Medtronic PLC (MDT) Q2 2022 Earnings Call Transcript

Medtronic PLC (NYSE: MDT) Q2 2022 earnings call dated Nov. 23, 2021

Corporate Participants:

Ryan Weispfenning — Vice President and Head – Investor Relations

Geoffrey S. Martha — Chairman and Chief Executive Officer

Karen Parkhill — Executive Vice President and Chief Financial Officer

Sean Salmon — Executive Vice President and President, Diabetes Operating Unit President, Cardiovascular Portfolio

Analysts:

Robbie Marcus — JPMorgan — Analyst

Vijay Kumar — Evercore ISI — Analyst

Larry Biegelsen — Wells Fargo — Analyst

Matt Taylor — UBS — Analyst

Cecilia Furlong — Morgan Stanley — Analyst

Matt Miksic — Credit Suisse — Analyst

Joanne Wuensch — Citi — Analyst

Christopher Pasquale — Guggenheim — Analyst

Presentation:

Ryan Weispfenning — Vice President and Head – Investor Relations

Good morning, and welcome to Medtronic’s Fiscal Year 2022 Second Quarter Earnings Video Webcast. I’m Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations.

Before we start the prepared remarks, I’ll share a few details about today’s webcast. Joining me are Geoff Martha, Medtronic’s, Chairman and Chief Executive Officer; and Karen Parkhill, Medtronic’s Chief Financial Officer. Geoff and Karen will provide comments on the results of our second quarter, which ended on October 29th, 2021, and our outlook for the remainder of the fiscal year. After our prepared remarks, our portfolio Executive VPs will join us, and 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 summaries. We also posted an earnings presentation that provides additional details on our performance. The presentation can be accessed in 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 revenue comparisons are made on an organic basis. Second quarter organic revenue comparisons adjust only for foreign currency, as there were no acquisitions or divestitures made in the last four quarters that had a significant impact on total Company or individual segment quarterly revenue growth.

References to sequential revenue changes compared to the first quarter of fiscal ’22 and are made on an as reported basis. And all references to share gains or losses refer to revenue share in the third calendar quarter of 2021 compared to the third calendar quarter of 2020 unless otherwise stated.

Reconciliations of all non-GAAP financial measures can be found in our earnings press release or on our website at investorrelations.medtronic.com. And finally, our EPS guidance does not include any charges or gains that would be reported as non-GAAP adjustments to earnings during the fiscal year.

With that, let’s head into the studio and get started.

Geoffrey S. Martha — Chairman and Chief Executive Officer

Hello, everyone, and thank you for joining us today. This morning, we reported Q2 results, which despite a challenging market backdrop reflect solid execution around new product launches and strong underlying earnings growth. Obviously, our end markets were impacted by the COVID-19 resurgence and the healthcare system staffing shortages, particularly in the US, which affected our quarterly revenue growth.

Procedure volumes were lighter than expected in markets, where our technology is used in more deferrable procedures like our spine business or those that require ICU bed capacity like TAVR. Yet in markets, where procedures are less deferrable like pacing, we experienced stronger growth.

While the US market was a headwind, many of our international markets were much stronger. We delivered 6% revenue growth outside the US, including mid teens growth in emerging markets. And our emerging market growth is up 9% versus pre-pandemic levels in Q2 fiscal ’20.

In the midst of these market headwinds, we focused on managing what was in our control and executed to advance our pipeline, launched new products and win share. And when you look at our sequential revenue performance, our 2% decline was slightly better than most of our large cap medtech competitors. While the pace of the recovery from pandemic headwinds is hard to predict, our markets will recover, and as that happens, Medtronic is one of the best-positioned companies in healthcare.

The underlying health of our business is strong,and it’s getting stronger. We have an expansive pipeline of leading technology, a robust balance sheet and an expanding roster of proven top talent. Coupled with our revitalized operating model and new competitive mindset, we remain poised to accelerate and sustain growth.

As I’ve done in prior quarters, let’s start with a look at our market share performance. Year-over-year market share is an important metric that our teams are evaluated against in their annual incentive plans, along with revenue growth, profit and free cash flow. And right now, the majority of our businesses are winning share, driven by our innovation and increased competitiveness. And this is exactly the sort of market share performance that gives us confidence in the deep strength of our businesses.

And to avoid any confusion about how we’re performing when we talk about our share dynamics, we’ll refer to revenue share in the third calendar quarter to keep it directly comparable to our competition. Share momentum in our three largest businesses continued. In the Cardiac Rhythm Management business, we extended category leadership, adding over a point of share year-over-year, driven by our differentiated Micra family of pacemakers, Cobalt and Crome high power devices and our TYRX antibacterial envelopes.

In surgical innovations, we outperform competition with strong performances in endo stapling and sutures, and our Signia powered stapling system, and Tri-Staple technology continues to see great market adoption. In Cranial & Spinal Technologies, we’re winning share and launching new spine implants that enhance the overall value of our ecosystem of preoperative planning software, imaging, navigation and robotic systems, and powered surgical instruments, which is transforming care in spine surgery.

Our new implants also go directly at the competition. Starting this past quarter with our Catalyft expandable interbodies to specifically attract Globus users. In addition to our three largest, a broad array of our other businesses have increased their competitiveness, are launching new products and winning share in their end markets. So for example in patient monitoring, we’re winning share with our Nellcor pulse oximetry sensors and our monitors. In respiratory interventions, we picked up four points of share in premium ventilation, due to our ability to respond quickly to spikes in demand from COVID resurgence.

And in neuromodulation, we won share across our product lines, including pain stim and DBS, as we continue to launch new products. In pain stim despite the sequential slowdown in the market, we’re gaining share with our Intellis with DTM technology and our Vanta recharge-free system. In DBS, we had a very strong quarter, winning over six points of share. We’re executing on the launch of our Percept neurostimulator with brain sense technology paired with our SenSight Directional Lead, and we continue to be the only company with sensing capabilities. Since launching SenSight in the US earlier this fiscal year, we surged ahead of the competition in new implant share. Sensing has redefined what it takes to compete in DBS. Our competitors don’t have it, and as a result, we’re expecting a long runway of share gains, as we build upon our category leadership.

Now, while the majority of our businesses are winning share, we do have a few businesses that are flat or losing share, and we’re focusing our efforts and our investments to grow above the market. In cardiac diagnostics, we’re focused on improving supply to reverse share declines, and we’re investing in new indications and novel AI detection algorithms to expand the market and drive growth.

In cardiac ablation solutions, we expect to win share, as we expand the rollout of our DiamondTemp RF Ablation System and drive awareness and adoption of our Arctic Front Advance Pro cryoablation, as a first line treatment for paroxysmal AF.

In diabetes, while we lost share again this quarter, we remain pleased with the momentum we’re building outside the US, not only with the 780G insulin pumps, but also with the positive customers’ feedback we’ve heard on our extended infusion set and fingerstick free Guardian Sensor 4. And we expect our US results to turnaround, as we launch these new products.

Next, let’s turn to our product pipeline. I’ve already talked about the impact, our strong flow of new products is having in the market. We’ve launched over 180 products in the US, Western Europe, Japan, and China in the last 12 months. At the same time, we continue to advance new technologies that are in development. We’re heavily investing in this pipeline with a targeted R&D spend of over $2.7 billion this fiscal year, which is an increase of over 10%, the largest dollar increase in our history. We’re expecting these investments to create new markets, disrupt existing ones and accelerate the growth profile of Medtronic.

Let’s start with our Symplicity Renal Denervation procedure for hypertension. While we weren’t able to end our ON MED study early, we remain confident in our program, in our ability to serve the millions of patients, who make up this multi-billion dollar opportunity. As a reminder, our previous three sham-controlled simplicity studies, all reached statistical significance, including the pivotal OFF MED study. And the ON MED study remains powered to detect a statistically significant and clinically relevant benefit at the final analysis. We expect that ON MED follow-up will complete in the second half of next calendar year, and then, we’ll submit the PMA to the US FDA for approval.

When we think about renal denervation, let’s start with the patients, who have indicated that they want options like the simplicity blood pressure-lowering procedure to treat their hypertension, as confirmed by our patient preference study presented earlier this month at TCT. We believe demand will be high and we continue to expect this to be a massive opportunity that we will lead.

Another opportunity for Medtronic is surgical robotics, where we are entering the soft tissue robotics market, as a second meaningful player. We achieved a major milestone when we received CE Mark for Hugo last month, and we also completed our first procedures with Hugo in our Asia-Pacific region at Apollo Hospitals in India. The first surgeons to use Hugo in the clinical setting have told us they believe Hugo addresses the cost and utilization barriers that have held back the growth of robotic surgery.

Look, demand is high, and we’re building a long list of hospitals that want to join our partners and possibility program and be among the first in the world to use Hugo and participate in our global registry, which will collect clinical data to support regulatory submissions around the world. Our robotic program is making progress toward a broader launch, and we remain well-positioned in this critical field relative to every other potential new entrant.

As we prepare for this broader launch, we’re working hard to ensure an outstanding customer experience. We’re also focused on optimizing our supply chain, manufacturing and logistics to prepare for scaling this business. We’re making steady progress on these activities, but not at the pace that we had originally planned. And as a result sales this fiscal year are likely to come in below our $50 million to $100 million target. Now, that said, we still expect double digit millions in sales this fiscal year, and we continue to expect a strong ramp in FY ’23.

We’re off schedule, but we’re not off track. And while we’re disappointed in the revenue push out for this important program, we’re confident that we have line of sight to the solutions we need to be successful and to optimize the customer experience. Demand remains high, surgeons continue to do cases, our order pipeline continues to build, and we’re looking forward to starting our US IDE soon. We remain confident in the success of this program, and we believe that we’re poised to meaningfully expand the soft tissue robotic market and drive growth for years to come.

In Cardiac Rhythm, we just launched our Micra AV leadless pacemaker in Japan earlier this month. We also completed the US pivotal study enrollment for our EV ICD, which follows our CE Mark submission in Q1. Just as we disrupted the pacing market with Micra, we intend to do the same in the implantable defibrillator space with our EV ICD. Our device can both pace and shock without any leads inside the heart and veins, and it does this in a single device that is the same size, as a traditional ICD.

In structural heart, we’re starting the limited US launch of our next-gen TAVR system, the Evolut FX this month with a full market launch planned for fiscal Q4. Evolut FX enhances ease of use with improvements and deliverability, implant visibility and deployment stability. We’re also making progress on our transcatheter mitral program. At TCT earlier this month, we presented very encouraging early data of our transfemoral delivery system for our intrepid mitral valve, and we will be rolling that system into our APOLLO pivotal trial.

In diabetes, our MiniMed 780G insulin pump combined with our Guardian 4 sensor continue to be under active review with the FDA. When approved and launched in the US, we expect the 780G system to drive growth, as it will be highly differentiated and further address the burden of daily diabetes management. And for the first time ever, is helping hard to manage pediatric and adolescent patients achieve outcomes mirroring well-controlled adults.

The user experience has also improved markedly, and these outstanding results were achieved with our 780G paired with our Guardian 3 sensor. So we expect the experience will be even stronger with Guardian 4. And the value of our offering will be further enhanced when we bring our Synergy sensor, which is now called Simplera [Phonetic] to market. Simplera is disposable. It’s easier to apply and half the size of Guardian 4, and we expect to submit it to FDA later this fiscal year.

In pelvic health, we’re awaiting FDA approval for our next-gen InterStim recharge-free device, which we expect in the first half of next calendar year. With its best-in-class battery, constant current, and full-body MRI compatibility at both 1.5 and 3 Tesla, we expect this device will extend our category leadership in this space.

In neuromodulation, we recently submitted our ECAPs closed-loop spinal cord stimulator to the FDA. We’re calling this device Inceptiv SCS, and we expect it to revolutionize SCS with closed-loop therapy to optimize pain relief for patients. We also continue to make progress on expanding indications for SCS into non-surgical refractory back pain, painful diabetic neuropathy and upper limb and neck chronic pain.

Finally in DBS, we continue to enroll patients in our ADAPT-PD trial studying our closed-loop adaptive DBS therapy in patients with Parkinson’s. We’re expecting enrollment in the trial to complete later this fiscal year.

Now before I turn it over to Karen, the one thing, I most want to emphasize is that despite the ups and downs of the pandemic and its collateral impacts on hospital procedures, nursing and staffing shortages, and the supply chain, our underlying business remain strong. Medtronic is advancing a pipeline of meaningful innovation that we believe will not only enhance our competitiveness, but will accelerate our total Company growth going forward.

And with that, I’ll turn it over to Karen to discuss our financial performance and our guidance. Karen?

Karen Parkhill — Executive Vice President and Chief Financial Officer

Thank you, Geoff. Our second quarter organic revenue increased 2%, reflecting the market impact of COVID and health system staffing shortages on procedure volumes, primarily in the United States. Despite the softer end markets, our team executed to deliver strong margin improvement and earnings growth. In fact, our adjusted EPS increased 29% significant growth, reflecting the pandemic impact last year, and our adjusted EPS was $0.03 better than consensus with $0.02 from stronger operating profit and a penny [Phonetic] from a lower than expected tax rate.

Our second quarter revenue growth came in lower than we were expecting back in August. We did see improving trends in our average daily sales each month of the quarter, as COVID hospitalizations declined. That said, the bounce back in the US wasn’t as fast as we had expected or had seen in prior waves. We’ve recognized many of our customers are dealing with staffing shortages on top of increased COVID patients, and we believe that had an increasing effect on procedure volume.

Looking down our P&L, we had strong year-over-year improvement in our margins, 360 basis points on gross margin, as we continue to recover from the significant impacts from COVID last year and 470 basis points on operating margin, given savings from our simplification program tied to our operating model.

Converting our earnings into strong free cash flow continues to be a priority. Our year-to-date free cash flow was $2.4 billion, up 58% from last year, and we continue to target a full year conversion of 80% or greater.

Turning to capital allocation, we continue to allocate significant capital to organic R&D, and we continue to seek attractive tuck-in acquisitions to enhance our businesses. For example, Intersect ENT, we announced our intent to acquire back in August. Intersect’s assets complement our own and are accretive to our WAMGR, plus, we believe we can accelerate their growth around the globe.

We’re also returning capital back to our shareholders with a commitment to return greater than 50% of our free cash flow, primarily through our dividend. Year-to-date, we paid $1.7 billion in dividends. And as a dividend aristocrat, our attractive and growing dividend is an important component of our total shareholder return.

Looking ahead, although, the environment remains fluid, we are seeing some improvement in procedures and our average daily sales in the first few weeks of November. So we’re encouraged that the negative impact of the pandemic and healthcare system staffing shortages on our markets could be moderating.

And while our operations team has done a terrific job managing our supply chain to-date like other companies, we are dealing with an elevated risk of raw material supply shortages. As a result of these potential headwinds and given we’re only mid way through our fiscal year, we believe it is prudent to update our fiscal ’22 organic revenue growth guidance to 7% to 8% from the prior 9%.

If recent exchange rates hold, foreign currency would have a positive impact on full year revenue of $0 million to $50 million, down from the prior $100 million to $200 million I gave last quarter. By segment, we expect Neurosciences to now grow 9% to 10%, Cardiovascular and Medical Surgical to grow 7.5% to 8.5%, and Diabetes to be down low single digits, all on an organic basis.

Despite the headwinds, we face on revenue, we will manage well what we can control, which includes expenses not directly tied to our future growth. We will continue to invest heavily in R&D and market development. And on the bottom line, we reiterate our non-GAAP diluted EPS guidance range of $5.65 to $5.75. This continues to include a currency benefit of $0.05 to $0.10 at recent rates.

For the third quarter, we’re expecting organic revenue growth of 3% to 4% year-over-year. This assumes no real pickup in organic comp adjusted growth versus pre-pandemic levels from what we saw in the second quarter despite the improving trends we saw in September and October. While we are encouraged by those trends and by what we’re seeing in November, we wanted to err on the side of caution with near term guidance given the dynamic macro environment.

At recent rates, we’re expecting a currency headwind on third quarter revenue of $80 million to $120 million. By segment, we expect Cardiovascular to grow 5% to 6%, Neuroscience 4% to 5%, Medical Surgical 2% to 3%, and Diabetes to be down mid single digits, all on an organic basis. We expect EPS between $1.37 and $1.39, with a currency tailwind of $0.02 to $0.04 at recent rates.

While we expect our markets will continue to be affected by the pandemic in the back half of our fiscal year, we remain focused on delivering solid revenue growth, strong earnings growth, and investing in our pipeline to fuel our future. We also remain confident about the underlying strength and competitiveness of our business and our ability to accelerate revenue growth ahead.

Finally, I’d like to take a moment to acknowledge our incredible employees around the world, who have worked tirelessly to overcome the many challenges created by the pandemic executing our operations and supply chain, helping our customers, and through it all continuing to invent, develop, and deliver the healthcare technology of tomorrow.

I also want to recognize a new member of our team, who many of you know. We couldn’t be more excited to have Bob Hopkins, the top rated medtech analyst over the past three years join our team, as Head of Strategy. And we look forward to a strong contribution and influence in the years ahead.

Back to you, Geoff.

Geoffrey S. Martha — Chairman and Chief Executive Officer

Okay. Thank you, Karen. And yes, it is great to have Bob here at Medtronic. For the last few quarters, I’ve been closing by commenting on the progress the Company is making in various areas of ESG, our environmental social and governance impacts. Part of the S in ESG is our focus on inclusion, diversity and equity and high employee engagement, which I discussed last quarter, and this makes Medtronic, an attractive destination for top talent.

In the release we issued last week, you read about how Bob Hopkins and other highly sought-after world-class leaders chose to join Medtronic and drive our transformation to become the undisputed global leader in healthcare technology. It’s very important for our culture that we’re bringing in new ideas and diverse perspectives to add to those of our talented leadership and employees across the Company.

On the E front of ESG, as you know, we set an aggressive goal last year to be carbon-neutral in our operations by the end of the decade. And two weeks ago, we upped our game announcing our ambition to achieve net-zero carbon emissions by FY ’45 across our value chain. This ambition outlined in our FY ’45 decarbonization roadmap will focus on operational carbon neutrality, supply chain greenhouse gas emissions reductions and ongoing logistics improvements. To support our progress, as well as progress across our entire industry, we joined the International Leadership Committee for a net-zero NHS in the UK, and we’re taking a leadership role with the US National Academy of Medicine action collaborative to decarbonize the US healthcare sector.

Our ESG efforts are gaining recognition, as last week, Medtronic was elevated from being a constituent of the Dow Jones Sustainability North America Index to joining a select group of companies in the Dow Jones Sustainability World Index. Look, we are really proud of this achievement. In addition, I hope, many of you were able to watch our inaugural ESG Investor Briefing last month, and if you haven’t, I encourage that you watch the replay on our Investor Relations website.

Now, let me close on this note, the lingering effects of the pandemic combined with healthcare system staffing shortages impacted our Q2 revenue more than we originally anticipated. We have both puts and takes on the timing of our pipeline and the supply chain dynamics pose near term challenges, but our challenges will be manageable. We’ve got this. Our pipeline is delivering, and we’re poised to deliver more innovation over the coming quarters and the next several years.

We have to show you that we can deliver, but robotics is coming, RDN is coming, closed-loop SCS is coming and our diabetes turnaround is coming and Evolut FX and mitral and EV ICD, and the pending acquisition of Intersect ENT, these are all coming. We’re ready to execute and capitalize on these opportunities. We’re in good markets, and we’re focused on innovating, winning share and maintaining and/or achieving true category leadership across our businesses.

I know we have more to prove, but I’m confident that our organization, our talented and dedicated 90,000 plus global employees are up for the challenge. We’re focused, we’re hungry and ultimately we’re going to deliver on these opportunities to accelerate our growth. And as always, we remain deeply committed to creating value for you, our shareholders.

And with that, let’s now move to Q&A. Now, we’re going to try to get as many analysts as possible, so we ask that you limit yourself to just one question. And if you have additional questions, you can reach out to Ryan and the Investor Relations team after the call.

With that, Wynne, [Phonetic], can you please give the instructions for asking a question.

Questions and Answers:

Operator

For the sell side analysts that would like to ask a question, please select the participants button and click raise hand. If you’re using the mobile app, press the more button and select raise hand. Your lines are currently on mute. When called upon, you will receive a request to unmute your line, which you must respond to before asking your question. 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. We’ll pause for a few seconds to assemble the queue.

The first question comes from the line of Robbie Marcus at JPMorgan. Go ahead, Robbie.

Robbie Marcus — JPMorgan — Analyst

Great. Thanks for taking the question. Good morning, everyone. I think everyone is happy to see the EPS guide reiterated here, but I think the top line guide is a little bit surprising, particularly where you have third quarter organic sales guidance, given I believe you made the comment that November was trending better. So I was hoping you could talk through that. And maybe just walk through the Hugo launch delay, what you’re seeing there, is it an adoption issue, a technology issue or is it purely difficulty getting into hospitals with COVID-19 going on? Thanks.

Geoffrey S. Martha — Chairman and Chief Executive Officer

Hi, Robbie, thanks for the questions. I’ll let Karen answer the guide question and maybe I’ll hit the robotics question.

Karen Parkhill — Executive Vice President and Chief Financial Officer

Thanks, Robbie. And you know what I’m going to — for the guide, I’m going to walk you through the quarters a bit to help give you and set the context. And I’m going to start with Q2 because versus — if you look at versus pre-pandemic levels or two years ago, our growth in Q2 was about 1% organically. It was a little below peers, but you got to keep in mind that our inventory levels were lower back then because that was before we made the change to bulk purchasing. So if you adjust for that inventory issue and a little bit of a tougher comp, our Q2 growth was in the 2% to 3% range versus pre-pandemic levels.

And if you look at it sequentially, our revenue from Q1 to Q2 declined less than 2% and that was while most of our peers saw declines of 3% to 5%. So our performance in Q2, we believe is in line — at least in line with what we’re seeing from our peers.

And then, if you look at Q3 in our guidance, we’re expecting that same 2% to 3% growth, as we saw in Q2 versus the pre-pandemic levels. And yes, that is — that equates to a slight deceleration from what we saw in October. And we’re encouraged by what we’ve seen in October and into November, but given the dynamic environment, we focused on wanting to err on the side of caution with our Q3 guide.

And then, for Q4, we’re assuming normal sequential seasonality just because it’s our fiscal year end. So you’ll see sequential improvement in Q4. So hopefully that’s helpful.

Geoffrey S. Martha — Chairman and Chief Executive Officer

Okay. So then maybe on the robotics question, I mean, let me first by saying, no, it’s definitely not a demand issue or the demand remains high, higher than we can fill at this point. And we’re continuing with our regulatory filings around the world. We’re going to begin the US IDE here very soon and surgeons are continuing to do cases. We’re doing so far uro and gyn cases, and we’re close to, I think, we’re in any day now, like our next — our first general surgery case. So and like I said, demand continues to build.

So the issue that — no, [Phonetic] this is more of a limited release phase that’s where we are right now, and we’re focused on optimizing the user experience. And the issues that we’re managing through are some supply chain issues and some initial manufacturing issues, and those are the issues that we’re working through right now, and we’re really focused on making sure that these initial experiences with surgeons are really good. And so that’s the reason for the slower revenue this year. But then again, next year, we expect next fiscal year a really strong ramp.

Robbie Marcus — JPMorgan — Analyst

Great. Thanks a lot.

Ryan Weispfenning — Vice President and Head – Investor Relations

Thanks, Robbie. Next question, please, Wynne.

Operator

Next question comes from Vijay Kumar at Evercore ISI.

Vijay Kumar — Evercore ISI — Analyst

Hey, guys, thanks for taking my question. Geoff, I had a two part product related question. One on Micra, there was an FDA letter earlier this month on complications related to perforations. How should we think about Micra, is that something the street needs to worry about?

And one on RDN, you expressed a lot of confidence in the outlook. I mean, we’ve had a couple of trials, where some of your peers have missed end points. Is your trial design different from your peer because when I look at your peer, they added a four drug and that’s when you saw the control arm improve. So is — if your trial design is similar to your peers then what is the confidence we have that your pivotal trial will hit the primary endpoint up a year from now? Thank you.

Geoffrey S. Martha — Chairman and Chief Executive Officer

All right. Thanks, Vijay. I will turn this one over to Sean, but before I turn it over because both the Micra and the RDN question fall in his world, I’ll give you my short answer on Micra, don’t worry about Micra. Micra is doing really well. I’ll let Sean provide a little more commentary on the FDA letter.

And then on RDN, look, we are and Sean will give you more details, but we’re very confident about this. We’ve got a lot of data here. We’ve had a registry going for a long time. We’re following a lot of patients, picking up a lot of data here. And I’ll remind you that our trial wasn’t designed to end early. I know some expectations got ramped up about it ending early, and we’re confident on this one.

And the patient preference, the FDA has seen the patient preference data, they work with us on this and patients really want this, FDA knows that. And look, I’ve been out myself in the last couple of months talking with — and in the last couple of weeks especially talking to a number of our investigators and this — look, this works, this works and patients like it. And the FDA knows that, and we’re confident in our trial. But I’ll let Sean give you some more commentary on that. Sean, do you want to chime in here. You got to unmute.

Sean Salmon — Executive Vice President and President, Diabetes Operating Unit President, Cardiovascular Portfolio

Yeah. Surely, Geoff and Vijay, thanks for the question. I would say first on Micra, this actually one [Phonetic] is more just a reiteration about the importance of being mindful of implant safety. But the actual rate of perforation that we’ve seen in the continued Access Study, the continued [Phonetic] Evidence Development Study, which we just reported out two year results at the ESC is actually below what we showed in the preclinical work and the pre-approval trial. And the overall complication rates for leadless pace making are about 30% lower at two years than what we see with transvenous. So there is certainly no concern here, and the customer reception has been really, really excellent and continues to be despite the letter of the FDA just emphasize.

And on the clinical trial front for RDN, you are right, there are differences in the clinical trials, and we remained, as Geoff said very confident that our ON MED trial is going to make a standpoint. I think what you’re referring to is the RADIANCE study that was reported, that [Phonetic] RADIANCE TRIO study, which at six months, they did a forward titration of drugs to get patients to their goal. So that was a — part of their study design was after the primary endpoint of two months, they added drugs on until blood pressure went down. And that’s kind of the point of renal denervation generals that you can get there without these many drugs.

And we saw something similar in the pilot study for ON MEDs, where we are able to forward titrate drugs after the primary endpoint and get people’s blood pressure there without having to go to diuretics, which patients really hate taking. So yeah, there is nothing to read through on that one.

The trial that we [Phonetic] had in Japan and Korea was a little different. It was more like HTN-3, where they didn’t control for medications. They had others [Phonetic] types of control, so that’s more of a legacy study design that didn’t leverage the learnings we got from HTN-3. Understood. Thank you, guys.

Ryan Weispfenning — Vice President and Head – Investor Relations

Thanks, Vijay. Take the next question, please, Wynne.

Operator

The next question comes from Larry Biegelsen at Wells Fargo. Go ahead, Larry.

Larry Biegelsen — Wells Fargo — Analyst

Good morning. Thanks for taking the question. So, one on diabetes. The quarter was in line, but you took down the guidance, why is that? What are your expectations for the timing of 780G and Guardian 4? And Geoff, we’ve seen a wave of spins recently. What’s your view of spins in general? And do you see opportunities at Medtronic for spinning off non-core or underperforming segments? Thanks, guys.

Geoffrey S. Martha — Chairman and Chief Executive Officer

Thanks for the questions, Larry. I’ll take the spin one, and then, I’ll let Sean take the diabetes one. Look, as we’ve talked about in the past, looking at our portfolio and capital allocation is a — as a high priority in this new operating model, the Executive Committee, so, my leadership — the leadership team here, we spend a lot more time on looking at our portfolio and capital allocation than we have in the last 10 years since I’ve been here, that’s for sure, orders of magnitude more time.

And look, there is — we’re always looking at our different businesses, including our high performance businesses and high growth businesses to make sure we’re the right owner because I do think focus is important and making sure that you can provide the right amount of capital and other [Phonetic] synergies between businesses that matter, and we’re always looking at this and debating this. I mean we’ve engaged our Board as well, quite a chunk of our time in each Board meeting is spent on this as well. So yeah, I do see opportunities. I’m not signaling anything. But I can tell you that this is something that we’re constantly looking at. And I don’t see ourselves as like a GE or J&J, they are like dramatically different businesses, but it’s — I do think it’s an opportunity for us over time.

Sean, you want to take the diabetes one?

Sean Salmon — Executive Vice President and President, Diabetes Operating Unit President, Cardiovascular Portfolio

Yeah. Sorry, Geoff. My mute button was broken here. Yeah. Larry, so nothing different than what we’ve been talking about all along. We’ve got really strong uptake of 780G and Guardian 4 sensor outside the United States. In the US, we have — just we’re waiting for that approval to come through. And we’ve had very good interactive conversations with FDA. I think we’re making an excellent progress there.

But do remember that when we launch a new product in diabetes, there is a training element to that and it takes some time, so it pushes the revenue outward before it starts to gain traction. What we’ve seen in the US is, well, we’re growing pump share right now. Globally, we do have a lot of patients that came out the installed base, you have to kind of rebuild that installed base to get momentum going, and that’s probably going to be driven by the 780 with Guardian 4 sensor launch.

Larry Biegelsen — Wells Fargo — Analyst

Thanks, guys.

Ryan Weispfenning — Vice President and Head – Investor Relations

Thank you, Larry. We’ll take the next question, please, Wynne.

Operator

The next question comes from Matt Taylor at UBS. Go ahead, Matt.

Matt Taylor — UBS — Analyst

Hi, thanks for taking the questions. I had sort of two small follow-ups. One on the overall environment, you’re talking about these COVID impacts and staffing shortages. It sounds like you’ve seen things get a little bit better in November, and I was wondering, if you had a hypothesis as to why that was? And could you give us more of a flavor for how much the improvement has been sequentially?

Geoffrey S. Martha — Chairman and Chief Executive Officer

Sure. On the environmental side, yes — sure that — look — like we said in the commentary each month throughout our quarter, throughout our Q2 was better than the next. We think it — we didn’t quantify that and it got better into November. But the procedures — so the procedures have bounced back, but not as quickly as prior waves and not as fast as we hope. It’s definitely a fluid situation, and it’s gotten a little bit harder, more difficult to predict, right and before it was more of an epidemiology discussion on [Phonetic] COVID cases and the severity of them and the impact to ICU beds, now you’ve got this critical staffing shortage in our — in hospitals around the world. I mean, we really predict more so in the US though and the [Phonetic] particularly this nursing shortage you hear about and that’s a little — that’s been a little bit more difficult to predict. And I think that’s the thing that I’d say surprised us a bit last quarter.

And then, finally, you’ve got some supply chain issues, which for us have been manageable so far, but as time goes on that gets more difficult. So we took, I think Karen walked you thorough the guidance, I think we took a conservative approach here, particularly for our Q3 guide on that. But it’s difficult to quantify all these things working together here, the COVID cases jumping back up, like you heard about in Europe, nursing shortages in the US and then, global supply chain issues.

Yeah. I think the hospitals are doing a good job managing the headwinds they have, and I think we’ve done a pretty good job. Our teams done a really good job on the supply chain issues. During COVID, we were able to build up inventory on some of these critical products. But as these issues drag on, it’s — it becomes more challenging, and that’s why we taken a — and I think a bit of appropriate position given the uncertainty for our Q2 guide — our Q3 guide rather, sorry.

Matt Taylor — UBS — Analyst

Thanks for that, Geoff. And maybe I can just ask the follow-up, supply chain, you talked about some of the issues with Hugo and the impact on this year’s revenue. Do you have any thoughts on how quickly that can resolve? And what kind of contributions we should expect in the subsequent years versus the prior guidance that you had given?

Geoffrey S. Martha — Chairman and Chief Executive Officer

Right. Well, so look first of all, I’d say what — I should have mentioned this when I was answering Robbie’s question. We did underestimate the supply chain, some of those supply chain issues, and early manufacturer issues in a complex program like that, not like this. This is a complex program and that’s on us. We should have probably provided a little bit more cushion there because we really, like we said all along want to make sure that we’re optimizing the customer experience here.

So in terms of how long this goes on, it will — in terms of like first of all, like we said, we’re still having double digit revenue this year, double digit millions, and we didn’t quantifying queue [Phonetic] the next year, but I’ll tell you this is, it will be a very healthy ramp off this year. So like I said before because we are — cases are continuing, demand is building, we’re continuing to get new regulatory filings that we file for and expect approvals and starting our US IDE soon. So there’s a lot of activity going on here, a lot of good things, a lot of good feedback. And we just appropriately are optimizing in my opinion the end user, the customer experience here and FY ’23 will be a strong year for the robot.

Matt Taylor — UBS — Analyst

Great. Thanks for taking the question.

Ryan Weispfenning — Vice President and Head – Investor Relations

Thanks, Matt. We will take the next question, please, Wynne.

Operator

The next question comes from Cecilia Furlong at Morgan Stanley.

Cecilia Furlong — Morgan Stanley — Analyst

Great. Good morning, and thank you for taking the question. I wanted to ask just on Hugo, as well RDN. The expenses you talked about previously the $400 million this year, just how we should think about realizing that this year versus what gets pushed into next year? And combined with that just how we should think about expense ramp in ’23 — fiscal ’23 associated with your other pipeline products? Thank you.

Karen Parkhill — Executive Vice President and Chief Financial Officer

Yeah. Thanks Cecilia. I’m happy to take that. So the $400 million operating profit drag that we talked about earlier this year was not just Hugo, it was both Hugo and RDN and the important investments we’re making in those big product launches for us. And so we will continue to have more expense on those products in FY ’23. It is too early to give you a signal because we still have two quarters to go this fiscal year, and we’re just beginning our planning process for next fiscal year.

Ryan Weispfenning — Vice President and Head – Investor Relations

Okay. Thank you, Cecilia. Wynne, next question, please.

Operator

The next question comes from Matt Miksic at Credit Suisse. Go ahead, Matt.

Matt Miksic — Credit Suisse — Analyst

Thanks so much. Can you hear me okay?

Ryan Weispfenning — Vice President and Head – Investor Relations

We can. Thanks, Matt.

Matt Miksic — Credit Suisse — Analyst

Great. So lots of things, we could sort of ask after, but if I just to take one question, I’d maybe come back to the staffing question. And it sounds like Geoff and Karen, you’ve taken a stab at the fiscal third quarter, which is obviously important calendar quarter for everyone in med devices given kind of the traditional Q4 push. And I just wanted to maybe ask you to talk a little bit about your confidence that we sort of see it turn after that or is just a Q3 impact, was there an improvement into Q4. And then maybe what — and I apologize because I know it’s a terribly uncertain topic, but just what kinds of things would give you confidence that, that we do get past [Phonetic] the staffing things say as we get through the spring and into mid year or next year?

Geoffrey S. Martha — Chairman and Chief Executive Officer

Well, first on, thanks for the question, Matt. I mean, obviously the staffing issues is a hot topic and I was spending a lot of time with our team on this as well as our hospital customers. Look these — the hospitals are basically investing more in staffing. I mean and that is, I think one of the biggest issues here is then — one of the biggest opportunities, they are just — they are paying more money for the staffing to get to incent people to come back

And the other thing that I see hospitals doing, where we’re spending a lot of time with them is adoption on more remote capabilities and business models. I mean, in our world, things like managing your cardiac rhythm patients, using remote technologies, they want to come back into the — to the hospital and get their device checks we’re doing that. We’re doing that remotely.

And I can go down the list to other of our therapies like another one would be in — it’s not in the US yet, but in the NHS in UK, they are using our PillCam, they have accelerated the use of — the rollout of PillCam to do colonoscopy, diagnostic colonoscopies for their patients there because they have built up a long waiting list of people, who are getting colonoscopy.

So I see hospitals one and it’s not a sustainable situation, but short term providing bonuses and incentives and two, much rapid — much more rapidly adopting some of, in our case, I mean, and they’re working with other industry players as well to adopt things that are more remote, and they’re prioritizing therapies that have less complications that result in less, less hospitalizations and return hospitalization.

So I mean it’s not an overnight solution, but we are — they are aggressively working this. I mean, no one likes to cancel a TAVR case because there is nobody to monitor the ICU bed or TAVR case. So nobody wants to do that. And so they are moving fast on this. And like I said, we’re seeing progress here even in our results into November. But it is fluid and that’s why we’ve taken the approach we’ve taken on the guide. I don’t know if you have anything to add Karen to that. No. She is saying no. So I don’t have more freedom, Matt. This one is a tough one.

Matt Miksic — Credit Suisse — Analyst

Well, thanks for the color.

Ryan Weispfenning — Vice President and Head – Investor Relations

Okay. Thank you, Matt. Take the next question, please, Wynne.

Operator

The next question comes from Joanne Wuensch at Citi. Go ahead, Joanne.

Joanne Wuensch — Citi — Analyst

Thank you for taking the question and good morning. A couple of things, I’m curious about. Do you think that there has been a change in the way that consumers are looking at healthcare?

Geoffrey S. Martha — Chairman and Chief Executive Officer

Well, you know, I’m not sure, if there is a question underneath the question. But yeah, I think consumers have been much more engaged in healthcare and this is something that’s weighing into, to our strategy. You saw that we rebranded Medtronic here last quarter and gone to a different look and engineering the extraordinary that’s part of a first step to us more aggressively directly reaching out to consumers and educating them about our therapies. I mean things, like you know, PillCam Genius, which I just talked about, things like cryoablation, as a first line indication for AFib. They don’t want to be on these regimen of drugs.

And so we historically have relied on our specialist physician partners like in the case of cryoablation and AFib, it’s been electrophysiologists, who kind of “build up” our referral pathways in our markets. Now I think given the changes in technology, the miniaturization, which leads to less invasiveness, the connectivity of our devices, the better efficacy, we’re moving up in the line — in the food chain here closer to first line, like I mentioned in AFib.

And some of our businesses are already there and more of a consumer business like diabetes, and our pelvic health or [Phonetic] overactive bladder. So you’re going to see us more engaging consumers and directly and we’re — and the reason we’re bullish on this is, one, like I said, the therapies have changed, less invasive, more efficacious, in some cases, just a better solution clinically proven than the — than pharma, which is the typical first line indication.

The other thing that we’re seeing getting to your question is like I said, here is not a [Phonetic] proof point on consumers more engaging like on our RDN trial. We did — that — this trial filled up really quickly, enrolled really quickly. All [Technical Issues].

Unidentified Participant — — Analyst

[Technical Issues] just wondering how long that some of these pressures you think will last. I mean is this something that’s going to go deep into calendar ’22 that you’re going to continue to encounter in that segment? And then what can really kind of what can you do to help persuade some of these issues on the staffing side? Thank you.

Geoffrey S. Martha — Chairman and Chief Executive Officer

Well, look, it’s — like I said, it’s harder to predict, Matt, the timing. But like I was just with a — one of our bigger customers in the South of the United States like a week and a half ago, and they had a couple of — and it was a cardiologist that had a couple of TAVR cases canceled that day. And there is a huge sense of urgency because of the nursing shortage. So they have a huge sense of urgency in correcting that issue.

And like I said, they are prioritizing moving nurses — or first of all, they are getting more aggressive with their staffing strategies to attract and retain staff. They are reallocating resources around the hospital — the health system if you will to get more nurses into these critical care areas. They are pushing certain cases out to ASCs. We’re seeing growth in surgical centers where they need less staff to do these cases. So, we’re seeing them aggressive — aggressively make these I’ll call it reallocations of resources and we’re helping them as much as we can in these areas. So I — look, these — like you said, you can’t defer these cases.

First of all, I don’t know how. I don’t like — I’ve never liked the term elective. I think it’s more deferrable and you can only defer some of these cases so long as you pointed out. And so people are innovating, hospital systems are innovating here, and I just don’t — it’s really hard to predict. I mean like I said last quarter, we underestimated the impact of the nursing shortage. Like you said, we’re seeing improvement, but — and we’ve taken a conservative guide in our fiscal Q3 in particular, but it’s really difficult for us to provide much more specifics than that.

Karen Parkhill — Executive Vice President and Chief Financial Officer

Matt, I might add, I know you’re all trying to figure out how long this will last. And if you just look at — if we just look at the recent trends in November, we saw some good upticks last month particularly in cardio. Now we don’t know if that’s because it’s pre-holiday, pre-Thanksgiving, but we are seeing some good encouraging trends.

Ryan Weispfenning — Vice President and Head – Investor Relations

Thank you, Matt. Take the next question, Wynne.

Operator

Next question comes from Chris Pasquale at Guggenheim. Go ahead, Chris.

Christopher Pasquale — Guggenheim — Analyst

Thanks, Karen and Geoff. Most of the focus in terms of macro headwinds has been on the US so far with some of the recent headlines that Europe had been a bit concerning. Just curious what you’re seeing in your European business over the past few weeks and whether guidance assumes any deceleration in OUS procedure trends during the third quarter.

Geoffrey S. Martha — Chairman and Chief Executive Officer

Well, Chris, thanks for the question and you’re right. Q2 was a US story for us. I mean, the other regions performed well, especially our emerging markets. We’re seeing really strong growth in emerging markets, but Europe performed well as well and other developed markets last quarter. Now in the last few days and weeks you’re hearing in Europe about certain countries pulling back on elective cases. I really don’t see this to be long lived here given the vaccination status in these countries, the high vaccination rates in most of these countries and other new therapies like the oral antiviral therapies coming online. So, I don’t see it taking too long there directly from COVID and we’ve reflected that in our guidance.

Christopher Pasquale — Guggenheim — Analyst

Thanks.

Ryan Weispfenning — Vice President and Head – Investor Relations

Okay. We’ll take the next question please, Wynne.

Operator

The final question comes from Rick Wise at Stifel.

Rick Wise — Stifel — Analyst

Good morning, everybody. Maybe Geoff, just since I’m bringing up the rear here, one bigger picture question from you and then I’ll add a question for Karen. I mean you are obviously working hard to — not to have a turnaround at Medtronic, but make Medtronic grow faster, be more portable, be more innovative, execute better. I’m sort of curious your reflections on sort of a big picture sense of do you feel that the challenges of COVID and staffing and everything you’re talking about today have slowed your personal mission to drive that forward? Obviously you’re highlighting innovation and all the new products, etc. But at a high level, I’m just wondering your evolving thoughts.

And maybe shorter, Karen, if you could just talk us through a little more gross margins despite the challenges in the quarter better than expected. Maybe give us a little more color on do we expect that kind of trend in the second half and do you feel more optimistic about the longer-term potential to expand gross margins as all these new innovations rollout? Thank you so much.

Geoffrey S. Martha — Chairman and Chief Executive Officer

Rick, well, thanks for the question. And maybe last, but definitely not least here, and I appreciate the question. And look, it’s a great question and I’m very bullish on where we stand and I’ll walk you through why. I mean yes, COVID and in this nursing — there’s a critical staffing shortage highlighted by this nursing shortage in the US and just spending a lot of time talking about vaccines and vaccine mandates. Yes, it is a bit of a distraction.

But I am very happy about our bigger picture here. We’ve won what I really like is to structurally how we’ve made the Company smaller on the front end, if you will, with these 20 operating units and the clarity that we have into the end markets and the dynamics, what the customers are really asking for, what the competitors are doing. And we’ve got a really good handle on our pipeline by each of these operating units and we have gotten more aggressive in funding these businesses and holding them accountable to making the right choices and prioritizing innovation and innovating faster.

So, I feel really good about that. And my team, we spend a lot of time looking at these operating units and making these judgment calls as what is the appropriate funding, what does a good pipeline look like, how should we feel about the competition. And it’s not just like me sitting around talking to an operating unit leader; it’s my team, the different portfolio leaders even if it’s the businesses not in their portfolio asking tough questions because every incremental dollar of funding we put in one business is one less dollar we put in another business. So, the rigor around this and the constructive debate and the diversity of thought coming from the different people, it’s leading to better decisions and the energy inside the Company and around the Company is palpable. I mean we’re getting — our employee scores remain high despite all the burn out and everything and is infecting employees — affecting employees, but still we got great scores and feedback.

We’re getting — attracting talent like never before. We’ve had a 50% spike in our — in people applying for jobs at Medtronic. The market share situation is going well. And so look, we’ve got a lot to do here. We got some big drivers that we’ve got to show. We’ve got to bring this robot program and ramp this already — we got to get that data back and ramp that. We’ve got the diabetes turnaround. We’re seeing — we can see it. You can just see it off of the horizon. You could see the products doing so well in Europe and other parts of the world. We’ve got to get that in the United States. But we’re making this progress and that’s why I feel good. And culturally, you’re seeing a level of competitiveness and accountability. So like this quarter revenue didn’t come in where we wanted, but we still had an operational beat on EPS and we’re holding EPS guidance for the rest of the year. That’s the kind of company that we want to be.

Disappointed about the miss on revenue. There’s some environmental factors. But quite honestly, I was hoping that we could overcome all of those. We weren’t quite able to this quarter. But just to give some color commentary on how we think about it, that’s how we’re thinking about it and we’re going to — I know we’re doing the right things. We’re going to stay the course, we’re going to keep making these investments, keep holding ourselves accountable to being like the undisputed technology leader and growing above the market. That’s where we want to go. And so, optimistic about where we’re going in that direction. So with that, gross margin.

Karen Parkhill — Executive Vice President and Chief Financial Officer

Yes. So — and I just want to emphasize something that Geoff said before I go to gross margin, Rick, and that is despite the challenges that we’ve had from COVID, our R&D investment is not coming down. And we said at the beginning of the year we were increasing that 10% and we still fully intend to do that. So, we’re offsetting our headwinds in a different way when it comes to delivering the bottom line.

Also on gross margin, yes, our gross margin was better than expected. We’re really pleased with that. We’ve got a very concerted effort to improve our operations and to lead to better gross margin. We’re focused on getting our gross margin back to pre-COVID levels and from there at least sustaining it and hopefully improving it. And if you look at just the year-over-year, we’re still focused on that 2.5 points to 3 points of improvement in gross margin this fiscal year.

And when I think about longer term, I would just say too that nothing has changed from our focus on delivering that 5% plus revenue growth and that 8% plus bottom line growth. And I would say that includes next fiscal year in FY ’23 even given some of these headwinds that we’ve talked about today.

Rick Wise — Stifel — Analyst

Thanks to you, both.

Geoffrey S. Martha — Chairman and Chief Executive Officer

Thanks, Rick.

Ryan Weispfenning — Vice President and Head – Investor Relations

Thank you, Rick. Geoff, please go ahead with your closing remarks.

Geoffrey S. Martha — Chairman and Chief Executive Officer

Okay. Well, thanks, everybody for the questions. We definitely appreciate your support and your ongoing interest in Medtronic. And we hope that you’ll join us for our Q3 earnings webcast, which we anticipate will be on — we will be holding this on February 22nd, where we will update you on our progress, and Ryan will kick off that call standing outside of our world headquarters here in Minneapolis, again, without a coat on, he has promised us that no matter what the weather. So with that, thanks for watching today. Please stay healthy and safe over the holiday. And for those of you in the US, I’d like to wish you and your families a very happy Thanksgiving.