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Medtronic CEO Omar Ishrak Discusses Q4 2014 Earnings Results

Medtronic today announced financial results for Q4 2014 which ended April 25, 2014. Omar Ishrak, Chairman and CEO of Medtronic Inc. (NYSE: MDT) discussed the earnings results in detail on a conference call held earlier today. Below is the full commentary… 

 

Good morning, and thank you, Jeff. And thank you to everyone for joining us today. This morning, we reported fourth quarter revenue of $4.6 billion which represents growth of 3.3% and Q4 non-GAAP diluted earnings per share of $1.12.

Before providing more detail on our Q4 performance, I would like to recap fiscal 2014. We grew our FY14 revenue 4% which was in line with our revenue outlook for the year and just within our mid single digit baseline goal.

It represented another year of delivering consistent results. We made solid progress in a number of areas over the past year, including quantifying, communicating and executing on each of our independent growth vectors.

Our first growth vector, new therapies contributed 180 basis points of growth in FY14, as we launched several significant new products that provide tremendous patient benefit and will serve as important future growth platforms.

In our emerging markets, we sustained double-digit growth, which contributed nearly 150 basis points to our overall revenue growth and represented 12% of our global business in FY14.

Finally, on our third growth vector, services and solutions, we sharpened our focus and economic value, translating our efforts into new value-based business models, including our cath lab managed services and Cardiocom offering which combined contributed 30 basis points of growth and $51 million of incremental revenue.

Healthcare payments and delivery systems are changing and evolving around the world. Through these efforts, we feel we are well-positioned not only to respond to these system changes but to demonstrate the role medical technology and related services can play in making this healthcare transformation successful.

Looking at the P&L, while we delivered a modest amount of SG&A leverage on an operational basis, we failed to meet our SG&A leverage goal for the year due to our Q4 spending which I will address in a minute.

However on an operational basis, we did deliver 50 basis points of operating leverage in FY14. And looking at our FY14 EPS, we were in the middle of our guidance range for the year covering for the incremental pressure from the medical device tax.

Looking at free cash flow, we had a very strong year in FY14, generating $4.6 billion as we continued to deliver on our working capital improvement program. This translated into strong shareholder returns as we met our goal of returning 50% of our free cash flow to shareholders in the form of dividends and share buybacks.

Achieving these financial metrics ultimately reflects the dedication and passion of over 49,000 employees living our mission everyday, collaborating with our partners in health care to deliver therapies and services to millions of patients around the globe, reducing pain, restoring health and extending lives.

Looking at our Q4 performance, while our 3% revenue growth was in line with our full-year revenue outlook, it fell just short of our middle single digit growth baseline goal. However it is worth noting that this performance was against the difficult comparison of 5% growth last year — strong performances from some of our key high growth businesses, including the AF solutions business in CRDM, DBS business in neuromodulation, surgical technologies and diabetes helped to offset challenges in other areas.

In core spine, the business showed stability again in Q4, consistent with our results all year. We also saw a solid growth in our new services and solutions businesses, Cardiocom and Cath lab managed services. At the same time, our recently introduced new products continued to drive growth. The MiniMed 530G system with the Enlite sensor is taking meaningful share, resulting in strong U.S. diabetes growth.

In CRDM, we had a very successful global launch of Reveal LINQ, a differentiated, miniaturized cardiac diagnostic monitor. This technology has been extremely well received by both patients and physicians, and promises to be an important new tool in cardiac and stroke diagnostics.

In structural heart, our U.S. launch of CoreValve is off to a good start, as we treat patients with extreme risk for surgery, with this unique technology. We are excited about the momentum we see in all of these areas and the future growth that they represent.

We also faced some challenges in Q4. The U.S. pacemaker and ICD markets were both a little slower than we were expecting. In addition, share gains in the U.S. pacing systems were offset by share pressure in U.S. defibs. In spine, while our core business, excluding BKP, posted modest growth, BMP and BKP declined, though both continued to show sequential stability.

We are continuing to implement our plan to broaden our BKP product line, including adding new products in interventional spine. Chris O’Connell will share details of this with you at our upcoming analyst meeting.

In BMP, we pointed out at our last earnings call that we faced a difficult year–over–year comparison following the resolution of a supply disruption last year. In neuromodulation, our Gastro-Uro business saw weaker than expected new patient demand in early calendar 2014, which we believe was due in part to insurance changes for elective procedures in the U.S. We also continued to face some challenges from non–device alternatives.

We’ve seen some recent improvement in new patient trends and remain confident in our ability to demonstrate the unique value of interest in therapy as the basis for attractive growth in this business.

We had four major U.S. clinical data presentations in Q4: CRYSTAL-AF, CoreValve for high–risk, SYMPLICITY HTN-3, and IN.PACT Admiral DCB. CRYSTAL–AF was presented at the American Stroke Association’s International Stroke Conference in February, where its compelling data demonstrated that our Reveal cardiac diagnostic monitor detected AF better in patients with recent cryptogenic strokes than standard care.

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.

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.

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.

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.

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.

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.

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.

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.

In spine, we are expecting a number of new cervical and interbody product launches, the ongoing adoption of surgical synergy, as well as continued stability in BMP and improvement in BKP. The RestoreSensor, SureScan MRI in neuromodulation, and new capital products in surgical technologies should also deliver growth performances in FY15.

In diabetes, the continued rollout of the MiniMed 530G system in the U.S. and expected launch of the MiniMed 640G in Europe should result in another year of strong growth. It is worth noting that we are working collaboratively with the FDA to accelerate the U.S. timeline of our next generation insulin pump system, and we are optimistic that we can bring this new technology to the market sooner than previously anticipated. We are mutually committed to advancing access to this important technology with all of the requisite patient safety requirements being met, and we truly appreciate the agency’s focus in this area.

Finally, last week, I appointed Hooman Hakami to lead our diabetes group. Hooman is an outstanding leader, has a track record of driving growth, and I’m confident that he will work to strengthen our core insulin pump and CGM franchises, as well as realize the tremendous growth opportunities in the type 2 market and in overall international expansion.

In our second growth vector, which is increasing the penetration of our existing therapies in emerging markets, we should see momentum continue through not only our traditional market development activities, but also new business model innovation in the areas of channel optimization and broader partnerships with governments and private providers. We expect our emerging market growth to accelerate in FY15 and contribute 150 to 200 basis points to our overall growth.

Our third growth vector, which is creating value based services and solutions, is also expected to deliver incremental growth in the coming year, with a contribution in the range of 40 to 60 basis points. We are expecting Cardiocom and Cath lab managed services, which are reported in our CRDM results, to more than double in size in FY15.

Looking at our growth vectors, it is not unreasonable to expect a revenue growth acceleration of 50 to 150 basis points over what we delivered in FY14. However, given the dynamic nature of our marketplace, we feel that our revenue outlook of 3% to 5% is balanced and realistic. Ultimately, our goal is to build a business that is diverse and robust enough to absorb challenges, while still delivering on our baseline expectations, something that we feel we’re beginning to do.

At our analyst meeting in a couple of weeks, we will share in detail with you how we intend to deliver on our baseline goals. We will lay out for you our full pipeline of innovative therapies across all of our businesses, discuss the efforts we are making to develop and grow in emerging markets, and explain our innovative new business models and partnerships that we believe will help shape the future healthcare landscape. In addition, we will present a detailed look at our financials and update you on the progress we’re making on our important product cost reduction and working capital initiatives.

 

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By Pangambam S

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