Medtronic's CEO Presents at Sanford C Bernstein Strategic Decisions Conference (Transcript)

Seeking Alpha

Medtronic Inc. (MDT)

Sanford C Bernstein Strategic Decisions Conference Call

May 31, 2013 9:00 am ET

Executives

Omar Ishrak – Chairman and Chief Executive Officer

Analysts

Derrick Sung – Sanford C. Bernstein & Co. LLC

Presentation

Derrick Sung – Sanford C. Bernstein & Co. LLC

All right. Good morning, welcome to the last day of the Strategic Decisions Conference. I’m Derrick Sung; I’m the Medical Devices Analyst here for Sanford Bernstein. And it’s my pleasure to welcome Medtronic to this year’s Strategic Decisions Conference. Omar Ishrak, Chairman and CEO of Medtronic will be speaking next. Omar has been at the helm of Medtronic for just about two years now, where he joined from GE. So we’re very much looking forward to hearing his perspective.

Following Omar’s prepared remarks, we will be taking questions from the audience. So please do write them down on those cards in front of you if you have any during the meeting and we’ll collect them.

And with that, Omar, welcome.

Omar Ishrak

Thank you, Derrick, and good morning, everyone. Glad to be here, and let’s get started with my prepared remarks. Here is what I’m going to cover, and this is essentially our story. We’re beginning to establish a track record of some degree of execution little early, but still few data points along the way. But our goal here is to achieve reliable some mid single-digit growth and that’s our baseline expectation, and we’ll talk about what the drivers are after that.

Capital allocation is a big factor in our strategy and our thinking, and so we’ll describe how we’re going to do that and what our strategy is? And finally, some strategic initiatives which are really transformational, which may give us some upside and certainly for the long-term give us durable growth. So these are the elements we’ll talk about in with a few slides.

So let me start with our track records we’re beginning to establish. Over the last 24 months, we’ve had establishing a pattern of growth over the last five quarters in fact, we’ve hit between 4% and 5% in a constant currency basis. And actually since 2011, where we grew 1% through 2012 about 3% and then 5% in 2013 all fiscal year’s for us, it is what we’re looking for. We’ve done this through share gain primarily and specifically in fiscal year 2013, the markets were closer to 2% to 3% in growth and while we grew at 5%. So we outperformed the overall market.

Now, EPS is also growing steadily. We strive to give leverage certainly every year and every quarter, and so again, we are establishing a pattern of this. So we are pretty pleased with what we’ve done so far, but at the same time, I want to point out very clearly that there is one year for data points, we need to do this consistently and we need to do it reliably, and we are a long way from really establishing a pattern of the nature that we wish to do. But it’s a pretty good start. now what are the drivers? why do we think we can do this in the future? And that’s what I’ll talk about in the next few slides and it breaks down into these patterns of elements, which really talk about stabilization first and then on different growth platforms.

There’s some markets that have been very visible, which have had significant amount of pressure over the last 24 months, which in the last 12 months have actually stabilized, so that’s given us pretty good sort of year-over-year growth performance. And there, the U.S. ICD and the U.S. Core Spine markets, which are two of our largest segments, if you like, of our entire business. And they have stabilized in a really dramatic fashion over the last 12 months. And what’s encouraging is that on a quarterly basis, do we see a pattern of year-over-year stabilization?

The U.S. Pacing market and the worldwide BMP market, which is infuse (inaudible) used in spinal implants. These two markets in our performance, let’s say has had pressure. We expect U.S. Pacing to start to stabilize; we’ve going to approve that. Now we are encouraged by the fact that some new products have been recently launched and when launched outside the U.S., these products have given us significant growth and they’ve just been approved and cleared for launch in the U.S., and we expect them to have to support growth in the U.S. at least to some degree. So that’s our expectation as to why we should get stabilization in U.S. Pacing.

BMP is a slightly different story. This product has had some pressure in the last 12 months ever since there was a series of articles in the spine journal, which created some controversy around it, which caused our revenue to drop. We’re basically the only player here. So we are the market and that have been steadily dropping, but it’s also encouraging to note that in the last four quarters, we’ve had some sequential stabilities.

If that holds, which we don’t see any real reason why it shouldn’t, then, of course, we get stability in the year-over-year comparison, which is very favorable. There is a independent study, which we commissioned, which is a systematic review of all articles through Yale and that’s going to be published actually in the next two or three weeks, and that may or may not have an impact. But we don’t know until we see what the results are. We don’t believe what the papers will say.

So that’s essentially stabilization of key markets and whole dispute as we’ll come back to this as we break down some of the key drivers that add up to what we expect growth to be in the short-term. There are other high growth platforms that have shown consistent growth over the years and certainly in fiscal year 2013 have continued that pattern, they’re across our business units in cardiovascular and restorative therapies as well as in diabetes.

The items to point out here are one insulin pumps, which showed 4% growth, and in fact, that deserve some commentary because internationally the insulin pumps actually grew at double-digit. But we’ve had a delay in the approval of a new product, which has been launched outside the U.S. now for several years, but we’ve had a delay in the approval inside the U.S., and that’s slowed the growth down. When that product is approved, we expect growth to return to double digits globally.

The other one worth pointing out is advanced energy, which sticks out as an outlier at 72%, that’s because we’ve had at least one quarter of inorganic growth. This is an acquisition we have to roll over of one quarter in FY 2013 as a comparison perspective. On an organic basis, that segment is growing at about 20%. So these are high growth platforms. We should had a history in the pattern of growth and we’ve got good drivers there, good momentum there. We expect this to continue to give us similar kind of growth patterns going at least into the near-term.

In addition to this, we’ve had some recent launches in late in FY 2013 and very early this year for which we will get the majority of revenue this year. And so they will give us good year-over-year incremental growth performance. The ones worth really pointing out are two of them in CRDM which are ICD and pacemaker businesses. Viva and Evera are two new CRT-D devise and ICD device, which are both high power cardiac rhythm devices and a pace maker, which is MRI compatible; both of these and the one that I was talking about just being launched in the U.S. Both of these products, I knew there is lot of excitement about these, I was recently at the HRS, which is the Heart Rhythm Society and both our sales team as well as customers have been pretty positive about the launch of these products.

We will see some other products across our entire portfolio. In Spine, some new products and going into fiscal year 2014 also some key new launches. In our pain simulator business, spinal cord stimulation as well as the expected diabetes approval of insulin pumps (inaudible) products.

And then going into FY 2015, we see two major new product launches in our transcatheter valve and our renal denervation systems in the U.S. So you can see that through we’ve had some momentum carrying over from fiscal year 2013 on growth platforms that have been established. Some new products launch late in FY 2013 and early in FY 2014, which we think will give us some tailwind going into this year. And then as we close out the year, we expect launches in FY 2015 of two major product lines. So we see a pretty good pipeline of products in the near term coming through steady progression, which gives us some expectation that overall we intend to see – maintain our growth levels.

The other key driver of growth for is emerging markets. Little bit of overlap what I talked about earlier, but not a lot, just pure penetration of our existing portfolio across emerging markets has given us significant amount of growth historically and this leverages our significant footprint in these markets and we are increasing that footprint all over in every country in emerging markets and honing our strategy and localizing more, both in terms of distribution and some degree of product customization as well.

We expect our emerging market exposure, which is now 12%, grown from about 10% in the last year or so. We expect that to get to about 20% over the next five years, and we also expect emerging markets to add about $2.5 billion worth of revenue in the next five years. It is significant because if emerging markets grow at 15% to 20%, and they represent 20% of our business that in itself is 3% to 4% of growth at a Medtronic level. So if you can – this is completely independent in many ways point of diversification for us because these are new markets where we’re getting increased penetration and if they can give us a baseline of 2% to 4% of growth that’s independent from our new products per se, then that’s good diversification and a good starting point for us as we aim to create a reliable formula for delivering the single-digit growth.

Now if I then put all this together and look at all the different segments, let me walk you through this, this is one way of looking at our businesses in terms of different segments. The ones right at the top are primarily U.S. based segments, and as you know U.S. is our largest market, so it’s important to point it out. First, the stabilization issue of ICDs and Spine, and we saw that stabilization in fiscal year 2013. We expect that to continue into fiscal year 2014 and if we do that, we’ll get slight change in growth from fiscal year 2013 to fiscal year 2014.

Pacing is a bigger swing for us because it was down in FY13 and we expect some degree of stabilization in FY14 like I described earlier and that has given even bigger delta in terms of our growth rates year-over-year. BMP is a big one. This one is this protein used in spinal implants, was down 15% on its own, which contributed to 60 basis points of decline in the Medtronic basis. If this only gets to flat instead is down 15%, it represents 3% of our overall business. So that in itself is a 40 to 60 basis points swing in our overall growth profile. So that is pretty significant as an element in our outlook for fiscal year 2014.

The drug-eluting stent that we launched in the U.S. in FY13 gave us great success. It doubled our business, but it represents only 2% of our overall portfolio, but it did provide 130 basis points of growth in fiscal year 2013. We don’t expect that kind of growth to continue because we’ve had a lot of share capture with the new product and that’s evened out. So we expect that to be more or less at market rates or little – outperform the markets slightly, but even there, it will be flat to down in the low single digits. And that in itself will give us a downward pressure to some degree, because we’ve had considerable uptick in share in the fiscal year 2013.

U.S. diabetes is another big wild card a little bit to us, because it was flat year-over-year, primarily because of the approval of the product that I mentioned earlier. Recall that this is U.S. diabetes as opposed to the global number that I gave you before of insulin pumps of 4%. But this is simply the diabetes business, which includes pumps and sensors was flat year-over-year in fiscal year 2013. If the new product is approved, we expect considerable traction and up to about 70 basis points of growth for contribution at the Medtronic level. So that’s another big swing here.

The rest of our businesses, the remaining 65% of our businesses, which is a whole series of products and 50% of that number are essentially emerging markets, which is somewhat diversified from the rest of the products that I just mentioned. Those products have been showing a steady 67% growth over an extended period of time and we expect that to continue. And if that does, that adds another 60 basis points or so, there could be some pressure on that per se even if it’s staged around the same levels, even if it is down about 6%, there is slight pressure on the overall Medtronic growth levels.

If you add all of these up, you can see why we get to 3% to 4% guidance that we’ve talked about. 4.5% is what we grew in fiscal year 2013; worst case, it could be down in 2.5% or so or it could be as high as a little over 5% as well. So we came up with the guidance number of 3% to 4% on that basis. And this is the near-term formula, if you like, for us to strive towards the mid single-digit number.

So I hope this clarifies the way in which we’re looking at our business and something that we’ll keep in front of you. It’s an organized way of looking at ourselves of our strategies, what it’s doing, taking different steps to correct things as they change, but a series of petty transparent assumptions that we make as we look to plan out business in the future.

Now lets go to the operating expense part of our business, we expect by and large slight leverage from SG&A, it’s where we’ll get the – most of our operating leverage. In terms of gross margin, we run at pretty high gross margins. Our goal is to keep that flat. And we intend to have a very aggressive approach towards product cost reduction, which goes in a continuous cycle of supply chain optimization, new product architectures, and design optimization. And there is a continuous cycle that every time you get a new product architecture, we go back to supply chain optimization, design optimization and then go back to another architecture. And we have that cycle into our programs across all our business units.

Through this process, we expect to deliver $1.2 billion of product cost savings in the next five years. This gives us some protection against pricing and through this we expect to maintain a flat gross margin of about 75% to 76% on a currency adjusted basis. And at the same time that will give us an opportunity when we see fit to tear our products as we approach emerging markets especially the value segment of emerging markets.

In terms of SG&A leverage, we continue to look at efficiencies across the board. There are many different tools that we use all the way from better IT systems to moving some of our work offshore to outsourcing some of our work, but we continue to look at efficiencies in SG&A. Some level of efficiency we’re also seeking in our distribution expenses, which we think is possible through many of the new products that we’re launching, which may not require the level of clinical support that we’ve had historically.

In addition, in R&D, we expect to keep it around the 9% number. we don’t really look at R&D spending specifically for a percentage basis. we look at what the products, projects are and whether they’re worth funding or not, and we expect that number to sort of go plus or minus around 9% in the future depending on the quality of the projects that are proposed for work. and so if you maintain the same level of R&D, maintain gross margins flat, the operating leverage that we’ll get is about 30 to 50 basis points from SG&A and we expect to continue that over an extended period of time.

The other thing that we’ve talked about is our capital allocation strategy, and you can see we’ve established a record of increasing our dividend, corresponding more or less to earnings, and we’ve had a history of doing this, we intend to continue doing this. We’ve also had a pattern of share repurchase. we’ve repurchased 14% of our shares in the last five years and over $1.2 billion in share repurchase in FY 2013 again, we expect to continue this level of share repurchase.

the way in which we’re looking at this is that it’s fueled by our free cash flow generation, and we expect we’ve had robust levels of free cash flow generation historically, we expect that to continue. and so it gives you a flavor of the order magnitude of cash generation that we expect on a yearly basis and specifically over a five year period.

So $25 billion of cash, free cash flow that we expect to generate over the next five years from our operations. What we do with this is, well, first it’s worth pointing out that this is 47% of our current equity, so that’s reasonably good number. We then expect that, that expected free cash flow is divided between cash that is generated outside of the U.S. and cash that’s generated inside the U.S. And as you all know, we’re constrained somewhat in our ability to use that cash to provide dividends and share buybacks because a lot of it is outside of the U.S. and because of tax reasons, we’re not bringing it back right now. Instead, we carry some debt and use the U.S. cash and through that we’re providing about 50% of that $25 billion back to our shareholders. The other 50% and another $12.5 billion is for our own use in terms of acquisitions or building up our cash position.

And that $12.5 billion that’s return to our shareholders is again divided equally between dividends and share buybacks. So that’s the sort of macro strategy that we’re employing and that’s something that we’ve had historically and we expect that to continue. This puts some hard numbers in front of you. You can see sort of a slanted line separating the OUS cash and U.S. cash and that’s because we’re cognizant of the constraint in bringing money back from outside the U.S. So we’re looking at several initiatives to drive further cash generation within the U.S.

And here is some of those initiatives that we’re talking about. First of all, it’s pure operating activity and improving working capital. It’s specifically around inventory. We’re particularly focused on inventory because the turns, the working turns in this industry and for us are relatively low. And there is a lot of inefficiency in the system because the culture of the industry is that we just missed a single procedure, which is very important, but that’s led to somewhat blotted structure of storing inventory in many different places in a very distributed fashion. Modernizing that system and improving that supply chain and streamlining that supply chain without compromising service levels to our customers, we think gives us an opportunity to improve working capital. And in fact, we’ve had this initiative going in the last year or so.

We expect a 50% decrease in inventory rates by fiscal year 2017 and we’ve had a good start on that, we’re just beginning to roll some programs out. But in fiscal year 2013 alone, we’ve already reduced it by 17%. And so this is a big factor and over time, we think this will give us a healthier business. This is global effort, but obviously, there’s a big impact in the U.S. itself.

We’re also shifting operating expenses to the degree that we can outside the U.S., much of this is simply driven by the fact that growth markets are outside the U.S., and a lot of differentiated investment will go outside the U.S., both in terms of distribution, and also increasingly, in terms of clinical work and R&D work. But certainly in terms of distribution where the China, India, Southeast Asia, Middle Eastern markets, Latin American markets are big markets for us, and we will do a lot of differentiated investment in those areas.

And finally, the tax policy, which we have fairly little control of, there’s one element that gets out a little bit, which is transfer pricing issue that we have with the IRS and depending on which way that settles, that could give us an ability to bring back some amount of cash into the U.S. But outside of that, we’re really dependent on overall tax reform, which essentially that’s out of our control. But it’s worth pointing that there’s a potential of treating by $20 billion worth of earnings into the U.S. So that’s a big swing, but again, that’s not something that we can do much by ourselves. what we can control, the first developments of working capital and the operating expenses and we are very heavily focused on both of those areas, because we do want to control, and sort of optimize what we can do in areas that we can control.

Moving on now a little bit to our overall inorganic strategy, we’re looking at our business around three customer groups, cardiovascular customer, what we call the Restorative Therapies Group, but it’s really around neuroscience and orthopedics customer, and some related areas where we use common technology. and then we have the diabetes area. We’ve focused ourselves around these three customer groups, and we intend to over time make ourselves comprehensive players in all three of these areas.

We already have very strong physicians, but we intend to increase that further. and we’ll supplement that with inorganic activity as we see fit, both in terms of increasing our footprint globally or going into value products in emerging markets as well as cutting across the continuum of care, in other words moving more towards diagnostics and patient management are grounded in our therapies.

In all of this, we look for good return levels and we are also looking at return levels that we expect, which is mid-teens risk adjusted, and we’re also intended to minimize any net EPS dilution. and by that, I mean what we’ve laid out in our baseline expectation of leverage in EPS, we don’t want to compromise that significantly through acquisitions, and it’s not that that will never happen, but that’s not our initial assumption as we look forward.

In the end, we look at the three factors that we ask of all businesses that we buy or even look at our internal portfolio at all times. Are we in an attractive market, are we positioned to win in that market, do we have the capability to win and that’s overall Medtronic actually add value to our competitive position in those specific markets.

So now we’ve covered all of this. And in summary, therefore, what we’re trying to do is build a roadmap through which we can deliver to these baseline expectations, which essentially are driving towards mid single-digit revenue growth, consistently returning EPS 200 to 400 basis points of growing that faster than revenue and then returning 50% of free cash to our shareholders. And I hope you understand what I believe out here is consistent with these baseline expectations. And we expect to keep this in front of us and develop plans as we go forward to hit this.

Now let’s look at some transformational opportunities. And to do that we need to take a step back and understand where we stand with the overall markets. And the market dynamics have a whole series of pressures, which you can look at but they can essentially be summarized into three universal needs. There is a constant desire to improve a clinical outcomes and one cannot forget that because there is always a need for better care and people aren’t going to walk away from that. There is access need specifically globally where large segments of the population are under penetrated with a lot of our therapies and then equalization and expectation of healthcare in all of these countries is going to happen. And through all of this we need to optimize cost and efficiency because there is a great deal of sensitivity to the amount of cost that’s been spent in healthcare around the world.

To address these needs, we’ve got these two strategies of globalization in the economic value, which I will explain in a minute here. First of all globalization which is a more obvious strategy. Here what we’re trying to do is we look at the world into the three segments. The premium segment, which is really defined by therapies that we have today, and develop a strategy through which the penetration of these therapies is simply equivalent in emerging markets to what we have in developed markets.

So by way of example in emerging markets, our existing therapies, so these are products that are already commercialized. Our existing therapies are penetrated to 11%. The same products or therapies in developed markets have penetrated to 24%. And if we simply take and this is on a basis of people who can afford these therapies, that’s what the premium segment designates.

So it’s not the entire population, it’s about 10% to 15% of the population of emerging markets. So one would expect that this population is going to afford these therapies, it is reasonable to expect that we can drive a penetration level, which is equivalent about to that of developed markets in those regions.

If you do that, that gives us a $5 billion annual opportunity. So that’s a tremendous opportunity. The key to doing this because the products are there, the affordability is there, the key to achieving this is basically breaking down barriers of awareness of making sure the infrastructure exist and making sure there is enough doctors who are trained to deploy these therapies. Typically governments will go after infrastructure first and that already exist, but in many of these emerging markets, these hospitals and cath labs are all under utilized. So if you create a patient awareness and bring more patients in to the system as well as do better training, we think we can make an impact.

In addition to that, we are looking into the value segment, which will be emerging as we go forward driven both our ability to produce low cost products and the rising wealth of populations around the world. To that aspect, we’ve done two recent acquisitions both value product platforms in orthopedics and in Structural Heart, the Structural Heart one is a minority investment. But there are two strategic partners and that will become the anchor point if you like of our future cardiovascular value products.

In addition, we’ve established an innovation center in Shanghai, and between the three of these from virtually nothing in FY 2013, we have about 250 to 300 engineers in China, looking at Chinese markets and emerging markets as a whole. We expect that number to grow and if you put that many engineers in the geography with good programs growing, we’re going to get traction of new products in the value segment.

So let’s shift gears now to what I mean by economic value. What’s happened in the developed markets primarily on the world is that, because of the cost sensitivity and the importance of healthcare, our customer base is broadened from a physician to a broader set of stakeholders. The payment models have evolved. A longer time horizon, people are much more, looking much more proactively at paying for value versus paying for procedure, which I think is very healthy for the healthcare system.

However, if we do nothing if the Medtech industry, which has not adapted to this and it’s stuck at a pay-per-procedure sort of a strategy, what that drives is increased pricing pressure, because the value of our products is usually realized after the procedure.

If you put a product in, the benefit that you get is after the implant is in the patient. A purchasing manager looking at this will look at only the cost. It’s very difficult for them to quantify the value in financial terms, they will only think about it in clinical terms.

So we think it’s important, therefore to look at this business in a different way. In the past, we’ve sold simply to the physician. as I said that’s changing, because the purchasing managers are now taking a bigger and bigger rollout just as cost sensitivity is increasing, but if you look at the physician and the purchasing manager only, then you’re really driven to a vendor relationship where you’re taking the side of the physician and trying to convince the purchasing manager to buy your product, but the value equation is described fairly qualitatively in terms of the physician and the purchasing manager sometimes is the part to kind of really ask the physician for evidence, which often you do not have. A preferred view instead is to demonstrate overall value for our products across the hospital and beyond.

So in other words, we can paint a picture of economic value to the entire hospital, reducing ICU stay as well as reducing readmission rates, if you can create that sort of a partnership, we can have a preferred physician. And that will project our pricing for example. Everybody cannot do this, the reason we can do this is because we’ve got a portfolio of products and therefore we have enough presence in a hospital that the C-Suite will pay attention.

We’ve got enough volume and breadth there. In addition, we’ve got the physicians support, because we’ve got market leading products, which is the fundamental of our success across the board. And then finally, we’ve got financial strength, which we can use in many different ways to do some level of research with different hospitals and by doing that, we can be a preferred partner.

The core to all of this is being able to describe our clinical value proposition in financial terms, in other words, demonstrate to a stakeholder why it’s a financial benefit for them to buy a product, which they understand intuitively what the clinical value is and we intend to do that in a very granular fashion.

So in all our products, we see three types of categories. we have core products, which are market leading products, but we intend to conceptualize these in economic terms as well as clinical terms and we’re creating this messaging based on evidence, treating our entire commercial sales force and talk about in these terms and through that we expect to appeal to the C-Suite in different hospitals.

In addition, there’s lots of products which – whose full value, economic value is not realized unless services are put around or different programs are put around those products to realize full economic value, and I’ll describe an example. And then finally, we got other types of solutions which can be independent revenue streams, which can be patient management or patient referral services that drive our therapies or come from our therapies, which we have to create, and there is lots of potential for doing that too.

Combined these set of offerings can create a pretty compelling package to a hospital administrator, where it will actually move the needle in terms of their financials. It is the volume that they purchase from us. Some examples; product example, if you take a series of our products, spinal products as well as the surgical technology products, we’ve seen that you can show real value in reducing procedure time and clinical outcome that are measurable by doing imaging and navigation together with our spinal implants. And by combining the spinal implants, by making them navigated tools, driven by imaging and navigation procedures – instruments, we can in fact reduce the operating time and produce less revision surgery, things that are completely measurable.

We’ve taken this to market where we do a combined transaction based on these products with a value proposition that’s clearly outlined in quantitative terms, and through our balance sheet what we do is we do some level of rebate depending on the level of implants that are put in while we place some of the capital equipment there. So there are innovative ways of going to market using our financial strength. It has been very successful and as you can see here, our revenues in accounts, which have O-arms, which is the imaging device, is like 10 percentage points higher.

We then have another thing, which is, we call a wrap-around program where we have blood concentration tools to conserve blood. And if you take these tools and put Lean Sigma programs or process improvement programs to manage patients as they go into a cardiac operating room and manage them post the operations with some very specific procedures, we’ve shown that we can save a fair amount of money for a hospital by using this entire program. So it’s not only the instrument, but the program that goes around it. And again, early results have shown some real savings and a lot of excitement in most of our customers.

And then finally, we have a broader aspect of independent revenue stream where we’ve – in Europe, for example, made some fairly major arrangements with some hospitals where we’re managing the entire cath lab. We finance the cath lab, we optimize the operational efficiency, we manage a lot of the daily operations because a lot of our clinical staff is involved in there, and we go with cardiac services by improving the patient referral channel and patient management beyond that.

So here we are really taking a much more broad based approach and we’ve had some successes already. We locked up a seven year contract with the University of Manchester in the UK, it requires a large shift have shared to Medtronic and this is operational today. We have a huge pipeline – robust pipeline of deals that we think will feed this and we’re gradually globalizing this concept.

So as you can see our overall strategy here is to first keep our head to the ground and deliver through some known and very measurable methods consistent performance that meets our baseline, to mid single digit growth, consistently growing EPS and returning free cash to our share holders. That’s our platform and we have to do that and not get side tracked from that in any way.

But at the same time we are investing in these innovative opportunities both in terms of globalization and in terms of economic value, which we think over the long term, would provide some level of upside to this performance, but more importantly, will give us durability over the long-term further diversifying our revenue for both from the customer type as well as geographically.

So in closing, I’d like to mention that look, our foundations do not change. all of the stories that I talked about are based essentially on focusing our mission, quality, therapies that improve clinical outcomes and our relationships with physicians.

So that focus, which has given us a market leading position in all our different product lines we’re in has to remain, because all of the economic value techniques and methods that we talked about are not worth anything, if you don’t have market leading positions and a physician support to start with. Once you have physician support, you have that across a broad range of products, give all kinds of options and that’s what we intend to leverage as we go into the future.

I think that’s all I have. Just in summary, again, consistent execution to start with, some clear initiatives to drive some upside that are always grounded in our basic principles.

So with that, I’d be glad to take some questions, there’s few minutes maybe I can take some.

Question-and-Answer Session

Derrick Sung – Sanford C. Bernstein & Co. LLC

Great. well, thank you very much, Omar. that was an excellent presentation and a great overview. Maybe, I can start out by commenting on that wonderful slide that you put up that showed the slide 14 top line outlook, which I really appreciate. I think that was a very compelling way to lay out, how you get the mid single-digit growth. What I did notice is that on sort of your variances, if you kind of add up the numbers together, right, you kind of get to 3% to 5% top line growth if you add up the difference between that and probably your last year, maybe talk to a little bit to sort of the conservatism on your guidance, and then also kind of what are the risks and the puts and takes that you see to get in there?

Omar Ishrak

Sure, well, just a moment to go back, yeah, it is working. Well, first this is not an exact size, but granulating it and looking at in segments and putting certain assumption in there. It allows us to measure things in a structured way and make adjustments, if the adjustment, if assumptions change. So that’s why we have a range over there. There is no uncertainty for that range of lots of variables.

What the variables are, are number of things. Market conditions, which we expect to try through our diversification as well as through our all new products, try to offset. But there are levels of uncertainty in the market that we just cannot control, maybe either legislative or there maybe some publicity around certain things, there is fine general articles and in fusion are great examples where you get the series of articles and the business was down 10% to 15% for almost two year period. So you can get uncertainties coming your way. But breaking the business down into those elements, we hope to contain those uncertainties to very specific segments, but again I mean that’s not an exact signs.

Regulatory approvals are another variable, but we built most of that in because in all those assumptions we’re talking about products that already exists with the exception of the diabetes product, which we’re giving in a full year for approval, so and that even a non-approval scenarios has built into that structure. So market uncertainties are the biggest things. I don’t think regulatory approvals are a big factor at this stage at least for FY 2014. I’d say any other competitive activity that’s significant is always going to be a factor. So we’ll look to see what happens there. But market uncertainties really the biggest one both in terms of overall volume, but also in terms of very significant pricing pressure that can happen for a variety of reasons.

Derrick Sung – Sanford C. Bernstein & Co. LLC

Great, thank you. So following on that your last comment there, I’ve got a number of questions here around the outlook for pricing in Medtech in general…

Omar Ishrak

Sure, sure.

Derrick Sung – Sanford C. Bernstein & Co. LLC

For your company specifically I think that reflects a lot of the concerns that investors have on this segment as a whole. So maybe, if you could give us your sense on where pricing is going not just with your company, but Medtech in general.

Omar Ishrak

Yeah.

Derrick Sung – Sanford C. Bernstein & Co. LLC

Is there any hope that we can see a stabilization of the pricing?

Omar Ishrak

I think for the industry in general, and looking at a macro level, there’s only one way to stabilize pricing. And that one way is to make sure that you equate the value of what we sell in financial terms.

Let me just expand what I mentioned earlier and I want to make it very clear. When you put an implant, that’s done during the procedure that procedure is paid for. The value of that implant in financial terms is almost never going to be realized during the procedure. You put something in, there’s a cost, the value is realized after the procedure, the financial value and the clinical value.

So to measure the financial value of something, you’ve to monitor what the benefit is after the procedure. If you can do that effectively and you can make a credible case as to what the true financial benefit is, only then, you can establish fair pricing. Our whole economic value program is geared towards doing that, which makes pricing much more quantitative as opposed to who can tell the best story, because who can tell the best story is only [Daniel], that’s for sure. So unless that is addressed, pricing is always going to be an issue in Medtech. and then we intend to move towards economic value, try to offset that and having relationships at the C-Suite, I think will help us in that endeavor.

Now in addition to that, the other moves that we’re making are two-fold. First, going after cost reduction heavily, which will give us (inaudible) work; it gives us a bottom floor in the traditional way of doing things. And we’ve demonstrated that we can hold our gross margins flat as a result of that and the other that you also have to understand is that although in some areas, the decrease in pricing is very visible. We’ve got some highly differentiated products; in fact, we’re increasing pricing in areas like pain stimulation, in areas like DBS, in areas like surgical tools. We in fact increasing pricing year-over-year. And so net-net, the overall impact in pricing is somewhat balanced.

Derrick Sung – Sanford C. Bernstein & Co. LLC

Great. And just one final question here as we’re running out of time. So you put up diabetes as an area of focus for M&A on the slide, and that’s an area that we haven’t seen too much activity on your part over the past few years. Talk a little bit about where you see some of the gaps in your portfolio and is this a greater area of focus for the company as a whole moving forward given the slow down in the cardio spine side of them?

Omar Ishrak

Well, I don’t know, I don’t want to give up on the cardio and spine side because I think there is opportunity there as well. But diabetes is a big opportunity. I mean, it is one of the biggest disease states. Our footprint today is only in Type 1 and our footprint today is only Type 1 highly penetrated in the developed markets. In emerging markets, the penetration level of Type 1 diabetes is miniscule; it’s 2%, 3%. And in places like the Middle East, these are big, big problems, where the healthcare systems have money and they expect us to fulfill that. So some of that is penetration, but we might need to provide some sporting tools to enhance our position in those markets, some kind infrastructure support that maybe needed, which may require some inorganic activities.

So to broaden out our Type 1 portfolio, we may need some level of inorganic activity. But bigger than that is an approach into Type 2 in some way, which is based on technology. We have a continuous glucose monitoring sensor, which in principle can do diagnostic in terms of Type 2; we can look at supporting acquisitions around it. So sort of broadening our footprint is one aspect through which in Type 1 as we go into some of these markets, going into value products in Type 1 is another area to look at for acquisitions. And the third aspect is, how do we supplement our footprint in Type 2 through continuous glucose monitoring with other types of products.

Derrick Sung – Sanford C. Bernstein & Co. LLC

Great. And with that, we’re out of time. So thank you very much, Omar, for your time. Thank you all.

Omar Ishrak

Thanks, Derrick. Thank you.

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