Medtronic plc (MDT) Earnings Call Transcript & Summary

Good afternoon. We're continuing to move down the medical devices track at the 42nd Annual Cowen Healthcare Conference. I'm Josh Jennings from the Cowen Medical Devices team, and we are excited to have Karen Parkhill, Executive Vice President and CFO of Medtronic, joining us for a fireside chat here this afternoon. Karen, thanks so much for joining once again in the Cowen Healthcare Conference, and it is great to see you virtually.

Thank you, Josh. Great to be here. Thanks for having me.

I know Medtronic and your team just reported earnings a couple of weeks ago, not even 2 weeks ago yet, but would love to just start off and learn if there are -- if there is an update on any fiscal fourth quarter trends as we've moved through the end of February and into early March. And then maybe just with the unfortunate war going on with the Russia and Ukraine, any exposure to those 2 countries that you can share for Medtronic.

Yes. Happy to talk about that, Josh. And you're right, we're just 2 weeks from our earnings call. So I'll just reiterate what we said on the earnings call on our Q4 -- fiscal Q4 trends. February was always expected to be the lightest month of the quarter for us with some modest underlying procedure acceleration, and it did end up being that way. The guidance that we gave on Q4 a couple of weeks ago assumed greater acceleration in March than February and even greater acceleration in April. And so we're still expecting that. How we end up doing this quarter will be dependent on that acceleration over the remaining 8 weeks, but we do expect that acceleration. And on Russia and The Ukraine, we are obviously saddened by what's going on there. And as we think about our own business, we are very focused on the safety and security of our employees in Russia and the Ukraine. We have just under 500 employees in both locations, most of them in Russia. And so we are focused on that. In terms of our business, our revenue -- we don't have a lot of revenue from Russia and The Ukraine. It's honestly less than 1% of our total company revenue. And when we think about manufacturing and distribution, we do not have any manufacturing and distribution in those -- in Russia or Ukraine as well. And we also do not have direct material suppliers in those regions. So we are closely monitoring for the potential of raw material or sub-tier supplier impact coming out of Russia or the Ukraine. But at this stage, we are seeing nothing that could impact us at this stage.

Great. And then just on the supply chain and inflation trends, we did have one large cap competitor provide an update. But they had provided guidance earlier in the quarter, but I'm assuming there's been no change to what you relayed on the fiscal third quarter earnings call.

That's correct. No change at this stage, Josh.

Well, moving on to one of a couple of different topics. To start off just on the diabetes warning letter, there have been some investor focus on the Diabetes franchise. And just on the Northridge facility warning letter, you're awaiting clarity on whether you can secure U.S. approvals for your key Diabetes pipeline program, 780G, Guardian 4 and then eventually Simplera. And then starting with the 2 under active review, 780G and Guardian 4, how would you characterize your latest discussions with the FDA about the possibility of getting approval with the warning letter in place?

Thank you, Josh. We continue to have very good engagement and interaction with the FDA on both the warning letter remediation and on our 780G and Guardian 4 sensor submission, which is under active review. As you know, the first and most important priority for us is to remediate and, honestly, sustainably fix the areas that were identified in the warning letter. And we are making excellent progress on that front. And at the appropriate time, we will have a conversation with the FDA regarding a variance for approval. Whether or not we ultimately get that variance or that they grant approval while we're under warning letter status will be completely up to the FDA. But we're focused on getting our products out to our patients as quickly as we can.

Understood. And just in terms of that, I guess, just discussion with the FDA and kind of sharing whether or not they'll be accepting of a variance or for approval with the warning letters in hand or an issue approvability once the warning letter is lifted, is that something that you expect the FDA to kind of show their hand or their decision early in this process? Or should we -- and maybe it's just an unknown in terms of how the FDA could communicate with Medtronic in terms of the accepting of this variance or we're approving -- while the warning letter is in place, or issuing an approvability decision, which would make the approval occur after the warning letter is lifted.

Yes. So I would say the approval timing is uncertain. We are working, obviously, with the FDA, as I mentioned, to resolve the warning letter and to identify appropriate pathways for obtaining approval on these important products. But those approvals, as you know, are really up to the FDA.

Understood. One follow-up on the Diabetes franchise. And the Blackstone collaboration is coming up on its 2-year anniversary. And is there any time line when investors should expect Medtronic to share any details on development programs? Or how much Blackstone has invested of the, I think, up to $330 million commitment?

Yes. So I would first say that our development programs, including the Blackstone development program, are not impacted by the warning letter and everything continues to move forward. We continue to receive Blackstone funding every quarter, and that does offset our R&D spend on these projects. But we're keeping the details on these programs very close to the vest for competitive reason. So we'll determine the best time that we can reveal more. But I do think that you should take away that we're investing heavily in our Diabetes pipeline with our own organic investments, with additional investments with Blackstone and with structured minority investments. And that's all geared toward returning to market growth in this important market.

Got it. But moving on to renal denervation and the ON MED trial and the U.S. filing for the indication, I think your team has reaffirmed the plan and complete the follow-up on the full study population in the second half of the calendar year for the ON MED trial, and that we're going to see 3-year results on the ON MED pilot study at ACC next month. And investors are focusing on ON MED results. But can you share your views on whether you have an approvable submission based on the data that's already accrued? The pilot data of ON MED, the OFF MED pilot and pivotal data, and then and what you've seen to date in ON MED. Is the laser focus on ON MED appropriate by investor community? But we're -- should investors gain comfort with the mosaic of data you've accrued and feel confident about the approvability of the total package?

I like the word you use, mosaic, honestly, Josh. But I'd start with the fact that OFF MED was our pivotal trial, but the FDA did ask to see the ON MED results as part of our overall submission, so that's what we've been working on. The statistically significant results, though from our previous 3 sham-controlled studies, including the ON MED and the OFF MED pilot studies and the pivotal OFF MED study and the data from our global registry of more than 3,000 real-world patients do give us really strong confidence in this program and give us confidence in the ultimate approval of the therapy. And we're really excited to see the results and share the data of our 3-year ON MED pilot data at ACC next month.

Great. And just speaking about that answer and Medtronic's commitment to completing a renal denervation submission to the FDA regardless of the upcoming ON MED results, is that a viable kind of channel where, where you will submit regardless of whether ON MED shows kind of over positivity in the traditional sense?

Yes. So the data from the ON MED study, in addition to the full clinical cohort, will complete our robust PMA submission to the FDA. And we do remain really confident in our ability to serve the millions of patients that make up this very significant opportunity for us. And I would just remind that -- again that our 3 previous studies all reached statistical significance. And the ON MED study remains powered to detect a statistically significant and clinically relevant benefit when we reach the final analysis. So we'll submit the PMA for approval. And when we think about renal denervation, we're focused on the fact that patients want options. We showed that with our patient preference study that we presented earlier at TCT.

Excellent. And then I know there's some uncertainty around timing. I don't want to set a timing bar for the release of the ON MED full study results. But I mean, are we still planning on having those presented at a major cardiovascular medical meeting at some point in the coming 12 months or so?

Yes, Josh. We do expect the 6-month post-procedure follow-up for the full cohort to be complete in the second half of this calendar year. And we've said -- and that remains that we'll look for a timely and appropriate medical conference to share those results.

Great. Wanted to have a couple of questions on Hugo. And I think you guys have announced the system is being used in India, Panama and Chile for urogyn and general surgery cases, and some initial procedures have been executed in Europe. And can you share any feedback from surgeons to date and how you're feeling about the readiness of the system for a broad commercial use? Your team is -- feels about it now that you have CE Mark approval? And what features are surgeons most enthusiastic about relative to other robotic platforms?

Yes. Thank you, Josh. The feedback continues to be really strong. Surgeons and the OR staff who are using our Hugo system have really appreciated the features that we've specifically designed in the system, the modularity, the open console, 3D visualization, the flexibility of the whole platform. And as you know, we're still in our ongoing limited market release, but demand is really high. We've been focused on data collection and on participation in our clinical registry to support our regulatory filings in the U.S. and elsewhere. And we've been receiving feedback on the physician experience as we collect that data. I would also add that our digital surgery, which we now call TOUCH SURGERY ENTERPRISE, has been used in these first Hugo cases. And surgeons are really impressed by the analytic capabilities and benefits of the secure video storage that we have. And they've also been sharing this for case review and training. So we've seen really good positive feedback on the digital surgery piece, too.

Great to hear. And I wanted to ask just an update on the manufacturing and supply chain challenges your team has called out for Hugo. Any update on the progress you made towards resolving these challenges? And what's the most pressing factor for Medtronic now?

Yes. We have been working really closely with our key suppliers, and we've made really good progress up our supply chain and with the user experience. We've been working with a limited list of issues that have come up. And we've been -- we've not only had a line of sight to those solutions, we're actively addressing them. So we're pleased with the progress. And as I speak, we're shipping systems all over the world right now.

Excellent. Excellent. You updated sales forecast for Hugo in fiscal '22. And was just curious on how you plan on issuing guidance for Hugo going forward? I mean, should we expect another update in terms of the expectation for Hugo revenue contributions in the -- at the end of the -- or on the fiscal fourth quarter call in May, as you're looking to get more details on the 2023 outlook?

We've talked that we expect a meaningful step-up in FY '23 from the double-digit millions that we've talked about for Hugo for FY '22, and nothing has changed there. But I would say because it's atypical for us to provide guidance for single product lines, I wouldn't expect specifics in May. I would just know that we're driving a meaningful step-up for next year. And you'll see that in the growth rate for our Surgical Innovations business and our Medical Surgical Portfolio.

Got it. Got it. just thinking about fiscal '23, I know you provided some initial commentary that outlined some of the puts and takes for both the top and bottom line growth next year. And maybe just to start, just can you just discuss your team's decision to offer that initial color on next year in February on the fiscal third quarter call? I think we'll get the formal guidance in May as usual for 2023 -- fiscal 2023. But just to offer -- the decision to offer the preliminary context or comments on next year early in May -- or versus waiting for -- potentially for the environment to improve, which is not a given, but a lot of fluid factors as we move from February through May potentially.

Yes. Yes. So Josh, I would echo what you said, it is early. But I do know that analysts and investors have been asking for color around next fiscal year. So as we work through our planning process and know that there are more puts and takes to consider the normal for FY '23, we just wanted to be transparent about those and at least share some of our initial broad thoughts. And that's what drove the color that we gave. As you know, we're going to give our full year outlook on our Q4 call in May, though.

Understood. Understood. And just thinking about the preliminary color, you did provide thinking. Always want to try and balance a lot of moving parts here, but just a conservatism that's baked in with it being early versus just being more realistic. But I mean, should we be thinking about the preliminary call as conservative? And maybe just from a high level on the commitment to EPS growth in fiscal 2023, I mean, is that fully in play? And would you consider tapering planned investments in order to ensure bottom line growth for fiscal 2023, if necessary?

Yes, yes. So with the color we talked about, the fact that we expect to drive our long-term organic revenue growth goal still of 5-plus percent. But that the plus side of that LRP may be more difficult in FY '23, just given the challenges that we've talked about. And on the bottom line, we definitely, as I said, wanted to be transparent on the real headwinds that we're experiencing. And as you've heard from others, like others, we're experiencing increased pressure from macro items like inflation and wage adjustments. And we also noted that currency for us is expected to flip from a tailwind to a headwind in FY '23. And we've also shared that we've got dilution from our Affera acquisition. So just those last 2 combined, just the currency and the Affera acquisition, could impact our EPS growth next year by a few hundred basis points. So it's more than modest that we're dealing with here. And we've said FY '23 is going to be a unique and challenging year given the macro environment, and that we don't expect -- we do -- we certainly do expect EPS growth next year, but don't expect it to be above revenue growth. And on your last question, Josh, we're still in our planning process, so I think it's premature to give you more. But when it comes to thinking about R&D, we certainly don't want to shortchange our investments in meaningful future growth drivers. Those investments are what's going to help us deliver on the plus side of that 5-plus percent over the long term.

Understood. And thinking about kind of longer term, I know -- or even earlier to talk about 2024. But I mean, it seems as if the goal -- just don't want to over-interpret, but the goal is to kind of get back on that LRP track after we get through this kind of transition fiscal '23 year and then get back to looking forward to hitting those targets within the LRP that you guys have put forward.

Yes. I definitely want to make sure you take away from this that we are still very committed to our long-range plan. And while we've got some puts and takes next year, some of the heavy investments that we need to make right now in quality should subside and obviously the dilution impact from Affera will anniversary. And we expect to have some meaningful revenue to go with the organic and inorganic R&D investments that we're driving that will ultimately help drive higher EPS growth. We do have a couple of hundred basis points of headwinds in FY '22, though, that will go away or become much less next year. When you think about it, our China drug-eluting stent BVP; the Navion recall; the exit of our LVAD business; the decline of our ventilator sales from way off, very high peaks at the early stage of the pandemic, all of those should go away or become much less next year. So hopefully, that helps.

Appreciate that. Yes, absolutely. I think one of the kind of new strategies -- or I guess it's not necessarily new, but you guys have brought it to the forefront, is this discussion about reviewing your -- or you have discussed, I should say, that you're reviewing your portfolio more intently. And it sounds like you're open to the possibility of pruning businesses that are no longer optimal fits for Medtronic. And maybe to start, just a pruning strategy, potential pruning strategy. I mean, how much more intently are you looking at optimizing the portfolio versus years past? Is this -- I don't believe it's necessarily a new item on the agenda, the strategic agenda, but maybe it is just a more intense focus.

Yes. So I would say, looking at your portfolio and assessing your portfolio is something that all good companies do. And we had been focused on doing that particularly after Geoff came on board as our CEO. And now is the natural right time for us to be focused on that because we put our operating model in place, we've got far greater visibility and transparency into the opportunities and the challenges of our businesses and the need for investment in our businesses. And so now is the right time to be doing this. So we're going to be focused as we do it on driving durable and sustained higher revenue growth. That's our North Star. And our businesses, we're looking at our businesses as to how well they fit into our portfolio and our strategy, what they bring to Medtronic, what Medtronic brings to them. And we're -- we can't say right now because we're still in the early stages, whether or not this will bring significant change or just changes around the edges. But I do think it's important that we do this work.

And do you think you'd have some, I guess, share some visibility or have some decisions made within the fiscal '23 time frame? Or is this more a 12-plus month review period and execution period if you find a business or a product line that doesn't fit within Medtronic's portfolio and goals for driving, accelerating organic revenue growth?

Yes. This is not a process that we expect to take forever, but it certainly takes a lot longer than weeks. So I would expect, over the course of the next fiscal year, for us to be finishing -- doing the work and completing the work. And what comes out of it, we'll see.

Some of your competitors, or the competitors in medtech, have started or completed spin-out processes for portions of their business. If your review process concludes that a business is not optimally owned by Medtronic, how do you -- does your team view your options for realizing shareholder value from taking action? And I'm thinking primarily about spin-outs versus divestiture sales versus straightforward discontinuations. I guess part of the decision would depend on which business unit or product line you decide is not a fit. But any high-level thoughts on those 3 different channels? And then how you could approach either of them?

I would say that we'll see what happens. But we're going to focus on driving long-term shareholder value in this process and obviously driving the right value for all of our stakeholders. But -- and as we focus on driving that long-term shareholder value, any move that we make could be in a variety of forms. But we'll use durable revenue growth as our North Star and ensure that we're focused on driving great shareholder value in the process.

Got it. Wanted to ask just about some of the macro challenges that you relayed that you're facing, the whole medtech industry is facing. But multiple factors such as hospital staffing, resin and semiconductor shortages, resin prices increasing, inflation, continued COVID pressure. But can you discuss how your team sees these variables changing in the coming quarters? And then -- and what do you think are the most -- potentially the longest-duration challenges for Medtronic? Which bucket of challenges would you say could last through fiscal '23 and potentially still be in place in fiscal '24?

Yes. Thanks for the macro challenge question because we certainly are dealing with several of them. But I would start by saying that absenteeism that we dealt with during the height of the Omicron wave seems to be stabilizing. And we're expecting COVID cases to return to baseline and procedures to continue to be on the uptick. We do though think that the chronic health care staffing shortages will persist. And if you talk to hospital administrators, the majority of them are not expecting significant improvement until 2023. And I would say that many -- and most of them though are mitigating this in the meantime by using traveling or temporary staff and driving a greater adoption of technologies with remote monitoring and telehealth. So I think they're faring well despite the health care staffing shortages that we think will persist. We are starting to see procedure volumes improve. COVID hospitalizations have obviously dropped and ICU capacity has increased. And in our fiscal Q4, we're expecting that hospitals may be able to get to 100% of pre-COVID levels by the end of our quarter. Many may be challenged to reach above that, to get to the 110% to 120% levels, but at least get back to pre-COVID levels. And then on inflationary pressures, we do expect that to continue in FY '23. That is one of the headwinds that we've outlined that we're facing. But when we look at just things like our own wage inflation, moving from typical low single digits increases every year to very high single-digit increases, we're not sure that, that's going to continue over the long term at that kind of pace. But at least in FY '23, it will be a challenge. And then obviously, we are facing supply chain challenges, that's not just with us, but just across our industry. We've experienced it the most in semiconductors and resins. Our team has been doing a great job staying on top of those issues and mitigating them as much as possible. And on resins in particular, I think our teams have done a really nice job improving our resin supply. So we expect to be able to meet near-term demand of things like our -- in our MedSurg business that uses resins. But on semiconductors, we do expect that short supply to persist a little bit longer, at least until the first half of next fiscal year.

Thanks for those details, Karen. I had a question on the Intersect ENT acquisition and time lines. And just any update there in terms of timing of closing of that deal?

That deal is progressing nicely, and we hope to be closing it soon. No updates on timing from what we've said before.

Great. And one more question from the investor audience, just thinking about the 780G and Guardian 4 submissions. Could you remind us when those submissions were filed with the FDA? And was approval expected, prior to the issuance of the FDA warning letter, by this period that we're in now in the first quarter -- calendar quarter of 2022?

Yes. We have submit -- we did submit a while ago. They are under active review. And prior to the warning letter, we would have expected approval soon. And so we're working through the issues with the warning letter remediation. And as I mentioned, when appropriate, we will be talking to the FDA about a potential variance.

Excellent. We didn't make it through our entire question list here. And we had some product-specific questions, but we'll have to save these for our next meetings, Karen, and earnings calls. But appreciate Medtronic and yourself joining the Cowen Conference once again. And we're looking forward to keeping in touch in the coming weeks and months.

Thank you so much, Josh. Appreciate it.

So thanks so much for the time, Karen. Take care.

You, too.