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Medtronic CEO Omar Ishrak Discusses Q4 2014 Earnings Results

At ACC in late March, impressive results from our CoreValve high–risk US Pivotal Trial were presented, showing superiority over surgical valve replacement at one year. In addition, the low mortality rates of our differentiated CoreValve system in patients considered high risk for surgery exceeded expectations. I was at ACC, and many physicians shared with me their personal excitement regarding these ground–breaking results.

Also at ACC, we shared our analysis of the HTN–3 data for treatment resistant hypertension. While HTN–3 met its primary safety endpoint, it was disappointing that it did not meet the primary efficacy endpoint.

We convened an independent panel of expert physicians and researchers to advise us in next steps for our RDN program. Based on their input, we decided to continue to provide access to SYMPLICITY in countries where it is approved, and continue to enroll patients in the Global SYMPLICITY Registry.

We are not abandoning renal denervation opportunity. We will continue to bring insight from the HTN–3 trial and map the clinical and commercial path forward in collaboration with the FDA.

One week after the ACC the extremely positive results of our IN.PACT Admiral Drug–Coated Balloon US Pivotal Study represented at the Charring Cross Symposium in London. This study showed patients with peripheral artery disease in the upper leg experienced significantly better outcomes at 12 months when treated with IN.PACT Admiral than those treated with standard balloon angioplasty. We are currently expecting FDA approval of the IN.PACT Admiral about this time next year and believe the global market for DCB could be $1 billion by 2020, a driver of growth not only for our endovascular business, but for overall Medtronic.

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In Q4, our international business grew 5% and accounted for 47% of our total revenue. Emerging markets delivered improved overall performance, growing 14%.

Our Middle East and Africa region, in particular, had a very strong finish to the year, growing 29%. This was driven by strong execution on several tenders in a number of countries across all three business groups.

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Our channel optimization strategy also added to the performance in the region, as we recently became majority owners in a new collaboration with our largest distributor in Turkey. This transaction not only allows us to work more closely with providers in this important market, but also unlocks incremental margin. We intend to continue to identify and pursue similar channel opportunities to optimize our performance in emerging markets.

Also, our results in Greater China were significant where we experienced a modest improvement in underlying market dynamics and grew 15%. On the other hand, growth remains slow in our Central and Eastern Europe region, driven primarily by challenges in Russia. Healthcare spending has tapered in Russia and did not improve as we expected due to the unforeseen geopolitical events.

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India also remained under severe pressure, declining 14%, as we continued to face challenges from the previously discussed termination of one of our largest coronary distributors. Going forward, we are focused on developing unique commercial and market development partnerships with different providers, in order to drive rapid improvements in therapy access and improve our performance in India. Despite the challenges in Russia and India, we are encouraged by the improved growth in emerging markets and remain confident in our long term outlook.

Turning to the P&L, our SG&A expenses were higher than expected in Q4. Some of the additional spending was due to the accelerated field investments that we decided to make, given the strong clinical data that was presented during the quarter. However, there was also a component that was unexpected and frankly, a surprise.

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This was clearly an execution issue and something that should be controllable. I take execution lessons of this nature very seriously. I’m disappointed with these results, and I’m taking immediate action with my management team to tighten up our spending control processes.

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Also in Q4, as in previous quarters, we had elevated levels of spending within cost of goods sold to address quality system improvements in our neuromodulation and diabetes businesses. While we expect these costs to taper over time, we do expect them to continue in FY15.

These efforts are costly, but they are nonnegotiable and are critical to ensuring the highest level of quality and regulatory compliance. We will not curtail or minimize these needed investments to ensure our products meet the quality and performance obligations. Finally, on a positive note, I am pleased with the way our global team executed on our working capital improvement programs, driving strong quarterly free cash flow of $1.2 billion.

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As we look ahead to FY15, we remain focused on striving to reliably deliver on our baseline expectations. To achieve these goals, we need to continue the momentum we built in FY14 on our three primary strategies: therapy innovation, globalization, and economic value. We are confident that these strategies will further strengthen, diversify, and expand our market leading competitive position.

As I mentioned earlier, we are actively translating these conception strategies into three distinct growth vectors: developing new therapies; penetrating emerging markets with existing therapies; and building new, independent services and solutions.

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Starting with new therapies, we are poised to deliver a number of innovative products to the market and expect them to generate 150 to 300 basis points of growth. In structural heart, the ongoing U.S. launch of CoreValve and the European launch of Evolut R will be significant contributors.

We are pleased to announce today the global patent settlement with Edwards. This comprehensive agreement removes uncertainty for the next 8 years, allowing us to completely focus on providing access of our important CoreValve technology to patients.

We expect additional growth in our cardiac and vascular group to come from Reveal LINQ, direct and AF Solutions, as well as continued growth in endovascular from our Aerotek business and drug coated balloons.

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By Pangambam S

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