Medtronic F4Q14 – Worldwide sales up 13% on continued strong US launch of MiniMed 530G; MiniMed 640G moving ahead in the US – May 21, 2014

Medtronic reported F4Q14 financial results yesterday morning in a call led by CEO Omar Ishrak. We note below the call’s top five highlights, followed by a pipeline summary, our key questions, and the call’s Q&A related to mergers and acquisitions (there were no diabetes-related Q&A).

Financial and Business Highlights

1. Worldwide Diabetes revenue totaled a record-high $460 million, growing 13% as reported and operationally year-over-year (YOY) – sales were driven by strong 15% growth in the US on an easy comparison to F4Q13 (when sales declined 2% YOY). US results were the same in F4Q14 as in F3Q14.           

• Outside the US, Medtronic achieved growth of 10% as reported and operationally on record-high sales of $190 million – this marks seven straight quarters of international growth exceeding 7%.
• Since launching the MiniMed 530G/Enlite in October, Medtronic’s internal estimates suggest it has “gained over five percentage points of US insulin pump share and over six percentage points of US CGM share” – this was up from the four percentage points quoted in the F3Q14 call. We believe some of this reflects patients moving from Medtronic’s Revel to Medtronic’s 530G who no longer have the Dexcom G4 covered by their insurance. Market share is of course impossible to calculate, since Dexcom and the insulin pump companies don't report units sold - as such, we're not sure how Medtronic is calculating this number, and the company has refused to share details with us. 

2. Management reminded callers of last week’s news that GE’s Hooman Hakami has been named Group President of Medtronic Diabetes. We look forward to seeing where Mr. Hakami takes the business.

Pipeline Highlights

3. Medtronic expects to launch the MiniMed 640G predictive low glucose management system in Europe this fiscal year (i.e., by April 2015), a more vague (and potentially six-month delayed) timeline from what we heard in the F3Q14 call (“in the first half of FY15”; i.e., by October 2014). The MiniMed 640G has obtained a CE Mark and is currently undergoing user evaluations at six centers in Europe.

4. Management specifically noted that it “is working collaboratively with the FDA” on an accelerated US timeline for the MiniMed 640G, and it is “optimistic it can bring this technology to market sooner than previously estimated.” On ClinicalTrials.gov, Medtronic has just posted an eight-center in-clinic US study of the MiniMed 640G with an Enlite 3 sensor (ClinicalTrials.gov Identifier: NCT02130284). The 84-patient study has a start date this month.

5. Medtronic presented new data on the MiniMed Duo (three-day wear combined insulin infusion/CGM set) on Day #3 of AACE 2014 last week.

Financial and Business Highlights

1. Worldwide Diabetes revenue totaled a record-high $460 million, growing 13% as reported and operationally year-over-year (YOY) – sales were driven by strong 15% growth in the US on an easy comparison to F4Q13 (when sales declined 2% YOY). We estimate the US provided 57% of F4Q14 growth, down from 80% last quarter (the first full quarter of launching the MiniMed 530G/Enlite) but a clear improvement from four straight prior quarters of no growth in the US. Sequentially, there was no growth in the US – the US results in F3Q14 were by far the strongest quarter seen in the US ever (up 15% from the previous record). Management noted that F4Q14 growth was driven by “strong performance” from the ongoing US launch of the MiniMed 530G/Enlite CGM – as a reminder, F4Q14 marked the product’s second full quarter on the market following the October launch. We certainly assume that growth will taper as the US launch of MiniMed 530G/Enlite continues (year-over-year growth was 21% in the US in F3Q14 and 15% in F4Q14) – what remains to be seen is what the “new normal” will be. Worldwide F4Q14 revenue was up 6% sequentially, though as noted, growth was flat in the US (from a very strong F3Q14). During F4Q14, Medtronic recognized $4 million of deferred revenue as the company shifted the last batch of MiniMed 530G systems to US customers that had enrolled in its new technology guarantee program. Without this deferred revenue, US growth would have been 14%.

• Outside the US, Medtronic achieved growth of 10% as reported and operationally on record-high sales of $190 million – this marks seven straight quarters of international growth exceeding 7%. The last time we saw negative growth in Medtronic’s international business was back in 2009; by contrast, F4Q14 is only the second time in the last six quarters that growth in the US was positive. We expect the strong international performance to continue with the continued rollout of the Enlite Enhanced and the upcoming launch of the MiniMed 640G.

Table 1: Medtronic Diabetes Worldwide Sales

Table 2: Medtronic Diabetes Sales by Geography

• Outside of the standard Diabetes Group discussion of results, management also mentioned higher cost of good sold (COGS) related to quality system improvements in Diabetes and Neuromodulation. The Diabetes business is “getting close” to resolving the issues. As a reminder, Medtronic’s insulin pump quality system problems (first discussed on the F4Q13 call) delayed FDA approval of the MiniMed 530G.  
• Since launching the MiniMed 530G/Enlite in October, Medtronic’s internal estimates suggest it has “gained over five percentage points of US insulin pump share and over six percentage points of US CGM share” – this was up from the four percentage points quoted in the F3Q14 call, the product’s first full quarter on the US market. Similar to the last financial results call, we thought this was a notable uptick and we wish management had provided more detail as to how these estimates were obtained/sourced and from what base. These are “internal estimates,” as we had of course suspected, since Dexcom doesn’t publish units so the calculation is impossible to make. As a side note, market share isn’t always driven by patient choice; we believe fewer payers would cover both the MiniMed 530G/Dexcom G4 Platinum vs. a MiniMed Paradigm Revel and Dexcom G4 Platinum, meaning some MiniMed 530G upgrades may be taking share from Dexcom. Still, this could not possibly explain all of the 6% gain in CGM market share. Assuming 25% of Dexcom users are on Medtronic pumps, and one-fourth of them upgrade to the MiniMed 530G, that represents a 6% change in share in favor of Medtronic. However, Dexcom sales grew at 68% in 1Q14, and we assume new patient adds were up at least 30%. Even if Medtronic saw a 30% gain in new patients (unlikely), along with the 6% gain from Dexcom, that would only translate into a 2% shift in market share - not enough to explain the full 6% shift in share. We contacted Medtronic to understand how this number was calculated; perhaps unsurprisingly, the company opted to give no color on how these estimates were obtained. We only learned that they used external and internal sources, which was less then helpful overall.
  • As of the end of calendar 1Q14, our financial model estimated that Medtronic had a 36% US CGM market share by sales and a 71% US pump market share by sales. [As we’ve noted in our quarterly roundups before, this model has several embedded assumptions, most notably that Medtronic’s pump/CGM split is 91%/9% (source: 2012 analyst day bar chart) and the company has the same geographical split in pumps and CGM as overall sales. Medtronic’s actual splits could be slightly different.] On the CGM side, it will be interesting to see how this changes in the coming quarters now that Dexcom has pediatric approval in patients as young as two years old (the MiniMed 530G/Enlite is only approved for patients >16 years). In any case, we continue to emphasize our hope that both Medtronic and Dexcom on the CGM front (in particular) continue to focus on the 90% of patients (in the US alone, more overseas) that do not have CGM and on raising awareness and building the market. Good news for Medtronic CGM is good news for Dexcom as well since there is so much market growth potential and having multiple good products increases the interest in the market overall. This is particularly true as there is still baggage associated with earlier, less patient- and HCP-friendly versions of CGM that have now been and continue to be vastly improved.
• We continue to wonder what types of patients have ordered the MiniMed 530G/Enlite to date; there was nothing mentioned on this in prepared remarks or in Q&A. The reported gain in market share (per Medtronic’s internal estimates) combined with deferred revenue recognized from the new technology program ($27 million to date) suggests early adopters likely include some combination of current Medtronic customers, non-Medtronic pumpers, and perhaps MDIs. We suspect the focus has been on upgrading the current installed base and would assume Medtronic upgrades reflect the vast majority of current MiniMed 530G/Enlite users. Making major inroads into non-Medtronic pumpers is likely a medium/longer-term road given the four-year nature of pump reimbursement in the US. A major unknown is how much the MiniMed 530G/Enlite has resonated with MDI patients. Insulet’s 1Q14 financial results were quite strong (35%+ OmniPod growth), suggesting that its business (70% from MDIs) has not been dampened by the 530G launch. We will be watching dQ&A data for more information on this front (contact richard.wood@d-qa.com for more information on this).
• The integrated pump/CGM system with threshold suspend gives Medtronic a bundling advantage that no other pump company can match right now in the US. The closest integrated product to market is J&J’s Animas Vibe with Dexcom G4 Platinum integration – as of Dexcom’s JPM 2014 presentation, a 2014 launch was still expected (the product has been under FDA review for over a year), though neither the J&J nor Dexcom’s 1Q14 calls offered a timing update. Meanwhile, FDA filing of the Tandem t:slim with integrated G4 Platinum is expected in June 2014, and a 12-18 month review is expected.  

2. Management mentioned last week’s news that GE’s Hooman Hakami has been named Group President of Medtronic Diabetes – Mr. Ishrak characterized him an “outstanding leader” who will not only help grow Medtronic’s core insulin pump/CGM businesses, but expand into the “tremendous opportunities in type 2 diabetes” and internationally. Mr. Hakami brings impressive previous experience as the President and CEO of GE Healthcare's $2 billion Detection and Guidance Solutions business (x-ray, bone density, mammography, etc.). He also spent time as general manager of a global services business, which is telling. Going forward, we expect device companies to marry their products with services to a larger extent, so we believe this experience should be quite valuable. Notably, Mr. Ishrak said in the announcement that part of Mr. Hakami’s role will be to “develop new and impactful partnerships and business models to address the needs of people with diabetes,” and it will be interesting to see what future partnerships stem from a potentially greater focus on services. Indeed, this emphasis on value-based services was a major theme of the F4Q14 call in management’s remarks on the company’s overall strategy.

• Medtronic will host an Analyst Day on June 5 in New York, where we hope to hear from Mr. Hakami. The last analyst day in 2012 was truly a goldmine of business and pipeline updates (we still refer to it!) and we very much look forward to the update in a couple of weeks. Said CEO Omar Ishrak, “I look forward to sharing with you at our analyst meeting the opportunities we have ahead as we transform Medtronic from being primarily a device provider today into the premier global medical technologies solutions partner of tomorrow.” We wonder what sorts of solutions-oriented businesses the company could pursue in diabetes – patient coaching, real-time monitoring, provider assistance with interpreting data, payer data mining, etc.

Pipeline Highlights

3. Medtronic expects to launch the MiniMed 640G predictive low glucose management system in Europe this fiscal year (i.e., by April 2015), a more vague (and potentially six-month delayed) timeline from what we heard in the F3Q14 call – at the time in February, management called for a launch “in the first half of FY15” (i.e., by October 2014). It’s unclear to us if this is indeed a true delay or management just avoiding a specific deadline, but we look forward to tighter timing in the company’s analyst day on June 5. We’d note that the timing given at JP Morgan called for this pump to launch by July 31 (“late F1Q15”), which itself was a delay from the F2Q14 call’s estimate for a launch by April 30 (“end of this fiscal year”). Per a slide shown at JP Morgan 2014, the MiniMed 640G has obtained a CE Mark.

• Per ClinicalTrials.gov, the MiniMed 640G is currently undergoing user evaluations at six centers in Europe (ClinicalTrials.gov Identifier: NCT01726621). Each patient will be trained on the MiniMed 640G and then use it for approximately six weeks. During this time, there will be three in-clinic visits and four follow-up phone calls. At the end of the six-week period, patients will revert back to their original insulin pump and complete a questionnaire on the study pump training materials, features and usability. The 60-patient study has an estimated primary completion date of August 2014. 
• This pump is certainly a big leap for Medtronic, as the pump platform has been redesigned from the Paradigm with a simpler user interface, color screen, and waterproof – we suspect that’s required a lot of effort on the manufacturing, design, and education side in particular. And of course, the predictive low glucose suspend piece is a whole new aspect that will likely require lots of labeling, training materials, instruction manuals, etc. The MiniMed 640G will use the next-gen Enlite 2 sensor, which launched in Europe at ATTD 2014 (no accuracy data has been shared, though it is 80% smaller and has several other improvements in design). Based on ClinicalTrials.gov (see below), it appears that an Enlite 3 is under evaluation in the US in-clinic study of the MiniMed 640G. With these significant product changes in mind, the delays are still unfortunate, though somewhat more understandable. 

4. Management specifically noted that it “is working collaboratively with the FDA” on an accelerated US timeline for the MiniMed 640G, and it is “optimistic it can bring this technology to market sooner than previously estimated.” This was consistent with our report last week, where we noted comments from Medtronic’s Patricia Shrader (VP, Corporate Regulatory and External Affairs) at the recent Food and Drug Law Institute annual meeting – she signaled potential to have the device approved and on the US market as soon as 2015. The news is very exciting from a patient perspective, especially given the delays in getting the MiniMed 530G on the US market. Our detailed report from last week reviews clinical data on the MiniMed 640G; discusses the impact of the device on the pump/CGM competitive landscape; includes some key questions for the field; reviews our themes from ATTD 2014; and curates our recent artificial pancreas reports.

• Encouragingly, on ClinicalTrials.gov, Medtronic has just posted an in-clinic US study of the MiniMed 640G with an Enlite 3 sensor (ClinicalTrials.gov Identifier: NCT02130284). The 84-patient max study (60 patients is the target) has a start date of this month (status is “not yet recruiting”) and an estimated study completion date of November 2014. The single-arm study (a big improvement from the onerous ASPIRE in-clinic study, which was a challenging crossover design) will increase patients’ basal rate to induce hypoglycemia (another improvement over ASPIRE, which used exercise to induce hypoglycemia). The MiniMed 640G’s low limit will be set at 65 mg/dl, and a subsequent observation period will evaluate its performance. The primary outcomes are serious adverse events, unanticipated device effect, severe hypoglycemia, DKA, and rescue events during in-clinic procedures. Enrollment at up to eight centers (Stanford, AMCR Institute, Barbara Davis Center, Yale, Atlanta Diabetes Associates, University of Virginia, Rainier Clinical Research) will start with adults (22-75 years) and progress to pediatrics (14-21 years).

5. Medtronic presented new data on the MiniMed Duo (three-day wear combined insulin infusion/CGM set) on Day #3 of AACE 2014 last week. Medtronic Diabetes’ Medical Director Dr. Scott Lee shared results from a 48-patient home study of the MiniMed Duo, a three-day wear combined insulin infusion-CGM sensor set (a “snake bite” configuration under a single patch, separated by 11 mm) – see a picture on twitter here. Patients wore five MiniMed Duo devices during the 15-day study and sensor accuracy was compared to SMBG values. The sensor’s overall MARD was 15.5% and 77% of points fell in Zone A of the Consensus Error Grid (n=5,056 paired points) – the accuracy was not particularly groundbreaking, especially considering there were an average of 4.7 calibrations per day. Of course, the combination form factor is a win for patients (especially pediatrics), and sensor accuracy is unquestionably a challenge given the three-day length of wear. Indeed, day one MARD of 18.7% was really the stumbling point, as days two and three saw much improved accuracy (13.1% and 14.1%) – we wonder if the warm-up time could be extended to allow for improved day one accuracy. There were 44 total adverse events, with 98% classified as mild in severity and skin-related (e.g., “bruising and bleeding”); one patient had an abscess that was treated with antibiotics. Overall, this is the longest-term data we’ve seen on this device, and it certainly demonstrates its real-world feasibility. We look forward to hearing about future improvements and whether Medtronic plans to commercialize this device.

Pipeline Summary

The call did not mention any other products, including the i-port Advance injection port for MDI users (launched earlier this year). See below for a summary of the pipeline products we are aware of.

*This table is informed by our coverage of Medtronic in exhibit halls, earnings calls, conversations with management, and the 2012 Analyst Day.

Close Concerns Questions

Q: Is the MiniMed 630G still in the pipeline, or will the next-gen platform only be MiniMed 620G (SAP) and MiniMed 640G (PLGM)?

Q: Can you give any further details or planned studies of the MiniMed 740G?

Q: In how many countries has Enlite 2 launched? How much more accurate is the Enlite 2 vs. the original Enlite?

Q: When will results be shared from the OpT2Mise trial testing pumps in type 2 diabetes? The study has a primary completion date of January 2014.

Q: Will Medtronic pursue an overnight closed-loop product following the MiniMed 640G? Would the device include daytime treat-to-range?

Q: Is Medtronic still working on its patch pump?

Q: How many sales reps does Medtronic Diabetes have? How does it compare to Insulet (135), Dexcom (90), and Tandem (60)?

Q: How will Medtronic move ahead to build service businesses in diabetes?

Questions and Answers

Q: How are you thinking about M&A these days?

A: The philosophy around that has not changed. We've got certain big core market segments in Cardiovascular and Restorative Therapies (which includes neuro musculoskeletal), as well as diabetes. Those are the three core areas. We intend to fill those area out opportunistically over time either organically or inorganically. And at the same time, we intend to invest in building out our services and solutions area, as well as value products in emerging markets. So those are the priorities for M&A. We'll do M&A transactions. I think our overall goal, is trying to provide a non-dilutive impact of these often inorganic growth is still there, and we hold ourselves accountable to execute and deliver on what we said, both in EPS and the top line and we will do M&A accordingly.

Q: We've had a couple of questions on this call about M&A, but we're also continuing to see companies split and spin out different divisions. What is your current thinking on that?

A: We're focused around the three strategic clinical areas: Cardiovascular, Restorative Therapies, and Diabetes. In each of those areas, we need to fill out. to the degree that things don't fit in those core areas or don't have any technology linkages with them, and we don't think we can win in those markets, they are opportunity for spinouts. Although we haven't done any recently, I can assure you that we constantly look at that and those will happen over time – but they will fit into a strategic framework. The strategic markets that they're going after as well as the globalization of those markets, and addressing those markets across a continuum of care is the way we look at this. So from an M&A perspective, I would expect us to add more to that rather than get rid of, but to the degree that things don't fit, sure we'll take those actions and we do look at that regularly.

--by Adam Brown and Kelly Close