Medtronic 3Q20 (F2Q21) – Diabetes sales of $574 million, declining 4% YOY, up 2% sequentially; MiniMed 780G off to “strong start” in 12 EU countries, will be submitted to FDA “in this quarter”; “Zeus” CGM submitted to FDA and Synergy pivotal complete – November 24, 2020

Medtronic reported its 3Q20 (F2Q21) financial results this morning on a call led by CEO Geoff Martha and CFO Karen Parkhill. Diabetes Group head Sean Salmon was also on the call during Q&A and continuing the trend from the transition from Medtronic’s last CEO, Omar Ishrak, Mr. Martha speaks far more about and references diabetes considerably more, compared to Mr. Ishrak. Diabetes is on slide #11 here and read on below!

Financial and Business Highlights

1. Worldwide revenue of $574 million, declining 4% YOY (-5% operationally); international revenue rises 1% YOY (as reported) to $289 million; US revenue declines 9% YOY to $284 million

Medtronic reported 3Q20 (F2Q21) total Diabetes revenue of $574 million, declining 4% YOY (-5% operationally), primarily due to declines in pump sales (as opposed to CGM). At $574 million, 3Q20 revenue represents a slight improvement compared to $570 million in 1Q20 and $562 million in 2Q20. However, 1Q20 and 2Q20 excluded, this quarter saw Medtronic Diabetes’ lowest revenue since 3Q17.

In 2Q20, we wrote that Medtronic Diabetes “fared relatively well” compared to Medtronic’s other Groups: Diabetes revenue fell 5% YOY, compared to a 17% YOY decline for the whole company. That trend largely flipped in 3Q20, as Medtronic’s total company revenue grew 1% YOY, compared to the 4% YOY decline in Diabetes – just one other group, Cardiac and Vascular, fared worse, down 5%, while Restorative Therapies fell 2%, and Minimally Invasive Therapies Group revenue grew 7% YOY, buoying the company. On Medtronic’s 2Q20 update, management shared guidance for a ~9% YOY revenue decline for the total company in 3Q20. This suggests a significant outperformance in 3Q20 (+1% YOY), perhaps an indication that the lingering effects of COVID-19 were not as severe as expected or that growth due to other factors made up for some of COVID’s impacts. To that end, Diabetes may have also outperformed in 3Q20 as the revenue decline was also supposed to be “in line” with ~9% YOY – that would have been surprising given the launch of the 780G in the EU.

• US Diabetes revenue made up about half of total Diabetes revenue, declining 9% YOY and 1% sequentially to $284 million. Once again, US revenue declines were attributed to “delayed new patients starts and competitive challenges.” Even pre-pandemic, Medtronic was 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. In fact, US Diabetes revenue has been trending downwards since its peak of $355 million in 4Q17. Moving forward, we will be watching to see any impact that the MiniMed 770G launch in the US have on pump sales and new patients starts. While 770G opens up AID to a new market (ages 2-6) and adds the useful Bluetooth connectivity feature, the pump market in the US continues to become increasingly competitive. Tandem “recently” filed a 510(k) for smartphone pump control to the FDA, Insulet is aiming to launch its Omnipod 5 (+smartphone control) in 1H21, Tidepool plans to submit its 510(k) for Tidepool Loop with iPhone control shortly, and Ypsomed is now partnering with Lilly to commercialize its YpsoPump and future YpsoLoop in the US though we imagine this won’t come to market for some time.

• International Diabetes revenue came in at $289 million, up 1% YOY (-1% YOY organically) and over 5% sequentially. Medtronic management attributed this slight improvement to the strong EU launch of MiniMed 780G in October, which was partially balanced out by COVID-related pressures. Overall, OUS sales made up just over half of total Diabetes sales, with 82% from OUS developed markets and 18% from OUS emerging markets. This follows the trends seen in the last few quarters with Medtronic’s US and OUS revenues about even. In 1Q20, Medtronic’s international revenue overtook US sales, but then, in 2Q20, US sales were back on top, and in 3Q20, OUS sales have again slightly outpaced US sales, though we suspect this wouldn’t be the case without the 780G international launch.

• Following trends that have stayed consistent through the pandemic, Medtronic saw worldwide CGM growth in 3Q20, driven both by standalone CGM sales and integrated CGM sales (i.e., as part of Medtronic’s AID systems?). Based on our estimates, Medtronic’s global CGM sales totaled $253 million (+7% YOY), making up 44% of total Diabetes revenue. Guardian Connect saw “momentum with strong growth despite COVID-19,” and integrated CGM saw increased penetration and new patients starts that were “partially offset” by the impacts of COVID-19. Our model estimates that 61% of sales came from the US ($154 million, +9% YOY) with the remainder from international markets ($99 million, +4% YOY). Although normally we’d assume that professional CGM would have been driving standalone CGM, as we understand it, Medtronic Diabetes is no longer pursuing professional CGM.

• Medtronic continues to see declines in pump sales and new patient starts. Based on our estimates, 3Q20 pump sales totaled $321 million, down 11% YOY and almost 5% sequentially. We estimate that US pump sales make up 40% of those sales at $130 million, almost a 24% YOY decline and a ~13% sequential decline, and that OUS pump sales make up the remaining $191 million (60% of sales), about flat YOY and up just under 2% sequentially. Per the quarter’s presentation, pump sales fell due to delayed new patient starts and “competitive pressures” in the US (read: Tandem’s Control-IQ and t:slim X2 and Insulet’s Omnipod patch pump). However, it’s worth noting that during Q&A, Head of Diabetes Sean Salmon shared that Medtronic has seen that new starts have grown as a proportion of US pump sales compared to “just replacements” for patients already on a Medtronic pump – i.e., despite no YOY growth, this is still quite a positive sign for Medtronic’s appeal to new customers, particularly because the perception of the 780G algorithm overseas appears to be so positive.

• During his prepared remarks, CEO Geoff Martha offered some general commentary on the Diabetes Group: “In diabetes, we’ve discussed with you our plans to return this business to market growth, and we’re seeing positive early signs as we lay the groundwork to create a business that can compete and win. We performed better than expected in Q2, but there is much more to do, and we’re laser-focused on doing what it takes to return to market growth.” This was very positive to hear the focus on diabetes, particularly at a time when Medtronic has made a major move to serve far more patients, all those taking fast-acting or rapid-acting insulin, up from those just pumping. We are not sure if Mr. Martha’s reference to “market growth” refers to the pump market growth in 2020, which should be more robust, driven by AID, then previous years have been, especially around the 2016-2017 era, when the field fell close to 5% each year on average, drive by US weakness. In 2019, the pump market was largely flat, globally, and was positive in 2018, benefiting from an easy comparison in 2017. To be sure, automated delivery has ushered in a new era of growth since Medtronic’s 670G was approved in 2016 and launched in 2017. AID from one player and anticipation from another player, Tandem, has buoyed the field for some time and we look for greater growth in 2021. Chart 1 shows that international growth has been steady since 2012 and that US growth has been flatter.

Chart 1: Insulin Pump & Delivery Sales by Geography (1Q12-2Q20)

2. Medtronic still not offering guidance but provides general commentary for “recovery ahead”; F3Q21 (4Q20) Diabetes revenue should “deliver improvements” sequentially with a YOY decline in “the low single digits”

Due to the continuing and now globally spiking COVID-19 pandemic, Medtronic once again chose not to share guidance and instead provided general commentary on “the recovery ahead.” For the company as a whole, CFO Karen Parkhill argued that if the recovery trend seen in the first few weeks of 4Q20 continue to for the remainder of the quarter, Medtronic could see 4Q20 (F3Q21) revenue that is “flat to slightly up YOY on an organic basis.” During 1Q21 (F4Q21), Medtronic expects to “return to normal organic revenue growth on a two-year stacked basis.” In Diabetes specifically, Medtronic expects improvements from 3Q20 with a YOY decline in “the low single digits.” We imagine that growth would come as much from new products as from some offices opening up after COVID-19 – from our view, having a choice of the 780G will be “night and day” versus a choice of the 670G. Since the 770G will be easy to upgrade, we would imagine that this will help Medtronic’s performance in the AID market as well. 

• Management also discussed several Diabetes segments to watch moving forward, including Companion Medical and the Medicare population. While most of this year’s tuck-in acquisitions are unlikely to impact revenue any time soon, during Q&A, Ms. Parkhill noted that Medtronic may start seeing meaningful revenue from Companion Medical as soon as next quarter. During his prepared remarks, Mr. Martha also shared Medtronic’s excitement about CMS’s recent proposal to cover adjunctive CGMs for the Medicare population. If adopted, the proposal would allow older patients on Guardian Sensor 3 (as part of a Medtronic integrated pump system) to stay on the system as they transition to Medicare and open up the Medicare market to Medtronic’s AID systems “as early as April.”

Pipeline Highlights

1. “Strong start” for MiniMed 780G in “twelve countries” in Europe, “intending to submit” to FDA “this quarter”; “really strong demand” for MiniMed 770G launched in US last week

Medtronic’s second-gen hybrid closed loop MiniMed 780G has launched in Europe – the 3Q20 slides (slide 11) characterize the launch as “strong,” CEO Geoff Martha said the launch was “off to a great start,” and Diabetes Group President Sean Salmon stated 780G was “off to a really, really good start.” There has been a lot of excitement about this product for some time, although the sensor is still not as strong as other sensors – but, it is said to be a very strong algorithm and has the advantage of being easy to buy, and an “all in one” system. Additionally, Mr. Salmon shared that 780G has launched in ~12 countries so far, and will “continue to roll out as time goes on.” We first learned that MiniMed 780G had launched in Europe at Medtronic’s Analyst Day last month, though this was the first we heard any sort of characterization of early adoption. As a reminder, 780G was CE-Marked in June. We imagine sales will also improve as the app improves.

• From a competition standpoint, Tandem shared on its 3Q20 update that it anticipates having Control-IQ available in “more than half” of its OUS markets by “year’s end.” Currently, t:slim X2 pump software is available in 12 languages and Control-IQ has launched in at least the UK and South Africa already. Insulet continues to roll out its Omnipod Dash outside the US, with availability in ~13 countries already. On Insulet’s 3Q20 update, the company shared that 100% of new customers in Europe are starting on Omnipod Dash, which will be a good bridge to the Omnipod 5, although itself, it is not yet AID so not truly competitive with Tandem’s Control IQ or Medtronic 780G, only available in the EU.

• With the disclaimer that “it’s hard to predict the review cycle time,” Mr. Salmon shared that Medtronic is aiming to submit 780G to the FDA “in this quarter” (i.e., before January 31, 2021). Assuming 780G could be submitted on the earlier side of those expectations, the system could be on track to launch before the end of Medtronic’s fiscal year (April 2021) though lots of things would have to go right to see this given how busy the FDA is. There is a lot going on at the FDA, particularly in the Division of Chemistry and Toxicology Devices (DCTD), which regulates diabetes devices, as well as COVID-19 testing. At DiabetesMine’s Innovation Days earlier this month, DCTD Director Dr. Kellie Kelm shared that regulatory delays in diabetes devices should be expected for at least the next 90 days. To this end, Mr. Salmon shared today that, at the request of the FDA, Medtronic is “pulling together a lot of parts” to consolidate its 780G submission into a single regulatory filing. This filing will include data from both adults and pediatrics, as well as the integration of Medtronic’s “Zeus” CGM, in an effort to speed up review time for both the FDA and Medtronic.

• Just last week, Medtronic launched MiniMed 770G in the US. During Q&A, Mr. Salmon called the demand for 770G “really strong,” driven by the upgrade pathway Medtronic has in place to provide 770G users a free upgrade to MiniMed 780G when that system becomes available. MiniMed 770G has the same pump hardware as the 780G system, but uses the older algorithm from MiniMed 670G. With launch of 770G, Medtronic also released the MiniMed Mobile smartphone app (App Store; Google Play) for secondary display, remote monitoring, and data uploading.

Slide taken from Medtronic’s ADA 2020 Analyst Day

2. “Zeus” CGM submitted to the FDA in October; fully-disposable Synergy pivotal trial completed

While a lot of Medtronic’s pipline discussion focused on the company’s pump and AID systems, today’s call featured two updates from Medtronic on the CGM front.

• The “Zeus” CGM was submitted to the FDA in October. This is in line with expectations to submit “before the end of the year,” but behind the initial goal to submit the device by “end of summer.” At Medtronic’s Analyst Day, Diabetes VP of R&D Mr. Ali Dianaty shared that the results from the pivotal trial for Zeus “should support a non-adjunctive claim in the US.” Mr. Salmon also shared that pivotal results indicate the Zeus CGM “exceeded” iCGM standards for accuracy in hypoglycemia – we believe the plan for Zeus continues to be to submit as a class II iCGM. The non-adjunctive claim 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.

Slide taken from Medtronic’s Analyst Day.

• The pivotal trial for Medtronic’s fully-disposable Synergy CGM has completed. This update comes about a month after Mr. Salmon shared that enrollment for Synergy’s pivotal had completed. Though no firm timelines were given, Mr. Martha noted today that the device would be submitted to the FDA when the “manufacturing module” is complete. Additionally, he shared that early feedback has been “great,” especially as the device is easier to use and is 50% smaller in profile than Medtronic’s existing offering. As a reminder, Synergy is Medtronic’s first fully-disposable CGM and is aiming for seven-day wear. Last month, Mr. Dianaty also shared a goal for self-calibrations (i.e., no fingersticks required).

Slide taken from Medtronic’s Analyst Day.

3. “Entire sales force” now trained on Companion’s InPen; real-time data integration with Guardian Connect announced earlier this month

Medtronic’s acquisition of Companion Medical continues to get significant airtime from management and we heard about it again during today’s call, as we did at Medtronic’s October Analyst Meeting in both the pipeline and business sessions. While revenue from InPen was “minimal” in the quarter, CFO Karen Parkhill noted during Q&A that InPen revenue could become impactful to the Diabetes business as soon as the “next quarter” (though still not yet impactful to the total company). Earlier this month, Medtronic launched real-time data integration between its Guardian Connect CGM and InPen, the first real-time integration between a CGM and smart pen. During prepared remarks, Mr. Martha noted that this data integration happened in “just two months, instead of two quarters,” a testament to the fast integration work happening, propelled by Medtronic Diabetes and its strong interest in being able to work with people with diabetes using fast- or rapid-acting insulin in any form, not just the pump.

• Staying on integration, Mr. Salmon shared that the “entire sales force” of Medtronic Diabetes has now been trained on InPen. This is impressive timing, given the acquisition only closed officially in September (two months ago). Having Medtronic’s wide-reaching and well-trained sales force will undoubtedly accelerate InPen interest and we will look forward to hearing more about conversion and adoption. In particular, we’re interested in how sales force incentives may differ between pumps and InPen – we imagine there is smart guidance on which patients will benefit from which intervention.

4. Other projects: 7-day Extended Wear Infusion Set launched in Finland, pivotal in US completed (?); Tidepool “really not a big focus” compared to other AID projects

Outside of pumps/AID, CGM, and Companion Medical, Mr. Salmon shared a couple notable pipeline updates during Q&A.

• Medtronic has started a “limited launch” of its seven-day Extended Wear Infusion Set in Finland. That device was CE-Marked as of ATTD 2020 and expected to launch in “selected countries” in “early 2021.” Mr. Salmon also shared that Medtronic has “locked the database” on the infusion set in the US, likely meaning the US pivotal trial for the device has concluded. This would be in line with previous expectations for the trial to complete in October 2020. We’re particularly interested in this since a longer-wear set is less hassle for patients; we hope that some savings is passed on to healthcare systems and not just priced commensurately higher than the three-day set.

• In the first notable update on Medtronic’s Tidepool Loop partnership since the announcement (ADA 2019), Mr. Salmon characterized the project as a “niche opportunity and really not a big focus.” Given the lack of attention paid to the partnership on Medtronic’s updates, it’s not a surprise to hear that the Tidepool integration is not a priority – we also did not ever see interoperability as a likely priority for Medtronic, given the benefits they see from one system and the investment they have put into improvements in the pump as well as the sensor (which will emerge in the future). Based on Mr. Salmon’s remarks, it seems that Medtronic believes, all things equal, either that most patients will prefer single-company AID systems over interoperable systems with components from multiple manufacturers or at least that that is how Medtronic wants to participate in this market. This may also be the case due to legal risk that the company is assessing that could emerge from interoperable systems; this is speculation but possible in our view given the unknowns. Regardless, Tidepool is getting closer to an FDA submission and based on remarks earlier this month, is aiming to launch Tidepool Loop with Dexcom G6 and Insulet Omnipod compatibility to start.

  • “I think that there's probably a smaller proportion of the market that is waiting for Tidepool to become available. Really, I think the capabilities of that algorithm are really not anything advantaged over what we have in the pipeline and certainly what's available currently in the market. So, I think the idea that this would run on a base pump and you can kind of pick your components is appealing to some, and to others, quite frankly, having to chase two or three companies around in order to kind of get your questions answered, track down what your challenges may be, is just not the kind of experience that a lot of people are looking for. They kind of want a one-stop shop where they can get everything they need and all their questions answered in a single place, and that's of course an advantage that will accrue to us as we get our pipeline of products out there. But, I'd say it's really more of a niche opportunity and really not a big focus. I don't see a lot of people waiting for it.” – Mr. Salmon

Diabetes-Related Investor Q&A

Q (Robbie Marcus, JP Morgan): I was looking at Diabetes, which to me is one of the businesses that could have the most upside potential if your turnaround plan works out. I was hoping you could walk us through maybe the next 6 to 12 months in terms of new product cadence, how that should impact numbers. And, also, I know you've been deferring pump sales for a long time waiting for 780G and the upgrade program. How do we expect that to play out into numbers over the next 12, 18 months when 780G hits the US?

Sean Salmon: Great. Thanks for the question, Robbie. So, over the next six to 12 months really the focus is going to be on rolling out the new pump platforms. We are off to a really, really good start for the European launch of the 780G. I think we're now in 12 countries, and we'll continue to roll those out as time goes on here. And the 770G, as Geoff said, just started its initial launch in the US. We've had really strong demand for that as we've got a number of these upgrade pathways in place. So, the pathway to upgrade from an existing 670G as well as a next tech pathway to get people to come into the new pumps.

We've seen an increase in the proportion of patients as the new starts in the US as compared to just replacements in warranty patients coming out of warranty. And of course, Companion Medical is going to be a big focus. We've got now the integration with our CGM in real time, which is a big deal. As we improve the sensor experience, that's going to get to be even more of a big deal. But more importantly, we've now trained up and have the entire sales force with this in their bag now in the US as opposed to just the small sales force that came with the Companion acquisition. So, I think in the near term those are the priorities, but you roll that forward into what's next.

Obviously, the 780G launch in the US is a big deal. The Zeus sensor globally would be a really important driver for us. And then a smaller product but important one. We just started a limited launch in Finland. It's for a seven-day infusion set. This allows you to wear the infusion set for almost twice as long as what is normally required. And that product we'll bring to the US. We just locked the database on that, so we should expect that to be part of the mix going forward. Of course, all of this flows. You have the hardware out there; it's upgradeable by software to 780 and beyond. You've got the compatibility designed in for the sensor pipeline as well as extended wear infusion set. So, I think we're setting up for a really nice cadence of products, and that will drive us into growth.

Q (Vijay Kumar, Evercore): I think you spoke about share gains. Are you seeing anything on, one, you look at the Q3 guidance. Down low-single implies improvement over in the 2Q. What's driving that?

And are you seeing anything on the pump market side? We're hearing some chatter about customers delaying pump upgrades, waiting for the Tidepool algorithms. Perhaps talk about the Diabetes pump market.

Sean Salmon: Yeah, so, Vijay, I think that there's probably a smaller proportion of the market that is waiting for Tidepool to become available. Really, I think the capabilities of that algorithm are really not anything advantaged over what we have in the pipeline and certainly what's available currently in the market. (Editor’s note – we imagine most using Loop now are drawn to it not necessarily only or at all due to the algorithm but likely due to the ease of use in getting it, in upgrading it, in pricing, etc.)

I think the idea that this would run on a base pump and you can kind of pick your components is appealing to some, and to others, quite frankly, having to chase two or three companies around in order to kind of get your questions answered, track down what your challenges may be, is just not the kind of experience that a lot of people are looking for. They kind of want a one-stop shop where they can get everything they need and all their questions answered in a single place, and that's of course an advantage that will accrue to us as we get our pipeline of products out there.

But I'd say it's really more of a niche opportunity and really not a big focus. I don't see a lot of people waiting for it.

Q (Chris Pasquale, Guggenheim): For diabetes, Sean, can you just clarify the expected timing of the 780G U.S. launch? It sounded like there still might be uncertainty about how you go about the filing strategy there.

Sean Salmon: Yeah, sure. The situation we have, I think as you probably already know, is that the FDA's division that regulates the diabetes sector is also involved in a lot of the COVID diagnostics work. So, it's really been a resource drain on their part for medical reviewers in particular. So, at their request, we're pulling together a lot of parts to that submission including the pediatric data and separating that out from just the adult data. So, one submission for all patients as well as the integration of the Zeus sensor into that package. So that's the summary of the package how we can consolidate it down to fewer component part that need to be reviewed, which will add efficiency for them and time to market for us for the entire package.

Q: Okay. But in terms of when we should expect to have 780G available for patients, any sense when that could be?

Sean Salmon: It's hard to predict the review cycle time but we're intending to submit that in this quarter.

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