Medtronic F2Q16 – Worldwide sales grow 11% operationally, with nearly 40% growth in Europe on 640G; FDA 640G submission pushed to early 2016 – December 7, 2015

Medtronic reported F2Q16 financial results on Thursday in a call led by CEO Omar Ishrak. We enclose the top ten highlights below, followed by a pipeline summary, Q&A, and an automated insulin delivery competitive landscape review.

Financial and Business Highlights

1. Worldwide revenue of $450 million grew 5% as reported and a strong 11% operationally year-over-year (YOY). The operational growth came on a tough comparison to 10% operational growth one year ago. The standout results came in Europe, where growth was “nearly 40%” on strong uptake of the MiniMed 640G.

2. US Diabetes revenue totaled $280 million in F2Q16, growing 9% as reported YOY and 2% sequentially. The sales represented Medtronic’s second-highest US revenue ever. Management said the MiniMed 530G is “doing incredibly well in the US.” Contact Richard Wood at richard.wood@d-qa.com for details on how patients in the US are responding to this pump.

3. International sales of $170 million declined 2% as reported, though grew a striking 17% operationally in developed markets ($135 million) and 5% operationally in emerging markets ($35 million). This marks two straight quarters of near-20% operational growth in international developed markets. The 640G is clearly resonating with many patients, and the question is whether this trajectory will be sustained going forward.

4. The type 1-focused Intensive Insulin Management (IIM) division saw “mid-teens” growth in F2Q16 driven by international sales of the MiniMed 640G. The division’s overall growth rose from F1Q16’s “low double-digit growth.”

5. Medtronic reported “mid-single-digit” growth in the Diabetes Service & Solutions (DSS) business on strong consumables sales and early revenue from the late September launch of the MiniMed Connect remote monitoring device. Management said the uptake and user feedback on MiniMed Connect “have been extremely positive and it is currently the highest rated connected glucose monitoring app in the US.”

6. The type 2-focused non-intensive diabetes therapies (NDT) division doubled its sales, driven by professional CGM (iPro2). Medtronic announced an exclusive distribution agreement with Henry Schein to bring the iPro2 and i-Port Advance to thousands of primary care physicians throughout the US. Henry Schein reaches an impressive 55% of US physician offices.

R&D Pipeline Highlights

7. FDA submission of the MiniMed 640G/Enlite 3 is now expected in “early calendar 2016,” back from the “later this calendar year” (2015) timing we heard in the September, June, and February calls. Though the US pivotal study is complete, Medtronic will now almost certainly miss the ambitious JPM 2015 guidance to launch the MiniMed 640G by April 2016 in the US.

8. The MiniMed 670G was not mentioned on the call, though the 150-patient, single-arm, three-month pivotal study of the hybrid closed loop is still slated to complete in May 2016. That puts Medtronic loosely on track to hit its April 2017 launch timeline (as of JPM 2015), assuming the PMA submission and approval take less than a year. We learned at DTM 2015 that patients in the pivotal study have successfully petitioned the FDA for continued access and use of the hybrid closed loop system.

9. The call briefly alluded to the IBM Watson data shared at DTM. In an exploratory analysis, Watson predicted hypoglycemia with 80-90% accuracy three hours post bolus insulin delivery.

10. The call did not mention the FlowSmart infusion set with partner BD (launching around March-April 2016, per BD’s November call), the Bluetooth-enabled Guardian Mobile CGM (pivotal study completed in August), digital partnerships with Glooko and Samsung, a simple CGM sensor for type 2 (mentioned at DTM 2015), patch pumps, or any other pipeline projects.

Financial and Business Highlights

1. Worldwide revenue of $450 million grew 5% as reported and a strong 11% operationally year-over-year (YOY). The operational growth was particularly notable, as it came on a relatively tough comparison to 10% operational growth one year ago. Moreover, this marks three of the past five quarters with double-digit operational growth, a good sign that underlying business is performing well despite currency headwinds. That said, this was just the third highest revenue mark seen to date and lower than calendar 1Q14. For the quarter just reported, the standout results came in Europe, where growth was “nearly 40%” on good uptake of the MiniMed 640G, which had its coming-out party at ATTD 2015 in February. The US carried all of the reported sales growth in F2Q16, however, as currency fluctuations negatively impacted the reported international results (more below). Reported sales rose a modest 1% sequentially.

• Management expects Diabetes Group growth in the high single- to low double-digits in the second half of the fiscal year. That guidance was no surprise considering the YOY comparisons are way easier in the upcoming two quarters (3% and 1.5% reported growth in F3Q15 and F4Q15, respectively).

Figure 1: Medtronic Worldwide, US, and International Sales (2013-2015)

Table 1: Medtronic Diabetes Worldwide Sales

*High-single digits excluding an extra selling week.

2. US Diabetes revenue totaled $280 million in F2Q16, growing a strong 9% as reported YOY and 2% sequentially. The sales represented Medtronic’s second-highest US revenue all-time (behind F4Q15’s $293 million). The 9% YOY growth was also positive , given a tough comparison to 12% growth in F2Q15. Said management, “The 530G is doing incredibly well in the US, and we are seeing very, very good performance there on tough comps.” Indeed, the MiniMed 530G has sustained solid momentum since launching in the US fall 2013: in the past eight quarters, Medtronic has had four with double-digit YOY growth in the US, two with growth in the 8-9% range, and just one with 3% growth (F3Q15). The results have come despite the launch of the Animas Vibe (January) and Tandem’s t:slim G4 (September), the first two CGM-integrated pumps to compete with Medtronic in the US.

Table 2: Medtronic Diabetes Sales – US

3. International sales of $170 million declined 2% as reported, though grew a striking 17% operationally in developed markets ($135 million) and 5% operationally in emerging markets ($35 million). This marks two straight quarters of near-20% operational growth international developed markets. The standout results came in Europe, where growth was “nearly 40%” on strong sales of the MiniMed 640G, which launched in January. In Q&A, Diabetes Group President Hooman Hakami said, “The European growth was something that stood out. We had incredibly strong growth in 640G, and we saw that not only in Europe, but also in Asia-Pacific.” We assume the latter refers to Australia, which was the first country to get the 640G in January. It’s impossible to know how much of the sales traction reflects upgrades vs. new pumpers, though the upcoming quarters should make that clearer.

• International sales declined 1% sequentially, and on a reported basis, have been roughly flat for the past ten quarters (with the exception of 1Q14 when sales reached $190 million internationally). In comparing the past three years, US sales have increased $46 million (from $234 million in F1Q13 to $280 million in the quarter just reported) vs. international sales that have remained flat over that time period ($173 million vs. $170 million).
• The emerging market business in diabetes is still early, with sales of $35 million representing ~21% of Medtronic Diabetes’ total international sales. This was up slightly from last quarter’s 18% and F4Q15’s ~20%, though broadly, emerging market sales are not growing substantially at this point. We wonder if Medtronic will launch lower-cost pumps or sensors to increase adoption in these areas. As a reminder, Medtronic only started breaking these sales out for Diabetes two quarters ago.

Table 3: Medtronic Diabetes Sales – International

* Not yet reported; ** F4Q15-F2Q16 operational growth listed for developed markets, which represents ~80% of the business. 

4. The type 1-focused Intensive Insulin Management (IIM) division saw “mid-teens” growth in F2Q16, driven by sales in Europe and Asia Pacific of the MiniMed 640G. IIM also reported high-single digit growth in the US as a result of continued strong adoption of the MiniMed 530G. The division’s overall growth rose from F1Q16’s “low double-digit growth” –this is only the second quarter management has broken out business-segment growth, so there is no basis for comparison. Perhaps management will break out the actual sales out over time.

• We’re also a bit uncertain about the products that flow into the separate divisions. This business is mostly durable pump sales, but what about ongoing CGM sensor and transmitter sales – are those considered “consumable” (and thus in the Diabetes Services & Solutions business, see below), or do those sales flow into IIM?

5. Medtronic reported “mid-single-digit” growth in the Diabetes Service & Solutions (DSS) business on strong consumables sales, early revenue from the September launch of the MiniMed Connect remote monitoring device ($199), and new Diabeter service revenue. The growth was a downtick from F1Q16’s “high-single-digit” growth on “strong consumable sales.” MiniMed Connect only began shipping on September 28, meaning the big launch impact could come in F3Q16. Of course, the device is only $199 and likely appeals to only a subgroup of Medtronic patients (those on pump+CGM, those with an iPhone, young children), so a major revenue boost is perhaps unlikely given the business’ large base. In the 2014 Analyst Day meeting, we estimated the consumable supplies/pump accessories business at ~$800 million per year (~$200 million per quarter).

• “The uptake and user feedback on MiniMed Connect have been extremely positive and it is currently the highest rated connected glucose monitoring app in the US.” For context, the MiniMed Connect iPhone/iPod touch app has 39 reviews and 3.5 stars on the App Store, slightly better than 3.0 stars and 44 reviews for Dexcom’s G5 app. On the BGM side, Roche’s Accu-Chek Connect app has just two stars on 12 reviews, while LifeScan’s OneTouch Reveal app (VerioSync) has 2.5 stars on 235 reviews. [Note: These ratings are for ALL versions of the aforementioned apps, which is more comprehensive than just the “most recent” version – clearly the “most recent” is the most relevant, though there are too few reviews to make comparisons.] This is a tough crowd, as we’ve said before, though it’s not all doom and gloom – even Facebook and Twitter’s mobile apps have just 3.5 stars (though 2.9 million and 325,000+ reviews, respectively!).
  
  • See our coverage from September for a more detailed look at MiniMed Connect and comparison to Dexcom’s G5. The device brings US competition to Dexcom’s Share receiver and G5 mobile system, offering some of the same key advantages: patients seeing diabetes data on the phone, caregivers getting notifications, and automatic upload to data management platforms.
• F2Q16 was the second full quarter of operating Diabeter, the Netherlands-based diabetes clinic that Medtronic intends to expand across Europe. Management said Diabeter brought some “service revenue” in, but it wasn’t quantified. The IT-enabled model of patient care allows the clinic’s 36-person staff to manage over 1,500 pediatric and young adult patients with type 1 diabetes. As a reminder, Medtronic acquired this clinic in April for an unspecified sum. As noted in our interview with Diabetes Group President Hooman Hakami, the acquisition is part of Medtronic’s highly ambitious goal to serve 20 million patients with diabetes by 2020, an approximate 20-fold increase (!) from the installed base of ~700,000 patients worldwide (as of April).

6. The type 2-focused non-intensive diabetes therapies (NDT) division doubled its sales in F2Q16, driven by professional CGM (iPro2) in the US and Europe. While the growth is presumably from a low base – this is the smallest of the three Diabetes segments – it is a notable uptick from F1Q16’s “60%-range” growth. NDT also includes the i-Port Advance infusion port, which is likely a very small business at this stage. We continue to think professional CGM should be used in more trials to capture more granular data (percentage of time >300 mg/dl, percentage of time <50 mg/dl, etc.).

• Medtronic announced an exclusive distribution agreement with Henry Schein to bring the iPro2 and i-Port Advance to thousands of primary care physicians throughout the US. The well-known distributor Henry Schein reaches an impressive 55% of US physician offices. This partnership adds CGM and the i-Port Advance to Henry Schein’s current portfolio of office A1c and blood glucose testing. Per the agreement, Henry Schein is the exclusive PCP distributor for these products, and Medtronic will continue to call on endocrinologists.
  
  • No deal terms were disclosed, though this partnership will clearly expand professional CGM into the PCP market. How big is that market? Do PCPs have time to set patients up on the technology and review the retrospective data? How much easier can it become to do this? What other business models are possible here (e.g., could a Medtronic clinical team review the data for PCPs?). For actual PCP views on CGM, contact Richard Wood, CEO of the diabetes market research company, dQ&A.
• Medtronic launched Pattern Snapshot for the iPro2 Professional CGM on November 30, a new one-page download report for the blinded iPro2 professional CGM. The report prominently shows a patient’s top three glucose patterns and lists up to six possible causes for each one (e.g., Pattern: low glucose, pre-dinner (5-8 pm); Possible Causes: Dinner delayed? Exercised before dinner? Oral medication(s) too high or incorrectly timed? Basal insulin injections too high?). Snapshot is designed to ease clinician interpretation of sensor data and serve as a teaching tool for patients. For pictures and a comparison to Dexcom Clarity and Abbott’s FreeStyle Libre Pro, see our detailed coverage.
• We are curious what other future products are planned for Medtronic’s NDT division– simple patch devices for type 2 insulin delivery? A type-2 focused CGM? The company told us both products are in the works, though the key goals are a tall order for any company: easy-to-use, affordable, and actionable. There will be much greater competition in both these product areas in the coming years – can Medtronic set itself apart?
• Professional CGM is quickly becoming a more dynamic field as Abbott brings FreeStyle Libre Pro to market globally. The blinded version of FreeStyle Libre is already available in India, and as of 2Q15, is under FDA review in the US (launch expected in 2016). At IDF last week, we heard very positive views on FreeStyle Libre Pro from the legendary Dr. Viswanathan Mohan, who has used the blinded 14-day sensor in ~1,000 patients (whoa!) in just nine months. See our interview from several years ago with Dr. Mohan – he has one of the largest diabetes practices in the world.
• Dexcom seems more focused on the patient side near-term, though the company is building a provider-facing version of Clarity, and perhaps the partnership with Google or other future products will do things on the diagnostic CGM front. Given the number of type 2s not at goal, there is tremendous room for all three companies (and more!) to improve patient outcomes.

Pipeline Highlights

7. FDA submission of the MiniMed 640G/Enlite 3 is now expected in “early calendar 2016,” back from the “later this calendar year” (2015) timing we heard in the September, June, and February calls. Though the US pivotal study is complete, Medtronic will now almost certainly miss the ambitious JPM 2015 guidance to launch the MiniMed 640G by April 2016 in the US. Assuming the best-case scenario is a speedy six-month PMA review, the soonest Medtronic could launch the 640G is calendar 3Q16. For context, the MiniMed 530G/Veo had an ~15 month FDA review, the Animas Vibe had a ~20 month FDA review, and the Tandem t:slim G4 had an ~13 month review. The MiniMed 640G/Enlite 3 is a new pump user interface, a new sensor, and the new predictive suspension algorithm.

• We wonder if patients will be able to software update the MiniMed 640G to the MiniMed 670G algorithm. This seems possible in theory: Dexcom did this with Software 505 (G4AP) and Tandem is pursuing this route with Project Odyssey. Without a software update, the upgrade process is going to be complicated, since it sounds like the MiniMed 640G and 670G could launch within 12-18 months of each other. The pump platform is the same, so alternatively, Medtronic might be able to offer a low-cost upgrade program for 640G users to get on the 670G.

8. The MiniMed 670G was not mentioned on the call, though the 150-patient, single-arm, three-month (!) pivotal study of the hybrid closed loop is still slated to complete in May 2016. That puts Medtronic loosely on track to hit its April 2017 launch timeline (as of JPM 2015), assuming the PMA submission and approval take less than a year. We expect that it could if the MiniMed 640G is approved in the meantime (i.e., largely the same pump user interface, with the exception of the algorithm changes).

• We learned at DTM 2015 that patients in the MiniMed 670G pivotal study have successfully petitioned the FDA for continued access and use of the hybrid closed loop system. In partnership with the FDA, Medtronic is extending use of the system for two years beyond the pivotal study or until final regulatory approval. This is a positive early sign of a system people want to use – “I don’t want to give it back” – and we’re elated to see Medtronic and the FDA making this possible and it is certainly good news on the perceived safety front. Apart from the benefit for these patients, it strongly suggests FDA has become more confident on the real-world safety of closed loop systems.
• Medtronic is the first to begin a pivotal study of a hybrid closed-loop system and is positioned to be first to market. See the landscape review below, which also includes Animas, Insulet, Roche, Tandem, Bigfoot, TypeZero, the Bionic Pancreas, and Cambridge.

9. The call briefly alluded to the IBM Watson data shared at DTM. In an exploratory analysis, Watson predicted hypoglycemia with 80-90% accuracy three hours post bolus insulin delivery. Dr. Rebecca Gottlieb (Director, Advanced Research) showed the topline results, which used glucose and insulin data from 100 patients with six months of CareLink data. “We can wait for the combination of events to occur,” she said, “and alert the individual. This technology can transform insights into personalized recommendations and actions.” The idea seems exciting and we look forward to prospective, real-time studies of the notification technology. It would certainly be compelling to receive a notification, “You are likely to go low” several hours before it occurs – particularly one generated by a computer and not requiring a health professional to generate it, which makes scalability far more possible.

• “The company continues to create a diabetes ecosystem through partnerships.” It was highly notable to hear management use the word “ecosystem,” which is a major departure from Medtronic’s long-standing siloed approach to diabetes data. We look forward to actual product commercialization via “ecosystem” partners, as even the Glooko partnership has still not launched (Medtronic originally invested in March 2015).
• The regulatory questions behind predictive recommendations are a key gating factor to launch, as is the user experience. We hope that the FDA sees the potential here, and that companies can prove safety and effectiveness. The user experience of such predictive notifications is particularly key to keep in mind – technology must walk a fine line between useful and annoying, and notifications can cross from one side to another very quickly. Getting the balance right is very tough; it would certainly be annoying (and defeating) to get too many “predicted low” or “predicted high” notifications.
• As announced in April, the IBM Watson Health partnership is focused on: (i) integrated care; (ii) artificial pancreas algorithm enhancement; and (iii) dynamic, personalized care plans for type 1 and type 2 diabetes. The partnership brings hefty computing power to Medtronic Diabetes’ Big Data to hopefully produce meaningful insights for patients and providers. Specific product launch timing has never been disclosed.

10. The call did not mention the FlowSmart infusion set with partner BD (launching around March-April 2016, per BD’s November call), the Bluetooth-enabled Guardian Mobile CGM (pivotal study completed in August), digital partnerships with Glooko and Samsung, a simple CGM sensor for type 2 (mentioned at DTM 2015), patch pumps, or any other pipeline projects. See the full list below for all pipeline projects we are aware of.

R&D Pipeline Summary

Questions and Answers

Q: You commented on the growth you’re seeing in diabetes, particularly in Europe, where you’ve got newer technologies available. Can you talk about that?

Mr. Hooman Hakami (President, Medtronic Diabetes): We saw great growth in diabetes, 11% overall. The European growth was really something that stood out. We had just incredibly strong growth in 640G, and we saw that not only in Europe but also in Asia-Pacific. I think what it shows is that new innovation here matters. And this is something that we're going to continue to drive.

We've got a plan to launch this product in the United States. You heard from the commentary that the trial is done and we are going to release it to the FDA in early 2016, so we're excited about that. And I think what you are also seeing is that the 530G is doing incredibly well in the US, and we are seeing very, very good performance there on tough comps. So when you take a look at those two things I think we're seeing great performance within the group and we expect this to continue.

Automated Insulin Delivery Competitive Landscape

• See below for an overview of the automated insulin delivery landscape, as far as we aware. We acknowledge this list may be incomplete, as there may be other stealth startups or academic groups working to commercialize closed-loop technology.

-- by Adam Brown and Kelly Close