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Medtronic, Inc. (NYSE:MDT)

25th Annual Piper Jaffray Healthcare Conference Call

December 3, 2013 1:30 PM ET

Executives

Michael J. Coyle – Executive Vice President and Group President-Cardiac and Vascular Group

Analysts

Brooks E. West – Piper Jaffray, Inc.

Brooks E. West – Piper Jaffray, Inc.

Okay, are we loud? Great. So welcome to the next session. My name is Brooks West. I’m one of the senior analysts on the healthcare team here at Piper Jaffray and I’m very pleased to have Mike Coyle, who is the Group President of Cardiac and Vascular at Medtronic. Mike thanks for coming.

Michael J. Coyle

Thanks for the invitation.

Brooks E. West – Piper Jaffray, Inc.

So I want to start with a theme who’s in exploring with a lot of our cardio companies and Mike really everybody is keying of the numbers you guys recently reported. We seem to be in a position where we’re talking about volume growth again. And I would have bet you any amount of money last year at this time that we would never have gotten back to talking about volume growth again. So as you think about your franchise at Medtronic broadly defined, has this returned to volume growth, opened up newer opportunities, because it allows you to think differently about your business as you think about for the next two, three years?

Michael J. Coyle

Yes, I think one of the things that’s been encouraging is that we’ve seen procedure volumes in ICDs, in particular, Pacing, to the rest of the them in the U.S., but certainly globally now come back to stabilized implant rates, which obviously is a much better place than where we were five and six quarter ago, where we were seeing meaningful decline, and in addition, we’re seeing some stabilization in the pricing associated with especially new product launches, where we’ve been able to get some premiums on the proven features, although we’re still seeing some of the mid tier technologies, some continued pricing pressure.

So what that really has done is in our biggest markets, in Pacing and ICD, has put us in a position, where is a hole that had to be filled by the growth isn’t there anymore and so you can start to see the growth areas and that’s particularly important to us as we now sort of head into the next six quarters, where we have a number of fundamental new therapy innovations that are going to be coming to market, U.S. launch of the CoreValve product.

We’ll be looking at the renal denervation here by the end of next fiscal year, drug-eluting balloons in the FFA application by the early part of our FY16. New technologies will [indiscernible] quarters, which we think can expand that market opportunity and obviously continued growth and things like paroxysmal atrial fibrillation therapy. So those items really now, I think, can become visible because they are not filling in for lots of growth.

Brooks E. West – Piper Jaffray, Inc.

And I want to explore that in a minute because you talked about over the next six quarters in your franchise as being some of the best pipeline driven growth that Medtronic’s had in a long, long time, which is great, but go back to the thought of you’re not filling up the hole anymore. I mean, you are generating more revenue for you guys in particular, giving you operating margin structure, gives you more cash, do you get to think a little bit differently? Can you invest more? Can you accelerate anything? Can you think about acquisitions now that maybe you didn’t have before? I always press you on AF ablation. Does it allow you to just think a little bit differently about the business or is it more just stay confidence on what we’re doing and we’re going to move forward?

Michael J. Coyle

Yes, I think if you look back over the last couple of years, we had reasonably balanced growth coming from internal innovation and decent cash for external acquisition. So I would be point to Endurant on the AAA side, Valiant Captivia on the thoracic, abdominal aortic side, and Resolute Integrity product line in the coronary space and of course the Advisa MRI in Pacing, the Viva/Brava and the various product lines in ICDs and CRT, also an internal development activity and obviously the ability to now not be filling in that hole, but just continuing to invest in these pipelines. So we’ve also completed that with, I think, acquisition activity into those we thought were fundamentally interesting growth areas like transcatheter valves and renal denervation and drug-eluting balloons. So from my perspective, this will give us a little more comfort in being able to make those investments just because we have a little more capacity to do it.

Brooks E. West – Piper Jaffray, Inc.

Okay. Fair enough. And a big room, lot of people and please raise your hand if you got a question, we’ll do our best get you involved. Let’s talk about, as we think through the next six quarters, let’s run through the highlights. You’ve had a lot of questions on transcatheter valves and your entry into the U.S. market, maybe that’s a good place to start, but just kind of walk through those quarters and let’s pick one by one those major growth drivers?

Michael J. Coyle

Sure. Just from a timing perspective, the near-term opportunities we see are clearly U.S. approval of the CoreValve product line at TCT or just a couple of weeks back we were able to announce both the dataset that supports the submission for the extreme risk group and then obviously the opportunity to bifurcate the approval timelines in bypass to panel, which basically puts us in a position, where we should be able to enter the extreme risk group here by the end of our fiscal year, which would be the end of April of next year. Then that would be followed on with the release of the high risk randomized dataset, which we should be seeing at ACC in March, which then should set us up for sort of a mid year FY15 opportunity for release there.

We have our next generation [indiscernible], which is basically instead of the implantable pacemaker like product that we’ve had here historically, a subcutaneously implanted device that helps in treat [indiscernible] patients with atrial fibrillation with [indiscernible] syncope and can be used in patient management and things like heat failures that we’re very excited about, which will be a fourth quarter – our current fiscal year launch.

By the time we get to the end of next fiscal year, we’ll be looking at renal denervation for the extreme risk group, which basically the data will be available we believe in the spring to be able to share that and would be the first approved renal denervation product data that supports that and available to us in the marketplace by the end of next fiscal year.

And then the drug-eluting balloon application for SFA, which we’re considering in and of itself could be a potential $1 dollar market if data supports it, we’ll be able to get visibility to those data by the Charing Cross Meeting in April of next year, so opening up a new sort of [indiscernible] if you will in the peripheral space for us in those data to support that launch. And then in things like the pacemaker space, we’ll be doing our first [indiscernible] implant yet this year – this calendar year for our approach to that therapy and so by the end of next fiscal year, we should be looking at CE Mark for that technology, so a lot of activity taking place in each one of the businesses in these growth – [indiscernible] growth driver activity.

Brooks E. West – Piper Jaffray, Inc.

Let me spend just a little bit time on CoreValve, which is probably where we get most of our questions these days. You have 60 centers in – that have been trained on the device?

Michael J. Coyle

45 in the extreme risk group that’s were the basis for the approval and then other 15, which were added for the [indiscernible]…

Brooks E. West – Piper Jaffray, Inc.

For the [indiscernible] moderate risk, okay. And there are centers obviously all using [indiscernible] right now. So talk about your questions on ramping, how do you introduce, is there a training curve, how should we think about the ramp of CoreValve launch as you come into the market?

Michael J. Coyle

well, obviously, the data that we presented at TCT really put us in a position to point the physician base that is interested in this technology to some fairly distinct differences between a self-expanding design and a balloon-expandable design, which is what they have been used to in the commercial market here in the U.S. and we saw not only lower rates, but improving rates of paravalvular leaks on a matched patient basis, which is something very new in terms of the data and shows that your self-expanded technology really differentiates in terms of improving long-term outcomes in paravalvular leaks and stroke rates that were roughly half of what we saw in competitive products, where no one can’t necessarily compare this one-for-one, the patient populations that we were studying, look extremely similar between the two, and so having lower stroke rates and then having those lower in the continue to access protocol, we really think puts us in a position to highly differentiate on a clinical performance basis the CoreValve product line. In addition, it offers a much modular way of sizes and obviously a lower profile for using patients with the more challenged vascular systems that is currently available in the marketplace.

So these are items that we think we can position very effectively. as you point out, we’ve already trained and have the capacity to launch into the 60 centers that have now had experience with CoreValve. I believe that the number would probably be somewhere closer to 200 of total sites that have had experience now in the U.S. with the transcatheter valve, so that second group of hospitals that have experienced the transcatheter valve, but not necessarily the CoreValve are a group that we have then target to be the primary training area for us.

Brooks E. West – Piper Jaffray, Inc.

Okay.

Michael J. Coyle

And obviously, the fact that we can offer a broader range of sizes and delivery routes should give us ready access to those centers from the standpoint of we think they’ll be very anxious to get hold of this kind of technology to show this patient they currently either can’t service or can only service under restricted protocol. So we think that’s a real opportunity as we move into market.

Brooks E. West – Piper Jaffray, Inc.

Okay. So obviously, there are some technique differences between the products [indiscernible]. Can we expect that similar to how you launch Resolute, you’re going to go out and potentially call 200 hospitals out of that or do you feel like you need to have a training ramp as you go?

Michael J. Coyle

Yes, I think this is a different technology than the drug-eluting stents, where essentially we could put them on the shelf and they’re going to be taken off and used by the physicians with very minimal trainings [indiscernible] so similar in the way they deployed to what else that’s available before from us and from other competitors. This is different in terms of – it is a different technique, there’s – it’s very training intensive. We obviously are going to be very careful to make sure sites are fully trained and learned from what we have learned both in Europe and in the clinical studies in the U.S., how best to deploy these devices. and so that they can get the kind of results that we saw in the clinical study execute again in the U.S. So I think it’d be fair to say it could take up to a quarter to ramp an individual site to a level of proficiency that we would be comfortable and basically saying that is ready to go generally. But we have trained proctors all over the world, because this product has been real outside the U.S. for quite sometime. And so we will be deploying many individuals here to the U.S. to help with that activity.

Brooks E. West – Piper Jaffray, Inc.

Okay. Last question on [Indiscernible] I want to relate that to comments you’ve made about improving paravalvular leak overtime and obviously relating that to stroke. So for the [indiscernible] who says, hey, is there going to be a problem in the U.S., because of the 20% Paceart. how do you in reality think the market is going to react to that, given potentially the action for paravalvular leak and stroke?

Michael J. Coyle

Well, the first thing I would point to the experience in Europe, where we essentially split the market with Edwards and obviously the pacemaker rates are higher in self-expanding design the way CoreValve is designed, then the balloon-expandable. And up until now, I think you can mostly list them has been, well, that’s the downside and there’s no upside in the comparison. I think what was important in the data that we’ve shown in extreme risk group with those benefits especially in the paravalvular leak are complications that are correlated to mortality in these patients, whereas pacemakers, we were able to show in our dataset have no correlation to mortality and in fact, patients have very good quality, the high schoolers and obviously as the leading global manufacturing pacemakers, we don’t think that’s a coincidence, I mean these patients feel that. So from a clinician standpoint, they’re going to be weighing those benefits in per revenue week and potential stroke reduction against the pacemaker rates. And generally speaking, I would say that that is now a done deal in their mind, but from a clinical perspective, the better outcome is what they’re going to be looking for.

On the other hand, when we start to talk about the cost, we have to start to look out is that going to add cost to [indiscernible] procedure. But our point of view would be, if you wind up and being able to show better outcomes in Medtronic’s in-patients, you’re going to have cost benefits from that outcome. So generally speaking, we expect pacemakers to get bettered out with the experience in Europe and we think we will be able to sell very effectively with the dataset on the basis of this design is being differentiated from what is currently available.

Question-and-Answer Session

Brooks E. West – Piper Jaffray, Inc.

Question from [indiscernible]. One more on electrophysiology, you built your key businesses before – your businesses before, if there is a hole in your portfolio right now maybe it’s – maybe, it’s there…

Michael J. Coyle

We talk about that all the time.

Brooks E. West – Piper Jaffray, Inc.

What’s your thought there, I mean you gave your [indiscernible] or are you going at the look at is that an immediacy in terms of you maybe filling out some products.

Michael J. Coyle

So our overall portfolio in [indiscernible] EP is going in the 20s and so it is growing faster than the market. so you are taking market share and the use of our especially prior technologies, the arctic front device in isolating pulmonary veins is going north of 30%. So we basically in a paroxysmal space like the trajectory of that business where isolation of pulmonary veins is sufficient to be able to treat the patient.

Obviously, we see a big opportunity with persistent atrial fibrillation down the line. We are just releasing the PVAC GOLD products in Europe, which we think is a play in addition to the use of [indiscernible] product line to be able to generate data and support of a use of these technologies and persistent atrial fibrillation, which by the way in U.S., nobody has made an indication for.

So we have the study of that – those product lines going on for more persistent atrial fibrillation and we continue to look at whether some of the recent developments around for example, radar mapping, we will provide a new opportunity to identify substrates for ablation that can complement where we are already doing in pulmonary vein isolation. so we will continue to invest in our place, because it’s a very interesting space. We like the growth profile in our business and we expect to be shared thinkers in the business going forward.

Brooks E. West – Piper Jaffray, Inc.

Okay, fair enough. We’ll talk about heart failure broadly and I want to talk about the Cardiocom business. there has been a lot of buzz recently about St. Jude’s in a potential acquisition of CardioMEMS, you’re approaching heart failure monitoring a bit differently and I’d like to tease out kind of how you’re approaching both on the product side, but also on the monitoring side and talk a little bit about Cardiocom and how that fits in and what is the larger opportunity that it presents for Medtronic?

Michael J. Coyle

So heart failure is a very expensive problem for the healthcare systems generally [indiscernible], but we sort of break it up in our mind in terms of two questions. One is a short-term heart failure problem that is there is a very high rate of rehospitalization of patients who discharge heart failure, some case [indiscernible] up to 25% of patients discharged with from the heart failure hospitalization will be back in the hospital within 30 days and then there is a longer-term issue of these patients having a chronic condition that periodically results in the need for hospitalization.

We have tended to focus in the recent time on that first problem of acute discharge, the hospitalization for the simple reason that it is unambiguous that this is a big significant economic problem for hospitals, mostly because CMS has decided that they are going to impose reimbursement penalties on hospitals that wind up with higher rates of rehospitalization after discharge for heart failure. And those penalties are significant last year, it was up to 1% next year, will be up to 2% of reductions in our reimbursement and then – and I’m not talking about just heart failure of reimbursement, but the reimbursement in general from CMS.

So there is a lot of focus in the cardiovascular line administrators that we interact with to say help us with this problem. Cardiocom is a solution that basically is an episodic solution for heart failure. We are basically saying on discharge, if the patient is provided with an iPad light device that is a smart system that let’s the patient relate their symptoms, did they take their medication, do they have shortness of breath et cetera, and it is supplemented with Bluetooth based measurements like weight scales and blood pressure cuts.

And these data are then provided to a call center that is manned by expert nursing staffs, but basically available to take numerous patients at one time and look at all those signals in these data, based on prior experience with these signals I would say these patients were at risk for rehospitalization, they should be seeing their primary care physician before they wind up being in an emergency room entrance at a hospital, which [indiscernible] reimbursed and then result in these penalties that could happen [indiscernible] hospitals.

So that model is what I would call an episodic model, meaning that it’s happening within a very defined period, 30 days for heart failure, some patients would say they want to look for 60 days or 90 days and what Cardiocom does is, basically we have a subscription model, where they provide the services to the patients doing this discharge window.

We think that is a perfect application for the type of technology that Cardiocom has and when you broaden it under the Medtronic umbrella, there are a number of features like the [indiscernible] product I referenced earlier [indiscernible] a patch technology, which we haven’t thought much about, but is something that we have been working with the third-party on that will be coming into our portfolio very soon, and then the things like the features in our device is more adoptable, which is a fluid status measurement to measure heart rate variability in our devices.

These are things that can provide increased specificity that patients who are at risk for rehospitalization are identified before they come back into the hospital and it can be sold on a services basis, sold on a subscription fee basis, so that was a primary driver behind the Cardiocom acquisition, not the only one, they also had services for diabetes – patients with diabetes, for the patients with hypertension that we think we can use in other ways in other parts of Medtronic, that gives you a good sense of the strategic rationale behind that.

Brooks E. West – Piper Jaffray, Inc.

Good.

Michael J. Coyle

This longer-term question about CardioMEMS, a permanent implant to help manage patients, it would be very interesting to see how that plays out from the standpoint that you probably recall that Medtronic 10 years ago had done very expensive clinical analysis around a similar pressure sensing device chronicle, and we frankly had a lot of difficulty teasing out what was the contribution of the expensive implants and the expensive pressure sensing device versus just the attention being paid to the patient by the nursing staff that was actually reviewing that and other data, and that basically caused us to back away from the approach.

You’ll probably recall that panel, which came up the first time around with CardioMEMS is it [indiscernible] affecting the data or is it real, that to me is still being discussed and we’ll see where FDA comes out on that question. but from my perspective, the idea of using non-permanent, less expensive measures in conjunction with symptom analysis with the patients that using connectivity to do it may provide a kind of episodic opportunity to manage these patients at a more cost effective way than putting in a permanent implant for the patient. We’ll see where it goes.

Brooks E. West – Piper Jaffray, Inc.

Okay. Fair enough. Let me – we got a just couple of minutes left here, let’s just finish up on international. we see each other in Minneapolis airport far too often, almost got you on planes quite a bit, the notion of emerging markets, a bogey was set out at kind of 20% growth and this is going to be a key driver for Medtronic. You guys have been bouncing around, still good growth, but not up to that 20% range, a piece of that right now is obviously it’s a big piece of that pie, your growth rate is, call it in the 15% range to get to the corporate 20%. how do we think about your emerging market business, is 20% not the right bogey, how do we think about that over time and kind of talk about that those markets and some of the products within those markets?

Michael J. Coyle

So the underlying aspirational growth objective of 20% was really driven by the fact that for most of our therapy, the vast majority of our internal therapies and you could probably say all, except maybe DBS are under-penetrated in most of the emerging – if not all of the emerging markets, relative to standard of care and how you deal it with the examples just because you have tended to have higher penetration rate.

So if one just looks at the numbers, the affordable population within these – the populations with sufficient means to be able to pay for these therapies, we should be seeing higher growth in those markets that should see that if we’d be able to approach that level.

I would say the important thing that has – that Omar has brought to the company is a very systematic approach to the identification of what are the specific barriers that are keeping us from being able to get to standard of care, therapy-by-therapy across Medtronic and we have a tool – proprietary tool in the Medtronic called patient acceleration – access acceleration model that basically identifies all of the key contributors to being able to have a successful therapy adoption being here.

do you have enough trained physicians, do you have payment systems available, do you have the infrastructure to be able to carry out the procedure base, is there a reimbursement available, is there a clinical evidence that’s been generated that’s convincing to the physician base and on and on and on. Those – what we have basically done is we used that tool to go business-by-business and therapy-by-therapy to say what do we have to knock down to get this therapy to standard of care in this specific market.

Those data then used by the local leadership of the countries to say what are the best bets, which ones should we invest in to drive which therapies is the quickest in these markets and I think that approach is going to pay off for us very effectively. I think what you’ve seen in terms of the bouncing around of the growth rates within emerging markets has really been a function of some of the discontinuities that occur in these markets.

Whether it’s – in India, for example, we just saw a government reimbursement for – government set pricing in a public sector for BESP [ph] dropped 60% overnight, couple of quarters ago, two quarters ago, that basically we’re now in a process of working with them on, all you are doing is taking the multinational products that have real data associated with them and moving them out into the market, is that really what you want to do for your patients, we’ll have a relation with them on that, if we get that resolved with them that kind of bogey goes away, if it doesn’t, a year later, we’ve lacked that issue, the procedure growth rates are still 20% plus growth. So we’ll get back on the growth trajectory and trajectory after the discontinuity, and these things happen in China with distributor disruption et cetera.

So I think what, the trick from my perspective is to have a broad enough portfolio of investments across all of our therapies that we can weather the unusual events that happen because of the more, let’s just say less efficient market activities that take place in some of these different markets, but it doesn’t change the underlying set of assumptions that if you knock down the barriers to get to the standard of care, you will ultimately have much better growth rates in emerging markets than we see in the developed markets.

Brooks E. West – Piper Jaffray, Inc.

Okay. I think that’s a good place to stop. Mike thanks again, for coming on.

Michael J. Coyle

Great, thank you.

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