Memorandum

Medtronic 2Q19 (F1Q20) – Sales of $592 Million Rise 4%, Driven by 15% OUS Growth as US declines 6%; 780G on track for April 2020 launch; iCGM pivotal ongoing; extended wear infusion set pivotal imminent – August 20, 2019

Executive Highlights

  • Medtronic reported 2Q19 (F1Q20) Diabetes revenue of $592 million, rising 4% YOY and fueled entirely by the international business: OUS sales of $286 million grew 20% operationally (+15% as reported), hitting the second highest mark ever on strong 670G OUS launch momentum. By contrast, US sales of $306 million declined 6% YOY on a tough comparison to breakout 33% growth in 2Q18. Management cited a tough competitive environment in the US (i.e., record 2Q19’s for Tandem and Insulet), and moved sales guidance to the “lower end” of the previous range – “6%-8%” growth for FY20 (i.e., April 2019 – April 2020).

  • The MiniMed 670G now has “approximately 200,000” trained, active users globally, up from 175,000 in 1Q19. We assume much of this growth came from OUS markets. The 670G is expected to launch in “key markets,” including France and Germany, in FY20, which should continue to fuel international revenue growth.

  • In the pipeline, non-adjunctive CGM labeling for Guardian Sensor 3 has been filed with the FDA (a PMA), which will enable Medicare coverage of the 670G once approved. The next-gen 780G advanced hybrid closed loop pivotal trial will complete enrollment this month for adults and in September for pediatrics (7+ years) – fast following the ADA announcement. The 780G remains on track for a launch by April 2020 (geography not specified). A separate pivotal to obtain iCGM labeling with day one-only calibration is making “good progress”; it also started at ADA, with completion listed for February 2020. FDA IDE approval just came through to begin a pivotal trial of extended infusion set wear, with the goal of seven-day wear and Mio Advance insertion form factor.  

Medtronic reported 2Q19 (F1Q20) financial results this morning in a call led by CEO Omar Ishrak. Diabetes is on slide #10, and below you’ll find highlights and diabetes-related Q&A.

Financial Highlights

1. Global Sales Grow 4% YOY to $592 Million, Driven Entirely by 15% OUS Growth; US Down 6% on Tough Comp

Medtronic reported worldwide Diabetes revenue of $592 million in 2Q19, rising 4% YOY as reported (+5% operationally) on a very tough comparison to 27% YOY growth in 2Q18. The gain one year ago (2Q18) was fueled by US adoption of the 670G, which has tapered against strong competition (Tandem’s Basal-IQ, Insulet’s Dash), a dwindling Animas opportunity in the US, and less conversion from MDI (Insulet and Tandem are relatively stronger in that population). Sequentially, worldwide sales declined 5% as reported from the strong performance in 1Q19. The MiniMed 780G is the next major product launch for Medtronic, though expected towards the end of the fiscal year (i.e., by April 2020).

  • US revenue of $306 million declined ~6% YOY on a tough comparison to 33% growth in 2Q18. This now marks the third straight quarter of YOY declines in US revenue, though all three have come on relatively difficult comparisons. Still, the $306 million in 2Q19 revenue was Medtronic’s lowest in the US since 3Q17, when 670G only had ~20,000 users and CGM capacity was constrained. On the call, CEO Omar Ishrak cited “more competitive pressure than we would like in the US”. Indeed, in 2Q19, Insulet’s US sales rose 26% (a record), Tandem’s rose 106% (a record), Dexcom’s rose 40% (a near-record) and Abbott’s rose 42% (a record). Medtronic faces one more quarter ahead with a very tough comparison: 3Q18 posted 26% YOY worldwide growth, including 30% growth in the US. The US will also continue to be challenging from a competitive perspective, as Tandem and Insulet both raised expectations for 2H19.

  • Conversely, OUS revenue rose 15% YOY as reported (+20% operationally) to $286 million on a tough comparison to 20% growth in 2Q18. This included 18% operational growth in developed markets ($231 million) and robust 27% operational growth in emerging markets ($55 million). Sequentially, OUS revenue fell 3% short of the record $296 million in 1Q19. The strong international performance was driven by uptake of the MiniMed 670G, which launched last fall and continues to expand to more countries. OUS revenue is now closing in on US revenue, making up 48% of total revenue in 2Q19.

  • According to the press release, sales of integrated CGMs (i.e. as part of MiniMed 670G, 630G, and 640G) saw growth in the “mid-teens” operationally, while the standalone Guardian Connect saw growth in the “high-eighties.” We estimate Medtronic’s total worldwide CGM sales were ~$215 million, rising 25% YOY (on a tough comparison to 47% growth in 2Q18) and comprising ~37% of total sales. We estimate global pump sales were ~$377 million, declining ~6% YOY and down for the third straight quarter. 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, growth rates reported today, and the general trend of CGM sales rising faster than pump sales.

2. Global MiniMed 670G User Base at ~200,000 users, +14% Sequentially

In prepared remarks, CEO Omar Ishrak shared that the MiniMed 670G hybrid closed loop now has “approximately 200,000” trained, active users globally, up 14% sequentially from 175,000 in 1Q19. Based on the revenue splits and management comments that 670G is experiencing “strong consumer demand internationally as [it] launches into new markets,” we assume that most of this user base growth came from international markets. Launch in other “key markets,” including France and Germany, are expected to come by April 2020 (in “FY20”). During Q&A (see below), EVP of Diabetes Hooman Hakami noted that the company expected to get German reimbursement for 670G in 3Q19, but is now expecting that to come in 4Q19.

3. Guidance of 6%-8% Diabetes Growth in FY20 Maintained, “Leaning Towards” the “Lower End” of the Range

Medtronic met its 1Q19 guidance of “5%, plus or minus” Diabetes growth for 2Q19 and reiterated its expectation for growth to reach 6%-8% for all of FY20 (April 2019 – April 2020). On the call, CFO Karen Parkhill clarified that the company was “comfortable at the lower end” of the 6%-8% range, citing “softness” in US diabetes. CEO Omar Ishrak added that Medtronic has “sort of turned down the numbers a little bit” on diabetes. 3Q19 will come on a very tough comparison to 26% growth in 3Q18 before easing up in the second half of FY20. In addition, the launch of Tandem’s Control-IQ in 4Q19, expansion of Insulet’s Dash launch into the pharmacy, and the imminent entry of FreeStyle Libre 2 iCGM in the US market (currently under FDA review) will bring further US competition. Non-adjunctive CGM labeling (filed in July) and the MiniMed 780G are the major pipeline projects with “FY20” timing (see below), and throughout the call, management expressed their excitement for these launches. Both will be key to re-accelerate Medtronic’s diabetes business.

Pipeline Highlights

Pipeline Slide from June 2019 ADA Analyst Briefing:

1. MiniMed 780G Launch Still Expected by April 2020; Pivotal trial enrollment to complete in “next few weeks”

Prepared remarks reiterated the plan to launch the MiniMed 780G advanced hybrid closed loop by April 2020 – “in the second half of this fiscal year” – aligning with five straight investor updates (ADA Analyst Briefing, 1Q19, JPM, 4Q18, 3Q18). The call did not specify whether that was US or OUS launch timing, and Medtronic told us the geographic cadence will depend on regulatory progress. The 780G pivotal trial commenced at ADA, and Mr. Ishrak said the company expects to complete 780G trial enrollment “in the next few weeks.” In a subsequent email, Medtronic said that trial enrollment for adults will be complete this month, and enrollment for pediatrics (7+ years) will complete in September. This is impressive recruiting speed, as the large trial is enrolling up to 350 adult and pediatric participants (7+ years old) in a three-month, single-arm safety evaluation (home study) – same design as the 670G pivotal, but nearly three times the study size out of the gate. According to ClinicalTrials.gov, primary completion is expected by January 31, 2020. The 780G pivotal has co-primary end points – change in A1c and change in time-in-range (70-180 mg/dl) from baseline. The 780G is marketed as an “advanced hybrid closed loop,” as it adds automatic correction boluses (on top of basal modulation), an ambitious >80% time-in-range goal, an adjustable target down to 100 mg/dl, Bluetooth, remote software updating, a mobile app for secondary display and wireless pump uploads, fewer alarms, and simpler operation. Initially, the 780G will require two fingerstick calibrations per day (non-adjunctive Guardian Sensor 3), though it will presumably move to the Zeus iCGM (see below) once that product is approved.

  • An ambitious pre-marketing slide shown at ADA (see below) suggested the 780G will be competitive with Tandem’s Control-IQ. Tandem expects to launch Control-IQ in 4Q19 in the US (submitted to FDA), leapfrogging the 670G with automatic boluses, the no-fingersticks G6 CGM, remote software updates (free of charge for in-warranty users), Bluetooth and a mobile app, and a simpler user experience (no juggling of Manual and Auto modes). The pressure will be on Medtronic to get the 780G out in the US quickly next year, given the upgrades with Control-IQ. The slide below selectively excludes at least two areas where Control-IQ is ahead of 780G: no fingerstick calibration G6 CGM (vs. two per day in 780G) and 10-day CGM wear with G6 (vs. seven days with Guardian Sensor 3).

    • It remains to be seen if Medtronic can actually achieve 80%+ time-in-range and the highly ambitious 99% time in closed loop. For context, Control-IQ’s pivotal data – shared at ADA – showed 70% time-in-range (70-180) vs. 59% in the control group and 92% time in closed loop over six months with a no-calibration CGM. We assume 780G’s time in closed loop would be the same or lower than Control-IQ, given that it does need twice-daily CGM calibration. Study populations may also differ, contributing to differences in outcomes: there are a lot of inclusion/exclusion criteria in the 780G pivotal, and it’s possible Medtronic will enroll a more engaged population vs. the broader group in the Control-IQ pivotal. 80% TIR is certainly a huge goal!

2. Guardian Sensor 3 CGM Filed for Non-Adjunctive Labeling as Part of 670G

Reiterating July’s announcement, remarks briefly noted the FDA PMA filing to obtain non-adjunctive labeling for the Guardian Sensor 3 CGM as part of MiniMed 670G hybrid closed loop. No FDA approval timing was forecasted today, though we assume the review will be straightforward – Medtronic is the fourth company to apply for a non-adjunctive CGM indication in the US, after Dexcom (G5, G6), Abbott (FreeStyle Libre 10- and 14-day), and Senseonics (Eversense 90-Day; obtained in June). The critical labeling update will finally allow the 670G to apply for Medicare reimbursement as a therapeutic CGM – a long-time coming follow first-in-class FDA approval of the hybrid closed loop nearly three years ago. Medtronic told us it will not change the 670G’s software (in the pump or transmitter), though this label update would officially remove the need for a confirmatory fingerstick before a food or correction bolus. At least two fingerstick calibrations per day will still be required for the sensor to function and keep 670G in Auto Mode. This is also the CGM labeling that will launch with the 780G, which adds automatic non-adjunctive boluses based on CGM readings.

  • Currently, FreeStyle Libre and Dexcom G5 are reimbursed by Medicare, with a G6 Medicare launch expected in 4Q19. We’d guess Tandem’s Basal-IQ will be first to launch into Medicare (once G6 is available), followed at some point by Control-IQ; Tandem has not commented on Medicare plans in recent calls. Depending on Control-IQ’s Medicare launch timing, 670G could be first to the market with a Medicare-covered hybrid closed loop.

3. Zeus iCGM Pivotal Underway, Day 1 Calibration Only; FDA Submission in April-October 2020 (per ADA)

Management highlighted “good progress” in the ongoing pivotal trial for Zeus, the next-generation sensor platform that aims for iCGM labeling and day 1 calibration only. It will maintain seven-day wear and the same reusable clamshell transmitter design. The pivotal trial was announced during ADA; at the time, FDA submission was forecasted for April-October 2020. According to ClinicalTrials.gov, primary completion is expected in February 2020. This is big study, enrolling up to 460 participants with type 1 or type 2 diabetes (2+ years old), with primary endpoints focused on iCGM benchmarks: ± 20%/20 mg/dl agreement vs. YSI and ±15 mg/dl Agreement with YSI (<70 mg/dl). We do not believe the inserter or Guardian Sensor 3 chemistry has changed, implying this is only a calibration algorithm update – from 14 fingersticks over the course of wear (two per day) to two on the first day of wear.

4. Extended wear infusion set to begin pivotal trial, with goal of seven-day wear; in partnership with Unomedical

On Thursday, Medtronic announced that it has received FDA investigational device (IDE) approval to begin a pivotal study of its extended wear infusion set. The goal is to support wear for “up to seven days.” The multi-center, non-randomized, prospective, single-arm study will enroll up to 150 participants with type 1 diabetes (18-80 years), all wearing the MiniMed 670G and comparing current 2-3 day sets to the new extended wear set. The set uses “proprietary technology” and has been developed in partnership with long-time partner Unomedical. The press releases only specifies “new adhesive technology” and “maintaining insulin stability.” Medtronic confirmed the extended wear catheter will be packaged in the all-in-one, hidden-needle Mio Advance automatic inserter device – this fantastic product has been available in Europe and FDA cleared for over a year, but not yet launched in the US (the companies are still building capacity). Per ATTD, this extended wear set technology is different from Unomedical’s internally-developed coated Lantern. A previous extended wear trial used heparin (prevents blood clots in catheters), but Medtronic confirmed with us that this new set does not.

  • The last update on this set came in February at ATTD, when Medtronic expected to launch it within “one-year” – i.e., by February 2020 outside the US. No launch timing was shared today, and it was not mentioned in 1Q19 or at ADA. The trial is not yet on ClinicalTrials.gov, though we imagine completion by early 2020 is possible. As noted above, the ongoing MiniMed 780G and iCGM pivotals trials – which started in June and are 2-3 times larger in study size – have primary completion slated for January-February 2020.

  • The extended wear set pivotal trial is in 670G users, which Medtronic told us is to align with current in-market technology. We’d also speculate on two other potential reasons: (i) a hybrid closed loop can automatically cope with higher insulin needs and hyperglycemia sometimes seen on later days of wear (see DTM for an example with Unomedical’s different technology); and (ii) Medtronic might choose to get the set cleared as part of the “670G system,” a sort of “exclusive” with Unomedical and potential regulatory barrier for competitors.

  • The announcement emphasized the convenience of this set when used with Medtronic seven-day CGMs – i.e., changing a sensor and set at the same time each week. This is an interesting point on convenience and valuable marketing rationale for a seven-day CGM – “you can change it together with your pump site!” Medtronic is behind Dexcom and Abbott on extending CGM wear to 10 or 14 days – its 24-month CGM pipeline has no plans to go past seven-day sensor wear.

  • Extended set wear is a long-desired improvement, and we’re elated to see Medtronic and Unomedical continuing to innovate on infusion sets. This critical tech category has unfortunately seen little commercially-launched innovation over the past decade, with Medtronic/Unomedical’s Mio Advance the most notable positive exception. (BD’s promising FlowSmart set was discontinued in November.) As of its last update, Capillary Biomedical aimed to launch a seven-day wear set in 2020. Some of our questions:

    • Will extended wear sets trade longer wear in the short-term for more long-term issues related to insulin absorption – e.g., scar tissue and lipohypertrophy? This will be impossible to answer in a pivotal study, though it will be key to assess once on the market. A potential benefit of fewer needle insertions, of course, could be less scarring.

    • Will extended wear sets require higher insulin doses on days 4-7? A hybrid closed loop would be able to cope with that physiologically, but this could be important from a cost perspective – will the cost reduction in infusion set supplies overcome higher potential costs from more insulin use?

    • Will Medtronic need to change its plastic reservoirs to keep insulin more stable at body heat over seven days? Will Medtronic ever switch to prefilled glass insulin cartridges, such as those Beta Bionics plans to use?

    • Is a combined seven-day CGM-insulin infusion set – i.e., Medtronic’s “Project Duo” – commercially viable? Given the need for twice as many sensors as a 14-day CGM, will the cost differential be worth the user experience advantage of a single-site? Will users burn the entire duo set if one component needs changing? As of ATTD, Project Duo was “2+ years” away from market.

5. Not Mentioned: Tidepool Loop, Personalized Closed Loop, Synergy Fully Disposable CGM, Sugar.IQ App Improvements

Other pipeline projects mentioned in the ADA Analyst Briefing were not discussed today. Note that in the ADA slides below, “FY21” runs from April 2020-April 2021.

  • Automated Insulin Delivery interoperability with the Tidepool Loop iPhone app via iCGM and ACE Pump indications. This exciting and unexpected partnership was also announced at ADA, with Medtronic joining Insulet and Dexcom as collaborators on Tidepool Loop. Medtronic’s iCGM study is well underway (see above), though it has not commented on specific timing to file for an ACE pump indication. Will we see an ACE pump submission with the 780G’s FDA filing? Will Medtronic develop a smaller pump without a screen or user interface, as smartphone control will be part of Tidepool Loop?

  • Synergy fully disposable, seven-day, iCGM sensor with day one calibration – FDA submission in November 2020-April 2021, Launch by ADA 2021. We note that this Medtronic fully disposable CGM offering in 24 months won’t match the current feature sets of Abbott and Dexcom in terms of factory calibration and 10-14 day wear. Still, it will be a fantastic improvement over current products.

  • Personalized Closed Loop – FDA submission in November 2020-April 2021, Launch by ADA 2021. This will have a lot of investment in the algorithm, leveraging the Nutrino acquisition, promising a big step up in simplicity and personal adaptation.

  • Sugar.IQ insulin dosing advice to enhance standalone CGM offerings for MDI users. A “smart guide” system is expected to launch by April 2020 (FY20), adding “basic” CGM-based insulin dosing guidance (presumably trend-based bolus calculator), a predictive trace, and some advising. By April 2021 (FY21), Medtronic aims to add a “virtual optimizer” bringing more personalized dosing (meals, activity) with the Synergy disposable sensor. We’re not sure what Medtronic plans to do on integrating smart insulin pens; as of June 2018, Medtronic aimed to have its own smart pen offering, though we’d assume this is less of a priority with strong offerings from Companion (on market), Lilly (under FDA review), Novo Nordisk (CE Marked last fall; full launch was expected this year), and others.

Questions and Answers

Q: On diabetes, I noted that you were nicely in line this first quarter, but have switched the guidance to the low-end of the range. Just curious if you could talk about that a little bit?

Omar Ishrak: On diabetes, I know we sort of turned down the numbers a little bit, but that doesn't remove our excitement regarding the upcoming launches here. The advanced hybrid closed loop with Bluetooth connectivity, in particular, towards the end of the fiscal year is one that we are zeroing in on, and the clinical trials and so on are in progress. We've had more competitive pressure than we would like in the US in the first quarter, so taking that into account, we decided to be prudent about what our guidance should be. But let's not take anything away from the product launches that we are anticipating in the second half, those are on time and we will see what the results are but we're pretty excited about them.

Hooman Hakami: Maybe first a little bit of color on the dynamics that drove Q1 and that I think also sort of drives the guidance. If you recall from ADA, the quarter was pretty much in line with what we talked about at ADA. We anticipated strong OUS growth – check. In the US, we expected consistent consumables and CGM revenue from the installed base – check. We said that we expected to renew our patients coming out of warranty in line with historical rates, we were able to do that, and then we said the most volatile thing was really the conversions in the US of patients coming from MDI, and that also sort of factored in. We are able to balance all of that and deliver in Q1. Now as far as the rest of the year goes, it’s largely as Omar stated: it's a function of the pipeline which remains on track versus what we discussed at ADA.

Now in Q2, we did expect to get some reimbursement for 670 in Germany and we were hoping that that would be an incremental contributor to offset some of the U.S. pressure that was discussed, but now we're assuming we don't get this and we'll get it next quarter. So for all of the reasons mentioned, this is why we're maintaining the range, but leaning toward the lower end of the range.

Q: There are a number of new products that are launching over the next 12 to 18 months. Can you please give us a highlight of which ones are you the most excited about?

Mr. Ishrak: There's a number of new products coming out, but I'm going to go through a few of these that I think of the most exciting […] in diabetes, the MiniMed 780G, that's got Bluetooth connectivity. It's an advanced hybrid closed loop system. It's the second generation of the closed loop based on our experience and the database that we have on patients already. […] And then finally, the diabetes system [780G], we also expect to complete enrollment of the patients in the next few weeks.

Q: Just thinking about the guidance for the second quarter, I think last quarter you suggested 4% growth for the second quarter, and now you're suggesting something closer to 3.5%. So is the relative change simply Diabetes? And you still need some momentum improvement frankly sequentially to get to that number? And what drives that confidence?

Karen Parkhill (CFO): In terms of 2Q, we're excited about the growth acceleration that we intend to drive in the second half. You know in Q2 we're seeing some US softness in Diabetes that we talked about, and we are seeing some pain markets issues. But beyond that, we are very excited about the acceleration that we are going to drive. And it's just the first quarter, so we are focused on delivering as we move through the year.

 

--by Albert Cai, Adam Brown, and Kelly Close