Medtronic F3Q14 – Worldwide sales up 16% on US strong launch of MiniMed 530G; MiniMed 640G delayed three months – February 19, 2014

Medtronic reported F3Q14 financial results this morning in a call led by CEO Omar Ishrak. The big story of the quarter was the impressive performance in the US, where sales of $270 million (the previous high was $238 million) grew a striking 21%. The results far exceeded management’s prior estimate for “mid-teens” growth and turned around six straight quarters of growth <0.5% (including three quarters of negative growth). Though zero granularity was given on the launch of the MiniMed 530G/Enlite – especially demographics on the early adopters – the numbers certainly speak for themselves. Notably, management estimates that Medtronic gained “over 400 basis points of pump share and CGM share on a sequential basis in the US” (i.e., four percentage points).

On the pipeline side, it was disappointing to hear the timeline on the MiniMed 640G predictive low glucose management pump get pushed back again – launch is now expected to occur by October 31, 2014 (“in the first half of FY15”), a three-month delay from the July 31 timing (“late F1Q15”) given at JP Morgan, which itself had been a one-quarter delay from April 2014 timing. On the bright side, the Enlite Enhanced (also called “Enlite 2”) is now available in six European countries, with further expansion in Western Europe coming soon.

See below for more on the call’s top five highlights, followed by a pipeline summary.

Financial Highlights

1. Worldwide diabetes revenue grew 16% year-over-year (as reported and operationally) to reach a record-high $436 million – sales were driven by very strong 21% growth in the US on sales of $270 million. Indeed, the 21% US growth is the highest we’ve seen since we began tracking Medtronic/MiniMed in 2004. The excellent US performance – which far exceeded management’s expectations for “mid-teens” growth – reflects several factors:

• The MiniMed 530G/Enlite CGM saw strong demand in its first full quarter on the US market in F3Q14;
• Medtronic recognized $23 million of deferred revenue as the company shifted MiniMed 530G systems to customers that had enrolled in its new technology guarantee program. Absent the latter, US revenue would have been $247 million (still a record-high), representing 14% year-over-year growth. Medtronic has another $4 million in deferred revenue left to recognize in the coming quarter. Management highlighted that the company was “inventory challenged throughout the quarter” but these supply constraints are now resolved. (We continue to hear anecdotally about supply problems); and
• Medtronic had a very easy year-over-year comparison, as sales declined 1% in the US in F3Q13; 

2. The international business continued its strong, steady performance, with sales of $166 million growing 8% as reported and operationally. This represented the business’ second-highest revenue ever and the sixth straight quarter where growth exceeded 7%. As the US business has struggled over the past year, the international business has carried Medtronic Diabetes’ overall growth (see table two below). Indeed, F3Q14 represents the first time in five quarters that growth in the US was positive; by contrast, the last time we saw negative growth in Medtronic’s international business was back in 2009. We expect the positive performance to continue with the continued rollout of the Enlite Enhanced and the upcoming launch of the MiniMed 640G.

Table 1: Medtronic Diabetes Worldwide Sales

Table 2: Medtronic Diabetes Sales by Geography

• Management hasn't shared too much to date about the types of patients that have ordered the MiniMed 530G/Enlite; there was nothing mentioned on this in prepared remarks or in Q&A. The gain in market share combined with the deferred revenue from the new technology program suggests early adopters likely include some combination of MDIs, non-Medtronic pumpers, and current Medtronic customers. Given remarks in previous calls, however, we suspect the focus has been on upgrading the current installed base. Making major inroads into non-Medtronic pumpers is likely a medium/longer-term road given the four-year nature of pump reimbursement in the US. A major unknown is how much the MiniMed 530G/Enlite has resonated with MDI patients; we wonder if Insulet’s 4Q13 financial results call will discuss these (a market segment that Insulet has been historically quite strong in). The integrated pump/CGM system with threshold suspend certainly gives Medtronic a bundling advantage that no other pump company can match right now in the US. The closest integrated product to market is J&J’s Animas Vibe with Dexcom G4 Platinum integration – as of Dexcom’s JPM 2014 presentation, a 2014 launch was still expected (the product has been under FDA review for nearly a year). We will be watching through our sister company, dQ&A, how many Medtronic/Dexcom G4 Platinum users decide to move to the MiniMed 530G/Enlite. As we understand it, payers won't cover both systems.

Pipeline Highlights

4. Medtronic expects to launch the MiniMed 640G predictive low glucose management system by October 31, 2014 (“in the first half of FY15”), a three-month delay from the July 31 (“late F1Q15”) timing given at JP Morgan. This marks the third straight delay in this pump’s launch, as the F2Q14 call estimated a launch by April 30 (“end of this fiscal year”). We wonder if the delay stems from regulatory requirements, clinical testing, manufacturing, a focus on the MiniMed 530G launch in the US, or other factors. This pump is certainly a big leap for Medtronic, as the pump platform has been redesigned from the Paradigm with a simpler user interface, color screen, and waterproof – we suspect that’s required a lot of effort on the manufacturing side in particular. And of course, the predictive low glucose suspend piece is a whole new aspect that will likely require lots of labeling, training materials, instruction manuals, etc. The 640G will use the new Enlite Enhanced CGM sensor (see below). With these significant product changes in mind, the delays are still unfortunate, though somewhat more understandable. It is unclear if the MiniMed 640G has been submitted for CE Mark; we assume not at this point. We continue to hear incredible things about this system and will be eager to see how it expands the market. 

5. Medtronic announced the launch of the Enlite Enhanced CGM during ATTD 2014. The sensor is now available in six countries in Europe and will be rolled out in additional Western European countries within the next few months. It is backwards compatible with the clamshell transmitter used for the Sof-Sensor and Enlite. No accuracy data has been shared to date, though the product does have some improvements over the original Enlite:

• An 80% reduction in implanted size;
• A new sensor adhesive to reduce skin irritation;
• A new electrode pattern with the goal of more consistent performance throughout the sensor life (not quantified); and
• An improved sensor to transmitter connection.

We expect the smaller size and electrode redesign could improve sensor performance, particularly early in the sensor life – it will valuable to see data to quantify this assertion. Medtronic said at ATTD that the plan is to “replace” the current Enlite with Enlite Enhanced, though no timeline has been given for when the conversion would complete or when any US regulatory submission might occur.

The call did not mention any other products, including the i-port Advance injection port for MDI users (launched last week). See below for a pipeline summary of the pipeline products we are aware of.

*This table is informed by our coverage of Medtronic in exhibit halls, earnings calls, conversations with management, and the 2012 Analyst Day.

Questions and Answers

Q: Can you comment on the potential for tax rate synergy transactions for medical technology?

A: […] First, we will never do something like that if it's not in line with our core strategy. We've got certain market segments that we have defined that we will be in – cardiovascular, restorative therapies (neuromuscular, skeletal), and diabetes. We're not going to go do some acquisition just for the sake of doing it so that we can have a better tax break. But if within our defined inorganic growth strategy, we find that there's a fit that is in line with where we want to go, then we will certainly look at that. The main point I want to make here is that the strategy comes first, the tax consequences come second.

--by Adam Brown and Kelly Close