美敦力 (MDT) 2021 Q3 法說會逐字稿

Good morning and welcome to Medtronic's Fiscal Year 2021 Third Quarter Earnings Video Webcast. I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations.

Before we start the prepared remarks, I'm going to share with you a few details to keep in mind about today's webcast. Joining me today are Geoff Martha, Medtronic Chairman and Chief Executive Officer; and Karen Parkhill, Medtronic Chief Financial Officer. Geoff and Karen will provide comments on the results of our third quarter, which ended on January 29, 2021. After our prepared remarks, we'll take questions from the sell-side analysts that cover the company. Today's event should last about an hour.

Earlier this morning, we issued a press release containing our financial statements and divisional and geographic revenue summary. We also posted an earnings presentation that provides additional details on our performance as well as changes to our future reporting structure, given our new operating model, which will go into effect next quarter. This presentation can be accessed from our earnings press release or on our website at investorrelations.medtronic.com.

During today's webcast, many of the statements we make may be considered forward-looking statements, and actual results may differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC, and we do not undertake to update any forward-looking statement.

Unless we say otherwise, all comparisons are on a year-over-year basis and are given on an organic basis, which adjusts for foreign currency. There were no acquisitions made in the last year that had a significant impact on total company or individual segment quarterly revenue growth. References to sequential improvement compared to the second quarter of fiscal 2021 are made on an as-reported basis. All references to share gains or losses are on a revenue and calendar quarter basis unless otherwise stated. Finally, reconciliations of all non-GAAP financial measures can be found on the attachment to our earnings press release or on our website at investorrelations.medtronic.com.

With that, let's get started.

(presentation)

Hello, everyone, and thank you for joining today.

The Q3 results that we reported this morning reflect that our business is well on its way to returning to growth with a sequential improvement in both revenue and earnings. This happened despite the impact of the COVID resurgence on procedure volumes in late December and January. We're also outperforming our markets as our new products are driving share gains in an increasing number of our businesses. In fact, we outperformed the market even if you exclude our strong ventilator sales. And when you consider that we're going up against a number of our competitors' year-end pushes and our results include the month of January when COVID was having a increased impact on procedure volumes, our performance is even more impressive.

We're also seeing signs that our hospital customers are preparing for a robust recovery. For example, purchases of our capital equipment this past quarter have been notably strong. The use of our capital equipment, such as energy consoles, robotics and navigation systems, is tied directly to procedures. So it's telling that hospitals are prioritizing spending on this type of equipment.

Now as we head into our fourth quarter, we're bullish on the recovery and our ability to return to growth and outpace our competitors. We feel that the momentum we have is going to build over the coming quarters driven not just by the COVID recovery, but by the strong new product flow that we expect to bring to the market. And we're supplementing this pipeline with an increasing cadence of tuck-in M&A. We've also implemented our new operating model, and we're enhancing our culture with a sharpened competitive focus. Through the actions we've taken over the past year, we're emerging from this pandemic as a stronger Medtronic, and I'm confident that we're well positioned for both the short and the long term.

Now as we've done on the past couple of earning calls, I'm going to lead off with the discussion of market share, which has become an important focus across the company. I acknowledge that the COVID impact on procedures, along with the timing of our quarter, does mask some of the underlying market dynamics. But I hope that you're now seeing a strong trend of share gains for Medtronic.

And there are multiple drivers for our improved market performance. Our prolific pipeline is key, but also the transformation of our operating model and culture is beginning to drive results. And the changes we've made during the pandemic, moving from simply serving as a supplier to our customers to becoming a true partner, has driven stronger customer relationships and improved business performance.

Our consistent and sustained flow of new products is our engine for growth. In the past quarter alone, we've received an additional 46 product approvals, bringing our total to over 220 regulatory approvals in the U.S., Europe, Japan and China since January of 2020.

Let's start with the businesses where we are gaining share in our Cardiac and Vascular Group. We continue to outperform our competitors in cardiac rhythm. We gained another point of share this past quarter on the strength of our micro family of leadless pacemakers and our Cobalt and Crome high-power devices. Micro continues to perform extremely well with 64% growth globally, including 76% growth in the U.S.

In coronary, while we we're dealing with the financial impact of the China drug-eluting stent national tender, we're still winning share globally. We estimate that our DES unit share is up 3 points year-over-year and 2 points sequentially led by strong share gains in the U.S. on our 1-month dual anti-platelet therapy labeling and expanded indication for high-bleeding risk patients. And in China, we believe that being one of the winners of the DES national tender strategically positions us to maintain our leadership in the China cardiovascular market. Not only do we expect to pull through other products, but we expect to leverage our scale and reach to drive the successful future rollouts of our TAVR and Ardian products.

In drug-coated balloons, we're growing well above the market despite increased competition. We gained a couple of points of share on the strength of our market-leading IN.PACT family. In fact, we're seeing continued strong adoption of our DCB for AV fistula maintenance for dialysis patients driven by the publication of our data in the New England Journal of Medicine.

Next, turning to our Minimally Invasive Therapies Group.

Our Surgical Innovations business had a good quarter against our primary competitor, J&J. We gained nearly 1 point of share year-over-year driven by our energy and endo stapling product lines.

Our Respiratory Interventions business had a great quarter, growing over 75%. And this was driven by the importance of our airway and ventilator products in treated COVID patients. And as expected, our ventilator sales were down sequentially, but nearly tripled year-over-year. And our PB980 gained share in the high-acuity ventilator market. We also gained share in airways driven by our impressive growth of over 60% in video laryngoscopes. Looking ahead, our ventilator revenue should normalize as pandemic-related demand decreases, and we anticipate year-over-year headwinds starting next quarter.

Our Patient Monitoring business also had a strong double-digit growth quarter. Our Nellcor pulse oximetry product lines grew double digits as we won share sequentially for Masimo.

In Gastrointestinal, we had some modest share gains driven in part by our partnership with the NHS in England. The NHS is using our PillCam COLON to help reduce large patient backlogs for colorectal screenings.

And our Renal Care business grew in the high single digits with share gains in renal access.

In our Restorative Therapies group, we're seeing share gains across several businesses. In Cranial & Spinal Technologies, while share was stable year-over-year, we do believe we're up sequentially.

We had a strong quarter in large capital equipment sales with a record number of Mazor robotic system unit sales and near records for our O-arm imaging and StealthStation navigation systems. And with Mazor, we estimate that we continue to meaningfully outsell our nearest competitor, Globus, in the spine robotics space.

In Neuromodulation, our recent product rollouts are leading the share gains in both Brain Modulation and Pain Stim. In Brain Modulation, our Percept PC launch has led to nearly 1 point of share gain year-over-year and several points of share gains sequentially from Boston Scientific and Abbott. Now given our technology differentiation, we expect DBS share gains to be a multiyear trend.

In Pain Stim, we're gaining strong momentum from our DTM launch with nearly 1 point of share gain year-over-year, which is even more impressive when you consider that this business is facing a replacement headwind. Our DTM trial surged this quarter after the release of our 12-month data in late October. And overall, our trials are up 10% year-over-year, which is a really good leading indicator for the health of our Pain Stim business.

In Pelvic Health, not only is the market growth accelerated over the past couple of quarters, but we continue to win share back from Axonics based on the differentiation of our InterStim Micro device. Since last quarter, we gained another point of share in Europe and 3 points of share in the U.S. We've now taken back 9 points of share from Axonics over the past 2 quarters. And when you look specifically at the U.S. rechargeable market, we gained back 14 points of share sequentially this quarter.

So there are a number of businesses where we are gaining or holding share, but there are still some businesses where we've got some work to do. In our Cardiac Ablation Solutions business, we believe we lost about 1 point of share year-over-year and sequentially, primarily to J&J's broad EP product portfolio. Now we expect this share performance to turn around in the quarters ahead due in part to our DiamondTemp cardiac ablation system, which just received FDA approval. In cardiac diagnostics, customer response to our LINQ II system has been outstanding given our remote programming capabilities, enhanced feature set and a 4.5-year longevity.

That said, we estimate we lost a few points of share sequentially to Boston Scientific as they enter this market. We continue now to ramp our unique wafer scale manufacturing for LINQ II, but expect to be supply-constrained for the next few quarters. However, we are confident in the competitive differentiation of our LINQ II device, and we expect to maintain our strong leadership position in this market that we created and have innovated for the last 20 years.

In Neurovascular, while we held share year-over-year with strong growth in aspirations and coils, we lost a bit of share sequentially. And this was primarily in flow diverters as new entrants, specifically Terumo and Stryker, pick up some share. We have a series of new product launches coming in neuro later this calendar year, so I'm confident that after the initial impact of competition in flow diverters that we'll get back to taking share.

In Diabetes, we're making considerable progress in our turnaround efforts, and we actually returned to growth this quarter. While we're still not growing with the market, we're gaining momentum with the successful launches of our 770G system in the U.S. and the 780G, which is now available in 26 countries across 4 continents. Now as a result of all this, we estimate we picked up several points of durable insulin pump share sequentially.

Next, let's turn to our product pipeline. We're at the front end of a number of large opportunities to win share and create and disrupt big markets, all aimed squarely at accelerating our growth. A number of these catalysts are on deck this calendar year, and the long-term pipeline also remains full.

Starting with CVG, we're expecting to present our ON-MED renal denervation pivotal trial results later this calendar year likely at the TCT Conference in October. This could be one of the most important events in medtech this year given the multibillion-dollar addressable market in hypertension. Now depending on the results of our On-MED trial, we're planning to submit for FDA approval later this calendar year, and we've already been granted breakthrough device designation.

In our Cardiac Ablation Solutions business, we are expecting a first-line therapy indication for our Arctic Front cryoballoon in the first half of this calendar year. We also continue to make good progress on bringing our disruptive pulse field ablation system to market.

In Structural Heart, we expect to roll out our next-generation Evolut FX TAVR valve later this calendar year with its enhanced deliverability and ease of use. We continue to enroll the pivotal trial for our Intrepid transcatheter mitral valve as well. And we're pleased to see that Half Moon Medical, which is our partnership with the foundry, completed the first-in-human procedure of its differentiated transcatheter mitral repair technology. This unique device has the potential to be very disruptive to current mitral clip technology.

In MITG, we're really excited as we're nearing some very important milestones for our Hugo soft tissue robot system. We remain on track to submit for CE Mark and to file for U.S. IDE approval next month.

In RTG, we're investing heavily in growth opportunities. In Neurosurgery, we're expanding the capabilities of our Mazor spine robotic system. In Pain Stim, we're expecting to launch our recharge-free device later this calendar year. This is a big opportunity for Medtronic to dramatically increase our share in the recharge-free category of Pain Stim. We also expect to submit our ECAPS device to the FDA later this calendar year. ECAPS could be a very disruptive technology in Pain Stim, and we intend to bring it to market combined with all the advantages of our DTM therapy and our Intellis device platform.

In Brain Modulation, we expect to launch our SenSight directional lead later this calendar year, which will close a key competitive gap. In fact, when you combine SenSight with our Percept PC device, our deep brain stimulation system will be far ahead of the competition. And we're not stopping there. We're now enrolling our ADAPT-PD pivotal trial, which is studying our closed-loop adaptive technology that will further extend our leadership position in DBS.

In Neurovascular, in addition to the flow diverter launch, as I mentioned earlier, we have 5 additional products that we plan to launch this calendar year. Now we haven't disclosed the details of these launches for competitive reasons, but we're excited about the innovation that we're bringing into the stroke market.

In Diabetes, we have now submitted the adult and the pediatric 780G insulin pump and Zeus sensor to the FDA to provide them with an efficient means to simultaneously review our multiple submissions. Approval timing, well, that's going to be dependent on the FDA's bandwidth as the branch of the FDA responsible for diabetes product reviews has focused their resources on COVID-diagnostic submissions.

Regarding our Synergy sensor, which is disposable, easier to apply and half the size of our current sensor, we've completed our pivotal trial and intend to submit it to the FDA once we complete our manufacturing module this summer.

I'll now have Karen take you through a discussion of our third quarter financials and our outlook. And then I'm going to come back with some concluding remarks before we go to Q&A.

Karen, over to you.

Thank you.

Our third quarter revenue declined 1% organic and adjusted EPS declined 10%. As Geoff mentioned, we're well on our way to returning to growth as sequentially, our revenue increased 2% and adjusted EPS grew by 26% on the strength of our new products and execution. While the resurgence of COVID did impact our performance across several businesses, we continue to view this impact as temporary. It's worth noting that our average daily sales in the third quarter were tracking higher than the second quarter through the latter part of December. However, we saw a step down driven by the COVID resurgence starting in the holiday period and continuing through the end of the quarter.

Procedure volumes were light in many geographies and specifically impacted our Surgical Innovations, Spine and many of our Cardiac and Vascular businesses. As Geoff mentioned, despite the slowdown in procedures, sales of our capital equipment were strong and point to a turn soon.

While our third quarter revenue was in line with Street expectations, we came in $0.14 ahead of consensus on EPS with an $0.11 beat on better operating margins and $0.03 on tax. FX, which was a greater-than-expected tailwind to revenues, was a headwind to EPS, $0.02 more than our November expectations.

We continue to see strong sequential improvement in our adjusted margins, 180 basis points on our gross margin and 430 basis points on our operating margin. Our operating margin improvement was faster than expected driven in part by expense controls in SG&A. Down the P&L, our tax rate came in lower than we expected as we finalized taxes owed on certain prior year's returns during the quarter.

Turning to our balance sheet. Our cash position is strong, and we remain focused on investing, both organically and inorganically, through tuck-in acquisitions and minority investments to drive our long-term growth. We recently announced another acquisition of the radial artery access portfolio from privately held RIST Neurovascular and now have 8 tuck-ins since the beginning of last calendar year with a combined total consideration of approximately $1.7 billion.

We expect these investments to fuel revenue growth acceleration and create strong returns for our shareholders. And we continue to supplement these returns with a strong and growing dividend. We are an S&P Dividend Aristocrat having increased our dividend for 43 years, and our yield of 2% places us in the top quintile of all S&P 500 health care companies.

Now turning to our outlook. While we expect the impact from the COVID resurgence to diminish, the effect from the ongoing pandemic to our business remains challenging to predict. So we will continue to not provide our typical guidance.

That said, I do want to give you our sense of the trends ahead. We continue to see a lag in our average daily sales in the first couple of weeks of February. But we expect that to steadily improve not only as we exit the month, but throughout the quarter as COVID hospitalizations decrease, ICU capacity increases and hospitals return to more normal procedure volumes. Said a different way, we expect March to be stronger than February and April to be stronger than March.

As we look at fourth quarter Street expectations and from where we sit today, we are comfortable with Street consensus on revenues and EPS. Within this, it's reasonable to think about organic revenue growth in a range between 30% and 34% if the recovery trends follow our expectations. In that case, by group, RTG organic growth would be around 50%; CVG, around 40%; and MITG, around 15%, reflecting the continued ramp-down in ventilator revenues and a tough year-over-year comparison; and Diabetes organic growth would be in the high single digits.

On the P&L, while we continue to invest in our product pipeline and launches, we do expect sequential operating leverage as our revenue improves. Therefore, we would expect around 1 point to 1.5 points improvement on gross margin and 1.5 points to 2 points improvement on operating margin, both on a sequential basis. Regarding currency, assuming recent rates hold constant, the tailwind to revenue would be roughly $250 million. On the bottom line, we expect an approximate $0.04 headwind.

I'd like to end by reminding you that our new operating model became effective earlier this month. And I'm excited by the impact it will have on our culture and our ability to drive growth acceleration. It will have minimal impact, however, on our external reporting. And you can refer to the slides in our earnings presentation for details on the minor changes going forward.

Back to you, Geoff.

Okay. Thank you, Karen.

Now to wrap up. We're continuing to put points on the board with strong execution across the organization. We're winning share in an increasing number of our businesses. We're executing on a record number of product launches. We're accelerating our growth. Our end markets are coming back, and we have exciting opportunities ahead of us. And importantly, we're positioning the company for long-term success as we continue to invest in our pipeline, enhance our culture and execute our new operating model.

We're empowering our 20 operating units. We've delayered and decentralized the organization, giving us greater visibility into our end markets and increasing our speed, decisiveness and competitiveness while at the same time, leveraging the strengths of our enterprise in areas like manufacturing and core technology development. And we're able to accomplish all of this because of our talented organization. I want to thank all of our employees for another great quarter and their continued hard work and commitment to the Medtronic mission.

So with that, let's now move to Q&A.

We'll now turn to the Q&A session with the Medtronic executives answering live questions from the sell-side analysts that cover the company. I'm Francesca DeMartino from the Medtronic IR team.

(Operator Instructions) Lastly, please be advised that this Q&A session is being recorded.

For today's session, Geoff, Karen and Ryan are joined by Sean Salmon, EVP and President of the Cardiovascular portfolio and the Diabetes operating unit; Bob White, EVP and President of the Medical-Surgical portfolio; and Brett Wall, EVP and President of the Neuroscience portfolio. (Operator Instructions)

We'll take the first question from David Lewis from Morgan Stanley.

Great. Can you hear me okay?

Yes. We can hear you fine, David.

Great. Just two from me. I'll start with financials. So Karen, I appreciate all the detail you gave us. Just want a couple of clarifications here. One, you talked about March better than February. Some of your peers have talked about February beginning to bounce a bit or improve relative to January. Have you seen February begin to turn? And is there anything about fiscal '22? I know we're not going to get full guidance for the full year, but anything about Street models in the forward year that you call out at this time that we should be focused on? And then I have a quick follow-up for Sean.

Thanks for the two questions, David. In February, so far, if we look at our average daily sales rate by week, we have not yet seen a turnaround, but we really do believe that it's due to the tough weather in the United States. And so we do believe that we will see that turnaround very soon. We think we're already seeing it in terms of procedures and hospitals. And again, we're focused on March being much better than February and April much better than March.

If we think about FY '22, it's still early. We are still in our planning period. And while I'd love to give some guidance on FY '22, it's premature given the fact that the COVID is still uncertain and we're still in our planning period.

Okay. And then just my follow-up here, just quickly for Sean. I mean, Sean, the Diabetes business obviously was the standout versus most Street models here this quarter. I just wonder if you could talk about what you're seeing in 780G relative to what we had seen historically with 670G. The guidance for next quarter probably doesn't seem as strong as I would expect given the momentum in diabetes this quarter.

So is there anything to think about there? And then just any sense of kind of Zeus versus Synergy in terms of relative time line? Does it make sense to launch those products independently if they're going to be sort of right on top of each other from a following strategy. So just a general diabetes update would be very helpful.

Yes. Thanks, David. So I'd say with 780G, what people are really enjoying about that is getting to stay in auto mode a lot longer. So that leads to better glycemic control. With the early reports, people are in the kind of the '90s in the post-market realm for glycemic control, but more importantly, they're not getting interrupted to take blood sugars that's cut down in half. They're able to sleep through the night with really good blood sugar control. And we measure things like Net Promoter Score on a product level as well, and it's up about tenfold from what we saw experience of 670G. So a very, very big improvement.

And we're also seeing in the 670G, I think the transmitter, which connects CGM to the pump, seems to function better than the way we used to connect that on 670G. So it's more reliable. And that, coupled with being able to see your numbers in the phone, has led to a better experience as well. And of course, that pipeline is upgradable to not just the 780G, but also the new sensor pipeline you asked about and the extended wear infusion set.

With regard to the Synergy, we've already filed Zeus that was filed in November. Synergy will be filed upon the completion of the manufacturing validation in the summertime. So they will be separated by probably enough to make a difference where we're going to want to have both products in the market, but we'll sort that out. We don't need to launch it if we don't need to launch yet, but I think we're going to have a period of time where Zeus will precede Synergy for both pump integration as well as stand-alone use.

The next question comes from Bob Hopkins at BofA Securities.

Great. So two quick things. First one, just to follow up on David's question on 2022. If you assume no third or fourth wave of COVID, and I realize that's an uncertainty. But if you just assume that doesn't happen, Karen, is there anything about the Street consensus that sticks out to you in that scenario?

Yes. I would say, Bob, it is early to tell from our planning process. But you can expect very strong growth off of a depressed base next year. And the Street is expecting that. So harder for me to give guidance beyond that when we're still in our planning process.

Okay. And then for Sean or for Geoff, on CBG, that was the 1 division in the quarter that was a little bit weaker than you originally thought. And I was wondering if you could just comment on that broadly. How much of that was simply worse than expected on the COVID side versus other things that surprised you during the quarter? And I ask the question because I want to understand what sort of turns around momentum in that division relative to your expectations.

I'll let Sean. Sean, do you want to go ahead and take that one?

Yes. Sure. Well, so first of all, I'd say that we got affected by a few things in the quarter, mostly coming out of the holidays into January. We saw the more elective parts of CVG slow down due to COVID and also where we had more concentrated kind of hospital clusters where, say you're in a tertiary care setting for like TAVR or cardiac surgery procedures. When you had cities shutting down because of COVID, we just had more of an impact on volume. And it's come back a little bit, but for some weather here in the February time frame, as Karen described. But I'd say generally, the things that were moving the quarter were Micra, also TYRX, they were both really good. DCB is coming back. And the CRM portfolio with the exception of tachy, which still has its replacement headwinds, was moving in the right direction.

As I said, TAVI was a slower than we had hoped quarter-on-quarter, but we think it's going to pick up momentum as we go forward into the next quarter. And of course, in core Coronary, while we gained share, we did have a $45 million headwind due to the China DES tender, which is going to recur every quarter until it annualizes.

The next question comes from Robbie Marcus at JPMorgan.

Congrats on a good quarter. Maybe two questions, I'll just ask them upfront probably both for Karen. One on margins. You did great OpEx control in the quarter. SG&A was down sequentially, which we typically don't see. How are you thinking about coming out of COVID going into fiscal '22? How much leverage can we see? How much is spending that's been held back versus needs to be put into place once procedures come back?

And then second, if you could touch on free cash flow. Trends continue to look pretty encouraging. How should we think about free cash flow conversion going forward?

Yes. Thanks, Robbie, for both questions. We did see good continued expense control this quarter, particularly in SG&A, and we would expect that to continue. That has helped drive our sequential margin improvement. It's not the only thing. Obviously, revenue growth helped drive it, too. And we talk about the fact that we expect sequential margin improvement both in gross and operating margins for Q4. As we think ahead, I would just keep in mind that our fourth quarter operating margins tend to be our highest margin. So I wouldn't necessarily extrapolate those onto the full year for next year. But we do, again, expect to have continued good expense control.

And in terms of free cash flow, yes, we have seen very encouraging things with free cash flow both on better-than-expected profit from the beginning of the year along with better-than-expected collections on accounts receivable despite the pandemic. So we've got good momentum particularly in both places. And you've seen our free cash flow, at least year-to-date, be above that 80% conversion. I would say that free cash flow is more of an annual metric because cash flows can be lumpy. And while we may be under that 80% conversion rate for the full year just because of COVID and the pandemic, we are clearly committed to that conversion rate being above the 80% going forward.

The next question comes from Larry Biegelsen at Wells Fargo.

One for Bob, one for Karen. Can you hear me okay, Ryan?

We can. Yes.

Great. So Bob, on the surgical robot, the filing seems like it's on track. Can you talk about how you're feeling about the 100 to 150 basis points of contribution to growth in fiscal '22? It seems like a lot at this point. And any reaction to the J&J system?

And I'll ask my question for Karen. Karen, I apologize. On fiscal 2022, I know we're going to get a lot of questions on it. So by my math, your guidance implies about 3% to 4% underlying growth in Q4. Should we be thinking about -- is there any reason why we shouldn't be thinking about fiscal '22 underlying growth of about 5% or there's ventilator -- you have headwinds like ventilator sales, the Valiant recall and the extra week in '21. So does that make 5% underlying challenging? And is there any reason why the margins in '22 won't be in line with 2019? You're exiting this year at about 29%.

Great. So I'll go first, Larry. Thanks for the question. We continue to expect to hit those same revenue contributions, Larry, I gave you in Hartford, right, which was less than 50 bps in '21; 100 to 150 in '22; and then in FY '23, 200 to 250. Look, the feedback on our system and our approach to building out the digital ecosystem, which you and I talked about around Touch Surgery Enterprise, has been really positive. We feel confident our portfolio is competitive, and we'll really expand the marketplace that I've talked about a lot going forward. So I think we're on track, Larry, with what I told you.

And of course, as Geoff mentioned in his comments a few minutes ago, we've got some really important milestones coming up, but we're really excited about where we're at. And as you'd anticipate, I wouldn't -- I'm not going to comment on the J&J system, Larry, other than to just say, we feel really great about our platform, the feedback we've got, the open council, the modularity, the upgradability, the leverage of our surgical instrumentation. So we feel great about the competitiveness of our system, and we're excited to get those milestones we talked about here in March.

So with that, I'll hand it back to Karen, I think.

Yes. And Larry, I appreciate the questions on FY '22 and recognize that you guys are getting those questions. And so I would love to be able to give you a lot more color, but I really -- we're really in this planning phase. And so it's very difficult for me to give you more color than I've given. Expect a strong growth off of a depressed base. We're very excited about our pipeline and our launches ahead, and we've talked about revenue growth being strong and accelerating into the future. So just we'll give you color when we can or official guidance if the pandemic clears on FY '22. But in the meantime, we're just going to have to wait until our fourth quarter call.

Yes. No. Look, just to emphasize, we are bullish about FY '22, but it is -- we're just -- it's too early for us to give any specific guidance.

The next question comes from Vijay Kumar at Evercore ISI.

Congrats on your solid performance here for 3Q. I have two product questions. Maybe the first one on diabetes. I guess you look at the time lines here on 780 plus Zeus, that's subject to the FDA. But based on I guess how the 780 launch has done in Europe, but do you now feel more confident of getting back to market growth just with 780 plus Zeus. And I'm curious on Synergy, you said the trial is complete. Have you seen the data? Do you think you have -- the product can get an ICM label?

Vijay, so 780, yes, the device it's very competitive, and I think we'll do well with it when we get into the marketplace. Now the sensor experience has continued to be what we need to improve. And of course, we have the pipeline working to that. With regard to the Synergy data, we will be filing an abstract with that as well as the Zeus data, hopefully, for the -- for an ADA presentation. So you'll see the data when it becomes available if that abstract gets accepted.

Got you. And then one I guess on RDN. I'm curious, the device has a breakthrough designation, the new MCIT ruling. How does that aid adoption here? I'm curious on how we should be thinking about the revenue ramp now that you have a flat rate for reimbursement.

Yes. So Vijay, that would give us 4 years of reimbursement if it survives the administration change, of course, within the Medicare population. And that's -- if I look at the trial population that we studied so far, that's about 1/3 of the population that was in the study.

So that means that the rest of the work needs to be done for commercial payers. And that's going to be a street fight, state by state, payer by payer. We're already beginning that work, but that would be the bigger work to do within reimbursement. And of course, that has to be repeated at the country level all around the world where we have regulatory approvals.

So the availability of reimbursement is a critical part of that adoption curve. And just to remind you, we think that we can get that to a $3 billion market with just a 1% penetration. So it's a huge opportunity for us, and reimbursement will be important for that -- the speed of that ramp.

The next question the next question is from Pito Chickering at Deutsche Bank.

Karen, a follow-up question for you on Robbie's question on operating margins. You talked about a very strong SG&A. Can you give us color on how gross margins were able to grow sequentially by 180 basis points despite negative organic revenue growth? And as revenues begin to normalize, why they couldn't be more tailwinds in the fourth quarter versus with the guidance you gave us?

Yes. So on gross margins, those are clearly impacted by price and mix and other things like tariffs that can come into play. So we do expect -- we've had sequential improvement. We expect continued sequential improvement, as we talked about. And where you see it mostly showing up so far is in the operating margin and because we are driving greater expense efficiencies on the SG&A line in particular, and you can expect that to continue.

Okay. Then looking to the script, I think you did talk about the strength of capital markets and in your press release, you highlighted Mazor and the O-arm. I mean hospitals spend whatever the capital they have budgeted by the end of the year, otherwise they lose it. Can you sort of talk -- walk us through what you're seeing in the capital markets sort of in January and through February? And what you're seeing or hearing from the field for calendar 2021?

Pito, we're just seeing -- look, there's -- the capital equipment that, obviously, that we sell is directly tied to procedures, right? Elective procedures that are -- tend to be in the United States, in particular, high profit margin for the hospitals. And we're tying this to, one, the value proposition in this equipment, right, which we've invested in over the years and how it enhances the procedure and the outpatient outcomes. But it is I think, in our mind, a signal to a snapback in patient volumes coming -- that we expect over the coming months. And that's consistent with the conversations we've had with hospital CEOs over the last 2 weeks.

I don't know, Brett, if you want to add to that.

Yes. Really the same, Geoff. We're seeing -- we haven't seen the turn yet in procedures after the January resurgence, but the capital markets remain strong. And the hospital CEOs and others are really preparing for that and then upgrading their existing fleets of navigation and imaging, and then we've seen the strong robotics quarter. So we think that portends well for the future here as we get through this time period and resurgence of cases commences.

The next question is from Matt O'Brien at Piper Jaffray.

I guess, Sean, just for starters, again, on the product side of things, Micra had another great quarter, getting tougher on the comp side of things. I'm just curious between VR and AV, where you're at in terms of penetrating those 2 indications. And especially on the AV side, what are you seeing in terms of adoption in that indication? And how much room do we have to go there?

Yes. I'll have to get back to you with the specifics. But just in general, the VR is penetrating within that single-chamber market a little bit more. And that's a phenomena we see deeper in the U.S than we see outside the U.S. And the AV is driving growth for the most part, except for China where we can introduce the VR, and that's starting to tick up. It's only there as well as in Japan, we only have the VR version.

So we have the AV coming in the third quarter of next year for Japan. So we think that that's going to be a big growth driver for us to continue the Micra penetration. But there's headroom to grow. And of course, we haven't touched the other market, which is the AV block market. We have a future product for left atrial appendage of Micra atrial.

Got it. And sorry to put you on the spot there just given how short you've been in that seat. I guess, Geoff, question for you. Just on the new product side, there's just been just -- there's a long list of new products that you're introducing, which is great to see. I'm just curious how potentially you could be impacted negatively because of COVID, because of hospitals' inability to adopt new technology in this environment. And how you kind of -- how that could potentially slow down some of these new products as we get in into fiscal '22 and how you kind of guard against that.

Actually, what we've seen is despite -- obviously, the COVID overhang has impacted all elective procedures and it's been a headwind for us in total. But where we're launching new products, even in this -- the backdrop of these market conditions, we're seeing adoption.

Would it be better without COVID? Absolutely, but we are still seeing adoption. I mean Sean was just talking about Micra. I mean it's -- it grew again, another great quarter at 75% in the U.S. and like 64% or something like that globally. In our neuroscience or in RTG, in the Neuromodulation space, whether it be our new technology in pelvic health or our deep brain stimulation, our Percept PC deep neurostimulator, or in pain, our new pain products, the DTM product, all of those are getting disproportionate share versus the competition.

And yes, I mean it would be better in a non-COVID environment, but we are seeing products get adopted. We are seeing some price improvement where we have differentiated technology that warrants it. So yes, I'm looking forward for COVID to be behind us here, but it really hasn't stopped hospitals from adopting -- maybe not at the scale they otherwise would have, but adopting new technology.

The next question is from Joanne Wuensch at Citi.

Two pieces. One, if there are a couple of headwinds and reliefs, we'll call it, next year, is there a way to quantify the ventilator headwind and the Valiant headwind? And then can you remind us when the China tenders annualizes?

Yes. Sure, Joanne. Thanks for the question. In terms of the -- I think you meant the Navion headwind, we do expect our Q4 revenue to be impacted by roughly $40 million from that headwind. And then if we look going forward into next year, we're going to be focused on introducing our prior product, the Captivia product, and ramping that up throughout the year. So we expect that to help offset the headwind from Navion. So we expect about $25 million to $30 million per quarter in fiscal '22, a little bit higher at the beginning of the year as we're rolling out the product and a little bit less toward the end of the year.

And then you had a second question, and I need to remember what that was.

It was part of quantifying the ventilator headwind and when the China tenders annualize.

Yes. Thank you. So on ventilators, obviously, sequentially, we're seeing ventilator growth come down as we expected. And we expect that to continue into next year. But keep in mind, ventilator is a small part of Medtronic. And so we recognize we've got certain headwinds, and we're going to be focused on offsetting where we can.

And in terms of the China tender, we expect the China tender along -- the DES national tender along with the balloon multi-provincial tenders to impact us about $45 million a quarter. That will start to anniversary in the second quarter of next year and then fully anniversary in the third quarter of next year.

Next question is from Josh Jennings at Cowen.

I wanted to just focus on Structural Heart franchise and the pipeline. With Mike Coyle's departure, we've been surprised that Medtronic hasn't pursued an edge-to-edge repair solution. I know the Half Moon investment is in place. But post the COAPT data, it's a proven therapy for degenerative and functional mitral regurgitation and the only game in town right now. Are there any internal plans outside of Half Moon to pursue -- Half Moon being a different technology, but are there any internal plans to pursue edge-to-edge repair internally?

And then also, I wanted to ask about the Intrepid enrollment pace? And any updates there you can share, the expectations of when enrollment could be completed. And then lastly, LAAO, any new thoughts or strategy to pursue that market, which is building nicely?

Josh, I guess I'll start with the edge-to-edge repair. That's based on a surgical procedure that isn't done as a stand-alone surgery anymore. And the reason for that is because you kind of leave -- you sort of trade one disease for another, right? You bring those edges together and you leave -- you fix the leak of the valve, but you leave behind basically a stenotic valve, which continues to partially leak.

And the idea of replacing that valve were in the case of like a Half Moon where you're basically replacing the back leaflet, you can eliminate MR completely and also leave open future options to fix that valve, which you're cut off from in a clip technology. So it doesn't really make sense to us to pursue something that has a couple of players in it already and has some residual limitations. It makes more sense to go for a repair solution that creates more options and does a better job of eliminating MR.

With regard to the Intrepid trial, we did change the end point in that trial. And it's picked up a lot. It's a Bayesian design, so the enrollment won't be dependent on some interim looks down the road. Enrollment did pick up. We continue to have some challenges where there are COVID hotspots at the individual center level, but it's continuing along.

And then your last question on left atrial appendage. I guess kind of like the first one, unless you have a really differentiated technology that brings more to the party, it's not something that we're going to pursue just me-too products in. We have obviously some interest in that space, but it has to be a technology that really matters and brings a difference to the patients and the clinicians.

The next question is from Matt Taylor at UBS.

So I wanted to go back to this commentary that you made about investment in productive capital and hospitals gearing up for the snapback in procedures. Could you offer any thoughts on whether you think there's pent-up demand in the system? And do you think that that's going to lead to elevated levels of utilization as we go through calendar '21? Is that what you think the hospitals are gearing up for? Or any more color on those investor plans would be helpful.

Sure. Well, Matt, I'll take that one. Look, I can go back to what we experienced in 2020, right? After the initial wave of COVID hit back in the spring time frame, there was a fairly -- especially in the U.S., but all over the world, a quick -- fairly quick recovery, I think, much faster than people anticipated.

And we feel that prior to this latest wave, this latest spike of COVID that really hit us in late December, we had worked through the majority of that backlog, right? So call that over a 6-, 7-month time frame. And so we would expect something similar here, right? So a new backlog has built up, and we expect to be able to work through that over the next 6 months or so.

Okay. So and then as a follow-up, I was hoping -- you gave a nice slide in the presentation on the performance by a number of different geographies, and there was pretty good recovery across most of them. Could you offer any thoughts on how you see the trends by developed versus emerging over the next couple of periods here? Is it going to be similar in terms of recovery in your mind?

Well, first of all, I'll start with China. China is pretty much back to normal, right? And for us, if you back out the impact of the China tender, we had a really strong quarter in China and don't expect that to change. So China is back to normal.

Then I'll come over to the United States, and we talked about that. I think the worst is behind us with this second wave. And as Karen indicated earlier, we expect to see the recovery. It was a little delayed I think by the -- some of the weather we had here over the last week, but they start to see a procedural recovery. And we do think that's going to go fairly robust recovery, fairly quick, like we saw the first spike.

And then Europe I think will be -- will trail the United States by a couple of months. It's just not going to move. I don't think it's going to move quite as fast in terms of recovery.

And then if you look at other parts of Asia Pacific and Latin America, they are back to growth. And I think they'll kind of continue to steadily improve.

So that's the way I'd sum it up, and we're really watching the U.S. recovery and the Europe one.

And like I said, we think Europe will trail the U.S. by a couple of months.

The next question is from Matt Miksic at Crédit Suisse.

So I had one follow-up on some of the questions you've had on 2022. And as we think about sort of the major drivers, very strong pipeline, obviously, as you've talked about. But if you could call out maybe some of the key business lines or where you're going to have continued momentum into 2022 and maybe some of the larger launches or product lines where we should expect those to be kind of the big poles of the tent to get to that whatever it is that you'd land on, mid-single-digit growth for '22. And I've got one follow-up.

Well, look, I expect -- I know the comps get a little harder with Micra, but a strong continued cardiac rhythm growth into the year in neuroscience -- in RTG, all the neuromodulation-related therapies there with DBS. I think we're going to see a multiyear share gain and growth in DBS because we're following up our Percept DBS launch with our new SenSight leads, which enhance the sensing and provide us durability. And we're launching a new clinical trial for closed-loop adaptive DBS.

In pain, we've got the new DTM product from the Stimgenics acquisition that sits on top of our Intellis platform, and that's got a lot of momentum. And I think the physician community is excited about the idea of us bringing ECAPS to market. So that's -- so we've got a little momentum there.

And of course, in our overactive or Pelvic Health business, neuromodulation for overactive bladder, you heard in the commentary, we've got a lot of momentum there as well. And then, of course, you've got the soft tissue robot launching, Bob already articulated the impact there at the MITG level of 100 basis points or so.

So those are some big ones. And in cardiology, we've got a lot going on as well. Our atrial fibrillation business with Diamond -- the DiamondTemp launch is another one in our first-line indication for our cryo product line are also exciting I think growth drivers for us.

I don't know, Sean, did I leave anything out there? You've got quite a bit going on in cardiology.

Yes. We've got a lot of, Geoff. And we also have the [official] market, renal stenting. So little ones that are there. The replacement headwinds within tachy that I mentioned go away in the coming year, which is good. And of course, PFA is a disruptive ablation technology for -- we've got coming. The LINQ device, LINQ II, as it expands its availability and moves into heart failure is a growth driver. TAVR will continue to be a great growth driver for us. And then, of course, we've got the mitral and Ardian franchises in the longer-term horizon.

I think the message, Matt -- I think the message here is whether it's FY '22 or beyond, we are really focused on not just launching the products in the pipeline, but keeping the pipeline full and really managing this business, balancing the short and the long term here.

And I know that morale within Medtronic is high despite all the things going on in the world, despite some of the changes we made, and it is because of the investment we're making in our pipeline. And so that is something we're going to keep going across the company that we're hyper-focused on that.

Great. and the follow-up I had, just one of the stories around the pandemic. Obviously, we've all talked about over the last year has been digital and sort of the leveraging of digital technology, sales and support and patient interaction, et cetera.

So wondering if you could talk a little bit about both the way that -- if there's any additional initiatives that worth noting like what you've done with Viz.ai and stroke, but also how we should think about the productivity of the P&L of operations in a world where you'll be leaning more, I suppose, on digital in '22 and '23 than you were in '19 and early '20?

Yes. I mean there are 2 categories, right? How digital is impacting our -- I'll call it our offerings to our customers and patients. And you mentioned Viz.ai, which is helping expand the stroke market and the way we -- and our partnership with them has helped differentiate Medtronic and drive share. That's a good example.

But I think another one that's a big one that we've talked about is remote capabilities in our implantable business, and I'll highlight our cardiac rhythm business. Correct me if I'm wrong, Sean, even there's remote programming, there's remote device management, there's remote patient management. And it is really picking up. Some of this technology was there before COVID, but the uptake was slow. And then during COVID, the timing worked out with our pipeline.

We launched some additional remote capabilities. But we're seeing things like, for example, MRI. When patients have to go back to get -- go into the hospital and they haven't implanted cardiac device, they needed an MRI, that used to be more of a manual intervention. A Medtronic field representative actually going to the hospital to meet with the patient and make some programming changes. That now is up to 25% or more of those are done now remotely. And it was pretty -- it was low single digits prior to COVID.

So the uptake on -- that's just one example of how digital is changing workflows and providing, I think, in this case, better patient outcomes, but in more -- a lot of efficiencies. So we're seeing the digital piece take off, and it will provide also productivity for our company. We believe we can provide -- we've learned how to do like medical education remotely.

Now you can't do all med ed remotely. I mean there's exchange of scientific data, and there's some ability to train remotely. And obviously, at some point, these physicians want to get in the cadaver lab or and things like that. And we haven't figured out how to do that remotely. But we're amazed at -- when our backs were against the wall and you couldn't meet with physicians, how digital came to the rescue and provided a high-quality experience. Now physicians, they are now onboard with this.

So I think that will, one, speed up adoption of new technology, which is a good thing; but two, provide efficiencies for us.

Our final question comes from Danielle Antalffy at SVB Leerink.

I just have one question, and that's around capital deployment and how you're thinking about M&A. I appreciate you've talked about more tuck-in type of deals. You've been pretty successful there, very active . But I guess just digging a little bit deeper, sort of where are the areas that you see white spaces from a technology perspective and/or where you feel like you need this scale from a technology or geographic distribution perspective that we should be thinking about Medtronic potentially being most active over the next, call it, 1 to 2 years?

Well, thanks for the question, Danielle. Look, the M&A, these -- I'd call them -- I won't call them bite size, but smaller tuck-in deals where we're getting at these companies at relatively early stage, most cases, before commercialization seems to be something that's working for us.

So we can do more of these. We add more value. And we're getting them at values that makes sense. So we're getting good returns on these. And we're spreading our risk across a number of these deals. And I would expect that to continue. And I think the most of the work of these tuck-ins, most of the volume rather, will come around our existing therapies in existing markets to augment them.

And really, I look at it as an extension of our organic growth strategy because we're not buying growth here. We're buying technology and then kind of adding to that, whether it be additional technology or clinical science, and then making these standard of care around the world. So that's going to be the lion's share of it.

In terms of white space, this is something we haven't signaled where we're always looking at new markets to better position the company to optimize our portfolio for growth. When you start looking at white space truly outside of the -- then you kind of move outside of the tuck-in, and these tend to be a little larger. And this really is something we're always looking at, if we think it's the right move to help our portfolio. But the focus is the tuck-ins.

Thanks, Danielle. Geoff, please go ahead with your closing remarks.

Okay. All right. Well, look, thanks, everybody, for the great questions and really appreciate your support and the continued interest in Medtronic. We hope that you'll join us again on our Q4 earnings webcast, which we anticipate holding on May 27 where we'll update you on our quarterly progress and look ahead to fiscal '22. I know there's a lot of questions on '22 today. So we'll get at that in our Q4 call.

So thanks for tuning in today, and please stay healthy and safe. The vaccine is on the way, and have a great day. Thank you.