Medtronic, Inc. (NYSE:MDT)
Barclays Global Healthcare Conference Call
March 13, 2013, 03:15 pm ET
Gary Ellis - SVP & CFO
Thanks for joining us for another afternoon session. Pleased to have Medtronic with us here today and Gary Ellis, the CFO, and so Jeff Warren, Head of Investor Relations. And so we’re going to do a fireside chat format here for about 25 minutes. Gary, maybe just to start off, would you want to give us some high level thoughts on the year. You did talk a little bit about Europe being weak on the last call and that's got a lot of focus I am sure in recent meetings, so do you want to talk about what you've been seeing there and maybe with the context of what you did there last year as well?
Well, I think overall obviously, our fiscal year is in end of April so we've been two or three quarters and overall for the last year we've seen improved growth overall as a company; we've been more of kind of in the 4% to 5% range from lower mid single digit growth. As you said this last quarter we saw a little bit of a weakness especially in Europe that surprised us, especially in the month of January, but overall the good news is that seems to be more of strictly in January and so far anyhow the results seem to be improving a little bit.
So net-net we've been seeing good growth prospects from many of our product lines; we are gaining some share and we are starting to see the markets in the US especially starting to stabilize a little bit especially in US ICDs and Spine which had been a big drag for us a long part of for the last couple of years. Both seems to be stabilizing and as that happens the other two-thirds of the business which has been growing high single digits continues to grow that way and we expect that will continue as we move forward.
So we are expecting, the guidance we gave for the rest of the fiscal year here we are expecting the fiscal year to be in that 3% to 4% revenue growth probably at the higher end of the range on the revenue based on what we've done for three quarters. And again the earnings per share, the same thing, we expect to be at the higher end of our range on earnings per share, so it’s been a good year, we are making some progress. We are not back to where we want to be yet which is very consistent mid single digit revenue growth as we go forward, but we see basically the steps we've taken this year the last four or five quarters is indicative of that we are making progress.
You've had this mid single digit goal for a while and it seems some better execution over the last several quarters; you talked about some of the key things, obviously there is a lot of factors, but what are some of the changes that have been helping you to drive to better execution and how do you see the company moving towards mid single digit growth over the next couple of years?
Yeah, as you said there's lot of factors obviously within Medtronic that with all of the product portfolio that have an impact on getting this back to mid single digit growth. As we've said the biggest issue that we had as far as the problem even a couple of years ago, as I mentioned was that a third of our business which was in US ICDs and Spine was down high single digits to double digit and the rest of the business was growing in again high single digit but that big anchor we had was really having a negative impact.
The big change has clearly been the fact that that market is stabilizing; you know anything we are gaining some share back in ICD and Spine that's helping us stabilize our overall market such that that's not that big drag and as a result part of the business that's been growing and it continues to grow now is getting us back to mid single digit range as we move ahead.
So we are feeling, but across all of businesses I would say we are starting to see share gains as some of these new products have been launched over this last year, we are seeing gains in CRDM, we are seeing share gains in cardiovascular with Resolute Integrity launch in US and Japan. We are seeing share gains in Spine at this point in time. Our neural business with its Restored Sensor we've seen significant share gains over the last year and we expect those to continue.
So I think across the board execution on new product launches we are starting to see some improvement. I think you have seen improvement just because the mix of businesses that are doing well are becoming a higher percentage of the total and we're also seeing that growth because obviously we continue to do very, very well in the emerging markets where the growth is about 20% and as that becomes the higher percentage of the total too is driving some of our growth overall. But half of our growth right now is coming from some of the emerging markets. So it's important for us to continue to have that focus there. So again, I would say, across the board, we're seeing more consistent execution across all of our businesses and we're feeling better that many of our markets seem to be stabilizing especially in the procedural growth side.
You mentioned emerging markets; it seems to be a little bit out in front there and that’s a big focus for the company’s stated goal. What are you doing differently or what are you doing to invest broadly in the emerging markets, so if you can help differentiate your growth there?
Well, I think, obviously first of all, we probably got a very good infrastructure in place; a very large critical mass. I mean, we get about 12% of our revenue already is in the emerging markets and has been growing 20%. So we have the infrastructure in place in each one of those locations and that’s important. Having in these emerging markets, have a decisive scale to get in to see the government officials to be have an impact on the marketplace is important and Medtronic, as you said, we've been focused on this for many years and we're starting to see it to pay off as we go forward.
I think it's also clear that that's been one of the focuses of Omar Ishrak when he came in as our new CEO was clearly to drive growth in the emerging markets and increase focus across the company to really focus on new products for that marketplace, new business models and new ways to go out to the emerging markets and understanding the markets and the consumer driving the growth. So it’s been a focus of his and continues to be a very strong focus of his as we move ahead.
And then as you know even recently some of the for investments side of the equation, acquisitions etcetera have been more in the emerging markets area, we acquired a company called Kanghui, which is in the spinal orthopaedic trauma value segment, we have made an investment in the company called LifeTech which is on the cardiology, surgical valve design for (inaudible) within China. So as we look at these emerging markets, we are looking at opportunities to make not only organic investments but also we have seen increased acquisition focus in those areas over the last year.
I mean talk about CRM for a minute and some of the new products there, it seem you did announce quadripolar product in Europe the other day, so can you talk a little bit about your expectations for that and how your product is differentiated in contracts and share gains?
Right I mean overall, I think everyone is aware on the ICD side of the equation, in the CRT-D segment, one of the competitors has a what's called quadripolar product it's a lead with a different types of sensors on it but it has been in the marketplace and as also the (inaudible) which gives you better sensing capability and better shocking capabilities as you go forward.
Overall so as a result of that, I think we have been gaining share in total high power, we probably were losing and lost a little bit of share in the CRT-D segment which is the probably the more advanced part of the segment itself. We did recently launch our quadripolar product in the Europe marketplace. We have taken some of the things that we have been learned what the competition is, is experienced in the marketplace.
We have tighten up where the sensors out there, leading the sensors and we think we will get better response from that as we go forward. So our team feels very, very good about the competitiveness of the product and we think we can gain back some of that share we lost, obviously as we didn’t have this product in the marketplace and then ultimately we are bringing this to all the marketplaces in the US probably in another 18 months or so following that. But in general, we are pretty excited about this two product we think it focuses on what the marketplace is looking for and it will help us getting back some of that share we lost in that niche CRT-D segment.
I am going to ask the audience a question about CRM market, so let's see what they will think about market growth this year. The question is what is your expectation for CRM market growth; it’s up more than 200 basis points up zero to 200 up 75 to 100, 50 to 75 or 25 to 50? So it looks you expect very well growth to the market, can you talk about your expectations for the CRM market and some of the different moving pieces?
I think overall, we would agree that the CRM market in general, it depends obviously what secular you are looking at it, but worldwide our expectation is that you are going to start to see more single-digit growth in general across the CRM market, that's with the US in some of the developed markets kind of be in flat to maybe just up a few dips in general, but the emerging markets well then kind of continue to drive a couple of percentage points of growth in general across the CRM, this is now.
That is the big improvement where its obviously been where it's been negative because of the decline in the US, but we are seeing procedure volume start and we start to see growth in procedures bonds in ICDs in the US and we expect and we are still seeing very strong growth in pacers and ICDs in the emerging markets, such that we expect procedure volumes are going to start to bounce back more in the mid single-digits, where you continue to see pricing pressure low-to-mid single digits such that our expectation is flat to couple of hundred basis points of growth is what you would expect in the market in general as we go forward and then as I said obviously with our product portfolio we are launching several new products both in ICDs and Pacemaker that we would expect that we would be able to gain some share in that marketplace but I think the market growth a couple of hundred basis points flat to couple of hundred basis points is probably more realistic.
And what do you is driving some of that volume improvement or stability that we are seeing in the US, is it the rebasing of volumes or there's other factors there?
No I think overall it is just, we've set a new base, I mean when you saw especially in ICDs the whole Department of Justice investigations, I think everyone in the hospital systems clearly clamped down on making sure they knew that how they were proceeding with ICD implants that just had a new base and then since that point in time what you are seeing is what we've always expected which is kind of based on demographics both in the Pacemaker and ICD markets that the ageing of population of demographics are going to kind of see low to mid single-digit procedural volume growth and that's what we are seeing at this point in time.
So we think we saw the drop now you've set utilizations at these levels and now you are going to see kind of a procedural growth that kind of drives based on demographics. Again outside the United States where the penetration levels are quite so high, you'll continue to see even more probably procedural growth than in the US but US is clearly being driven we believe right now by demographics.
And do you feel like it’s a similar story in Spine, your Spine business is the big chunk of the market and you've seen some more stability lately but maybe some of that's been product driven, what about the volume side, is it also rebasing or are there other things that are driving the growth?
I think in the Spine, our view on the Spine business is first of all, we are seeing it’s a procedural growth back in Spine now it seems to ticking up a little bit. The Spine market overall is more impacted I think by the economy and recession and all the people have insurance than probably some of our other businesses and so the fact of the matter is some of the procedural growth we have probably seen in the marketplace in Spine is just that if the economy does improve I think you are starting to see some of that come into play.
It is the one business potentially that even as you see you know the (inaudible) kind of coming in play as people get more insurance you could see that kind of popping up on the procedural side of equation, what we've always felt is that the Spine business unlike even ICDs and Pacemakers is not a mature market in the US. There's still plenty of growth potential, the penetration levels are still relatively low and so you can still see mid-single digit growth in the Spine market as things start to recover but I think its going to be probably more driven by the economy and insurance trends than anything else.
And so but we do see a little bit of a stabilization in procedure volumes to starting to come back a little bit and the ASP pressures also have been stabilizing a little bit down you know kind of 1% to 2%. So in general that market overall excluding I'm not including Infuse in this obviously which is a different part of the market but the basic core metal construct etcetera, the market seems to be improving and as you indicated we are also seeing some share gains in that market as some of the new products we've launched are certainly picking up little bit of share.
Can you just remind us (inaudible) update on Infuse and what's exactly the Yale study and talk about some of your other biologics as well?
Yeah, overall Infuse as everyone is well aware is that our bone morphogenetic protein based on some articles in Spine journal probably about 18 months ago now has been under a lot of pressure and has been declining probably almost 20% over the last four or five quarters.
It seems to be from a standpoint of sequentially from a quarterly perspective, seems to be stabilizing a little bit in this arena. So we will see how that plans out, but as you know, to respond to those, that article, we've basically have take a look at this with two independent reviewers, take a look at all the clinical data. We basically turn all the clinical data related to Infuse to this group.
They are going through that. We understand now that based on the timing they are expecting that this will be published. The results of these review is to be published in the May-June timeframe. It's clearly at their discretion. We're not involved in the process other than supplying them all the data and we believe that once that data is out and everyone sees the results that that will help stabilize the market also even ignoring the fact that we see the business, it's also stabilize the last couple of quarters but that’s expected beginning of FY ‘14. So we will see what those results are and we think that will help stabilize the overall business kind of the levels we've been at the last couple of quarters.
You mentioned some of your other business that are performing really well. Can you talk about some expectations for pipeline drivers that are going to be higher growth including your transcatheter valve, you got renal denervation products. What are some of the biggest products over the next year that is going to help to cruise the top line?
Well, I think there is clearly across all of our businesses, there are several new products that they are all launching that will have an impact. Obviously, in the current fiscal year, we've been benefiting quite dramatically by the Resolute Integrity launch in the US and Japan. That will continue the anniversary as we go in to the next year and so you won't see quite as big growth but there are still opportunities in that product line to continue to gain share. Across all of our other businesses, our neuromodulation businesses which launched a new product restore sensor here this last year, we are seeing a new high single-digit, double-digit growth.
Diabetes we are getting ready to launch what we call the 530G insulin pump with a new sensor, when we received FDA approval. This product drill as driven in South United States mid-teens growth since it was launched about two or three years ago. And so we are expecting that will drive very strong growth in diabetes as we go forward.
Our endovascular peripheral product lines continue to do very, very well and continue to grow quite nicely as we move ahead and people now focus on our surgical technologies business, which has become a $1.3 billion- $1.4 billion business with advanced energy navigation ear, nose and throat. That has been growing double-digit for the last three to four years and we expect that to continue as we move ahead.
So there is still some of different role platforms in the company that continue to AF with new CRDM as it continues to grow very quickly. So in general we feel pretty good about the product portfolio across all of our existing businesses. Then on top of that as you indicated there is two product lines and I think everyone is very excited about that transcatheter valves in RDN renal denervation our product line, which are now launched outside United States, but are expected to be launched in the United States in FY‘15 and these are both multi-billion dollar market opportunities where Medtronic has a leading position or one of the leading positions in that market, and so we feel very, very good that’s going to help us accelerate some of our growth once those products are launched.
So in general every one of our businesses has some very good and new technology coming out, and then some of these new growth platforms will be once it will have probably more of an impact as we get into FY‘15 and beyond in next year, but clearly we will also into our growth as we go forward.
One product I haven’t heard you talk about much about is Engager and that was a recent approval as well. Can you talk about how that fits in to your TAVI business and also just general expectations for TAVI this year?
Yes, so overall in the transcatheter valves, and I think as everyone is aware, outside the United States we’ve been basically splitting the market with the other major competitor in this arena, but we have not had transapical product, we’ve only had transthecal product and probably 20% to 25% of the market outside the United States is in the transapical product line.
And so we are launching our first transapical product this quarter, in fact we just got CE mark approval for this, that’s is called Engager and so the 20% to 25% of the market outside the United States that we have not been participating in, we are launching our product kit. We think it’s a very competitive product, we think it will do very well in the markup place, so we are excited to get in that part of the market that we haven’t been up to this point.
So overall based on the continued growth in the transcatheter market outside the United States, we would expect to maintain the potential gain on the transapical side of the equation as we move ahead even obviously as we talk about this few minutes ago launch our product in the U.S. market in FY’15.
And then in renal denervation you’ve been the market leader and are ahead on a number of trails. Can you talk about the up tick in Europe and how you think the market could develop over the next couple of years?
Yeah, overall as we communicated on the calls and I think its clear, the excitement around the, renal denervation in the hypertension market our product continues to build. We started the clinical trails not only for renal denervation for hypertension, for blood pressure above 160, uncontrolled hypertension above 160. We just recently launched the trial for 140 to 160 on blood pressure and we also have a trial underway for heart failure. We also think that this therapy could have an impact on heart failure.
So the expectations and the excitement around the growth potential I think continue to build and I really think they are probably getting larger as we go forward. Unfortunately I'd also say on the other hand its been more heavy lifting to get this market to really take off than what we expected I think probably a year to year and a half ago.
Two things, first of all I think the enrolment in the United States has been slower than we expected and the protocol is very difficult to make sure you get patients who are following their drug regimen to be candidates for their clinical trial. That has required us to have the funnel a bit larger to make sure we get all the patients enrolled on the trial.
Now the trial itself will be I think we believe a very, very strong evidence around the benefit of innovation as a result of that, but it hasn't made it more difficult as we went through the enrolment process and so the enrolment which we expect now to complete here this summer is probably good six to nine months behind what we originally would have been expecting.
Also I would say outside United States the commercialization of the product has been a little bit slower than we would have expected, because we've had to work through the reimbursement and regulatory cycles to get this product reimbursed. We were kind of expecting more the transcatheter valve uptake that how quickly that happened.
It’s been a little bit more heavy lifting as we've had to work through every country to provide them the clinical evidence etcetera to get reimbursed and so we are still excited about it but its kind of been pushed out a little bit form the standpoint of how quickly the ramp will occur until we get the reimbursement. And we are starting to get reimbursement in many of the European countries and as that happens during this next calendar year we think the growth rate commercially will also accelerate.
So and also there's a change of referral patterns. We've got to obviously work with the cardiologist we are referring to patients to get them to a person who is performing the procedure overall. So in general the excitement is still there, but we clearly have acknowledged that its been a little bit slower, a little bit more heavy lifting than we originally expected, but it will draw the excitement. We are still really excited about the opportunity in the marketplace.
And just on the margin side, so you have some pricing pressure but you were also early to start restructuring and you talked about reducing cost over the next several years. So can you talk about your ability to offset some of that pressure over a multi-year horizon and what we should expect from operating margins?
Well, as we've seen over the last five years as we've seen pricing pressure, we have been focused as a company on making sure we take out - reduce our product costs to maintain and hopefully even improve our gross margins. Obviously Medtronic right now has some of the highest gross margins and operating margins in the industry, but there's still room for improvement and even with the pricing pressure that we see in the marketplace we've been able to maintain our gross margin over the last five years because we took a $1 billion, 25% of our product cost was reduced over the last five years.
We have plans in place to take another $1.2 billion, another 25% out over the next five years and this isn’t just a dream and we've got a laid out by business by plan how we are going to achieve that overall objective. So we believe if we do that, that we can offset at a minimum what's going on right now in the pricing pressures that we see in the marketplace and hopefully even set us up to be in a situation that a minimum maintain and hopefully gain on gross margins.
It also sets us up more as we enter some of the emerging markets, because we are going in with obviously lower cost products and as global cost producer in the marketplace it gives us a lot more flexibility. So that's on the product cost side. We think we can maintain gross margins. We also think we can actually have some impact in improving operating margins because the reality is the SG&A expense which is largest expense item we have on the P&L is even more of a product cost. We think there is opportunities to continue to leverage that infrastructure we have in place as you have more revenue that’s current across the organization, is to see if there is a natural leverage that occurs.
And we also seeing our business model change such that as we get more away from the service component than we've been providing in our industry, that SG&A as a percentage we think will continue to come down, such that we're expecting our operating margins can improve over the next few years. We've indicated, our objective is on that mid-single revenue growth, mid single-digit revenue growth that we can grow the bottom line, earnings per share 200 to 400 basis points faster than that and that will include obviously share buyback and on top of that an operating margin improvement.
We wish you then we will continue in the break up. Thank you.
[No Q&A Session for this event]
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