Medtronic plc (MDT) Earnings Call Transcript & Summary

Hello, everybody, thank you so much for coming to the next session. This one is with Medtronic, represented by Brett Wall. He is the Executive Vice President and President of the Neuroscience portfolio, which includes 5 operating units: Neuromodulation, Cranial & Spinal Technologies, Neurovascular, Pelvic Health, and EMT. Brett, thank you so much for joining us. Uh-oh, I don't hear you. There you go.

What I was saying, it's a pleasure to be here. So hopefully, you can hear me now.

Great, cool. Hello, great to hear you. Love technology, so Brett, can you tell us a little bit about yourself, your time at Medtronic and how long you've been heading up this business unit?

Yes. It's been about 1.5 years or so. When I came through the Covidien transaction. And I was running the Neurovascular business there, which originally was ev3, which is kind of where we started this whole thing. And so I've been in this role now, when Jeff was appointed as President and then CEO, I moved into the RTV role. And then as we change the operating model structure, now we've entitled it neurosciences. And that's been the only operating systems, the new operating unit is going live as of February, and then this role has been about 1.5 years or so.

It's funny. We covered ev3, Covidien. And now I'm talking to you at Medtronic. So it was just a matter of time before we did this call. But when you think about running all of those different businesses, it's not a small business. It's a lot. How do you think about integrating research and development, SG&A, product development, all the different pieces that make that franchise work?

Yes. I think a couple of things. When you look at the business itself, you're right, there are 5 operating units. It's about a $9 billion piece of Medtronic's overall business. And it's all primarily related to neurosciences, but the markets are different, and the technology is different. One of the reasons we moved to this new operating structure, if I go back to what Geoff Martha was talking to me about, he said, he said, you don't remember what you didn't like about the corporation when you are running the business. So as we think about structuring or restructuring the company, think about that. And really, what we have here now are these 5 operating units that are very close to their customers, very close to the markets and understanding the markets and then very close to, frankly, the teams that are doing the work and understanding that work. And what we like to be able to create is an environment where there's freedom within a framework. And that's a lot of how we did it at Covidien, which was great. And I really like that process, where you have a few metrics you're going after. I need to generate a certain level of top-line growth. I need to hit an income number and I need to manage my cash flow, which kind of helps me understand how much capital I can invest in different areas. And if I have those metrics and understand those metrics, and I'm running a business and I'm closer to that business, then I can start making the trade-offs and decisions about where do I invest, how do I go to market, what technologies are the right technologies. And so the example I would give you in our Pelvic Health business I don't really want it to be Medtronic against maybe the one other company that's out there. I want it to be Brook Story's business where she is in Pelvic Health then and her team are out there. With this other company, with the customers in the market and making all those decisions. So we want to provide that flexibility because I actually believe that the level of real granularity on what to do and how to do it resides at that level of the organization, probably less so at the previous group level that we had there. And it was harder to make those decisions across the enterprise. And then the goal here is make those decision easier, faster and provide the levers to those operating unit President's and their teams. So they can pull them and make different decisions.

And I hope we can probably spend a whole discussion on COVID-19, but we're not going to. But I do have to ask, how has that impacted these 5 units?

It was really interesting because all the businesses are a little bit different. So it impacted them really in different ways. So what I guess what it was now, we really started feeling the brunt of this, probably 11 months ago, right, in the March time frame I think, it was building around the world but in the March time frame, the avalanche became pretty clear. So if I look at the different businesses. Interestingly, in stroke, what we saw, you would think stroke, very acute. Big problem, great therapies for it that there wouldn't have been an issue there. But what we saw is we saw people not going to the hospital. And so at different times, as COVID spiked, we saw maybe a 10% depression in the number of patients that were actually arriving, getting CT scans and moving through the process. One of the things we did there is we worked with our CBD unit and with the American Heart Association, and we worked with them on the Don't Die of Doubt campaign doing public service ads, just to tell people that don't be afraid of COVID-19. If you have these types of symptoms, get to a hospital and get therapy. And that was helping to some degree, but we've still been able to see that. So they had a very different reaction. Whereas if you go to spine, where there is a pretty good depression in these elective cases. And what we saw at the beginning of the pandemic, primarily where governments would do kind of large shutdowns over large geographic areas, the cases plummeted and went down. And what we made a determination to continue to invest in at that time. I mean, as you've tracked us, you've seen our earnings and the other things. But we made that very distinct determination to do that. But now in the recurrence, we had a great start to Q3 -- fiscal Q3. And then we saw in the back half of December and January, more pressure on cases as COVID came up. But it manifested itself, at least in a different way in how we experienced it. What we saw were like spot shutdowns, and then as hospitals, we're getting better at, first of all, understanding, okay, how many ICU beds do I have? Do I have enough personnel to manage the situation? They were restarting a little more quickly. And usually, it wasn't the entire geographic area. Sometimes it was different hospitals in the same city would make these changes. And so what we saw was even though we saw a spike here and we did see pressure on cases, it wasn't like in the same way that it was done before. And so the teams have responded in that way by finding different ways to engage with physicians, making certain that our teams are ready and available to be in the hospital. And then the other really interesting thing is our capital. What we saw was a really strong capital quarter in fiscal Q3. So even now during the height of this spike of what we're seeing is we had a record in spine robotics, a record quarter in spine robotics. We had a near record in our navigation system, our Stealth navigation system, StealthStation which is used in cranial, spinal, and we have another version of it for ENT procedures. We saw a near record there and then a new record in our O-arm, our visualization imaging system, a near record for that. So when we see hospitals and we talk to administration and we talk to individuals that are making these decisions, they actually want to be prepared for when the case load starts to turn. We haven't seen the full turn yet, but we do believe it's out there and then maybe sooner than we think. And so they're preparing for that. So with those capital purchases, that's usually a pretty strong indicator to us that the procedural volume follows that, and if you look at our business, it's a little more skewed to the U.S. than it is outside the U.S. just a little bit. And in our system here, there's a great need of the patients to have it and the hospitals and the physicians actually want to perform the procedures. So we think those things are going to work well for us.

We pull apart 2 different ideas, and I'd like your opinion on them. One is what we saw last summer was a very sharp recovery, a good -- what we call a V-shape recovery. But some of the people that I'm speaking with physicians and management such as yourself, are saying we might not see as quick of a rebound because patients may wait to reenter the funnel until they're vaccinated. Do you agree with that viewpoint? Or is it similar to last summer, the window is open, I got to get it done, let's go?

I don't think it will be quite the same V-shape recovery. I think what we're going to see, though, is a good, steady recovery as we go forward. I mean, great news, with more vaccine being able to be on the market here. I think we're going to move from -- maybe this wasn't done very well to -- as far as vaccine becomes available, more people get comfortable. But I also think what we've seen is maybe not the same depths of depression in the cases that we saw. So I think that's a different dynamic because hospitals seem to be much more equipped now from the standpoint of instead of just shutting everything down in the United States specifically. They're doing -- I think they're being more pragmatic about it, probably finding ways to restart a little bit sooner and doing those procedures. And really across the board, that's good for the hospitals because our system economically, that's good. At the same time, there's a huge amount of patients that's needed and it's there. Now in Europe, I mean, that might take a little bit longer because the system is different there. And the way things are working there is a little different, but probably won't be the same V-shape recovery, but I also don't think we have the same dramatic drop in cases. We didn't experience Niagara Falls. I mean, we experienced -- we did a year ago, but it wasn't quite that dramatic this go around.

And one of the other things, I'm switching gears a little bit here to the capital equipment comment is. We're picking up 2 different things this quarter as we speak to management teams, 1 that's saying, hospitals had money left over at the end of their calendar year, so they were buying more capital equipment. And I'm also running into physicians who are saying to me, we're anticipating these procedures coming back. And therefore, we want to be prepared, particularly when it comes to things like robotics and navigation, which is the right answer or is it both?

I think both. I think both because if you look at Q3 a year ago, fiscal Q3 a year ago for us was like a record quarter.

Yes.

Before the pandemic really took hold. So we saw ourselves reapproaching those numbers. And in one case, with robotics, spine robotics, exceeding that. And so that maps with our experience. So I think we can hold that idea and have both things be true. That at the end of a calendar year, there are the desire to maybe spend some dollars that are available to make sure that you have the capital that you need. And at the same time, these patients are still out there and still need the procedures and still need to work. And I go to spine or I go to SCS or these other patients in intractable pain who maybe have delayed the procedure they have a strong desire to get the work done and to have this work done and have -- and get relief. And so I don't think that dynamic necessarily goes away. So I see that turning now. Does the turn happen? Did it happen in January? No, of course, not. Is it a little better in February? Well, yes, maybe. But hopefully, we'll get March to be a little better than that, and April better than that. And then we see a turn out there someplace as the vaccine rate goes up and the transmission rate goes down, and we just get back on the road to -- I won't ever say normal again. I'll say some semblance of normal, but I think a better normal than where we are today.

A new normal. So shifting gears a little bit here. At the 2020 Analyst Meeting, Medtronic unveiled the Cranial & Spinal Technologies Group. And put in there, robotics, navigation, imaging, implants, and biologics. And by my math, Medtronic has the broadest grouping of all of those products currently on the market. You want to talk a little bit about how that's an advantage to you.

Yes. We're really creating an ecosystem there. And we've had the patients to kind of go at this really step-by-step and create all the different technologies. And really, I think in some cases, what we've seen in the Spine business, in particular, is a consolidation in some cases of that. And maybe in some cases, maybe deciding not to be in that business anymore. I think we've seen some of those areas, and we've taken a very patient approach to this. Let's -- I would say we're patient with how we really see this moving forward. And we believe that by creating this ecosystem, where we can now plan procedures with Medicrea and get very, very good results on the plan. Incorporating that with our navigated procedures, our robotic procedures which we're continuing to increase the capability of the robot with new product launches and new capabilities on the robot, which we can talk about. By having imaging there that where we can do confirmatory post-procedural imaging. And now even with Medicrea in complex procedures, we're actually making personalized rods for advanced procedures that are personalized to that patient. There is no other one like them in the world because they're exactly for you. So that's what's kind of interesting. So instead of trying to manipulate it or bend it or do kind of work during the procedure to get it right. This will be created specifically for that patient and ideally and exactly for them. And we think all of that then leads to a better system to operate in, better outcomes and actually makes the procedure frankly, you can do more, you can do more in a way that you're under a lot more control. And at the end of the day, you're going to get better results. And so that's the system that we're creating with all of that technology. And it all speaks together and works together. And then on robotics, what started out as effectively a screw trajectory system. Now what we have is, we have interbodies that we've just launched that are navigated. We have navigated Midas Rex with robotics, so now we can remove bone and do so in a very controlled way, and that's of great interest and we're going to continue to add capabilities to the robot and just get it better and better and allow it to do more things, more complex procedures, and we're just going to keep adding to that system. And by bringing this all together, we really want to create a system that physicians want to enter into and don't like leaving. It all works together, and it all works seamlessly. And I also think as we see new physicians who are training today, entering this world. What's interesting is that they grew up with all this.

Right.

Unlike me, there are others who had to adapt technology or adopt technology later. We have new generations coming out now that, frankly, not only did they grow up with it, they kind of expect it. And so delivering on that promise becomes more important. So I think it's the beginning 1 or 2 chapters of what's going to be an interesting book to read in the space to launch.

And what products do you think are missing from this relatively large portfolio already?

I think what was -- I don't think we have necessarily anything missing. We can almost play in every single aspect that we want to play in. But we've also had to make decisions. There are certain areas we're going to invest in, maybe more than others and have technology there where we haven't added a new disc for a while. That might be something eventually that we want to take a look at. But there's areas there that were very thoughtful choices though. Medtronic, we're a large company. And certainly, this business is a very large business, has a very large P&L, and there's lots of things that this business is doing. But one of the things that we always kind of say inside neuroscience as the mantra is that we can probably go after any problem we set our mind to, but we can't do every problem. So we just have to choose carefully, make those decisions. And then when you lock on to those decisions, you have to fund them and then you have to see them through to completion, that's one of the other challenges is once you decide to do something, it doesn't mean you continue to do it no matter what, there could be some dynamic that happens where you decide I'm going to change. But what you have to, I think, not have is a fear of missing out. Like I decided on this, if something else happens, you have to constantly evaluate but be very, very committed to your strategy. Many of these technologies, they don't happen in 6 months. And particularly, if we look at our PMA-level products, those are multiyear commitments. And one of the things we did when Geoff was running RTG, and I was running the brain group there, we made decisions there that when we decided to invest in one of those multiyear programs, we would always make the decisions to continue funding. No matter what happened, no matter what bad news was waiting for you that you didn't know about yet. We would make the trade-offs and the sacrifices there because it's not hard to usually start funding something in year 1. It's really hard in year 2 and year 3, with all the other things come together. And so we made those decisions, and that's really a philosophy of ours is when you start, you don't stay beholden to it no matter what. But usually, you can stick to that. You stick to it and you fund it and you continue funding it and you take it through to completion because when you get it done, you're going to have this great new product and new technology. But it requires commitment. It requires managerial courage to do it from the teams to make the trade-offs to make it happen.

I want to spend a little bit of time on Mazor. And that acquisition and what it has brought to you? Do you specifically have an estimate of your spine robotic market share? And my second question is now what do you do with that technology? Like the robot is out of the box, now what do you do?

Well, the first thing, we don't reveal all the market shares because if I give you that number, I think you already know how many the other guys sold. And so now you're going to do the numbers in reverse. We do have a -- not you. But -- and you could do that. That's why. No, we are outpacing the competition. We know that. We continue to do that, and we have -- we are building a large installed base there, and we're going to continue to build that. And we're not quite at we're some of the hip and knee are at installed base. But we're -- but we are building that, and we're moving in that direction. We're continuing to build that installed base. I think what the robot actually provides us is like a lot of these new technologies, when you bring out the first iteration of it, it's really hard for people to kind of see -- like a lot of the commentary we would receive is like I can do this faster without the robot. And it was -- absolutely. I know you can. But what we're actually doing here is, we want to build an initial capability, we want to learn from that, we want to add the next capability and the next capability and the next capability after that. And in this world -- this increasingly digital world, where AI plays a role or these other -- I guess I would call in decision assistance aids, started to working. They can really augment the physician in a lot of different ways. And I think it was going to be able to bring to us as we integrated in our system. It's not only augmenting the physician's hands and providing ways for the physician to do the procedure. But I think it's going to actually augment some of the decisions and how they decide to do things, and the approach they take to the procedure. How it's planned, and how it's done. Medicrea which fits into this ecosystem. The reason we acquired that was the ability to plan and get the correction that you want is really powerful. And having that type of a tool available for physicians to start utilizing to get a better correction is really, really interesting. And we had a workshop a few months ago, where we are socially distanced, we did it the right way, but we had a workshop where we had people shape rods for the correction and then we actually had -- and then we did them with the technology. And what we found is what you would expect. The -- people have been shaping rods for a while are pretty good at it. But when you use artificial intelligence, when you use the algorithms in this system and then when you custom make it, the rod is about as close to perfect as you can get. And we think that's going to have an impact over time. And that's going to create better procedures and as we integrate some of that technology with robotics and be able to do these procedures robotically which w'ere not there yet, but we're going to be able to do that. It's going to build upon that system and then what you'll see is further iterations of the robot, new platforms of the robots and these types of things. So I kind of see it working like some of our other capital businesses where we build a platform. We take it. We add to it. And then over time, we bring out a new platform. As you update the platform. And we've been doing that with StealthStation and other technologies for quite a while. And it just gets better, and you learn, and you incorporate that, and then you eventually build a new platform and you do the same thing and you keep moving.

Do you think we're at the stage where physicians and hospitals have stopped asking, do I need a spinal robot and they're well into, do I need a second one or which one? Or like I'm trying to understand the tipping point is really where I'm heading here.