Medtronic plc (MDT) Earnings Call Transcript & Summary

Welcome to the stage, Chairman and Chief Executive Officer of Medtronic plc, Geoff Martha; and CFO of Medtronic plc, Thierry Piéton. And Managing Director and senior equity research analyst covering medical technology, Larry Biegelsen.

Okay. Well, welcome, everyone, to the 21st Wells Fargo Healthcare Conference. I'm Larry Biegelsen, the medical device analyst at Wells Fargo. And on behalf of the entire research team, I want to thank everybody here for helping make this our most successful health care conference to date. We had about 2,000 people registered, over 300 companies attending, a great turnout. So now let's turn to our keynote speaker, Geoff Martha, the CEO of Medtronic, the world's leading medical device company. Geoff is also joined by Thierry Piéton, Medtronic CFO. The format is going to be moderated Q&A. We'll spend the first part of the discussion on industry trends, and then we'll turn to Medtronic specific topics. So Geoff and Thierry, thanks so much for being here and agreeing to be our keynote speaker today.

So let's; jump into questions.

Sure.

So Geoff, we've seen a rotation at a health care and out of medtech in recent years due to high growth -- into high-growth areas like AI and technology. As the industry leader, Geoff, why is this a good time to invest in medtech?

Well, first of all, Larry, congratulations on the conference. It's great to see it continue to grow, and thanks for having us. Look, I think it's a great time to invest in Medtech. I mean, because the -- look, we see some really great innovation happening, not just in the traditional biomedical engineering side, less invasive devices, smaller devices, longer batteries, et cetera. But when you take the AI and robotics, they're like force multipliers. And they've allowed us to expand our scope of innovation from not just improving patient outcomes, but to lowering costs over time and also expanding access. And so I think it's a great time to invest in medtech right now. We're pooling -- when you look at -- and we can go through this, when you look at our growth, and the growth acceleration in Medtronic, a lot of it -- yes, some of it's market share, but a lot of it is expanding the markets and pulling new patients in. In some cases, it's brand-new segments like renal denervation for hypertension. But in other cases, it's just like lowering the threshold for 75-year-old businesses like cardiac rhythm management and expanding those markets and pulling more patients in. Above and beyond any kind of impact from chronic disease, rising chronic disease or aging population, above -- when you factor that out, we're still pulling a lot more patients into its new therapies.

That's good to hear. So Geoff, as you know, a concern right now is potential impact to procedures and capital equipment spending from some of the policy changes going on, what's your -- how are you thinking about the impact?

Well, the policy change I hear the most about would be like the ACA rollbacks and look, we've looked at that, a couple of things because we've seen some of that commentary. First of all, our procedural mix is very acute, right? So that's 1 piece of it. We're not into these more elective procedures. We don't have as much exposure to that. And when it comes to ACA linked to that acute nature, like we -- maybe 2/3 of our payer mix is Medicare, 25% commercial and less than 10% Medicaid. And when you look at our exposure to ACA related programs, over -- it's less than 1% of our revenue globally. So it's just not a lot of exposure to it.

That makes sense. And you touched upon, Geoff, AI, which is transforming many industries. What impact is AI having across the industry and at Medtronic? What does it mean for revenue and for costs?

Well, look, I'll start on the revenue side. It's definitely having an impact on our revenue. Again, when we talk about AI, and like I said, especially when you combine it with robotics, but even by itself, it's a force multiplier. And when we talk about AI and our products, we're largely talking about, look, we have a lot of access to structured physiological data, structured device data, procedure data. This isn't -- we're not talking about large language models and just general data. We're talking about very precise data. And we're using that more in a machine learning environment. And it's dramatically impacting like our ability to diagnose things earlier or better to -- here's the big one, to personalize therapy at scale. So whether it's personalizing your DBS therapy, personalizing like a surgical plan in spine for one patient. You're able to do that at scale, and that's going to help a little clinical outcomes. And then as I said just a second ago, it's helping us expand our aperture on what the benefits of the innovation to like talk about access take our -- like I just saw this example of the day, our GI genius for colonoscopy, that's AI and the colonoscopy procedure. Yes, it's -- in the U.S., it's quickly becoming the standard of care because we found in our clinical trials that anywhere from 25% to 50% of the polyps are missed and the leading centers in the U.S. Went over to -- and so this is a race that, right? It's fixed that with the GIgenius that we have. Go over a place like India, I saw a massive hospital with hundreds of people in the waiting room, getting coloscopies. You hear what we saw is like very young physicians and the CEO of the hospital said, "Look, these physicians are right out of medi -- don't have the apprenticeships or the fellow ships that you have in the U.S., but they're getting the exact same diagnostic yield you're getting in the U.S. because of GIgenius. So it provides good -- democratizes good care.

That makes sense. China, Geoff, as you know, has been very volatile in recent years. I think you've said in the past it's maybe 6%, 7% of Medtronic sales. I don't know if that's still the case. How are you thinking about -- what's -- how is your business performing in China? And how are you thinking about that geography going forward?

Well, the percentage of our revenue has come down after the VBP, but it's stabilized. And look, we view China, it's performing well. It's a growth market for us. There's still a lot of -- the Chinese government is very focused on expanding health care to people that don't have coverage in more higher in health care that we play in, right? And they're serious about it. There's a lot of growth there. And it's a growth market for us, and it's a good profitable market for us.

If it's growing and it's a growth market for you, you're in the minority right now. I think for most medtech companies, it's probably been less of a growth market in recent years because of VBP.

Well, look, in recent years, like I said, it's come down as a percentage of revenue. It's more -- the VBP is more baked into our growth rate. And...

Yes. I mean we've come down to between 5% and 6%, but it's still a good contribution for us. And -- and the VBP is mostly behind us. So now we're back into a normal sort of environment.

And you're committed to China going forward still?

Yes. Yes, we are.

Okay. Because I think we've seen some companies maybe pull back in recent years. Geoff, innovation is the lifeblood of the industry. You talked about it earlier. What's the state of innovation in the medical device industry today? And what are the areas you're most excited about?

Look, I said before, I think the state of innovation is strong. I mean you're seeing -- I know there's concerns on procedures and things like that. We're just not seeing it. We're seeing strong procedure growth. You got the rise of chronic disease, you got the aging demographics. But like I said earlier, above and beyond that, our markets are responding well to innovation. We're pulling in patients that otherwise would not be treated like with our Ulta Viva device for overactive bladder. These patients maybe not seek treatment. But now that you put this just let the skin on the ankle, this is opening up -- pulling more patients in the medtech. There's like 16 million patients in the U.S. that's suffering from overactive bladder. This thing has turned around our private health business or you're bringing in from where they were using a pharma solution like hypertension, right, as we -- renal denervation or AFib like PFA, right? That's the industry -- there's a couple of players there. PFA deploying people off of drugs and doing more of a procedure. So I see more and more of this. And then you've got, on top of that, the AI and the robotics. And as we -- robotics is -- look, we think about it in the context of the United States. And it's clearly a huge trend in the U.S. But outside the U.S., like in emerging markets, robotic surgery is less than 1% penetrated. And I do believe the combination of AI and robotics is going to change the way. These countries train their physicians we're not going to replace physicians anytime soon, but like having a driver assist, the digital platform that's the heart and soul of that robotics ecosystem, is going to, like I said, earlier, democratize good surgery. And that's what I think is going to be an important part of emerging market growth where they just don't have -- there's a huge labor issue, train physician issue.

The areas that you're excited about that you can share with us today that you're watching that you're not in today?

Larry, you're going to have to come to our Investor Day to hear more of that in December in Charlotte, North Carolina. where we're going to be having at the ERCOT facility. And 1 of the main things we're going to get into there is new growth drivers. But I'd say, in general, like there's a lot in the Neurotech area that we're excited about, that's net new to, I think, medtech. We have -- within the medtech, we have the broadest and the deepest -- we're literally #1 in every single area of neuro. And so we're excited about that. But then there's a couple of areas that we're not in that we still like IVL and a few -- these high-growth areas that we're not in that would fit in our portfolio. We're not looking at hips and knees or anything like that, it's not high growth. But we're looking at these high-growth areas in cardiology that we're not in today. So we'll continue to look at those.

Got it. That's helpful. And I want to talk about the Investor Day later in the conversation. The first one you've done in I think 5 or 6 years. Thierry, is that right since 2020?

Yes, 2020. I think.

Yes, 2020, yes.

But first, maybe let's talk about the start that you had to your fiscal year. You're on a fiscal year basis, you reported the Q1 results last week, I believe, strong growth, I think, 7% organic. I think you said something to the effect that Medtronic is at an inflection point. So just talk about the durability of the growth that you saw coming out of Q1.

Do you want to take this one?

Sure. So okay, thanks. Yes, it was indeed a good quarter. So it was 13.7% with the extra week, about 7%, if you correct from that element. Look, one thing that you might have noticed in the Q1 earnings release is we talked about the big franchises first because we've got a lot of questions around cardiac ablation, around hypertension, et cetera. But we wanted to make a point that, first of all, our 3 franchises are growing significantly faster than they used to. So you take cardiac rhythm management one of our biggest franchises in the portfolio. A lot of the competition considers this to be a pretty stable, low single-digit market growth. We were up 15% in the first quarter with the extra week, so about 9% corrected from that. we saw super strength driven by innovation. So EV ICD was super strong. Everything around conduction system pacing was very, very strong, up strong double digit. And we saw even leadless pacemakers, technology that we launched over a decade ago, be double digit. So we continue to see strength in CRM. In our CST in our Spine business, large franchise same thing. Stealth Access has enabled us to offer a full suite of products to the customer from navigation, visualization, robotic assistance. It's made the implants a lot more stickier, helped us from a pricing perspective. So that franchise now big capital-efficient franchise performing Super well. And our surgical business was performed very well, including acute care and monitoring. So the big franchises were strong, and they continue to accelerate. And on top of that, we've got these 4 super high growth areas between cardiac ablation, simplicity with hypertension, Altaviva in urge urinary incontinence and Hugo and surgical. There are each one of them multi-billion opportunities going forward. So that's kind of the algorithm going forward. Strengthen the base with big super penetrated franchises in which we protect the position with innovation and then 4 large franchises at different stages of development that generate more growth going to that. This -- as Geoff said, this will be a key element of our Investor Day in December. We'll talk about the dynamics of how that's going to unfold over time.

And you asked about the durability. Just to build on what he said, everything he just said, I just want to point out that effectively, we've doubled the investment in innovation over the last couple of years because we've really ramped up the M&A machine, so venture investments and M&A to go with our organic. And when you do the dollars, it's effectively doubling our investment in innovation. And I would point, like we've talked about breadth and depth. So we're like to his point, the breadth of the growth, the big businesses and all the businesses, also geographically dispersed growth. And now you have -- and you have the growth drivers. And then were a mix of organic and now inorganic. So we're not relying on 1 thing. We're not relying on just inorganic. We're not relying on just 1 country. We've got breadth and depth, no matter how you look at it. geography, geography, business-wise, growth drivers, inorganic versus organic, it's breadth and depth.

That's helpful. It's hard not to ask about cardiac ablation. It is driving a lot of the growth. 8% growth, I think, a $2 billion business today.

Well, you one of the ones that said we wouldn't get there in time. I can't remember.

No, that was someone.

There's a lot of people that. I say, yes, we said we're going to be $2 billion, and people laughed and we beat that expectation by a lot. So...

Congratulations. So how are you thinking about at some point the business slows, law of large numbers. Thierry, you said you're going to grow more than 2.5% of the market in 2020 -- fiscal '27.

2.5x the market.

Right. so just maybe put a finer point on that. How fast do you think the market is growing? What's more than 2.5x mean?

Yes. I mean, look, what we see in the market from a market growth rate perspective is mid-teens, around 15%. So you can do the math. The comps get a little bit harder during the year because we're lapping quarters where last year, we were already up 70% or 80%, but we'll be up 3x the market -- over 3x the market rate in the second quarter and around 2.5x market rate on the full year. So look, it's early innings. We still have a lot of opportunity, commercially speaking. In the U.S., we're mostly focused on large accounts at this stage. And even those large accounts, they want to grow their installed base. So we're growing internationally. We launched in Japan. We're growing -- we're adding indications. We added particular tachycardia in Europe this quarter, and we're applying for it in the U.S. And we've got -- we're not stopping that from a portfolio perspective. So today, is our main workhorse, and that's driving a big portion of the growth. As you know, we've got 3 -- so 360 coming up. It's now launched in Europe. And -- it's going through clinical trials in the U.S., and that will be the next stage driving growth. And in addition to that, you probably saw us make an investment in NICE. So we're trying to surround the electrophysiologists to have the full picture. But clearly, for us, we're still in very early innings for this business. I think the 1 One thing to keep in mind short term is we grew the installed base of capital equipment by 40% in Q4 and by 35% sequentially in Q1. So just in terms of the pull-through of catheters that that's going to generate, it's super good news for us going forward.

Geoff, what can Sphere 360 do to your cardiac ablation franchise. Why is that an important pipeline product?

Well, look, as you know, the single shot right now, Sphere 9 has been a class all by itself, a dual energy, large tip catheter in the point-by-point space. It's by itself. That's one of the reasons, plus people will over the venerability of it. Sphere 360 goes right at the heart of all of our competitors. And we think on the single shot, and we think it's a better mousetrap and the large chip, the movability of it. We think it's going to be a winner. And it's going -- again, it's going right at the competition. And it's got -- as you know, it's got very -- it's very fast. It's very fast. So if you're going for efficiency of single shot, this is going to be your tool. And as Thierry said, I mean, it's -- we're not -- we realize how competitive the market is. It's a very attractive market. We realize how competitive it is. We thought like hell to get to where we are, and we're not resting on our laurels. So Thierry just walk through all the things that we're doing, making these investments. We're looking ahead multiple quarters, multiple years, building around the procedure. And on top of all that, like in the U.S. We're still in these large centers. We haven't really expanded to the medium and smaller centers. And to help do that, we've combined our cardiac rhythm and our cast sales leadership to leverage those relationships. We've got -- we're everywhere in cardiac rhythm. Our market share is at an all-time high. everywhere around the world. And we're going to use that business to help us ease into those relationships around the world. So we've been building for this.

That makes sense. The time line for Sphere 360 in the U.S.

Well, we just wrapped up the enrollment in the clinical trial, I believe that's a 12-month follow-up, and then we'll submit. So...

That's helpful. So let's switch gears, talk about the soft tissue robotics or robotic-assisted surgery, as you call it, RAS. Big news on the Q1 call last week, $700 million investment and distribution agreement with Cornerstone based in Hong Kong. It gives you rights in select international markets. Talk about the rationale for that deal, please?

Gives us rights in 50 countries, right? So it's a lot of countries outside the U.S. Look, we're doubling down in the developed markets. This offers us more choice outside the U.S. Remember, outside the U.S., our market share is disproportionately higher. I mean we're -- there's not nearly as many -- a lot of the competitors you hear about here in the U.S., you don't see them outside the U.S. It's really us and we're dealing with health ministers at socialized medicine. It's controlled at the country level. And they won an offering. And we weren't going to be there -- and we have a big surgery business. Surgery is our biggest business in emerging markets by far. But everyone does surgery, open and lap everybody. If you're going to have a hospital, anything in health care, you're going to have a surgical -- we're, by far, we're us and J&J are the biggest. And this gives us an opportunity to introduce robotics to these customers. So look, the leader in the space. We've got a ways to go, but we are miles ahead of the next guy and this extends our lead.

So what is it about Cornerstone's entire robot that's more amenable to these emerging markets that HUGO doesn't provide?

Well, we're going to -- we can have a tiered approach in terms of various things, but that's one. And it's designed for those markets in mind. It was designed in Asia for those markets. So there are different preferences. There are different needs. It's got its own set of instruments. It's got real small instruments, like 5-millimeter instruments, 8-millimeter instruments. And it's a different design than HUGO. So there's a preference sometimes for that. So it just gives customers a choice.

But there's -- when you say tier, do you talk about tiered pricing?

There'll be tier pricing tiered offering now.

Got it. And how do you see the relationship with Cornerstone evolving over time?

It's early. We'll see. I mean, we've been with them for a year, first of all. We've been over a year, we've been working with them. We've seen the robot. They've had thousands of cases. The quality is there. The technology is good. It's really good. And the management team is A+. I mean these guys are very professionally run with -- sometimes these emerging market companies, it's one founder who's also the lead inventor and engineer here. They've got just a great bench. And so we'll see, but right now, the focus is on -- we're both an important moments like in the U.S. for HUGO, we've got new indications coming. We'll cross 50,000 cases by end of the year, 250 unit installed -- installations around the world. We've got new instruments coming. We've got these 2 new indications in the U.S. are important, and it will make it more of a workhorse. So that's where we're focused. and centere is starting their launch, right? They're going to be starting their launch and they're more focused outside the U.S. So that's the focus right now. We'll see where it goes.

Just last question on this. So HUGO is your U.S. surgical robot the U.S. is still the biggest market for surgical robots. When does HUGO start moving the needle in surgical and for total Medtronic, you gave us some numbers, but we don't know the baseline.

Yes, we haven't gotten -- I can tell you this is already having an impact on our surgical business. You're seeing accelerate. I don't know if you want to go any further.

No, yes, we haven't given specific numbers on it, but it's already having an impact on the surgical numbers for sure. And look, it's super encouraging. As Geoff said, 50,000 procedures in the year. We'll end the year with about 250 installed robots out there and build from that. And we'll generate pull-through from an instrumentation perspective. It's -- yes, there's numbers.