Medtronic plc (MDT) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thank you so much for joining us during our annual health care conference, and I hope everything is going well with this virtual format. This is Matt O'Brien from Piper's equity research team. I'll be moderating this fireside chat with Medtronic. From the company is Mike Coyle, the Executive Vice President and President of the Cardiac and Vascular Group. One quick housekeeping item. If you do have questions for Mike, there's a box at the bottom of the Zoom call here that you can send them in, and I'll ask on your behalf or you can e-mail me directly at [email protected]. So with that out of the way, let's go ahead and get started with the fireside. Mike, thanks so much for joining us this morning.

Thanks for inviting me. Good to be here.

Of course. So Mike, can we start off with Micra. We just continue to be blown away by the performance of that product specifically. I mean I think in the last earnings call, you said 75% global growth, 84% here in the U.S. There's a lot to unpack here, I know. But how much of that stellar fiscal Q2 growth was backlog versus just more traditional business versus getting into the new indication?

Yes. I think like a lot of our emergent procedures, pacing is not something that has a big backlog. It got worked through pretty quickly. And so what you're seeing, I think, is just the underlying strength of the technology from the standpoint that we're capturing important sort of unit adoption in certainly the single-chamber segment, where we've been in the market for a few years now. But obviously, the release of the AV product now allows us for the first time to move into what has been a dual-chamber segment of the AV block patient population. And of course, not only do we take unit share with the technology, but it comes at essentially 3x the price point of a traditional endovascular system. So collectively, that's really what's behind the driving of the growth rates that you're seeing.

Got it. Okay. And what exactly are you seeing? I know AV block plus AF, that market size is a couple of times the initial indication, which is just AV block only. So you've done unbelievably well just on the AV block side. If memory serves, I think you said you've gotten about 80% share just in that patient population. So do you think you could get to 80% share in this indication, which is twice the size of the original one or more than twice the size?

Yes. The VR segment, the single-chamber segment, which is basically patients with AV block and atrial fibrillation, represents about -- we'd estimate around 17% of the market. As we now have moved into the AV block segment, so this would just exclude patients with sinus node dysfunction, we now open up the market to about 55% of the total available patient. So to your point, on the VR side, the single-chamber side, we got to about 2/3 unit -- 2/3 of our units are in Micro now versus the traditional pocket device. And that's because, frankly, there are very few trade-offs for that patient population. When you move into the AV block patient population, there are some considerations that physicians may have about whether -- if the patient develops sinus node dysfunction with a conventional system, they could just do sort of reprogramming and take care of the patient. So the penetration will be a little bit less in that group. And also sort of the Bluetooth connectivity capabilities of the conventional systems lets you do sort of diagnostic device tracking real time to the patient's phone or to the bedside monitor, which you don't get with a Micra. But the benefits of essentially eliminating 60% of the complications associated with the implant, and the patients really enjoy the fact that they don't have a pocket device that's reminding them every day of their underlying condition, really has created a lot of patient pull. So we don't think we can get to quite 80% revenue share, if you will, that we have in the VR segment. But right now, we're sitting at about -- I would estimate about 14% of the AV block implants that we have at Micra. So we still have a lot of running room to go on this technology.

Got it. Mike, and that's really interesting. So speaking of running room, I think you said on the call, you're annualizing the $350 million of revenue. And I know we'll get to renal denervation in a minute. But can this be a $1 billion or $2 billion product for you guys eventually on a global basis? And then how much more time do you think you'll have alone in this marketplace?

Well, certainly, we think this segment can be $1 billion market just with the 2 devices that we have already introduced, meaning that the AV block plus AF and then AV block generally. To get to a $2 billion market, I think we're going to have to wait for the third device, which basically is the Micro AV. And that's a product that would actually not sit in the ventricle, it would sit up in the atrium. And it would sense and pace from the atrium. And that would then allow you to basically treat patients with sinus node dysfunction. And that alone would get us to about 90% of the patients. And then, of course, by communicating between the 2 devices, you could actually do true dual-chamber pacing. So over time, we expect to be able to address all patients with this approach. But we're still a couple of years out of the Micra Atrial product being developed and proven in clinical trials. In terms of competitive product entries, it's a little opaque to us in terms of -- there had been a product from Abbott called the Nanostim product that was removed from the market several years back. We have not seen that product reenter clinical trials, though we are seeing some announcements of -- on clinicaltrials.gov that there may be some trials about to -- or will be launched in this area. So perhaps we'll see that technology come back. And then, of course, Boston Scientific, as mentioned, usually in the context of a system with their subcu ICD, a dual-chamber system that would include a micro-like device, I have not seen any reference to its use as a standard pacemaker. But I can imagine if they're going to do that in a system, that they wouldn't also do it as a stand-alone device. However, the time frames on that aren't completely clear to me. So we expect -- obviously, it will be some time after they start clinical trials, assuming they go well, and then go through the approval cycle, that we'll have this market to ourselves. And hopefully, by the time, anyone else comes in, we'll have the Micra Atrial.

Got it. Okay. So we're talking at least 2 and maybe more like 3 years where you still have the market to yourself.

That would seem likely, but I don't want to underestimate our competitors' speed either.

Got it. Got it. Okay. Really interesting. Great product. And it sounds like tons of runway still on that one. EV-ICD, why do you think that can be a $1 billion product by 2030? Is ATP and [ pause ] prevention really that big of a deal?

Yes. So there's numerous limitations to the existing subcutaneous device systems. They're much larger than conventional ICDs, much shorter battery life, obviously, much more expensive. But to your point, they are not able to do antitachycardia pacing or post-shock pacing. And if you look at a conventional ICD system in a patient, typically, about half the time the patient gets therapy from the device, it's atrial tachycardia pacing, essentially preventive pacing, where the device has detected a fast ventricular tachycardia and then paces the patient out of it. And of course, the benefit of that is the patient never know it happened because the painless nature of the shocks or of the pacing pulses. And if it progresses on to basically become ventricular fibrillation, then the device provides a shock. And I assure you, the patient knows when they've been shocked. So the subcutaneous ICD only has the option to shock the patient. And so as a result, that's the only therapy available, whether it's a ventricular tachycardia, ventricular fibrillation. The EV-ICD that we're developing basically has the lead sit under the sternum as opposed to on top of the heart or on top of the rib cage. And as a result, it actually can provide a pacing pulse that will stimulate the heart and then allows for essentially a period of antitachycardia pacing before it reverts to a shock. And so we think that will be a very unique advantage of the device. It will also be able to do post-shock pacing. But it will also have a conventional size. Because it's not shocking through the rib cage, it doesn't need the energy requirements that the subcutaneous ICD requires. And thus, it's going to have a lower cost point associated with its manufacturing. But also a much smaller device footprint, which obviously lends itself to lower rates of infection. So we think there will be multiple advantages of this system, and we're very excited about its ability not just to take share, but to actually expand the appeal of EV-ICD therapy to patients.

Got it. Got it. Okay. That's compelling as well. Appreciate that. So let's move over to the TAVR market, Mike. I mean we all understand the bulk order changes that you've made just across the organization and how that impacted the TAVR business in Q2, that all makes sense. Is that fully behind you at this point or 80% behind you, something along those lines? And can we now get a clean look at your performance in this category going forward?

So certainly, in the current quarters, in fact, the Q2 as well as Q3, we are now a true run rate business, meaning the revenue tied to our business is tied to the implants of the products as opposed to customers building up stock of the product. But in the prior year periods, you may recall, pre-COVID, there was a fairly significant ramp going on in start-up of new centers. And so there was actually -- because we were not doing consignment, any accounts that wanted to essentially establish their position in TAVR would be buying bulk product. And so the inventory levels of hospital-held inventory were higher, obviously, in Q2 than they are -- a year ago than they are now. I mentioned a number of around $25 million. We would see that declining to 0 in Q4. And in Q2, we'll probably be about halfway in between, where there will still be some reduction of hospital-held inventories. But we are now moving to a very clear sort of run rate business. And the comparisons by the time we get to Q4 will be sort of apples-to-apples.

Got it. Okay. That's really helpful. And then let's think about Boston a little bit. They're off the market here in the U.S. with Lotus Edge. I know they don't have a ton of share. But doesn't it stand to reason that you would -- you recapture, I'd say, probably a majority of what they did have here in the U.S.?

So you're absolutely right. In terms of market share, they have about 2% of the U.S. market. And those patients who are attending to get a Lotus valve generally are patients who have sort of calcified annulus physicians. And because the Lotus product has basically carried a fairly high pacer rate -- a lot of these patients actually already have pacemakers before they get a Lotus valve. And so the natural patient substitute here is not a balloon expandable product because of the concern of annular rupture. So we think there is a significant opportunity for us to take, if you will, more than our fair share of the business that will be vacated by Lotus. And really, the opportunity for share capture is not just Lotus, obviously, here in the U.S., but also the potential to take market share with the ACURATE -- from the ACURATE neo product from the standpoint that at TCT, the data presentation by Boston Scientific of a randomized study against the core valve product failed to meet its noninferiority endpoint. And so we now have, obviously, significant clinical evidence to basically use -- to take share in Europe, where there's a meaningful share of ACURATE neo in the market. So those 2 things, in addition to what we've talked about before, the increasing evidence around the hemodynamic benefits of supra-annular design, the impact on longevity or durability of the device and, of course, just the development of our field footprint all give us an opportunity to take share not just from Boston, but we feel like we can do that sequentially here from Edwards. So we're feeling pretty good about our share capture opportunity going forward.

Got it. Okay. All right. That's really helpful. What about the market in general? How much runway do we have left between -- as far as continuing to penetrate high risk, intermediate and low risk here in the U.S.?

Well, generally speaking, we would say the extreme-risk and high-risk patient populations are pretty well penetrated on an incidence basis, 70-plus percent kind of utilization of the technology. And we're approaching that with the intermediate risk group as well, probably in the 60s. But the real opportunity is obviously in low risk, where we would say probably penetration rates of the incidence pool are still only about 30%, and then especially in the bicuspid patient population where things are really just getting started. And I think you're aware that in that low-risk patient population, more than half of those patients, probably 60% of those patients, are bicuspid patients. So the availability of the evidence on that particular patient population has now become available from us. And the fact that we see similar results from the trial lead patients means we see a lot of opportunity going forward just to continue the penetration into that group. So we think we have several years here of continued sort of double-digit growth of the market as a result of those patient populations. And I think you heard at our Analyst Day, we're starting to look at more of the asymptomatic sort of patient populations as well. So there's still a lot of opportunity, especially given patients really like the idea of having a transcatheter valve if it's a suitable therapy for them versus an open surgical procedure. And so continuing to generate this evidence will be important to the continued growth of the market.

Got it. Okay. And then from -- well, I guess, let's skip around a little bit because I don't want to run out of time on this, but on the mitral side of things, you announced the design change to the APOLLO trial, where the study is now enrolling using a single-arm design, those patients that are not optimal candidates for transcatheter mitral repair or mitral valve surgery. Can you talk about what the implications are from that design change, both from an enrollment and regulatory standpoint?

So I'm sure you could imagine that prior to that change, when we were trying to -- essentially, we're randomizing to a surgical procedure, that's a difficult sell to a patient who wants relief and knows that there's other alternatives available in the market. So what we did was, with the help of FDA, really narrowed the patient population to those who essentially have a higher level of surgical risk. So they're not ideal candidates for surgery and yet are not candidates because of anatomical limitations to sort of edge-to-edge repair opportunity. And by doing that, basically, we can go to an OPC, objective performance criteria design, and it makes enrollment a lot easier. And we've already seen, despite COVID, an acceleration of our enrollment because of this change. And obviously, the important thing from our perspective is being able to enroll this in sufficient patients to see if our theory that the ease of use benefits versus sort of edge-to-edge repair as well as, and more importantly, the ability to essentially eliminate residual mitral valve regurgitation then provides a compelling argument to then move into a broader patient population. So this, we think, is an important opportunity for us to generate sufficient volume of patients to show the benefit of replacement versus repair.

Got it. Okay. So it seems like from a labeling perspective, it will be a broader patient population then.

Well, of course, we'll get labeling for what we study. But I think the idea would be once you have evidence that in that patient population you get a better mitral regurgitation sort of level, then we can start talking about moving into other patient populations and expanding labeling from there.

Got it. Okay. Okay. That makes sense. Any update on your move to transseptal delivery for Intrepid?

So we are progressing with the clinical evaluation of our 35 French device under an early feasibility study. And so we have multiple patients who've been implanted with that device system and is performing very well. And we have very active engineering and development work going on to basically take that same valve and deliver it in a much smaller device profile. So that work, we've talked about being around a 29 French target, and that continues to progress. So obviously, the idea here is to repeat what happened in the TAVR space, where we basically got clinical approval of the valve based on sort of the combination of the transapical and this larger transfemoral system, but then to iterate the system by changing the delivery mechanism to a smaller profile device and do that as a PMA supplement. So we'll roll it into the clinical study. So that's our approach.

Got it. Got it. Okay. Okay. Helpful. Let's switch gears again. The update on the Arctic Front cryoballoon as first-line treatment for paroxysmal afib patients was definitely an interesting one. I certainly missed it. And it definitely seems very exciting for these patients and for Medtronic and a couple of others that are playing in this space. So can you talk about any analogues that we can kind of think about where drug was first-line therapy before and then a surgical procedure was approved as first-line therapy? How long does it take to convince the clinicians and patients to make the switch just right off the bat to surgery versus using drug therapy, which is less invasive, although much longer lifestyle adjustment for these patients?

Yes. No, It's a great question. I was kind of racking my brain about that. I think you almost have to go back to PTCA, right, to see a device therapy that came in and replaced a drug therapy or became first line, if you will. And most of the devices since then, if you look at something like a WATCHMAN, right, it basically was used first in failed drug patients. But I think the idea here is the compelling nature of the comparison of the groups on multiple studies. We had the first-line study and 2 other studies that have been presented here that basically show when -- at a year, the presence of any kind of atrial arrhythmia was in only 18% of patients on the cryoballoon. But when you looked at the patients who had been on antiarrhythmic therapy, it was 1/3 of them, right? So basically, a very significant reduction in the actual presence of the atrial arrhythmias. And then when you roll in the quality-of-life data, basically any kind of symptomatic sort of result, the cryoballoon has 25% of patients symptom-free in a year, whereas the optimal drug therapy has at -- essentially, 45% are symptom-free. So it's a very compelling sort of story and not just on the efficacy level, but it actually had a better safety profile in these studies, which is a little different than what we saw with WATCHMAN, where you were trading off a higher complication rate in the procedure for some therapeutic outcomes out in outquarters, right? So we think the story here will be very compelling. And to some extent, we have seen physicians in the referral chain already come to this conclusion, where they've seen patients get better quickly on ablation versus their antiarrhythmics. And so there are actually patients being sent, it's not in the guidelines, but being sent for sort of first-line therapy. And I think what this does is really provide the clinical evidence that allow us to get guidelines changed, that will allow us to promote as we get FDA approval for the indication to the referral channel. And frankly, this is one where we would look at direct outreach to patients because, really, they are -- when they are symptomatic and not responding to the medications, they're miserable. And the idea of being able to basically direct them to physicians who have been exposed to the first-line data, we think is a real opportunity for us. But obviously, all of this is going to have to follow the approval for labeling expansion in the U.S., which we'll be submitting for about now and would expect to get toward the end of our fiscal year here. And then, of course, we can start this activity in Europe, where we have CE mark and can begin to promote on this opportunity.

Got it. Got it. Yes, I just got a question through e-mail from an investor, and he was asking about the impact of -- or I guess, the risk impact of COVID as we're seeing a little bit of a flare-up. I guess the question specifically, Mike, would be in CVG, what areas could be impacted if we do see some of these flare-ups?

So I think you know our technology tend to skew to the emergent procedure versus elective procedure kind of continuum here. So things like pacing, ICDs, CRT, drug-eluting stents, our TAVR, in our Tyrx product, drug-coated balloons, they tend to basically get therapy because of the emerging nature of the condition. And there are only a few product categories that have more of an elective nature to them. Our diagnostics business, the LINQ business would be one of those. The superficial venous or treatment for varicose veins is one of those. And to some extent, the low-risk TAVR population can be deferred, and we have seen some of that. But I would say, as we look at our broad categories, those last 3 are the only ones where we're not sort of above the pre-COVID levels of performance right now. And even in those 3 categories I just talked about, they're generally 90%, in most cases 95%, of what volumes were before COVID. So we really have seen some nice recovery across the entire product portfolio. And even as we've begun to hear more noise here in recent weeks,about sort of COVID flare-ups in pockets in the U.S. and Europe, looking at our implant rates, they're flattening a bit from October, but they are not declining. And so we think we're continuing to see how effective hospitals have become at being able to manage patients who need therapy even in the presence of COVID. And I think that -- I applaud the hospital systems around the country and around the world who've figured out how to isolate these patients and still treat their other patients.

Got it. Okay. And we only have about a minute left here. Got a ton of stuff I'm not going to be able to get to, but [ innovation ] we do need to talk about, when are we going to get the ON MED data. And then it's been an area historically that has had a lot of enthusiasm and then a lot of other companies just fail with their clinical studies. So how difficult is it going to be with the clinical community to convince them of your therapy and really see the growth that you're expecting over the next, I guess, 10 years?

Well, I think the principal thing will be the clinical evidence showing that not only it's effective, but the magnitude of the effect and that it works in the presence of medications as adjunctive and additive to medications. Obviously, on the first question of how does it work relative to no med, we've already published those data. We did our original pilot study. Then we enrolled the pivotal trial in a Bayesian design and included that pilot study patient population and saw the same results in a much larger patient population, which we presented at ACC, showing not only statistically significant but clinically important improvement in reduction of blood pressure. We've also demonstrated in our pilot study for the ON MED a very similar effective reduction in the presence of medication of blood pressure. So now what we're obviously waiting on is the pivotal enrollment of the ON MED clinical study, which obviously will include that pilot study population that we have presented and shown positive results on. So what -- we have completed the sort of requisite enrollment, if you will, to basically get to the answer that would support the conclusion of its effectiveness and safety, which we're in the follow-up phases of. And if it -- obviously, if it mirrors what we've seen in the pilot study, as it did on the OFF MED study, that we would expect, certainly by the time we get to TCT next year, to be able to present those data; and combining those 2 data sets, submit the PMA for the product, which would then put us in a position to essentially have approval, let's say, within a year. So basically, that's where we sit. It is a Bayesian design. There is an outside opportunity to come a little bit earlier than that, but not much. So I think that's probably the way to think about the approval. With FDA giving us a breakthrough device designation on this, that also helps immensely with reimbursement for the technology. And so we are beginning now to sort of earnestly look at the development of the market, right, how do we set up the referral channels from those who have these hypertensive patients into the interventionalists that will do the procedure, how do we do outreach to patients which we're already doing in our clinical trial enrollment for these patients. And so those, we think, will be the key sort of items to be able to drive growth. And I think we mentioned at the Investor Day, we would expect by 2026, this is a $1 billion market. And by the time we get out to 2030, it should be triple that.

Got it. Okay. Well, Mike, you've got a ton of stuff going on. I've taken us over and I still didn't get to all the questions I wanted to. But it sounds like a lot of really good things going on at CVG. I really do appreciate all the feedback and your time today.

All right. Well, thank you for the invitation. It's great to be with you.

Thanks, Mike.

Thanks.