Medtronic 1Q21 (F4Q21) – Record Diabetes revenue of $647 million on 14% YOY growth (+9% operationally); international and pump sales are bright spots; MiniMed 780G now in “over 30 countries” – May 27, 2021

Medtronic reported its 1Q21 (F4Q21) financial results this morning on a call led by CEO Geoff Martha and CFO Karen Parkhill. Diabetes and Cardiovascular President Sean Salmon also joined the call for Q&A – as usual, he continues to strike us as a very impressive leader, with equal parts brilliance and true understanding of diabetes and all its challenges. Diabetes is on slide 11 and see our top highlights below.

Financial and Business Highlights

1. Record worldwide revenue of $647 million rises 14% YOY (+9% operationally); international revenue of $355 million (+20% YOY); US revenue of $293 million (+7% YOY)

Medtronic Diabetes reported 1Q21 (F4Q21) revenue of $647 million, rising 14% YOY as reported (+9% operationally). Sequentially, sales grew 3%. The strong YOY revenue growth pushed Medtronic to its highest-ever quarterly revenue recorded in our model (which dates back to 2005). This quarter’s $647 million figure just edges out the previous record of $645 million reported in 1Q18. Diabetes revenue growth of 14% YOY in the quarter on an easier comparison to a 9% decline in 1Q20, but also represents the highest growth rate since 3Q18’s 26% YOY growth.

• Diabetes’ 14% YOY growth rate came ahead of previous guidance for Diabetes revenue growth in the “high single digits.” However, CEO Geoff Martha noted that Medtronic Diabetes is still growing slower than the broader diabetes device market and the company continues to lose share. On a fiscal-year basis (i.e., May 2020 – April 2021 vs. May 2019 – April 2020), Medtronic estimated it last “about 5 points” of market share. On a more positive note, the company estimated market share was about stable from 4Q20 to 1Q21, suggesting the company may have some momentum with its recent product launches (see below).

• Insulin pumps were a bright spot in the quarter, seeing “strong [double-digit YOY] growth” 1Q21. Sequentially, Medtronic actually saw its pump market share grow – by our estimates, Medtronic’s pump market share first dipped below 50% in 1Q20 and has continued to fall slowly. Medtronic’s CGM sales grew more modestly, in the “mid-single digits” in 1Q21.

• International revenue in the quarter came in at a record $355 million on 20% YOY growth (+11% operationally). The sizeable reported vs. operational YOY growth rates continue to be affected by a weaker USD. Still, MiniMed 780G’s continued rollout (now in 30 countries vs. 26 countries in 4Q20) is helping to drive growth. By geographies, Medtronic’s “Emerging Markets” were a particular highlight, growing 41% YOY as reported (+44% operationally), albeit from a smaller base, to $68 million. Medtronic’s “Non-US Developed Markets” also saw steady growth of 16% YOY as reported (+5% operationally).

• In the US, revenue was $293 million on 7% YOY growth. Sequentially, Diabetes revenue fell 5% on seasonal dynamics. According to Medtronic, MiniMed 770G helped drive growth in the US, which was partially offset by declines in company’s CGM revenue and consumable sales (e.g., infusion sets). At 7% YOY growth, 1Q21 actually represented Medtronic’s first quarter of YOY growth in the US since 3Q18, following nine straight quarters of YOY declines. We’d be curious how InPen has been performing since Medtronic acquired Companion Medical in August.

2. Medtronic provides guidance for the first time since COVID-19 pandemic; Diabetes revenue to grow 3%-4% in FY22

For the first time in four quarters, Medtronic provided formal guidance as hospital procedure volumes around the globe rebound from the COVID-19 pandemic. For the entirety of Medtronic, CFO Karen Parkhill shared revenue growth guidance of “9%, plus or minus a point” in FY22 (May 2021 – April 2022). For context, Medtronic’s FY21 revenue came in at $30 billion on 4% YOY growth as reported (+2% operationally). During Q&A, Medtronic provided some insights into the state of the recovery globally, sharing that the procedure volumes are “nearing a full recovery” with each month improving over the previous month. In the US, depending on the specific procedure, Mr. Martha estimated volumes “anywhere from 85% to over 100%” of pre-COVID levels. Mr. Martha described volumes in China as “pretty much back to normal totally,” while Western Europe is still lagging behind the US. Finally, Mr. Martha noted high levels of variance in Emerging Markets, such as India, which has seen a massive surge in COVID-19 cases.

• For Diabetes, Medtronic is guiding for FY22 revenue growth of “3% to 4%.” This would represent a slight step-up from the “approximately flat” YOY operational growth in FY21 with revenue coming in at $2.4 billion. Analyst Chris Pasquale from Guggenheim asked about the guided revenue growth rate during Q&A with Ms. Parkhill sharing that excluding a change to Medtronic’s fiscal year (i.e., the addition of an extra week to FY21 resulting in a tougher comparison), revenue growth guidance would be closer to 4.5%-5.5%.

3. Medtronic lands #11 spot on Diversity Inc’s Top 50 US Companies for Diversity List; executive compensation incentives to focus on market share in FY22

During prepared remarks, Mr. Martha chose to highlight a couple notable company details for Medtronic. Firstly, this past month, Medtronic landed the #11 spot on Diversity Inc’s Top 50 US Companies for Diversity list, “one of the biggest jumps by any company.” According to Diversity Inc, factors considered for the list include “human capital diversity metrics” (gender and racial/ethnic representation of the workforce and management), leadership accountability, talent programs, workplace practices, supplier diversity, and philanthropy. Other notable diabetes-related companies on the list include Lilly (#3), Abbott (#4), Sanofi (#27), and AstraZeneca (#49).

• In FY22, Medtronic will start its new executive compensation structure, which takes market share into account. As Evercore analyst Vijay Kumar called it, a “new, confident, aggressive Medtronic” was palpable at last year’s Analyst Day. That meeting centered on two themes: (i) “Going on the Offensive & Taking Share” and (ii) “Creating & Disrupting Big Markets.” Back in October, Medtronic shared that starting in FY22, Executive performance criteria have been modified to focus on revenue growth, market share (“[if you’re] not growing at or above the market, that’s a problem”), and shareholder return. We’ll be eager to see how this changes Medtronic’s approach in Diabetes, if at all, where the company has not seen the same growth rates as other companies in the space (e.g., Abbott, Dexcom, Insulet, Tandem).

Pipeline Highlights

1. MiniMed 780G now in “over 30 countries” across four continents; MiniMed 780G still under “active review” with the FDA with no expected timelines for approval

Medtronic has now launched MiniMed 780G in “over 30 countries” across four continents. Previously, MiniMed 780G was available “in 26 countries across four continents” in February and “twelve countries” in 3Q20. As a reminder, we first learned that MiniMed 780G had launched in Europe during Medtronic’s 2020 Analyst Day in October, four months after receiving CE-Marking in June. The device is clearly helping to drive growth internationally, where revenue grew an impressive 20% YOY as reported in 1Q21 (+11% operationally). In 1Q21, MiniMed 780G also drove sequential pump market share gains worldwide.

• In the US, MiniMed 780G is still under “active review” with the FDA, and the review timelines “remain uncertain due to FDA resource limitations.” As a reminder, Medtronic submitted MiniMed 780G to the FDA by February. The submission combined adult and pediatric data, as well as data on Guardian 4, as “an efficient means to simultaneously review [Medtronic’s] multiple submissions” to minimize delays due to COVID-19 related backlog. During Q&A, Mr. Salmon shared that the reviewer working on the MiniMed 780G package submission is the same individual who reviewed MiniMed 770G, “so we think that the familiarity is going to be helpful.”

• Both during Q&A and in their prepared remarks, management expressed that Medtronic continues to receive positive feedback on MiniMed 770G and MiniMed 780G. On MiniMed 770G specifically, the 1Q21 presentation noted that 770G has seen “strong” patient utilization of the system’s Bluetooth connectivity and smartphone app. As a reminder, MiniMed 770G was approved by the FDA in September and was launched in the US in November.

2. FDA submission for Synergy delayed to “the first half of the fiscal year”; Guardian Sensor 4 CE-Marked with EU launch slated for the fall, data readout at ATTD 2021

Medtronic’s next-generation CGM, Synergy, is slated for FDA submission in “the first half of the fiscal year” (i.e., by October 30, 2021). This is a slight delay from the expectation set in February, when Medtronic slated Synergy’s FDA submission for “summer” 2021. Although the pivotal trial for Synergy was completed in November, Medtronic will also complete a “manufacturing module” prior to submission. As a reminder, Synergy is fully disposable and 50% smaller in profile than Guardian Sensor 3. Like Guardian Sensor 3 and 4, Synergy has seven-day wear, and like Guardian Senor 4, Synergy will be “self-calibrating.” Medtronic didn’t offer a timeline for getting Synergy approved in OUS markets.

Slides taken from Medtronic’s Analyst Day

• Yesterday, Medtronic announced that Guardian 4 (f.k.a. Zeus) had received its CE-Marking and is slated to launch in Europe this fall, along with InPen. Both products will launch this fall. In the US, Guardian 4 sensor is under “active review” with the FDA as part of the MiniMed 780G submission package. Medtronic (wisely) did not offer a timeline update for FDA approval or US launch due to COVID-related capacity issues at the FDA. Data on Guardian 4’s no-calibration accuracy will be read out at ATTD 2021 next week (see Mr. Martha’s commentary on the data below). During Q&A, Mr. Salmon argued that MARD is not the most important accuracy metric, arguing that instead, accuracy in hypoglycemic ranges and hyperglycemic ranges, as well as the accuracy of trend information, is most valuable and noted that the ATTD presentation will show Guardian 4’s strength in those regards. As a reminder, Guardian 4 is Medtronic’s first consumer CGM approved for fingerstick- and calibration-free use. The device is indicated for patients ages 7+ years old and builds on the existing features of the Guardian Sensor 3 system with the same form-factor and seven-day wear. Importantly, the system comes with non-adjunctive labeling, meaning that patients can dose insulin directly off of CGM values without performing a confirmatory fingerstick (see product details here and a feature comparison to other CGMs here). Notably, during Q&A, Mr. Salmon shared that “there is no plan to change the pricing” between Guardian Sensor 3 and Guardian Sensor 4, meaning that patients will be able to access the device at parity with Guardian Sensor 3.

  • “We're pleased with the accuracy of Guardian 4 and that it has now been labeled for dosing without fingersticks. Starting this fall, Europeans will not only have access to the 780G with the highest-reported Time in Range of any insulin pump, but also, our Guardian 4 sensor with no fingersticks required and our extended infusion set, with an industry-leading seven-day wear. We think this is a highly differentiated product offering and one that we can't wait to bring to other markets.” – Mr. Martha

  • “In terms of your specific question on MARD, that's really not a great metric to look at. There's sort of an overall average of how the difference is looking across the full range of the sensor, but what you really want to know is when your blood sugar is high or when it's low is your sensor accurate and those data are really accurate, and you'll see that in the presentation. The other thing that's important is the trending is the blood sugar reliably being going up or down and that's really what matters, so kind of like A1c is a big average over time for glycemic control and Time in Range is replacing that metric, really the accuracy at the right place and the range is what's important, and you'll see that in the data that's being presented.” – Mr. Salmon

3. Other Projects: Seven-day Extended Wear Infusion Set has been submitted to the FDA, available via limited launch in EU; InPen receives limited attention

• Medtronic has submitted its seven-day Extended Wear Infusion Set to the FDA, according to this quarter’s earnings presentation, following the completion of the pivotal trial in November. This exciting update went unmentioned during the earnings call, so we don’t know more details on the submission or timeline for approval. Regardless, this is energizing for many patients as it is a common request of patients using pump systems. Outside the US, Medtronic continues its limited launch of the seven-day infusion set in Europe, which began in Finland in November.

• Along with Guardian Sensor 4, InPen received its CE-Marking yesterday. Medtronic plans to bring InPen to Europe “this fall” with integration with Guardian CGMs, including Guardian Sensor 4. As a reminder, a previous version of InPen was CE-Marked in 2018, but Companion Medical never launched the device in Europe. Looking ahead, Medtronic hopes to “close the loop” for patients on MDI by integrating InPen with AI-powered meal detection technology acquisitions, Nutrino and Klue.

Diabetes-Related Analyst Q&A

Q (Joanne Wuensch, Citibank): I'd like to spend just a couple of minutes on Diabetes. There are two major medical meetings coming up, ATTD and ADA, and you're launching Guardian Sensor 4 and the smart insulin pen outside the United States. It's sort of a multi-part question, but first of all, what should we be expecting at these two meetings as it relates to the sensor? Could you give us some of the parameters? I note there are calibrations, but I'm curious. And then lastly, how do you look to price these products as you bring them first outside the United States and then into the United States? Thanks.

Sean Salmon, President of Diabetes Group: Yeah. Thanks, Joanne. Yes. So, we've got a lot coming out next weekend at ATTD. I do plan the sensor data which will be released, and it's available on the website right now which includes the numbers. We also have information coming out on the 780G experience which I'd point you to look at in the first 4,000 patients, the real- world experiences are being launched there. And we'll have additional smart pen data coming out at the ADA meeting.

But in terms of your specific question on margin, that's really not a great metric to look at. There's sort of an overall average of how the difference is looking across the full range of the sensor, but what you really want to know is when your blood sugar is high or when it's low, is your sensor accurate? And those data are really accurate, and you'll see that in the presentation.

The other thing that's important is the blood sugar reliably being going up or down, and that's really what matters. So, kind of like A1c is a big average over time for glycemic control and Time in Range for placing that metric, really the accuracy at the right place and the range is what's important. And you'll see that in the data that's being presented.

In terms of pricing, there's no plan to change the pricing between what we've done with Guardian Sensor 3 and Guardian Sensor 4 in any market.

Q (Chris Pasquale, Guggenheim): Wanted to follow up on the Diabetes business. Three percent to four percent growth coming off a year in which sales were flat doesn't imply a ton of progress on the turnaround in FY 2022. I'm curious whether that guidance really assumes any contribution from 780G and Zeus in the United States. And maybe tied into that, just your latest expectations on the timing of potential FDA approvals for those products?

Karen Parkhill, CFO: Yes. Chris, I'll take the first part. I'm going to let Sean comment on the second part. One thing to keep in mind with our Diabetes guide is that we purposely did not adjust for the extra week across the whole company that we had last year, because the reduction in bulk purchases offset it. But that reduction in bulk purchases did not affect our Diabetes business. So, really, we need to look at it with the loss of the extra week that is indeed affecting them, and that loss of the extra week is about 150 basis points on the year. Hopefully that's helpful.

Mr. Salmon: Just building on what Karen said, we also have a bit of a comparable issue within some international markets where there was some stockpiling of the consumables that get used. That's a little bit of a year-on-year comparison, but the bigger effect for us is that the installed base in the last six months, those coming out of warranty in the last six months, was just higher than what we're going to see in the first half of the fiscal year, so just getting a difference of how many patients come at it with timing. Certainly, the new product flows you mentioned, 780 and Zeus for the U.S., have been most important for us to continue to move both patients from the installed base as well as those new patients coming out of MDI and our competitors.

I don't have an update on the timing. We're in active reviews, as Geoff said, on the filing, and the reviewer that's working with us is the same one that reviewed the 770 device. So we think that, that familiarity is going to be helpful, but there's no update on timing at this point.

It's good to see the pipeline starting to show up here. I mean, we're looking forward to get to the U.S., but the 780G, the new sensor, the extended wear infusion set, it's a pretty powerful combination. And we're seeing great clinical results and great patient feedback, and I think you'll see that in the data that comes out. And it's a good leading indicator of what we're going to see in the United States when it gets here.

--by Katie Mahoney, Albert Cai, and Kelly Close