Medtronic plc (MDT) Earnings Call Transcript & Summary

Good morning. I'm Larry Biegelsen, the medical device analyst at Wells Fargo. And it's my pleasure to host this session with the management team from Medtronic. With us, we have Bob White, Executive Vice President and President of Medical Surgical. Also somewhere hiding in the background is Ryan Weispfenning, Vice President, Head of Investor Relations. In terms of the format, it's going to be a fireside chat. If anybody has a question they want me to ask on their behalf, please e-mail it to me. And before we jump in, just by way of background, Bob, of course, heads the nearly $9 billion Medical Surgical Portfolio of Medtronic. It represents about 30% of total company sales. So Bob, thanks so much for being with us.

Well, Larry, it's a pleasure. It's great to see you again.

Thank you. Same. And I think we're going to try to do a polling question. It's worked well. And in terms of the structure, I was going to ask a couple high-level questions about Medtronic and MedSurg and then spend the majority of the time on the Hugo surgical robot, which is obviously housed in your business. So let's start with the key business trends. You guys reported fiscal Q1 earnings in August -- late August. You talked about an impact from the Delta variant. And you made some assumptions. You gave us 150 basis point impact for fiscal Q2, I believe, and some assumptions of when cases would peak and hospitalizations would come down. How -- it's only been a few weeks, but how have things trended relative to your expectations?

Yes. Thanks for the question, Larry. And as we noted a few weeks ago on the earnings call, we started to see the Delta variant have an impact in late July and then into August. And certainly, when we saw that impact, Larry, it was in procedures that required an ICU bed or those that were deferrable. But interestingly enough, Larry, and we said on the call, we really expect the impact to be transitory. We called out the 150 bps, as you mentioned. And when we look at the epidemiology, the vaccination rates, the IHME curves, we really see the impact localized to those major metropolitan areas that have really lower vaccination rates. And I think really that gives us optimism about the transitory nature of this is I think the health care systems, and we'll talk about the U.S. for a minute, are just in a better position to treat patients and work their way through the pandemic. So we feel optimistic. We feel really good, obviously, about the rest of the year. We'll talk about the pipeline and where we're at across Medtronic. But we're in the same place we were on our earnings call that we expect to be transferred. We expect to get through this.

So the 150 basis points still holds?

That's right.

Okay. Because I assume the cases would peak in late August, early September, and I'm not sure that's the case yet?

Yes. And it's so localized and situational, right, Larry, as you know. I mean you look at some of the hotspots, if we can call that around the country, sure they're struggling. But it's not like it's a contagion that's spread across the country. You know what I mean. So -- and the other thing we look at, Larry, and you can appreciate this. You look at some of the leading indicators, certainly for the surgical business and what is the consult volume. So are people scheduling consults, which are a precursor to surgery. And we're seeing those consults still at a really good level. So we're feeling like we're going to get through this.

That's great. And I assume you're talking about the Medtronic overall?

Correct. Yes.

Because I wanted to transition to your business. And I think you probably had the strongest quarter in fiscal Q1 relative to the guidance you guys gave. So congratulations.

Thanks.

And it sounds like your business was more resilient than some other areas of Medtronic. Why was that?

Well, I think when you look at the portfolio across, Larry, you mentioned, we've got a $9 billion-plus piece of Medtronic. In the surgical business, we provide those surgical technologies to all types of procedures. So oncological procedures were not being deferred. There are certain procedures that are not being deferred. But we saw some softness like the other portfolios did in deferred procedures. But overall, we did weather the storm well. The other thing is we saw great performance across the rest of the portfolio, too, right? We saw a good performance in patient monitoring, good performance in respiratory interventions. Ventilator sales, while they've started to come down, in Q1, were still above that pre-pandemic level. Now we'll expect that to come down. We talked about the headwind here later in the year. But the portfolio overall is performing well. The innovations are paying off. You and I've talked about that in years past about the investment in the pipeline. So we expect to see good strength continued out of MedSurg.

That's helpful. And maybe level set people on ventilators, I think you're talking about for fiscal Q2 alone, 200 basis point headwind to overall Medtronic, 800 basis point headwind to your business. I mean we've been trying to track it. It looks like ventilators maybe pre-COVID were $250 million business for you. Last year, maybe as high as $700 million. What -- how do we think about the ventilator business going forward?

Yes. It's been an amazing contributor to world's response to the pandemic. But let me kind of frame it for you. In FY '21, we saw ventilators as 2.5x the typical run rate, right? So just a tremendous run rate. In Q1, they were still above the prepandemic level. But now we're seeing that -- we'll see that come down in Q2. And then I think in Q3 and Q4, you'll see those go below what it was in prepandemic because of the way the market is saturated with ventilators. Now that said, Larry, and even this quarter, we've seen hotspots. We sent in Q1 1,000 ventilators, PB980 top of the line ventilators to India, right? We've seen orders in specific states and countries for a couple of hundred ventilators. But I believe that the way you're seeing the vent business, particularly as hospitals are better equipped, as you know, if you are vaccinated, you certainly may get the disease, but you're unlikely to be hospitalized as much as if you're not vaccinated. So we're seeing that vent business come back down to earth certainly across the world.

That's very helpful. And then maybe big picture. Medtronic's guiding to MedSurg growth of 8% to 9%, which is below where the company is guiding to for cardio and neuro. But adjusting for ventilators, MedSurg will go faster. My question is beyond fiscal 2022, do you see MedSurg as being accretive to Medtronic's overall growth, which is a target of 5-plus percent, right? And maybe -- and then I guess if the answer is yes, could you be more precise?

So we think MedSurg is going to be a mid-single-digit growth business for Medtronic, Larry. We really like where we're positioned with the innovation pipeline, the execution of the team. So our anticipation is we're right where Medtronic has us pegged at that mid-single digits. And this team has just put together, as you know, Larry, you follow us pretty closely, a track record of execution and delivering results. And so we like where we're at from the pipeline. We'll -- undoubtedly we'll get into robotics in a minute. We like some of the growth drivers, and we like the underlying performance of the business.

I have to admit, I'm a little surprised you didn't say I think we could be accretive. But...

We always like to exceed your expectations, Larry.

Okay. All right. Because I mean I think you have been at the higher end of that mid-single-digit growth, mid-single digit, but at the higher end, pre-pandemic.

We feel good about the business.

Good. And you have Hugo. So...

And we have Hugo.

All right. So let's spend the next 21 minutes on Hugo.

Okay.

We'll see if we run out of questions. I doubt it.

I doubt it.

Maybe just level -- with that running through all the time lines, just level set people on the major milestones coming up here, CE Mark, U.S. time line, just level set us, please?

Yes. No, it's great. Thanks. So when you've seen this across Medtronic, we've really been communicating with The Street and our investors filing deadlines because that's really what we can control. And so as you saw in March, we filed for our CE Mark. We filed for our U.S. IDE approval. Both of those are going well. We're having multiple discussions with company and authorities, both in Europe and of course, with the FDA. And as it relates specifically you mentioned some of the key milestones, we've talked about our Expand URO IDE clinical trial. And right now, we're working with the ethics committees, the IRBs, getting the clinical sites up and running, doing the physician training. Now for competitive reasons, I'm not going to tell you which sites and the specifics around that. The other thing, Larry, which you and I've talked about in the past, is this will be in the U.S. a de novo approval for Hugo. And look, we feel good about that. That means that it's different than the existing system on the marketplace. It's differentiated. And so we feel pretty good about that. And our CE Mark, again, good discussions with that. That will be both for URO and GYN, and that makes sense. It's about half of the surgical procedures done robotically assisted today. So those are the big milestones coming up, and then we can talk about the experience in Panama and Chile, but that's where we're at. So we feel good.

So we'll get there. That's helpful. At the Analyst Meeting, you did September, I think, maybe 2 years ago or when you unveiled the robot, you were willing to say you think you could be in the U.S. market, I believe, in the second half of calendar '22. Where you are with the IDE trial? If we do the math, is that still realistic?

Yes. What I'd like to say on that, Larry, is so much of this depends on the FDA's review, running the clinical trial, what we see, their discussions with it. The de novo path is probably a little bit longer than the 510(k), but we've kind of factored that into our thinking already. So I think we're just going to have to see how this clinical trial unfolds and how the agency -- which, by the way, they have been super responsive. The conversations have been great. And so we're excited to get the trial started underway, and then we'll see how it goes from there.

Well, just 1 more. You said you're willing to give filing dates. So if we -- so what would -- when do you think -- what's the rough filing date in the United States? And then we can make our assumption on the...

Yes. Fair enough. We'll get back to you as we get close to that date, Larry, but that's a helpful thing. I'll let you know when we're going to file the FDA approval. So that's a fair question. But right now, let us get through the Expand URO trial, the IDE, see where that goes, and then we'll have a good indication of that.

Okay. And just 1 more on the U.S. regulatory pathway, Expand URO or urologic procedures, it doesn't sound like you're going to have gynecologic procedures in there? I think...

That's right. Yes. What we expect, Larry, is it is a fair question. When -- and already today in Chile and Panama, we've done URO and GYN procedures with Hugo, and we expect to expand into general, thoracic, colorectal, hernia, bariatric. You've seen our system. It's designed as a general surgery robots. So we'll be using it for everything, but those indications will follow.

The investment community believes that you have to have each indication in the United States. That's how FDA is clearing things. And that will kind of -- it will make the rollout in the U.S. a little bit slower for you because you've got to build each indication. Is that a fair way to think about the U.S. market? That I think it's time -- it's going to just take a little bit longer in the international market. So you got to build those indications 1 at a time.

Yes. So a couple of thoughts on this, right? So I know you're going to ask me how much revenue we're going to get from Hugo. But well, when we talk about that, that $50 million to $100 million, that assumes very little U.S. revenue. And then to your point about sequential indications of approval, that's an active discussion, as you know, right now with the FDA. And there's this concept of can you use umbrella procedures to get approvals for a number of procedures. That, again, is going to be up to each of the competent authorities around the world, but those are also active discussions with the FDA. So a lot of that indication approval, I would say, we're going to see as we roll forward here.

That's helpful. And then maybe switching gears back to kind of the initial feedback on basic. What's resonating with physicians that have tried the robot?

Well, a couple of things there, really positive feedback on the system. They really like the open design. They love the open console. And interestingly enough, 1 of the great feedbacks we got was we knew that it's important for the surgeon because he or she can interact with the operating room team very easily and naturally. But the other thing the feedback has been great is you can have multiple surgeons around the console as well, not just one. And so they've really commented on that. So the modular in general, they love the 3D visualization, flexibility of the platform. So we're getting really good feedback. And as you know, Larry, 1 of the things we've done is we've used Touch Surgery Enterprise digital surgery capabilities with every Hugo case, right? So if you think about that, we're getting great feedback on that. And we had it -- I don't know if you were at SAGES, Larry, but just in the U.S., the approval -- the product is not approved to market in the U.S., but we were allowed to do an innovation room at SAGES to include both Hugo and Touch Surgery and the feedback was great. The ergonomics of the system, the flexibility of the modular design and then particularly the pairing with digital surgery, they just love this -- just how the practical demonstration, the power of this seamless interface to video record, to annotate, to share in the cloud, and that really resonated with them. And we can talk about the future road map. But -- so that was good. It was really good feedback from our first customers.

Right. Have you said how many human cases you've done so far, Bob?

We have not. I don't think we're publishing that. But as you can imagine, we're doing more every week.

That's helpful. And related question to your digital surgery comments. You know your competitor really talks about the whole ecosystem, the incumbent here. And what are your thoughts? You've probably heard them talk about how people need to really evaluate, not just the features of the robot itself, but the whole ecosystem. How do you feel about -- what do you think the competition of the -- how do you feel about your ecosystem? And where do you think the competition will be?

Yes. Well, it's a good question because as you know, we're -- I just touched a little bit on digital surgery. It really gets at the heart of the ecosystem, the leverage of data and AI in robotic-assisted surgery. And that platform, Larry, one, it's really unique because we're using that not only in robotic-assisted surgery, but also minimally invasive assisted surgery. So look, we know we're a leader there. And then I want you to think about this in terms of these innovation vectors I've talked about before, which is not just the robotic system, but instrumentation, data and analytics, visualization. We think this come together. And one of the things that you and I've talked about in the past is just also the training that goes along with this. We think we've got a phenomenal training program. We've been training surgeons for 60 years, right? So we think this is coming together. And you'll see a cadence of innovation along each 1 of these vectors, and that's pretty exciting for us. We think that ecosystem is important for us. And well, I talked to you about this. This isn't just about selling a robot. This is truly about developing the future of surgery. And we're really excited about that, and that's in our wheelhouse to do.

Great. Let's move to the financials. Bring up first polling question, David, from OpenExchange, please. And I know there's a lag between this -- the live Q&A and the webcast, so I'm going to continue asking questions. But David, do you need me to read the question just -- okay. So Medtronic has guided to Hugo sales of $50 million to $100 million in fiscal 2022, which is May 2021 to April 2022. What is your view of this guidance: A, it's conservative, they'll exceed $100 million; B, it's aggressive, they'll fall short of $50 million; C, it's about right, they'll be between $50 million and $100 million; D, I'm not sure? So please respond to that. And I'm going to ask Bob 1 more question. In fiscal '23, you've talked about doubling or even tripling. What do you -- how do we think about the numbers there based on the $50 million to $100 million you've given?

Well, it's like I didn't get to answer the poll question. It didn't come up, but that would probably be -- so the reason we give you a range we feel good about the range. We still feel good about the range that I gave you. And I think that we'll double or triple off of that number. And the thing that's important, Larry, and I talked a little bit about this, we don't assume much U.S. revenue, right, just given what we've talked about in the time lines for the approval cycle. Now of course, that's subject to regulatory body approval, but we feel good about the range and we feel good about the outlook really. This is, I think, arguably the most exciting market in medtech. There's others we play in, renal denervation and others, but I think to be the meaningful second player in this marketplace is really important. And as I shared with you, the early feedback we've got on the system is really good. And so we like where we're at. And it's early innings, but we feel good.

Okay. David (sic) [ Bob ], are we almost done? Or are they still coming in? Why don't we -- they're done. Right. Let me see. So basically, what -- I didn't see the results. Did you? I didn't -- what was it, David? Sorry, Bob, did you catch it?

I did. It looked like it was split between it feels about right, and all fall short. So yes, 42%, 37%. And then the 16%, it's conservative.

Okay. But you feel good about it today?

I do.

Good. Okay. So it's interesting to see. Okay. One thing that I found interesting is you've talked about the per procedure costs a lot since the beginning, and I even noticed on the last earnings call it came up. And obviously, Intuitive Surgical has kind of come out with the extended use program. They lowered the ASP on some instruments. How are you thinking about the per procedure cost? And you've talked about it being equivalent to a lab procedure. I don't know math -- where is the lab procedure on the per procedure? Is it $800, $1,000? So how do you think about that?

It's a great question, Larry. And way to think about this is that we continue to hear, and I'm sure you're hearing. The 2 big barriers to robotic-assisted surgery are cost and access. And it's not the upfront capital cost. That's the problem. It is the per procedure cost. And so we continue to march towards this goal of delivering robotic-assisted surgery near the cost of laparoscopic surgery. So that hasn't changed. Each laparoscopic procedure is very different. A bariatric procedure is different from a hernia, et cetera, et cetera. But on that per procedure basis, we think that's what customers want to see. And what Gary and the team did at their extended use program, we think, validates our approach. We think pricing is important. And so it's good to see the recognition, the validation of our strategy here. And so we still feel that's the right target to go in.

Do you think with that program you can have an advantage on a per procedure basis or they basically close the gap, on a like-for-like procedure?

I think -- I mean, there will always be variability because there's variability in terms of what surgeons do in a laparoscopic procedure, right? So for example, how many stapling reloads are you going to use, et cetera. But I think we'll be closing that gap towards and then ultimately delivering robotics at the cost of laparoscopic surgeries. So that hasn't changed on a per procedure basis, right? Procedures vary and there's a lot. But I think it's right for us to think and for the customers to expect that, that's what really gets at that cost barrier. It's not the upfront capital. And so I think you'll continue to see that. And that also will open up the access question as well.

And the $50 million to $100 million, I assume that most of that -- you've said that the majority is OUS. I assume that most of that's also placements as opposed to procedures, obviously?

You mean capital? You mean capital? Yes, exactly. Yes, exactly. You certainly would expect to see the early days of this as more capital and less consumable procedures. Now over time that shifts, right? But yes, you've got to get the units in it. So it's large capital.

And have you made any decisions on the business model, where most people are pretty familiar with the Mazor strategy? We focused on placing systems in exchange for volume-based commitments. Any updates there? Is that what we should think about for Hugo?

Yes. I think you should think about an upfront capital acquisition for Hugo. And that will offer customers flexible financing options to how they want to finance it and move forward in it. But I don't think -- we're not giving away robots. We're not placing robots and then so make it up in end effectors. Again, it's a capital purchase, the flexibility, right? So leasing other financial structures to help you acquire the capital. But no, that's how you should think about it.

And I know you said earlier in the first year or so of fiscal '22, the vast majority of revenues from outside the U.S. If we look at the penetration of robotics in the U.S. versus OUS, it's pretty obvious it's much more penetrated in the U.S. than OUS. Does that mean that you have a greater opportunity to penetrate the market outside the U.S. given that?

So I think the way you think about it -- and it's a very fair question, Larry. If you look at a globally robotic-assisted surgery penetration, that's the 3% number. And Gary and his team would say the same thing, which is there's 97% of the market out there to go get, right? And that's true market expansion. In the U.S., penetration is higher. But still, we're nowhere near entitlement on what the opportunity is for surgical robotics in the U.S. I mean, SAGES was a classic example. We were just there 2 weeks ago. These are U.S. surgeons, and we just can't get access to the robotic system. So there's a lot of pent-up demand for alternatives and just robotic-assisted surgery in general. So I think you should think about the U.S. market as a fantastic robotic-assisted surgery market.

I know that in most device areas, physicians want competition, especially in implantables. But in this -- for a robot where there's training and there's a lot of people that -- the workflow, my question is, do you see hospitals having both an Intuitive and a Hugo? Because it seems -- it could create some inefficiencies from a training and workflow standpoint. And that was my question -- the basis of my question for the U.S. where we know that a large percent of hospitals have at least 1 da Vinci. And so they may want more but more robots but there is just kind of -- everyone is kind of this familiarity with da Vinci. How do you think about that?

Yes. Our customers in the U.S. or potential customers in the U.S., they have been resolute in wanting options and alternatives. And so we've not heard from customers that, "Hey, I use your competitors, so I'm not interested in your robotic platform". Look, I think you're going to see all 3 varieties. I think you're going to see customers that will be a Medtronic only house. I think you'll see customers that are split between the various platforms. And then I think you'll see customers that just pick 1 vendor. That may not be us. But we're not hearing in the U.S. that customers aren't interested. In fact, I'm here all the time that they're super interested and they want us to come to market because they're excited about -- it's really the -- it's different, right? Larry, it's so different. When we talk about the Medtronic offering, we're not tying up a room, we're not dedicating a room. You've got a lab tower that can be used for minimally invasive surgery as well as robotic-assisted surgeries. You've got arm carts that can be moved between rooms. You've got an open console. It's just -- it's a whole different paradigm in robotic-assisted surgery and customers are excited about it.

That's good to hear. One more financial question. You're in the fortunate position of your CEO giving you ample funding. So Geoff has talked about -- for Hugo. He talked about $400 million in operating loss, I think, associated with the surgical robot and Ardian platforms. And I think you guys have said that Hugo is getting a little more than Ardian. So how much more? And when do you expect this investment? Where are these investments going? And when do you expect it to be accretive?

Yes. Well, one, we're always very appreciative of the capital allocation that we do across the company, right? We don't give specifics in terms of between Bob, Brett and Sean, who gets what publicly, right? But look, I think we're fortunate as a company to invest in game-changing programs like renal denervation, like robotic-assisted surgery and knowing that these are big investments. And yet, we're able to do that and still deliver EPS growth to our shareholders, right? And so I think we're fortunate there. And as I talked to you about before, Larry, this isn't about just selling a robot. This is about building a multibillion-dollar robotic business, right? And that's investment. So today, to answer your question specifically, we're investing in our commercial organizations. We're investing in our training centers. We continue to invest in R&D and innovation. We invest in our service capabilities, right? So we're investing across the board to make sure our customers have an amazing experience. And so that's what we're investing in. And Sean is doing the same. I mean you know where we stand with kind of Ardian, and maybe getting an early look at that data. So we're building that up as well, so.

That's good to hear. So Bob, we've got a minute left.

Okay.

We covered a lot of ground, but I'm sure there are things that you would have liked to have talked about that we didn't have time to. So I'll give you the last word and anything you want to highlight that we didn't get to.

Yes. What I would highlight, Larry, is we've got a tremendous innovation pipeline across the portfolio. We didn't talk much about the core Surgical Innovations business. I love that business. We've got a tremendous pipeline there in terms of instruments. We've got tremendous global growth there. That business has a tremendous growth profile. Also, we didn't talk about GI. You know where we're at with PillCam and those things, tremendously exciting. I would also say the same about our patient monitoring business, and we touched briefly on the RI business. But I would leave investors with the impression of this is a great time to invest in Medtronic. We've got a great pipeline. We're executing well, and we're delivering results. And I think when you've got that combination, you should feel good about putting your money inside of Medtronic.

Perfect. Great place to end. Bob, great seeing you. Thanks for doing the conference. Ryan, thanks also, and I hope the rest of the day goes well for you.

Good seeing you too, Larry. Bye-bye.