Memorandum

Medtronic acquires Companion Medical, identifying key gaps and expanding T1D + T2D insulin delivery capabilities – pump plus pen! Major positive for patients, PCPs, and payers; financial terms not disclosed but presumed win/win – August 11, 2020

Executive Highlights

  • This morning, Medtronic and Companion Medical jointly announced the acquisition of Companion by Medtronic. As Companion was a private company, the financial terms of the deal were not shared. According to the press announcement, the deal will close very soon, “within one to two months.” Companion Medical will become part of Medtronic’s Diabetes Group and Companion’s employees will be joining Medtronic. Encouragingly, Medtronic told us that there are no plans to make changes to “the ability of InPen to communicate with other CGMs.” We love that CGM expansion is in Medtronic’s blood.

  • For Medtronic, the acquisition expands the company’s offerings in its core insulin delivery business into the MDI market. Although the entire diabetes business has grown over the past several years, the pump business was a tough business prior to 670G and following FDA approval of Control IQ – while we see Medtronic’s pump business becoming much stronger upon approval of the next-gen AID 780G, we think it’s strategically smart to acquire Companion and move into other forms of insulin delivery that can clearly help to reverse pump revenue trends. At JPM 2020, Companion CEO Sean Saint noted that InPen added ~17,000 new users in 2019 alone – though this has been faster growth in some years than pumps, we believe CGM will continue to propel AID. And, AID prompting better insulin delivery and diabetes management will bring other products alongside it, like smart pens. Rather than building out its own offering, upon the closing of this deal, Medtronic will have the only commercially available smart pen in the US. This gives Medtronic a far easier, quicker, and more proven pathway into the nascent smart pen landscape than it could otherwise hope to have – and gives Companion a far more stable path to grow.

  • For Companion, Medtronic will bring a wealth of expertise and existing infrastructure to get InPen into new markets more quickly. The acquisition will presumably speed up the timelines to get InPen launched into international geographies. Medtronic’s experienced sales force and marketing expertise could also expand uptake for InPen, both domestically and abroad. Through Medtronic, Companion also gains a large population of potential users and providers to gather data and potentially even test new business models.

  • The acquisition has a number of implications for competitors, including Abbott, Dexcom, Tandem, Insulet, Novo Nordisk, Lilly, and Bigfoot. Combining the only FDA-cleared smart pen with Medtronic’s considerable sales, payer, and marketing muscle is obviously a threat to direct competitors, like Bigfoot, Lilly, and Novo Nordisk. See more below.

Acquisition Details

This morning, Medtronic and Companion Medical jointly announced the acquisition of Companion by Medtronic. As Companion was a private company, the financial terms of the deal were not shared. According to the press announcement, the deal will close very soon, “within one to two months.” The acquisition is expected to be “neutral” to Medtronic’s earnings for the current fiscal year (May 2020 – April 2021), but “accretive” in the future.

  • Medtronic CEO Geoff Martha spoke briefly on the company’s last earnings call about potential mergers and acquisitions with many asset prices down significantly during the COVID-19 pandemic. On that call, Mr. Martha expressed a preference for “tuck-in” acquisitions, which is what we’re seeing with the Companion deal.

    • “I think it is a good time to do M&A. As you mentioned, asset prices are down. Doesn't mean that we lower our standards. I just think, again, we can play offense, and I think our focus remains the same on tuck-ins that can, tuck-in acquisitions that can – I'm a little more partial to the tuck-ins that are more meaningful and can actually affect our growth rate, our long-term growth rate. Like I said, we don't buy growth, we grow what we buy, and so that's what we're focused on. And like I said, there are some opportunities that at least I felt personally, were out of our reach, too expensive before this, and now are kind of more in-line with what we think are reasonable returns for those investments.” – Geoff Martha, CEO

  • Companion Medical will become part of Medtronic’s Diabetes Group and Companion’s employees will be joining Medtronic. Companion’s leadership team will “remain focused on their current responsibilities, playing key roles in the integration and ongoing operation of the business.” Additionally, InPen will continue to be manufactured at Companion’s facility in San Diego.

  • Encouragingly, Medtronic told us that there are no plans to make changes to “the ability of InPen to communicate with other CGMs.” As a reminder, InPen has data integration partnerships with Dexcom and Senseonics. With the acquisition, we’re almost certain to see integration between Medtronic’s CGM offering, Guardian Sensor 3, with InPen. Presumably, InPen data will also make its way into CareLink in the near future. Additionally, there are no immediate plans to change the pricing for InPen for customers.

Acquisition Rationale, Strengths, Weaknesses, Opportunities, and Threats

Strengths

  • >20,000 users in the nascent smart pen category (based on 17,000 InPens sold in 2019)

  • 100% distribution through the pharmacy, reducing paperwork and hassle for patients, providers, and manufacturer

  • Strong coverage in place already (“>80% coverage with PBMs” as of JPM 2020)

  • Existing and proven manufacturing ability at scale

  • CGM data integration partnerships with Dexcom and Senseonics

  • An attractive design and brand recognition as the first and only smart pen on the market

  • Existing and quickly expanding sales force

  • Strong profitability profile (gross margin of 65% with “notable upside”)

Weaknesses

  • Limited data on clinical and financial ROI outcomes around smart pens, particularly for SMBG users

  • Guardian Sensor 3 lags behind competitors in terms of usability and features (though InPen will retain integration with Dexcom and Senseonics)

  • Reusable pen form factor may be less attractive than disposable, particularly in the US

  • Limited patient and provider awareness of smart pens to-date (though this is quickly growing)

  • Challenge of integrating Companion’s employees and culture with those of Medtronic

Opportunities

  • Massive potential market of MDI users

  • Potential to bundle Medtronic’s CGM offering with InPen

  • Easier (and quicker) pathway into international launch for InPen

  • Medtronic’s wealth of experience and market power with payers

  • Medtronic’s wealth of experience with the FDA and international regulatory agencies

  • Medtronic’s large and experienced sales force and supporting infrastructure (e.g., customer support, CareLink)

  • Opportunity for Medtronic to enter new markets (e.g., type 2s)

  • Competitive hedge against recurring revenue business models (e.g., Omnipod Dash)

  • Access to a larger user and provider base to study outcomes and test new business models (e.g., at-risk pricing)

Threats

  • Growing awareness, access, and enthusiasm for automated insulin delivery systems

  • Competitors emerging in the smart pen space (e.g., Bigfoot, Lilly, Novo Nordisk)

  • Dependence on compatibility with insulin cartridges from potential competitors (i.e., Lilly, Novo Nordisk, Sanofi)

  • Relatively unproven regulatory pathways for certain features (e.g., automated insulin dose titration)

  • Potential for Medtronic’s pump and MDI offerings to compete with each other

  • Medtronic’s weaker CGM pairing could make a Dexcom/Abbott-partnered smart pen offering more appealing

For Medtronic

  • For Medtronic, the acquisition expands Medtronic’s offerings in its core insulin delivery business via pumps into the MDI market. We estimated insulin pumps made up ~58% of Medtronic’s total Diabetes revenue at ~$329 million in its last reported quarter. Notably, the pump business has been a tough business in the years prior to 670G – and very competitive since Tandem’s Basal IQ entrance,  Medtronic’s pump business has been mostly flat over the past few years, with the exception of 2016 when Medtronic’s first semi-closed loop pump, the 670G, was approved; the acquisition of Companion could certainly help to reverse that trend. At JPM 2020, Companion CEO Sean Saint noted that InPen added ~17,000 new users in 2019 alone – while the comment that it grew faster than the “entire pump industry combined” was not applicable to the entire market, certainly Companion’s growth has been impressive! We are very happy and relieved for the company that it now has a parent company that has lots of influence around payers. Indeed, the MDI population also offers significantly more runway – Insulet’s bullish projection estimated that the number of type 1s might be up considerably on pumps within the next five years. That would still leave over half a million type 1s and tens of millions of type 2s in the US market alone on MDI. Especially in the type 2 market, InPen is also a strong competitive play against Insulet’s no-upfront-cost Omnipod Dash business model, which has been particularly strong in the type 2 market.

  • Rather than building out its own offering, Medtronic now has the only commercially available smart pen in the US. This gives Medtronic an easier, quicker, and more proven pathway into the nascent smart pen landscape. The upside of smart pens as a category is easy to understand (see bullet above), and, at least for now, Companion/Medtronic have the only offering. With Medtronic’s marketing, payer, and provider muscle, InPen will continue to build on its lead as a first-to-market system.

  • Though Medtronic plans to retain InPen’s data integration partnerships with Dexcom and Senseonics, InPen could be a driver of Guardian Connect. As Medtronic and Companion build out integration of InPen with Guardian Connect and CareLink, there is the opportunity for tighter integration and co-marketing/bundling of InPen with Medtronic’s CGM offering. This opportunity would obviously become more powerful as Medtronic’s CGM pipeline continues to develop with better features and usability. With InPen, Medtronic could also be particularly well positioned to bring its CGMs into the traditionally underpenetrated type 2 market.

For Companion Medical

  • For Companion, Medtronic will bring a wealth of expertise and existing infrastructure to get InPen into new markets quicker. The acquisition will presumably speed up the timelines to get InPen launched into international geographies. Medtronic’s experienced sales force and marketing expertise could also expand uptake for InPen, both domestically and abroad. Leaning on Medtronic’s sales muscle might also help expand InPen into the primary care market faster, where InPen is, presumably, a much easier sell than an insulin pump. Medtronic also has existing and reliable support infrastructure in place (e.g., customer support, IT staff) that Companion will not have to build out on its own as InPen expands.

  • In recent years, Medtronic has made considerable investments in algorithms that could be combined with InPen. Companion has almost made sure to invest in the algorithm and software side of the InPen experience, building a smartphone app with insulin on board calculation and a smart bolus calculator for carb counting, fixed dose, and meal estimation users. With a CGM “partner” now in-house in Guardian Connect, Medtronic and Companion engineers have the opportunity to work side-by-side to build out more accurate and easier to use decision support systems for CGM and MDI users, with the ultimate goal of “closing the loop” for MDI users. As new features come to InPen, the two companies will also benefit from each other’s expertise in navigating regulatory pathways.

  • Through Medtronic, Companion also gains a large population of potential users and providers to gather data and potentially even test new business models. Unlike the higher-profile studies of AID systems, clinical outcomes data around smart pens has been limited to-date. Medtronic has done a good job of gathering both clinical outcomes and financial ROI data with its MiniMed systems (see data from Medtronic and UHC here) and we hope this would continue to be the case with InPen. With more outcomes data, Medtronic may also have an opportunity to pilot new, at-risk based pricing models for InPen – this could be especially appealing for the type 2 market, where payers may be less inclined to cover diabetes devices.

Competitive Implications

Abbott – NEUTRAL/THREAT

  • Although Abbott is not aiming to make its own smart pen, Abbott does have multiple partnerships with companies for whom this acquisition is competition, including Bigfoot, Tandem, Novo Nordisk, and Sanofi. Bigfoot is developing its Unity dose titration system, which will compete with InPen’s existing market presence, now backed by Medtronic. Novo Nordisk had previously aimed to launch its smart pen in 2Q20 (as of Nov 2019; no recent updates); while some say it’s unclear whether Sanofi still has smart pen ambitions given its divestment from diabetes-related R&D in December, we certainly believe that better insulin delivery will continue to mount. Medtronic is also a key competitor for several Abbott partners in the pump market, including Tandem, Insulet, and Bigfoot. Finally, the Medtronic acquisition could rule out a potential data integration partnership with Abbott’s FreeStyle Libre franchise.

Dexcom – NEUTRAL/THREAT

  • Dexcom and Companion Medical’s data integration partnership will not be affected by the acquisition. The acquisition result in an integration of Companion’s data with Medtronic’s Guardian Sensor 3 data, but given the competitive advantages of Dexcom’s CGM offerings, we can’t imagine many users would switch to Medtronic CGM. However, especially with tighter bundling or lower or at-risk pricing, there is the potential for a greater percentage of new InPen users to opt for Medtronic’s CGM over competitors’. Dexcom also has partnerships with Novo Nordisk and Lilly which have smart pens under review (Lilly, as of April 2019). Novo Nordisk had previously aimed to launch its smart pen in 2Q20 (as of Nov 2019; no recent updates. Medtronic is also a major competitor for Dexcom’s many partners in the pump market, including Tandem, Insulet, Tidepool Loop, Beta Bionics, Lilly, Diabeloop, and Cambridge.

Tandem – NEUTRAL/THREAT

  • Tandem is one of Medtronic’s largest competitors in the insulin pump market with its t:slim X2 pump and Control-IQ hybrid closed loop system. However, as Medtronic’s acquisition of Companion is focused on MDI users, it is unclear how this deal will impact the pump market. More concerning for Tandem is Medtronic’s continuing growth to reach more diabetes patients, particularly type 2s. Additionally, with Companion’s InPen integrated into Medtronic’s diabetes product offerings, InPen users looking to “upgrade” from MDI to pump therapy might be inclined to stay in-house with Medtronic’s MiniMed offerings instead of switching to Tandem.

Insulet – THREAT

  • Insulet represents Medtronic’s other major pump competitor with its Omnipod Dash offering. We believe Companion (and smart pens, in general) present a bigger threat for Insulet, given Omnipod’s strengths in the type 2 market and MDI users. The availability of low-upfront-cost, easy-to-use options for both pumps and smart pens is certainly a win for both patients and providers, though outcomes for MDI-based insulin dose titration algorithms remain to be seen. For now, there is plenty of runway for Insulet both in type 1s and type 2s (especially with an AID system coming) and it’s unclear how the pump market will be affected by smart pens. Of course, Insulet should be concerned with Medtronic’s expanding array of offerings and the potential for Medtronic to convert current InPen users to its MiniMed pump system.

Novo Nordisk – THREAT

  • Novo Nordisk is currently partnered with Medtronic to integrate its upcoming NovoPen 6 and Echo Plus insulin pens with Medtronic’ CGMs; it is unclear if this partnership is at risk now that Medtronic has its smart pen offering. Additionally, combining Companion’s current user base with Medtronic’s extensive resources and market power could make it more challenging for Novo Nordisk to penetrate the MDI market with its smart pen. Of course, InPen is currently dependent on compatibility with Novo’s insulin cartridges. Novo Nordisk also has partnerships to integrate its NovoPen 6 and Echo Plus data with Roche, Glooko, Dexcom, and Abbott.

Lilly – THREAT

  • Medtronic’s acquisition of Companion represents a significant competitive threat to Lilly who is trying to bring its first smart pen to market. Currently Lilly has a non-exclusive partnership with Dexcom to integrate their pen and CGM data. Though we do not know if Lilly planned to pursue a data partnership with Medtronic, such a partnership would now be unlikely. Medtronic’s significant marketing, sales, and reimbursement muscle could rapidly expand Companion’s first-to-market advantage, potentially limiting adoption of a smart pen offering from Lilly. However, InPen does depend on compatibility with Lilly’s insulin cartridges.

Bigfoot – THREAT

  • Bigfoot is currently working to bring its “Unity” insulin pen cap system to market and today’s acquisition will strengthen perhaps its biggest competitor. Bigfoot currently has a CGM partnership with Abbott, but now that Medtronic can bring InPen into its system we feel we are unlikely to see an additional partnership between Bigfoot and Medtronic. Additionally, InPen has continued to gain users and will now have access to Medtronic’s substantial resources and market power potentially hindering Bigfoot’s ability to enter the smart pen market; of course, the runway of MDI users not using smart pens is massive and could certainly support more than two players.

Roundup of Past Companion Coverage from Close Concerns

Date - Title

Update

June 23, 2020 – FDA clears Companion Medical’s InPen for pediatric use

  • Cleared for ages 7+ “or under the supervision of an adult caregiver”

  • Pediatric-specific app features and remote monitoring features not available but in the works

April 9, 2020 – Companion Medical launches “virtual conference space” with product theater, webinars, and live demos

  • Webpage created in response to COVID-related conference cancellations

  • Also launched fixed dose and meal estimation-based dose calculator in InPen app the same week

February 28, 2020 – Companion Medical receives FDA clearance for fixed dosing and meal estimation-based dose calculation

  • Meal estimation gives dose calculation based on “medium carb dinner,” “small carb lunch,” etc.

  • First dose calculator that doesn’t require carb counting

  • Takes into account insulin on board and glucose level

February 25, 2020 – Companion Medical’s InPen secures FDA clearance for use with Novo Nordisk’s Fiasp insulin

  • Companion Medical now compatible with Humalog, Novolog, and Fiasp (Novolog’s rapid-acting insulin)

February 11, 2020 – Senseonics announces data integration partnership with Companion Medical

  • Real-time Eversense CGM and InPen injection data shareable across both companies’ software applications

January 15-16, 2020 – JPM 2020 – Companion Medical: 17,000 InPens sold in 2019, 8,000 sold in 4Q19 alone, growing faster than “entire pump industry combined”

  • 17,000 InPens sold in 2019, 8,000 in 4Q19

  • 100% of InPens sold through retail pharmacy

  • “>80% coverage with PBMs,” up from ~70% the previous year

  • 20% of InPen users were previously pump users (other 80% from other pens)

  • InPens are sold for $665, but patients pay “$35 or less”

June 6, 2019 – Companion Medical announces data integration partnerships with Dexcom, Glooko, and Rimidi

  • InPen insulin data to be displayed in Dexcom Clarity app, also integrated into Rimidi’s physician-facing software, Glooko’s mobile app, and Enterprise data management system

  • Dexcom CGM data integrated into InPen software

April 23, 2019 – Companion Medical InPen now available in retail pharmacies

  • “Most” commercial copays at <$50/year, with copay assistance to ensure that all users are at <$99/year

  • New Medical Advisory Board aims to raise category awareness

  • Expansion of San Diego headquarters and sales territories

March 23-26, 2019 – ENDO 2019 – Companion Medical’s exhibit hall booth

  • InPen officially launched in retail stores as of March 8

  • Those with commercial insurance can expect to pay “no more” than $99, Medicare copays “vary”

  • User base “significantly growing” and sales team “significantly” has expanded

  • Study on InPen vs. traditional MDI already enrolling

February 27, 2019 – Smart Insulin Pen and Cap Competitive Landscape

  • Details on the InPen product

  • Coverage as of June 2019

July 19, 2018 – Companion Medical’s InPen obtains CE mark, EU launch in 2019 through distributors

  • Bluetooth-enabled reusable InPen received CE mark for both iOS and Android use

  • Initial commercialization expected in 2019 with plan to go through distributors but subject to change based on “possible strategic relationships”

December 15, 2017 – Companion Medical launches Bluetooth-enabled InPen in US, with strong coverage: mostly $0-$50 co-pays from “most big plans”

  • Prescription-only launch; to hit retail pharmacies “early next year”

  • Only iOS app; Android app expected in 2Q18

  • Covered by “most of the big plans” (aka those like UnitedHealthcare, Aetna, Humana, Cigna

August 4, 2016 – Companion Medical’s Bluetooth-enabled insulin pen and app, InPen, receives FDA 510(k) clearance; US launch in 2017

  • Launch expected in 2017

  • Cleared for use with Humalog or Novolog, Apple iOS app

  • Indicated for ages 12+

  • CE mark filed in March, anticipating approval in new few months

Close Concerns’ Questions

  • What were the financial terms of the deal?

  • How exactly will Companion be integrated into Medtronic Diabetes?

  • Will we see re-branding of the Companion or InPen names, or will they be integrated as part of Medtronic (e.g., MiniMed)?

  • How quickly could this accelerate InPen’s growth, both in the US and internationally?

  • How will Medtronic focus its marketing and sales efforts for InPen and MiniMed systems for different populations of people with diabetes?

  • What sorts of outcomes data could be gathered by Medtronic? Could we see new business models tested?

 

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