Medtronic's Management Presents at Morgan Stanley Healthcare Conference (Transcript)

Sep.10.13 | About: Medtronic plc (MDT)

Medtronic, Inc. (NYSE:MDT)

Morgan Stanley Healthcare Conference

September 4, 2013 10:30 am ET

Executives

Gary Ellis - CFO

Analyst

David Lewis - Morgan Stanley

David Lewis - Morgan Stanley

Great. Let's get going. Thanks for joining us here for the morning session. It's my pleasure to have with us here Medtronic and their Chief Financial Officer, Gary Ellis. My name is David Lewis, Director of the Medical Device franchise here in the U.S. So, for those who do not know and I think most of you know who Medtronic is. So, this has been an interesting year for cardiovascular large cap stocks, they virtually all materially outperformed our index by 2X to 3X so "cardio" to back. Medtronic obviously was not star from that either. They had a significant year here. So, I think what we're talk about today is why is cardio outperforming this year and frankly are those trends sustainable, and I guess it all comes back to growth return, the stabilization in the CRM market.

And I think Gary where I wanted to start just thinking about the second quarter, I mean last year was really kind of a fascinating year where Medtronic growth returned. All of a sudden Medtronic is growing 4% to 5% there is reacceleration.

Here we get into this most recent quarter and if you sort of back out benefits you got from the German market by stocking with an IP suit with CoreValve and Edwards, which may be we'll talk about a little later, it looks like growth was kind of 2.5% but you're guiding 3% to 4% for the remainder of the year. I think, what Edwards was trying to figure out is what specifically happened here in this quarter and how do you get that to 3% to 4% growth by year-end?

Gary Ellis

Well as you indicated our first quarter was a little softer than what we had expected overall. The general trends I'd say are still very positive and for the last five or six quarters, we've actually been seeing growth above 4% on kind of an average. But unfortunately there are some -- there were some head wins we dealt with little bit in Q1 that are good head wins because they would all primarily relates to new products being launched and it's primarily within our Cardiac Rhythm Disease Management business, our neurological business, and our diabetes business. The two, our CRDM and Neuro basically as you know in the quarter both of them launched new products in the U.S. marketplace.

And as a result of that, the transition from the new product excuse me the old product to the new product had an impact on our ability to do what we call bulk purchases. About 15% to 20% of our business especially in CRDM is done by bulk purchases people buying in bulk versus on an implant basis. With these new products there is price increases and the results of that they were not in contract in many of the hospitals yet and so our level of bulk purchases was at the lowest level we've seen in over six years because of just the timing on when these new products hit the marketplace.

Our implants per day everything else continued to be very strong. We still believe we're taking share but those bulk purchases were lower in the first quarter that is now working self through and all these new products are now on contract in the U.S. and we expect our bulk purchases volume to get back to levels that were consistent with the prior quarters at a minimum and we think there could be some uplift related to the Q1 being so low, but in general we feel that really confidently that will come back.

Neuro is the same thing. Neuro just launched MRI Safe product that we received approval for right at the end, which was at the end of the quarter, as we transition from the old product to the new product everyone wants the new product as MRI Safe the first MRI Safe product in the U.S. marketplace and as a result of that, we saw a reduction in demand of the old product and we didn't have enough product obviously on the news our new product to really meet the demand and that was a softer calls for our neurological business.

Diabetes, we're waiting for the approval of our 530G pump, which is similar to the Veo pump outside the United States, which has a low good cost of spend feature. It's the only product to have that feature. We're waiting for approval from the FDA on that product line and as a result of that again people in the U.S. are waiting for that product to be launched and it's had a negative impact on our growth rate in the U.S.

So, in general those are all three issues, we dealt within Q1 are related to positives because they should be positives as we go into Q2, and go forward as these new products hit the marketplace we expect that growth rate to accelerate back to what we were seeing over the previous four or five quarters. So, our guidance is 3% to 4%. We feel very for the current fiscal year. We feel very confident in that. Q1 was a little softer than what we might have normally expected, but generally there is good explanations for that and we feel very confident that actually we’ll see accelerating growth as we go through the back half of the year.

David Lewis - Morgan Stanley

The one thing we did not know at the time of the quarter was with your pending lawsuit with Edwards regarding CoreValve in the German market post the quarter we now have Edwards putting up the buy as you're now enjoying from German market. I think the question was asked in the quarter, do you still feel comfortable in that 3% to 4% guidance if the injection goes through. I think you feel confident that was still the case and it sounds like today you still believe you're going to see organic acceleration in the back half regardless of CoreValve?

Gary Ellis

Absolutely. I mean, again the CoreValve business is doing well. Obviously we're at this point in time enjoying some selling in the German market until the ability of the patent gets determined but so that will have a little bit of head win for us in the back half of the year. But it always had a positive I just mentioned gives us plenty of confidence that we'll continue to be able to grow in that guidance 3% to 4% for the full year.

David Lewis - Morgan Stanley

So your growth of acceleration plans even going back four and five quarters it's really been focused on two things it is stabilization and improvement in your troubled markets with CRM and spine and then its pipeline improvement and the combination of those things should drive acceleration. I think what the critics are saying about CRM right now is Boston has never bought a portfolio last year and St. Jude was recovering from fears about this Riata lead as St. Jude is recovering and Boston's pipeline is picking backup there is just no way that Medtronic is going to be able to hold or grow share in this market. It still looks like in this last quarter even with the stocking issues you did take over the share it looks like, you actually took less share but what do you say all those people saying about there is just no way that performance last year in CRM can be perpetuated here going forward?

Gary Ellis

Well again I think there is no question that the completion continues to come out with new products but Medtronic does too. I mean, as I just mentioned we had several new products that we're launching right in the quarter in the U.S. market they had an impact on the U.S. If you look outside the United States and in fact we still gain a little bit of share even in the quarter with a slowdown, a softness in the U.S. The realty is outside the United States we continue to gain significant amounts of share with those new products.

So, yes all the competition we're all coming out with new products, we're all introduce some new technologies in the marketplace, which is good I think actually that will help minimize a little bit of the pricing pressure we've been seeing and I think we're seeing a little bit of softness -- the pricing pressure has mitigated a little bit with these new products being introduced. But the reality is, we had some holes in our portfolio the Quad full type of product outside the United States we've launched that our product now there and so we're feeling good about that as far as with the growth there. Japan there is MRI Safe products that we just launched in the U.S. is doing extremely well and taking share.

So the fact of the matter is about the entire that's on the product side. You put on top of that the entire CVG strategy, which are that we're selling our entire cardiovascular portfolio, which nobody in the industry has the strength across CRDM, coronary, cardiac and there is transcatheter valves et cetera that entire portfolio we're utilizing in all of our markets really to drive continued share gains going forward. So, gaining share in this marketplace is difficult. There is no question.

The fixed share is sticky but we feel very, very confident that our products, the performance of the products continues to be very strong and those people would challenge us I mean, the reality is we'll have to wait and see how the results indicates, but I think people are surprised even over the last six quarters that we gained share and yes there were some issues in the marketplace with some of our competitors but the fact of the matter is I think Medtronic consistently has shown we've a stronger portfolio and a stronger overall solutions that we're providing to the hospitals that are providing us the ability to continue to gain share.

David Lewis - Morgan Stanley

So, the market improved this last quarter there is no question it looks like Medtronic did not benefit as much as other and kind of explain for people now why that was the case. But in your mind the CRM now is this the market simply stable and we're anniversarying more challenging comps and we've nice stability or do we really seeing improvement in pricing and really improvement in end market implants?

Gary Ellis

I think it's fair to say that the majority of what we're seeing is stabilization just from the standpoint of anniversarying lower levels. I mean, I don't want to, such as were, I don't want you tweak sided that we're seeing strong growth out yet in the marketplace but obviously yes stability is important for us. So, just achieving stability and anniversarying some of the more easier comps obviously is very important and I think that's occurring. But I do think there is also a little bit of a sense that we're seeing with the new products being launched by not only ourselves but some of the competitors, we're seeing a little bit of easing on the pricing side of the equation.

Now there is still pricing pressure in the CRDM market but it's been mitigated over the last quarter or two from what it had been and we're confident that the certainly new products will help us mitigate that. We're also seeing procedure volumes pick back up a little bit. We are seeing growth. There is a little bit of growth in the procedural volume especially in the United States market, which had been declining obviously for a couple of years. We're starting to see some procedural growth as the market seem to be stabilizing. Some of its easier comps, but some of it is the new products are driving some procedural growth.

David Lewis – Morgan Stanley

Do you think pricing is actually getting less that? You actually just think new product growth is driving improved mix so net pricing is getting better.

Gary Ellis

I would say it's probably a little bit of both. I think there are clearly -- in our industry there is always been pricing pressure. All the technologies every in the next year it's always in the lower price. That's been consistent for the last 20, 25 years. It's been the speed of new products coming to the marketplace has slowed down over the last few years has probably put more pressure on the markets than anything else.

So, I think the pricing pressure in existing old technology is probably the same or about the same as what you've seen over the last several years. But it is the fact that the mix that benefit of having new products at the marketplace with some price premiums and the market paying for the value of those products that you're seeing a little bit of mitigation on the price itself.

David Lewis – Morgan Stanley

So, the other market that has made investors want to stay with Medtronic now for last two years has been spine?

Gary Ellis

Right.

David Lewis – Morgan Stanley

You've gone from a difficult market, where volumes are shrinking, prices very, very poor, and obviously it would be a few pressures. And now spine is stabilizing as so good, that investors are expecting consolidation activity in spine now it's the best place to be.

Gary Ellis

Exactly.

David Lewis – Morgan Stanley

So that seems it's a strange transition we've had in the last couple of quarters, but as it relates to your business, what's happening in spine is it that price is being stabilized, you're starting to see the benefits of scale, is it the PODs, the physicians and distributorships that have been passed by the government. What specifically is going on? And what's a new outlook for what this business actually you could grow at?

Gary Ellis

Well, first of all if you take a look at the entire spine market. I mean market itself as you said where some pressure procedure volumes fell, we saw pricing pressures in the marketplace, not as extreme as CRDM, but we saw some occurring in spine at the same time.

I think procedural volumes are starting to kick back up a little bit. This is an elective type of surgery and the reality is the economy is starting to improve, see more people doing on our insurance, even potentially with ObamaCare the reality of having more people on our insurance could benefit the spine market probably more so that we leave out other businesses because it does tend to follow a little bit more of the economic aspects of how the patient is dealing right now, where there is job et cetera.

So, part of that what we're seeing on procedural volumes is just that what we always expected, which is the procedural volumes did fall, but they will come back as the economy improves and this is still an underpenetrated market the spinal market. There is a lot of push back and some procedures there for period of time, but as that push back starts to lesson, we're starting to see procedure volumes kick back up slightly.

Now it's not back to the growth rate that we expected to get to, but it is improving and so the market in general is starting to come back a little bit. Then you need share and from our perspective we've launched several new products over this last year that are trying to get to critical mass that are starting to have an impact in the market our SOLERA product line. We have a POWEREASE. We have a new interbody type product that was launched. We have new cervical plates that are being generated and the reality is we believe we're taking share because we basically almost have redundant type of portfolio in our spine product and that's starting to have impact in the marketplace, not only from neither of a price uplift, but more importantly from a standpoint of share of procedural volumes.

I think also which you're having a little bit of benefit in the marketplace is the impact of the physician-owned distributors the smaller players and the impact that they had in the marketplace is being mitigated. I don't think it's necessarily dropping, but the share gains that had been occurring in that arena are clearly have slowed than anything might be on the slight decline as the government does focus on the PODs and what that means the conflict of interest related to that.

Well, I think that's for all of the larger players. I think that's starting to have a benefit a little bit in the marketplace that the hospitals are going back to the larger players we're not focused or not looking at the PODs themselves.

So, in general the market has started to stabilizing and the fact that the only think we always think that that we would expect the spine market to see growth again. It's just -- it's so underpenetrated and there is so much need out there that we think that will continue to grow and secondly Medtronic is performing better. And we've got some new products in the marketplace. We're making a lot of progress.

David Lewis – Morgan Stanley

Can you go back to year ago, even 18 months ago you sort of said look, we talked about half year growth strategy, let's just get CRDM, and let's get spine back to flat?

Gary Ellis

Correct.

David Lewis – Morgan Stanley

You're there in CRDM. You're almost there in spine you could actually get there by the second quarter and lot of this is more BMP related. So now these markets are back to flat, let's be honest, some of them are getting or I believe they are going to get back to about year ago now they are back to flat. Is flat -- what we think when we get to 5% constant growth here from Medtronic. Is flat good enough or those markets have to be sort of 1% to 2% growth?

Gary Ellis

No, obviously from our perspective we're seeing back to flat in those markets is a win versus what we've experienced over the last two years. But I agree with you I think there is opportunity to get even some slight growth in both of those markets as we move especially from a Medtronic's perspective.

We believe as we said before with about 70% of our business growing in 6% to 7% range, the big issue we had over the last couple of years is we had U.S. ICDs and spine and pacemakers declining several percentage points and that was actually hurting us, we should have gone down some more in the low single-digit growth as a result of that.

If we can get just those back to flat you get back to closer to 4% to 5% for the company in general. So, the reality is a little bit of growth in either one of those markets obviously it gives us a lot more confidence that we can consistently above that kind of 4% to 5% range. But flats gets to stair what we would like obviously anything above that would be give us more confidence and being consistently quarter-on-quarter at those levels.

David Lewis – Morgan Stanley

See 3% to 4% you’re growing may be this last quarter and not so much 2.5%, 3%, but you were growing faster since last year still growing faster than your peers although they are catching up. One of the catalysts for them catching up and analyzing that's just pipeline and Boston Scientific we're talking about Subcutaneous ICD, exactly those things CoreValve we're talking about Aortic and Nanostim.

I think Medtronic's pipeline especially not been talked about as much the question is, is that because you don't have it or is that because you're just too damn big and it's hard to move the needle. So, I would like to know about when you focused on probably next 18 months what products really matter and what's that inflexion here for investors is it 15, is it 16, so the pipeline can take you above 5%?

Gary Ellis

Yeah I think overall I mean as we said in the last year, last fiscal year I mean we had quarters, we were kind of averaging around 4% to 5%. So, there is a couple of quarters we were at 5% in general. We want to be more consistently in that area. And part of that there is some new products that we are excited about launching.

I mean couple of them are in the current year obviously as I mentioned I mean the diabetes pump, Veo 530G in the U.S. certainly could be very significant driver for us. Outside United States we've seen that drivers to that kind of double-digit growth. And right now in the U.S. on diabetes pumps we're actually cropping slightly down as people wait for those pumps. So by sort of nature that could be of a significant growth driver for us as we go forward, not only next year but certainly even in the current year. There is a lot of new products within the existing business that people don't focus on. The MRI Safe product I just mention and Neuro that just launched.

No one else has an MRI say Neurostimulator in the marketplace. We've seen on the pacing side, that's a significant share gainer and the reality as we think that will help us dramatically improve our growth rates in our Neuro business, which is almost $2 billion business.

So, all of our businesses, endovascular, diabetes, Neuromodulation all also have new products that people don't spend a lot of time focusing on because everyone will focus on CRDM and spine. And the reality is, there is several growth drivers there. Then there is things on top of that, there is especially as we get into FY'15. I think people have been focused on FY'15 for us because that’s when we are expecting to launch CoreValve in the United States. We are expecting the results really from the hypertension from the RDN product. So you have clinical results from that trial, which will help us obviously driving growth outside United States and set us that also for launch of that product towards the end of like FY'15 in the U.S. itself. So I think those are the two products that also people focus on that actually even accelerate our growth more than what we're talking about in general.

But I do think you're right, I think across the organization there is a lot of different products. We're coming out with if not any one that's going to move the needle with in Medtronic. It's a combination of all of them and it’s not just products. I think everything I want to focus on is that, in our view what's happening in this marketplace is the size and scale becomes important as you focus on the hospital administration, as you focus on the CEO's of the hospitals and the governmental officials, we are finding we are just gaining share from this standpoint of bringing them entire portfolio towards these organizations. So, the size and scale Medtronic is also our hospital solutions, which we could talk about later some of the other initiatives we have underway, which are more service related. We think also help us drive share and growth across the company.

David Lewis – Morgan Stanley

Okay. Question for Gary.

Question-and-Answer Session

Unidentified Analyst

You talked about hospital solutions you're kind of expanding the rationale there and then if you kind of look at the last, what's happened in other sectors like in (inaudible) patient's dialysis you seem move the population help in captivation kind of how do you position yourself in those kind of environments, which will say kind of many catheters will play out?

Gary Ellis

Well as many of you may know I mean, we've been talking for the last couple of years under Omar's leadership, we've been talking a lot about economic value and how do we provide economic value to just to the basically the system, the hospital system, the healthcare systems around the world that we needed to shift ourselves away from just being a device provide to someone who is actually looking at the solutions that we're trying to provide in healthcare. There is obviously -- there is tremendous demand for our products, the question is how does society figure out, how to pay for what demand in healthcare is going to be. And what we've decided is we want to be part of that solution and we want to be part of the ability to actually provide healthcare at a more reasonable price particularly efficiency et cetera.

Hospital solutions, where we just announced here recently there is several different aspects about around hospital solutions, different programs but the one that was just announced here recently is in Europe. We've actually entered into contracts with two very large hospital organizations at this point in time or hospitals in each country and basically, where we're providing the cath lab service. We literally are taken over the cath lab and managing the entire service for that hospitals. So we're partnering with the hospital not only providing the products but basically also helping manage the services itself.

And so, we've seen all the cath labs around the world. We operate in all of them. We see the best practices and we believe we can bring that to the cath lab themselves and help gain efficiency and reduce cost in general and expand the refill patterns. We also know that depend on patient population, what are the patients were, they are refilling that are not as robust as they should be. The ability to have people get actually the benefits that they need can be improved dramatically on almost every system around the world.

And we think we can help provide that service to hospitals and to governments as we move ahead. And so, we just started this process in Europe it's just getting going. We've also entered into a minority investment with an Italian company called MGC, which does this already where there named cath labs backlogs around Europe. And so, we’re very focused on seeing how do we not only provide the products for the procedures but how do we get more involved in the disease management of the patient themselves. That's on top of in the U.S. here we just made an acquisition recently of a company called Cardiocom, which does monitoring of heart failure patients especially and control significant benefits as results of that from reduced hospitalizations and reduced costs of managing heart failure patients.

And so, all these are basically our attempt to go into that marketplace where as we evaluate the patient population as we evaluate how do we provide healthcare for the patients in a certain population group? How do we take on more risks? How do we take on more service related to that? How do we provide more value as a company? And the reality is the products we've and the breadth of the products give us a unique ability to go into these communities and with these hospitals and partner in a way that most other organizations can't do. And so that’s one of the things we're trying to do to help differentiate ourselves from the competition is not providing only just product helping to provide solutions as we move ahead.

Unidentified Analyst

So, let me I'm dwelled on to this, same question here because the way I see the service of business evolving I see the good and I see the bad maybe talk about the good first so that’s more fun. The good is you're way ahead here there is no question I mean, years ahead and we’ll see if you will close the gap, you are way ahead and this has been something you are almost been very focused on since you got into the business. The second thing is if you do bundle successfully it could be a mechanism for getting significant share in markets that's the good. The bad is two words at-risk and at some point to take this tragedy and degree does Medtronic have to go at-risk in certain markets and does Medtronic really have a typical competencies to go at-risk?

Gary Ellis

Potentially we do and that’s something that we’ll have to evaluate as we go probably each of these deals are right now are obviously different. We’re trying different things how much at-risk is obviously going to really evaluate how much we need to be reimbursed for relating to do that. But I think our answer is yes, I think and Omar was sitting here, he would clearly tell you Medtronic needs as a device operator, we need to be, we can’t just be, if you are going to do it only just supplier then the pressure on margins and the pressure on pricing and everything else is going to get very extreme. We’ve got to be able to provide solutions providing solutions means, you go more at-risk in certain areas and how we manage that is going to be difficult.

We’re kind of happy to have additional expertise that’s why we’re making minor investments in companies like MGC that’s why we’re acquiring the companies like Cardiocom is it an expertise that Medtronic has right now maybe, maybe not but the reality is we understand the cath labs, we understand the physicians, we understand what’s going on and how to manage these patients probably better than anybody at this point and time other than the physicians. And so the reality is that we can partner with the physicians and the hospitals and the government to manage that patient population.

We think there is a better more value provided by Medtronic and as a result of that there is more value we’re providing, we would expect to be compensated appropriately for that that also might mean that there is more risk we have to take on as we go forward. But I think our view right now is in this new environment, in this new world as we go forward it's going to be take years to play out but if it does the fact of the matter is all of us going to have access what additional risk that we take on because we can’t keep operating in the sales we’ve done operating in, we’ve done it from a broader perspective and there is new additional risk that we’ve to take on as an organization none of us know yet and some of these things work, some of them won’t but in general Medtronic is committed to basically being a leader in transforming the industry as it really had and we’re going to play this cautiously but we also going to be we’re very committed to it. So, I mean I think it’s something that the board and management team are very committed to changing the view the way we view the world and we’re hoping as we go forward but actually in the end ourselves and are certainly will be compensated appropriately for the risk that the potential risk, additional risks we take on.

Unidentified Analyst

I think Gary, it would surprise people or would you be surprised if you are at-risk in diabetes or cardio or Cardiocom saying that CHF or diabetes by 2015. Do you think you can have at-risk contracts by 2015?

Gary Ellis

I think that’s very possible. I think especially in a certain communities and governments I mean, we already having those conversations in certain locations, where people are saying listen can we partner together and you and we’ll go at-risk on some of these things. So yes I think the answer to the by 2015 yes you will have some of that isn’t a meaningful component yet of Medtronic probably not but I think you’ll at that by that point and time you will start to see a meaning directionally, where is it heading.

David Lewis - Morgan Stanley

So the question has been coming up even in the first day of the conference mostly yesterday as [there have been] some lots of people how do I make a lot of money on Medtronic in spite great company there is no question. It’s heading in the right direction, new management, new focus well that’s wonderful but how do I make a lot of money for multiple extent let’s assume for the sake of the argument you get this culminate to a 5% growth consistently and someone who want to pay you 15 times for that. I think what we get a lot of concerns on from investors let’s look margins and the reality is people are saying they are paying you with the same margin multiple St. Jude and Boston in fact they are giving the discount to EBITDA relative to Boston and St. Jude you are cheaper on EBITDA you are in line on earnings and with the focus I think they were saying is you can’t drive the leverage whatever the market is going to grow they can grow at the same rate and if so you can’t drive earnings like they can. So, two things, you can’t drive earnings as fast some people don’t think frankly at your peak margins, you can drive leverage. You continually drive leverage year-on-year but there seems to be sort of fear that you cannot do that going forward why are they wrong?

Gary Ellis

Well it’s always; it’s always a little frustrating to be criticized for being the best in the industry and some saying you can’t do any better than that. (inaudible) I mean, as you have indicated yes we’ve some of the highest gross margins and operating margins in the industry and it’s because we’ve focused on this over the years and we continue to focus on driving efficiency across the organization and doing things better. And as the market leader we should do things better I mean, we should be, I mean, we should be able to leverage ourselves probably better than anybody else in the marketplace and I think we’ve been consistently doing that and that’s why we do have the leading margins at this point and time but that does not mean we’re done. There are clearly still tremendous opportunities in the organization.

As many of you know over the last five years up to FY'12 we’ve got $1 billion in product cost out. We got a program to reduce our product costs by 25% we did that. We have another program underway to take another $1.2 billion another 25% out of the next five years and it’s not just a program and we relate that, we know exactly how we’re going to do it. It takes time that these new product hit the marketplace but consolidating manufacturing and reducing designing the products for simpler manufacturing, we think we can continue to take the product cost out and maintain and potentially even improve our gross margins but clearly maintain in this operating environment.

SG&A there is still tremendous opportunity for us to continue to leverage our SG&A. The infrastructure Medtronic has already created around the world, the investments we’ve already made in the emerging markets et cetera is all paying off obviously as these emerging markets grow. So, there is a natural leverage that occurs just from the standpoint we’ve already made the investments and now we’re seeing the payback in those environments. There will be a change in the on the service component side of this as we on the monitoring capability or even like on the Cardiocom there is obviously tremendous advantages for we believe for the patients and the physicians with something like Cardiocom. But also it has potential of reducing the service burden that we have has an organization in monitoring all those pacemakers and defibrillators that are out in the marketplace. We’ll continue obviously buyback shares I mean the cash flow of their company continues to allow us and in fact continue to buy back shares in the marketplace.

So, the point is obviously when you get to a high share, when you get to a high margins is it more difficult as you move ahead, yes. But the reality is also having a team that’s been able to show that we can consistently do that and we feel very confident that we’ll continue to improve on our operating margins when you move ahead even in this very price sensitive marketplace. If we can continue to show value like we’re talking about, we believe that we can continue to drive our operating leverage not only on their earnings side but obviously financially on earnings per share with the share buyback.

David Lewis – Morgan Stanley

So, you went there in emerging markets, China that have been the focus of the company, $0.5 billion business, some could argue China is driving it got 20% a year growth rate if not higher on China alone. You’re early in this business also you walking of this year in the Chinese government is now rumbling that, we’re going to control distribution channels, we’re going to control price. You didn’t seemed very concern in this last quarter that China was going to be a risk for investors in the back half of the year, critical part of your growth rate you’re very early but is this going to be coming albatross here in the next couple of quarters?

Gary Ellis

No, we don’t believe so I mean obviously there is a lot going on in China and especially they’re watching what’s going in the pharmaceutical side of the equation because obviously that’s a little bit concerning. They’re focused on changing the distribution model in China that the government has. We’re supporting that that’s not anything new I mean there is a big focus on that. We saw through dealers and distributors right now in China and we were looking at ourselves I mean how do we change the business model and how – what’s the right focus. Actually we think that’s an opportunity not necessarily a big risk as we move ahead but we’ll have to manage that effectively and appropriately.

What you’re seeing is for example in China I mean as they’re very focused on making sure their managing pricing and the distribution model. But they’re also very focused in making sure as their government that they provide healthcare for their population. And we’re seeing as we interact with the government is that they’re clearly very focused with working with us to figure out how do we will expand the infrastructure and the ability to access to our technology out from that’s what we would call a Tier 1 cities to Tier 2 and Tier 3 cities. So, the opportunity in China in our minds is still is greater than it even has been.

Will there be some fluctuations as the government tries to adjust the dealer distributor models et cetera, the answer is yes. But we actually think that’s all upside as we move ahead. We’re watching it because obviously if something came out of the pharmaceutical investigations that kind of more focused on that from the government side, that obviously could throw a little bit of wrinkle into the whole equation. But the demand is so great in China and the government is so focused on providing healthcare to their population that we think we can manage through whatever happens in China in the near term.

David Lewis – Morgan Stanley

So, we’ve got about couple of minutes, see if there are questions for Gary but if we think about capital requirement department that kind of as they going back criticizing you for giving half of your cash back to shareholders. But look one of the ways you could set yourself apart from staying tune in Boston is pay even a bigger dividend yeah classic 3% dividend payout, get some restrictions based on where your cash is trapped. So, if you can’t pay a bigger dividend, you’re already giving back 50% of cash to shareholders. Isn’t another way to drive material increasing for shareholders to get much more aggressive on either U.S. or O-U.S. M&A?

Gary Ellis

Possibly, I mean the reality is we’re going to be disciplined on the M&A as we’ve heard you say previously on being but the reality is as you imitated we have a cash balance of cumulative downside in the United States. The growth in many of our markets is coming from the outside of the United States. And so as you’ve seen recently with like (inaudible) and few of these and even this MGC in minor investment we are making more focus on probably investments outside the United States now than we were say three or four years ago, that’s where the growth is and right now that’s where our cash is at as far as the excess cash that we were creating as a company.

As you indicated, we would love to be in a situation that we potentially to look at the dividend payouts or even share buyback on more of a flexible basis than we are currently the 50% we feel very confident in, we can maintain that. But our ability to really increase dramatically over that is obviously clearly restraining right now by the fact that much of our U.S. excuse me much of our cash flow is been generated outside the United States we can’t bring back into the U.S. without a significant penalty. And so, what we’re doing is how do we utilize that cash that is outside the United States to expand our growth. And you’re right, M&A is going to be part of that, that’s where the markets are, that’s where some of the clearly the services are being providing. And so I think you could see on the M&A side a higher percentage of the things that we are going to be doing in the future could be or U.S. oriented versus what they’ve been over the last several years.

David Lewis - Morgan Stanley

(inaudible) Gary just to wrap-up such transaction, large transactions couple of years ago, we haven’t seen many deals over $1 billion are we still on the sub $1 billion?

Gary Ellis

I mean, we I think so. I mean the reality is obviously we never say never because you had the right opportunity and we would obviously take advantage of that. But I think what you have seen is that we’re more successful with a better return related to things that are little bit smaller in size. We’re basically dropping them into the Medtronic infrastructure. We get a better return in general and we can get to the regulatory process. We can get through the commercialized and gain share much quicker when we drop them in our infrastructure. Larger acquisitions, where you are dealing with culture and more mature businesses they are harder to integrate and we haven’t been successful doing that type of acquisition. So, you never say never because there is right things out there but right now I’d say our focus is to continue what we’ve been doing recently, which is more in the smaller side.

David Lewis - Morgan Stanley

Great. With that, we’re out of time. Thanks so much for being with us here. I think we have the break. Thanks, Gary.

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