Organized for success: Where does Medtronic see opportunities and challenges?

April 2021

Less than a year into his role as CEO, Geoff Martha and the Medtronic leadership has overseen a significant overhaul of medtech’s largest player.

Martha says the company is clearing minor COVID-19 bump and sees an open road for the company to continue to grab share from competitors.

Martha details what products are gaining the most traction while also identifying those that still have some ground to gain.

We also discuss:

• When it may bring its renal denervation project to the FDA
• Why the surgical robotic Hugo system will be worth the wait (and why development has taken more than a decade)
• Whether or not Medtronic will collaborate more with private equity firms, early-stage incubators and maybe even SPACs?
• What will the company’s acquisition strategy look like in 2021. And why.
• Why the price-cutting for drug-eluting stents may represent an opportunity for Medtronic’s more innovative products.

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Tom Salemi (00:00):

Hey everyone, this is Tom Salemi of DeviceTalks. Welcome to our newest member of the DeviceTalks podcast family, it's called MedtronicTalks. Our constant search to find new ways to bring you insights in the MedTech industry led us to the fine, fine folks at Medtronic. They've agreed to make their senior leaders available to us and to you. In each episode we'll discuss the opportunities and challenges facing one of MedTech's clear leaders, so you'll have an inside view on what makes Medtronic go. We'll ask the questions, Medtronic will provide the answers, and our great network of sponsors makes it all possible. So sit back, hop on a treadmill, take the dog for a walk, whatever you do when you listen to a great podcast, and let's listen to how Medtronic is getting the job done. Let's go.

Tom Salemi (00:43):

Hey everyone, this is Tom Salemi, editorial director of DeviceTalks and co-host of the DeviceTalks weekly podcast. Welcome to our newest podcast, it's called MedtronicTalks. As I promised up top, we'll be bringing you at least twice a month the thoughts and insights of Medtronic's leaders, including its CEO, Geoff Martha. Geoff Martha has been on our DeviceTalks weekly podcast a couple of times, and I know he'll be a regular contributor to the MedtronicsTalks podcast as well. So please do subscribe if you don't want to miss any of these important podcasts. Just push the subscribe button on your Apple, Google, Spotify player, whatever it is, and future podcasts will be sent directly to you.

Tom Salemi (01:28):

I did this interview with Geoff back in February, in this conversation we hit upon several of their businesses, talked about their opportunities and their challenges. Geoff is a great interview. He's very forthright and direct, and I know you will enjoy this conversation. So without any further delay, let's hear from Geoff Martha, the CEO of Medtronic. Well, Geoff Martha, welcome back to the podcast.

Geoff Martha (01:55):

Thanks. Good to be here, Tom.

Tom Salemi (01:57):

So you had a great earnings report today, or good earnings report today. Wanted to go over some of the details from that, but also kind of get an update on the reorg that your folks are undergoing. I think you announced that it was done, at least that was my understanding. But let's first get into the business. You had indicated that February was stronger than January, and I think you anticipate March will be stronger than February. So we're moving in the right direction, give us an overall sense of Medtronic's performance.

Geoff Martha (02:25):

Sure. Well look, we're really pleased with our fiscal Q3 performance, especially in the backdrop of the recent COVID surge. I mean, we're making progress sequentially quarter over quarter in terms of getting back to closer to more normal levels of revenue growth, as well as profitability. Launched a number of products that are having an impact, and we're taking share and continuing to advance the pipeline for the products that haven't launched yet. Some of these are blockbuster potential here with like the surgical robot and Ardian . So it was a good quarter for us and hopefully a good quarter in a series of quarters here. We're just consistently executing like this.

Geoff Martha (03:06):

In terms of the overall market backdrop, we said that we believe March would be better than February, April, better than March. Quite frankly, we haven't seen... So for us, the second wave or this latest wave of COVID, it really didn't start to impact elective cases from our perspective where our recovery didn't slow down and actually turn down a bit until late December. So later than maybe some of our competitors, I think part of that is because of so many new products out there, that masked it a little bit. And then it went into January and into February, and we really thought we'd see by now a turn. Now we're very optimistic that's going to happen. We think it's delayed a week or so because of the weather that we've had in the United States. But we are, in talking to hospital CEOs, they're very bullish in terms of the snap-back, the anticipated elective procedures.

Geoff Martha (04:05):

And like we talked about on earnings call, we're seeing our capital equipment which is, as you know, Tom, is tied to procedures. Whether it be consoles for energy, surgical products, energy consoles for surgical products, or it be imaging or navigation equipment for our neurosurgery procedures, or actually our robots, this type of stuff is selling at record numbers. Each one of them is either at a record or near record number. And our StealthStation™ navigation's been out there for years. So we believe this is a leading indicator what's to come with the bounce back or snap-back, I'll call them, procedures in the United States. And we think Europe will lag by a few months actually, but will experience something similar.

Tom Salemi (04:48):

For the larger capital items, have you had to introduce any new financing to assist the hospitals in their purchasing? Or are they able to manage that still on their own?

Geoff Martha (04:56):

We haven't introduced new financing, just anything... We've been offering more and more financing over time because capital equipment's become a bigger part of our business. At the beginning, it just wasn't a big need, but now that capital's become a bigger part, we've gotten more sophisticated in our customer financing options. But that isn't some... A part of that is a result of COVID. It is actually now that I think about it. Back a couple of months ago, particularly with our Mazor robot, we didn't want to slow the adoption of that, because it's such an important component of our strategy and a leading indicator, I think of our spine business. And so we did, a couple of months ago, introduce some new financing options. That's helped. And I've seen some of our competitors, or even people in capital equipment that we don't compete with, are using more financing as well from what we can tell. But that's helped. But I really think the bigger message here is hospitals gearing up for procedures.

Tom Salemi (05:49):

And you mentioned that new products might have masked the slow down a bit. Why would that be? Honest, I'm not sure. Because you're allowing for new procedures to be done? What's the connection between a new product?

Geoff Martha (06:00):

Well, I think it's taking share. So we're taking share, I mean, and so we're getting growth in excess of the market, and I think that's what I mean by that.

Tom Salemi (06:10):

Okay, great. So let's talk a bit about the new products. You talked about that you had 46 approvals last quarter. And you've had 220 since last June-

Geoff Martha (06:18):

January, [inaudible 00:06:18].

Tom Salemi (06:18):

January, sorry, last January.

Geoff Martha (06:18):

I wish it last June, that'd be even better.

Tom Salemi (06:23):

It began with a J, let me read my own notes. January.

Geoff Martha (06:26):

Yeah.

Tom Salemi (06:27):

So talk a bit about some of the ones that really have stood out and have been adopted quickly.

Geoff Martha (06:32):

Sure. Well, the indication expansion for our Micra™ leadless pacemaker, the AV indication, indication expansion, and that has been a huge standout. It's been growing, like last quarter, it grew 75% in the United States, 64% globally. And the quarter before that it was even higher growth. And so that's been a real standout, and it's really redefining the pacemaker market. So it's the fact that it's leadless and can be inserted with a catheter versus a procedure. So that's a big one.

Geoff Martha (07:03):

And then our various neuromodulation franchises. We've been investing in... We invented neuromodulation 20 some years ago. And then, maybe five plus years ago, five or about seven years ago, we'd fallen behind and started losing share there. And we made a lot of investments over the last few years in our neuromodulation platforms, and those products are coming to market.

Geoff Martha (07:26):

So one is our deep brain stimulation, our Percept™ deep brain modulation system for Parkinson's. That has brain sensing in it, so you can actually listen. The way I like to say it is, we're now having a two-way conversation with the brain. Before our DBS and our competitors, you're just kind of screaming at the brain with energy, modulating it to mitigate the symptoms. Now we can listen back to how the brain is responding to that. And then gives us the ability to personalize the therapy. So our Percept™ system is the only one out there that has the ability to sense.

Geoff Martha (07:59):

And then we got more products coming. Our leadless... Or, I'm sorry, our directional leads, so we call them SenSight™ leads, are coming in a couple of months. And so we really believe this is starting a multi-year I think market expansion and market share for DBS for Medtronic.

Geoff Martha (08:17):

And then on pain we did an acquisition, our pain stim SCS, spinal cord stimulation. We did an acquisition a couple of months ago called Stimgenics, and launched this new waveform on top of our existing pain stim device called Intellis™, which is the best battery life, the smallest, et cetera. And then you add this algorithm to it, this new stim pattern. We've got great 12 month data. And that is leading to some share gain there, despite a replacement headwind that we've got. And then we announced at NANS in January that we're coming out with ECAPs, of a compound action potential, and that is generating some excitement.

Geoff Martha (08:54):

So we're seeing a lot of momentum in pain, and then finally pelvic health. This is neuromodulation or sacral nerve for overactive bladder. That business, that market is starting to become a pretty decent-sized market. I don't know, it was a billion or so. Our revenue is just over 700 million or so. And so that's growing double digits now. We got a new competitor there at Axonics, and some of the new products that they've introduced, and focus they've put on the market to help expand the market. But we've launched a new rechargeable system there. And I think we talked about our earning commentary, like eight or so plus points a share that we've taken back in the last couple of months.

Geoff Martha (09:36):

So those are all standouts for us that are out on the market. And then, I can't, I have to highlight our surgical business. Legacy Covidien surgery business had a really good quarter, and that's important for us because that's one of our big franchises.

Tom Salemi (09:49):

Is that one of the franchises that really generates the cash and helps fund innovation that you spoke about earlier?

Geoff Martha (09:55):

Yeah, it is. So for us, we've got our three biggest businesses. Our cardiac rhythm business, so pacing, ICDs, that's one. Our surgery business from Legacy Covidien, and our spine business, including the capital equipment that goes with it. Those three generate a lot of the cash flow for the company. And then you've got your high flyers, like neurovascular, that's big and growing fast, stroke. And then our structural heart, like TAVR, that's also big and growing fast. You got your high flyers, but a lot of our cash flow comes from those other three big businesses. And what's good about things right now for Medtronic is all three of those are growing at or above the market, and the markets are doing for line in all of those, and we have a really strong pipeline. So when one of those three starts to lag, it really hurts. It really hurts. It puts pressure on the company. And we feel good about where we are now and the road ahead for all three of those businesses.

Tom Salemi (10:50):

And those businesses are going get some competition as well. We've talked in the podcast last couple weeks, Corsa Medical. And I don't know if you want to get into do details, they're going after surgical. And Zimmers spun out their spine group. I don't know what that's going to become, but the competition is certainly out there.

Geoff Martha (11:06):

Yeah, it is. I do feel in spine, I know that little bit better than the others because I used to run that division. I'm still learning the others a bit. I do feel like there used to be in the spine, and there still is hundreds of competitors, but you're starting to see the market consolidate now because not everybody can afford... It's more than just about a screw and a rod and some new thread on a screw. And it's way beyond that. Now you're talking about interoperative imaging, navigation, robotics. We just bought a company called Medicrea out of France that's data and AI that's allowing for surgical planning and personalized implants.

Geoff Martha (11:44):

So the game has gotten much more technical, which it needed to in spine. It needs to because the outcomes in spine are too variable and you're too reliant on a physician's skill. And you're not going to train enough physicians around the world to democratize good spine surgery. So you need this technology. And so it's good for patients. And it's good for Medtronic because we've been investing in this. And as the industry consolidates, we're going to be a winner. That enabling technology has really taken our spine business from losing share, even shrinking a few years ago, now it's growing mid-single digits and depending on the quarter, holding or gaining share.

Tom Salemi (12:27):

Are there any products out there that are needing a longer runway than you thought initially that maybe aren't getting the traction that you anticipated?

Geoff Martha (12:32):

Yeah, I'd say one, and not for the reasons you might suspect, is our diabetes new pump 780G, which is launched in Europe but not in the US. And it's gaining great traction in Europe, the problem is it's not in the United States yet. It's our new closed-loop system. And what it does is a couple of things. First, it's got new algorithms on it. And the time and range of these insulin-dependent diabetics is very... it's like we've not seen before. And then it eliminates a lot of the hassle factor of our existing system, alerts and alarms that go off and keeps you in auto mode a lot longer. And so the feedback we're getting from patients and physicians has been phenomenal in Europe. But I just...

Geoff Martha (13:16):

Actually talking to investors, some of these are longer investors in Medtronic that know MedTech do their own market research, and just talking to them over the last few days around earnings, their own surveys are validating what we're hearing, which is always good. And it's getting great traction. The problem is it's delayed getting into the US. You need, and this is public knowledge, the approvals for diabetes products of the FDA is backlogged, because that same division is focused on COVID diagnostics. And so I understand that. When I say I'm frustrated, I'm not frustrated at the FDA, I'm frustrated at the situation. And the FDA's been very good about communicating this, I just don't like the answer.

Tom Salemi (13:54):

Let's talk about the pipeline coming up. We can give a bit of an overview, but I'd love specifically to hear more about renal denervation, which is... Are you calling the product OnMed? Or is that the name of trial?

Geoff Martha (14:05):

That's the name of the trial.

Tom Salemi (14:05):

Okay.

Geoff Martha (14:08):

This is, in terms of what we call the product, that's something interesting, and even the procedure. But sorry, I didn't mean to interrupt you, the OnMed is a trial.

Tom Salemi (14:16):

Okay. No, that's fine. So let's talk about that first. So where are we with renal denveration? I think you're talking about maybe going to the FDA later this year?

Geoff Martha (14:23):

Right. So, well first of all, one, it's got Breakthrough destination. Assuming this, was it M6? That ruling stays, it survives the new administration here, the Biden administration, which we think it will, we automatically get four years of reimbursement upon FDA approval. And what we're waiting for to go to the FDA is this OnMed trial, which is the last piece of our pivotal work, pivotal clinical evidence generation, which we anticipate those results will present themselves this year. It's a Bayesian trial, which means it's variable when you've reached your endpoint. And so we expect to hear this year and present a TCT in the fall. And based on all the work, this is... Decades have gone of work, and over a billion dollars has gone into this. We're very excited and optimistic about what renal denervation can do for patients.

Tom Salemi (15:22):

And talk a bit about the effort you're working on with Half Moon, the MitraClip, The Foundry project.

Geoff Martha (15:29):

Yeah, sure. This one's an interesting one. First, the whole model of... If I take a step back just to kind of talk about Medtronic's strategy, the thing that... Above all us, we'll talk about the new operating model and all that. But really what we're trying to do here, the leadership team at Medtronic has put more resources to work in terms of R&D. And we're doing it in traditional ways through putting into organic R&D, we're doing a series of tuck-in acquisitions, if we can talk about. We've done like eight over the course of the last year or so. We're leveraging third-party money from like Blackstone to come in and augment.

Geoff Martha (16:14):

And then we're looking at partnerships, like The Foundry here, and to extend our R&D. And in this case, this is a situation where The Foundry, as you know, invented the MitraClip, and has really great capabilities. And we decided, we didn't tell them what to do. We said, "This is the end result that we'd like, and then we can figure out how to achieve that." And in the mitral repair area, and they came out with an interesting design. And we provided the funding for this company, which we call Half Moon. And there's pre-negotiated purchase agreement here.

Geoff Martha (16:52):

And they've come out with we think a very innovative device that basically... the way it's been explained to me, and I've seen it, I thought it was good, is you got these leaflets that aren't really touching, and you get the leakage there. And we put a backboard on one of the leaflets that enable it to close. And it's a lot more sophisticated than that-

Tom Salemi (17:14):

Sure.

Geoff Martha (17:15):

... but my depth doesn't go too much deeper than that.

Tom Salemi (17:18):

Works for me.

Geoff Martha (17:19):

And we've done a few cases. And the first case I'm a little bit more aware of, I think we've done two or three more since. And it had totally... It was easy to insert according to the physicians. And it completely eliminated the MR, the mitral valve regurgitation. So we're excited about this. And obviously that structural heart space is... I mean, people go back and forth on what's the biggest growth opportunity in healthcare in MedTech. Is it structural heart-related, mitral and bicuspid, is it surgical robotics, is it renal denervation? I don't know, but it's a big growth area. And we've got organic and inorganic shots on goal here. And the partnership with The Foundry's been really good so far. And we're excited about this Half Moon venture.

Tom Salemi (18:05):

No, The Foundry's a great group, and they coincidentally also developed Ardian, which is your renal denvervation project now.

Geoff Martha (18:11):

Right.

Tom Salemi (18:11):

It's interesting though, you mention Blackstone, you mention the effort with The Foundry. These are both almost kind of pharma-like models where you're bringing in private equity money to fund ongoing business, or partnering with startup efforts really early on at the concept stage. You usually didn't see that very often on MedTech. Is this something you're looking to replicate either with a private equity firm or find some other incubator effort out there?

Geoff Martha (18:35):

It is. I mean, look, first of all, what strength of Medtronic I think it is our technology capabilities and platforms. I think our clinical, or we're really good at clinical science. And then I think we're good at taking these devices, therapies, products, and then globalizing and making them a standard of care, so the commercial side of this. And I have a lot of faith in our technology team. And so we're trying to give them as much resources as possible to work their magic. And our batting average is very high. And so that, even third-party money, right? Third-party money is using the Blackstone type of deals. It's all our people, all our ideas, all our IP.

Geoff Martha (19:17):

Something like The Foundry, we are using not just... In that case, we're using our money off our balance sheet. In the case of The Foundry, we're using some of our... There's new IP generated, but we contributed IP. And then we do contribute people that go there on like a sequestered basis, but they contribute a lot of people. They generate new ideas and new IP as well. So it's not just our technical capabilities in clinical, it's theirs as well. And so that is a little bit of a different model. Probably we'll do that less than, I think, the Blackstone type of deals, bringing in third-party money. Because we do have a lot of ideas, and there's not as many people out there I believe that can do it as well as we can do it internally.

Tom Salemi (20:07):

Excellent. A final new product I wanted to talk about, Hugo™. People are interested in getting an update on the robot.

Geoff Martha (20:14):

Look, we are excited about this. It's been a long road, and it's been a lot longer than certainly we wanted to get it done. It's the most complicated project I think we've taken on, certainly Legacy Covidien. And even at Medtronic, there's a lot of moving parts here in building a robot from scratch, and a lot of different technical components. The testing and the validation and verification work that we've been doing over the last couple of months has really gone well, especially the past two or three months.

Geoff Martha (20:45):

And so we're on schedule too, which we've been signaling to investors for a while, to file for the CE mark, as well as file for our US IDE here at the end of the calendar quarter here, so March. And hopefully have our first surgery and our first sale sooner than later. The first surgery would be obviously in a jurisdiction that doesn't have the regulatory requirements for approval. But we hold ourselves to a pretty high standard here before we do a surgery. But the animal works gone well. And like I said, the training with surgeons has gone well. And I'm personally starting to shift my focus to the commercialization of it now.

Tom Salemi (21:24):

Why was it important to develop it internally as opposed to acquire? Was there just nothing attractive out there to acquire?

Geoff Martha (21:29):

On the robot?

Tom Salemi (21:29):

On the robot.

Geoff Martha (21:31):

Yeah, this decision goes way back before me, or even the product. This started way back. I can't remember the exact date, but it's 10 years or so.

Tom Salemi (21:39):

Okay.

Geoff Martha (21:39):

But Covidien made this decision. And it makes sense because, look, their big franchise at the time, and now our biggest business, is that surgery business. Yep. And without a robot I think you're going to be marginalized in surgery over time. So many of these surgical procedures are moving to robotics. Physicians are partnering with companies that bring them the best technology, whether it be laparoscopic. There's still a lot of runway in laparoscopic around the world. The growth and laparoscopic in terms of dollars is going to be more than the growth in robotics, I think, for a while. But the growth rates in robotics is going to be higher.

Geoff Martha (22:12):

So Covidien made the decision to do this organically, and it started out... I don't know if you heard this story before?

Tom Salemi (22:18):

Mm-mm (negative).

Geoff Martha (22:20):

They bought some IP and technology and some people from basically Germany's version of NASA. I think it's called DLP, I can't remember the exact acronym, but it's Germany's NASA. And we still have a facility in Germany real close to one of their NASA. I can't remember, DLP. I can't remember the acronym. And I went to visit it once, it's really cool. And it's great technology. So that's how it all got started. I wouldn't call that inorganic, because it was so early. And by the time Medtronic got involved, this project was well on its way. And it's been delayed, like I said, a couple of years later than we originally thought. But still, I think the end product is going to be worth the wait.

Tom Salemi (23:07):

Excellent. No, that's really interesting, I hadn't heard that. Well, let's move. That's a great segue to M&A. A year ago you said we'll be doing more tuck-ins today, you talked about a lot of the tuck-ins you did. You can highlight a few of the larger acquisitions if you'd like, but I'm more interested in knowing what does 2021 look like in terms of M&A for you. Are you going to be doing acquiring?

Geoff Martha (23:26):

Yeah. We're still on the hunt for these tuck-ins. I mean, that's our focus, right? And tuck-ins are by definition, first of all, they're around our existing markets that we're in, our existing therapies or products. So surgery, spine, various areas of cardiology, so it's the areas that we're in. They tend to be early-stage, right? So many cases, not commercial or just going commercial. They tend to be technology or clinically oriented. And they're really an extension in my mind of our organic growth strategy. And we're going to continue to look for these.

Geoff Martha (24:02):

And I think they do need to be earlier stage, because a couple reasons. One, these early stage companies, as they start to get closer to maybe an IPO and start to get their sight set on that, the valuations, the capital markets are white-hot. And as you know, for these type of products, the valuations get tough once they get to an IPO. And now you've got SPACs out there as well.

Tom Salemi (24:30):

I almost wanted to ask you about SPACs. I'm like, "No, that's too far afield."

Geoff Martha (24:34):

Yeah. So you got SPACs out there as well that are looking for deals and they're looking for deals that are closer to that IPO time frame. So I think for us it works better to do them a little... I'm not saying we're not going to do later-stage deals. I mean, we'd still do those, but I think the more the frequency will be these, which is what we've done over the last year. These eight deals are all tuck-ins, relatively early stage, some earlier than others.

Tom Salemi (25:00):

So are the SPACs really jacking up the price for M&A for later-stage properties?

Geoff Martha (25:06):

I haven't seen it for us yet, all right?

Tom Salemi (25:09):

Yeah.

Geoff Martha (25:09):

We haven't like a deal that we were circling around. But if you look at some other MedTech acquisitions like this Butterfly ultrasound company, I'm not an expert on Butterfly and their ultrasound technology, but it went for over a billion. It was well over a billion dollars, and based on what I know about the company, that's a high valuation. And so I could see that translating into our space, I don't know why it wouldn't, so.

Tom Salemi (25:32):

No, good point.

Geoff Martha (25:34):

It could be. But we're going to turn around and we could partner with some SPACs. I mean, I'm not anti-SPAC, I think we can partner with some SPACs and use those to our advantage, so.

Tom Salemi (25:45):

That's a good idea.

Geoff Martha (25:45):

But it just a reality.

Tom Salemi (25:49):

Yeah, for sure. Well, I know you got to go. Let's just, I want to wrap up with an update on the reorg. What is the status? Is it complete?

Geoff Martha (25:56):

No, it's not. I wouldn't say it's complete. But let me be specific. We went live with it February 1st, and that's like the structural piece of it, right? So the decentralization into what we're calling our operating units, the 20 operating units. Decentralizing into them, consolidating a lot of our decision making into those operating units. We took out over two layers of the company, not quite three, but over two, which helps with our agility and things like that. So that is done. Okay? And been announced and everybody knows, and the dust is still settling on that. But this operating model is much broader than structural. Think of that as kind of going from mainframe to PC. Right?

Tom Salemi (26:38):

Okay.

Geoff Martha (26:38):

But we still have software issues, right? We got to rewrite the software. And so we are launching... We're still working on our new operating mechanisms. That's all our standard meetings, our quarterly business reviews, trying to streamline those, streamline some of our core processes, including our product development process. So we got to streamline the processes. We're putting new incentives out there, which we started last year. We're going to continue into this year.

Geoff Martha (27:02):

And I think last time I talked, we talked about market share. Putting market share more into our annual bonus plan. We've already put it into our annual goals and objectives. We're now shifting to put that in our bonus plan. We needed a couple of quarters to learn how to measure market share more accurately, because in a lot of the markets you're triangulating, right? Like big comp, some of our larger competitors, like a Boston Scientific or a Stryker, may have these products that are kind of buried in their P&L, it's hard for us to tease out exactly how much. So we getting better at doing that.

Geoff Martha (27:36):

And so putting market share into our incentives, and then finally our new cultural norms, which work alongside our Mission. You know Medtronic, we're very mission-driven company. Not changing the Mission at all, but the Mission was written 60 years ago, the competitive landscape was very different. The world wasn't... MedTech wasn't global, there weren't all these focused startup competitors that are well funded, that are nibbling at us from all angles. So it didn't really address some of the competitive nature and the speed at which things were happening. So our new culture gets at a more competitive mindset, that's where the market share measure helps us with, comes at being more agile and doing things faster without though cutting corners on quality at all, or integrity.

Geoff Martha (28:22):

And so adding that and getting that ingrained into the company, that's going to... All these other, the software I call it, is going to take a little bit of time, but there's a lot of enthusiasm about it. And I'd say some of the early signs that we're seeing that are tangible is on the market share piece. I mean, we focused on that first and we are seeing it show up in our results where we're gaining share in more areas across the business.

Tom Salemi (28:49):

I notice you highlighted that in the presentation. One thing I wanted to just ask about the reorg, and just sort of personnel. Chris and I were talking at the podcast last week about we're seeing Medtronic people take senior positions in other companies, including a CEO position.

Geoff Martha (29:02):

Yeah.

Tom Salemi (29:02):

And how do you look at that when you're going through this reorg? There must be an expectation that some people are going to find other opportunities, not just during reorg, at any time. How do you look at that as a CEO? Do you factor in those changes? Do you have backup plans in place already? But how do you approach that attrition issue?

Geoff Martha (29:23):

Yeah, I think there's two things I address that. One on a reorg, because any time you kind of shift some of the decision making, if you will, in a company from one area to another, you're going to create some disruption and you're going to have people that you don't necessarily want to leave that are going to leave. And we had some of that, not a ton, but we had some of that. But it was within our expectations for sure. But then beyond any kind of reorg, when you got our 20 operating units, and... I want to be known as not just from... I want Medtronic to be known as not just a mission-driven company and a technology company, but a talent factory, okay? And there's pros and cons that come with that, right?

Geoff Martha (30:08):

The pros are you're attracting people, you're develop... you build these development programs and this culture of developing people, it's going to help your company for sure. Okay? One of the kind of the side effects of that, though, is you're going to have other companies poaching your people. And, look, I remember when I was growing up in GE, back in the good days of GE, we won't talk about that now. But they were known for their training programs, and they were a management factory. And one of the training programs I went, which is the oldest one, it's their financial management program, which was considered the most successful management training program in business. It was entry-level program. It had over 50% attrition, meaning that once you graduated that program, less than 50% of the people stayed with GE for whatever, 10 years or more. And a lot of them would go to other companies because they were so sought after.

Geoff Martha (31:00):

And it was still a really great return for GE on the investment. Now I don't want anywhere near that kind of turnover from our executive team, but you get the point. The point is we want to invest in people. There will be turnover because we're going to be a talent factory, but we're also going to be attracting better talent on the front end. And it's just something we're going to have to... If you want to be a talent factory, that's one of the things you contend with.

Tom Salemi (31:22):

Be a Bill Belichick, filling coaching slots across the league.

Geoff Martha (31:27):

Come on, you're killing me. I grew up in Pittsburgh. I grew up in Pittsburgh, I don't want to hear about Bill Belichick.

Tom Salemi (31:31):

I withdraw the statement.

Geoff Martha (31:32):

That's okay. But it is a good analogy, except I'd like to think... I don't wear hoodies. I smile a lot better, a lot more than him too.

Tom Salemi (31:39):

You are a lot more personable than he is, at least from here. One final thing I wanted just follow up on, it was kind of news to me. There's an issue. It was brought up during the analyst questions, and I think you brought up during the presentation. But just the China tenders and the pricing pressure on drug looting stents. Can you sort of bring me up to speed on that? And you seem to convey that maybe, hopefully, that Medtronic had some sort of advantage in sort of contending with this.

Geoff Martha (32:04):

Well look, anytime you take a pricing hit of that magnitude, and it's a very significant pricing hit in China, okay? It's been contained to China. And this isn't new to the coronary stent world, there's big major pricing differences all around the world. But this was a big one with China digging-

Tom Salemi (32:23):

How big was it?

Geoff Martha (32:26):

It was in the 90% range, yeah.

Tom Salemi (32:27):

Wow. Okay.

Geoff Martha (32:29):

And so that hurts. But what we got in return is we are one of the five winners of this national tender, is dramatically increased volume. And the Chinese government actually called us and said, "Are you ready for this? And are you prepared for this kind of volume?" And the other thing strategically, what's happening now is because of the lower price so many of these other more rural cities in China, tier two, tier three cities that weren't participating in coronary stents before, these hospitals are now participating in this.

Geoff Martha (33:01):

So that's allowing us to expand our sales force out of the tier one cities into these... not out, but keeping them in the tier one, but adding sales people with all this new volume into these lower tier cities. And even though the margin's not quite the same on stents, this will be the highway, if you will, that we launch our newer products that are differentiated and we don't think we're going to be hit by these type of tenders. Things like we talked about earlier, renal denervation. Things like some of our other products as well, TAVR that was the one. So they go to that same physician group. So our transcatheter valves should be coming in China soon, as well as renal denervation.

Geoff Martha (33:42):

So it allows us to expand our sales force and get ready for that, even though I would rather not take the pricing hit. But that is one of the ways that we're contending with it, and overall been able to manage it. But it is, for the next couple quarters, it's a headwind for us.

Tom Salemi (33:58):

Okay. Well, I appreciate your addressing that. And I appreciate you for taking a few minutes today to talk to us, I know it's a busy day. Thanks for joining us, Geoff.

Geoff Martha (34:05):

Yeah. Thank you, Tom. Always had fun with it.

Tom Salemi (34:09):

Well, that is a wrap. Thanks for joining us on this episode of the MedtronicTalks podcast. Once again, we'll bring you new episodes at least twice a month. So make sure you subscribe on Apple, Spotify, Google, Amazon, we're everywhere. Push subscribe and future episodes will be sent directly to you. My name's Tom Salemi, I'm editorial director of the DeviceTalks programs. Please do find me on Twitter @MedTechTom. Please find me on LinkedIn, Tom S-A-L-E-M-I. And of course you can find out more about DeviceTalks at devicetalks.com. Finally, don't forget to share this podcast episode with your friends and colleagues. Put us out there on Twitter, put us out there on LinkedIn, and please connect with me while you do. I would love to be part of those conversations. Thanks again for joining us on the MedtronicTalks podcast.