Medtronic 4Q20 (F3Q21) – Diabetes revenue of $630 million (+3% YOY) marks highest since 1Q18; sales growth driven by MiniMed 780G in EU and 770G in US; 780G filed with FDA, but review timing uncertain – February 23, 2021

Medtronic reported its 4Q20 (F3Q21) 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. We love it by the way what a big job he has and is moving through it so well. Diabetes is on slide 11 and see our top highlights below.

Financial and Business Highlights

1. Worldwide revenue of $630 million rises 3% YOY to highest level in nearly three years; international revenue rises 8% as reported to $323 million; US revenue declines 2% to $307 million

Medtronic reported 4Q20 (F3Q21) total Diabetes revenue of $630 million, its highest quarterly revenue in Diabetes since 1Q18 ($645 million) and second highest ever. This fourth calendar quarter also represented Medtronic’s first and only quarter of YOY growth in 2020, with revenue rising 3% as reported YOY in 4Q20. Sequentially, revenue grew an impressive 10% from 3Q20. The strong 4Q20 results come well above 3Q20 expectations for Diabetes to decline in “the low single digits” in 4Q20. While CEO Geoff Martha acknowledged that Medtronic is still not growing at the same pace as the larger diabetes device market (see Abbott 4Q20 and Dexcom 4Q20 and Insulet 4Q20; we’ll hear from Tandem later this week), the return to growth is promising with momentum being driven by “successful launches of [Medtronic’s] 770G system in the US and the 780G, which is now available in 26 countries.”

Note that the number of countries in which 780G is available more than doubled from calendar 3Q20, when it was merely a dozen.

• For full calendar-year 2020, Medtronic reported Diabetes revenue of $2.3 billion, declining 4% YOY from the high-water mark set in 2019, the only year higher than this one. The decline was driven by COVID-19, which had a sizeable negative impact on sales in the first three quarters of this (calendar) year. In terms of geography, full-year international revenue grew 1% as reported to $1.2 billion even while the change in US revenue offset the international increase – US growth declined 8% to $1.1 billion.

• The curve converge: As seen in the graph below, US and OUS revenue have been on opposite trajectories for some time, with the two figures crossing each other in 2020. While international revenues exceeded US revenues in three out of four quarters this year, before 2020, this was never the case. The US had edged or beaten OUS very strongly in all other quarters so this is new and different. That said – we imagine that profitability related to the US pump business is higher than profitability outside the US.

• US revenue in 4Q20 totaled $307 million, declining 2% YOY. Sequentially, revenue rose 8% to the highest level all year. According to Medtronic’s slide deck, the US decline was driven by declines in CGM and consumable sales (e.g., infusion sets), but partially offset by growth from the launch of MiniMed 770G in November. Still, the 2% decline in 4Q20 represents the slowest decline since 3Q18 and the US business is looking better. Of course, it goes without saying that pre-pandemic, Medtronic was also seeing declines in US Diabetes sales, with an 11% YOY decline in 1Q19, a 6% YOY decline in 2Q19, a 7% YOY decline in 3Q19, a 10% YOY decline in 4Q19, and a 17% YOY decline in 1Q20 – all due to heightened competition. Competition on the pump and automated insulin delivery front continues to grow, and Tandem’s Control IQ is performing particularly strongly. Insulet is hampered a bit by the same thing, the Insulet 5 isn’t available yet though we expect it to be later in 2020. In the future, we hope to hear more about revenue and growth from the company’s smart insulin pen, InPen.

• Record international revenue in 4Q20 totaled $323 million, rising 8% YOY as reported and ~3% operationally, clearly due to 780G availability. Indeed, the record revenue was attributed to the continued rollout of MiniMed 780G, which is now available in 26 countries (vs. 12 countries in 3Q20). The strong 8% YOY growth rate, as reported, is also inflated slightly by a particularly weak US dollar in 4Q20. The international revenue growth was entirely driven by Medtronic’s “Non-US Developed” markets, where, presumably, MiniMed 780G has been launched. Revenue from these Non-US Developed markets grew 14% YOY as reported (6% operationally), compared to a 13% YOY decline (-8% operationally) in “Emerging Markets.”

• In 4Q20, Medtronic saw “mid-single digit growth in durable pumps and CGM.” Historically, Medtronic has seen higher growth rates in its CGM sales, while pump sales declined. In fact, by our estimate, 4Q20 represents the first quarter of pump sales growth since 3Q18. This dynamic was especially strong in the US, where we estimated the first ever YOY decline in US CGM revenue in 4Q20. This is particularly notable as competitors Dexcom and Abbott continue to post ≥40% YOY unit volume growth. While both pump and CGM sales grew in the quarter, both continue to be impacted by COVID-19. 

2. No traditional guidance provided, but broader commentary on COVID-19 recovery; Diabetes expected to grow in “high single digits” in 1Q21

As has been the case for the last three quarters, Medtronic again chose not to share guidance with the COVID-19 pandemic continuing to linger – we think that’s smart. According to CFO Karen Parkhill, the pandemic continued to pressure sales “in the first couple weeks of February,” but trends are improving. Looking at 1Q21 (F4Q21), Medtronic expects April to be stronger than March and March to be stronger than February. If recovery trends as expected, Ms. Parkhill estimated organic revenue growth of 30%-34% YOY for the entire company. For context, Medtronic saw a 25% YOY decline in 1Q20 due to COVID-19 impact. Diabetes is expected to grow much slower than the broader company with YOY growth expected in the “high single digits.” The slower growth in Diabetes is to be expected – again using 1Q20 for reference, Diabetes declined just 1% YOY, while the overall company declined 25% YOY.

• The pace of recovery from COVID-19 continues to vary considerably by geography. While China is “back to normal,” the US is still seeing impact from the pandemic, though the “worst is behind us with this second wave.” Mr. Martha also called out the recent severe winter weather across large regions of the US as slowing down many procedures. In Europe, Medtronic is expecting a slower recovery from COVID-19, trailing the trend seen in the US by “a couple of months.” Finally, in Medtronic’s Emerging Markets in Asia Pacific and Latin America, many countries are already back to growth.

3. Healthy Equity Efforts: Addressing Barriers; Increasing Internal and External Awareness; Incorporating into Strategy and Business Goals

We recently spoke to Medtronic leadership about Medtronic Diabetes’ efforts to promote health equity. In our conversation, Medtronic Diabetes VP of the Americas Mark Grant, VP of Global Health Economics Jeff Farkas, Senior Director of Global Communications Janet Cho, VP of Product Innovation Ali Dianaty, VP of Customer Experience (and very highly regarded and experienced Medtronic executive) Julie Foster, and Director of Healthcare Equity Maribel Baker shared Medtronic’s initiatives to address four key barriers: bias, awareness, access, and trust. Specifically, Medtronic has taken its “initial steps” toward promoting health equity in diabetes in four ways: driving company awareness through an internal panel of health disparity experts; engaging in social media campaigns and with advocacy groups to drive external awareness and addressing perceived barriers to diabetes technology use; and committing to integrate health equity into Medtronic Diabetes’ strategy and business goals.

Likewise, Medtronic includes representative patient perspectives early on in the product development process and ensures that marketing representation matches the diversity of patients: “We are looking at the entire journey from market research, product development, clinical research to marketing commercialization assets making sure that we are being inclusive and representative throughout.” We applaud this mindset and feel strongly that it can drive actionable change moving forward, particularly with leaders like Sean Salmon and Julie Foster at the top, along with many others in addition to Grant, Farkas, Dianaty, Baker, and others.

At CES 2021, we attended a talk on addressing racial and gender bias in the development and testing of AI, and we believe that the lessons of that talk apply everywhere in product development and particularly in diabetes technology, which has seen marked disparities in who accesses and uses products. Looking ahead, Medtronic will refine its broad efforts as it learns from its first year executing on its health equity strategy, for example, by working with community health workers to implement training and education on diabetes management, technology, and access programs.

• These steps do not mark Medtronic’s first foray into diversity, inclusion, and equity work. Since 2015, Medtronic has set five-year goals for diversity and inclusion and reported on its progress every year. In the most recent 2020 report, the company shared a 2020 goal for ≥20% of US leadership positions to be held by BIPOC by 2025, which every Medtronic senior manager is required to incorporate into an action plan that diversifies talent at the leadership level. We applaud this work strongly; if over-representation has been widespread historically, we believe this has some meaningful chance of working, particularly if the effort has good investment and more diverse candidates see the possibilities.

  • Medtronic offers employees Employee Resources Groups and high-level support through Diversity Networks, which aim to attract and support employees of color and help provide very strong experiences. These groups also help to form Employee Engagement Initiatives, grassroots employee movements to drive inclusion and diversity for particular populations at Medtronic (e.g., Black Engineers, Asian Impact @ Medtronic Network), as well as initiatives in STEM at the high school and college level.

  • Medtronic also has an employee-led referral program “GOT FRIENDS” in which Black employees promote open positions to diverse candidates in their personal networks. In response to the murder of George Floyd and the Black Lives Matter Movement, the Medtronic Foundation pledged $16 million in July to partnerships to address racial disparities and “advance social justice in black communities.” As it happens, within diabetes, the one approach with even remotely similar official dollars attached belongs to J&J with a $10 million pledge. While all these steps are important, Medtronic’s recent work is its first large push to focus on health equity specifically, and we applaud the initial steps, and hope to hear regular updates of the subsequent actions taken. 

    • While Medtronic and J&J have provided meaningful examples and while we look forward to checking in with them again regularly, we have not scanned all of health care yet to understand which approaches are similar. We do know the approach of notable technology companies and the tech sector is substantially larger and we look forward to seeing what they are doing, learning, and activating. That said, at press time, we believe that big tech is ahead of healthcare significantly:

      • Microsoft will pledge $150 million to diversity and inclusion, $500 million to diverse suppliers, $50 million to community partnerships for five years, $20 million to BIPOC partners, and $3 million in training programs. 

      • Facebook is taking a similar, diversified investment approach. They pledged $200 million to Black-owned businesses, $1.1 billion to diverse suppliers, and $5 million to Facebook fundraisers for racial justice organizations. Along with this, they are intending to reach 2 million Black and Latinx community members with the Elevate digital skills training program, and support 100,000 Black students with scholarships from the Facebook Blueprint program. Facebook is also creating a new platform (“Lift Black Voices”) within its main app to highlight stories from Black communities and creators, educate, advocate for action, and inspire fundraising for racial justice causes.  Internally, Facebook is engaging in “new internal staffing and education drives to improve both representation and understanding.”

      • Google will also invest $175 million to advancing economic opportunities for Black business owners and developers in the Google for Startups Accelerator, with $5 million reserved for the Google for Startups Black Founders Fund. In its press release, Google also highlighted its partnerships to support the Black startup community, including those specifically in Atlanta this year (Russell Center for Innovation and Entrepreneurship and Collab Studio), and the Google for Startups Founders Academy which it formed this year.

      • Amazon is the only big tech company researched that is giving far less than the other three companies; they are donating $10 million to organizations supporting justice and equity, including NAACP, ACLU, Equal Justice Initiative, National Urban League, Thurgood Marshall College Fund, and United Negro College Fund. Based on an update from July 14, by matching $8.5 million in Amazon employee donations, Amazon donated an additional $17 million to 12 organizations selected by the Black Employee Network, as well as local education and racial equality initiatives in the communities where employees live and work. This said, following this press release, Amazon received criticism from activists for its internal practices and partnerships with law enforcement.

• Broadly speaking, racial disparities in diabetes are tremendous. We believe they are worth mentioning here due to Medtronic’s focus in this area and the potential for what its focus will impact. The racial differences in the prevalence and mortality of diabetes are well-known and startling with Native people having almost twice the diabetes prevalence of white people, and Asian American people, Black people, and Latinx people all having significantly higher diabetes prevalence rates than white people. Internal Medtronic data found that among type 1s, Black, Asian, and Hispanic patients are significantly less likely to use diabetes technology. For example, only 10.8% and 10.5% of Black type 1s use CGM and pump, respectively, whereas 27.5% and 33.7% of white type 1s use CGM and pump, respectively, suggesting that white patients are almost three times as likely to use diabetes technology as Black patients. This is in line with pediatric CGM data presented at ADCES 2020 by Florida researchers and with pediatric pump data published by University of Pennsylvania researchers, and highly alarming. Notably, the researchers found that these health disparities are not solely due to socioeconomic status and/or insurance coverage (Lipman et al.), but are likely related to overarching inequities in clinical care, implicit bias, and biological cortisol responses to structural racism.

Pipeline Highlights

1. MiniMed 780G currently available OUS “in 26 countries across four continents”; submitted to the FDA with no expected timelines for approval; early customer feedback very positive with 10x NPS of MiniMed 670G

MiniMed 780G is now available “in 26 countries across four continents,” marking a significant expansion from “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 2020, four months after receiving CE-marking in June. During Q&A, Mr. Salmon expressed that Medtronic continues to receive positive feedback on the system highlighting that patients are “getting to stay in Auto Mode a lot longer” leading to better glycemic control. Additionally, in “early reports,” Mr. Salmon claimed many real-world users reaching “kind of 90s” Time in Range with MiniMed 780G. For reference, mean Time in Range in the MiniMed 780G pivotal study reached ~75%, though the earliest adopters of diabetes technologies usually have much better glycemic control than the general population. Mr. Salmon also touched on the reduced number of calibrations needed to keep the 780G system in Auto Mode (about “half” as many calibrations as MiniMed 670G); of course, this is still a disadvantage compared to Tandem’s Control-IQ, which does not require CGM calibration. According to Mr. Salmon, the Net Promoter Score for MiniMed 780G is “up about ten-fold” compared to 670G. According to dQ&A data, the NPS for MiniMed 670G was about +7, suggesting an NPS of +70 for MiniMed 780G. This would put the NPS for MiniMed 780G right between those for Abbott’s FreeStyle Libre (+67) and Dexcom’s G6 (+83) – an incredibly high score compared to the 670G, for which Medtronic receives great kudos for having brought to the field – the first “real” closed loop.

• During today’s call, Mr. Martha confirmed that MiniMed 780G has been submitted to the FDA. While this was in-line with 3Q20 expectations to submit by the end of January 2021, we were glad to hear it and a little relieved given all the expectations by multiple companies to hit certain deadlines and then missing them due to “COVID-19”. As expected, which is a big deal, the submission combined adult and pediatric data, as well as Medtronic’s previously submitted Zeus CGM to provide the FDA “with an efficient means to simultaneously review [Medtronic’s] multiple submissions.” That’s an incredible advantage for Medtronic in our view. Presumably, this is a strategy suggested in the company’s conversations with the FDA to reduce the number of submissions the FDA must review and minimize any delays due to COVID-19 related back-log. Given the delays around the FDA, Medtronic is not providing any timelines for approval or launch of MiniMed 780G in the US. That’s very smart. For now, a quite optimistic timeline seems like approval by the end of Medtronic’s fiscal year (April 2021) with a potential US launch of some kind over the summer coming. Without question, FDA work had slown down on the tech front – it sounds like it’s picked back up, but not without meaningful delays hampering progress in a big way.

• MiniMed 770G continues to roll-out in the US, following initial shipments in November. As a reminder, the system combines the pump technology and Bluetooth connectivity from the 700G series pump hardware with the 670G hybrid closed-loop algorithm. While the US launch of 770G was cited as a contributor to increasing momentum in Medtronic’s Diabetes business, we anticipate the real win for both patients and sales will come when the 780G algorithm launches and 770G users will be able to update their systems for free.

• MiniMed 780G’s relatively quick global rollout should help strengthen Medtronic’s competitive position. Our last update from Tandem indicated international launches for Control-IQ in the UK and South Africa with plans to be in “more than half” of Tandem’s OUS markets by the end of 2020 – we’re looking forward to hearing how those expansions are going during Tandem’s 4Q20 update tomorrow afternoon. Insulet has seen strong international adoption of Omnipod with 100% of new customers in Europe starting on Omnipod DASH, which should certainly serve as a strong bridge to Omnipod 5 when it becomes available. However, for now, Medtronic certainly has the strongest international footprint and brand recognition compared to competitors. They also have incredible scale and quite a reputation in much of the world.

2. Synergy and Zeus CGM data to “hopefully” be presented at ADA 2021; Synergy pivotal completed with FDA submission to come in “summer”

Medtronic continues to make progress with its CGM pipeline, which the company recognized in the past and on today’s call as the weakest link in its AID systems. According to Mr. Martha, Medtronic is aiming to share accuracy data from both Synergy and Zeus CGMs at ADA 2021, which is currently slated for June: “With regard to Synergy data, we will be filing an abstract with that, as well the Zeus data hopefully for an ADA presentation. So, you’ll see the data when it becomes available in that abstract gets accepted.”

• Medtronic’s Zeus CGM was submitted to the FDA as part of the MiniMed 780G system. The submission as an AID component follows another submission of Zeus to the FDA in October as a standalone device. From what we’ve heard from Medtronic, the device has enough clinical data to support a non-adjunctive indication and potentially meets iCGM accuracy standards. The non-adjunctive indication is particularly important, as it will likely be required for the 780G system to deliver automatic correction boluses. The number of fingersticks required for Zeus is unclear – at Analyst Day, Mr. Dianaty noted that the goal was to “reduce or eliminate fingersticks.” As a reminder, Zeus will keep the same reusable form factor and 7-day sensor wear as Guardian Sensor 3. Expected timelines for approval or launch of Zeus, either as a standalone CGM or as part of MiniMed 780G, have not been shared.

• As we heard in November, the pivotal trial for the fully disposable “Synergy.” On today’s call, Mr. Martha shared that Medtronic intends to submit Synergy to the FDA following completion of its “manufacturing module this summer.” As a reminder, Synergy is Medtronic’s first fully disposable sensor and has a form factor about 50% smaller than Medtronic’s current Guardian 3 Sensor. Medtronic is targeting 7-day wear for Synergy and, according to comments from Mr. Dianaty in October is also working on “self-calibration,” effectively eliminating the need for fingerstick calibration, which would be very welcome by patients. While the MiniMed 780G system was submitted to the FDA with the Zeus CGM, Medtronic is eventually aiming for combability with the Synergy CGM. 

  • “They [Zeus and Synergy] will be separated by probably enough to make a difference from where we’re going to want to have both products in the market, but we’ll sort that out. We don’t need to launch if it we don’t need to launch it, but I think we’ll have a period of time where Zeus will precede Synergy for both pump integration as well as stand-alone use” – Mr. Salmon

Slides taken from Medtronic’s Analyst Day.

3. Other Projects: “EU limited launch” for 7-day Extended Wear Infusion Set in 1Q21; “working through” OUS regulatory and coverage for Companion Medical’s InPen

• The “limited launch” of Medtronic’s 7-day Extended Wear Infusion Set will continue in 1Q21. As of November, the limited launch had begun, starting in Finland. Today’s update didn’t specific countries where the infusion set would launch. As a reminder, the set was first CE-Marked about one year ago. In November, we also learned that Medtronic had “locked the database” on the pivotal trial in the US and the trial’s page on ClinicalTrials.gov now indicates the study was completed in November. We’re following this progress closely since a longer-wear infusion set means less hassle for patients and also has meaningful potential to reduce patient and healthcare system costs. At ADA 2020, Medtronic shared data estimating the 7-day infusion set could save users 5-10 vials of insulin per year – we’d love to know what it could save in set expenses!

• Over email, Medtronic shared with us that company is “working through the regulatory and commercial plans to introduce InPen into additional countries.” Currently, InPen remains a US-only product, where it is also the only FDA cleared smart pen on the market. In November, we heard that the “entire sales force” for Medtronic Diabetes had been trained on InPen and we’d love to see Medtronic break out InPen revenue in the future. Also in November, Medtronic announced the launch of real-time data integration between its Guardian Connect CGM and InPen marking the first real-time integration of CGM data with a smart pen.

Diabetes-Related Investor Q&A

Q (David Lewis, Morgan Stanley): Sean, the Diabetes business obviously was the standout versus the Street models here this quarter. I just wonder if you can talk about what you're seeing in 780G relative to what we had seen historically with 670G. The guidance for next quarter probably doesn't seem as strong as I would expect given the momentum in Diabetes this quarter. So is there anything to think about there? And then just any sense of kind of Zeus versus Synergy in terms of relative timeline? Does it make sense to launch those products independently if they're going to be sort of right on top of each other from a filing strategy? So just a general Diabetes update would be very helpful. Thanks so much.

Sean Salmon: Thanks, David. So, I would say with 780G what people are really enjoying about that is getting to stay in Auto Mode a lot longer. That leads to better control. With the early  reports, people are in the kind of 90s in the post market realm for glycemic control. But ,more importantly, they're not getting interrupted to take blood sugars. That's cut down in half. They're able to sleep through the night with really good blood sugar control. And we measure things like net promoter score on a product level as well, and it's up about ten-fold from what we saw from the experience of the 670G. So, a very, very big improvement. And we're also seeing on the 670G I think the transmitter which connects the CGM to the pump seems to function better than the way we used to connect that on 670G, so it's more reliable. And that coupled with being able to see your numbers on the phone has led to a better experience as well. And, of course, that pipeline is upgradeable to not just the 780G but also the new sensor pipeline you asked about and the extended wear infusion set.

With regard to the Synergy, we've already filed Zeus. That was filed in November. Synergy will be filed upon the completion of the manufacturing validation in the summertime. So they will be separated by probably enough to make a difference from where we're going to want to have both products in the market but we'll sort that out. We don't need to launch it if we don't need to launch it but I think we'll have a period of time where Zeus will precede Synergy for both pump integration as well as stand-alone use.

Q (Vijay Kumar, Evercore): I guess you look at the timelines here on 780. That's subject to the FDA. But based on, I guess, how the 780 launch has gone in Europe, do you now feel more confident of getting back to market growth just with 780? And I'm curious on Synergy. You said the trial is complete. Have you seen the data? Do you think the product can get iCGM approval?

Sean Salmon: Hi, Vijay. So, 780, yes. The device is very competitive and we'll do well with it when we get into the marketplace. But the sensor experience continue to be what we need to improve and of course we have the pipeline working through that. With regard to Synergy data, we will be filing an abstract with that as well as the Zeus data hopefully for an ADA presentation. So, you'll see the data when it becomes available if that abstract gets accepted.

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