Medtronic plc (MDT) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Medtronic second quarter earnings release conference call. [Operator Instructions] Thank you. I would now like to hand the forum over to Mr. Jeff Warren, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Christie. Good morning, and welcome to Medtronic's second quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic Chairman and Chief Executive Officer; and Gary Ellis, Medtronic Chief Financial Officer, will provide comments on the results of our fiscal year 2012 second quarter, which ended October 28, 2011. After our prepared remarks, we'll be happy to take your questions. First, a few logistical comments. Earlier this morning, we issued a press release containing our financial statements and our revenue-by-business summary. You should also note that some of the statements made during this call may be considered forward-looking statements, and that actual results might 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 filed with the SEC. Therefore, we do not undertake to update any forward-looking statement. In addition, the reconciliations of any non-GAAP financial measures are available on the Investor's portion of our website at medtronic.com. Finally, unless we say otherwise, references to quarterly results, increasing or decreasing, are in comparison to the second quarter of fiscal year 2011, and all year-over-year revenue growth rates are given on a constant-currency basis. And with that, I'm now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

Good morning, and thank you, Jeff. And thank you to everyone for joining us today. This morning, we reported a second quarter revenue of $4.1 billion, which represents growth of 6% as reported or 3% on a constant-currency basis. Q2 non-GAAP earnings of $898 million and diluted earnings per share of $0.84 increased 1% and 2%, respectively. Our Q2 results reflect a quarter of stability in a challenging market. New products are making a difference in many of our businesses, and our international markets continue to deliver solid results. Once again, over 60% of our revenue grew a combined 80%. This portion of our business has steadily delivered improving growth over the last 5 quarters. It's also worth noting that the same set of businesses grew a combined 9% in the U.S., demonstrating that the U.S. healthcare system still recognizes the value of innovative products. Let me provide you with some specific details. In Cardiac and Vascular, we had good growth in almost all our businesses, but I was particularly pleased with our ability to take share in the Pacing market with our Revo MRI pacemaker. We are also gaining share in drug-eluting stents, as Resolute is performing extremely well in international markets. We're looking forward to RESOLUTE's expected U.S. approval later this fiscal year. In our Restorative Therapies Group, DBS, Uro/Gastro, Diabetes and Surgical Technologies all delivered solid results. InterStim continues to perform extremely well, both in urinary and our new U.S. fecal indication. In Diabetes, we gained share in insulin pumps and continued to see strong global growth, largely a result of the success of our Veo pump and Enlite CGM Sensor in international markets. Our Surgical Technologies business continues to deliver consistent growth accelerated by products from our new Advanced Energy business. At the same time, ICDs…

Thanks, Omar. Second quarter revenue of $4,132,000,000 increased 6% as reported, or 3% on a constant-currency basis after adjusting for $123 million favorable effect of foreign currency. Breaking this out geographically: revenue in the U.S. of $2,300,000,000 was flat; while international sales of $1,832,000,000 increased 14% as reported, or 6% on a constant-currency basis. Q2 international result -- revenue results by region were as follows: Greater China grew 24%; growth in Latin America was 17%; Middle East and Africa grew 12%; growth in other Asia was 6%; Japan grew 1%; while Canada declined 1%. Europe and Central Asia grew 5% where the current economic environment and payment uncertainty continues to cause us to defer revenue in Greece, which has now accumulated to $14 million. Q2 GAAP earnings and diluted earnings per share were $871 million and $0.82, an increase of 54% and 58%, respectively, due to the settlement of our U.S. Fidelis lawsuits last year. After adjusting for certain acquisition-related items, as well as the noncash charge for convertible debt interest expense, second quarter earnings and diluted earnings per share on a non-GAAP basis were $889 million (sic) [$898 million] and $0.84, an increase of 1% and 2%, respectively. After adjusting for this onetime tax benefit we received in Q2 last year, as well as the Ardian dilution, our non-GAAP diluted earnings per share increased 8%. It is worth noting that while our non-GAAP quarterly results include the gain, acquisition costs and dilution related to PEEK and Salient, we expect the overall impact of PEEK and Salient to be neutral to our fiscal year non-GAAP earnings after including the expected modest dilution in the second half for this fiscal year. In our Cardiac and Vascular Group, revenue of $2,207,000,000 grew 1%. Results were driven by growth in Pacing, AF Solutions,…

Your first question comes from the line of Kristen Stewart with Deutsche Bank.

I was wondering if we could just kind of walk through real quick the additional gains related to the PEEK and Salient acquisitions. I just wanted to make sure that, that had been in your prior guidance.

Well, Kristen, this is Gary. In the prior guidance, we had not provided any information on PEEK and Salient other than we had said that basically to PEEK and Salient, for the year, would be basically earnings neutral, which is what we are still saying. That's our current expectation. But we knew that, that -- what we had also indicated was that the gain on the investment would be offsetting the dilution from an operating basis, and that is also still our expectation. But as you indicated, in the quarter itself, because of the gain was -- all recorded in the quarter with some of the dilution coming in the back half of the year, we actually end up with a little over $0.02 benefit of the gain more than offsetting the dilution we had, obviously, in the quarter and the integration cost itself. So there is a couple of cents pick up we have in this quarter that was not in our original guidance, that obviously will be offset as we go through the back half of the year by $0.01 or $0.02 dilution we expect from the operating results of PEEK and Salient.

And then just for Omar, I know you'd talked about making appropriate divestitures. I was just wondering if you could maybe give us an update, now that you've had another 3 months under your belt just in terms of how you're thinking strategically about Medtronic, the businesses that you have today and just kind of an update on if there's other things that you view to be noncore, nonstrategic?

Well, first of all, as I look at Medtronic, we're basically in attractive markets, in the long term. The demographics are such that these are all potential growth markets around the world. And even in our businesses which are challenged with results, these are attractive markets with demographics suggesting that there will be growth in the long term. We constantly look at our portfolio, and we look at our ability to win in these different businesses. Right now, as I see it, our portfolio is well balanced. And more importantly, we think that different elements in the portfolio actually add to each other to provide considerable synergies in front of our customers, not just putting products together but real technical synergies through which performance can be enhanced because of our expertise in different areas. So at this stage, we feel that we've got a pretty good portfolio, but we continue to look at this on a quarterly basis and a regular basis.

Your next question comes from the line of Matthew Dodds with Citigroup.

I'll focus on Europe. Just, Gary, when you look at Europe, there seems to be rising concerns again that austerity might get tougher in calendar '12. So can you say what you're seeing specifically in Western Europe? And on sort of the receivables payments fronts, is there any concern there that other countries, not just Greece, may be extending payments?

Yes, I mean, overall, Matt, as we look at Europe in general, I mean, our performance in Europe actually right now continues to be still relatively strong. I mean, I think that new products that we're launching, the innovative products, are still a positive. As we talk to our team over there and the management team, I think they're still feeling good that our products, in this marketplace, they can win and that we can continue to grow. But as you know, Europe is not just one market either. The reality is the growth we're seeing in Germany, for example, and France and some even the Northern European countries, is stronger right now than probably what we're seeing in some of the countries that are struggling more, especially Greece, which is, by far, the worst at this point. We have seen Italy, on the receivable front, I mean, some concerns on their receivables and so that's one of the reasons we saw a higher bad debt expense, and this quarter was not just from Greece, but it was also -- we took some additional bad debt in Italy because what we're seeing happening in that environment. Now that, that being said, in Italy and Spain, where you're seeing some of the other concerns about the overall economic troubles, our business is still relatively strong. So as we look to the next year, we're cautious, we're watching it carefully. We're making sure we're managing the receivables issue overall. But the business itself, outside of Greece, outside of kind of what I would say the worst situation, is continuing to be relatively strong. And we expect that, that our innovative products will continue to take share and we can actually continue to grow. And so I'm feeling good in general, but the international receivable issue, especially in Italy and Greece, are the ones we're watching.

And then one just quick product question. Revo in the U.S., can you give a rough idea what percent of units do you think it was? Is it in the 10% to 20% range in the quarter?

Yes, that's been, right now, we're thinking it's right about the 20% range.

Your next question comes from the line of Mike Weinstein with JPMorgan.

Omar, I want to just talk more bigger picture than just the quarter. And I would be appreciative of your insights, I mean, if we look at this quarter in a broader picture what's going on in the medtech landscape, Medtronic once you back out currency and acquisition noise grew about 1.5% organic, which obviously, isn't where you want to be longer term. So can you just talk a little bit more about how you reinvigorate growth? And I guess, first question is A, is it possible? And B, how do we think about the timetable for you doing that?

Well, first, it's possible. That I want to make absolutely clear. I completely believe in it. I see data around the world that suggests that it's completely possible, and the management team absolutely believes in it. Second, the approach we're taking is pretty straightforward. First of all, we've got to make sure that the investments that we make today result in better growth. We're investing a considerable amount of money, every year, reinvesting a considerable amount of money every year, because of the margins that we have. And we've got to align them in the way that results in growth. And the way we'll do that is, first, by better execution. So in all areas, facets of the company, tighter discipline around targets, commitments, aligning goals with each other. So just basic, good, excellent execution. Following that, using customer economics is a very important lens through which we've got to select what we work on. I'm a strong believer, and we're all a strong believer, in the fact that especially in this environment, but in general, if you take innovative products and you show to your customers how they can be financially better off by using these products and provide better care, then these products will sell, and we will grow. Now we uniquely in the industry have the capability to actually generate that kind of evidence in a customer base, a specific customer basis. We haven't done so in the past in a comprehensive and rigorous fashion. We intend to do so. So that's one big bet, if you like, that we're making that we think, when employed comprehensively across their company in every product that we work on, will trigger growth. And then the third thing that I've talked about before, as I believe in it more and…

And just to maybe add to Omar's comments, Mike, I mean, the reality as we have highlighted in the comments, 60% of our businesses right now are growing high-single digits, as far as the growth rate; 8% for the quarter. And so the fact of the matter is yes, we have a few couple of businesses right now that clearly are holding us down as far as where the growth rates are. But at some point in time, that will also start to anniversary from the standpoint of the comparisons and from the new basis that we kind of have within the Spine and the ICD markets in general. And so as we look forward of it, all the focus we have internally here is starting to have some pay off. Now I think we're going have to obviously work through this, for the current year, and that's why we still gave guidance of 1% of 3% for the current year. But as we start to see some of these businesses that have been really pulling us down start to anniversary, I think you're going to start to see the growth rates accelerate as we see a broader businesses, which are growing, as Omar said in his comments, are clearly growing in very tough economic conditions. You can get growth in this marketplace, and that's what we're focused on trying to do.

Okay. Let me [indiscernible] that, there's a lot I could ask you on that, just relative to the math. But let me just ask you on a gross margin line. If we look at a couple of different things. If we look at the pricing pressure and your comments at mid-single-digit pricing pressure in Spine, you're getting a bit of a reprieve right now in your CRDM business because of the new product launches of Revo and Protecta, that's helping you for a piece of time. But longer term, you're looking at probably pretty significant pricing pressure in Spine and CRDM, and your growth is going to come more from the emerging markets versus, obviously, developed markets, which has already taken place. Is the plan to take out 25% of your COGS over a 5-year period sufficient to offset the pricing pressure that you'll see across the portfolio? If all you do is take out 25% of your cost of goods sold, in other words, are gross margins flat 5 years from now?

Well, first of all, we're not going to stop at 25%. That's the initial target, and we continue to look for opportunities to continue to improve that. That's one point. Second is that -- and we need to create within our businesses a culture that this is an ongoing effort. So we're working on long-term programs right now that take costs out dramatically in the future. So this is not going to stop. It's a continuing effort that we continue to have across all our businesses. Second, there are other line items between the revenue and the gross margin outside of the cost of the products, which we're also working on making more efficient. Everything from our logistics to the way we sell our products, all of that, while always preserving customer service and focus. We want to make sure that we drive much more efficiency in lots of these other line items. And I think there's opportunity there as well. And I think pricing our products in a realistic fashion around the world and during those products, over time, will give us incremental growth in these different regions. And I think we have the capacity to afford it.

Your next question comes from the line of Bob Hopkins with Bank of America Merrill Lynch.

So obviously these are fairly extraordinary times when it comes to the CRM market and potential changes in Europe. And with that in mind, I was wondering, since you're the only company that we have listened to over the last month that has good data on October, I was wondering if you could give us any comments, specially as it relates to the ICD market about trends you saw for the market in October relative to the DOJ process? Are there any signs in your view that, that process may be coming to an end as you look at the numbers for your results later in the quarter?

Yes, I mean, Bob, this is Gary. Just to add some comments there, I mean, obviously it's hard for us that we don't have a lot of market data for October. We have some of our own data. In our implant rate, actually, we've actually seen even a slight improvement here as we kind of ended the quarter, and especially as even going to Q3. Now -- so we've actually seen the implant data, trying to see some modest improvement. What we don't know right now was -- are we taking more share or is that just the fact that the market is starting to stabilize. So we don't have market data. Until we see that, we're being cautious. Our current thought is we're optimistic that maybe we bottomed out and we're starting to see some flattening, but we'll have to wait and see what the actual market data is, which we probably won't have for this period for another couple months yet.

But do you have any thoughts on the DOJ process, anecdotally, from the field in terms of fewer audits or anything of that nature?

Yes, I mean, our overall -- I don't think we've seen anything, or if it's necessarily falling off, but we are starting to anniversary against that. And so our people -- are cautiously optimistic that the market is starting to stabilize. We're coming up on the anniversary of when this kind of started, this larger process. Our implant data is starting to stabilize and actually seeing some modest improvement. We'll have to wait and see again and what's the actual data as we go forward. We don't want to say that this is over yet, so we're trying to be cautious on that regard. But we see at least some hope in what our results are showing.

And then just to round that out, from a pricing perspective in ICD, obviously, you have some new products but if you exclude these new products, any change in the pricing environment for ICDs as you see it? And then also on Europe, was Europe kind of stable throughout the quarter? I think, you might have mentioned that, but I just wanted to confirm.

Yes, from a pricing perspective, overall, we really didn't see -- as you said, we're getting some uplift in our prices because of the new products that we have launched in the marketplace. But even outside of that, we didn't see necessarily any big change in pricing pressure from what we've been seeing for the last year or so here. So I think it's been pretty consistent. Within Europe, same thing. We really didn't see any change in the trend as we went through the quarter or is even as we've entered into the current year. So, I mean, there's been no change, dramatic change, in that. It continues to be kind of the same pressures we've been experiencing in working through and be able to manage through at this point.

Your next question comes from the line of David Lewis with Morgan Stanley.

Omar, your one area of the business that we've heard some broad strokes about but very few specifics is actually the topic of R&D and R&D efficiency. And clearly, you want to enact some positive change here. But I guess, given the cycle of the medical device investment and then, obviously, commercialization, can you kind of help us with some realistic guidepost in terms of when we could expect some type of improvement in Medtronics, relative to R&D efficiency? Is this something that you can affect positive change on in 6 to 12 months or is this something the investors should be thinking about from an 18 or 36 month-type perspective?

Well, first of all, the way in which we'll measure this is when our growth rates start to improve, it's pretty straightforward. It's tough to be very precise about what caused what in this scenario. And so the general improvements we're making in R&D will start to impact results. Now as I pointed out earlier, while a lot -- the new investments that we make will go to the screen that we talked about, which will result in better selection of products that will create growth in a more efficient fashion. However, products that are already in our existing pipeline, and some which we've already launched, could also benefit from a value creation in an economic sense, which we haven't done so in the past. So I think from that perspective, we can probably get more near-term results as a consequence of this focus in the economic value equation. So products that we already have in the market, recently launched, or products that are in our pipeline. When we look at their economic value, get evidence at our customers' sites to demonstrate that economic value, and we sort of communicate that to our customers. We think that, that can give us differentiated growth on a continuous basis quarter-over-quarter.

And just to add to that. I mean, you're going to see continuing improvement. I don't think it's going to be all of a sudden, two years from now, everything changes. I think what, as Omar is saying, there's opportunities for us to do things now and we'll start to see from benefit from that. Clearly, some of the programs that are just in our -- currently under development, you won't see those benefits until, as you point out, David, until 2 to 3 years. But you shouldn't assume that you have to wait 2 to 3 years for that to happen. We expect the things that we put in place are going to start to have pay offs already. But it's not also kind of a cliff item. You're not going to all of a sudden see this change dramatically in one period. You're going to continue to see continuous improvement.

And, Gary, in coming quarters, should we expect Medtronic to come out and give a much harder number around those COGS reduction issues that came to with what the company did several years ago?

Well, as we go through our processes, as we finish the current year, my guess is yes as we go forward for the next 5 years. We'll give you some specific expectations on what we're going to be looking for. As Omar said in his comments, he has challenged the organization to say how do we achieve another 25% out. But as he indicated, we're actually driving some expectations that need to have more than that. And so what are those programs? The businesses are -- have developed plans already from much of that. But there are still some things that are being developed and firmed up. Once we have that kind of firmed up, as we get into kind of the next 5 year plan, yes, we'll lay out some expectations.

Your next question comes from the line of Rick Weiss with Leerink.

Let me turn to INFUSE. INFUSE down 16%. Is it your sense that we've seen the worst of the decline? When we were at MAST, I was surprised that just at -- my random conversations with various docs, it seems like the move away from INFUSE -- and this is totally anecdotal now, seemed to be actually accelerating in the last 3 months. And can the other biologic products continue to help offset? Just any perspective of when you think we're over the hump there.

Well, first of all, our data shows that in Q2, actually, the number kind of stabilized to a fairly steady number, which is a drop in the high teens. Now we're watching it carefully. We remain cautious and we're watching it carefully, and we're going to watch the data and then conclude. So we don't want to make any concrete conclusions that it's completely stabilized. But our data does suggests in Q2, it was pretty steady. But again, I mean, this is volatile and we watch it very carefully. I think -- anything else, Gary?

The only thing I would add to that comment, Rick, because I agree with Omar, I mean, it's been -- we're watching it. We're not predicting that we're at the bottom yet, on the other hand. It has been -- Q2 did not get worse as we went through the quarter. It was pretty stable as he indicated. The issue is we are seeing, as we have mentioned in the comments, we are seeing increases in some of our other types of biologic products. Osteotech and MagniFuse, and a few others, where we're starting to see a strong growth in those businesses. The fact of the matter is INFUSE, if you do see a decline, they have -- there is something that you need to use for these procedures. And so we think we have a strong product line even outside of that, that would help to drive the growth going forward. But INFUSE, we're just right now, it's cautious until we can get the Yale data up there. I think there's going to be -- continue to be these people's comments and questions and concerns. And so as a result to that, we expect the business will be -- and our guidance assumes that basically, we kind of continue to see the same kind of decline that you've saw here in Q2.

I think, also, before we finish the topic, I just have to make a point that aside from the financials, I just want to reiterate that our position is that we always put patient safety and quality first. We believe in the clinical data that we submitted to the FDA, and we know that, that data supports safe use in the indicated areas. We-- the Yale study we're depending on, to look at the data transparently, and we will take action resulting from whatever we find in Yale study. And I think that, I just have to make those points that integrity, patient safety and quality are our highest priorities and that will continue to be so, irrespective of what financial sort of consequences we have here.

Just on a different, maybe happier note, Omar, you seem to have a pretty good quarter, up 6% x FX, if I'm looking at it correctly, maybe the best since early fiscal '10. At RestoreSensor, you talked about, with the fiscal third quarter launch in the U.S. and Japan and the other new products, do we get this business back to double digits or how do we think about the second half or the outlook ahead on the Neuromod side?

Well, maybe I'll make some comments and then Omar can add, Rick. Overall, as you said, yes, we saw improvement in the Neuromodulation performance this quarter. They saw some very strong growth, continuous strong growth in the InterStim, and also even this quarter for the first time we saw also some very strong growth in drug pumps. But InterStim, with the new fecal indication in the U.S. is clearly continuing to grow, and that's helping that part of the business overall. And then we also saw our DBS and pain pump relatively increasing. We -- pain stim in the U.S. was still somewhat of a struggle. That obviously, with RestoreSensor now being in the marketplace, we think will clearly help us in the U.S. market as that product launches here in Q3. And as we start -- and we roll it out full during the quarter. We won't get the full impact in RestoreSensor in the quarter because that's actually, I think, the launch, as I assume, kind of hearing mid-December. So we'll have it for about half the quarter overall. But we do think that would like to continue to help accelerate the growth in that business. And as we've talked about in the past, the Neuromodulation business, it's more of an elective procedures. So it can be impacted somewhat in this marketplace with reduced procedures overall. But we think, ultimately, this has back to a double-digit kind of growing business. And with these new products we're launching now, we think we can stop the share erosion in some -- in the Pain Stim side, and actually start to see some pain -- excuse me, share gains.

I think, also, I'd like to add to Gary's comments and saying that this is also an example where using our economic value modeling of, say, the RestoreSensor, is to show that how -- usage of the RestoreSensor is better economically for the providers. It's something that we will gather evidence around and demonstrate, and we think this will incrementally drive growth of that market and growth of our position in that market. So we remain optimistic about this segment and about the new products, and particularly excited about the RestoreSensor and what it can do for us.

Your next question comes from the line of Steven Lichtman with Oppenheimer.

Just a -- first question, as a follow-up to Spine, it seems like the core Spine business x Biologics held up okay. Can you talk about the efforts of the sales force, the sort of ring fence, the INFUSE issue from the Core Metal business?

Well, yes, I can try to address that a little bit. I mean, overall, as you indicated, our Core Metal Constructs, we actually saw sequential growth in that business and that was actually up about 5% versus the prior quarter. It is still down, I think, with the numbers were 1% was still a bit down overall, but we are starting to see some improvement in the Core Metal Constructs because that's where we have a lot of new products, Solera, the POWEREASE things we have talked about earlier. And so we are expecting that business will continue to kind of improve as we move forward. INFUSE, they're basically overall. INFUSE is -- there's no commissions with respect to INFUSE. It's a straight salary sales force, so there's really no connection between the impact of the Core Metal side on INFUSE itself. It clearly -- it can drive some share gains overall, but there is no connection on the sales force side. I'm trying to address the question. I don't know exactly what you're getting at, but if that's what you're saying, INFUSE itself is a noncommissioned kind of sales force versus the sales organization for Core Metal Constructs is obviously the typical commission.

I think, if I can add to that, I think the point is that the salespeople have plenty to sell in the Core Metal area, especially with the new products and back of my whole story around economic value, even there, where we recently launched products, we're doubling our efforts to make sure that it's clear what the economic value is of these products. And as we do that, we find that our customers are more receptive to the value of these products, and it makes more sense for them to use it. It's still early days, but that's the angle we want to take and the sales force will stay focused in that area, while INFUSE has to play it up depending on the data that we find and we'll take action correspondingly.

Okay. Great. And then just a follow-up, on SG&A, the guidance maintained the 33.5% to 34% but first half was running a little higher than that. So in the second half, Gary, so what should we expect is different? You mentioned that bad debt expense may be comes off a little bit. What else? Is the restructuring really start kicking in, in the second half?

Yes, obviously, some of the things that we did at the beginning of the year, you're starting to see bigger benefits on the restructuring side as we go through the back half of the year. It's normal also if you look historically at our SG&A because of the revenue, especially in the fourth quarter, we get more leverage in the back half of the year. It's just natural because we get outside of the summer season, et cetera, and so we get to see some leverage there. But we are expecting the expenses that the decisions we made as far as restructuring to start to have a bigger benefit in the back half of year than we did in the first half as these things play out. And we are not expecting that we're going to continue to have the bad debt expense being a significant of an issue that was in this quarter. As we indicated, we're expecting that there's could be some small issues as we go forward and we're watching it carefully, but we're not expecting that it's going to be at the magnitude that we saw here in Q2.

Your next question comes from the line of David Roman with Goldman Sachs.

I just wanted to clarify something from your prepared remarks regarding CoreValve. I think you said that you expect the enrollment in the high-risk arm to be completed at the end of this year and your extreme-risk arm to be competed in the summer of next year. Can you file on those separately, and gain approval for 2 different cohorts there, or are those intended to be filed together once both trials are completed?

Well, first of all, I want to make sure that you had it flipped. The extreme risk is the one that will be done, we're expecting it by the end of this calendar year. The high risk is the one that's summer of next year. And from my understanding, that they are -- they can submit different data, but in total, they are going to have -- all the data will have to be in there ultimately. But right now, you can submit them separately.

And so you're still comfortable with the FY '14 approval of CoreValve in the United States? I think that's what you communicated previously?

Yes, I mean, I think we're seeing -- I think we have indicated calendar year '14 or FY '14. But basically, it's in that timeframe. We're still expecting that the timing on the enrollment has been tracking along with what our expectations are. So we're not expecting any major difference. Obviously, once you get the data, we're going to have to go through the process, and then go through the whole FDA approval process. So we're not giving you more specific about that at this point in time.

Understood. And then just, Omar, to some of your comments regarding Medtronics portfolio on some of the previous calls we heard from management, only your second call that the value of the diversified model and the opportunity to either cross sell or take advantage of some of the vendor consolidation issues that hospitals are undertaking right now, can you maybe update us on your latest thoughts. It wasn't something you had addressed too much on this conference call. I was wondering if this is something you're potentially either deemphasizing or taking another look at?

Well, look, all of that, we start with the customer. If there's true value from the customer, then it's going to go more than the fact that we just have a collection of products. And we've got programs in place where we work with customers to make sure that their operation runs better as a result of the capabilities that we have. That's one thing that we are doing and will accelerate in the future. Now in addition to that, there are a number of other areas where adjacent businesses working together can provide real and unique value for Medtronic. For example, using a suite of technologies around the spinal surgeon, not just the implant but the navigation system that we have, the power tools that we have. All of that linked together in appropriate fashion can provide differentiated value for us over a spine-only company. In other areas, we can share technology from one area into another. The delivery system for -- in our Peripheral and Vascular business can be used in our Coronary business or in our Transcatheter business. So there are technologies that can be shared across businesses. So this is not a matter of every business in Medtronic having something to share with every other business. You just need a couple of adjacencies where you can really make a difference in front of the customer, and that's what we're focused on. And I think through that, if we do that in a consistent fashion across our business, we think we can create some unique positions which will really demonstrate the true value of the breadth of Medtronic.

And just to add to what Omar indicated, I mean, the reality is it gets back to the question who is the customer? And in all these cases, the physician clearly is the customer, the hospital is -- in some cases, the cardiovascular administrator in a hospital is a customer, the hospital administration's a customer, hospital systems. And so back to the point, on each one of those, we have the ability now with our products so we can go on and address each one of them individually on where can we provide value, back to Omar's point, to each one of them, and it will vary depending on what their interest is at that level.

We believe that there's real synergy there, and we'll provide further clarification of these different categories as we move forward. It's an area we're working on to clarify. We just really believe internally that there's real opportunity here.

Your next question comes from the line of Derrick Sung with Sanford Bernstein.

On the ICD share gains that you're seeing, can you give us a little bit more color there in terms of the breakdown of how much of that is mixed from the new products that you've launched, how much of that is Protecta, how much of that is the lead issue and how sustainable do you think that is?

I really don't have the details of being able to tell you the break down and say what is driving the overall share gains that we're seeing. Obviously, we believe it's probably everything related to our entire portfolio. We have think we have a very strong portfolio, with the new products we just launched. Protecta, its capabilities in -- for shock reduction and lead integrity-alert aspects of it. The overall aspects of the product portfolio in general, the leads, et cetera, we think we just have the strongest portfolio in general that's out there and I think that we believe that the customer physician is noticing that. So from our perspective, we've indicated when these new products start to hit the marketplace, we will start to see some benefit in share, and that's what's occurring at this point in time. But I don't have any more details about which is driving what share in each different category.

Okay. And Omar, you talked about kind of the cyclical versus the secular pressures that are facing the whole industry moving forward. As we think about the 2 biggest markets that you're in that are declining spine and ICDs, can you talk about how much of that you think is secular versus cyclical? And then also, how do you see the hospital spending cuts that are coming from the deficit-reduction deal impacting your business in 2013?

Well, first of all, some of this -- in those 2 businesses, there's probably some cyclical trends there because in certain areas, there is a little bit of a choice of -- sort of elective choices to whether you want it or not. And so under depressed economic conditions, there's always a tendency for those kind of sales to be depressed. But at the same time, the secular tendency is true as well, which is true across all our product lines. I mean, just the fact that the demographics will create a huge onslaught of new patients into the healthcare system, we have to reduce costs. And the healthcare system has to be more efficient at providing value. And so, although, on those 2 instances, there are cyclical trends, we just cannot forget the fact that efficient delivery of care is something that is pervasive to all our businesses. In terms of the spending cuts and so on, I mean, we don't see anything that's clearly tied to one-off changes in the government policy and so on. It's more that there's a level of uncertainty, which forces both the hospitals, as well as our patients to be more cautious. And that leads to a certain degree of pressure in our markets. And I think, until the overall economy improves, and there's more certainty in the way in which healthcare is going to be deployed in the U.S., there's always going to be a level of pressure in this market. People are going to be cautious before they spend their money.

And just to add to that, that's the reason also why the U.S. market is a little bit hard to predict, what's going to happen as move forward. But that's why we're also focused on all these markets, but are still growing at this point. And at some point, the U.S. market will come back and you'll see growth in -- even though, all of our -- across to our businesses. But in the meantime, we're focused on where we do see the growth and where there's significant under penetration, which is we've indicated is mainly in the international markets.

Your final question comes from the line of Bruce Nudell with Crédit Suisse.

Omar, one of the things that is a great gift of Medtronic is its free cash flow. And I think you're bringing a more disciplined lens to how that's deployed. As you look back on the acquisitions that have been made recently with that lens of medical economic cost benefit and maybe emerging market opportunity, could you cite a couple of the acquisitions, one good, one bad, and what went right and what went wrong?

Well, I don't know of the total history here, but I do know that I'm really -- one big bet was Ardian. I mean, here was an acquisition that we made which had virtually no revenue. We paid a lot of money for it, and there was a very strong clinical promise and a hypothetical economic value it and the clinical promise played out. So that was a big bet. And we've still got a long way to go. But there's one where that swing may actually connect. So we're really excited about that. I mean, there are other areas where, again, it's difficult to predict, and I don't want to call any specific one out. But a little more of a refined lens around the certainty of return and the economic -- potential economic value of those technologies would probably allow us to be a little more selective about what we buy. I would, however, say that we probably haven't focused nearly as much in emerging markets as we can, as we could have and as we will in the future. The risk levels that are associated with emerging markets are different, but are no higher than the risk levels that, say, with something like Ardian. And we would have belief in some of the companies there and belief in those markets and take some swings there. And I think, when you pass it through the economic lens in those emerging markets, you will find that there are big opportunities there. So if I were to go back and kind of comment on the past, that will be the only thing that I would really bring out that have a more stronger focus around emerging markets earlier, probably that would have had us in a better position today.

And I guess, just as a follow-up, one of the frustrations of investors is that Medtronics has large positions in defibrillator market and the spine market. And basically they were very buoyant markets, but Medtronic almost seemed oblivious to the fundamental changes that were likely to occur in those markets. Is there anything that you're doing to ensure, just kind of a better market intelligence wherein the company doesn't get taken by surprise or kind of rely on past trends as predictors of future performance as it were so that the company's more nimble in responses to change?

Yes, indeed. I think actually we've got some excellent tools and some really industry-leading tools in terms of market analysis and market understanding as to where we stand on these markets and what barriers have to be crossed to promote further growth. And this tool, that we're also kind of optimizing right now, also gives us a view as to what it takes to overcome some of those barriers. And if you look at that systematically across the company, I think we'll have better insight in the future and we'll make better decisions. This tool has existed for a while, we just haven't used it rigorously, and we haven't applied it to our business planning in a way that we will going forward. And we have insight as to the size of potential markets of virtually every therapy that we have in every country in the world. That's the kind of data that we have. And not only that, we also have data regarding where those therapies stand in the progression of their maturity and what barriers have to be overcome to take them to the next level. We have to organize all of this into a systematic business planning methodology, which we're in the process of doing. And I think that will give us a better selection process and a far better insight as to what's happening in the marketplace and enable us to make much better decisions going forward.

This concludes our question-and-answer session for today. I would now like to hand the program back over to Mr. Ishrak for any further comments or closing remarks.

Okay. Well, thank you very much for all of your questions. And before I end today's call, I would like to reiterate that Q2 was a quarter of stability in a market that's still faces many challenges. I was pleased to see the strong performances in many of our businesses as our new products are taking share and protecting pricing. In addition, our international markets had another successful quarter and our top priority is to improve our growth on both the top and bottom line, and we remain focused on the 3 key imperatives that I've outlined: improving execution, optimizing innovation and accelerating globalization. We still have a lot of work ahead of us, but I'm encouraged by the progress that we made this past quarter. I look forward to updating you on our plans in the coming months, and despite a number of challenges, I see tremendous opportunities and I'm very optimistic about our future. With that, and on behalf of our entire management team, I would like to thank you again for your continued support and interest in Medtronic. And for those of you in the U.S., I want to wish you and your families all a very Happy Thanksgiving. Thank you.

This concludes today's conference call. You may now disconnect.