Medtronic plc (MDT) Management Presents at 13th Annual Wells Fargo Securities Healthcare Brokers Conference (Transcript)

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About: Medtronic plc (MDT)
by: SA Transcripts

Medtronic plc (NYSE:MDT) 13th Annual Wells Fargo Securities Healthcare Conference September 6, 2018 10:55 AM ET

Executives

Robert White - Executive VP & President of Minimally Invasive Therapies Group

Kristen Welnick - Investor Relations

Analysts

Lawrence Biegelsen - Wells Fargo

Operator

Good morning, everyone. I'm Larry Biegelsen, the medical device analyst at Wells Fargo, and it's my pleasure to introduce Medtronic. With us today, we have Bob White, Executive Vice President, EVP -- or Executive Vice President and Group President of The Minimally Invasive Therapies Group, or MITG. We also have Kristen Welnick, with the Investor Relations. My understanding is this is Bob's first solo performance at an investor conference.

And so a little bit of background on Bob. He was named Executive Vice President and Group President for Medtronics MITG business in late 2017. Previously, Bob served as Vice President and President of Medtronic's Asia Pacific region. He joined Medtronic on the close of the Covidien acquisition, in 2015. And I believe he joined Covidien in 2010. So just a little -- Bob will give you a little bit more color on MITG, but at a high level, it's about a $9 billion business. It accounts for about 30% total Medtronic sales. The 2 segments that Medtronic reports out are Surgical Innovations and Respiratory, Gastrointestinal and Renal, or the RGR segment. The biggest segment is Advanced Surgical. That's in the Surgical Innovations business, and that's about $4 billion business, comprised of Stapling and vessel sealing. And interestingly, emerging markets account for about 18% of MITG sales, which, I think, is higher than the overall corporate average of about 15%. So we're going to focus the discussion today on MITG. It's a moderated Q&A. If anybody in the audience has a question, please raise your hand, we'll come around with the mic.

Bob, thanks so much for being with us.

Larry, thanks for giving us the opportunity to talk here, and share a little bit about MITG.

Question-and-Answer Session

Operator

Q - Lawrence Biegelsen

Yes. So why don't we start there with maybe an overview of MITG?

Robert White

Sure. As we talked about MITG, as one of the 4 operating groups inside of Medtronic. As Larry mentioned, we're about $9 billion in size. And I think the -- what you've seen, a consistent 4-plus percent grower on net base in really good markets, which we'll get into a little bit, Larry. And here, we report the business in those 2 segments we talked about, Surgical Innovations, and then we talked about Respiratory, Gastrointestinal and Renal. And in that business is -- the respiratory business, the GI business as well as the renal care business, which we'll get into. So look, we feel good about our markets, we feel good about what we've done so far. And most importantly, and we may get into this a little bit, is the technology pipeline we have ahead of us.

Lawrence Biegelsen

That's great. So if we look at kind of your goals for the business, at the analyst meeting last May or June, I think you laid out a goal to grow mid-single digit. Corporate goal is 4-plus percent. Does that imply you expect to kind of grow a little bit ahead of the corporate average?

Robert White

No. I think the way you think about it, is you think about MITG, in line with company average, hitting about 4-plus. 4-plus, I think, is the right one. And you saw in Q1, Larry -- we posted a 5. In Q2, we've guided to 5 to 5.5. Now Q2 has gotten some favorability in it. We had a hurricane last year, so I think, across Medtronic, we've really been focused on giving guidance, that we have a high confidence in our ability to deliver. So that's the way I'd think about it.

Lawrence Biegelsen

If we look at the full year guidance for 2019, it's 4% to 4.5% for MITG, or you call it, MIT G?

Robert White

MITG, or MIT G, either one works that way.

Lawrence Biegelsen

MITG is easier for me. But given that you grew 5 in the first quarter, guiding to 5% to 5.5% in the second quarter, it implies that a deceleration in the second half of fiscal 2019. Is there anything to call out here that's driving that deceleration? Is it just the comps getting tougher?

Robert White

Look, I think we've got some tough comps in the second half of the year. I'd go back to the confidence we have in delivering that 4%, 4-plus for the year. Last year, we get a lot of tailwinds in one of our business from a -- when the flu season is a very difficult flu season for the country, the world, we benefit from that. But we're not anticipating that to recover. But in general, we feel good. We feel good about where we've guided, and our ability to deliver it.

Lawrence Biegelsen

That's helpful. And after the divestiture, what's the margin profile of MITG?

Robert White

No, that's a good point. And for those of you who know, we've divested our Patient Care, recovery business to Cardinal. And with that, we saw a nice margin accretion for the MITG business. What we disclosed publicly at the group level includes some corporate costs, and so it's not exactly apples-to-apples. But the way to think about it is that the MITG group, when we talk about high 30s, is right in line with CVG and RTG, so we saw a nice margin accretion from that portfolio management.

Lawrence Biegelsen

It's helpful. So let's start with the surgical robot. We're focused on that at this conference. It's a big focus of investors. So I know you're limited in what you can say. But what's your high-level view of surgical robotics in general?

Robert White

Yes, sure. Look, we're really excited. We're excited about -- it's really opening up the opportunity for robotic-assisted surgery to the broader world. And I think you've got to think about this in context, which is, there are roughly 50 million procedures in our area of focus that take place every year. And of those 50 million, Larry, 60% are done in open surgery, which means, the balance are minimally invasive. So -- but if you take that 60% that are done open, we think 90% of that could be done either traditional laparoscopically, or with robotic-assisted surgery. But then, you ask yourself, today, globally, we think robotic-assisted surgery is only a 2% penetration; maybe in the U.S., it's 5%, still the opportunity is enormous. But then we get to ask about, well, how -- and you get past those barriers -- but your question was really why do we feel good about the opportunity? It's that. It's 95% of those procedures are not being done with minimally invasive, or robotic today, and there's a real opportunity for us.

Lawrence Biegelsen

So what do you think surgical robotics bring to the table that some technology doesn't?

Robert White

Yes. Well, look, so I think the benefits the marketplace has seen from robotic-assisted surgery, I like to think about it as kind of better eyes for the surgeon because you get visualization, better hands because you get better dexterity and certainly, you get ergonomic benefits. But yet, we've hit this barrier. And I think we hit this barrier, a couple of big barriers. One, the utilization barrier, in terms of, one, the number of the procedures that are done, but also, how often the robot gets used every day. And two, a cost barrier, which is how on a per-procedure basis, can you get a robotic-assisted surgery at the cost of laparoscopy. And I think that's a challenge that we can take on, and you do that through the way you think about the flexible design in your system, you think about that through the lens of the instrumentation you use. And so that's what it brings us, and we think we've got some pretty thoughtful ways to think about the barriers as well.

Lawrence Biegelsen

But how do you break through that utilization barrier?

Robert White

Yes. And so I think, the first thing you keep in mind is that we've been developing surgical products for a long time. And so we really understand surgeons. And the way you break through that barrier is first, designing a system that is flexible and therefore, it can do multiple procedures in multiple rooms. And so you create this opportunity not to have just a rigid approach to use it. But then, very importantly, you leverage the tools that the surgeons have come to know a lot, and we feel pretty confident in that. And so you'll see this flexibility approach, this focus on the surgeon, interface, the surgeon tools that you use, as an area, we believe, we're going to focus.

Lawrence Biegelsen

And I think you expect the full launch in the fiscal 2020.

Robert White

So look, what we said in Investor Day was an FY '20 launch, our fiscal year, we're right on track with that. We continue to have surgeons -- have experience on the system, we love the feedback we get. But importantly, for us, it's bringing this complicated system to the market when it's right. And so we feel good about our time line, we feel good about the progress we're making, most importantly, we feel good about the feedback we're getting from surgeons as they use the system.

Lawrence Biegelsen

And time -- milestones that you...

Robert White

Look, I think the big milestones you should hold us accountable for is that FY '20 launch. You know what I mean? If there's something material in there, then we'll certainly let you know, but that's the way we think about it.

Lawrence Biegelsen

Then in terms of competition, I think the perception among investors is that you're intuitive. It's so well entrenched. It's going to be difficult for newcomers like Medtronic to break into the market. What's your perspective?

Robert White

Yes. Well, my first perspective is that you just called Medtronic a newcomer to surgery. So we've been bringing surgical products to the marketplace for 60 years. We were the pioneers in minimally invasive surgery. I go back to the opportunity of -- focused on the 95% that is not being done in either minimally invasively, or robotic-assisted surgery, and focus there. The other thing I'd add -- I'd offer you as a perspective, is that every year, we train tens of thousands of surgeons, in surgery, using tools. I also every day send thousands of commercial people into the marketplace into surgeries, to talk and meet with surgeons. So from a breadth and a scale standpoint, we feel really good about our technology portfolio. The innovations in this core Advanced Energy and surgical business and how that will play into robotics. So -- and Larry, I don't know what your perspective, I don't know of a single med tech market that only has a single player in this big and exciting as the marketplace. So I think for all the competitors who enter into this robotics space though, all have to prove their value proposition. But it's a great market to be in, and I think, we feel pretty confident in our ability to -- and our right to win.

Lawrence Biegelsen

All right, perfect. So let's transition to kind of the current business, starting with Surgical Innovation. It's about 70% of your total business. It's a -- it grew 5 to 6 mid-single digit -- maybe a little bit better in Q1. What's driving that growth?

Robert White

When you think about that surgical business, you really think about the technology pipeline. Procedures have been largely stable for us. And we see certainly in the U.S. these procedures of 1% to 2%. But what we've really been fortunate to do is lean on our technology innovation. So you first think about that in terms of Advanced Stapling, right? You mentioned that as a category. In Advanced Stapling, our Signia stapler has exceeded our very high internal expectations. And why it has, I think, it's a technology that gives the surgeon real-time feedback. It has an adaptive firing technology, so that the stapler speeds up, or slows down -- it adjusts to the variability and the thickness of the tissue. And so it's truly delivering great results. So we feel good about that. And if you think about that, we should be fully launched around the world, maybe with the exception of China in FY '19. I think China will come past that. So we feel really good about that. And so what's driving growth, is product innovation. And then, if you think about the Advanced Energy platform, we've seen really good success. And it's hard to believe that LigaSure has celebrated its 20th anniversary. But what you see then is our commitment to innovation. And so the LigaSure products that you see today, the innovation, the new products, the ones that are applicable to gyn and colorectal surgery, LigaSure exact which does find dissection. What you see is a portfolio here that continues to meet the needs of surgeons in the marketplace. And so that's why we feel good. And I think I shared this at Analyst Day. When you step back and look at MITG, we've got, over the next 5-ish years, 75 products that are coming to the marketplace. And when we think about our innovation pipeline, we think about this, and this is true across Medtronic. We think about what can you continually innovate on, where can you invent, and where can you disrupt. And on this continuous innovation, you look at Signia, you look at LigaSure, you look at some of these products, and you're just seeing really nice growth.

Lawrence Biegelsen

And the colorectal stapler, how big do you think is that?

Robert White

Yes. So thanks for bringing that one up, too. So what's the big deal about a colorectal stapling? And you've got to go inside colorectal surgery and know that surgeon gets one shot at making the anastomosis correct if he rejoins or she rejoins that. And the colorectal stapler is the first time ever that a circular staple has our Tri-Staple technology. And that Tri-Staple technology does a couple of really unique and differentiated things. One there's less stress on the tissue; two, there's greater profusion; and then, three, the outcomes are excellent. And so you manage that Tri-Staple technology with that colorectal staple, and all of a sudden, you've got a device that surgeons are really confident in. So that's why that's important, too. That's another one when I talk about kind of this innovation pipeline, look at this Tri-Staple, and how that continues to expand and grow. And that's interesting, Larry. I was mentioning it to somebody today, and they were asking me about robotics and how we think about the volumes and stuff. I said, look, which is a hypothetical case, if the leader in the marketplace today sells 200,000 surgical staplers a year, I make well over 100,000 every week, so just that -- again, why do I feel confident about our ability to be in the space, it's because of our commitment to size and scale and what we've done.

Lawrence Biegelsen

And the colorectal stapler, is that a fiscal 2019 one?

Robert White

Yes. So thanks, Larry. I think we're going to be -- It's clearly going to be in the market in '19, full commercialization in '20 by the regions. Yes.

Lawrence Biegelsen

Okay. And just -- can you ballpark? I mean that's -- Stapling is a $2 billion business for you, the stapler. How big of an opportunity is that for colorectal stapling?

Robert White

Look, I don't know that we disclose specific numbers around the colorectal stapler. I would just say, colorectal procedures are a very important procedure, and they're growing, right? So we view it as a meaningful addition to the portfolio, not just are nice to have.

Lawrence Biegelsen

And sticking with Advanced Surgical, hernia is still a big business for you, by our estimates, maybe, $0.5 billion.

Robert White

Yes.

Lawrence Biegelsen

But that's actually growing below the 2 businesses we just talked about. What's the outlook for your hernia businesses?

Robert White

I look at hernia -- when I looked at MITG, what we look at our 6 fundamental growth drivers, Larry, that will one get disproportional among our investment and unlock growth for us in the future. And specialty surgery focus is one of those growth drivers, right? So when I look at a gyn, colorectal, hernia, lung, these are areas that, we believe, continue to offer growth. The question about hernia -- look, I think, hernia -- I'd like our product portfolio there, in terms of where we're at or the mesh and the fixation standpoint. I'd also like where it fits in the portfolio, from a focused standpoint. So as you mentioned, it's a big business for us, and we're pretty pleased with where we're at.

Lawrence Biegelsen

Yes. The other -- so RGR is about 1/3, or $2.5 billion in sales. That's actually growing below overall MITG. Can you talk a little bit about -- just kind of give us an overview of that business and what's driving the growth, maybe what's growing below the MITG, what's dragging the growth down?

Robert White

Yes. So when you think about the RGR business, some of those businesses are in slower-growth markets, and there's an airways business in that portfolio. And others are in very good growth markets. You think about GI, right, a good -- so we think about renal care, which we'll touch on, is also kind of externally reported in that business as well. But then also, when you look at that RGR business, I talked about our 6 growth drivers -- and it's worthwhile when we're talking about those -- one, advancing MIS, which we talked about; emerging markets, which maybe we can come back and talk on; but the third one is this advanced parameters and informatics, and that sits right within the RGR business, and I'll come back to that; just the other ones, GI disease, renal care and specialty surgery at the balance. But let me kind of come back to this advanced parameters because that's right within the business you talked about, Larry, which is -- I think about advanced parameters as giving an early warning to a clinician to take action. And so what's an example of that? If you think about capnography, which has been a great growth driver for this business, strong double-digit growth. We launched last year our capnography 35, which again, both as a monitor and a consumable in a sensor. What it does is it measures exhaled CO2. And so the nice thing about this is this gives an early warning of respiratory failure. And so we see this advanced parameters as a real growth opportunity within RGR business. So while some markets may be slow, there's other segments in there. So that's where we've been very focused on, identifying the growth drivers, and then allocating our capital appropriately to those. Does that make sense?

Lawrence Biegelsen

That makes sense.

Robert White

So that's a little bit of the RGR business for us. We'll talk more about that.

Lawrence Biegelsen

You touched upon renal, so that seems to, at least to me, maybe, one of your more exciting pipeline opportunities. You've talked about the multi-pass hemodialysis system. Could you kind of -- can you give us an overview of that, and what your vision is for that business.

Robert White

Yes. No -- I think that's right, because the renal care business itself -- the renal care market, as you know, is very large. And in some elements of it clearly dominated by a few big players. The thing I'd offer you about our renal care business is, one, it's a very global business. Most of our business is outside of the U.S. And if you think about our transition and view of the renal care business was -- back in 2014, 2015, we started to talk about and think about how we could just bring a disruptive hemodialysis technology to the marketplace. And I'll come around that. But then you think about the journey, it's been interesting, because then we acquired Covidien. Covidien brought us critical mass in terms of renal access catheters. Then we made this acquisition of Bellco in Europe. And now we're poised to get ready to bring to market our multi-pass system that you referred to. We think this falls in that transformative category, right, because of not only the footprint, the water usage, the clinical outcomes. And so we believe, and I think publicly, we've talked about preparing for like an FY '20 CE Mark for this product. This one, again, though, if you think about where the market is moving to, this isn't necessarily for kind of the big stand-alone dialysis clinics. This will fit really well in the micro clinics, in the home as well. So we think it could be disruptive. We're excited about where it's going to go.

Lawrence Biegelsen

But what are the milestones before you can launch in fiscal 2020?

Robert White

Look, I mean, as you are anticipating, and all the usual milestones, right? So is the clinical proceeding? Are you retiring the technical risks? Are you engaging with the right regulatory and competent authorities around the world, right? So all of those same milestones apply, and we feel on track with we're at. We feel really good about the program, actually.

Lawrence Biegelsen

There's a competitor in the market that's launched in the U.S., Outset Medical. They have a system called Tablo. It looks at least -- looking at the pictures, it's not too different from your system. How would you compare and contrast the system?

Robert White

Well, when I -- much like robotics, I love when multiple entrants come into the marketplace. One, it tells you that you're in a market where people are interested in. I don't know the specifics on the Tablo system. One of the things that we try to think about is, do you have flow rates, correcting variable? What's your energy consumption? How are you thinking about water? So look, I think we'll position ourselves very favorably to Tablo. Like I said, in general, I'm glad to see multiple entrants into a market space that we're excited about.

Lawrence Biegelsen

And why have you only talked about CE Mark? Is this more of an o U.S. opportunity?

Robert White

Yes, it's a good question, Larry. I mean, we think very globally in our approach. And when I think about the millions of patients who don't have access to a dialysis. I don't mean to exclude the U.S. market from that because the U.S. market is a fine market, but there are such good growth opportunities outside of the U.S. It's just been natural for us to think where that growth could come from outside first.

Lawrence Biegelsen

And in terms of device and service, you guys, I think, have done some work on the service side, in renal. How do you see yourself 5 years from now, more of a device company, or a device and service provider?

Robert White

Yes. Look, I think one thing we've been really clear across Medtronic is we're going to lead with therapy innovation, which is devices. You're going to continue to see, just a great pipeline of innovation across the 4 groups, and MITG certainly. You'd always expect us to be leading edge for technology, that's most important. But understanding that it can't just be technology without understanding where it fits in the continuum, and what around that value proposition, do we need to provide. So I think you can expect to see us continue to partner, build, develop those corollary capabilities to make sure our value proposition works best, right? And that's market specific, right, Larry? You'll see us do things different in China than we would in Western Europe, for example.

Lawrence Biegelsen

We talked about some important pipeline products. We talked about the robot. We talked about the hemodialysis system. We talked about the colorectal staple. I think, at analyst meeting, you talked about 70-or-so new products. What are some others that we didn't talk about this morning that you're excited about?

Robert White

Well, look, I think within each one of those portfolios, the one we just -- we haven't talked about, we talked about surgery -- within the GI space, pretty exciting technologies. As you know, we're the market leader with PillCam. I'm really excited about the technology that's coming on there, that we think will be very disruptive. And it is organic, what we're working on, which will take both the reading time short and non-traumatically, looking at artificial intelligence. It's around image processing and how we do that. So we feel really good about that. Look, we feel good about alone, and where with those technologies as well. So that 75 products over the next 5 years, I think, builds on a story that says we lead with technology innovation, with consistent execution. And that's you get almost $9 billion business without robotics, growing at that 4-plus range. And then, you take robotics on top of that, and I think you've got a business you should feel really good about we do.

Lawrence Biegelsen

The lung, you're talking about superDimension. This is a relatively small product today, is that fair? I know you're presenting the 1 year navigate data, that's a big outcomes trial that you guys have been working on for many years, at the Lung meeting, which I think, it's 25th or so of September. How much of a catalyst, assuming that data is positive, how much of a catalyst is that 1-year data to (inaudible) 2-year data...

Robert White

Yes, I think so. I mean, we're going to -- I think, we talked about the study here, as you mentioned, at the 25, but then we're going to really look at the 2-year data as well. But I think, importantly, when we think about lung, I don't just think about the superD because when you think about lung, we have this how do you identify the patients, right? How do you diagnose it? And then how do you treat it? And so one of the areas were excited about you saw or read about is this lung GPS, right, which is how do you identify those nodules, early because badly, 30% of lung patients are identified when it's too late for surgery. And then if you can identify those patients earlier, you know the clinical outcomes better. And then as you know, that thoracic market, from our surgery businesses, is very big for us, right? We do a lot, $400 million, $500 million in that thoracic space. And there are still almost 1 million lung procedures done every year. So both the surgical piece of lung is good as well as with think about this identify, diagnose and treat the lung patient, so the treat part.

Some of your competitors are raising, to kind of marry the diagnostic and therapeutics, or it's obviously has a joint venture, or in agreement with J&J and their new wave. I don't know if we've heard from you, where superDimension is diagnosis. I don't know if we heard from you...

Yes. Well, we're excited about the pipeline that we're talking about. Past that as well that gets you into the treatment space. But I think you're right, this is a space that can be very dynamic over the next several years. So I think -- we believe in lung, we're confident in lung, and I would think you both continue to see us invest organically on developments to make sure that we're well position in that space, but clearly, as you mentioned, there's a lot of...

Lawrence Biegelsen

There's a lot of therapeutic benefit that's something that you would do organically, internally or [indiscernible]

Robert White

The way we think talked about it, we think (inaudible) place, right? And we think by far, our best return on investments is organic development. And so we spend a lot in that 75 products in the pipeline. But also, as you know, and Medtronic itself, we're very active in understanding where those technologies in the marketplace that we don't have, and what makes sense there, whether it's a early relationship or an acquisition, we look through that pretty systematically.

Lawrence Biegelsen

One question on emerging markets. So correct me if I'm wrong, but I think your growth was only about 7%, fiscal Q1, in emerging markets. It was a little below the company average, and I think, below trend for you. Anything to call out there?

Robert White

No. Look, I think it was planned because we knew we were making a -- you probably notice we're making this company-wide transition to a single SAP system, which we're really excited about. We knew that Latin America was going to take place, so we moved a lot of that growth, took it down for that reason. You should feel confident that, that snuffs right back into double digits. We feel really good, not only about Lat Am, but our growth in China, Southeast Asia, Middle East continue to be a nice growth driver for us.

Lawrence Biegelsen

Let me sneak one more in. M&A. Medtronic has been very quiet, even in tuck-in deals. What's your appetite for M&A within MITG?

Robert White

Look -- I mean, I think our appetite is good. We run a very disciplined process. It's monthly, as I imagine, most good companies do, where I take those 6 fundamental growth drivers that are going to unlock growth for MITG over the long haul. I look at the organic pipeline and where we're positioned. I look at where those gaps, and those adjacencies, not big, transformative stuff, but tuck-ins acquisitions, technologies that I need and -- but very active in discussions as well as looking at opportunities. But it comes down to finding that right fit at the right price, and getting the deal done. So yes, I'd say, good understanding, good discussions and very active in that inorganic look as well. We never keep it to ourselves.

Lawrence Biegelsen

Perfect. Bob, thanks so much for being with us. Great overview.

Robert White

It's been a pleasure. Yes, thank you.

Lawrence Biegelsen

Thanks.++++