Medtronic plc (NYSE:MDT) 2022 Wells Fargo Healthcare Conference Call September 7, 2022 11:35 AM ET
Company Participants
Karen Parkhill – Executive Vice President and Chief Financial Officer
Gregory Hertz – Senior Director of Investor Relations
Conference Call Participants
Lawrence Biegelsen – Wells Fargo Securities, LLC
Lawrence Biegelsen
All right. Good morning. I’m Larry Biegelsen, the Medical Device analyst at Wells Fargo. And it’s my pleasure to host this session with Medtronic. With us we have, Karen Parkhill, the CFO and Greg Hertz from Investor Relations. In terms of the format, it’s going to be a fireside chat. If anyone has a question they want me to ask on their behalf or if they want to ask just raise your hand. So Karen, thanks so much for being here.
Karen Parkhill
Thank you, Larry.
Question-and-Answer Session
Q – Lawrence Biegelsen
So Karen, we are starting all of these fireside chats off with the macro discussion with no surprise. You guys highlighted a number of macro headwinds on your fiscal Q1 call recently. Maybe just remind us of kind of what – well, how do you see the year progressing? What’s getting better? What’s getting worse?
Karen Parkhill
Yes. So in terms of macro headwinds, obviously we have several, but in general, I see many of them getting better. I’ll start with our supply chain challenges, which have been the biggest impact for us, at least, in our Q4 and Q1. We expect those supply chain challenges to get better sequentially as we move through the year. But particularly better in this second quarter where – when we – by the time we exit the second quarter, some of the challenges we’ve been facing particularly in our Surgical Innovations business, mostly from a resin shortage and packaging tray, sterile packaging tray shortage, we expect that acuteness to get a lot better as we exit the second quarter.
We do expect some continued lingering impact from semiconductor shortages throughout the year, but that’s built into our guidance. As we think about – as we think about the other challenges, inflation has been one challenge that we’ve been faced with and we saw a significant impact from inflation towards the end of last year that has come into this fiscal year and that’s been built into our guidance. We’ve seen a little bit of an uptick on freight and fuel and surcharge – fuel surcharge costs on our shipment. And that’s one of the things that we signaled on our last quarter call.
As I see inflation right now, hopefully stabilizing at this higher level, that’s what we are expecting at this point. When we think about hospital staffing that I think too has stabilized a bit if not gotten better. I think hospitals are better able to deal with the shortage challenges. We’ve seen a little bit less reliance on traveling nurses in certain systems, and I think that’s helped, so hopefully that has stabilized as well.
We continue to have foreign exchange challenges. We’re seeing that impact our topline fairly significantly this year. We do have hedges in place, but lessen the impact on the bottom line. We said on our last earnings call, but if currency rates remained where they were at our earnings call, that we’d have roughly the same bottom line challenges next year that we have this year, but currency is always fluid, we know that, we do hedge it and so we’ll see where it goes from here.
Lawrence Biegelsen
That’s super helpful. Good to hear that things are getting better. One, I think you said electronic component, you expect to still be challenging for the remainder of this year and that mostly impacts cardio and neurovascular. Is that right?
Karen Parkhill
Yes. Mostly impacts cardio and neurovascular and it’s our capital equipment as well.
Lawrence Biegelsen
Got it. And how do we – the cadence for the year at 3% to 3.5% organic growth for Q2, and then I think 8% to 10% implied for the second half. The first quarter was negative. I think 3.6% organic. You obviously had a lot of supply challenges there. How do we, first of all judge the performance in Q1 not knowing kind of what the supply constraints impact was and how do you see kind of what gives you the confidence in that cadence through the year?
Karen Parkhill
Yes. So I’ll start with Q1 Larry, because I think it’s important to note that the comp for Q1 was particularly tough because we had 19% growth globally last year in Q1. And that growth was coming off of obviously the original significant impact of COVID the prior year. But also the fact that we had the third wave of COVID the prior quarter last year, which help drive greater growth 19% in the prior year. So comp is a big factor and obviously our supply chain disruption played – had a meaningful impact on the quarter, and we are coming out of that. That’s an acute issue that we are coming out of. Absent comps, we do have some – we did have some slowdown from volume-based pricing in China ahead of a national spine tender and we are having some impacts from a stapling provincial tender as well in China.
So we had a lot of factors playing into Q1, but as we look ahead, this quarter in our Q2, we have the comps getting a little bit better. So last year, second quarter, we grew 2.2%. So much better comp. We also have our supply chain challenges getting better, not fully out of the woods, but getting better this quarter. And we are expecting – I would note that we are expecting the national tender to impact our spine business in the second quarter. But as we look ahead to the meaningful ramp in the back half, and yes, that does imply about 8% to 10% growth in the back half, that meaningful growth is driven off of lower comps last year.
So last Q3 and Q4, last year we had about 1.5% growth in each of those quarters. The third quarter last year was impacted by the third wave of COVID. The fourth quarter last year was impacted by the acute supply chain challenges that we had and so we expect to grow meaningfully off of those lower bases. We also had headwinds in last fiscal year that will lessen fairly significantly in the back half. We had headwinds around ventilator sales, the LVAD business that we shut down, our Navion recall, those abate more in the second half and that adds about 175 bps of growth just from that.
And then, of course, we’ve got really a good pipeline and good product introduction and continued global expansion of some of our products. We’ve got continued global expansion of our Micra leadless pacemaker around the world, which is driving strong growth. We’ve got the new opportunity around painful diabetic neuropathy that we expect to drive some good growth in the second half. We’ve got our Extravascular ICD that we should be introducing in Europe. And we’ve got Evolut FX in our TAVR business, which is a typical strong growth for us. And with this new product, we expect to drive more meaningful growth. We expect that to be in the United States in the back half.
Lawrence Biegelsen
Very, very helpful and comprehensive overview. Maybe just one clarification question on your comment on the Q1 call on August and I know we’ve talked about this, so I know – you know the question already, but for the audience, you talked about in businesses not being impacted by COVID that you were, but August was similar or something along those lines to the year-ago period. And people – the question I got was well, that means August was probably down year-over-year because there’s supply constraints this year. So maybe for people, who haven’t had a chance to hear your clarification of that, hope that understand what you are trying to communicate around August?
Karen Parkhill
Yes. Thank you, Larry, for allowing me to clarify that. You know, what I meant to say is that August was trending as we had expected. And we didn’t necessarily see a slowdown in August, it was as we expected. And so I think we’re going to continue, particularly as we put our supply chain challenges behind us to see ramp each month. And so that’s been built into our guidance and things are as expected.
Lawrence Biegelsen
Got it. So fair to say it wasn’t negative year-over-year August.
Karen Parkhill
That’s correct.
Lawrence Biegelsen
Yes. I don’t think I’m going to get you to say whether it was in the 3% to 3.5% range, but it doesn’t sound like because you expect it to ramp through the quarter?
Karen Parkhill
Yes. For us, at least have granted, we got supply challenges. So the underlying trends in August are as expected.
Lawrence Biegelsen
Okay. And this whole concern about summer seasonality being more pronounced this year and you guys are in the best position to comment on that given you reported just at the end of August?
Karen Parkhill
We always see summer seasonality, but I don’t think it was any different this year than we’ve had in prior years.
Lawrence Biegelsen
Okay. That’s helpful. And Karen pricing, I think Medtronic historically, it’s been negative a 100 to 200 basis points, correct me if I’m wrong. Every medtech company, probably every company manufacturer in the U.S. is trying to offset inflation with pricing. Where do you see pricing going for Medtronic? And is that a 100 to 200, right, I can’t remember?
Karen Parkhill
Yes. There is a 100 to 200 typically that we’ve seen and that was pre-COVID. As we went through COVID, we saw a little bit less pricing pressure than typical in COVID as hospitals were not focused on doing big tenders during that time. But I would say, we have a strong concerted effort around pricing today. And that’s driven because we’ve got significant inflationary pressures that we recognized we are going to focus on offsetting as best we can in cost, but we also need to focus on price. And so we have built in new pricing, reporting that we’re doing throughout the company. We have built in a new pricing incentive compensation into our sales incentive compensation, both for our sales force and in particular for our sales leaders.
We have been talking about it in all of our business reviews and we are seeing the right opportunity and great uptake and focus from our teams on this. If we’re not going to drive price in this kind of environment, where are we going to drive price and when? So we’re going to focus on putting it in, in this environment and hopefully maintaining that discipline as we move forward, even out of this environment.
Lawrence Biegelsen
Can price be neutral for Medtronic or positive?
Karen Parkhill
I think, this fiscal year outside of the impact from volume-based pricing in China, we’re focused on driving it to neutral and we’ll see beyond this year.
Lawrence Biegelsen
That’s helpful. And China, we just had J&J here. And they said that volumes are still down about 10% to 13% in pre-COVID levels, I believe, but much better than Q2. So improved from calendar Q2, but still down. I was a little surprised to hear they’re still down about 10%. What are you guys seeing outside of the volume-based purchasing?
Karen Parkhill
Yes. So clearly, VBP is impacting revenue growth, but outside of that, China with their lockdown policies around COVID is very difficult to predict and so we could see some effect of that as different COVID wave’s pop-up in China. The biggest impact for us in China though was more the fact that employees were not allowed to go to work. They had to be shut in their apartments and homes. What we’re seeing at least most recently right now with some current lockdowns in China is that employees as long as they can test negative are allowed to go to work.
And so I think that’s hopefully going to help us a lot more than it did when we saw the Shanghai shutdown. And we had many employees that were not able to get to our distribution center in Shanghai. We had a skeletal staff there and those that were there had to live there. And then we also had some issues from a supplier that had a complete lockdown for a while. So that is abated. And I’m hopeful that going forward China can adopt this policy where folks test negative, they can go to their facilities to work.
Lawrence Biegelsen
And China is a big market for you. I think you said 6%, 7%, something like that. With VBP, can China be a growth market again in fiscal 2024? Is that going to take kind of two years to play out before it’s a growth contributor?
Karen Parkhill
Yes. So China is typically a strong double-digit growth contributor for us. We expect it to get back to that. Currently this year it’s more like low-single digits because of both VBP and because of COVID. But we do expect it to get back to that and it depends on the cycle of VBP. Right now, we are expecting this fine VBP to hit us this quarter, second quarter and we’re expecting – we were expecting a stapling of VBP to happen next fiscal year. And now what we’re seeing is, the province is doing much more significant VBPs in stapling in the provinces. So we believe at this point that the provincial tenders and stapling will supersede the supposed national tender that we thought we would get next fiscal year. So as long as that is the case, and we can get through these VBPs and anniversary then, we’ll get back to double-digit growth there.
Lawrence Biegelsen
And it seems like people are concerned about the macro environment in Europe. Any color on what you’re seeing there?
Karen Parkhill
Yes. So right now in Europe, we have not seen a real slow down. We’ve seen continued robust growth. We are focused on driving resiliency in any of our offices or facilities over in Europe around fuels. But beyond that, Europe is doing okay right now.
Lawrence Biegelsen
Good to hear. The other big picture question for Medtronic has been around the portfolio management that you and Geoff have talked a lot about on recent calls. So what are the goals in the criteria you’re using to make these decisions and when can we expect an update?
Karen Parkhill
Yes. So I think on portfolio management, the important thing is that, I think we’re prudently looking deeply at our portfolio and making sure that we’ve got the right talent against our businesses, that we’ve got the right investments against the opportunities in our businesses, that Medtronic is bringing the right benefit to those businesses, that those businesses are bringing the right benefit to Medtronic. And I do think that overall this portfolio management work is a journey, not a destination. It’s something that – we’ll continue to make sure that we’re doing. I would say that you’ve seen us take an initial smaller first step with a separation with our renal care separation through a joint venture with DaVita that we announced recently.
We’ve also announced several acquisitions recently that are all part of this too. We’ve had the Intersect ENT acquisition. We’ve had the Affera and Acutus acquisition in our cardiac ablation space. We’ve done some decent investments that would – could be deemed structured deals with like CathWorks, which is an FFR technology for our coronary business. All of that is part of portfolio management too.
And I would say, overall, the North Star that we’re really focused on with this portfolio management work is driving our weighted average market growth rate higher and making it more sustainable or durable. That’s the key important focus. And we’ll be doing that as we look through our portfolio into the future.
Lawrence Biegelsen
When I hear you talk about it now, and you talk about the journey and some of the deals that you’ve announced so far, it makes me think that it’s going to be smaller, not larger because those are not, I wouldn’t say those were really significant. So is that – are you signaling that this is more of an evolution and it’s going to be more of what we’ve seen or could we see some large or more significant changes?
Karen Parkhill
Yes. I would say, as you would expect and want us to do, we’re looking at this dispassionately. Everything is on the table as we look at it. But I wouldn’t read into small, large or anything, I think what we are definitely saying is that this is a journey. And we’re going to be focused on doing the right thing for our businesses, for our shareholders. That’s what we’re going to be – what we are.
Lawrence Biegelsen
Is it a long or short journey?
Karen Parkhill
Long.
Lawrence Biegelsen
Long journey.
Karen Parkhill
You look at other companies that have done portfolio transformations like this, they’ve been long journeys.
Lawrence Biegelsen
Okay. And one question I have is, how do you balance increasing the [indiscernible] and margins because I can think about classic cash cows, if you will, business school, they maybe low growth, but very profitable. So how do you balance that?
Karen Parkhill
Yes. I think part of doing portfolio management right is always working on that balance. But we are focused on driving that higher growth rate and for businesses that drive significant growth, they do take a lot of investments. And you do need reasonable growth businesses that drive cash flow in order to fuel that. I think we’ve got that. But we’ll always be focused on striking that balance.
Lawrence Biegelsen
That makes sense. So you talked about the pipeline driving growth in the second half of the year. So why don’t we touch about some of those growth drivers? The one that I’m going to ask about first is actually not in your guidance, which is diabetes and 780G, diabetes obviously is, but 780G in the U.S. is not. Maybe start with kind of what you’re seeing. You’re having success outside the U.S. with 780G and it’s reinvigorated the diabetes business. What are you seeing outside the U.S.?
Karen Parkhill
Yes. We’re seeing significant strong reception for our 780G in Europe and Latin America particularly in Europe where we have a strong market share. We’re seeing uptick there and very good mid-teens to high-teens growth. The 780G, the algorithm with a 780G is the best algorithm out there. And it keeps patients blood glucose levels in range for a much longer period of time than anything else out there. And so that buzz is spreading not only in Europe, but back in the United States. And we’ve got many patients here in the United States that are just waiting for the 780G. And we can’t wait to take it to this market.
Lawrence Biegelsen
You talked about – so in the U.S. you have a warning letter, is that right now is holding up the U.S. approval? You talked about reinspection being needed to resolve that warning letter. You also talked about being over 90% done resolving the warning letter. When are you going to be able to ask FDA to come in to reinspect? And do you think you need the reinspection to take place before 780G approval?
Karen Parkhill
Yes. We are focused on the warning letter remediation right now, we’ve talked about that. We did, yes, say on our last earnings call that were 90% complete with the work that we believe we need to do. On the prior earnings call, we said we’re 80% complete, so we’re making the right progress. We expect to be fully complete soon. And yes, the FDA will come in for reinspection when we’re ready and we can’t time that exactly.
And as we think about the 780G approval, the FDA is actively reviewing our 780G and Guardian 4 sensor, even though we’re in warning letter status. And at some point, we can always ask for a variance to if we need to. But at this stage, we’re very focused on remediating the warning letter.
Lawrence Biegelsen
I got it. And remind us outside the U.S., Guardian 4, the sensor does not require fingersticks for calibration.
Karen Parkhill
That’s correct.
Lawrence Biegelsen
In the U.S., in the past, you’ve talked about it needing at least I think two on the first day. What do you think the chances are that you have a similar label to in the U.S. that you have in Europe?
Karen Parkhill
Yes, we’ll see. That’s up to the FDA. So it’s hard for us to predict. We’ll see what happens. But we do know that our system is working incredibly well and doing that without the fingersticks over in Europe.
Lawrence Biegelsen
Fair enough. And moving on from diabetes to Hugo, one question investors have asked is, what is Medtronic’s commitment to this program given some of the delays? So I’ll give you an opportunity to tell us now what is Medtronic’s commitment to the program?
Karen Parkhill
We are incredibly committed to the program. We view this as a journey as well and this journey started long ago with our focus on moving from open procedures to minimally invasive or laparoscopic procedures to now robotic procedures. And we know robotic procedures are not high in penetration yet, but we believe that’s the future. And so we have been investing quite heavily in this. We’re really excited to ultimately get it to the U.S. We’ve penetrated with many countries and doing several procedures even beyond Urogyn procedures and we’re working through the kinks right now with our supply base and hopefully moving to U.S. IDE very soon.
Lawrence Biegelsen
And what’s been the hold up on the IDE because it has taken a while to start?
Karen Parkhill
Yes. So our focus has been making sure we work out the kinks with our supply chain before we start the U.S. IDE, so it’s been our focus.
Lawrence Biegelsen
And it sounds like, but it sounds like the – the start of the U.S. IDE is closed.
Karen Parkhill
Yes.
Lawrence Biegelsen
But you won’t say if this quarter or what and…
Karen Parkhill
We’re not going to do exact timing.
Lawrence Biegelsen
Not exact timing.
Karen Parkhill
Yes.
Lawrence Biegelsen
That’s fair. Okay. And then the other big pipeline product is obviously RDN, and it sounds like, you’re hoping to present the pivotal ON MED data, or it’s not technically pivotal data, but the ON MED – full ON MED trial later this year?
Karen Parkhill
That’s correct. Our pivotal data was the OFF MED trial, it’s already complete.
Lawrence Biegelsen
And American Heart seems like a logical venue, but that hasn’t – that’s not official yet, but…
Karen Parkhill
Right. So we would be late breaking data that we would submit to the American Heart. So that’s our intention right now. The trial is still not complete, but should be soon. I would note that that this is the final piece of data that we’ll be submitting to the FDA. We’ve had four other trial submissions to the FDA, so this will be the fifth and we’re very excited about this opportunity. We have longstanding data now for over 3,000 patients that have used RDN. It’s real world data, it’s very strong, and that’s on top of the other prior trials that we’ve had.
Lawrence Biegelsen
I know you have goals out there for RDN, I think in 2025 or 2026 and 2030, but my question is around the ramp, how you would characterize it right now? And I’m only asking because there’s no formal reimbursement yet. It’s a new market, new procedure. So obviously, where I’m going with this is one would think this would be a more gradual ramp at least initially. Would you agree?
Karen Parkhill
I would agree. I would agree. I mean, we’ve got market development to do here and that includes reimbursement and training physicians and introducing a brand new breakthrough therapy, that does take time. So I expect this to be a decent long-term growth driver for us, but not to be significant bolus right away.
Lawrence Biegelsen
And it sounds like the messaging, I mean, this has been the messaging from you guys for a long time, but if ON MED, for some reason, the final data does not hit the primary endpoint. You still feel the totality of the data is strong enough for approval?
Karen Parkhill
Absolutely. We’ve got, again several other studies prior to this ON MED study that have shown very significant and positive results. We’ve got real world data in over 3,000 patients as well, that has shown very strong results. And so we’re confident in our ability to take this to market. And we’ve got the last trial coming out soon and based on the positiveness of the other trials, we expect that to be positive too, but we’ll see.
Lawrence Biegelsen
And the other high growth area for you has been TAVR. The TAVR market was soft in Q2 when we aggregate your results in the Edwards results. What’s your view on the market – the U.S. market specifically, interestingly, the international market is actually been pretty good. So the U.S. market people are concerned about and you have Evolut FX coming out, why do you think that to share that that’ll help you take share?
Karen Parkhill
Yes. So I’m not concerned about the TAVR market that is a strong growth driver for us. And to be honest, just this past quarter, you’ve got to look at the prior year comp because we had a significant growth in TAVR in the prior year coming off the third wave of Delta and procedures picking up at that point in time. So when you take that comp out, I’m not that concerned. This past quarter, we also had some perhaps a shortage from the contrast dye shortage that was going on as well. But I do expect TAVR to be a significant growth driver for us going forward.
And when we look ahead, Evolut FX, which should be coming out to the U.S. soon, we expect to be taking strong share in that and have that be a very strong driver. The physician reception to Evolut FX has been super strong. It’s got easy delivery, great durability and better hemodynamics than anything else out there right now.
Lawrence Biegelsen
We’ll be looking closely at TCT, which is, I think it’s only like a week away. And then the other pipeline product you talked about and you presented the pivotal data on was EV-ICD. This was a week or two ago also, right at ESC. What were the key takeaways in your view and what gives you the confident that you can take share in that market?
Karen Parkhill
Yes. So we’re super excited about EV-ICD as well. Our device is smaller, it has a longer battery life and it has the ability to pace in addition to defibrillate and that pacing can help be a pain free way to get patients out of cardiac arrest. So we’re super excited. We expect it to have strong reception. We hope to introduce it in Europe, very soon and can’t wait to get it out there.
Lawrence Biegelsen
All right. Perfect. And the U.S. is, I think you said first half calendar 2023?
Karen Parkhill
Calendar 2023 is what we’re saying, yes.
Lawrence Biegelsen
And so I wanted to give you the last word, Karen, any kind of high level thoughts before we end the session.
Karen Parkhill
Thank you, Larry. I do think that we’ve got significant change going on at Medtronic that between our operating model change, our cultural mindset change, that we’re focused on, our improved operations and quality focus and bringing in new leaders from outside our industry in particular in operations to help us drive that better and more reliable supply chain durability. And we’ve got a really strong pipeline, some of the growth drivers that I know you have been waiting on for a while between RDN, Hugo, the diabetes turnaround, those are near now. And so I think Medtronic is a – has a very strong trajectory of 5 plus percent durable growth for the foreseeable future.
Lawrence Biegelsen
All right. Perfect. Thank you so much for being here.
Karen Parkhill
Yes. Thank you.
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