Medtronic CEO and Chair Geoff Martha [Photo courtesy of Medtronic]
Martha — who leads the world’s largest medical device company — offered his latest observations on labor, supply chain issues and international markets. He also discussed plans to increase R&D spending and the latest on Medtronic’s surgical robotics system, Hugo.
Related: 5 growth areas where Medtronic’s CEO wants to invest more
The 35-minute interview is available for replay. The following excerpts have been lightly edited for space and clarity:
Labor issues are abating, allowing for increased procedure volumes
“The labor markets have gotten a little better. Some of the procedures that were lagging were really dependent on labor like TAVR (transcatheter aortic valve replacement) and things like that. You need to get an imaging work-up just to get to the TAVR procedure and there were some backlogs there. That’s gotten a lot better. The U.S. is doing a lot better and like we said on our call, our fiscal year ended in April but even into May, we saw continued acceleration. Quite frankly, the U.S. for whatever reason was a little bit behind Europe. Europe was stronger earlier and now we’re seeing that translate to the U.S. and keep going around the globe to our bigger markets. Japan has had a real strong bounce in the last couple of months. Overall, I think things are in a good spot from a procedure standpoint. … I was actually in D.C. last week and got to hear the treasury secretary speak a few times. They’re definitely saying labor markets are loosening up a bit. And we’re seeing it, both for procedure utilization — health care workers — but also suppliers. A lot of the supply chain issues — everybody hears about commodities like certain chips and resins and things like that — but a lot of the (supply chain) issues were labor too. And so it’s better on both ends.”
Medtronic’s supply chain improves
“A lot of analysts and investors are focused on the commodity shortages, like resins or plastics and certain large chips, larger-format semiconductors. They’re still a bit fragile, but they’re in a lot better spot. We’re supplying demand, we’ve now eaten away at our back orders. It feels a lot better. But another driver that was just labor in the labor market and our suppliers. Suppliers couldn’t staff their lines. And then on top of that, you bring in new labor, and they have to be trained, so it hurts their productivity. So that’s in a better spot as well. And then us specifically, our surgery business had a couple of specific supply issues that kind of came together and really brought that business to its knees for a while where it couldn’t supply, and it impacted our growth. And it’s such a big business for us, it impacted Medtronic’s growth. We were saying all along that business is more contracted physician preference business and it woul come back when our supply chain comes back. Well the supply chain’s coming back and our business is snapping back for us. That’s behind us.”
On designing the supply chain for resiliency
“There’s a huge opportunity for us, because we’re managing it for cost and cost productivity and resilience at the same time. Let me explain. We managed this in a fragmented way. Each one of our businesses had their own supply chain — some businesses shared — but when you add it all up we had 13, 14 supply chain organizations. We’re now down to one. Think of a commodity like metals, and maybe we need a dozen, 15 suppliers, we’d have hundreds. What happens is we were fragmented, we were small, even though we’re a large company, we were small to that supplier. and when the markets got turbulent, we weren’t above the line for them. And on top of that, we weren’t getting the best pricing. So now we centralize this and we [drafted] an all-star team of sourcing and supply chain professionals from all different industries. That takes a fun place to come and apply your craft. And they’re bringing in a whole new expertise to Medtronic, but even to medtech. We just recently did a metals request for proposal, and we’re bringing hundreds of suppliers down to a dozen, and we’re going to have higher volumes and better price. We’re not going down to one, we’re going to still have the dozens so we have the resiliency, and they’re strategic suppliers with contracts and service level agreements with us that we didn’t have before. And we’re getting better pricing at the same time. So the reason we’re able to get better resiliency and better pricing at the same time, which might seem counterintuitive, is because where we work, and it’s a big improvement.”
Previously: Supply Chain EVP Greg Smith sees fewer suppliers in Medtronic’s future
What’s the latest from China?
“Procedure recovery is back. I was just there a month ago and the economy, although it’s still a little lighter than what they want, it’s humming and procedures are back. The second thing we’re seeing is the volume-based pricing. That’s kind of happening over a two-and-a-half, three-year period. And we’re saying that by the end of our fiscal year, everything in our portfolio that will have a VBP impact will be done, so volume-based pricing is something that goes into our FY24. It’s all in our guidance. And then after that, we’ve been taking significant costs out because the market’s now more of a contracted business — fewer vendors, higher volume, more contractors — we’ve been able to take sales and marketing costs out to [mitigate] the pricing declines. It’s a lower profitable mark. It used to be pretty high. It’s a little lower profit margin for us, but still good. And then the third thing that we’re watching in China is geopolitics. Every day you pick up the paper, you read more about that. But we’re investing in China. It’s a big market, and it’s growing. We anticipate — this last year It was down for us, because of VBP — this year, more flattish. And then after that, it gets back to that high single-digit, double-digit growth.”
Growing R&D spending
“We’ve been working on [R&D] allocation. We’ve had this cap allocation framework, we’ve identified our top growth areas. And as we sit here today, we’ve identified these five top areas. And then we’ve got our big three businesses like surgery and cardiac rhythm and spine that you need to meaningfully iterate to — they’re all in really good spots right now — to keep them there. So if 20% is in that top bucket, 50% is in the big three businesses, the other 30% you’ve got to invest enough so that none of them take a step back. So I feel we’re in a pretty good spot there. But I do think that over time — and it’s not going to be like a big jump at once — I’d like to get our R&D as a percentage of sales a little bit more than it is, so growing faster than sales.”
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Hugo robotic surgery system progress
“It’s handling the most complicated surgeries on par with the competition and getting great feedback. … [the U.S. IDE] has gone really well. … Our robot’s going to be roughly on par — based on the market analysis I’ve seen — with the competition in terms of the price of the unit. Why we’re confident that it’s more cost-effective is because it’s compatible with our laparoscopic technology … and because it’s more mobile and modular. … When we get our stapling and our energy on Hugo, wow. That’s what people want. … That’s the physician preference part of our surgical franchise, which is very durable. You get that on the robot, that opens up a lot because that’s what surgeons are trained on. Everybody’s focusing on the robot, but there’s a lot of technology that has end effectors and we need some time to get them all converted over. But that’s what we’re working on. That’s why we feel like our surgery business is so well positioned. In the case of Medtronic and J&J, we do a lot of the cases, most of the cases, and Intuitive sold a lot of robots and the robots aren’t doing as many cases yet. So now, we are the one company that has the instruments that the hospitals rely on for the bulk of their cases in laparoscopic surgery and we’ve got a competitive robot. We’re the only one with both of those, and it’s contracted business, so we feel good about where we’re going with this business.”
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