Memorandum

Medtronic 2Q16 (F1Q17) – US remains competitive, 640G drives 11% growth OUS; 630G ships in US in September; 670G submitted to FDA and “on track” – August 25, 2016

Executive Highlights

  • Worldwide sales of $452 million grew 2% as reported and 2% operationally year-over-year (YOY) in 2Q16. Excluding an extra selling week in 2Q15, sales rose a strong “high single digits” operationally YOY. US sales totaled $263 million, declining 4% YOY and down 10% sequentially (the first quarter of negative YOY growth in the US since 2013). International sales fared much better, growing 11% as reported to $189 million, including strong 11% operational growth in developed markets on continued 640G adoption.
  • The MiniMed 630G (threshold suspend on the new pump platform) received FDA approval two weeks ago and will ship in September. The 670G/Enlite 3 hybrid closed loop was submitted to the FDA in June, and approval is “on track” with previous expectations (April 2017). Guardian Connect (standalone Bluetooth-enabled mobile CGM) received a CE Mark in July, but launch outside the US has been pushed back a quarter to ~Nov 2016-Jan 2017; US launch is still expected by April 2017. The first-gen app with IBM Watson and an Android version of MiniMed Connect will launch in the next few months

Medtronic reported 2Q16 (F1Q17) financial results today in a call led by CEO Omar Ishrak, including an accompanying slide deck (Diabetes is slide 12, pasted below). We include the top highlights below, followed by a significantly updated pipeline summary (post-Analyst Meeting). Remarks on the 670G from Q&A are also enclosed.

Financial Highlights

1. Worldwide revenue of $452 million grew a modest 2% as reported and 2% operationally year-over-year (YOY) in 2Q16. Excluding an extra selling week in 2Q15, sales rose a strong “high single digits” operationally YOY. Revenue declined 9% sequentially from record-high sales in 1Q16. This quarter also marked Medtronic’s lowest YOY reported growth since 1Q15. The slide deck shared an optimistic Diabetes “growth outlook” of high-single/low-double digits.

2. US Diabetes sales totaled $263 million, declining 4% YOY and down 10% sequentially. Growth was in the “low single digits” excluding the extra selling week in 2Q15. Management said the US market “remains competitive,” and indeed, this marked the first quarter of negative US growth since 2013 (prior to the 530G launching). The just-approved MiniMed 630G is expected to reinvigorate the US business (launching in September).

3. International sales of $189 million grew 11% as reported, including a strong 11% operationally in developed markets ($155 million) and 16% operationally in emerging markets ($34 million). Sales declined 7% sequentially from blowout record sales in 1Q16. The MiniMed 640G/Enhanced Enlite again saw “strong sales” in Europe and Asia Pacific. This marked the second straight quarter where the international business supplied 100% of the business’ growth.

Pipeline Highlights

4. Management shared excitement for the MiniMed 630G (threshold suspend on the new pump platform), which received FDA approval two weeks ago and will ship in September. The 630G brings customers features they’ve asked for ahead of the 670G (waterproof, color screen, remote meter bolus), and refreshes the three-year-old product line in the US. Said management in Q&A, “We didn't launch the 630 because we thought there was a risk to the 670 timeline.” Still, we do not expect many upgrades to this pump ($599 or $3,100 out-of-pocket), and assume many will choose to wait for the 670G to launch. See our detailed coverage or below for more on the 630G.

5. The MiniMed 670G/Enlite 3 was submitted to the FDA in June, and timing is “on track” with previous expectations (April 2017). The FDA is “actively engaged” and management characterized the relationship as “outstanding.” We assume the 630G approval bodes well for a rapid review (same pump platform). A 670G pediatric pivotal trial (7-13 years old) has started.

6. The Guardian Connect standalone Bluetooth-enabled mobile CGM received a CE Mark in July, but launch outside the US has been pushed back a quarter to ~November 2016-January 2017 (F3Q17). This will launch OUS with the current Enhanced Enlite (“Enlite 2”). This product is a key competitive answer to Dexcom’s G5 and Abbott’s LibreLink, plus an important Medtronic move to bring CGM into MDIs.

7. A US launch of Guardian Connect with Enlite 3 is still expected in ~November 2016-April 2017 (“second half of FY17”). The PMA was submitted to FDA in March.

8.The first-gen app with IBM Watson, Sugar.IQ (renamed from "SugarWise"), will now launch in the “next few months,” behind the Analyst Meeting expectation for a “summer 2016” launch. The initial app will analyze retrospective data, and a future gen will add the forward-looking hypo prediction.

9. An Android version of MiniMed Connect is still expected to launch in the US this fall (August-October 2016, F2Q17), on par with the most recent expectation. As a reminder, the 630G and 670G are not compatible with MiniMed Connect.

10. The tables below include more detailed pipeline summaries for Medtronic’s planned pumps, CGM sensors, and data analytics over the next four years – incorporating today’s call and the June Analyst Meeting.

Financial Summary

Figure 1: Medtronic Worldwide, US, and International Quarterly Sales (2013-2016)

Table 1: Worldwide Sales

 

F1Q16

F2Q16

F3Q16

F4Q16

F1Q17

Worldwide Sales (millions)

$445

$450

$474

$496

$452

Year-on-Year (YOY) Growth:
   Reported

   Operational

7%

15%*

5%

11%

6%

11%

6%

10%

2%

2%*

Sequential Growth

-5%

1%

5%

5%

-9%

* YOY operational growth was in “high-single digits” in both F1Q16 and F1Q17, excluding the extra selling week in F1Q16.

Table 2: US Sales

 

F1Q16

F2Q16

F3Q16

F4Q16

F1Q17

US Sales (millions)

$274

$280

$293

$293

$263

US Sales Growth (YOY)

13%

9%

5%

0%

-4%

US Sequential Sales Growth

-7%

2%

5%

0%

-10%

US Contribution to Overall Medtronic Diabetes Reported Growth

100%

100%

56%

0%

0%

Table 3: Medtronic Diabetes Sales – International

 

F1Q16

F2Q16

F3Q16

F4Q16

F1Q17

International Sales (millions)
   Developed Markets
   Emerging Markets

$171
$140
$31

$170
$135
$35

$181
$144
$37

$203
$166
$37

$189
$155
$34

Sales Growth (YOY)
  
Reported
   Operational**

- 2%
~18%

-2%
~17%
 

7%
~24%
 

17%
~27%

11%
~11%

Sequential Sales Growth

-2%

-1%

7%

12%

-7%

International Contribution to Overall Reported Growth

0%

0%

44%

100%

100%

**Operational growth is listed for developed markets, which represents ~80% of the business

  • The type 1-focused Intensive Insulin Management (IIM) division grew in the “high single digits” operationally (excluding the extra week in 2Q15), driven by “strong adoption” of the 640G outside the US.
  • Diabetes Service & Solutions (DSS) again saw “high-single-digit” operational growth on “solid” consumables sales, 50% revenue growth from the Diabeter clinic (no base to compare to, but now treating 1,700+ patients), and continued “strong growth” in MiniMed Connect. Over 18,000 people are now using the $99 device (priced dropped from $199) to view data on a smartphone, up from 16,000+ in 1Q16.
  • The type 2-focused non-intensive diabetes therapies (NDT) business grew >75% operationally, led by strong US sales of the iPro2 CGM with partner Henry Schein.

Table 4: Operational Sales Growth by Diabetes Division

 

F1Q16

F2Q16

F3Q16

F4Q16

F1Q17*

IIM YOY Operational Growth

Low double digits

Mid-Teens

Low double digits

High single digits

High single digits

DSS YOY Operational Growth

High-single digit

Mid-single digit

High-single digit

High-single digit

High-single digit

NDT YOY Operational Growth

60%-range

~100%

250%+

230%+

>75%

* YOY growth comparison excludes the extra selling week in F1Q16

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)

FDA approved in August; ships in September 2016

MiniMed 670G with Enlite 3

Hybrid closed loop

FDA PMA submission in June 2016. Launch expected by April 2017 in the US and April 2018 in the EU.

Pediatric pivotal clinical trial underway (7-13 years)

MiniMed Pro-set Infusion Set with FlowSmart technology

Full commercialization in roughly October-December 2016 (per BD’s August 2016 call)

MiniMed 690G

Incorporating DreaMed MD-Logic algorithm to add automatic correction boluses

Feasibility study completed in June 2016. Bridging study has NIH funding
(per July 2016 NIH AP Workshop)

Other infusion set innovations:

- New Quick-serter device
- 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 Enlite 3 (US).

CE Marked in July 2016; Launching in ~November 2016-January 2017 in EU, Asia Pacific, Latin America (“F3Q17”)

FDA PMA submission in March 2016, approval expected in ~November 2016-April 2017 (“second half of FY17”).

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 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

MiniMed Connect

Android launch in US in August-October 2016 (“F2Q17”)

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

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

Launch in fall 2016 (“next few months”)

Glooko integration for pump/CGM data management

Expected to launch within the next month, per Glooko comments at AADE. Still listed as “coming soon” on Glooko’s compatibility page.

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

Launch previously expected this summer (per ADA 2016)

Provider CGM Analytics: Logbook app

Adding behavioral context to CGM data

Launch by April 2017
(per the June 2016 Analyst Day)

IBM Watson app, Sugar.IQ Gen 2

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

Launching in ~Summer 2017
(per the June 2016 Analyst Day)

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)

Questions and Answers

Q: Can you comment on 670G timing in light of the 630 approval?

Hooman Hakami: With respect to the 670, the PMA is with the FDA. It's really hard to predict when they're going to approve it. Obviously it's in their hands now. We're working actively with them to answer the questions that they have regarding our submission, but in the meantime, we launched the 630G. We're excited about this. It is going to address some of the biggest request we've seen from patients, the color screen, waterproof, remote bolus capability, and so it's a chance for us to really bring additional enhancements to our patients while the 670 process goes on. So we're excited about the new product that we have, and in the meantime, we are working actively with the FDA on the 670. 

Q: I just wanted to make sure there's no change in timelines on the 670G from your perspective?

Omar Ishrak: The 670G is on track. Hooman, do you want to say a couple of words on that?

Hooman Hakami: There is absolutely no change or any indication that things are going to push out on the 670G. Just an additional point of clarification, we didn't launch the 630 because we thought there was a risk to the 670 timeline. With the 670, as I said, we're working very, very closely with the FDA. The relationship is outstanding and we're actively engaged with them. We launched the 630, not due to anything related to the 670, but because of two things:

One, it gives our patients the request that they've asked for, and I touched on what some of those were, from waterproof to color screen. At the same time, what it does is it refreshes our product line in the US. The 530G was launched in September of 2013. That's three years ago. And we've held our own with this product even as its long anniversaried, but if you take a look at how well the 640 has done outside the United States, we felt that by bringing these patient-centric features and a new hardware platform into the US now, we could really refresh our product line and really drive growth in the U.S. while we wait for the 670.

F1Q17 Medtronic Diabetes Summary from Slide Deck

Appendix: MiniMed 630G Key Features and Drawbacks

630G Key Improvements

630G Key Drawbacks

  • Color screen, larger, light adjusting, more color coded indicators (huge improvement over grayscale Paradigm platform)
  • Waterproof (pump: 12 feet of water for 24 hours; transmitter: 8 feet of water for 30 mins) – fixes major criticism of Paradigm pumps
  • Remote bolusing from Contour Next Link meter  (more discretion, big win for parents)
  • Insulin-on-board (IOB) on home screen (previously buried in menu)
  • Easier pump navigation than on Paradigm (four-way arrow key, back button, select button, menu button)
  • More alarm customization, including louder volume and ability to set up different time segments or have no alarm (corrects key criticism of 530G)
  • Improved CGM transmitter communication, less lost sensor alerts (2.4 ghz)
  • Vertical orientation: pump can be used with one hand, left or right
  • Cannot be software updated to add next-gen automation algorithms: 640G with predictive suspend (out in Europe) or the 670G hybrid closed loop (under FDA review)
  • Upgrade program is very expensive for current MiniMed pumpers ($599 or $3,100)
  • Current Medtronic users must also purchase new transmitter for $511 (different RF frequency from 530G/Enlite transmitter)
  • Not compatible with MiniMed Connect remote monitoring device
  • No Bluetooth included
  • Only approved for 16+ years old (limited by Enlite labeling)
  • Slightly larger size than Paradigm pump

 

-- by Adam Brown and Kelly Close