also hindered by the anniversary of the Animas transition and the last major payer covering 670G a year ago. Robust OUS sales of $262 million rose 14% as reported YOY (+19% operationally) and 5% sequentially, driven by the MiniMed 670G international launch and, notably, versus a very tough comparison (+20% in 4Q17). OUS sales were “especially strong” in Western Europe (+25%), Latin America (+17%), and China (+16%).

  • Counting operational growth, Medtronic did hit the goal for “high single digits” diabetes growth in 4Q18; however, the upcoming three quarters have far tougher YOY comparisons – +22%-33% YOY worldwide – including a comparison to record sales in the coming quarter (1Q19). With that in mind, Medtronic expects flat 1Q19 diabetes growth, which will be the “low” point for FY20. In addition to tough comps, it’s very clear that Tandem’s Basal-IQ with the no-calibration G6 is giving the 670G stronger US competition than Tandem gave Medtronic a year ago.

  • Medtronic has received FDA breakthrough device designation for its next-next gen Personalized Closed-Loop (PCL) system. This will include a priority review, speeding time to market. As of JPM, this system was positioned for a launch sometime after April 2020 (“Beyond FY20”); it sounds like this designation could speed things up, but how much is unclear. Hooman Hakami did say more color is expected at ADA 2020, implying it is certainly well over a year away. The PCL aims for >85% time-in-range and far more personalized therapy with advanced adaptation – we’ve certainly heard a lot of great things about it from outsiders. Mr. Hakami said it “paves the way for a true closed-loop system,” and Medtronic is “investing heavily” and “driv(ing) this program as aggressively as possible.” The system will leverage the food expertise following the acquisition of Nutrino in November, a big algorithm key for improving time-in-range – we are very excited to learn more about this. Insulet’s Horizon system also has FDA breakthrough device designation for its tubeless, hybrid closed loop with phone control (2H20 launch) and there’s also big excitement for this product.

  • The next-gen MiniMed 780G is still expected to launch between April 2019-April 2020 (FY20), adding automated correction boluses, Bluetooth, remote software updating, and an >80% time-in-range goal – it was great to see this mentioned in prepared remarks, aligning with JPM and 3Q18 timing and reinforcing how important this is for Medtronic big picture. We always love seeing diabetes prioritized in management’s general comments, which hasn’t always been the case.  

  • A non-adjunctive label claim for Guardian Sensor 3 will be submitted in the “next few months,” enabling Medicare coverage (and important for 780G).

Medtronic reported 4Q18 (F3Q19) financial results this morning in a call led by CEO Omar Ishrak. Diabetes is slide #10, and below you’ll find Q&A and summaries of other financial and pipeline happenings not mentioned above. We’ll expect to hear more on the 670G international launch and future pipeline at Medtronic’s symposia at ATTD this week.

Financial Summary

Medtronic Diabetes Quarterly Sales (1Q13-4Q18), millions

  • Advanced Insulin Management sales grew in the mid-single digits operationally, driven by global demand for the MiniMed 670G. The division saw high-single digit growth in insulin pumps and high-20% range CGM growth.

    • The MiniMed 670G has over 157,000 trained, active users, up a softer 16% following  3Q18’s robust 39% sequential growth in users. Additional OUS markets will see a 670G launch by July (“early FY20”); countries were not specified.

  • Emerging Technologies sales grew in the low-50% range operationally, driven by the ongoing launch of the standalone Guardian Connect CGM with Sugar.IQ. This was a slowdown from 3Q18’s >100% YOY growth, though in line with >50% growth in 2Q18. Guardian Connect grew “triple digits for the third consecutive quarter,” a positive sign for Medtronic’s standalone CGM following the launch last summer.

  • Medtronic’s CGM sales grew over 30% in 4Q18, with over 60% growth in Western Europe. Both were a big slowdown from 3Q18, when CGM sales grew 70% worldwide and 90% in the US. CGM sales were not broken out, though we estimate they are running ~$200 million per quarter and perhaps more.

Pipeline Summary

The below is taken mostly from Medtronic’s JPM presentation last month, with comments added based on any updates from today.

Just Launched

  • In January, Sugar.IQ’s long-awaited hypoglycemia prediction feature, IQcast, launched for Guardian Connect standalone CGM users in the US. The companion app update offers predicted hypoglycemia warnings 1-4 hours in advance; we have not read any reviews of its real-world accuracy yet. The paired Sugar.IQ companion app has 3.4/5 stars (n=34 reviews), with no marked change in ratings following the hypoglycemia prediction launch last month. The Guardian Connect CGM app has a weak 2.0/5 stars (n=89 reviews). For comparison, FreeStyle LibreLink’s has 4.2/5 stars (n=238 reviews) and Dexcom G6 has only 2.8/5 stars (n=469 reviews).

Launch in April 2019-April 2020 (FY20) window:

  • MiniMed 780G advanced hybrid closed loop with automated correction boluses, Bluetooth, and remote software updating – launch timing by next April confirmed today in prepared remarks

  • Non-adjunctive CGM claim for Guardian Sensor 3 (enabling Medicare coverage) – confirmed today that FDA submission is going in the “next few months”; launch by next April seems very doable

  • iCGM indication for Guardian Sensor 3 – not mentioned today, but at JPM was listed together with the non-adjunctive claim; it’s unclear if this is still together, delayed, or lower priority

  • Guardian Connect on Android (previously expected by this coming April) – not mentioned today

  • Sugar.IQ “Gen 2” with meal handling and carb counting advice (Nutrino acquisition) and predictive insights going beyond 60 minutes (partly launched in January for hypoglycemia) – not mentioned today

Launch After April 2020 (“Beyond FY20”):

  • Personalized closed loop with advanced adaptation (>85% time-in-range) – received FDA breakthrough device designation today, strong R&D investment, and more color at ADA 2020; see Q&A comments below

  • Synergy CGM sensor (50% smaller than Guardian Sensor 3, day-one calibrations, and three-step application) – not mentioned today

  • No-calibration Unity CGM sensor (10-14 day wear) – not mentioned today

  • Sugar.IQ Gen 3 (with behavioral feedback and overnight glucose prediction) and Gen 4 (meal prediction with dosing, advanced glucose prediction) – not mentioned today

  • Two key pipeline projects were not mentioned at JPM or today, but were previously slated by April 2020: (i) Sugar.IQ dosing assistant and insulin pen dose capture (though perhaps that is now called Sugar.IQ “Gen 2”); and (ii) Envision Pro (formerly iPro 3) professional CGM with fully disposable, no-calibration, and Bluetooth. 

Questions and Answers

Q: I appreciate the fourth quarter commentary. How should we think about Diabetes heading into next (fiscal) year? Can this still be a high-single-digit growth business for Medtronic or should we start thinking more about mid-single digit as you anniversary the first wave of the 670G?

Hooman Hakami: Before talking about FY 2020, it's probably instructive to talk about the comps that we're dealing with in Q3, because this impacts Q3, it impacts Q4, and you've seen a deceleration in the year-over-year growth versus what we posted for the past four quarters. But we have indicated all year that we're coming up against of these more difficult comps.

And I'll just maybe call out a few of the critical ones. If you recall, in the back half of last year, we started to increase CGM capacity that allowed us to fulfill shipment, pent-up demand for both pumps and CGM that carried over from the first half of last year.

In addition, in Q3 of this year, we anniversaried Animas, and so all of the consumable revenue and all of the out-of-warranty conversions no longer provide a year-over-year benefit.

And then the third thing in Q3 of last year, we also had one of the last large commercial payers approve the reimbursement of 670G.

All of these three things distort the year-over-year performance in Q3, they’ll do so as well in Q4 and it's primarily a US dynamic. And maybe just to kind of point out some perspective, to give you a flavor for the impact of the comps – last quarter Diabetes delivered $583 million of revenue and we grew 27% (YOY). This quarter we're delivering $610 million of revenue which is 5% higher than was a quarter ago and our (YOY) growth rate is 6.5% and so hopefully that should give you a sense of the difficult comps. That's going to carry into Q4 and you heard the commentary from Karen for Q4, but from a growth rate standpoint, we absolutely expect Q4 to be the low point for Diabetes growth, we expect the comp dynamics to normalize, we expect the return to growth in Q1 of next year, and then for FY 2020 certainly the full year comp impact will normalize and we are very confident that Diabetes is going to grow above the corporate average as we indicated all along.

Q: I wanted to circle back to diabetes and touch on the breakthrough designation you got this morning for the Personalized Closed Loop. Can you talk about what the recently acquired Nutrino Health adds to this? When we might see data and approval of this in the US and outside the US? Is there new hardware involved on the CGM and pump side? And maybe touch on how this compares to where you think the competition is in next-generation systems?

Hooman Hakami: There's probably not enough time on this call to do personalized closed loop justice, but I'll give you a flavor for it. We really think that Personalized Closed Loop is going to be a system that truly paves the way for a true closed-loop system.

Now – and because of that – we don't feel that closing the loop is aspirational any longer. It's actually achievable. And if you really think about today's algorithms, they essentially behave the exact same way for every single patient even though every single patient is different.

Personalized Closed Loop changes all that. It's real-time system. It automates all facets of insulin delivery in a way that is personalized and adaptive to the user. In addition the system is going to provide unique insights to help the patient, help them with predictive diagnostics, which we think is going to dramatically simplify diabetes management. And so we really think this is going to be a transformative system. We're thrilled to have received breakthrough designation for it from the FDA.

As far as launch date goes and all of that, we just received the breakthrough designation. For competitive reasons, I think it would be premature to talk about launch dates, but what I will say – and you touched on this – is that we're investing heavily in Personalized Closed Loop.

Our acquisition of Nutrino was made with Personalized Closed Loop in mind. We are fully resourced from an R&D standpoint to drive this program as aggressively as possible and we're excited to share more details with you as we progress with the program. (Editor’s note – we had not previously felt that closing the loop was aspirational only.)

Q: Is that something we might see data at ADA 2020?

Hooman Hakami: Yea, so ADA 2020, I think, we will outline for you more details around Personalized Closed Loop for sure. And I think what you will see as we start to more articulate what the system is and what the capabilities are, you'll see that it will be completely differentiated with respect to what's out there today and what's also coming.

--by Adam Brown and Kelly Close