Memorandum

Medtronic 1Q19 (F4Q19) – Global sales of $626 million decline 3%, driven by 11% US decline; Record OUS sales on 670G uptake; FDA filing soon for non-adjunctive CGM labeling – May 23, 2019

Executive Highlights

  • Medtronic reported Worldwide 1Q19 Diabetes sales of $626 million, down 3% YOY as reported (+0.6% operationally) on a tough YOY comparison1Q18 saw record sales of $645 million (+26% YOY) when 670G backorders were cleared in the US on expanded manufacturing capacity. US sales of $330 million declined 11% YOY and 5% sequentially – the largest quarterly decline ever recorded in our 14-year Medtronic model. OUS sales hit a record-high $296 million, rising 8% as reported YOY, up 13% sequentially, and providing 100% of the quarter’s growth for the second straight quarter. Impressively, the OUS record sales came on a truly difficult comparison to 32% YOY growth in 1Q18. OUS revenue now comprises 47% of worldwide sales. The 670G has some nice overseas momentum and more countries are expected in the coming months.

  • Worldwide Medtronic CGM sales grew “over 20%” in 1Q19, which we estimate at just under ~$225 million and comprising a record ~36% of sales. This would imply pump sales were just over $400 million, declining 13% YOY.

  • Diabetes growth is expected at “5%, plus or minus” in the upcoming quarter (2Q19), and 6%-8% growth is expected for all of FY20 (April 2019-April 2020).

  • The MiniMed 670G now has 175,000 trained, active users, an 11% sequential gain from 4Q18. We assume most of these 18,000 sequential additions came from outside the US. Additional OUS markets will see a 670G launch by ~July (“early FY20”), though countries were again not specified.

  • A non-adjunctive label claim for Guardian Sensor 3 will be submitted to the FDA in early FY20 (April 2019-April 2020), enabling Medicare coverage of the MiniMed 670G. Assuming submission by ~July, a launch seems possible later in 2019.

  • The next-gen MiniMed 780G remains on track 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 positive to see this mentioned several times today, aligning launch timing with three straight updates.

  • On Sunday of ADA (June 9), Medtronic will host an Investor & Analyst Briefing, providing a Diabetes pipeline update and launch plans over the next 2 years.

Medtronic reported 1Q19 (F4Q19) financial results this morning in a call led by CEO Omar Ishrak. Diabetes is slide #10, and below you’ll find highlights and diabetes-related Q&A.

Financial Highlights

1. Global Sales Decline 3% YOY ($626 million), Driven By 11% US Decline on Tough Comp; Record OUS Sales Grow 8% on 670G Momentum

Medtronic Diabetes Quarterly Sales (1Q13-1Q19), millions

By Geography
  • Worldwide Diabetes sales of $626 million declined 3% as reported (+0.6% operationally) in 1Q19 on a very difficult year-over-year comparison1Q18 saw record-high sales of $645 million (+26% YOY) as Medtronic cleared 670G backorders in the US on expanded manufacturing capacity. For the second straight quarter, this was Medtronic’s toughest YOY comparison in 11 years. Worldwide sales did increase 3% sequentially in 1Q19, and this performance still marked Medtronic’s second highest Diabetes revenue ever. But it was a tale of two geographies: International sales drove 100% of the quarter’s growth, and that came on a far more difficult comparison than in the US (see below). Management called the flat operational growth “an anomaly” given difficult prior-year comparisons, and this was “in line with expectations” following the 4Q18 call.

  • The US had the largest quarterly decline ever recorded in our 14-year Medtronic model: 1Q19 sales of $330 million declined 11% YOY and 5% sequentially. It was indeed a tough YOY comparison (+22% in 1Q18), but this is concerning: the US business has now had two straight YOY declines, and the upcoming two quarters have more challenging YOY comparisons. The international business handily outperformed the US, even with a tougher YOY comparison (see below). The slide and remarks highlighted “competitive pressure” in the US, which is certainly the case: in 1Q19, Tandem’s US sales grew 100% YOY, Insulet’s US sales grew 23%, Dexcom’s US sales grew 45%, and Abbott’s US sales grew 77% YOY. Given strong expectations from all four competitors and tougher Medtronic US comparisons in the quarters ahead, it may be a difficult period ahead for Medtronic’s US business.

  • International sales hit a record-high $296 million, rising 8% as reported YOY and providing 100% of the quarter’s growth for the second straight quarter. This included 17% operational growth in developed markets ($236 million) and 14% operational growth in emerging markets ($60 million). Impressively, the record sales came on a very difficult comparison to 32% YOY growth in 1Q18. OUS revenue rose 13% sequentially and now comprises 47% of worldwide sales – a high watermark for the business following four straight quarters where this figure held steady at 43%. The gains were driven by the continued MiniMed 670G international launch (it began last fall) and the long-awaited OUS launch of Guardian Sensor 3 for MiniMed 640G (PLGS) users. Management expects international revenue to continue to grow in the mid-teens, implying we may see Medtronic’s OUS sales exceed US sales in the near-future.

Pump vs. CGM

  • Worldwide CGM sales grew “over 20%”, which we estimate at just under ~$225 million and comprising a record ~36% of sales. This would imply pump sales were just over $400 million, declining 13% YOY. (Note: These are estimates, since Medtronic doesn’t break out pump vs. CGM sales; that said, these estimates are directionally in line with prior company updates and growth trends.) The 20%+ CGM growth was a notable downtick from over 30% in 4Q18 and 70% in 3Q18.

  • Pump-integrated CGM sales grew in the “high-teens” operationally, while standalone CGM sales (i.e., Guardian Connect) grew in the “triple-digits” for the “fourth consecutive quarter – given overall CGM growth of 20%, we’d guess the standalone Guardian Connect CGM business is under $25 million, meaning it is still a small base following the US launch last summer. Professional CGM sales and growth were not reported.

2. MiniMed 670G Has 175,000 Trained, Active Users, a Softer 11% Sequential Rise

  • The MiniMed 670G now has 175,000 trained, active users, an 11% sequential gain from 4Q18. We assume most of these 18,000 sequential additions came from outside the US, given the stark geographic difference in sales growth. Additional OUS markets will see a 670G launch by ~July (“early FY20”), though countries were again not specified. Plotting quarterly 670G user updates below shows adoption may be tapering, as sequential user growth has rapidly declined from ~40% in 1Q18-3Q18 to 16% in 4Q18 and now to 11% in 1Q19.

Global MiniMed 670G Users

  • Separately, Hooman Hakami noted in Q&A that Medtronic Diabetes’ “installed base” grew by “mid-single digits” in FY19 – both globally and in the United States. This was used to defend the company’s competitive position, though our takeaway was the opposite – FY19 sales growth was 13% (operationally), meaning the installed base grew at half the rate of revenue. For competitors (e.g., Insulet, Tandem, Dexcom, Abbott), the opposite is generally true – installed base growth typically outpaces revenue growth. It will be key for Medtronic Diabetes’ mid/longer-term revenue growth to accelerate installed base growth – most notably, can it catch up on CGM product features? Mr. Hakami added that “patient retention rates [in FY19] were in line with historical rates globally,” a sign it is holding onto share (true to historical form). That said, the market is getting more competitive, meaning it could become harder to hold onto to users if competitor innovation outpaces Medtronic.

3. Guidance: Return to ~5% Diabetes Growth in Coming Quarter and 6%-8% Growth in FY20

  • Medtronic expects diabetes growth to reaccelerate to “5%, plus or minus” in the upcoming quarter (2Q19), and to reach 6%-8% growth for all of FY20 (April 2019-April 2020). We note that the upcoming 2Q19 and 3Q19 calls will present challenging YOY comparisons (+26%-27%), though the absolute sales figures were both sub-$600 million – meaning it should be easy to post growth against them. Tandem’s Control-IQ will present tough US competition later this year (4Q19 launch expected), and the potential near-term US entry of Abbott’s FreeStyle Libre 2 iCGM (under FDA review) will bring yet another challenge on the standalone CGM front. Non-adjunctive CGM labeling (opening up 670G to Medicare) and the MiniMed 780G are the major pipeline projects with “FY20” timing (see below) – meaning both will have some pressure on them to reaccelerate the business.

4. ADA Diabetes Briefing on June 9 To Provide Pipeline Update

  • On Sunday of ADA (June 9), Medtronic will host an Investor & Analyst Briefing to provide a Diabetes pipeline update, focused on product launches “over the next 24 months.” We’ll be closely comparing the timing to the ATTD presentation (see below), which shared a pretty ambitious closed-loop pipeline. It will also be fascinating to hear more about the type 2 diabetes pipeline, of which there have been very few updates of late. We wonder if Sunday of ADA was chosen deliberately, as that is the day Tandem’s Control-IQ pivotal trial will report results – see our preview.

Pipeline Highlights

1. Non-Adjunctive CGM Filing to FDA in Coming Months, Opening Up 670G to Medicare

  • A non-adjunctive label claim for Guardian Sensor 3 will be submitted to the FDA in early FY20 (April 2019-April 2020), enabling Medicare coverage of the MiniMed 670G. Assuming an FDA submission by ~July, a launch seems possible later in 2019. This is critical for competing with Tandem’s Control-IQ/Dexcom G6, which may have Medicare coverage out of the gate (assuming G6 has launched to Medicare at that point). This labeling update seems to be taking longer than expected – as of February’s call, this submission was expected “in the next few months” (i.e., by this month).

  • Of note, iCGM labeling was not mentioned today; as of JPM, non-adjunctive and iCGM labeling were discussed together. We’d assume at this point that iCGM will come after non-adjunctive labeling.

2. MiniMed 780G Launch by April 2020, Adding Automatic Correction Boluses

  • The next-gen MiniMed 780G remains on track to launch between April 2019-April 2020 (FY20), adding automated correction boluses (to reduce carb counting burden), Bluetooth, remote software updating, and an >80% time-in-range goal – it was positive to see this mentioned several times today, aligning launch timing with three straight updates (JPM, 3Q18, 4Q18). Mr. Ishrak confirmed our expectation that this will launch “towards the end” of FY20, implying an early 2020 (calendar year) launch. No pivotal trial expectations have been shared, though we have to imagine that will start soon to hit the timing.

  • At ATTD, Medtronic shared a goal for a mean glucose of 135 mg/dl for the 780G, which would bring the average down by ~15 mg/dl from the 670G and represent another ~0.5% A1c reduction. It’s not clear if Medtronic plans to get to day 1 calibration only with the 780G, which was also implied at ATTD (see below).

3. Not Mentioned: 670G Pediatrics, Mio Advance in US, 7-Day Infusion Set, Day 1 Calibration Only, and Many More Pipeline Products

  • No other pipeline products were mentioned today, following the ambitious closed-loop and CGM pipeline shared at ATTD. Medtronic Diabetes VP of R&D Ali Dianaty shared the exciting slides below in February, implying three other key products would launch within “1 year”: (i) 670G with Bluetooth, mobile app, and a 2-6 year old pediatric indication; (ii) a 7-day wear infusion set; and (iii) CGM with fewer fingerstick calibrations (just on day 1). It’s possible these were European timelines, meaning the US plan may be different; the ADA briefing will hopefully clarify this. We also continue to wonder what’s happening with the Mio Advance, which has been FDA-cleared and available in Europe for nearly a year, but still has not launched in the US. (The companies are still building capacity, according to Unomedical at ATTD.) Two other products previously expected in FY20 have not been mentioned in some time: Guardian Connect on Android and Sugar.IQ “Gen 2” with meal handling and carb counting advice. (Guardian Connect does seem to be available on a very limited set of Android phones, with rough reviews – 1.4/5 stars.)

  • As of ATTD, five product launches were expected in “2+ years”: (i) personalized closed loop (>85% time-in-range, mean glucose of <130 mg/dl, FDA breakthrough device designation); (ii) direct smartphone control (expanding on the remote monitoring app); (iii) a 50% smaller sensor with easier insertion; (iv) a lower-cost pump that is 50% smaller (it looks like half the size of an insulin pen); and (v) an all-in-one sensor/insulin infusion set with factory calibration (fingerstick replacement). The latter two are ambitious and we’ll be curious to see how far beyond two years those are – Medtronic’s pipeline and timelines are often a moving target. 

Questions & Answers

Q: In diabetes, in recent months there has been this emerging concern that the industry is changing very rapidly just given reimbursement, regulatory and various technology changes. How is Medtronic positioned over the next one to two years from a share perspective in both your pump and CGM businesses? Do you think an independent diabetes business would allow you to adapt or grow more quickly?

Hooman Hakami: We get a lot of benefits from being part of Medtronic. The scale and breadth of the company we leverage every single day – things like wafer scale technology that we're doing with CVG. As we think about global expansion, we leverage our regulatory resources and relationships around the world. So there is tremendous benefit and I think that helps us drive the growth that we need.

With respect to the competitive positioning: For all that's been said and written about the competition and its impact on us, let me give you a few data points with respect to how we finished. First, our installed base in FY 2019 grew by mid-single digits. This is true globally as well as in the United States. In addition, our patient retention rates were in line with historical rates globally. And as we think about FY 2020 we see a lot of things to be excited about. International is going to be and continue to be a big portion of our growth. This is about 45% of our global revenue and it's growing in the mid-teens and we expect it to grow in the mid-teens.

And the other dynamic that we outlined at the Analyst Day is the CGM penetration and the CGM growth of our installed base, as well as standalone CGM growth, which had four consecutive quarters of triple-digit growth.

You put all of those things together, we feel really good about our ability to be accretive to overall Medtronic in FY 2020 and that's even before we talk about the pipeline that we'll share with you at ADA, which is incredibly exciting and will bring a whole host of new innovation over the next 24 months.

Q: Could you talk about some of the product launches in fiscal 2020 and then fiscal 2021 that give you confidence in accelerating growth throughout the course of this year? And also, I think it's great to hear accelerating growth in fiscal 2021 as we sit here over a year out from that. What are the products that give you confidence?

Omar Ishrak: Well, there is a whole series of them. And I'll go through them because they're all contributing and they're all exciting. [..] And then last not the least, Diabetes: we expect the 780G to launch towards the end of the [fiscal] year (i.e., by April 2020) as well as the non-adjunctive labeling which will allow us greater market access and that will happen much sooner in the year. […] [In FY2021] Diabetes will have the continued rollout of the 780G, which will have significant benefits as I mentioned in the commentary.

Q: […] How should we think about more on the M&A side? I think you mentioned tuck-ins. But should we expect an increase in the rate of maybe acquisitions going forward and more focus on products and really leveraging the portfolio?

Omar Ishrak: Yes, we have a lot of firepower here and we are building it. And we intend to use it in M&A. And the focus on M&A indeed is in tuck-ins that accelerates our growth. […] We did Nutrino Health, which is a great tuck-in to our diabetes pipeline with the nutritional database – and you will see that that work through into our next-generation pumps.

 

--by Adam Brown and Kelly Close