Memorandum

Medtronic 1Q17 (F4Q17) – 670G launch to 20,000+ Priority Access participants starting in June, coverage confirmed with most payers, but non-coverage decision from Anthem; sales of $512 million, record-high for second straight quarter – May 25, 2017

Executive Highlights

  • ~ 750 people are taking part in the MiniMed 670G “customer training phase,” and an initial US launch of the hybrid closed loop will begin in June to “more than 20,000 pump users” that are enrolled in the MiniMed 630G Priority Access Program. The true “broad launch of the MiniMed 670G will follow “later in FY18” (May 2017-April 2018).
  • Notably, Medtronic has confirmed MiniMed 670G coverage with a majority of large commercial payers (e.g., Aetna, Cigna, Humana, UHC). Anthem has issued a truly baffling non-coverage decision for the MiniMed 670G, citing that data is “too limited.”
  • Medtronic’s Worldwide sales of $512 million hit a record-high for the second straight quarter, growing 3% year-over-year (YOY) as reported and 4% operationally. US Diabetes sales totaled $303 million (up 3% YOY), while international sales reached a record-high $209 million (3% YOY).
  • Medtronic estimates it gained insulin pump share in both the US and international markets in the quarter, including an estimated share gain of 4-percentage points in durable pumps in the US driven by 20% growth in direct US pump shipments. Meanwhile global CGM growth was in the low-20% range in the quarter.
  • On an ambitious note, management expects 10%-12% YOY Diabetes growth in FY18 (May 2017-April 2018), with a ramp towards the second half of the year as the MiniMed 670G launches broadly.

Medtronic reported 1Q17 (F4Q17) financial results this morning in a call led by CEO Omar Ishrak, including an accompanying slide deck (Diabetes is slide 17, pasted below). The business saw record high sales for the second straight quarter, buoyed by pump and CGM sales offsetting declines in the consumables and type 2 businesses. Read our highlights below, followed by the one question on the 670G from Q&A.

MiniMed 670G Launch Highlights

1. ~ 750 people are taking part in the MiniMed 670G “customer training phase,” which began in early March. An initial US launch of the hybrid closed loop will begin in June to “more than 20,000 pump users” that are enrolled in the MiniMed 630G Priority Access Program. The true “broad launch will follow later in FY18” (May 2017-April 2018). This was the first-ever quarterly update on the size of the Priority Access Program, which is much bigger than we had guessed in March. It is not clear what “later in FY18” means, but it could imply a “full” launch of the 670G to non-priority access program individuals might occur much later this year. We cover some of the impressive 670G marketing below.

2. Medtronic has confirmed MiniMed 670G coverage with a majority of large commercial payers. JDRF shared with us this includes Aetna, Cigna, UHC, and Humana. Anthem has notably issued a truly baffling non-coverage decision for the MiniMed 670G, citing that data is “too limited.” A number of other plans are still deciding. The Anthem document is worth a read.

Financial Highlights

3. Medtronic’s Worldwide 1Q17 Diabetes revenue of $512 million hit a record-high for the second straight quarter, growing 3% year-over-year (YOY) as reported and 4% operationally. Both came against very tough YOY comparisons to 6% reported growth and 10% operational growth in 1Q16. Sales grew 2% sequentially from the previous record high in 4Q16 – nice momentum for the business. Medtronic estimates it gained insulin pump share in both the US and international markets in the quarter, including an estimated share gain of 4-percentage points in durable pumps in the US on 20% growth in direct US pump shipments. Meanwhile global CGM growth was in the low-20% range in the quarter. Ambitiously, management expects 10%-12% YOY Diabetes growth in FY18 (May 2017-April 2018), with a ramp towards the second half of the year as the MiniMed 670G launches broadly

4. US Diabetes sales totaled $303 million in 1Q17, rising a modest 3% YOY on an easy comparison to flat growth one year ago. We might have expected higher growth with all the 670G enthusiasm, strong 20% growth in US pump shipments (see above), and an easy YOY comparison. That said, this was the second highest mark ever for the US Diabetes business, and sales only declined 2% sequentially from the previous record-high last quarter.

5. International sales reached a record-high $209 million, growing 3% YOY as reported, including 4% operationally in developed markets ($168 million) and 8% operationally in emerging markets ($41 million).

6. The intensive insulin management division grew in the high-single digits operationally, with low double-digit growth in the US (630G) and high-single digit growth OUS (640G, CGM sales)

7. Sales in the Diabetes Service and Solutions division declined in the low-single digits operationally. This is the first time this segment has reported a decline in the two years growth has been disclosed. The division saw fairly significant mid-single digit declines in the US “due to more stringent payer requirements and lower order sizes.” Average selling price for consumables declined in the quarter

8. Sales in the non-intensive diabetes therapies division declined in the low-single digits operationally. This was also the first YOY decline for this segment in the two years growth has been disclosed. This is the smallest of Medtronic’s three divisions and growth in this business has slowed in recent quarters.

Other Pipeline Highlights

9. There was no US timing update on the standalone, Bluetooth-enabled, Guardian Connect mobile CGM. Previously, US approval was expected around this time, and per JPM, a US launch was expected in May-October.

10. The IBM-Watson-partnered Sugar.IQ app has received “positive feedback” from a patient preview. No launch timing was shared. Medtronic’s JPM presentation called for a full launch in May-October,

11. Slides confirmed a “next-gen iPro” product will launch in FY18 (May 2017-April 2018) outside the US. This is presumably iPro3 (per the 2016 Analyst Day), which will be “Single-use,” blinded, and have an expected MARD of ~11%.

12. The MiniMed Pro-set with partner BD was not mentioned on the call, slides, or in prepared remarks. BD’s 1Q17 call noted that shipments have been temporarily halted and the companies are beginning a trial to validate updated training materials. There is no new launch timeline; we wonder if the set will be at ADA...

MiniMed 670G Launch Highlights

1. ~ 750 people are taking part in the MiniMed 670G “customer training phase,” which began in early March. An initial US launch of the hybrid closed loop will begin in June to “more than 20,000 pump users” that are enrolled in the MiniMed 630G Priority Access Program. The true “broad launch will follow later in FY18” (May 2017-April 2018). This was the first-ever quarterly update on the size of the Priority Access Program, which is much bigger than we had guessed in March (we ballparked it at ~5,000-15,000). Management said the feedback has been extremely positive on the 670G, with a “continued increase in patient satisfaction levels.” Revenue growth is not expected to ramp substantially until after Medtronic has fulfilled the priority access orders; it is not clear what “later in FY18” means, but it could imply a “full” launch of the 670G to non-priority access program individuals might occur much later this year. Certainly we assume shipping and training 20,000 patients this device will take much of the summer. Presumably we’ll hear much more at ADA, and hope to see the device in person. See our Closing the Loop ADA 2017 category doc for a preview of 670G-related data.

  • Medtronic issued an urgent field safety notification last week for 6-series pumps (630G, 640G, 670G). It concerns a “rare and temporary condition” in which the keypad buttons on the pump may become temporarily stuck and the keypad becomes unresponsive. This is most likely happen from pressure differences, typically when traveling in an airplane during takeoff or landing. In most cases, Medtronic says the pump will resolve this issue on its own within 30 minutes. Otherwise, users should pull out the battery to clear the issue. Medtronic is very clear that 6-series pumps do not need to be returned or replaced. Ultimately, this seems like a minor hiccup, and we only stumbled on this on Medtronic’s Facebook page. Still, this is a whole new pump platform, so we’ll be washing closely for other hardware issues going forward.

2. Medtronic has confirmed MiniMed 670G coverage with a majority of large commercial payers. JDRF shared with us this includes Aetna, Cigna, UHC, and Humana. Anthem has notably issued a truly baffling non-coverage decision for the MiniMed 670G, citing that data is “too limited.” A number of other plans are still deciding. The Anthem document is worth a read, as it covers the MiniMed 530G, 630G, and 670G in one piece. It notes right at the top that hybrid closed loop is “considered investigational and not medically necessary under all circumstances.” The Anthem decision is truly absurd, as it will cover the 530G/630G under certain circumstances, and the 670G pivotal data is miles better on hypoglycemia alone. Further, Anthem also cites ~20 other hybrid closed loop studies from academic groups (i.e., not specific to the 670G) in its decision, ultimately concluding: “While these studies demonstrate improved control of glucose concentrations with fewer hypoglycemic events, the data at this time is limited to studies with small populations, short follow-up times, and other methodological issues, which limit the generalizability of their findings. At this time, the incremental benefit of automated closed-loop control of insulin administration is unclear.  There is currently no data available demonstrating health outcome benefits of such technology compared to other treatment methods, including multiple daily injection therapy and continuous insulin infusion therapy with or without a threshold suspend device.” WHAT?!

Financial and Business Highlights

3. Medtronic’s Worldwide 1Q17 Diabetes revenue of $512 million hit a record-high for the second straight quarter, growing 3% year-over-year (YOY) as reported and 4% operationally. Both came against very tough YOY comparisons to 6% reported growth and 10% operational growth in 1Q16. Sales grew 2% sequentially from the previous record high in 4Q16 – nice momentum for the business. The 4% operational growth, Mr. Ishrak said, was an expected deceleration from last quarter’s 8% operational growth ahead of the full launch of the MiniMed 670G.

  • Medtronic estimates it gained insulin pump share in both the US and international markets in the quarter, including an estimated share gain of 4-percentage points in durable pumps in the US on 20% growth in direct US pump shipments. Meanwhile global CGM growth was in the low-20% range in the quarter. It was great to have this granularity, which is never provided in quarterly calls! The market share gains for pumps are presumably internal estimates, and we’d guess the gains come mostly from Animas and Tandem pumpers (since Insulet is still growing).
  • For FY17 overall, sales of $1.9 billion grew 3% as reported and 4% operationally. This was well below the initial 1Q16 guidance for “high-single to low-double digit” Diabetes growth in FY17. This discrepancy was not mentioned on the call, but does make us wonder about the big growth expectations (see below) for the coming year. Notably, the MiniMed 6-series pumps were highlighted on the overall Medtronic-wide slide as an example of new product launches driving the company’s overall growth.
  • Ambitiously, management expects 10%-12% YOY Diabetes growth in FY18 (May 2017-April 2018), with a ramp towards the second half of the year as the MiniMed 670G launches broadly – this was more specific than the previous estimate for “double-digit growth” in FY18. There is definitely confidence that the MiniMed 670G will drive significant growth once the full launch starts, and we’ll be interested to see if the business can meet this ambitious guidance – Medtronic has not seen sustained double-digit growth since 2014.

Figure 1: Medtronic Worldwide, US, and International Quarterly Sales (1Q13-1Q17)

4. US Diabetes sales totaled $303 million in 1Q17, rising a modest 3% YOY on an easy comparison to flat growth one year ago. We might have expected higher growth with all the 670G enthusiasm, strong 20% growth in US pump shipments (see above), and an easy YOY comparison. That said, this was the second highest mark ever for the US Diabetes business, and sales only declined 2% sequentially from the previous record-high last quarter. Some deceleration seems likely given signups for the Priority Access Program and the continued wait for the full 670G rollout. The slide deck noted “solid US sales” and “excellent feedback” on the MiniMed 630G. Notably, the upcoming June launch of the MiniMed 670G for priority access program participants will only result in “minor” revenue recognition, as upgrade fees are small for this group to go from the 630G->670G. Revenue declined 2% sequentially this quarter, and the US business provided 63% of 1Q17 growth (the same level seen in 4Q16).

5. International sales reached a record-high $209 million, growing 3% YOY as reported, including 4% operationally in developed markets ($168 million) and 8% operationally in emerging markets ($41 million). The 640G continues to do well outside the US (Latin America and Asia Pacific launches were noted), while the new Guardian Connect standalone mobile CGM has seen “strong adoption.” Sales grew an impressive 9% sequentially.

6. The intensive insulin management division grew in the high-single digits operationally, with low double-digit growth in the US (630G) and high-single digit growth OUS (640G, CGM sales) – this was the same growth as reported last quarter and a clear sign of nice momentum in this area of the business. (The other Diabetes segments, by contrast, saw YOY declines; see below). The slide again noted “CGM retention” and highlighted “improved sensor accuracy” and “excellent” feedback on the Guardian 3 sensor. We’d point out that very few patients have this sensor right now, so this seems unlikely to be driving substantial sales. Assuming ~20% of Medtronic’s overall business is still from CGM, that translates to ~$100 million in total CGM sales this quarter.

  • The Diabetes slide noted that the MiniMed 630G has an “opportunity for use by intensive insulin type 2 patients.” We’ll be interested to follow this from a payer perspective, given the substantial price tag of this device (~$6,000-$9,000).

7. Sales in the Diabetes Service and Solutions division declined in the low-single digits operationally. This is the first time this segment has reported a decline in the two years growth has been disclosed. The division saw fairly significant mid-single digit declines in the US “due to more stringent payer requirements and lower order sizes.” Average selling price for consumables declined in the quarter (not quantified), though the slide deck optimistically noted that the installed base continues to grow – this is expected to drive volume and keep sales steady, particularly following the MiniMed 670G launch. Sales were flat operationally outside the US, despite “strong adoption” of the Guardian Connect standalone mobile CGM system in EMEA and APAC (this reports into this business and not intensive insulin management). Ultimately, this definitely shows some pressure in the consumables segment of the business, which clearly dragged down overall growth in the quarter. The MiniMed Pro-set was not mentioned anywhere on the call or in prepared remarks.

  • There were no material updates on Diabeter, though the  “funnel of expansion opportunities [is] growing.” The slide noted that a fifth Diabeter clinic has opened in the Netherlands, but this was not news – it was announced in 3Q16. Given all the excitement and hope around this acquisition two years ago, it seems to be moving slower than we might have expected.

8. Sales in the non-intensive diabetes therapies division declined in the low-single digits operationally. This was also the first YOY decline for this segment in the two years growth has been disclosed. The decline was not characterized, and the slides noted positives (i) the division grew in the mid-single digits in the US on PCP sales of the iPro2 Professional CGM with Pattern Snapshot; (ii) iPro2 saw “strong” growth in China; (iii) the i-Port Advance injection port saw “solid growth” outside the US; and (iv) Medtronic expanded its dedicated type 2 sales force during the quarter. Presumably it was professional CGM outside the US that drove the quarter’s decline, or perhaps weaker US growth than it has seen in the past. We’re not sure how big the sales force is, but these extra feet on the street could be a major advantage over other diabetes device companies seeking to broaden into type 2 (e.g., Abbott, Dexcom, Insulet).

  • This is the smallest of Medtronic’s three divisions and growth in this business has slowed in recent quarters. Has Abbott’s FreeStyle Libre Pro cannibalized some of Medtronic’s type 2 professional CGM business? As a reminder, Libre Pro launched last fall in the US and has been available in places like India for some time. The 14-day, factory calibrated sensor is a substantially better product than iPro2 on pretty much every product dimension – cost, prescribing/setup hassle, patient burden, wear time, calibration and disinfection (none needed), etc.

Other Pipeline Highlights

9. There was no US timing update on the standalone, Bluetooth-enabled, Guardian Connect mobile CGM. Previously, US approval was expected around this time, and per JPM, a US launch was expected in May-October.

10. The IBM-Watson-partnered Sugar.IQ app has received “positive feedback” from a patient preview. No launch timing was shared. Medtronic’s JPM presentation called for a full launch in May-October, behind the initial plan to launch by the end of 2016. We assume it will launch in tandem with Guardian Connect.

11. Slides confirmed a “next-gen iPro” product will launch in FY18 (May 2017-April 2018) outside the US. This is presumably iPro3 (per the 2016 Analyst Day), which will be “Single-use,” blinded, and have an expected MARD of ~11%.

12. The MiniMed Pro-set with partner BD was not mentioned on the call, slides, or in prepared remarks. BD’s 1Q17 call noted that shipments have been temporarily halted and the companies are beginning a trial to validate updated training materials. There is no new launch timeline; we wonder if the set will be at ADA...

Questions and Answers

Q: On the 670G launch, I want to make sure we're all thinking about the timing of this ramp, not only in terms of what it means for revenues, but in terms of share gains. Is it fair to assume that you really don't want the offensive going at what I would characterize as non-Medtronic patients more in the second half of the FY 2018 versus the first half? Because right now, you're obviously doing the initial customer feedback side of the launch, and then, in June, you're going to the existing Medtronic patients? Will it be more second half of the year before you're really in a position to go out and take market share?

Hooman Hakami: First, maybe a little bit of perspective on the fourth quarter because we were going through priority access there. As was indicated in the commentary, even with priority access, we actually saw a strong performance relative to the market and our peers. So, with the MiniMed 630G and priority access, we gained over 4 points of durable pump market share in the fourth quarter. The other thing I'd point out, that I think, is worthy of note, is that globally, our CGM sales grew in the low 20s because of the sensor attachment to all of these pumps.

So, even though we are going through priority access fulfillment right now in Q1 and we expect, as Karen mentioned, a ramp from Q1 to Q4, I think we're going to really put ourselves in a position to continue to take market share and as we think about the full year we feel really good that we're going to be able to end the year not only with market share gains but also double-digit growth.

Pipeline Summary

Pump, Automated Insulin Delivery, and Infusion Sets

Pump/Infusion Set Pipeline Product

 

Latest Timeline

MiniMed 630G with Enlite

Threshold suspend on new pump platform (waterproof, color screen, remote bolus from meter)

US shipments began in September 2016.

Approved in Canada in October and launching in early 2017.

MiniMed 670G with Guardian Sensor 3

Hybrid closed loop

Customer training launch began in March to ~750 people. Priority Access Program launch in June to 20,000+ people. Broader launch “later in FY18” (May 2017-April 2018)

International launch expected in May-October 2017.

Pediatric pivotal clinical trial currently recruiting (7-13 years) and expected to complete by April 2018.

MiniMed Pro-set Infusion Set with BD’s FlowSmart technology

Limited launch began in September, but shipments halted in January due to higher-than-anticipated complaints associated with insertion. BD/Medtronic pursuing trial to validate updated training materials. No launch timing shared.

Future Bluetooth-enabled pumps incorporating Roche Accu-Chek Guide Link BGM

No official timing shared by Medtronic. A Roche  webinar suggested last week that this could launch in mid-2018, but Medtronic has never confirmed this.

Advanced Hybrid Closed Loop (Formerly called the MiniMed 690G)

Incorporating DreaMed MD-Logic algorithm to add automatic correction boluses

Feasibility study shared at ATTD 2017. NIH funded IDC/Schneider Children’s Hospital study to start later in 2017 and compare to 670G. Not FDA submission or launch timing shared.

Other infusion set innovations:
- An extended wear set
- Two different CGM-insulin delivery combo sets
- Two unknown innovations (“SC2,” “Solo”)

 Over next three years
(per the June 2016 Analyst Day)

Next-gen Advanced Hybrid Closed loop

Smaller touchscreen-looking pump with smartphone control, an algorithm that performs automatic bolus corrections, and “biometric,” “multi-parameter” sensing

May 2020+
(per the June 2016 Analyst Day)

CGM Sensor Pipeline (Personal and Professional)

CGM Pipeline Product

Latest Timeline

Guardian Connect standalone mobile CGM

Bluetooth-enabled transmitter, Enlite 2 (OUS) or Guardian Sensor 3 (US).

Launched outside the US (EMEA, APAC).

FDA PMA submission in March 2016, approval previously expected around this time. A US launch previously expected in May-October 2017.

iPro 3 Professional CGM
“Single-use,” blinded, MARD of ~11%.

Launch by April 2018
(per the June 2016 Analyst Day)

Harmony 1 personal CGM sensor

10% MARD, 10-day wear, one calibration per day, 90-minute warm up, redundancy via two sensor flexes

Pivotal trial previously expected in 1H17, launch by April 2019 (per the June 2016 Analyst Day).

iPro 4 Professional CGM
Adds real-time data to iPro 3

Launch by April 2019 (per the June 2016 Analyst Day)

iPro 5
Slim, round bandage-looking; seven-day wear, <10% MARD

Launch by April 2019-April 2020 (per the June 2016 Analyst Day)

Harmony 2 Personal CGM sensor

<10% MARD, 30% reduced size, and “additional biometrics”

Launch by April 2020 (per the June 2016 Analyst Day)

Combo seven-day CGM-insulin infusion set

Launch by April 2021
(per the June 2016 Analyst Day)

Data Analytics and Connectivity Pipeline

Data/Connectivity Pipeline Product

Latest Timeline

Fitbit partnership for professional CGM

myLog mobile app launched in December to capture exercise, food, fingerstick data while wearing iPro2.

Turning Point Program with IBM Watson

Bluetooth-enabled BGM, a patient mobile app, a one-on-one health coach, clinical decision support for PCPs, and optional iPro2 to help patients with uncontrolled diabetes.

Went live in F3Q17. Initial pilot data reported at ATTD demonstrated 2.0% A1c reduction from a 10.1% baseline in n=35 completers (view the poster here).

IBM Watson app, Sugar.IQ Gen 1 (“Personal Diabetes Assistant”)

Analyzes retrospective data: “How have I been doing?”

Positive feedback from patient preview. Per JPM, a US launch was expected in May-October.

 

mySugr-CareLink integration for pump/CGM data management

Partnership announced in a mySugr industry update in November, but no launch timing shared.

Next-gen CareLink Pro reports, including analytics to optimize pump basal and bolus settings

No recent updates. Launch previously expected last summer (per ADA 2016).

IBM Watson app, Sugar.IQ Gen 2

Adds glucose prediction: “How will I be doing?”

Previously slated to launch in ~Summer 2017
(per the June 2016 Analyst Day), but seems unlikely.

Provider CGM Analytics: Outcomes Snapshot

Population health, quality metrics, benchmarking

Launch by April 2018
(per the June 2016 Analyst Day)

IBM Watson app, Sugar.IQ Gen 3

Adds therapy dialogue Q&A: “Watson, what should I be doing?”

 

Launching in ~Summer 2018
(per the June 2016 Analyst Day)

Provider CGM Analytics: Patient Snapshot

Personalized care plans via proCGM and Biometrics

Launch by April 2020
(per the June 2016 Analyst Day)

-- by Adam Brown and Kelly Close