Medtronic plc (MDT) Earnings Call Transcript & Summary

[Audio Gap] from the Medical Devices team, and we are moving down the Medical Devices track here at the TD Cowen 43rd Annual Healthcare Conference. We're excited to have Karen Parkhill, the Chief Financial Officer, Executive Vice President at Medtronic, the largest medical device company in the world. And Karen, thanks so much for spending time with us. I know we spent a little bit of time last night at the dinner, and it's great to see you again today.

You too, Josh. Thank you.

So I was hoping to start with just some high-level questions. I know with Geoff Martha becoming CEO and the new strategy is being put in place over the last 2 years, I think there's an updated operating model kind of limiting the bureaucracy of some of the groups and growing more nimble operating units and also leveraging Medtronic's scale. And maybe just from a high level talking about the progress, I knew you have seen some success. You have seen some traction in terms of operating each business unit performing. There's always puts and takes. We've got the pandemic. We've got supply chain challenges, et cetera, et cetera. Maybe just the progress where you see kind of what inning are we in, in this pivot and then the strategy that's been put in play. And then I'll follow up and just ask about how Medtronic is leveraging your sales successfully and any strategies going forward.

Perfect. Perfect. So I would say, the operating model changes that we've put in place now a couple of years ago are working really well and have really helped streamline a greater understanding of our businesses that used to be underneath our group structures. So we have greater transparency now into the strengths, the weaknesses, the opportunities, the investment level required that have really helped enable us to drive better capital allocation decisions, better focus on talent needs and talent moves. And so I think from that perspective, the operating model is working really well. We also, at the same time, have driven and are still in the early innings of an operations transformation across the company. So we used to have a very decentralized operating and supply chain -- manufacturing and supply chain operations. We had 9 different and distinct supply chain groups. We had 4 different and distinct manufacturing groups, and we've now consolidated that into 1 each. And we brought in place new leadership from outside of our industry in ops and supply chain. MedTech was not necessarily known to be best-in-class manufacturing and supply chain operators. And so we brought in expertise from outside of our industry to help drive that. And we think it's going to be a competitive advantage going forward. But we're still in the early innings of that transformation. Our new ops leadership has put in place better systems and tools to help us better forecast both supply and demand planning. We're driving standard KPIs in one best way across Medtronic. And we're also going to be consolidating our supply chain more. During the supply chain impacts that hurt us and many other companies out there, it was very visible to us that we had way too many suppliers. We had over 1,900 suppliers. And so we weren't really leveraging the size and strength of Medtronic with our supply chain base. And so as we consolidate our suppliers, we're going to become even more important to them. We're going to expect them to invest and innovate with and for us, and I think that's going to help us a lot going forward.

Excellent. Just to talk about this strategy to leverage the scale of Medtronic. And I mean how are you -- is Medtronic enable to leverage scale in its selling efforts and contracting efforts with hospital systems in the United States on the tender side internationally? And where can you leverage scale more going forward?

Yes. So clearly, we're focused on leveraging our size and scale everywhere that we can. And when we think about it in the go-to-market world, we do have enterprise sales teams, not just in the United States but also in Europe, in Asia, in Latin America. And those teams focus -- are focused on bringing the whole size and scale and breadth and depths of Medtronic to our customers. And with those teams, we're focused on making sure that we're selling all of our products into those customers in a very efficient fashion. But we're also helping bring solutions to those customers that help them overall become more efficient. And those enterprise accounts have been working really well, and we think that's going to continue. As it relates to the rest of leveraging Medtronic, we are really strong at things like clinical trials. Most of our clinical trials are done in-house, and we have a great expertise that all of our businesses can leverage. We're also good at regulatory and reimbursement in all parts of the world. And we leverage that strong expertise again across all of our businesses. And those are just 2 examples. We're going to be focused on being better at leveraging our supply chain over time, too.

Great. I know there's been this, I guess, bearish kind of outlook on Medtronic just size since the Covidien acquisition. And I guess one of the mantras we've heard over and over again is just too big to grow. Revenue base of $30-plus billion is -- it's just -- it's a mountain to move. But Medtronic, I mean the WAMGR is -- you guys are optimizing WAMGR, and you're executing on some portfolio optimization moves to move lower-growth businesses, maybe even lower-margin businesses. But just in terms of that content, what -- how would you respond to Medtronic's revenue base being too big to grow and achieving that mid-single-digit or even 5%, 5% plus growth trajectory that I think the team is striving for? Is -- should we be thinking about portfolio optimization as just that, optimizing the WAMGR and you'll be able to execute even though the revenue base is $30 billion plus? Or is there a better, smaller size of revenue where the company can be more nimble and execute on growth initiatives?

Yes, we're focused on growing at least in line with our WAMGR, which is in the mid-single digits. And so by right, that's at least in line. And as we innovate and drive even greater market share in our businesses, that will help, too. At the JPMorgan Healthcare Conference in January, we did outline our growth formula going forward. And we grouped our businesses into 3 buckets and outlined the growth formula with that, where we have our 3 largest businesses that are market-leading franchises in Cardiac Rhythm, in Surgical Innovations and in Spine. And so those market-leading businesses, our focus is on growing those in line with the company average. And so that's the foundation of the formula. And then we've got very high-growth market opportunities and businesses that we add on top of that. And there are 5 areas. It's Neurovascular. It's Surgical Robotics. It's Cardiac Ablation. It's Diabetes and Neurovascular. So we're going to add those on top. And then we've got a group of synergistic businesses. And those synergistic businesses, in the aggregate, we're focused on growing at least in line with the company average. So we think about that growth formula as an important way for us to ensure that we're delivering that durable mid-single-digit top line growth going forward. And the portfolio moves that we're focused on driving and making are intended, and our North Star is to drive our WAMGR higher with those portfolio moves and make it durable.

Excellent. And I know just thinking about that WAMGR, achieving the WAMGR, I mean, there -- I think there are aspirations to capture share. I think that was one of the, I guess, initiatives that when Geoff took the CEO seat and along with you and your executive team kind of put forward is that we're going to focus on share gains. And so is that still -- I mean is that your base case, growing at the market rate is maintaining share, but there are a number of initiatives in place to gain share. And part of operating model is to facilitate that, correct? And so how are you thinking about the share gain potential? If there's incentive -- if incentive structure is in play for business unit leaders to -- where that share gain is recognized annually?

Yes, absolutely. So we added market share to our incentive compensation structure a couple of years ago. And that's been an important focus for us to be focused on, not just how we're driving towards our internal plans but also how we're driving competitively in the market. And so market share is a really important piece. So we are incented against it at the top of the house and into our businesses. But the key to driving market share is innovation. And we're going to be focused on continuing to drive that right investment in that innovation now and in the future. That will be key to market share and key to driving that higher WAMGR and higher growth going forward.

And you've talked about the investments, particularly given -- when you gave some color on fiscal '24 and protecting that R&D investment level growing at, I think, at the level of top line growth while also putting cost reduction initiatives in place to offset some of the inflationary pressures. But just thinking about that commitment to R&D -- sorry, this is setting up the question to ask about kind of competitively, if you think about all the number of business units and segments within the medical device industry, then Medtronic's levered to kind of invest at the same level as a company that's a pure play, for instance, say, Edwards in structural heart, really Medtronic to invest at that same level, I think it's hard to parse out where each investment dollar is going within what your team reports. But how do you think about that? How do you think about competitively getting your R&D investment levels to the level of a pure play like Edwards in structural heart for instance, just as an example?

Yes. Yes. So you've seen us grow our R&D, at least in line with revenue over the last several years, and that's going to continue. The good news is we have plenty of really strong opportunities internally within Medtronic, driven by our core tech experts in the company. And so we're going to continue to grow R&D at least in line with revenue. And in years where we have really strong internal R&D opportunities, we may even grow faster than revenue because we view that as super important to drive that durable top line for us.

Excellent. I wanted to touch on just the LRP targets that have been out there -- that have gone through -- the whole industry has gone through some -- a very volatile period with the pandemic, 2022 with all the supply chain pressures and inflationary pressures, currency pressures. But thinking about the LRP targets that are out there and then thinking about the color that you've provided for fiscal '24, it sounds like fiscal '24, there's going to be a lot of positives in terms of moving towards those LRP targets. There's also some headwinds. So I guess the question is, how should investors think about the LRP targets in Medtronic getting back in terms of hitting those targets, I believe, kind of mid-single digits on the top, maybe getting to 5%, 5% plus, 8% on the bottom with some margin expansion in the middle?

Yes. What's really important is that we're hitting our annual commitments, first and foremost, and we are very focused on doing and driving that. And we have said that next fiscal year, particularly as we look at the headwinds that we're facing that impact our bottom line, it will be a challenging earnings year. We've said that. We are focused on driving significant cost takeout to help offset the significant headwinds that we've got in inflation, in currency, in interest, in tax. And we're also focused on making sure that we don't skimp on the long-term investments that we need to make despite the short-term pressures. So we're going to be focusing on -- and we're still in our planning process. So we will give guidance on our Q4 earnings call. But -- and so we'll see where all these puts and takes net out for next year. But as it relates to the long-range planning, well, next year may be a little challenged on the bottom line. We're focused on driving that durable top line growth to the 5% plus that we've talked about over the long-range plan. And then after we get through some of these near-term pressures, we're going to be focused on driving that right leverage down the P&L to drive the bottom line. So really, our long-range plan hasn't changed.

Excellent. And I know you're in the middle of your planning process. You only given -- you've given color, nice color on fiscal '24. I guess one of the questions we get as an analyst team since the JPMorgan update and the fiscal third quarter call has been -- is the message that there is some earnings growth to be had. I know you may not be able to answer this question because you haven't given guidance yet. But is there any, I guess, incremental detail you can share?

Yes. So again, we're still in our planning process. So it's premature for me to give you anything more than we've already given you on '24. I will give an update on currency, though, because that continues to be volatile for us. And we updated our FX based on current rates, which were at the beginning of the month on the earnings call. And since then, the dollar has strengthened a bit over the last month. So our headwind on currency has gotten a little bit worse. So if we look at just the fourth quarter impact on currency, it's about $60 million worse on the top line. No change to the bottom line because of the hedges that we had in place. And for next fiscal year, we had said that we'd have a $339 million tailwind on the top line on currency for next fiscal year. And that's moved to be about flat to slightly up from the prior year on the top line for next year. And then on the bottom line, at earnings, we said it was about a $0.27 headwind to the bottom line, which is about 5% of our total EPS growth, and that's gotten a little bit worse. So based on current rates, it would be about a $0.33 headwind, and that's about 6% on our bottom line.

Understood. Thanks for that update. And we'll keep tracking those -- the moves on the currency side. But maybe we should move on to just talk about some of the growth drivers for 2024 and beyond, and there are a number of them in place. And maybe to start, an issue, you talked about internal R&D investment. This is a growth driver that's in play right now, but wanted to initially address, external business development strategy has been pretty steady for the last number of years, focused on tuck-in acquisitions. You've had some success with Intersect, have the Affera acquisition that could bear a nice fruit as well. But maybe just to refresh on the M&A strategy. And are there any changes and -- as we look out into the out years?

Yes. We're focused on driving important additions to our portfolio that again helped drive our WAMGR higher. And so there's really no changes to what we've been focused on of late. We're going to continue to look at tuck-in acquisitions and continue to do that in a disciplined fashion. So no changes.

Excellent. I didn't expect any, but I just wanted to take a shot there. Maybe on Diabetes, that's an anchor unit. I think if we go back a couple of years, Diabetes approaching 10% of the revenue base, growing nice double digits. So that unit alone was contributing 100, 150 basis points to the organic revenue growth. And so with some of the challenges that have been experienced, if that business can recover, that could be a nice tailwind to the organic revenue growth trajectory. And I don't think there's any updates on the FDA remediation efforts. But if there are, you can, please, share them. But if not, maybe the question would be just in terms of competitiveness of 780G and how your team is thinking about getting through the FDA warning letter, launching 780G and Guardian 4 and whether you think that Diabetes franchise and the IDE segment can gain share in the U.S. market.

Yes. So we're clearly focused on driving an important turnaround in Diabetes and do expect and focus on getting that business back to the double-digit growth that it should be. We're seeing that great strong growth outside the United States, high teens growth OUS. We're in 90 countries now with the 780G and just seeing really great reception of the system. The algorithm is one of the best out there. We are focused on getting 780G lifting the warning letter in the United States and getting 780G approved in the United States. We're not going to give a play-by-play at this stage with the FDA. But when we have important news to share on either the warning letter or the 780G approval, we'll clearly get that out there.

Understood. And I think we have a diabetes panel tomorrow, and we've had checks with endocrinologists in the past. And I think that the consensus, at least that we've captured, is that the algorithm for 780G is fantastic. The sensor needs to catch up a little bit. So far as in the pipeline, you've filed for CE Mark already. We could see approval depending on how quickly the regulatory bodies work over there sometime in the coming quarters. And then we have the U.S. filing strategy, I think, a PMA filing. Any updates on either the CE Mark process or the Simplera FDA process?

Yes. I mean you said it well, Josh. We filed for CE Mark with the Simplera in the first quarter of this fiscal year. And we will -- it is a PMA in the U.S. And we'll -- we don't have an update on that. But we're focused on bringing a strong cadence of innovation in our Diabetes business to market every year. So right now, we're focused in the U.S. on the warning letter, on 780G approval, but we've got Guardian 4 and Simplera shortly after that.

And just to -- I know we're talking about growth drivers in this segment of the discussion, but just to ask a question, I want to follow up. I think Geoff's comments on the fiscal third quarter call is about you, guys, have doubled down on this commitment to the Diabetes franchise, your whole team. Medtronic has been committed to Diabetes franchise. There some out there that are speculating that maybe they'll be -- as you've executed on the patient monitoring and respiratory unit or solutions spin that there could be bigger spins in the future to reduce the size of Medtronic's revenue base. I know you're not going to give me an answer on Diabetes specifically, but could -- as part of the portfolio optimization initiative, could it involve a bigger business unit? Or I mean should we be thinking more on the smaller units? I think your Renal Care and respiratory/patient monitoring are about 8% of the revenue base. Smaller chunks that you're knocking out or are you -- I mean it sounds like you're evaluating every possibility, your team as you're going through the portfolio optimization strategy.

Yes, we're not going to speculate. We are very committed to the Diabetes turnaround. No question about that. And I would say on the portfolio management work that we've been doing, we view it as not a destination but an ongoing journey for sure. We're going to -- we evaluated quite heavily all of our businesses within Medtronic. We're going to continue to do that. And we evaluate them based on, again, strengths, weaknesses, opportunities, the kind of investment level required to drive the growth in the future. And whether or not we're properly invested, need to invest more, we're going to continue to do that, and we'll see what the future holds. But to us, good portfolio management is just an important piece of what big companies like us need to do.

Understood. Understood. And just one more question on the Diabetes franchise. I mean it sounds -- I mean the commitment is there, and I think that's been clear. But has there been a limitation in terms of what your team could share just on some of the pipeline initiatives? You have the co-investment partnership with Blackstone. ADA last year, I think there were some limitations because of the FDA warning letters in place. But is that the case? I mean are there projects underneath the hood that have not been shared with the investment community that we should be somehow thinking about in terms of this Diabetes turnaround? And then some of the fuel that you guys will add in the coming years?

Yes, we've got a really strong pipeline in Diabetes. And Que talks about the key focus of the business to drive innovation every year in that business. And so we're going to be focused on that. So we've got stronger CGMs in the pipeline. We've got multiple shots on goal for patch pump that we've shared before. And we're going to continue to invest in our algorithm. We've also got, in the durable pump, goals to take that durable pump size down, too. So we're going to continue to invest in that business and have a really strong pipeline.

One of the pipeline initiatives that seems to be coming to fruition, even more so after this morning, is pulsed field ablation. Medtronic, I guess, leading the pack now with first pivotal trial data set being presented at ACC earlier today and its successful outcomes. Maybe just talk about Medtronic positioning in the PFA space and maybe just the build-out of the ecosystem. I mean Cardiac Ablation Solutions is one of the most -- had been one of the most -- or not Cardiac Ablation Solutions but Cardiac Ablation segment within the medical device industry has been one of the most durable growth segments, 15 years double-digit growth, doesn't show any signs of slowing. Medtronic has been represented well but mostly on the cryo side, RF side, ablation side, not so much, but now potentially taking leadership or leadership, better share position, if you can be successful in the PFA launch. But maybe -- sorry, long-winded questions [indiscernible] generally talk about the Cardiac Ablation Solutions ecosystem build-out and how that can reposition Medtronic in this high-growth segment?

Yes, absolutely. When I earlier talked about our focus on growth, and 1 of the 5 segments of higher growth is Cardiac Ablation. And we're super excited. The data has been released this morning. We reached the end points on both safety and efficacy. On safety, we had higher safety data than anything out there yet. And so this is going to be an important growth driver for us to come. We were more of a one-trick pony in this cardiac ablation space with just cryo. And now we have a fuller suite with PFA and with the Affera acquisition that we did that has important mapping and navigation technology. So we feel like we are far better equipped now to drive that higher growth in this space because we have a full suite of offering there, and we're super excited to get it to market.

Excellent. I think we may be missing a session with some Medtronic team members today post the data presentation. But I'm not sure if you can share whether or not the PMA has been submitted or not for the PFA platform.

Yes, we're not commenting on that right now. But yes, Sean Salmon and Rebecca Seidel will be with investors at ACC this morning.

Great. And one other area definitely want to get in before the clock runs out here is just on robotics and Hugo. And I think I may be just underappreciating the potential there myself. It's been a long development pathway. There's been some stops and starts. But just in terms of the recent updates, it seems like you turned the corner of that team, Bob White and his team, and where you stand in the international launch but also moving forward in U.S. IDE trial. And it's such a big, big market and being the relative #2 player in even small share grabs that are going to lead to some really strong revenue generation, particularly in the United States. But maybe help us just think through where we stand here and when can Hugo be a more meaningful revenue contributor. I know it's -- I think $30 billion revenue base. You need $300 million of incremental revenue to add 100 basis points to the organic revenue growth trajectory. So that's a tough sled. But I mean -- but even adding 30 50, 70, somewhere in that range, how should we think about timing of Hugo being a more meaningful contributor?

Yes. I think the good news for our robot is it's going to be a strong contributor to our revenue growth for many years to come. It's not -- today, less than 5% of surgeries worldwide are done robotically. And that's ticking up continually because we think more and more surgeries are going to be done robotically around the world as we look ahead. And we are really well positioned. We've got our robot out there now. It's performing really well. The feedback that we're getting from surgeons is really strong. They love the open console. They love the imaging technology, which is a little sharper, brighter than our competition. And we're going to continue to drive indications across a variety of surgeries out there, not just [ urogyn ]. And so we're excited for the long-term growth driver of robotics.

Excellent. Maybe I could get one -- couple of questions on the renal denervation pipeline effort. I think submission, to my recollection, at TCT last year was prior to that data set presentation. We're getting up to the 180-day mark. There's always questions back and forth to the FDA, but they -- is there anything you can share just in terms of back and forth with the FDA or whether or not a panel -- an AdCom panel will be required?

Yes. So it's going to be up to the FDA on whether or not a panel is required, but that's not something we control. So we're preparing as if there will be a panel. And we're really excited about this Ardian for our future, too. We've got many trials out there that we're now complete and the totality of evidence in that data for the strength of Ardian as a treatment for hypertension is real. And so we're just -- we're excited to eventually get it out there.

Excellent. Just the expectation, I think we talked -- spoke a little bit about this last night. Sorry to make you repeat yourself. But just in this forum, I mean, [indiscernible] is still for a broad label and really no limitations based on -- I mean the ON MED trial. There's a lot of ways to cut the data. I think we're in agreement with our team that the totality of evidence should support an approval. Is broad label the goal for Medtronic?

Yes. We are definitely focused on a broad label, and we're going to be focused on using the totality of the data.

And then just lastly, last question on -- and for renal denervation but also for this discussion. Just on the reimbursement side, I think whenever there is any kind of not clear-cut data set that could -- where investors can sink their teeth into and say this is going to drive a positive reimbursement decision by Medicare and private payers. I don't think there's ever been a real clear 100% clear dataset that -- where anyone can conclude that for most device technologies. But just thinking about the renal denervation set up, is there anything you can share just sort of your discussions with your team's discussions with payers over the last couple of years and how important renal denervation is to add to the armamentarium of blood pressure control? It's a massive opportunity, a lot of uncontrolled patients. But is that -- does that seem to be a priority for payers? And how confident is your team that reimbursement will follow approval?

Yes. So I know there's some skepticism out there on reimbursement, and our focus is just to prove it wrong over time. So we've got a really strong team. And one of the strengths of Medtronic is we have strong reimbursement teams. And we've got a really strong team working on this. We're going to be focused again on using the totality of our data to help us drive reimbursement. And our focus is to just prove it at this stage.

Understood. Well, I think we'll leave it there as we ran to the top of the half hour. Karen, thank you so much for spending this morning with us and last night. Great to see you in person, and hope you have great meetings the rest of the day.

Thank you so much.