Medtronic plc (MDT) Earnings Call Transcript & Summary

Good morning, everyone. Thanks so much for joining us for the SVB Leerink Global Healthcare Conference. I am Danielle Antalffy, one of the senior med tech analysts here. And we are very lucky to have with us from Medtronic, Mike Weinstein, their Head of Strategy and I believe, Corporate Development as well. So Mike, thank you so much for joining us.

Danielle, thank you for having us.

And this is pretty timely given the fact that you guys reported your Q3 earnings yesterday. So maybe let's touch on that. I mean one of the messages that new CEO, Geoff Martha, and really, I feel like it started to change when you joined the company was really going on the offensive and driving share gains. And it feels like based on your earnings yesterday, you're starting to see that. And maybe if you could talk about some of the businesses where you are seeing early success there and how sustainable you think the recent success has been?

That's a good question. What I would say, Danielle, is we're making progress. I feel like, and Geoff feels like we still have a ways to go. But this is -- there are a lot of things we've been trying to put in place, particularly over the last 12 months. You're aware of the organizational changes. You've heard us talk about some of the cultural changes that we're trying to drive at Medtronic. And we're doing it at a time when we've got a really strong pipeline and it's coming to fruition. And we're also doing it amidst COVID. So there's all sorts of challenges, but I feel like we're making really good progress. I think you can see it despite the challenges of trying to dig in the businesses during COVID is, I think you can see it in several businesses. I think you can see it, and I'll just name a few of them, like our Cardiac Rhythm management business, we certainly have been gaining market share, a low-power franchise, thanks to Micro, which is our leadless pacemaker, which is an incredibly novel technology that none of our competitors have. You can see it in -- the business I'd highlight right now is our neuromodulation business -- to me, one of the great turnaround stories in Medtronic is Deep Brain Stimulation. This is a business that Medtronic invented going back 20 years ago and over the last 5 years. Effectively, the technology curve had flattened out and new competitors came in, Boston and Abbott, and Medtronic lost market share. In fact, from a technology standpoint, there were some technologies that competition brought in that Medtronic didn't have. So Medtronic lost share over the last few years. That started to turn when we introduced Percept, which is the first Deep Brain Stimulator that has the ability to actually sense activity in the brain, which is no easy task, very, very hard to do. And we introduced that last year, first in Europe and then in the U.S. And we have this whole string of technology that's coming in front of us that is going to just blow away the competition, we'll be so far out ahead. And so this quarter, this last quarter, we just reported, Danielle, was the first quarter in the last several years in which we've gained market share in DBS. And it should be the first of -- I would expect share gains over the next several years in that business. So yes, there's a long list of businesses like that. Not every business is where we want it to be right now. And that's clear, which we have more work to do. But in aggregate, we have more businesses that are taking market share than we had 6 months ago, 12 months ago, and our goal is to keep driving that percentage higher. And if we do that, Danielle, if we just execute in our businesses today, deliver on that pipeline that we've been talking about over the last 12, 18 months, We should be able to grow above our WAMGR, which is that 5% before we even talk about all the big new market opportunities that you're aware of.

Right. Like Hugo, like renal denervation, that would all be incremental. Got it.

That's right.

Got it. Okay. And so just to sustain that success, I mean, presumably, your competitors will continue to try to iterate their products. And so competition gets fiercer. And Medtronic is going to have to improve R&D productivity versus where it was, call it, 2 years ago or whatever, a few years ago. So can you talk about what's happening within the business to do that? I know Geoff has spoken about making Medtronic more agile. So maybe talk about what's changing from an R&D productivity perspective and how businesses are being held accountable in a different way today to make sure that, that improves?

Sure. Well, I think the good news is that Medtronic, we talked about this over the last 1.5 years is that -- there was this long period of investment in R&D at Medtronic that had yet to bear fruit and some of that is still the case today. The amount of money that has been invested and we are investing today in FY '21, and the FY'22 in say soft tissue robotics is significant. That is not a small number in Medtronic. That is a very significant number. Renal denervation. The amount of money we're investing in transcatheter -- mitral replacement and repair and tricuspid replacement. So a lot of kind of the bigger technology that we would have been investing over a long period of time. And part of what you see, Danielle, in the industry is some of the bigger success stories in terms of new market creation are just taking -- sometimes taking longer to come to fruition. So if you looked across the industry and say gosh, what's driving growth at Abbott or Boston or another player. They're actually technologies that were developed maybe 10 years before. This for a lot of reasons took a long time to either have the clinical evidence to get reimbursement, to drive adoption, all those different pieces that have to fall in place. So at Medtronic, there were some big bets that the company had made that just have yet to contribute to growth. And so there was I think a period of time in which the weighting of the R&D spend was towards a number of bigger bets that were -- that just happened to kind of line towards the same time period. And so for a period, Medtronic didn't get the benefit of a significant amount of spend beyond kind of the iterative. Now we're in this phase where we should start to get the return on those bigger projects in addition to what's been going on a day-to-day basis, on some of the -- you talk about -- like we talked about Deep Brain Simulation a minute ago. The investments that were required to turn around that business, that was 3 years prior to seeing any benefit from it. So it's -- the good news on the R&D front is we're now in this period where we're just starting to get the benefit of all that money that was spent going back sometimes 5-plus years ago to generate. So it's less about R&D productivity, although I definitely think there's an element to that. And I do think Medtronic has gotten better and the industry has gotten better, but I feel like the returns on that R&D spend or what's in front of us that I would be excited about from the investor side.

Understood. Okay. So I understand. I guess one of the -- as you were talking, I was thinking like a good case study here is spinal cord stim. And when Nevro, a competitor came to market, Medtronic, this predates you of course, but you were a covering analyst. So Medtronic was kind of caught flat-footed. And it feels like -- and tell me if I'm mischaracterizing this, but it feels like new Medtronic, if -- I coined that, whatever you want to call it, is not going to let that happen again and is going to stay ahead of the curve. I mean it sounds like that is the goal in these -- across their businesses. Is that a fair way to think about it?

Absolutely. Absolutely. And your characterization of, I think, of what happened at spinal cord stim is 100% accurate. I think the company was a bit asleep at the switch, and that and I don't think that was the only case where that happened. And it's -- so there's a new dynamism in Medtronic. There's a new awareness of what's happening outside of, call it, the four walls of Medtronic, where it's -- the company is more competitive. The company is anticipating competition and trying to raise the bar on competition. A lot of times, what happens in the industry is a market develops and the momentum and the adoption of the technology slows. And then so the companies tend to put their resources elsewhere and let kind of that technology curve flatten out. Medtronic, I think, has done that and part of what we're very focused on is not letting the technology curve flatten out. We've done a ton of innovation across segments and making sure that we're getting the most out of those R&D dollars to see that doesn't happen. And when competition does come, we're not going to cede share easily. And on the flip side, we're going after competitor share, too.

Yes. Okay. Got it. You mentioned the business reorganization. It sounds like you guys are implementing more of a silo format, if that's the right way to think about it across the individual businesses presumably to improve transparency and thus accountability. But I was curious if this effort could also potentially lead to more portfolio pruning to shed underperforming businesses and/or those that are just no longer a strategic fit? Are you at a point yet where you guys are looking at that? Or is that something that's not on the table right now?

Well, that's a good question. And what I would say is my view, Danielle, and I imagine you probably share this view is that the best companies in health care over the last 10, 20 years have been active managers of their portfolio. Our #1 financial objective at Medtronic is to accelerate and sustain our growth profile, right, at a higher level. And so to do that, it means delivering on our pipeline, it means executing on our existing markets. It means externally, adding bolt-on technologies that can help accelerate our growth or competitiveness. And it means reviewing our portfolio. So we have in place now at Medtronic, a very robust capital allocation process where we view every business through its own specific lens. There are businesses that we are investing in today -- for growth today and there are businesses we're investing in for future growth. And there are businesses that are more mature businesses that we may be harvesting in order to use those -- their profitability and cash flow to another business. And so every business is viewed through a portfolio management lens and the businesses where we -- I would say, either they're lower margin or lower growth businesses where we just have higher priorities. We're going to consistently evaluate what is the best use of Medtronic's capital and what's the best thing to do with those businesses.

Okay. And then the flip side of that, you guys talked about this on the call yesterday as it relates to your M&A strategy. And it sounds like it shifted very much towards -- again, tell me if I'm wrong, but almost an early stage, like maybe the Boston Scientific playbook, like early-stage, pre-commercial and Medtronic put some money behind bringing technologies to market. Is that a fair characterization? Or am I totally mischaracterizing that?

Well, I think it's fair. What I would say is that the targets are tending to be earlier stage, right? The valuations on, say, public market companies that are growth assets are, in our view, and I think I'd probably speak for the rest of the large multinationals are not at a level that would be attractive for acquisition. So that tends to drive...

The prices are quite high.

Yes. I mean that -- and that tends to drive companies. So in addition to acquisition, part of what we've been doing is we've just been much more creative. We've been very active in our venture portfolio over the last 2 years. That's kind of -- most of that's below the radar screen of what the Street sees. We've been very active in structuring relationships and potential future acquisitions. So that does, by its nature, move us towards an earlier stage of targeting and partnering and trying to identify technologies where we can create the most value with them at an earlier point of development.

Can I throw another case study at you. So in your spinal cord stim business, you guys have an investment via the venture fund in Saluda, which has been developing a closed-loop technology. But Medtronic recently announced at their NANS analyst meeting that they will be going forward with their own closed-loop ECAP system. So is it fair to say that, that was an investment that was made, but from a return on investment perspective, When you guys look at this, do you think developing that technology organically is a better return than making that acquisition. Is that like a fair thing to say?

I think so. I don't want to get into the specifics of that one, but you can assume, number one, that whenever you can develop something internally, the return is the highest versus spending capital to acquire something that's outside the company. I do think in spinal cord stimulation, we have today with our existing product that we introduced a year ago, the best-in-class technology. And that itself, the acquisition of Stimgenics was a partnership that Medtronic had done to develop technology that we -- that was developed on our -- for our -- specifically for our platform once it was developed and demonstrated the results in clinical trials. We then acquired the technology which was, again, designed for our platform and launched it. So now we have, we think is the best-in-class platform. And so when we look at ECAPS and what we can potentially do and this is getting a bit in the weeds probably [indiscernible] as close to it as you are, Danielle. But we look at what we can do and effectively closing the loop in spinal cord stimulation. Doing it on our platform adds significantly more value than maybe a platform that might be a lot older technology than what we have in-house today.

Okay. That makes a lot of sense. Okay. I do want to shift gears a little bit and look at the COVID impact from a high level. Because Rich, the other med tech analyst and I actually hosted a panel on Monday on site of care and shifting site of care and how also with the President and CEO of the Northwell Health System around how delivery of health care is changing, probably, in some ways, permanently because of COVID. So Medtronic is a supplier to basically every health care provider across the country in some capacity. So from your perspective, how do you think COVID has changed or will change the delivery of health care? And what are companies like Medtronic going to have to do, like what technologies we'll see a more outsized focus? How will clinical and regulatory pathways change? How our pricing negotiations change to adapt to this change in the delivery of health care?