Medtronic plc (NYSE:MDT) Morgan Stanley 20th Annual Global Healthcare Conference September 12, 2022 12:30 PM ET
Company Participants
Cecilia Furlong – VP, Medical Technology Equity Research
Conference Call Participants
Geoffrey Martha – Chairman and CEO
Cecilia Furlong
Good afternoon. Welcome to the first day of the Morgan Stanley Healthcare Conference. I’m Cecilia Furlong. I’m med device analyst here at Morgan Stanley. It is my pleasure to have Medtronic CEO, Geoff Martha, with us here today. Really quickly disclosures, please see morganstanley.com/disclosures.
With that Geoff, thank you for being here today.
Geoffrey Martha
Yes, it’s great to be here. Thanks for the great walk-upm, I’m ready to go now.
Cecilia Furlong
So back, but I’d love to just start…
Geoffrey Martha
So back, still on my plate here every day, that’s on my every day. That’s not to a throwback to me.
Question-and-Answer Session
Q – Cecilia Furlong
But I’d love to start just kind of high level what you’re seeing today in the market? Any updates? I know it hasn’t been that long since your call, but kind of how you’re viewing a lot of the macro dynamics?
Geoffrey Martha
I was actually in Europe last week, so I didn’t — wasn’t at the Wells conference, but there was a lot of positive, I think, I guess, more upbeat news I think that’s consistent with what we’re seeing is that the — one, the staffing issue is — continues to improve.
It’s not 100% back, but it’s a lot better than it was. And for the most part, I’d say we’re back to prepandemic levels in terms of procedures, a couple of pockets where we’re not, but for the most part, we are. And then the supply chain issues are — there’s a lot of plastics, resins, packaging, things like that in semiconductors.
A lot of that has gotten a lot better. And for us individually, as a company, our Q4 and our Q1 were by far the worst part of that supply chain piece. And that’s — we see continued — it’s gotten quite a bit better for those commodities, and we see continued improvement. The one that’s sticking around as the semiconductor, that’s all in our forecast and all that, but — in our guidance, rather, but that’s going to take a little longer, but even that’s getting a little bit better.
Cecilia Furlong
In terms of kind of the staffing. How do you view that playing out, too, and incorporate in your guidance? What do you see improving? Is this kind of a steady state? Do we still have room for improvement? And then capital, just capital — what are you seeing in the field? I know Cougar [ph] is kind of early stages, but as you think about just what you’ve seen there, your other capital-intensive segments of the business, how do you think about just…
Geoffrey Martha
So capital for us is still a relatively small piece. It’s mid-single-digit percentage of our revenue, and it’s tied to profitable procedures. And I spent — I spent a couple of years in health care. So I mean it’s a little different than maybe the big iron folks that aren’t as tied like Gilt directly to profitable procedures as we are.
So we it’s — we still see a healthy capital environment. For those — that type of capital tied to procedures — profitable procedures like ours. So — and then, of course, we’re offering different financing plans as well, but that helps a little bit.
Cecilia Furlong
Kind of turning to the broader view on Medtronic. You’ve talked about looking for areas to make change. That’s been a focus area, I think, among investors. Since you came in, there’s also been a big focus on share. So as you think about just optimizing the business overall, share versus long [ph], what’s the greater driving force in you…?
Geoffrey Martha
They go hand in hand. I mean on the WAMGR parts, that gets to capital allocation, portfolio management, and that’s what I’m asking my direct reports, my leadership team. We are spending a lot of time on capital allocation and how we’ve been allocating — we’ve been allocating capital more decisively. We have 20 operating units now and allocate it more decisively across the company to the higher growth areas, which we can get to if you’re interested in.
And also, when you’re looking at our portfolio, part of our portfolio thinking is improving that weighted average market growth rate. And then we look to our businesses, right? So that’s where the share comes in. They’re executing in a very specific market. We know what the market growth rate is, what the competitors are doing, and we’re asking them to, and expecting them to grow at or above the weighted average market growth rate and then their incentives are tied around that.
Cecilia Furlong
Few dynamics have played out since you came in at, some of the macro drivers with HUGO, Diabetes working through the warning letter, and RDN, which we should see data later this year. Outside of those three dynamics, which I think are kind of key investor focus point, but what across the business since you came in has exceeded your expectations? Stripping those out? Or conversely, where do you still see improvement? What hasn’t quite gone?
Geoffrey Martha
Yes. So just to put it all in context, there is a lot of change that we’re trying to drive — focuses this whole focus on improving the cadence of innovation and actually putting more of our resources to work in on R&D. And so that’s where we decentralized our — into these 20 operating units from these three big groups. So that was one big piece.
And also tied to that, we changed incentives to really focus on growth and more of the incentives are really driving a more performance-based culture. That was a big push and has played out well. And if there’s one thing that I’d say that has exceeded — the benefits of that has exceeded our expectations because in addition to getting that level of focus and allowing us to better allocate capital, hold people accountable, drive to a more performance-based culture, that structure is really helping us do that.
The thing that I didn’t necessarily anticipate that is an added benefit, I think, is we talk about that being the — we talk about the model being playing small and playing big at the same time. That’s like the more small and focused part. It’s really helped us out on the big part where we go to leverage our scale, and we’re trying to leverage our scale in three areas.
One is strategic customers. And yes, we’re calling on the specialists. I think a U.S. health system, we’re calling on the specialist in eventual cardiologist, spine surgeon, electrophysiologists, et cetera. But these systems also want us to come to them as one Medtronic, and now we’re able to do that. That’s one.
The other is technology platforms that cut across multiple parts of our businesses, plantable electronics, batteries, robotics, and that would be another one. And the third and probably the most impactful recently is centralizing our supply chain.
So those three working on like the big side of the model, which gets leveraging our scale, those came after the decentralization piece, and those are — we’ve been spending last year on those, I would say. And then over this whole time, I said — I talked about changing incentives and driving culture change that’s ongoing.
Cecilia Furlong
And if you think about just separating the business units and now being more autonomous, but initial stages of being able to still stay connected, take learnings from one asset. Where are you in that process specifically? Do you think there are areas that you may have kind of fallen back because you don’t have such a connected presence today? And then as you think going forward, what are the opportunities to further drive sort of adjacent pull-throughs, if you will?
Geoffrey Martha
No. I think actually when you — when we got the 20 operating units, we’ve created like an OU President — Operating Unit President and Counsel, and they’re talking amongst themselves and deciding where — because remember, they’re very focused on hitting their — the goals of their business, revenue growth, market share, profitability, cash flow conversion, that’s how they’re getting paid, and they want to make sure they hit those. And so they’re very focused on that, which is what we wanted. But they are working with the other operating unit presidents and say, “Hey, look, where we can work together to help each other, where it benefits it’s a win-win.”
They’ve determined those areas. And so I would argue that because we’re letting them talk across the company, they weren’t — in the past, it was kind of everybody who was in these silos of cardiovascular, neuroscience and surgery. Now we’re coming across all those. And those businesses are determined where we want to work together, like, for example, digital platforms or areas. That’s a big theme that you’re seeing, I think, across med tech and certainly in Medtronic as the intersection of biomedical engineering and digital. When I say digital, I’m talking about AI, machine learning, cloud computing, connectivity, 5G, Bluetooth, all of that coming together.
There, we’ve got a couple of digital platforms in hospitals that are really primarily funded by one business unit that now are being leveraged across multiple business units. Some of these are acquisitions like digital surgery out of London or Nutrino and our Diabetes business out of Israel. These things are now becoming platforms across the business units. That’s one example of where they’ve determined where they want to work together, and I think it’s moving faster now.
Cecilia Furlong
You talked about med tech and tech in that intersection. There’s also a component, I think, in specific areas of DTC. And as you think about diabetes, your business going forward and the importance of DTC, how you roll that out? And then opportunities, too, as you think about RDN, targeting those patients. How are you just thinking about investment on both of those initiatives? And are there other areas that you think, longer term, that you look to do more of a DTC approach?
Geoffrey Martha
No, I definitely think med tech is not — it’s not happening overnight, but we are becoming more of a consumer — looking at patients as consumers, right? And it is a change. And you mentioned diabetes. That’s a big area. That’s our — by far and away, our most direct-to-patient business.
But areas like RDN, the direct to consumer is going to be really important because we have to drive awareness of what RDN is. What is renal denervation? How does it benefit patients? What’s the safety profile? What are the risks, et cetera, et cetera?
If we’re going to — as we make this a big segment of med tech, we’re going to have to drive that awareness directly versus relying on the specialists. I don’t think if we rely on like interventional cardiologists, no offense to them, I just don’t think they’re going to really be able to get the word out appropriately.
And there’s a high level of demand for something like renal denervation. Our clinical trials have all been filled over the Internet for people opting in. There’s a lot of awareness around the issue and a lot of desire for a better solution.
Cecilia Furlong
Looking forward to — you’ve talked a lot about business optimization and overall structure. We’ve seen kind of straight up M&A. We’ve seen structured transactions. We’ve seen some partnerships recently. As you look for, what is kind of the optimal either addition, subtractions, how you’re thinking about the trajectory of adding assets, subtracting assets, but the model, the size, anything you could comment on there?
Geoffrey Martha
Yes. I think, for us, I mean, one of the things that I talked about is looking at our portfolio and not just adding but also subtracting and making that pruning part of what we do. So we’ve — we talked about I spend a lot, we spend a lot of time, a lot more orders of magnitude more time on capital allocation, but also looking at the portfolio, my leadership team, the Board as well.
And we built out a team that’s really focused on, not just the M&A team doing the transaction, but like a team focused on integrations and divestitures to execute on these. So to build that muscle. So for us, in terms of portfolio subtractions, we’re going to kind of — like we have a history of doing acquisitions.
But kind of add into the next area so often a divestiture to help achieve our goals of whatever the — in this case, higher weighted average market growth rate or maybe it’s — that segment of med tech dynamics are changing. We don’t think it’s changing in our favor. And so we want to divest.
So we’re building out that muscle and that capability to make it a part of what we do. In terms of how we do this? We’re — we’ve, over the last couple of years, built out a healthy venture portfolio. We have a separate venture investing team, and we use that as a tip of the spear and even like we just did the Affera [ph] acquisition, and our cardiac ablation solutions business, our AFIB business. That started out as a venture deal and went from there.
So I think — I’ve seen this with our competitors, too. Much more creativity and trying to get into these companies earlier on venture and maybe what we call the structured acquisitions where you’re helping them with something could be commercial, it can be civilization, it could be clinical trial execution, it could be some technology issues that you’re helping them with and then you have call options and things like that.
I think we’ve definitely been doing more of those. I think it helps us derisk. And then there’s, of course, there’s straight up M&A. And for us, the issue on the — one of the things on M&A, given the size of the company, I think — and the size of our revenue base of $32 billion for the half, we’re really one, focusing our M&A more, like the cardiac ablation solutions is a good example.
We did three deals in the last two years to make that — to add mapping and navigation, to complement our internal PFA program with external PSA to get a crossing needle through acuitas, to build our therapy there. We added DiamondTemp acquisition for RF ablation. So that business, instead of spreading out M&A across multiple businesses, we focus on one that makes a difference and you can feel at the Medtronic numbers. I think that’s more of the way we want to do things going forward.
Cecilia Furlong
As you think about R&D, too — and M&A focus areas going forward, as you think about kind of what you just described in a focused approach to building out a full portfolio, what are the area segments of the market that you really are focused on? Historically, we had a lot in HUGO, but where does that transition?
Geoffrey Martha
Yes. So I mentioned we have the 20 operating units and where we’re decisively allocating capital, where are we allocating that capital? Robotics is one. So Hugo and that is very much linked to our surgery business. I mentioned the other is AFIB, a number of acquisitions in organic R&D like around our — we have a PA program. Ardian would be another one. For us, structural heart.
So we just launched another TAVR valve. We’ve got a lot invested in mitral. That’s both repair and replacement. And again, on replacement, we’ve been public is we have a third-party company that we started called Half Moon on repair for mitral.
So we’re using these different levers. So structural heart is another 1, and then, of course, diabetes. So those five are areas that we’re really differentially investing, both using our income statements and more R&D using some creative structures like acquisitions or even third-party financing like we did with Blackstone with diabetes to really get more capital into those businesses and just driving that innovation.
Cecilia Furlong
On diabetes, too, as you think about just your model, the historic Medtronic model, connected system, pump, CGM versus what we’re seeing in the market, just how do you think about kind of your place that model in an evolving market?
And then on Blackstone, too, just curious kind of when we could hear more? InPen with another acquisition you made in the space. But when does that play in bringing patients into the pharmacy channel, just the comprehensive approach that you’re talking about?
Geoffrey Martha
Yes. So we — it’s a great question. I mean there’s a lot going on diabetes for us. And first of all, for context, our focus is that insulin-dependent patients, right? So that’s type 1s and a segment of type 2s, that’s where we’re focused. And then there’s two segments within it that we see. We see stand-alone CGM, and we see automated insulin delivery, AID market.
What I don’t see is like a stand-alone pump market. I don’t — there — it’s just not a great — I don’t think that’s an offering. This whole — the market seems to be — I know there’s a lot of fuss around iCGM, but we see it — automated instance delivery where you have an insulin delivery vehicle, pump, patch, pen, tied to a sensor with algorithms linking them and closing route for that patient. And then we see stand-alone CGM.
And where we’re really competitive today is that automated insulin delivery. Our Guardian Sensor 4 and 780G in Europe is doing really well, outgrowing the market. We got great clinical data, great clinical experience in the wild, great patient experience. We just got to get it on the market in the US. We’ve got to get through that with the FDA warning letter. And when we see a huge $10 billion TAM growing 10%, 15% — 15%, and we have a very strong position there.
And then in stand-alone CGM, for us, that’s another two, three years out. So I think we’re competitive there, but that’s how we see those playing out.
Cecilia Furlong
How do you think of your role in targeting nonintensive TAM, too?
Geoffrey Martha
For I think, the tip of the spear, for us, we have to have a differentiated value prop. But I want to be naive here. And you mentioned the InPen. so I think InPen right now is selling really well, just not the economics are in the sensors.
And we haven’t attached our sensor to it yet because we want to wait till our next gen because I want to make sure we put a sensor on it that, I think, is the right sensor for that product. That will create a whole new revenue stream for us and move us into the less — these are — would be type 2s that — type 2s that one get to get more control of their insulin and basically close the loop in the least invasive way.
And we also see InPen for type 1s that are taking a holiday from their pump or their patch like going to the beach or whatever. And with our platform, they can do that. They can switch between devices and not lose the data.
But maybe a lot of the income comes from the consumables here, the sensors and all the other consumables around us. That’s where most of the income comes from, not the pen, but the pen is an important part of the enabling technology here.
Cecilia Furlong
As you think — and I’m going to switch gears, but pricing power, and that’s been med tech less pricing power versus other areas of the market. But as you think about just going forward various geographies where you could take price and then with new products, your approach to premium pricing, too, especially as we’re entering what could be a recessionary in all of the economic pressures that we’re seeing today?
Geoffrey Martha
Well, what going into this — if there is a recession or slowdown, I mean we do think med tech is a little bit less impacted by that, but although impacted. We also like, from a Medtronic perspective, our balance sheet, our dividend, these are all good things heading into — differentiated things, I should say, heading into this environment.
But in terms of pricing power, you’re right. You saw it this last couple of quarters where there’s, call it, 8%, whatever inflation. And we can’t pass 8% pricing increases back. But we have, I think, stepped up. Med tech, as a whole, I would argue, based on our analysis, would have been year-over-year given maybe 200 basis points of price and us in that same range.
And that, at least for us, has reversed. I mean we’re not — we’re in flat to positive territory now on price and kind of building that muscle and trying to head up. But it’s not going to be 8%, but it’s not minus 2% like it has been, and it’s in positive territory.
And where we — and we take price where we can, like things like our micro leadless pacemaker where we’re way out in front, that we’re getting 3x the price that we would of a normal pacemaker. In areas like ENT, where we’re — we have this broad range of products and the dynamics there, again, these are areas where we’re taking price on a consistent basis. But then there’s other businesses that the dynamics are — there’s a lot of RFPs and it’s a harder to maintain price.
So where we can, we take it. But overall, as a company, we put a lot more focus on this and more of a centralized, when I say central by region and by business top-down pricing, raising the prices and then giving your sales team a more narrow band to play in. And because of that, the pricing has gone up. And I can see us at Medtronic building that muscle and making this part of our normal how we do business.
And then, as you talk about inflation, other opportunities for us beyond price are cost of goods sold. As we’ve made changes to our supply chain and narrowed down the number of — most of our cost of goods sold is materials. We’re cutting the number of suppliers we deal with in half over the next five years, and that is giving us a whole lot of reduction of cost — more cost of goods sold productivity that’s also helping us offset inflation.
Cecilia Furlong
Turning to some of your products. You brought up Affera, that acquisition. Your presence in [indiscernible], was the geeky component, didn’t have a masking system. How do you think about just your messaging? How you change your business model now with the mapping system, full therapeutic catheter portfolio, separate crossing to add to the ASP. But how does your approach, your competitive approach versus the two incumbents really in the shift going forward?
Geoffrey Martha
Well, shifts in that we’re relevant to that whole procedure now, right? Before we didn’t have that mapping in navigation, as you noted, and we’ve been looking for this for working on this for a decade. We feel Affera is the answer to that. It makes us a much bigger partner for that position. We’re there for the whole procedure — and we’ve got — and we believe our mapping and navigation is like, call it, the digital to the current incumbents more analog solution.
The user interface is very — is a big upgrade. It’s more like a video game, if you will, and very positive feedback from physicians. And then we have a broad range of therapies now like you cryo, where we pioneered that, but also RF. We keep adding BRF and now a very broad offering and — relative to competition in PFA, between Affera PFA and the Medtronic internal PFA.
Cecilia Furlong
Switching gears to HUGO, another product but…
Geoffrey Martha
Just less on that product division solutions, at the end of the day, though, that makes that a growth driver. Before it was like a high-growth business, but niche not affecting the overall Medtronic growth now this becomes a growth driver for Medtronic from a financial standpoint. I bought that in.
Cecilia Furlong
And in the high-growth market, too, across med tech.
Geoffrey Martha
Yes.
Cecilia Furlong
But turning to Hugo, you think about just building out the ecosystem competitors has been on the market a long time. All of the instruments, everything around that entire ecosystem. How does that evolve? What are the time lines like there? Just broadly — I know there aren’t formal time lines, but just the path to really having that full offering?
Geoffrey Martha
Well, first of all, as you know, we’ve already got a very healthy surgical business with a lot of great leading positions in the end of — with the surgical robotics, endofactors, energy and speccing all that and stapling. So we have that, which is a huge strength and basically split that market with J&J, and then you get intuitive in 3% of the cases or whatever they’re in.
Now we’ve got to focus on the robot and they have got a lot of robots out there. We’ve got — we’ve got Hugo. We’ve gotten really good feedback. We’ve got to accelerate the launch — there’s a few things that the feedback that we got from the European launch on a couple of the instruments that were incorporated into our offering before we hit go on the US IDE.
But that’s nearly done, and we’re going to be hit and go on that US IDE shortly, and at the same time, accelerating our ramp in Europe because we’ve been holding it down a little bit as a limited market release as we get this feedback, we decided to make adjustments to two instruments, and then we’re going to accelerate things.
And so getting that Hugo install base out there has been very important for us. And we’ve set up third-party leasing arrangements. We’ve got — obviously, we’ve got a very competitive robot with the ASP in the range of Intuitives.
We have third-party leasing arrangements. We have earnouts that we can do where you can pay for that robot by more devices sales in our surgery business, which you can’t do if you don’t have any — if you’re only in one procedure a day for a robot. So this gives us some flexibility to drive that — to drive the installed base.
And then the other part is the ecosystem, which are really important, visualization, the digital piece, we have the digital surgery platform. These things are being kind of — when it comes to digital surgery, that’s developed, that’s being rolled out now. So we’re not moving sequentially.
We’re moving in parallel here of getting the robot out there, the installed base, getting our instruments, the leading instruments in the marketplace from just laparoscopic use — in open and laparoscopic converted to the wristed robotic environment.
And then, finally, in parallel building out that ecosystem, digital surgery, visualization, interoperative imaging, all that — because you look in the — you see the robot in the arms that captures your imagination, but there’s a lot more software and imaging and digital around that to make that robot much more effective and ubiquitous.
Cecilia Furlong
In the OUS countries where you’re in today, what is your presence? You talked about kind of taking a more measured limited still, I believe, in a limited market release. What transitions to the full market release do you have capacity constraints at this point? Or is it really just trying to take those initial learnings before you really push forward?
Geoffrey Martha
Again, we’re starting from — it’s early. So there’s definitely some capacity constraints, but not really — you’ll see a meaningful ramp here in the — over the next back half of our fiscal year and into the next fiscal year, you’ll see a meaningful ramp. A lot of that will come from Europe and then some in the US through the IDE, but a lot of it will come in Europe.
Cecilia Furlong
Okay. I know we’re almost out of time. I did want to touch on Ardian. Potential to see data coming at AHA or sometime this fall, hopefully. But how do you think about the cadence of rollout in the US just from a timing standpoint? Do you take a limited market release? And as you think about just the sales force and the sales force targeting strategy, how do you roll this into your existing sales force? Do you need to really add assets to that today?
Geoffrey Martha
No I think, look, the nice thing about — we’re very excited about getting this data and are very optimistic about it because we — what we’re seeing in the patients. But yes, the good news here is it is — we have the sales force. So it’s going to be our interventional cardiology sales force. And this is going to be a big focus area for us.
That sales force, quite frankly, with the way stents have been — the pricing of stents over the years that we don’t — we’re not covering as many cases as we used to. We’re more on contract. These reps have capacity, and we’ve been holding to move them over to focus on because it’s the same interventional cardiologist a specialist who will be doing the procedure to cover this.
And so we’ve been working on the training. So you’ve got interventional cardiologists with the catheter skills to do this, so the training lift isn’t as huge. You’ve got reps already in place globally to cover this. And device is not something that’s to catheter-based energy device that we know how to do that.
I think the issue that we’ve got to work through is the reimbursement, and the reimbursement bodies are waiting for this final piece of evidence here. But the rest of it is in a good position, I think, to scale.
Cecilia Furlong
With that, I think we are out of time, Jeff.
Geoffrey Martha
Okay. Well, Thanks a lot. Glad to seeing everybody in person. Thanks for having me. Okay.
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