Medtronic plc (MDT) Earnings Call Transcript & Summary

Okay. We're going to kick off this next company fireside chat. I'm Josh Jennings from medical devices team here at Cowen. And we're lucky to Brett Wall, Executive Vice President and President of the Restorative Therapies Group of Medtronic here to -- for this fireside chat. Brett, I really appreciate you coming out East here and joining us.

Thanks for having us.

And congratulations -- I believe -- congratulations on your promotion and taking the leadership over of the RTG group, Restorative Therapies Group.

Thank you.

And maybe just off of that, you can just talk about -- Geoff Martha is now the CEO, he was in your seat prior. You guys were partners and you were running the Brain Therapies business. But yes, maybe -- anything we should look for or anything we should understand about what -- any strategies you're bringing that are maybe new? Or how are you thinking about the evolution of RTG as we move forward in the next couple of years?

Yes. Thank you, and thanks for having us here. I think a couple of things. One, I had a ringside seat for the last 4 or 5 years or so because I came through the Covidien transaction. And then when Geoff took over RTG, he asked me to lead that broader business. So I've seen a lot of the progression of RTG from some of the challenges it had earlier to some of the changes as they were made as we go forward. So I think the strategy is pretty sound that Geoff put into place. But the other thing that Geoff and I talked about is he really hasn't given me a lot of restrictions on things that I may see differently, that I may want to change. And a couple of the changes that we're looking at, which we can preview for you now is we are going to be reorganizing RTG as we enter into FY '21. We're going to be really reconstituting more of the neuromodulation business, putting that back together because we share platforms and technologies. We're also now bringing together our enabling technology business, which is Mazor Robotics, StealthStation, our O-arm imaging platform, our Midas Rex-powered surgical platform, along with our Spine business, and that will be a cranial and spinal technology business that has all of those pieces together. And the Surgical Synergy play that we made with all of that technology, inclusive of Mazor, was really important. And what you'll see from us and what's really important to me is that we bring those types of businesses together. And then what we try to do, Josh, is get a lot closer to the customer where and when we can. Because the closer we are to the customer, the closer we are to the employees that are actually at that point of contact, I think the better decisions we make. And then, which it would happen sometimes when we make a bad decision, we feel that decision, good or bad, pretty quickly, and that allows us to make changes and do things that we need to do.

Excellent. I think RTG has a WAMGR at 5% and you're running all the different businesses that are under your roof now. I mean it's a strategy -- it sounds like the Medtronic strategy that's evolved and is in play now. I guess, corporate-wide, I just want to -- sanity check for RTG, is that -- you want to grow at least at WAMGR, but continue to take share in a dynamic [ that ] now could outperform the weighted average market growth rate. But can you talk about just that -- the perception there for RTG specifically in terms of that initiative? And then also maybe just filling -- backfilling, just the drivers that are the driver of that confidence of your outperformance relative to the WAMGR?

Sure. So when we look at that, yes, you're right, it's about 5% today. And one of the more important things in medical devices is being in faster-growing markets. You get -- you wake up every morning with that tailwind. And when you're not in those faster-growing markets, you wake up every morning with that headwind. So as we look at RTG across the board, there are businesses that we're really categorizing all our businesses in kind of an investment cylinder methodology. And it's nothing earth-shattering or radical, it's just simply a framework for how we look at our businesses. And we think about it in really these 4 cylinders. There's your strategic bets. An example of that would have been a couple years ago; stroke, would have been a strategic bet, which paid off pretty well. There's your core growth business that are growing well, that grow in high single digits and continue to invest in there. There's the maintain business, which probably -- those are businesses that grow probably with the population. They can be good businesses, profitable businesses but aren't changing a lot. And then you have your last category, which is managed differently. So think about if it's underperforming or it's not performing well, is there something you can do to either disrupt that business or would you look at that business and do some portfolio exercise to either manage it out or do something differently. And when lay that out, it looks a lot like a life cycle or a product life cycle curve. And we have products in each of those particular areas. The other thing we do is then it forces an exercise of where you spend your R&D. And what you find is when you do that exercise, you might find, it's you're spending not enough R&D in your core growth or you might not have a strategic bet where you need one, and you may have -- you may be spending too much money in the maintain areas and those particular areas. And I can tell you that the general managers who work in my organization, they absolutely hate it when they're in the managed differently category. But it doesn't have to be bad, it just has to be: Are we going to do something different? An example, in my coils business in CBG would be, if you look at Micra. That business was losing a couple of points every year, and it was going down, and then basically a leadless pacemaker moved it all the way back to a strategic bet where the average selling price of that product is 3x what it was before they made that change. So there's lots of ways to look at that. So we look at that business and we look at it by business, and then we hold the general managers within our organization responsible for innovating and then executing with the portfolio that they have.

Great. I know you're probably going to go real deep at the Investor Day later this year.

Yes.

But maybe you can just help us, or call out some of the product drivers in 2020 and maybe some pipeline products that I guess, in the next 1 or 2 years, that are getting you excited?

Yes. I think -- one of the things we've been excited about is really a turnaround in the Spine business. If you go back in the last year or 2 years, we were a pretty routine share donator in Spine. And by bringing in the enabling technologies in this ecosystem where the surgeon has to plan the procedure, they use navigation, they use powered-surgical instruments, they use robotics and then they use our imaging platform, our O-arm imaging platform to confirm everything that's happened in the procedure before they let that patient go from the operating room. We've been able to use that to get and swing our Spine business, our core Spine business back to growth. And we want to continue investing there and continue doing that because as we make more procedures available with the robot, as we add more capability, we have more opportunity to move in and take share and to create this ecosystem. So we're in the very early days of that, but we're going to see continued investment there and more driving there. And then Neurovascular, I think, always has opportunity there that's -- we are going to see the market for stroke continue to grow, and we're going to continue to participate in that. I think we've grown that business very aggressively over the last decade, really. But I think we'll see there's a little more competition there, so we're looking at other strategies, different products, different services to continue to drive that. And then neuromodulation. I've been very excited about the new DBS platform that we have. We've been share donator in DBS. A couple of the strategics have moved in, but we have a new product we just launched in Europe called Percept. It absolutely changes the game in treatment for these patients that have essential tremor in Parkinson's and these other conditions, because for the first time, what we can do is actually sense what's happening in the brain. We see the signals. We understand when we stimulate, if we're stimulating and getting the brain activity in the zone that it needs to be in. And what we're going to be able to do with that now is advance the next series of clinical trials, where we actually have algorithms. And the goal here is really to create a thermostat for the brain. Right now, DBS therapy, no matter whose you employ, it is constantly on. It is continuous stimulation, and I likened it to discovering fire. Fire was a really good thing, but it wasn't a temperature regulator. And what this therapy will be able to do, we'll be able to manage that and to be able to do it. So we're really thrilled about that. New pelvic health simulator coming soon, we're very excited about that technology. And then Stimgenics, which actually treats pain from failed back surgery syndrome in a different way, exclusive to the Intellis device. We're getting very good results on the trial on that technology. We're getting good trialing, and we haven't been really satisfied with the performance there. We've donated share in the last quarter or 2 and that's not something that we like doing. So we want to work on that, take that technology and swing that back to actually starting to gain some share.

Excellent. Maybe we can dig into a couple of the business units, and I guess we can start with spinal cord stimulation. And Intellis had a great run. You guys ran up against some tough comps, moving the share loss from last quarter or 2, revitalizing that portfolio with the DTM technology. But maybe to start with the market, any kind of hints or I guess post hoc analysis of what happened in 2019 and why you're optimistic, or if you're optimistic, that sort of [ CRYSTAL ] market can rebound here in 2020?

Yes. I think a couple of things. The market is still pretty sluggish. I mean we see the market, it's -- what I'm not going to do is call a bottom to it because I think it's still a little sideways. That being said, though, what I have seen is this market responds to data. So when you have new data, new technology out, there seems to be a market response to that. The data with Stimgenics, the DTM technology is really compelling for these failed back surgery syndrome, and it's going to allow us a platform to move into other conditions and other areas. And what we have to do now is take that device and really go execute. So when I look at our organizations, I really look at a couple of things. Do we have technological parity? Do we have some advantages in some places so we can go out and win more than lose those conditions? If that's in place then, I want to understand what's the leadership like. Do we have the right leadership? Do we have the right sales leadership in running these things? Do we have the right general management leadership? Those types of things, and we're setting a pretty high bar for that. And when all those things come together, then we should expect to see with Medtronic and the investment that we're capable of doing and the footprint that we have, we should expect to see that share gain. And if we're not getting that, then we have to go in deeply and ask questions about that and dive in. I am optimistic about the technology. I think we have every opportunity now to start to turning that to gaining share. And so what I would say is I won't call a bottom in the market because I think the market is still pretty sluggish. But what I'm calling a bottom on is our performance, and those are different things.

Got it. Got it. Maybe we can talk about sacral stim, the InterStim platform and Micro's in the pipeline. And maybe just talk about Micros first, about the timing of FDA approval. You guys have talked about the strength and maybe some of the features there that kind of put you in a better competitive position.

Yes. So what's interesting about [ circu-modulation ], currently, Medtronic's portfolio has been the nonrechargeable and that's the vast of the portfolio. When our competitor came out, they had a rechargeable system. Now we're a couple of months behind them, and we're still saying late spring for the Micro technology. And what's initially on the Micro technology is it literally wins on every single competitive front when we compare it with the competition. First and foremost, our device is almost 50% smaller that you would implant. We will have 3 and 1.5 Tesla ability coming right out of the gate. You won't have to wait for that. And as more institutions go to 3 Tesla, we're going to have that opportunity. If you look at kind of programming and the programmability of the device, what we have the ability to do is lock on to that signal for the recharge, be able to recharge very effectively and then simple programming with a smartphone that the patient will have and that the doctor can actually access when they see them if they need to do that. And so we like our chances there. And we like the ability to actually go into that market and compete and compete very favorably. Now look, whenever you have 100% market share, you're probably always going to lose a little bit market share. But the market itself is one of the largest untapped markets available. 225,000 people or something, right in that range, get therapy every year. And this is a really important number, 4 million people drop out of therapy. So they failed to drugs; and for whatever reason, they don't go to the procedure of having sacral nerve modulation. And it's 4 million people, and it's a horrible quality-of-life type of disease. And so there may be economic reasons they fall out, but they may just fall out because they're not wanting the procedure or don't -- aren't aware of the procedure or not getting that procedure. So in some ways, having a competitor with a large sales force talking about that, and "Well, we'll contribute to market growth which we like." The other thing, my whole life, I've had competitors. I actually like competitors. A competitor is the absolute best antidote to complacency one could possibly ever imagine. When you own the market by yourself, it's great. But you don't have maybe the feeling that you need to have every single day. And I don't mind being paranoid and having the wolves at the door every single day because I think it absolutely makes you a better manager and make you think more effectively and more pragmatically about what you need to do next. So competition doesn't really bother me. It's our response to it. We better get ahead of it. We better be faster. We better look how to disrupt these markets, to make it harder for the competition to play in. And there's a degree of match toughness that you have to have when you have competitors.

Any details you can share just in terms of the remaining steps prior to your approval for Micro?

Just ongoing -- we're working with the FDA and in kind of ongoing discussions, and we feel good about where we are. We have a good technology.

And just how big is the sacral stim business for Medtronic? I mean is that a -- from a revenue standpoint?

Yes, it's under $1 billion, it's under that $600 million kind of range there. But I think the point is, if you look at the technology there and all the people that are untreated, there's opportunities for breakthrough and opportunities for different things there. There's real opportunities in that space. And it's a good space, and I think a fertile ground for further innovation.

We can dip into Spine quickly and just the robotics. You guys have -- you gave some stats at NASS about number of systems that were in the field, and you've been consistently giving metrics around the Surgical Synergy numbers, combining core hardware with some of the capital as your -- a lot of your competitors do. Maybe you can talk -- talk us through kind of the pipeline with Mazor and how you see applications expanding for pedicle screw placement, and where could this technology be and what type of applications could it enable or the capabilities in 3 to 5 years.

Yes. It's very, very early days today. So if you at the technology today, it does a couple of things pretty well, mostly with pedicle screws, posterior kind of cases. And so effectively, it takes a procedure that physicians are doing pretty routinely. But we're on the first chapters of kind of a story that I think is going to grow and kind of move out there over time. And where we have the best success is when we start adapting full procedures into the workflow into new technology. So we've been able to do that over the years with our spinal technology and with our stealth technology and with the other technologies. Now we're starting to develop it in the -- with interbodies. We're starting to develop it with, ultimately, with OLIF, these other types of procedures over time. So I think what you're going to see is you're going to see more procedures and more capability being added to the robotic platform, so physicians can actually do more and do more complex procedures. And what we find is that the screw placement is more accurate and more consistent. When you have navigation, we're starting now to take our Midas Rex drills, and we're adding optical trackers to them and we'll be, very soon, adding Midas drills into the workflow, where you can actually see them in the navigation system, and you'll be able to manipulate them and understand precisely what you're doing and where you're doing it. And then as you bring the different spine technology and the implants through is really important. I think there's 350 competitors out there in Spine, something like that. And the great, great, great majority of them are small shops that are just turning titanium screws in their garage. So you can call that market whatever you want to call it. But I think the real opportunity there is taking and advancing this enabling technology, getting more procedures on it and then pulling through the implant as it comes with it. And you're seeing it happen in the marketplace, I mean we're the farthest ahead and we're out there. There's a couple of our competitors who have systems, one, that's trying to get a system, or is in the middle of getting a system. And even some companies now are trying to make purchases where they can bring on some of this enabling technology to offer that to the physician. So I really believe that's where the heart of the strategy is, and we have to execute better, more quickly and provide more procedures and technology onto that. And then, frankly, just manage that very closely and very directly every single day. And the great thing about it is, is we have very capable competitors there. And so you have to understand who they are. You have to understand how they think. You have to understand how they work. And then you have to kind of scale your organization in tone and tenor to kind of go after that and then reward the performance when you win and really understand what happens when you don't.

And any update just in terms of your installed base that you can share? I think you guys -- 270...

Yes. We don't give the numbers any longer for obvious reasons. But we -- but what I will tell you -- I'm not being coy with you. It's just I'm trying not to benefit my competitor during this talk today. But what I will tell you is we're taking a significant majority of every socket that we -- when we say socket, we mean placement that goes out there. So we're outpacing and outstripping the competition very routinely in the number of units that go out to the marketplace. And we're leveraging the largest spine business in the world to go out and be able to do that.

And you reported nice success just in terms of getting those units in, taking share, sometimes I think it's volume-based guaranteed to get a system placed at some centers. Any metrics you can share there? Is it just continuing to...

Yes. I think what we find is a couple of things. When we're in these sites where we're really learning along with the physician, how it gets done, any new technology, that's always been my experience. You bring in new kind of breakthrough kind of technology. And then you learn with the physicians, what works, what doesn't work and how that works. What we're finding is that in these accounts that have a Mazor X Stealth Edition unit, we're getting extraordinarily high attachment of Medtronic. It's just easier. Our people are there, they're in there, the hardware, the metal comes along with it. And what we're working on now, the attachments are there, now we're working on generating more cases at each particular site. What we have are some sites that are doing a large number of cases, some sites that are kind of in the middle and then a few on the tail that are probably doing less than we'd like. So we're investing more resources in our people and our teams that actually can go in and work with the sites to get them to do it. And this isn't unique, a new technology. We're taking a physician and say, "Look, take something you do every day. Let's learn robotics together and then as we advance the procedure, you're going to have that opportunity to use it in a new procedure as we move forward and work with us." And I think in truth, as we look out 5 years and 10 years, every single fellow that's going through is going to learn how to do this. Now maybe if you're my age and you're in your 50s, and you're happy with your career and you're going to retire in a decade, you might say, "I'm just going to -- I'm not going to do it." I think if you're starting your spine career, you're going to learn how to do it. I was at a urology conference last week, and I was sitting with some physicians. And I was really curious, does anyone learn how to do radical prostatectomies anymore? And it was a very dramatic answer. They say, "Oh, no, none of the fellows know how to do it. They all -- they use a soft tissue robot and do a radical prostatectomy." Now I'm sure that they teach radical prostatectomy because I'm sure somebody has to know how to do it. But the truth is, a lot of things have switched over to that. It's like our neurovascular business. Neurosurgery communities that teach both open cerebrovascular surgery and coiling or pipeline, one of the challenges they have is none of the people really in their career want to open a skull and clip an aneurysm. They feel like they don't have to, most times. They can use endovascular technology, which they think is better, less risky. The trial showed that. And sometimes the challenge is, is maybe some procedures get a little bit less frequent now because the new technology works better. And we'll get there in Spine because I see this is going to be a journey here over the next few years.

And just on the Neurovascular side, maybe you can just talk to us about the Aspiration platform and that portfolio, and where you guys are from a share perspective? And what's the path there in terms of getting deeper penetration for your technology?

Yes. We have seen a shift towards Aspiration, but that's probably too simplistic to talk about how that works. What we have seen is really a tool chest of technologies, but you've got to be there with Aspiration. So we like the React and Riptide system, and we're continuing to evolve and build new technologies and new products there. But what we find is the world kind of breaks down into like 3 groups with a bailout option. There's an Aspiration-first group. There's an Aspiration -- there's a Solitaire-first group. There's an Aspiration and Solitaire-combined group that goes together. And then there's a bailout group if Aspiration doesn't work, they'll use Solitaire to try to get it to work and to clear that. So we think you have to play across the entire spectrum and have every technology there. So when we look at share, we're in a very strong, if not #1 share position across the whole spectrum, but we're lower on the Aspiration straight. So we're continuing to invest there, continuing to launch new products. We just launched in China. We're just launching in Europe, the Aspiration system. And then we're continuing to augment some of the other technologies, small, sub 3-millimeter vessels. So when you're in the distal MCA, where most of these strokes occur, Aspiration doesn't work quite as well. What we find is low profile, smaller stent retrievers can be delivered there, and they work actually well. So having all of these combinations and all these therapies are really important. Stroke is going to continue to grow. It's just too much of an unmet population need. And right now, speaking for the United States, we only have 6 states that have the equivalent of a Level I Trauma Law that actually demands that a patient experiencing a suspected stroke has to go to a comprehensive stroke center. So if you live in like Tennessee, Florida, Delaware, I think Rhode Island is in there and maybe Colorado, you're in good shape. If not, there's a pretty good chance you might not go to Level I or a comprehensive stroke center. And those laws will change state by state, but they do need to change. So a public service announcement for all of you, understand where your comprehensive stroke center is close to where you live. And if -- and tell your family and if anyone in your family has it, do not allow the ambulance to take you anywhere else because your treatment options will be severely restricted because they won't be able to -- because of the agreement they have with the ambulance company, they might take you to a hospital that doesn't do intervention. And the other thing that I kind of like, Josh, in that space, we've partnered with a company called Viz.ai and -- were you going to ask about that?

No, no. It's perfect timing, yes.

Because Viz.ai is a company out of Israel, they have operations in the Bay Area. They're an artificial intelligence company and what they do -- our team helps -- distributes that for them. What they do is on the PAC system, every single head CT in a hospital that uses this technology automatically goes through an algorithm in a millisecond and it scans for a large vessel occlusion. If they see a large vessel occlusion, that is immediately elevated to the stroke neurologist, and at the same time, the entire stroke team, on their mobile phone, get an alert like an AMBER alert that says there's a possible stroke, and they get the images. So if the interventionalists or the neurosurgeon is driving home and the phone lights up, many times, they look at it and they see the CT image, and they say, "Yes, that's probably a stroke." So they turn their car around and go back to the hospital. But the benefit of that has been -- certainly, a stroke maybe gets a little more commoditized with the different products in there, but the benefit of that has been is now we're seeing statistics where we're shaving 59 minutes off of intervention time. And the reason that's so powerful is it's not replacing the stroke neurologist, it's simply elevating something to the top of her or his inbox that they can then look at and make a determination on and make the diagnosis. It takes the acute and actually brings it to their attention very quickly, alerts the team very quickly and really sets up the structure. And it's so disruptive because if you really look at how it has been done, there's a lot of these mobile units that drive around hospitals and a physician can operate them from afar, and they can look at a patient with a nurse there and do a diagnosis. And that's still going to be important, but the idea that somebody gets a CT and then they linger for a while, while somebody is trying to make a decision, or taking that time off, every minute you lose in a stroke is 1.9 million neurons dead. So 1.9 million neurons dead. Every half hour that you can improve time to treatment, you actually are able to shift patients down on the modified rank-and-scale to better results. So this stuff is really important, and we think it's a very pragmatic use of AI in a very pragmatic space.

Maybe just one last question. I just wanted to throw in just -- there's been a focus on Medtronic's operating margin line, and the corporate-wide guidance have been in this kind of 40 to 50 basis point range. RTG, I believe, is margin accretive to that business. And just maybe talk about prioritization of leverage and operating margin expansion in your business. And then -- and how you see that progressing.

It's interesting. When Geoff took over, one of the things we talked about was how do you continue that, how do you continue to grow. And I think one of the things we're looking at as a company is not only growing the top line, which helps a lot of things, but really trying to simplify the company. Large companies can become an interesting patchwork quilt. We've grown the business organically. We've acquired a lot different technologies. But what we're looking to do is say, "Okay, how can we get more efficient, still get the right decision, still get things done but look at the structure and be more efficient?" We're going through a bit of a restructure in RTG, where that's somewhat the focus there is. It's not -- although there -- we will see some cost savings as a result of that, it was really about the strategy, get close to the customer, get more efficient in your decision making, be able to do that more quickly and then be able to do it in a way where some cost does come out, but then you have the option to return some of that to shareholders and then take some of that and invest it back in the business. And that's always the mantra. We have to be -- there's no reason why we can't be nimble, why we can't be fast, why we can't be thoughtful and still be big. I haven't figured out why that's mutually exclusive. I don't think it has to be. I think you'll see us focus a lot on how do we move at pace, speed is our friend. We can do it thoughtfully. We can do it with the right intentions, but there's no lack of benefit in maybe being a little faster in doing that and getting ahead of where the market might be. Making -- and then doing it more efficiently because sometimes, when I look at layers, myself right now in my best businesses, I'm 5 layers from our salesperson. I don't want to be 6. I don't want to be 7. I want to be close enough so we can see those things happening. And then we have some business where it's not quite that efficient, we're going to make that more efficient. So...

Got it. Thank you so much.

All right. Thank you.

It's been great pleasure.

Yes. Great to see you. Thanks so much. Thanks for having us.

Thanks for joining the conference. Appreciate it.

Take care.