Medtronic plc (NYSE:MDT) 5th Annual Evercore ISI HealthCONx Conference Call November 29, 2022 5:10 PM ET
Company Participants
Geoff Martha – Chairman and Chief Executive Officer
Karen Parkhill – Chief Financial Officer
Conference Call Participants
Vijay Kumar – Evercore ISI
Vijay Kumar
Okay. Thanks, everyone for joining us. I think this is the last presentation, but perhaps, one of the key ones for us. Pleasure to have with us the team from Medtronic. We have the CEO, Geoff Martha; CFO, Karen Parkhill, and I think in the background we have Ryan Weispfenning from Investor Relations. Geoff and Karen, thank you both for taking the time with us this afternoon. I think, Geoff, you had some prepared remarks, a few opening remarks and then we can dive into Q&A.
Geoff Martha
Yes. Sure. Thanks, Vijay, and thanks for having us, and thanks for everyone joining this session today. As you know, just last week, we reported our fiscal Q2 results, where we had a topline miss, which we were able to – topline miss consensus, which we were able to offset coming in on the bottom line, coming on the high-end of our EPS range. And of course, we recognized the focus though was on the downward revision of our initial guidance that indicated a slower pace of recovery for both procedure and supply chain reasons causing some really meaningful change to our initial assumptions.
Now we are certainly disappointed at the reset for our second half of FY2023 in terms of our outlook. But when we look beyond these headwinds of our markets and supply, we have a really a fundamentally strong business with attractive end markets and several positive catalysts to drive growth, including that will have an impact on the ramp over the back half of this fiscal year.
And look, we have a clear direction of travel, where we’re headed as we transform the company and as the multiple changes we’ve enacted over the last two years, take hold, whether that’s operating model changes, enhancements to our culture including being more competitive as well as the incentive changes to drive different behaviors. And we are focused on leveraging our scale and making that an advantage, allocating our capital and managing our portfolio to drive this higher growth and more consistent growth. And we also find that especially now that our investors value the strength of our balance sheet and our dividend during times like we are in right now.
So with that, Vijay, I’m happy to jump into the Q&A.
Question-and-Answer Session
Q – Vijay Kumar
Geoff, I appreciate those opening remarks, and I think that sort of segues nicely into this question. And it’s been sort of a pretty common inbound of garden Geoff to say. I know there have been a lot of changes Medtronic has done, but the company has had its fair share of thought one-offs, right? And I think for a large cap investors [indiscernible]. When you look at the business, I think people are asking, is this something underlying structural? Is this a cultural issue? How can investors gain confidence that Medtronic has done the right things and has the ability to execute here?
Geoff Martha
Sure. Well, look, I’d start with saying no one is more frustrated than I am. And clearly, it’s been rockier than we would have liked, but there are underlying benefits that are being masked, I believe. And there is several proof points. I mean, for example, the quality improvement plan we put in place. We have a lot of our products actually coming back to the market that were off the market for quality reasons coming back in the second half year – of the year with the significant improvements on the supply chain side. I know it was slower to take hold this past quarter, but the worst is behind us, and we believe we’ve made durable changes to our global operations and supply chain.
And we do have several businesses that are outperforming like Cardiac Rhythm Management and consistently outperforming. Like Cardiac Rhythm Management, we had – our Structural Heart businesses had a really good quarter. Our Cranial & Spinal Technologies business has really differentiated itself and is performing well. Neurovascular, ENT, Cardiac Surgery, there is quite a list of businesses that are outperforming.
And then there is a number of businesses that we are setting up, setting up to be big growth drivers for us, like our Afib business, which we call Cardiac Ablation Solutions with the Affera acquisition, Acutus acquisition, and our PFA portfolio both from Affera and organically.
Diabetes is another one, which I am sure we will get into, and surgical robotics is a third. These are areas that we’re setting ourselves up I think for strong growth over the next couple years on top of the businesses that we talked about. And I know that the changes we’ve made and continue to make are also setting us up. I mean, they’re kind of foundational supporting these businesses, the organizational simplification, the new capabilities like the global operations, supply chain changes that I talked about and the new people that we’ve brought in from outside the company. The incentive changes that we’re enhancing, it’s driving a different culture and these benefits will come through.
And finally, capital allocation and portfolio management. You are seeing very intentional moves on where we’re putting our R&D and where we’re prioritizing as well as our portfolio and you’re starting to see that, for example, some of the pluses like, I mentioned cardiac ablation solutions or Afib business, where we’ve added mapping and navigation and strengthened our organic PFA portfolio with Affera.
And then in the last three quarters, we talked – in the last two quarters, we’ve announced three divestitures in our Renal Care business, RCS and our patient monitoring business and our respiratory interventions or ventilation business. So you’re starting to see that. When you put these together, this has an impact on the growth of the company and makes it more durable. So it’s not where we want to be this last quarter in particular, but there’s good reason to be optimistic and the results are just taking more time than we thought to surface. But I think you’ll see some of this in the second half, and we’re definitely going to get this right, Vijay.
Vijay Kumar
That’s helpful context, Geoff. Sometimes it’s easy to miss the positives, right, when we’ve had these kinds of issues. Starting with the second quarter here, Geoff, I think you brought this up, the miss was, I think [indiscernible] guidance or perhaps versus where the street was, half of it was supply chain and half of it was slower recovery. But starting with that supply chain, and this is where – was this unforeseen or was this a guidance setting process, help us understand like why supply chain became incrementally more worse here and has it been resolved?
Geoff Martha
Well, it didn’t become, I guess incrementally worse, just didn’t recover at the pace we thought. Some of the – let me start by saying that the biggest challenges, the most acute challenges that we had particularly in our packaging area for our surgical innovations business, that’s behind us. But it did come in later in the quarter than we thought. And that really is driving some of the back half guide down from where we were because our momentum has been shifted out. And like I said, the supply chain [issues to our] surgical innovations business were like quite acute, and that business is going to hit the most, and there were several issues. But like I said, the worst is behind us. And we believe you’ll start to see that here in the second half.
Like I said, in SI, where we had the biggest issues, our competitor benefited, stepped in and filled the shelves with our customers and we’re under long-term contracts with these and we’re confident we’re going to gain our share back. I am just with the couple – the East Coast right now with a couple customers yesterday and today and they indicated the same thing. So I know it’s been bumpy, but we are making progress here addressing headwinds and getting back playing on offense here, and our outlook calls for continued acceleration into this second half of FY2023.
Vijay Kumar
Understood. And how much – that’s some helpful context here Geoff that Medtronic hasn’t lost customers. This is not a share loss, it is a timing issue, but how much inventories do a customer stock as we look at the back half? Should we expect some of these dynamics to normalize by Q4? Or is this more of a fiscal 2024 event for Medtronic?
Geoff Martha
You’re talking about on the surgical innovations piece?
Vijay Kumar
Yes.
Geoff Martha
Yes. I know that. I think over the course of FY2023, it normalizes.
Vijay Kumar
Got it. And then the other element which has been really tricky for us is the slow pace of elective recovery in the developed markets. We’ve seen ortho procedures do pretty well, ASCs do well. Again, [indiscernible] I think for your main competitor was – we’ve seen some impact. Give us some context on why Medtronic is seeing this differential pace of recovery in these different end markets and when can these dynamics get back to normalized levels?
Geoff Martha
Yes. And with us, like you mentioned, ortho, our spine business, for example, which is kind of a parallel to ortho, I would say. We didn’t have that issue there. We had a really strong quarter like U.S. Our spine business in the U.S. grew over 15%. So I mean, some of that is share gain. But that’s partly market recovery. So in certain, and then you mentioned TAVR is one, so you mentioned ortho is good. Our spine was good. And it was impacted by China VBP a bit globally. So globally it was like 5%, but in the U.S. it was 15%.
And then you mentioned TAVR, our competitor having talked about a slower market recovery there. We indicated the same even though our numbers for TAVR were pretty good partly because of new products, but our numbers, I think it was 17%, 18% in the quarter. So those are pretty good numbers, but we had a new product launch only a month of it with our new Evolut FX valve. But it’s doing really well and we are anticipating even a slightly more growth than that. So the market growth was consistent with what our customers saying, not quite where we thought it would be. So the markets that – so we’re not saying overall the market recovery wasn’t there, it’s very targeted in areas like TAVR.
Another one is PCIs were part of it, and then China VBP was a piece of it too. So it’s not across the board, it’s very specific ones. I think for the most part you’re hearing other competitors talk about as well. PCI is one where we are strictly in the stent business and don’t have ancillary products around it and really are tied to procedure growth there, and that’s the one that slowed down as well or didn’t recover like we feel like it was on a pace and kind of plateaued. So these are assumptions for these specific markets we’ve assumed for the rest of the year that they won’t continue to get back and we’re going to – in our guidance, we have them staying consistent with what we saw in Q2. So that’s a assumption that if there’s upside to that that’s great, but that’s what we’ve assumed.
Vijay Kumar
Understood. And China VBP, I’d saved this question towards the end, but since you brought up, Geoff. When I just think about the second half guidance rate, I think the change in second half as prior was high singles and the new guide is 400 basis points. There’s about a 400 basis points delta versus the prior guide, right? How much of this is China VBP and what is driving the remaining 300 basis points or so for the delta here?
Geoff Martha
Sure. And maybe I’ll let Karen answer this one.
Karen Parkhill
Yes, happy too. Thanks, Vijay. Thanks, Geoff. We said that our guide down – about 15% to 20% of the impact of our guide down was due to additional provincial tenders in China that we had originally believed would be a national tender and occur next fiscal year not this fiscal year. And it’s just simply been pulled forward. So again, Vijay, China was about 15% to 20% of the guide down. We said that the assumption that we’re making on procedures not improving from where they were in Q2, particularly in those areas that Geoff already mentioned plus in some general surgery areas too. That was a little bit more than 50% of the impact of our guide down. And then the remainder would be due to the impact of the supply challenges that are causing us to recover more slowly, particularly in SI given [the stocking] that happened from our competitor on the shelves.
Vijay Kumar
Understood. How should we think about this China VBP? Was this originally slated to happen in 2024 and just got pulled forward? Does this make 2024 – now the comps are easier in a much better? And I think I had a related question. People were asking me is there incremental VBP, CRM or neurovascular, et cetera, that we should be thinking about here?
Karen Parkhill
Yes. So as we think about China, yes, we do think that these tenders that are happening, particularly in our stapling business, and we had some provincial, some tenders in our spine business as well this year. But particularly in the stapling that’s happening more on the provincial level, we think that’s a pull forward from what was going to happen at the national level. And so it’s just happening more quickly.
As we look ahead into FY2024, we do expect some additional VBP, particularly in neurovascular and some coils and other products there. You mentioned CRM, we already had some provincial tenders in CRM back in 2021 for dual chamber pacing. So I think the bigger impact for us at least in FY2024 will be likely neurovascular.
Vijay Kumar
Got it. And just maybe on that point, Karen, how big is neurovascular business in China for you guys? Or any way to think about what the incremental impact could be?
Karen Parkhill
Yes, it is one of our larger businesses. So when we think about China this fiscal year, in Q2, it declined 9%, mainly because of the impact from the spine tender that happened that quarter. For the year, we expect it to be around low-single digits. I certainly don’t think next year it’s going to be back to its normal double digits given the neurovascular likely impact. But beyond that, we do expect China to be a double-digit grower for us well into the future.
Vijay Kumar
Got you. And then maybe one, you’re on this back half guidance. I think third quarter guidance was low singles, 2.5% to 3%. I think the guide implies you step up back to north of 4% in Q4. Just talk about your assumptions, what drives the sequential acceleration from third quarter to fourth quarter?
Karen Parkhill
Yes. So we have a lot of good things going on in the back half, including some headwinds going away that we’ve talked about. But we also have new products. We’ve got our new TAVR valve. Geoff talked about the Evolut FX, which was only in the market for a month last quarter. And so we expect continued acceleration from that. We’ve got Hugo that’s starting to ramp. We’ve got our Harmony valve back on the market. We’ve got the diabetic painful neuropathy opportunity that we are working to tap in the back half. So we’ve got a lot of things helping us in the back half. And then also, when we talk about the prolonged impact from the supply challenges in our SI business, that gradually improves as we move through the quarters in the back half.
Vijay Kumar
Understood. And then Geoff, maybe back to you on some of these pipeline opportunities that you highlighted. Let’s start with the robot. You noted Medtronic had received the IDE approval to start a trial here. I think in the past, Medtronic has been a little tight-fisted on the trial size, how many sites. So any color to share on this trial – duration of trial and when perhaps we could see an FDA approval?
Geoff Martha
Well, nothing new to share on that. On that part, Vijay, the details on the trial will be posted on clinicaltrials.gov pretty soon. So you’ll see more details there, but nothing more to share on the trial itself.
Vijay Kumar
Understood. And I think OUS, on the call, there was some optimism on the order book here. Talk about what’s happening in OUS and any numbers you can share on what that order book size is?
Geoff Martha
Yes, sure. I mean outside the U.S. and in the U.S. too, I mean these surgeons have these conferences that are global, they talk and feedback is getting out there. So first, let’s start with the robot itself. I mean we have – for a couple of reasons we’ve been, I’d say, keeping the – even though it’s been on the market outside the U.S. and New York for a couple of months we haven’t – we have not put the foot on the accelerator until recently because we wanted to – a couple of tweaks we wanted to make system instruments, those instruments are done and we’ve been building up supply of robots.
And by the way, getting those instruments kind of making some adjustments to them and getting those approved by the FDA was also a catalyst for pushing the go button on the U.S. IDE. But in Europe now, we’ll accelerate the ramp because we’ve got the product ready to go and where we want it. And the big thing that’s happening is just the feedback is getting out there. We do have – we’re not getting into how many robots we’ve sold and how many cases, but it’s quite a few. And the cases or the feedback is getting out there, it’s strong. And then – and recently – and I’ll give you the feedback what we’re hearing. But just even recently, there was this ARIS 2022 conference in Barcelona in October, where they had live stream cases out there on these almost like an esports kind of gaming screens all throughout the conference us versus the existing competitor and just the two of us.
I mean, that says something about the – how the surgeons are looking at the marketplace as the da Vinci robot than us. And it was used to perform a range of OR procedures in these live cases, and we performed very well versus da Vinci and generated a lot of interest. And that’s – what we’re hearing is it’s that the platform instruments, the AI and just the performance, both hospital and physicians are excited for us to bring this modular solution to market. The footprint like, if you don’t need all four arms, you can just bring in two or three or whatever and that helps with the kind of the footprint in these ORs. It helps with training. They’re also the visualization. There’s a lot of feedback on the surgeon console and how that’s set up and the 3D viewing and just the ergonomics of the console. So just a lot of good feedback. And then there’s confidence as they see the instruments that are coming.
I mean we have a long history of innovation in surgery. But I think more than anything, Vijay, it’s – and the update over the last couple of months has been, one, getting these new instruments out there that we can hit the acceleration on the ramp. And two, just more feedback in this ARIS conference and helped a lot in terms of exposing surgeons to the robot and just word of mouth amongst the surgeons is very positive. And even some of our investors that have done their own checks have come back to us with what they’ve heard and it’s consistent with what we’ve been saying to you.
Vijay Kumar
And maybe, Geoff, one last question around this Hugo topic, and then both of you can chime in. From a Wall Street perspective, success for us is always in the numbers, right? So when will we have some details on the number of procedures or placement numbers? Is Medtronic plan to share some of those details? And Karen, I think on the profitability side, you’d mentioned something about $400 million of investments in robotics. How should we think about those investments or profitability on the robot on a go-forward basis?
Karen Parkhill
Let me start with that, Geoff?
Geoff Martha
Sure, go ahead.
Karen Parkhill
So the $400 million that we had said before, Vijay was the investment that we had and the negative op profit drag from both Ardian and the Hugo robot at the time. Clearly, we expect both to be important growth drivers for us, and we were investing heavily in them. In terms of margins for the robot, that’s capital equipment. And typically, capital equipment is a little bit lower margin than some of our other products. But that doesn’t mean it’s a really important growth driver for us.
And obviously, there is a bit of a razor-razorblade model as you know with robots because you’ve got the end of factors or the consumables on the end of the robot, which are important. In terms of just Hugo and a growth driver in what we would disclose, we don’t typically do product disclosure. And so it’s not something that we’re anticipating doing on a regular cadence because it’s just not typical for us to do. We’ll clearly give investors what they need to think about our growth drivers overall, but product level disclosure just isn’t something we typically do.
Vijay Kumar
Understood. And then just to maybe sum up the conversation on the robot, Geoff. As we look at the last 12 months or even perhaps 24 months, right, perhaps time lines might have moved on the robot, but your optimism on the Hugo perhaps that has been consistent or perhaps even maybe coming in a little bit above expectations. Would that be a fair comment, Geoff?
Geoff Martha
I’d say – look, a couple of dynamics. One, it took a little longer. We made the decision, we got good feedback initially on the robot that we have something to build from and another skepticism out there on this. I’m going back a year or two years. The initial feedback was positive from surgeons. And again, these aren’t like our – these are surgeons that are robotic surgeons and that have been doing surgeries on da Vinci for years and have a lot of experience. And then they gave us some feedback on a couple of things that they’ve – if you could change these couple of things that we think it would – they weren’t fundamental design issues, but things that we felt like on the two instruments that would help a lot.
So we made the decision because you only get one chance to make a good first impression. You’re going up against an established competitor like this that has a long history. It’s not like they just started a couple of years ago. They’ve been in the market for 20-some years. And so we decided to make those enhancements. And now that we’ve done that and it caused a little bit more of a delay, but now that we’ve done that and now that it’s out there, and we’re seeing it actually compete in the wild mono to mono that my enthusiasm has gone up. It’s always good to hear the confirmation of what you’ve been told by a handful of surgeons to many, many more out there in the wild, not in a controlled environment, and that’s why.
And then when we hear our investors who are very healthcare-focused investors do their own market checks, and come back with – these are skeptics too, coming back with this kind of feedback. It’s good. Now we can’t take our eye off the ball. I think there’s some things that like training and things like that, that we need to make sure that we do properly. That’s another thing we’re seeing. Once you’ve been trained robotically, the switching isn’t at least between the two main systems that are out there haven’t been too difficult for surgeons, and so it’s – we’re excited.
And robotic surgery has tentacles beyond soft tissue, right? We have – our spine robot has been instrumental as a part of our stable of enabling technology in our spine business, Cranial robot. And there’s – so becoming a real robotic player across multiple therapies is exciting for us, and we think a real differentiator for the company.
Vijay Kumar
Like mono to mono, I already used that in one of my titles now. Maybe switching gears now to diabetes. I think there’s some confusion in the market, Geoff. I think on the call, you guys said Medtronic hadn’t asked for a variance letter. And for me, maybe I’m simplifying it in my mind, but it was shooting a friendly e-mail to the FDA asking for a variance. Why didn’t Medtronic ask for a variance letter? And now what went into the decision making process?
Geoff Martha
Well, look, we’ve had an ongoing dialogue with the FDA on a number of topics on this one in particular. And it’s been very constructive. And look, I’d say a couple of things. One, we’ve got – there’s 780G and Guardian Sensor 4, but also we’ve got a lot of technology that’s right behind it. It’s kind of logjam that we’re getting further along outside the U.S. in terms of regulatory approvals. And the warning letter stands in the way of all of that, not just the 780G.
And even enhancements to 780G and enhancements like extended-wear infusion sets, all these other things that we need to get done. A variance is not a typical thing for the FDA. It’s a different process for them. And if you have to keep asking, they’re not going to give you 10 variances. And so – and especially now where their resources, especially in that area have been stretched, I think, which is well understood out there in the marketplace now in terms of that area of the FDA. And so in those discussions and we just determined that our best path forward is really focus on lifting the warning letter. And as we’ve indicated, we’ve gone back to the FDA and said, okay, we’re based on all the dialogue we’ve had and the areas that they pointed out, we think we’ve made those corrections and we like them to come back in and reinspect and move forward and hopefully get this lifted.
Again, our perspective is that we’ve completed the use to the standards that they’ve asked us to and in some cases, beyond that. And hopefully, they’ll agree when they see the work, but that’s what needs to happen when they come back in and reinspect. And we don’t have exact timing of that, but it does seem to be a priority for them, especially given that we’ve focused on this versus other things we could be asking them to do.
Vijay Kumar
Understood. That’s helpful context, Geoff. You noted Medtronic is ready for reinspection. Has the FDA given a date on when they might come in and reinspect? I’m curious related to that, right, because this is a very conscious decision from Medtronic for not asking a variance letter, right, does that put Medtronic in a good light when the FDA comes for reinspection?
Geoff Martha
Look, I don’t know. When we make decisions like these things, whether it be a warning letter or any other dealing with the FDA, we do try to take into consideration what they’re dealing with and trying to be a good partner – a long-term partner with the FDA. And we spend a lot of time with them not just reacting to things, but just being a strategic partner and a thought partner on many things. And so yes, I don’t want to put words in the FDA’s mouth, but we hope that what we did is looked upon favorably in terms of how we are handling this.
Vijay Kumar
I’m sorry, on the time line for when is the FDA going to come and inspect…
Geoff Martha
They didn’t give us an exact date, but it’s sooner than later, I mean it’s not quarters – it’s not measured by quarters, it’s earlier than that.
Vijay Kumar
Okay. That’s helpful. And then I think one of the positives was this OUS growth in diabetes, I mean it really stands out, it’s been strong for several quarters now. Initially, I thought, look, this is just Medtronic’s channel presence in international markets, but this is – it seems like really the underlying product, it’s driving share gains here. It’s being seen as a better product. How confident are we, Geoff, like the same thing can be replicated in the U.S. once the product has launched?
Geoff Martha
Yes, we’re very confident. I mean, the people are type 1 diabetic, type 1 diabetic. And the reason for the growth is the patient feedback, the patient clinical results and the user experience. And I know that for the last couple of years, there’s been a lot of focus on the component parts of a system, the CGM, the pump and our competition is kind of an amalgamation of those things. No one has the whole system. And even the whole iCGM, the thought process that everything’s got to work with everything. All those things – once the 780G hit Europe and people saw the benefits of the whole system, when you have the pump or the insulin delivery device in this case of durable pump with a sensor design for that system and the algorithms all designed together, the whole is greater than the sum of the parts.
And we’re seeing that in the clinical benefits and the user experience. Like I said, we’re seeing for the most difficult patients this more than any other system is putting diabetes in the background for patients and helping them control the diabetes. And we do think there’s more room to go here, more innovation, but it is a bigger step forward than I think people anticipated because they’re looking at the component parts and the specs of those component parts when you put them together, it works. And we anticipate seeing the same thing, and we’re confident that we’re going to see the same thing in the U.S. and that will lead to growth for us.
And beyond that, Vijay, is while we were dealing with this warning letter, we are also continuing. We did make the double down investment in diabetes to continue the pipeline. And so it will just continue to improve. We’ve got our Simplera sensor that we’ve already submitted for the CE Mark, and we’ll be ready to submit that in the U.S. as well. And just a broader pipeline of sensors, insulin delivery devices and continued enhancements to our algorithms as well as the different other accessories around the ecosystem.
Vijay Kumar
Got you. That’s helpful, Geoff. And then maybe one last question here on diabetes. You didn’t mention Simplera that you had submitted the 780G plus Simplera. Is that a true Zero calibration device, Geoff?
Geoff Martha
Yes. So like you said, we did submit our IDE for the 780G and Simplera to the FDA as well. And for Simplera stand-alone, we haven’t submitted Simplera for stand-alone, but for – it is – the benefits of Simplera, to answer your question, is an all-in-one disposable. It’s 50% smaller than our Guardian Sensor 3 or 4. And does – requires no fingersticks. And has a simple insertion for patients that only takes seconds. It’s like a three-step thing that takes like three – it takes a couple of seconds. So, yes, no fingersticks.
Karen Parkhill
It is zero calibration. Yes.
Vijay Kumar
Fantastic. And I just want to switch to some of the financial questions here, Karen. We’ll get back to Ardian in a bit. But I think recently, you mentioned $0.36 headwind from FX in fiscal 2024. That’s almost like 6.5%, 7% headwinds, right? And for me, simplistically, if Medtronic algorithm was mid-singles topline and high-singles earnings double-digit TSR. Are we now looking at no earnings growth for fiscal 2024? Or just talk about – because FX in and off itself without the other components or context rate, it kind of makes it looks like fiscal 2024 might be below trend?
Karen Parkhill
So we’re not as you know, Vijay ready to give FY2024 guidance yet. We still have two quarters, half a year to go in FY2023 and just at the early stages of our planning process. But when you look at FX and isolation, your math is correct. Based on recent rates, we are forecasting a headwind to FY2024 EPS to be around $0.36, and that does equate to about 7% EPS growth off of our guidance for this year.
On a positive side, on the topline, you can see that we expect to exit this year with mid-single-digit growth. And down the P&L, we’ve said that we are in a challenging operating environment with inflation, with interest rates, with currency. So we are purposely driving significant expense reduction throughout the company, given these headwinds and given the fact that we want to continue to focus to drive important long-term investments, too. So we do have several puts and takes next year. And obviously, we’re going to work to be giving you more on FY2024 as we move through this back half.
Vijay Kumar
Understood. And then just one on gross margins, Karen. How much, if I guess inflation has been a drag. How much of this has been capitalized on the balance sheet and should that have an impact on a go-forward basis?
Karen Parkhill
Yes. You’re right. We do put some of our inflationary pressures in the inventory on our balance sheet. So you see our inventory going up right now, too. And that will flow through our P&L over time. So some of the inflationary pressures, obviously, that we’re seeing right now will hit us in the back half and into next fiscal year and create pressure for the next fiscal year. So we’ve got that pressure plus if inflation continues.
Vijay Kumar
Understood. And Geoff back on Ardian here. Medtronic remains confident. I mean for me, when I looked at the numbers, again, the control or the way it behaved, it was very off, right. I’m sure the FDA is going to be cognizant of this. But are we now – are physicians – do physicians understand this? Or has the enthusiasm and opportunity for Ardian perhaps a little bit less tepid now?
Geoff Martha
No, physicians when they look at the data, and we – they see it. I mean they see what’s happening here. And we think it further validates both the safety and the meaningful blood pressure reduction that we’ve seen for the Ardian system. I mean bottom line, the sham arm increased their level of medication and the Ardian arm decreased it, and the difference was 10x. It’s very compelling.
And at the same time, you’ve got all this – the totality of data that the FDA is going to consider of all these different trials, our pivotal trial, which was successful OFF MED, then you have ON MED and you have the different measurements and you’ve got the registry that we’ve shown. And at the same time, of all this is coming to an FDA approval. You’ve also got the current standard, the SMART trial that shows unrelated to Medtronic that this the current standard just isn’t working. And it just confirmed the SMART trial that came out in September, which was the largest hypertension trial out there, just confirms that for these intensively managed hypertensive patients, that the current standard of drugs just doesn’t work. And so you’ve got that at the same time and you got this new solution that’s safe, effective, and we’ve got durability data out multiple years, even up to seven years, it’s very compelling.
And the health systems, I’m talking to large health systems around the world, particularly here in the United States, they want to lead. They want to actually lead the discussions with payers. I mean they need help, both for their mission to take care of patients. But financially, this situation isn’t working for them. And so I think we’ve got some real strong advocates. I know reimbursement is a question with payers.
Vijay Kumar
Just on the FDA time line here, Geoff. Have they given you any indication on what path they’re going to take? Whether there’s going to be an AdCom or will they just review this?
Geoff Martha
No, they haven’t yet. We don’t know. I mean, like we indicated, we did submit the day the Ardian results came out because four of the five modules required for approval already approved, so this last one left. I don’t know – we don’t know if it’s going to go to an AdCom or not. But we do – in discussions with FDA, we do know they’re looking at the totality of the data.
Vijay Kumar
Got you. And then maybe moving on to the last few minutes here to have some capital allocation missions. Stock is at these levels, right, it’s pretty cheap. I mean the dividend yield is north of 3%, your free cash conversion has been great, balance sheet is in a good position. Why not – either we’re doing a large M&A or a big share repo rate. I’m curious how Medtronic is thinking about capital allocation right now?
Geoff Martha
Sure. Karen, do you want to take this one?
Karen Parkhill
Sure, happy too. So I think, Vijay, as you know, when it comes to returning cash to shareholders, the main way we do this is through our dividend. We have a large and growing dividend that we pay every year. And we’ve executed share repurchase for sure to offset dilution from stock-based compensation. And then we’ve done additional repurchase on top of that.
We’ve spent $500 million year-to-date on share repurchases. But we also balance that with investing for the long-term with the company. And in Q1, we closed the Intersect acquisition. In Q2, we closed the Affera acquisition. So we are using our balance sheet to drive these important future growth drivers for us, too. And I think you should just continue, investors should just continue to expect more of that same kind of balance.
Vijay Kumar
So the current share price, that wouldn’t change your capital allocation policy one way versus another?
Karen Parkhill
Clearly, when we see our stock where it is, we do like to do share repurchase. And we’ve done – we did it last year. We’ve done more this year. And so we will continue to do that when we see the right opportunities.
Vijay Kumar
Got you. And maybe one last question here in the last couple of minutes Geoff. I think the portfolio changes that we’ve done with the recent announcement of divesting, monitoring and respiratory business. I think that’s like a $0.40, $0.45 sort of based on some math. How does Medtronic plan on filing that EPS hole, Geoff? Or is the new mantra for Medtronic slim or lighter focus on the right areas?
Geoff Martha
Well, we aren’t giving specifics on the margin profiles of the NewCo or the RemainCo at this time. But for modeling purposes, I think the NewCo currently has a slighter revenue profile than overall Medtronic and a slightly higher operating margin. So your numbers are – the $0.45 are not pretty accurate. And in terms of what we plan to do, one is to fill that hole, I think you go to look at our portfolio moves in totality, right? There’s the pluses that we’re adding and the minuses. And what we’re really focused on is getting to that – when you look at them in totality, that a higher level of growth for the company. And that’s really what we’re going for. And I don’t know, Karen, if you have any comments on the EPS component of it.
Karen Parkhill
I think you covered it, Geoff. Thank you.
Vijay Kumar
Great. I think with that, we’re at the end of time. Geoff, Karen, thank you so much for spending this afternoon with us. All the best for fiscal 2024. It seems to be exciting with the product pipeline.
Geoff Martha
Thank you, Vijay. Appreciate it. Thanks for hosting us.
Karen Parkhill
Thank you.
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