Medtronic plc (MDT) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thanks so much for joining us. Sorry about that. I'm Danielle Antalffy, one of the senior medtech analysts here from SVB Leerink. And we are very lucky to have with us Bob White, the Head of the Minimally Invasive Therapies Group at Medtronic. We also have in the audience Ryan Weispfenning and Francesca DeMartino from Investor Relations.

So we're just going to launch right into a fireside chat format here. So Bob, why don't we start? You guys just reported results last week, MITG, a little bit weaker than you've been looking for. Can you talk about some of the issues that impacted MITG and how -- it sounds like they were pretty transient in nature. What growth would have been ex these issues?

Yes. No, thanks, Danielle. That's a great question. So when we look back at the quarter, specifically for MITG, we had migrated to the company-wide ERP system in the U.S. and Canada. But of course, we ship globally out of the U.S. and Canada. And that certainly created a disturbance, right? We ran into disruption. The good news about that is, as you saw, that we -- so we delivered a 3.2%. We thought we would be 4%-plus. But you've seen now where we've guided for Q4, a 6%-plus for MITG. So the good news is we've moved past the ERP system, but it did cause a slowdown. And certainly, we lost some procedures in the quarter, but we feel good about where we're positioned now. And that's backed up really by where we put the guidance for the quarter.

Okay. And as we think about Q4, and it is a strong guide above market, where do you think your end markets are growing? What's driving Medtronic performance, of course, Q3 aside, Medtronic's MITG performance ahead of the market?

Yes. No, certainly. So when I think about our end markets, we're at about 4%. But importantly even with Q3, MITG is a 4.7%, right, so above market for the year, take that Q3. And as we look towards past Q4 into FY '21 and FY '22, and I think this is really the story for Medtronic, you just see that accelerating growth profile. And of course, we'll give guidance on our Q4 earnings call. But what you should feel good about is it's innovation-driven growth based on the technology pipeline we have ahead of us.

Got it. Got it. And one of those innovations is, of course, the robot Hugo. Before we get into Hugo and how additive that could be to growth, let's talk about the Digital Surgery acquisition that you made and how that integrates into the MITG business broadly.

Yes. Look, I'm really glad you asked about Digital Surgery because it's a really exciting acquisition. And if we think about Digital Surgery, data and analytics are a key capability. And when I've spoken to you about the 4 vectors of innovation that you're going to see from MITG in surgical robotics, I talked about the robot itself, I talked about instrumentation, I talked about visualization in data and analytics. And so we're really excited about what Digital Surgery brings. And in fact, Digital Surgery with their Touch Surgery app, 4 million users, one of the most downloaded apps in the surgeon community. But it's more than that. It's a real ecosystem around understanding, analyzing surgeon video, annotating it and really looking at the phases of surgery. And so what I think is a real important point here, Danielle, is this is a big play for us not just in our robotics road map but also in our core surgical business, right, because you think about what we can do with data and analytics in minimally invasive surgery, this becomes a really important piece for it as well.

Yes, got it. And I think that was sort of lost when people saw the acquisition, that it impacts both business overall and it's not just -- right. So maybe let's talk about Hugo. I mean that's a pretty meaningful product launch coming up here. And it felt like the message coming out of the Hartford Analyst Day was less, "This is a zero-sum game, we're going to take share from Intuitive," and more, "Look at all the opportunity ahead of us, and we want to play in this market." Can you talk about how you're coming at these market assumptions, where we are from a penetration perspective today, where you think we can be in 5 years with Medtronic, a player in the market? And then secondarily to that, from a market share perspective, why would a hospital buy a Hugo versus the...

Yes. No, this is an excellent question. So I think we ought to step back and look at the available procedures. And so when you think about 50 million surgical procedures done every year, 60% of those are done via open, a big cut down the middle. 40-ish percent of those are done minimally invasive. And if you think about minimally invasive, less than 5% globally are done with robotic-assisted surgery. So this is really important because if you think about it, robotics -- surgical robotics has been around for 20 years. And to have only a 5% penetration, less than 5% penetration globally tells you that this is really about a market expansion opportunity. And the reason we're really excited is the 2 barriers that a lot of people talk about are cost and access. And we can get into this a little bit more. It's not just the upfront capital cost. It's really on a per procedure basis of how you can make robotic-assisted surgery equivalent to laparoscopy. And then its utilization, right? If you think about it, the vast majority are still -- surgical robots today are used less than 1 time a day. And so I think that this is truly a market expansion opportunity in a great market. We're pretty excited about it.

You mentioned something at dinner last night that was -- I thought was interesting. I think you said that the number of operating rooms that have a robot today versus the number of operating rooms that are using Medtronic surgical tools today, can you give -- just sort of highlight the potential market?

Yes. Well, I think it's really interesting. You think about 5,000-ish surgical robots installed today and that's a lot. But then you ask yourself, "Well, how many operating rooms are there just in the U.S. alone?" And so if you just do some math to say, "Well, there are 6,000 hospitals. They have on -- an average of 10 operating rooms. That's 60,000 operating rooms, right?" And so when -- it solidifies my point that this is true market expansion. And then the reason we're so excited about it, as you think about Medtronic, we know surgery really well. These are undeniable facts. We know surgery, we know surgical instrumentation and we know surgeon training, right? And those 3 things are really critical. And so we train 24,000 surgeons every year around the world and we have that global infrastructure in place. We're absolute market leaders in surgical instrumentation. And we bring that to the party as well. So that's why I'm so optimistic about the long-run expansion of this market.

So given the market expansion potential, what is the -- or what can you say about the go-to-market strategy for Hugo? Are you going to go to robotic-naïve centers? Or are you going -- how do we think about Medtronic's approach to entering the market?

Yes, right. The way to think about this is you'll see us enter the market, of course, in academic centers but also institutions that have the procedure volume to support a robotic-assisted program, so high-volume centers, but also those centers that are maybe underutilizing their robotic program today. And you'll see that focus. And again, when you talk about our go-to-market today, we've got a great channel. So every day, thousands of my people go into operating rooms around the world. I think our value proposition, like I talked to you back in September when we showed you Hugo, is really compelling. And then you couple that with our surgeon training capabilities around the world, I think you've got a winning formula there.

Yes. And I think there is some confusion, too, around how Medtronic will sell the robot. Maybe comment on that. Are you giving away the robot?

We're certainly not giving away the robot, right? And this gets right back to what those barriers are for the adoption of robotic-assisted surgery. It's not the upfront cost. This is an expensive piece of capital equipment. And you should expect Medtronic to have a very high value on the capital equipment, very high-value surgical instrumentation and a really world-class customer experience, right? So we're fortunate in that we have a leading position in end effectors, as we call them, surgical instrumentation. And certainly, as we think about all the innovation we do in that business, we do that with an eye towards leveraging that in our surgical robotics platform as well. So we feel pretty good about that.

Okay, that makes sense. And then as far as the -- I pushed you on this a little bit last night, the growth contribution you're expecting from Hugo, I mean again, given the market expansion potential here. Why so conservative? Can you help us understand how you're thinking about the first, call it, 2 years of Hugo being on the market?

Yes. I think what I've said is in FY '21, it's less than 50 bps and then that steps up to 100 to 150 and then it goes 200-plus in the third year. And I think it's important to remember that as of today, I don't have a robot that's marketed for sale, right, in the United States or in Europe, where obviously I showed you where we're going with that. And where we're really focused is to make this a world-class experience for our customers. So we'd rather make sure we're conservative in our discussions as we bring this to marketplace.

Okay. That's fair. And then last question on this and then I want to move on. But as it relates to clinical data, and sort of this question came up from a -- not just a regulatory perspective but also from a driving adoption perspective, sort of how you guys are thinking about collecting the clinical data necessary?

No, no. It's awesome, an excellent question. So look, as we begin to put robots in places around the world, that becomes part of the clinical data registry that will be used for our submissions, both with the competent authorities in Europe as well as the FDA. I talked about in September about us doing a premarket IDE in the U.S. as well. So -- and we are in active discussions with the competent authorities to ensure the clinical trials, what's required, will be part and parcel of our submission. So we feel pretty good about that.

But no, you're not planning to do any head-to-head trial for...

No. We don't really need to.

That's not necessary. Yes. Okay. So Hugo coming, launching in its first territory, I think you guys said before the end of next fiscal year, right?

That's right.

So between now and then, I'd love to hear your views on where Medtronic is and will be from a share perspective. It feels like one of your competitors might be, I mean they call it out, losing share to robotic-assisted surgery. Where is Medtronic in the surgical business from a share perspective?

Yes. So look, we get you -- the good news is we report every quarter, so you kind of see our share against the competition. What you see is we're doing really well in that surgery business. And that's borne on the strengths of both Advanced Energy and Advanced Stapling. And so you'd see in Advanced Energy the continuous innovations we've had with our LigaSure products and what we're doing there and also in Stapling with our powered stapling. So we do not view -- and it goes back to -- with less than 5% of eligible procedures being done on the robot, the vast majority are still being done either minimally invasive or open, as I talked about. And we really like our technology pipeline across all my businesses but in that surgical business related to your question as well. So we're doing okay.

Okay. Yes. So it -- actually, is it right to -- I mean, you're growing ahead of the market. So is it right to characterize Medtronic surgical business is actually still gaining share even in the -- without a robot?

We absolutely think it is. And it goes by categories, right? So we have real strength in Advanced Energy and Advanced Stapling. In terms of access and instrumentation, we're not big share players in that space. That does interestingly tie back though, in a robotic environment, you would expect to get share for all of that, that's used in the case, both access, instrumentation, stapling, energy, et cetera. So that's the way to think about it.