The Surprising Reason for Medtronic's Disappointing Diabetes Sales

Medtronic secured early FDA approval for its MiniMed 670G, the closest step toward an artificial pancreas for patients with diabetes, during its last fiscal quarter. So why were diabetes sales below expectations?

In its quarterly earnings report Tuesday morning, Medtronic reported sales that missed analyst expectations, notably in the Diabetes as well as Cardiac and Vascular Group businesses. At first glance, the shortfall in the Diabetes business may seem odd given the regulatory victory during the quarter--early FDA approval of the MiniMed 670G insulin pump. 

In reality, it seems that the light diabetes revenue may have been because of--not despite--the early FDA win.

Medtronic reported diabetes sale of $462 million for its second quarter of fiscal 2017, $24 million below Wall Street's consensus estimate of $486 million. In slides presented alongside its November 22 earnings call, Medtronic pointed out that US. sales of its insulin pumps were negatively impacted as consumers anticipated the new device launch. The 670G system commercial launch is anticipated in spring 2017.

According to a Seeking Alpha transcript of the earnings call, Omar Ishrak, Medtronic chairman and CEO, said, "We were pleased with the earlier than expected FDA approval of the MiniMed 670G . . . however, the earlier than expected approval has created a bigger than expected gap between product approval and shipment." 

The 670G system has the SmartGuard HCL algorithm and seven-day Guardian Sensor, which is more accurate than the company's earlier sensors. While patients do need to input mealtime carbohydrates, calibrate the sensor, and accept bolus correction recommendations, the algorithm is intended to keep patients within their target glucose level range as much as possible, according to Medtronic.

Approval of the 670G system occurred just a few weeks after the company announced the U.S. launch of its MiniMed 630G system. This, combined with the early nature of the approval, led to a gap in sales as some patients who planned to get the 630G system are likely now waiting for the 670G release. 

Medtronic did create a Priority Access program that would allow patients who buy the 630G system to be the first to receive the 670G system upon its commercial launch. So far, the program has seemingly attracted early adopters, not a large portion of customers. The company is also deferring recognition of some of the 630G revenue because of the program, which includes the option for a $500 exchange when patients return their 630G pump and transmitter upon upgrade.

This sales setback is expected to recede as the 670G system comes to market. 

"Going forward, we expect some improved revenue growth for the remainder of this fiscal year and we expect diabetes to ultimately return to double-digit growth once the 670G is fully on the market next fiscal year," Ishrak said.

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