Memorandum

Medtronic 4Q19 – Sales of $610 Million Stay Flat: 16% YOY OUS Growth Offsets 10% Decline in US; 780G Launch Expected “Beyond” April 2020 – February 18, 2020

Executive Highlights

  • Medtronic reported worldwide Diabetes revenue of $610 million in 4Q19, flat YOY as reported (+1% operationally) on an easy comparison to 5% YOY growth in 4Q18. A strong performance internationally (+16% YOY operationally) was offset by a 10% YOY decline in the US. Medtronic Diabetes continues to do well in international markets (+14% YOY as reported, +16% operationally) as 670G continues to see adoption. However, demand for 670G domestically has leveled off, partially due to strong competition from Tandem’s Control-IQ, Insulet’s Omnipod Dash, Dexcom’s G6, and Abbott’s FreeStyle Libre. The standalone Guardian Connect CGM (not sold as part of 670G) continues to be a bright spot, seeing approximately 50% growth YOY.

  • The MiniMed 780G advanced hybrid closed loop is now expected for launch “beyond” FY20 (April 2020). This represents the first confirmatory change from the 0riginally timeline of launching it by April 2020. “Adult data” will be submitted to the FDA in March, while pivotal data will be read out at ADA 2020. MiniMed 780G had already been filed for CE-Marking as of JPM 2020, suggesting the product will launch in Europe first.

  • There were also no mentions of the class I recall of the MiniMed 600 series insulin pumps (i.e. 630G and 670G). While we’ve seen quite a bit of commotion around the FDA’s notification (understandably so), Medtronic has downplayed the risk of harm from potential pump malfunctions. As of January 13, Medtronic had received 26,421 device malfunction complaints and was aware of 2,175 “injuries” and one death. However, Medtronic told us that “most” of the injuries did not require any medical intervention and that a causal relationship between the one death and the pump malfunction could not be made (though it also could not be excluded). Medtronic is currently working on gathering and validating the number of “serious harm” incidents (e.g., hospitalizations due to severe hypo or DKA) and will release a statement to clarify the risk of the issue.

Medtronic reported its 4Q19 (F3Q20) financial results this morning on a call led by CEO Omar Ishrak, CFO Karen Parkhill, and Medtronic President and incoming CEO Geoff Martha. Diabetes is slide #10 and you’ll find our highlights below.

Financial and Business Highlights

1. Worldwide Diabetes Revenue of $610 Million Flat YOY Operationally; 16% YOY OUS Growth Offset by US Decline of 10% YOY

Medtronic reported worldwide Diabetes revenue of $610 million in 4Q19, flat YOY as reported (+1% operationally) on an easy comparison to 5% YOY growth in 4Q18. Growth during 4Q18 and 3Q18 last year came from high demand of the MiniMed 670G. Medtronic Diabetes continues to do well in international markets (+14% YOY as reported, +16% operationally) as 670G continues to see adoption. However, demand for 670G domestically has leveled off, partially due to strong competition from Tandem’s Control-IQ, Insulet’s Omnipod Dash, Dexcom’s G6, and Abbott’s FreeStyle Libre. Sequentially, revenue rose $14 million (+2%) from 3Q19. The standalone Guardian Connect CGM (not sold as part of 670G) continues to be a bright spot, seeing approximately 50% growth YOY. Medtronic’s Diabetes revenue has stayed fairly steady around $600 million for the past nine quarters now (see graph above).

  • US revenue of $312 million declined 10% YOY on an easy comparison to a 2% YOY decline in 4Q18. Sequentially, revenue stayed roughly flat with $311 million in 3Q19. US Diabetes revenue has now declined YOY for the last five quarters, driven by stiff “competitive challenges” as the company awaits its new CGM and automated insulin delivery offerings. However, management also expressed strong growth in the company’s “pathway program” announced in 3Q19 – the program allows people to purchase MiniMed 670G now and get on 780G at no additional cost when it launches. Medtronic’s competitors have seen very high momentum so far in 4Q19: Dexcom saw record 4Q19 US sales of $376 million (+34% YOY) and Abbott also saw record 4Q19 US sales of $193 million (+43% YOY). Tandem and Insulet will both report their earnings next week.

  • International Diabetes revenue rose an impressive 16% YOY operationally (+14% as reported) to $299 million on a tough comparison to 14% growth in 4Q18. Growth was strong in both Medtronic’s developed markets, which grew 13% operationally YOY to $236 million and emerging markets, which grew 31% operationally YOY to $63 million. Sequentially, revenue grew by $14 million from $285 million in 3Q19. As has been the case for the last few quarter, growth was driven by strong international adoption of MiniMed 670G – “double digit” growth was observed in Germany and Italy. Reimbursement for 670G in Germany was announced in September and is expected in France in F4Q20 (April 2020). OUS revenue continues to close in on US revenue, making up 49% of total revenue compared to 48% in 3Q19.

2. MiniMed 670G User Base Up 6% from 3Q19 to “~237,000”

Medtronic’s slide deck (#10) for 4Q19 shows that MiniMed 670G’s trained, active user base is up to “~237,000,” up ~6% sequentially from “approximately 224,000” users in 3Q19. The ~13,000 sequential patient additions in 4Q19 represent the lowest absolute sequential increase recorded, albeit on a growing base. With the launch of MiniMed 780G expected later this year than planned (and no way to upgrade 670G pumps to the 780G algorithm), we expect demand to slow significantly. That said, Medtronic is still a favorite for many HCPs, and there are certainly reports of too much demand for Tandem to handle (they also don’t compensate educators for training as other pump companies do). Many HCPs like the Carelink system “and all the data in one place” – this may change as time goes on. Although we understand that desire for “all the data in one place,” we do point out that each company makes it more than possible for each patient to have the data. How to share it is where the conversations get a little messier; while we see why each doctor would want each company to finance making the data free and simple to use for every HCP, we also think it’s important to recognize that doing so happens at a cost. Still, Medtronic is losing out in our view by not having data open at least to Apple Health – for any patient on Medtronic, they are unable to use, for example, popular apps like “UnderMyFork” etc. like patients using Dexcom and Senseonics can. 

3. Medtronic 1Q20 (F4Q20) Diabetes Guidance: Revenue “Flat” or “Down [By] Low Single-Digits”; Details on New Guidance Metrics System Coming at Investor Day in June

Medtronic is now guiding for “flat to down low single-digit” operational results for Diabetes in 1Q20 (F4Q20). Conservatively assuming Diabetes revenue in 1Q20 (F4Q20) stays flat YOY, FY20 annual revenue would come in at ~$2.4 billion (+1% YOY as reported), on the low side of 3Q19 expectations for “low single-digit” growth in FY20 and well below start-of-the-year guidance for 6%-8% YOY growth in FY20. Notably, Mr. Martha mentioned on the call that Medtronic is susceptible to fluctuations late in the quarter due to large orders coming at the end of the month. This phenomenon “stresses” company operations and “makes it difficult to mitigate headwinds that pop up within the quarter.” The company plans on changing its internal operations metrics by adding an extra week in 1Q20 to help mitigate this effect. It’s unclear how much this will affect Diabetes revenue.

4. No Mention of Class I Recall on MiniMed 600 Series Insulin Pumps

Of note, there were no mentions on today’s call about the FDA’s identification of a class I recall for MiniMed 600 series insulin pumps last week. While we’ve seen quite a bit of commotion around the FDA’s notification (understandably so), Medtronic has downplayed the risk of harm from potential pump malfunctions. As of January 13, Medtronic had received 26,421 device malfunction complaints and was aware of 2,175 “injuries” and one death – this is since 2016, which most reports don’t include. We’ve asked what the number of reports is since November (far more relevant) and for many days, we haven’t received a clear answer on this. However, Medtronic told us that “most” of the injuries did not require any medical intervention and that a causal relationship between the one death and the pump malfunction could not be made (though it also could not be excluded). The issue causing the recall is the same one that caused Medtronic to issue an “Urgent Field Safety Notification” in November due to incidences of the pump reservoir becoming loose when the retainer ring was broken or missing. At the time, Medtronic gave us a predicted rate of the issue “occurring and causing harm” as “less than 0.01%” – the company has since clarified that this refers to the risk of “serious harm” occurring from a pump malfunction. Medtronic is currently working on gathering and validating the number of “serious harm” incidents (e.g., hospitalizations due to severe hypo or DKA) and will release a statement to clarify the risk of the issue. Fortunately, class I recalls are rare for diabetes devices – the most recent that comes to mind relates to an issue with Dexcom G4 and G5 receiver speakers in 2016.

Editor’s note, February 20, 2020: Regarding the FDA safety warning associated with the 630G and 670G, Medtronic got back to us after reviewing the 26,421 complaints in the US potentially related to the retainer ring on the pump. Of these, less than 10%, or 2,175, were also potentially associated with high or low blood glucose events, of which 94% (2,045) were self-remedied by the patient and required no medical intervention. This suggests that 130 required medical intervention of either an ambulance visit or a visit to the hospital or checking into the hospital, likely for severe hypoglycemia or DKA, though it could be other things. Since that is since 2016, we felt that record was very positive - far less than 1% of the complaints required any medical intervention. There was one death in the US reported by Medtronic, the cause of which they could not determine and therefore could not be excluded for consideration - we also don’t have a comment on it except to say that since so few problems arose that were “real” complaints, the chance that the death was associated with a problem with the pump seems unlikely (we stress it’s not for us to say, however, and this is speculation). 

Pipeline Highlights

Pipeline slide from June 2019 ADA Analyst Briefing:

1. MiniMed 780G CE Mark Filed, “Adult Data” Slated for FDA Submission in March, Pivotal to Read Out at ADA 2020, Approval Expected “Beyond” April 2020

For the first time, management confirmed that MiniMed 780G is now expected to launch after FY20 (April 2020), though the device has already been filed for CE-Marking in Europe. Adult clinical data is expected for FDA submission in March and pivotal data will readout at ADA 2020. Last quarter, we also learned that the “hardware” of the device had already been submitted to the FDA. In the past, management had regularly affirmed that 780G was “on track” with longstanding plans to launch by April 2020 (3Q19, 2Q19, ADA Analyst Briefing, 1Q19, JPM, 4Q18, 3Q18); however, based on pivotal trial timing and the announcement at JPM 2020 that the pivotal trial had finished recruiting and results would read out at ADA 2020, this launch timing seemed increasingly unrealistic. It is still unclear from today’s comments whether 780G will launch first in the US or Europe, though given that 780G has already been filed for CE-Marking (before the new European Medical Device Regulation rules take effect in May), it seems likely that a CE Mark will come before FDA approval. However, during Q&A, new President of the Diabetes Group Sean Salmon expressed that meetings with the FDA have been positive, characterizing them as “very interactive” and stating that Medtronic had another a scheduled meeting sometime later this week. The 780G pivotal study is “single-arm”, with “150 patients … ages 14+.” Approval for “adults” is expected to come first (unclear if that’s 14+ or 18+ years), with pediatric approval following (7+ years). On ClinicalTrials.gov, the study has a primary completion date of January 31, 2020 and is enrolling for 7-75 years of age. Given Guardian Sensor 3 is already FDA approved and the pump hardware is already under FDA review, the 780G is the final component needed to be submitted for regulatory approval.

  • During prepared remarks, CEO Omar Ishrak noted that Medtronic is seeing “strong enrollment” in its “pathway program” which allows “customers who are out of warranty or new to pump therapy” to purchase a 670G now and upgrade to the 780G at no cost when it becomes available. For users of the programs, Medtronic is “deferring a portion” of each 670G sale until after patients exchange the 670G for the 780G. Medtronic's Device Upgrade page still advertises a $399 fee for upgrading an in-warranty pump to the “latest technology”; hopefully, that will remain in place for in-warranty users looking to move to 708G. Enabling remote software updates in 780G will  help limit this problem in the future, as users will be able to get Medtronic’s latest software without having to switch their pump hardware.

  • MiniMed 780G will enter an increasingly competitive marketplace especially given the recent launch of Control-IQ. Beyond having to differentiate itself against Control-IQ, Insulet’s Omnipod Horizon is also expected to launch by the end of this year. At JPM 2020, we learned that Horizon has started its pivotal trial with primary completion by May 2020. In the opinions of multiple KOLs, the Guardian Sensor 3 remains the weakest component of Medtronic’s hybrid closed loop systems, with 7-day wear and 2 required calibrations/day. Both Control-IQ and Horizon use Dexcom’s G6 CGM, with 10-day wear and no-calibrations. Medtronic has recognized this shortcoming at both JPM 2020 and on today’s call (see below), but in the past Mr. Ishrak has pointed at the MiniMed 780G’s simplified meal management and resiliency to unannounced meals as an area where 780G could compete with no-calibration CGM closed loop systems in terms of patient burden.

2. CGM a Priority for Medtronic, “Confident” in iCGM for Zeus; No Updates on Non-Adjunctive Guardian Sensor 3 or Next-Gen Synergy

During Q&A, Diabetes President Mr. Sean Salmon mentioned that Medtronic was “de-risking” its sensor pipeline. Though standalone Guardian Sensor 3 has seen relatively strong growth (on a low base) for the past few quarters, it’s clear that Medtronic’s CGM offering lags significantly behind its competitors in Dexcom, Abbott, and Senseonics. Dexcom and Abbott, in particular, are seeing hypergrowth of their devices and quickly eating up market share – the two companies have a combined user base of ~2.5 million people. Mr. Salmon stated he was  “confident” in the company’s ability to meet iCGM standards, likely for the Zeus CGM; more information will be shared at the company’s Analyst Day in June. With Medtronic’s CGM offerings mentioned on both of the company’s last updates (JPM 2020 and today’s call), it’s clear that CGM is increasingly a priority for Medtronic. Whether this results in any accelerated timelines remains to be seen. While Medtronic’s Synergy CGM (launch by ADA 2021) will be a significant upgrade from Guardian Sensor 3 and Zeus, it will remain behind current offerings from Abbott and Dexcom in certain respects.

  • We haven’t heard any updates on the non-adjunctive labeling for Guardian Sensor 3, which Medtronic had submitted to the FDA in July. Non-adjunctive labeling would not only remove the need for a confirmatory fingerstick before delivering a bolus with the 670G but also allow it to apply for Medicare reimbursement. To our knowledge, it would also be necessary for the 780G which will deliver automatic correction boluses.

  • The pivotal trial for the Zeus iCGM is still ongoing. This device will require day 1 calibration only and iCGM labeling, though keeping the same seven-day wear time and reusable form factor as the Guardian Sensor 3.  The pivotal trial was first announced during ADA, with FDA submission forecasted for April-October 2020. The primary completion date is this month, according to ClinicalTrials.gov.

  • Medtronic’s Synergy iCGM was last expected to launch by ADA 2021. The device will feature a fully disposable form factor, seven-day wear, day 1 calibration, and iCGM designation.

3. Not Mentioned: Extended Wear Infusion Set, Personalized Closed Loop, Tidepool Loop, Sugar.IQ App Improvements, Novo Nordisk Smart Pen Integrations

Outside of CGMs and MiniMed 780G, there were no updates on the rest of Medtronic’s Diabetes pipeline.

  • The last update we got on Medtronic’s pivotal study for its extended wear infusion set came one year ago at ATTD 2019. At the time, the product was expected to launch within “one year” outside the US. The device secured FDA investigational device approval in August, with the goal to support wear for “up to seven days.” Read our deep dive in the 2Q19 report.

  • Medtronic’s December acquisition of gesture-based food-tracking startup Klue went unmentioned. The technology will be incorporated in the next-generation Personalized Closed Loop (PCL) system. PCL, which received FDA Breakthrough Device Designation last year, was last slated for FDA submission around November 2020-April 2021 timeframe and for a launch by ADA 2021. The Klue app (not commercially available) uses “gesture-sensing” and AI software based on Apple Watch data to detect when and how fast someone is eating or drinking. Notably, the acquisition come approximately one year after Medtronic acquired Tel-Aviv-based startup Nutrino, a company that allows users to log food and pair them with CGM traces. Both of these acquisitions should help Medtronic strengthen its efforts to advance the Personalized Closed Loop which is supposed to include meal prediction (“no more carb counting”).

  • Since the announcement, we have not heard any updates on Medtronic’s partnership with Tidepool Loop. Though there is certainly at least a remote possibility the 780G hardware (already submitted to FDA) was filed as an interoperable ACE pump, this hasn’t been confirmed. The initial interoperability announcement caught some off guard, and while we certainly applaud Medtronic for recognizing the value of and supporting a growing interoperable ecosystem, we wonder the degree to which the announcement was just marketing (the company knows this is a popular topic) and to what degree it’s actual dictating product strategy.

  • Medtronic had previously mentioned that it planned on launching “smart-guide” system for Sugar.IQ by April 2020. The system would add basic” CGM-based insulin dosing guidance, a predictive trace, and some advising. By April 2021, Medtronic plans on adding a “virtual optimizer” to bring more personalized dosing with the Synergy disposable sensor. Given the lack of updates on this product, we are not certain if these timelines are still current.

  • Medtronic’s CGM and Novo Nordisk’s smart pen data integration partnership, announced at EASD 2019, went unmentioned. As of DTM 2019, Novo Nordisk’s smart pens are expected to launch in 2Q20, presumably beginning OUS.

 

--by Ani Gururaj, Albert Cai, and Kelly Close