Memorandum

Medtronic 3Q19 (F2Q20) – Sales of $596 Million Rise 2%, Driven by 15% OUS Growth as US Declines 7%; 780G Data to Read Out at ATTD 2020, Hardware Submitted to FDA – November 19, 2019

Executive Highlights

  • Medtronic reported 3Q19 (F2Q20) Diabetes revenue of $596 million, rising 4% YOY operationally (+2% as reported) and driven entirely by the OUS business. International Diabetes revenue grew 19% YOY operationally to $285 million, while US revenue declined 7% YOY to $311 million. Strong international growth continues to be driven by OUS launch of the MiniMed 670G – reimbursement for 670G was secured in Germany in September. Full year revenue guidance was lowered to “low single-digit” growth for Diabetes in FY20 (April 2019 – April 2020), including sales flat to slightly down” in 4Q19. Management repeatedly acknowledged tough US competition as it awaits the 780G’s launch; the upgrade program planned will also reduce revenue near-term as the upgrade program will result in a deferral. There are now just under 225,000 people on the 670G.

  • MiniMed 780G advanced hybrid closed loop adult data will be presented at ATTD 2020 in February. The next-gen pump hardware has also been submitted to the FDA – i.e., adding Bluetooth to the 6-series pump body, and, if we had to speculate, perhaps getting an ACE Pump indication? Mr. Ishrak repeatedly said the 780G is “on track” – the previous goal to launch by April 2020 (FY20) was not explicitly confirmed, but was implied. It is not clear if 780G will come to market in the US or OUS first, but Mr. Ishrak referred to it as “the most important product launch we have” in diabetes. Remarks said the data at ATTD would be "pivotal," but Medtronic later confirmed it will be OUS data. There were no other pipeline updates, though we were glad to hear management acknowledge the competition - Medtronic has some catch-up to do in terms of CGM features and there’s much more competition coming. That said, the relationships with many doctors’ offices is very strong and we do think the closed loop market is going to explode once all the infrastructure is in place.  
  • In the first call after two leadership transitions (CEO, Diabetes Group President), incoming CEO Geoff Martha spoke very positively about Medtronic’s Diabetes business and said that “reinvigorating the Diabetes business” a priority. New Diabetes Group President Sean Salmon took over for Hooman Hakami last month; Mr. Salmon will make his first call appearance next quarter. CEO Omar Ishrak will retire in April 2020 and fielded most of the diabetes Q&A today. Ishrak virtually gushed at points about the division and at one point referenced potential “tuck-in acquisitions” that were possible (nothing specific).

  • There was lots of Q&A related to diabetes on the call.

Medtronic reported its 3Q19 (F2Q20) financial results this morning on a call led by CEO Omar Ishrak. Diabetes is slide #10 and you’ll find our highlights below.

Financial and Business Highlights

1. Global Sales of $596 Million Rise 4% Operationally, Driven Entirely by 19% OUS Growth; US Declines 7% YOY


Medtronic reported worldwide Diabetes revenue of $596 million in 3Q19, rising 2% YOY as reported and 4% operationally on a very tough comparison to 26% YOY growth in 3Q18. The strong growth one year ago (3Q18) came from US adoption of MiniMed 670G, which has since tapered – in part due to the disappearing Animas opportunity in the US and strong competition from Tandem’s Basal-IQ, Insulet’s Dash, Dexcom’s G6, and Abbott’s FreeStyle Libre. Sequentially, revenue rose $4 million (+1%) from 2Q19. Medtronic’s Diabetes revenue has stayed fairly steady around $600 million for the past eight quarters now.

  • Medtronic’s incoming CEO Geoff Martha stated in prepared remarks that “reinvigorating [Medtronic’s] Diabetes business is a priority.”

    • Management then stated that Medtronic Diabetes would get back to “leading innovation,” and noting that it had a strong foundation with which to work. “The potential is huge on pump and sensor side,” he said, expressing confidence that “Sean and the rest of diabetes business will get it right,” mentioning that Medronic Diabetes is committed to improving the patient experience.

    • Management recommended that investors should expect Medtronic Diabetes to move into “share-taking mode,” and emphasized that the company gauges its business on whether “we are taking share.” They said investors will learn more about the Investor Day next June.

    • When asked about reducing guidance in diabetes, Ishrak mentioned the upgrade program, the “next tech pathway” and said that Medronic would defer some revenue until they can upgrade patients to the new technology; “growth will follow.” He concluded, “I want to make very clear we are very excited about the pipeline and the 780G …” and said although there was pressure with new patients, there should be no doubt that there was enthusiasm at Medtronic for the diabetes pipeline – “It’s an area of focus and we will win it…” he said (see more below on management commentary.

  • US revenue of $311 million declined 7% YOY on a tough comparison to 30% YOY growth in 3Q18. US Diabetes revenue has now declined for four straight quarters  - the last two came on particularly difficult comparisons. Sequentially, revenue rose 2% from the $306 million in 2Q19, Medtronic’s lowest US sales since 3Q17. CEO Omar Ishrak again cited “competitive challenges,” but also expressed enthusiasm for the upcoming 780G, which will help “differentiate [Medtronic] in terms of the algorithm over anything that anyone [else] has.” Medtronic’s competitors are seeing extremely strong momentum; in 3Q19, Dexcom saw US sales rise 53% (a record), Abbott saw US sales rise 40% (a record), Insulet saw US sales rise 34% (a record), and Tandem saw US sales rise 85% (a record). Can the MiniMed 780G catch up to these other products’ momentum?

  • International Diabetes revenue rose an impressive 19% YOY operationally (+15% as reported) to $285 million on a tough comparison to 22% growth in 3Q18. Growth was strong in both Medtronic’s developed markets, which grew 16% operationally YOY ($226 million) and emerging markets, which grew 33% operationally YOY ($59 million). Sequentially, revenue fell by $1 million from 2Q19. Medtronic’s international Diabetes business continues to be driven by new 670G launches. Reimbursement for 670G in Germany was announced in September and is expected in France in F4Q20 (April 2020) – both very large pump markets and places where Medtronic could drive share gains. OUS revenue is closing in on US revenue, making up 48% of total revenue in 3Q19, compared to 43% in 3Q18.

  • Sales of pump-integrated CGMs (i.e., as part of MiniMed 670G, 630G, and 640G) saw growth in the “mid-teens” operationally, while the standalone Guardian Connect CGM saw “mid-30s” growth. By our estimates, Medtronic’s worldwide CGM sales were just over ~$230 million, rising ~16% (compared to 70% growth in 3Q18) and comprising 40% of total revenue. Our model estimates pump revenue at just under ~$360 million, a 5% YOY decline. Note: These are highly estimated since Medtronic doesn’t break out pump vs. CGM vs. consumable sales; that said, these estimates are directionally in line with prior company updates, growth rates reported today, and the general trend of CGM sales rising faster than pump sales.

2. Global MiniMed 670G User Base at “~224,000,” Rising 12% Sequentially

Medtronic’s slide deck (slide #10) for 3Q19 shows that the MiniMed 670G trained, active user base is up to “~224,000,” up 12% sequentially from “approximately 200,000” users in 2Q19. Given the US performance, we assume most of these incremental adds came outside the US. 

3. Guidance Lowered to “Low Single-Digit” Operational Growth for FY20, “Flat to Slightly Down” in 4Q19

Medtronic is now guiding for “low single-digit” operational growth for Diabetes in FY20 (April 2019 – April 2020), down meaningfully from the 6%-8% guidance given in the previous two quarters. CFO Karen Parkhill cited “competitive pressures” and waiting for new product approvals as reasons for the lowered guidance as well as lower revenues due to deferred revenue given upgrades. Though the YOY comparisons ease up into 4Q19 and beyond, Medtronic is guiding for Diabetes revenue to be “flat to slightly down” in 4Q19. With the impending launch of Tandem’s Control-IQ (expected 4Q19) and Abbott’s FreeStyle Libre 2 (still under FDA review), Medtronic’s competitive pressures in the US will only get bigger though the market will surely continue to expand – the closed loop is a fantastic improvement for virtually anyone on MDI in our view. Improving Medtronic’s CGM offerings and MiniMed 780G will be key to re-vitalizing Medtronic’s Diabetes business in the US.

  • “I think with [CGMs], we still have work to do. I think that's going to take a little longer in reducing the number of fingersticks. We continue to make progress, but that's going to be an area of pressure even going into next year. But we expect that there are many other benefits of the 780G in terms of not only the algorithm, but in terms of its capabilities that we will benefit from. That’s the way I'd look at it. The sensor area is going to take a little longer to completely resolve and make incremental progress ....” – Mr. Ishrak

4. New Diabetes Group President Sean Salmon Replaces Hooman Hakami; CEO Omar Ishrak to Step Down in April, Remarks from Incoming CEO Geoff Martha

During the quarter, Medtronic announced two major leadership changes. In August, Medtronic announced that CEO Omar Ishrak would step down in April 2020 (end of FY20), to be replaced by EVP of the Restorative Therapies Group Geoff Martha. Two months later, it was announced that Diabetes President Hooman Hakami was departing the company, effective immediately, replaced by Sean Salmon. Mr. Salmon was not on today’s call to answer questions, as he is new to the position, but incoming CEO Geoff Martha provided the following prepared remarks. Mr. Salmon previously served as SVP and President of Coronary and Structural Heart (CSH) within Medtronic’s large Cardiac and Vascular Group. He is a 15-year Medtronic veteran, and is highly regarded from our conversations with multiple team members at different levels and slightly under the radar screen given his senior role. In his previous role, Mr. Salmon was in charge of ~11,000 employees and a $3.7 billion per year business, ~50% bigger by revenue than Medtronic Diabetes ($2.4 billion in revenue in FY19) though not its own separate division like Medtronic Diabetes .

  • Reinvigorating our Diabetes business is also a priority. This is a rapidly growing market that has huge long-term potential, and I am confident in our ability to leverage our strength to get back to leading the innovation in this space. We have a strong foundation with which to work and a really exciting pipeline of innovation on both the pump and sensor side. Also, I am really confident that Sean, along with the rest of the Diabetes business, will get this right. Most importantly, he is committed to improving the patient experience.” – Mr. Martha

  • “I'm incredibly excited about Medtronic's future. We have several product launches coming up, and you can be assured that executing on these is top of my list of priorities. Actually, the entire Medtronic leadership team is focused and committed to delivering on our pipeline, allowing us to build momentum as we head to the back half of the fiscal year and into the next.” – Mr. Martha

  • “The transition with Omar is going great. We've worked together for a long time, and we know how to build off each other's strengths. Additionally, I am thrilled with the support from the Board and my colleagues on the executive committee. Having continuity in a transition like this makes life a lot easier.” – Mr. Martha

Pipeline Highlights

Pipeline slide from June 2019 ADA Analyst Briefing:

1. MiniMed 780G Pivotal Data Expected at ATTD 2020 in February; Pump Hardware Already Submitted to FDA; “On Track” (April 2020?)

The MiniMed 780G advanced hybrid closed loop has completed adult pivotal trial recruitment – management said that some data will read out at ATTD 2020 in February, though in an email afterward, we learned that this might be international 780G data rather than US pivotal data. Management also said that 780G “hardware” has also been submitted to the FDA. Considering the pump body itself has the same size and form factor as the 670G, we assume this is mostly to get the addition of Bluetooth cleared, prior to the closed loop pivotal trial data. It’s also possible Medtronic is going for an ACE Pump indication for the 780G pump itself, following the pathway Tandem has taken with Control-IQ – i.e., get the pump and CGM components cleared, and once the pivotal data reads out, it will be the last component to be submitted to FDA and approved. At DiabetesMine’s 2019 Innovation Summit earlier this month, the 780G study design was described as “single-arm, 150 patient study for 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+ years of age.

  • The longstanding plan to launch the 780G by April 2020 (in FY20) was implied – it was included in a long list of Medtronic-wide pipeline products expected to receive “either US or European approval…starting in the fourth quarter and building into the early part of next year.” It was unclear if this phrasing referred to calendar year or fiscal year timing (Medtronic’s fiscal Q4 runs from ~February-April 2020). It also remains unclear if the launch will come first in the US or OUS; while certainly the business need is higher in the US, it wasn’t necessarily clear which geography this would be. Mr. Ishrak characterized the FDA interaction as typical so far and multiple times said in Q&A that the 780G is “on track.” Assuming the plan to launch by April 2020 has not changed, this would mark consistency for an impressive six updates (2Q19, ADA Analyst Briefing, 1Q19, JPM, 4Q18, 3Q18). Mr. Ishrak referred to the 780G as the “most important product launch we have” in diabetes (of course!).

  • The big changes with 780G will come in the algorithm: adding automatic correction boluses (in addition to basal modulation), an ambitious >80% Time in Range goal, an adjustable target down to 100 mg/dl, fewer alarms, and simpler operation. Medtronic is catching up to Tandem by adding remote software updating (this is a big deal) and a mobile app for secondary display and wireless data uploads. As a reminder, the Guardian Sensor 3 has already been submitted to FDA for a non-adjunctive indication (see below) – leaving the pump hardware (under FDA review) and the 780G algorithm (pivotal data at ATTD). The Guardian Sensor 3 CGM is the one piece that is significantly behind competitors, as it will require two fingersticks per day and only offer seven-day wear.

  • To bridge the gap between 670G and 780G, Medtronic is launching a “pathway program” that will allow “customers who are out of warranty or new to pump therapy” to purchase a 670G now and get on the 780G at no additional cost when it becomes available. This is a smart way to reduce pent-up demand and continue on-boarding new customers, though a bigger question remains for in-warranty 670G users – will Medtronic offer an upgrade program to get them on the improved 780G at a reasonable cost? A Medtronic Device Upgrade page notes a $399 upgrade fee to get on Medtronic’s latest technology (in-warranty), and we hope to see that  remain in place for the 780G. (Otherwise, Medtronic will have a lot of frustrated 670G users!) The addition of home software updates with the 780G will also be welcome for Medtronic, reducing the hardware upgrade hassles that have plagued users and Medtronic in the past. When Tandem’s Control-IQ launches, it will be available to t:slim X2 users at no cost as a free software update – a historic change to rolling out pump industry innovation that began with Basal-IQ one year ago.

  • MiniMed 780G feasibility data (pre-pivotal) from a study performed in Australia (n=12) were published last month in DT&T with very promising results. Time in Range improved from 75% in the open-loop period to 85% during at-home closed-loop use, driven by time in hyperglycemia reduction from 21% to 10%. Time spent in closed loop was an impressive 99.98%, with a median of one Auto Mode exit during the three-week closed-loop period, and patient-satisfaction was very positive with all participants reporting the system was the best therapy they had ever used. See DiabetesMine 2019 Innovation Summit for a more detailed look at the results.

  • Tandem’s second-to-market Control-IQ is expected to receive approval and launch in the next six weeks, putting pressure on Medtronic to deliver the 780G to market quickly. The slide below from ADA 2019 compares 780G with Control-IQ, though we’d note that the level of Time in Range a system can achieve depends strongly on baseline Time in Range – e.g., users with a low A1c in Tandem’s pivotal trial saw Time in Range well over 80% but that same improvement wouldn’t be likely if starting with a much higher A1c. During today’s call, Mr. Ishrak expressed confidence that 780G will be able to differentiate itself from Control-IQ when it launches. If Medtronic is able to deliver on the ambitious >80% Time in Range and 99% time in closed loop goals, 780G would be a strong offering – though still behind G6 in terms of fingersticks (no-cal vs. 2/day) and wear-time (10-days vs. 7 days). From our view, we’re not sure how important “differentiated” is – it sounds terrific, but just to get to baseline positive Closed Loop will be quite a step!

2. Not Mentioned: Non-Adjunctive Guardian Sensor 3, Zeus iCGM, Extended Wear Infusion Set, Synergy Fully Disposable CGM, Personalized Closed Loop, Tidepool Loop, Sugar.IQ App Improvements, Novo Nordisk Smart Pen Integrations

With MiniMed 780G dominating pipeline discussion, other projects mentioned in the ADA Analyst Briefing were not mentioned. All slides below are taken from that presentation in June.

  • Medtronic filed non-adjunctive labeling for Guardian Sensor 3 in July, though we haven’t heard any updates since. The critical labeling update would allow 670G to apply for Medicare reimbursement and officially remove the need for a confirmatory fingerstick before delivering a bolus with 670G. This label update will also be important for the 780G, which will deliver automatic correction boluses based on CGM readings.

  • The pivotal trial for Zeus iCGM is still ongoing. That device will keep the seven-day wear time and reusable form factor as Guardian Sensor 3, but will bring day 1 calibration only and iCGM labeling. The pivotal trial was announced during ADA; at the time, FDA submission was forecasted for April-October 2020. According to ClinicalTrials.gov, primary completion is expected in February 2020.

  • A pivotal study for Medtronic’s extended wear infusion set received IDE approval in August, with the goal to support wear for “up to seven days.” The last update on this set came at ATTD 2019 (February), where it was expected to launch within “one year” outside the US. We haven’t heard any updates on launch timing since. Read our deep dive in the August (2Q19) report.

  • As of June, Medtronic’s Synergy iCGM is expected to launch by ADA 2021, with fully disposable form factor, seven-day wear, day 1 calibration and iCGM designation. We note that this Medtronic fully disposable CGM offering in 24 months won’t match the current feature sets of Abbott and Dexcom in terms of factory calibration and 10-14 day wear. Still, it will be a fantastic improvement over current products.

  • As of June, the next-generation Personalized Closed Loop system was also slated for launch by ADA 2021. This will have a lot of investment in the algorithm, leveraging the Nutrino acquisition and promising a big step up in simplicity and personal adaptation.

  • We haven’t heard any updates on Medtronic’s AID interoperability partnership with Tidepool Loop since the announcement at ADA. The iCGM pivotal is underway already, but we have not heard much on ACE pump timing – as noted above, we’d speculate the 780G pump hardware might have been filed for this purpose. It’s hard to know, but we certainly applaud Medtronic for its notional emphasis on interoperability and emphasize that this is clearly what the FDA and patients want to see – though certain things like customer service certainly need to be worked out.

  • A “smart guide” system for Sugar.IQ was previously expected to launch by April 2020 (FY20), adding “basic” CGM-based insulin dosing guidance (presumably trend-based bolus calculator), a predictive trace, and some advising. Given the management changeover and lack of updates on standalone CGM, we have less confidence in this timeline. By April 2021 (FY21), Medtronic aims to add a “virtual optimizer” bringing more personalized dosing (meals, activity) with the Synergy disposable sensor

  • At EASD 2019, Medtronic and Novo Nordisk jointly announced a data integration partnership for Novo Nordisk’s smart pens and Medtronic’s CGMs. Novo Nordisk’s smart pens are expected to launch in 2Q20, likely beginning outside the US.

Questions and Answers

Q: To focus on the change of guidance in Diabetes, could you go into a little more detail on what specifically has changed and driven the reduction in the guidance here? Maybe a sense for US, OUS assumptions in the back half? And then more broadly on Diabetes, how does this impact your view on the future growth rate of Diabetes, say, in fiscal 2021?

Karen Parkhill (CFO): Omar did talk about the fact that we're facing competitive challenges in the US in Diabetes while we await new product launches, but international growth continues to grow well. You saw that in our results, and we expect that strong international growth to continue. In the meantime, in the US, Omar mentioned we did initiate a Next Tech Pathway which you also may have seen advertised. That means that we'll defer some revenue until we can upgrade those patients to the new technology. And in terms of future growth for Diabetes, we believe that will follow our robust pipeline, and we expect growth acceleration in that business with the pipeline as we do in many of our other businesses.

Omar Ishrak (CEO): I just want to be very clear that we're very excited about this pipeline. The 780G promises to be an outstanding product. We're making good progress in terms of our enrollment in the pivotal trial. We've already submitted our next-generation hardware for approval with the FDA. And so, that whole pipeline is on track, and we're going to go through a period of some pressure, especially with new patients in the US. But look, there should be no doubt about our enthusiasm for this pipeline and what we see into the future in Diabetes. As Geoff pointed out earlier, this is an area of focus of for us, and one that we will win in.

Q: Maybe one on the 3Q guidance here…Diabetes, flat to down. How much of that flat to down is assuming a share loss vs. the upgrade program? I assume you're deferring revenue recognition. Are you seeing any delays in FDA approvals because one of your other competitors seems to be having issues on the diabetes side from a regulatory perspective?

Ms. Parkhill: […] In terms of Diabetes, the upgrade program is an impact for us in the third quarter. And in terms of market share, our installed base is increasing, particularly as we put 670Gs in Europe. So, we're seeing an installed base increase and we're pleased with that.

Mr. Ishrak: In terms of product launches, right now, we're on track. The most important product launch we have is the 780G. And like I mentioned earlier, we've already submitted our next-generation hardware for approval to the FDA. We've completed adult enrollment, and we expect to see the initial pivotal trial results at the ATTD meeting in Europe in February. And we expect adult approval first, and the ped approval will follow that.

Look, the exact timing is up to the FDA. There's no signal to us that things will be unnecessarily delayed or anything like that. So, as far as we can see, things are progressing as normal. They have their normal questions and we go through this process. So I don't see anything out of the ordinary there.

Q: On Diabetes, I appreciate the confidence in recovery there, returning to growth as you move into next year. But, I guess, even when one thinks about the competitive landscape in Diabetes, there's going to be developments from your competitors on automated insulin delivery systems as well. How confident are you that 780G can get you where you need to go? Do you need to have improvements on the CGM side of that business in particular in order to see improving results?

Mr. Ishrak: I think 780G will take us a long way, and it actually differentiates us in terms of the algorithm over anything that anyone has or from what we can see projecting. And so the advanced hybrid closed loop system is really going separate us from that dimension. I think with the sensor area, we still have work to do. And I think that's going to take a little longer in reducing the number of fingersticks we continue to make progress. But that's going to be an area of pressure even going into next year. But we expect that there are many other benefits of the 780G in terms of not only the algorithm, but in terms of its capabilities that we will benefit from. So, that's the way I'd look at it. The sensor area is going to take a little longer to completely resolve and make incremental progress, but that's going to take just a little longer.

 

 

--by Albert Cai and Kelly Close