Medtronic is seeing signs of a supply chain recovery and is working on its pricing strategy as inflation rises, CEO Geoff Martha said Tuesday at the Goldman Sachs Global Healthcare Conference.
Disruptions in the company’s supply chain, particularly for semiconductors and resins, helped lead to a 1% drop in Medtronic’s sales in its fourth quarter, which ended April 29. Martha said as recently as last month that the company expected the supply chain issues to continue in the fiscal first quarter.
On Tuesday, Martha said those supply problems may be easing.
“We're seeing the resin issue get better. We're seeing the packaging issue get better. It's going to still take some time and we factored that in,” Martha said at the conference. “So, it's going to affect our Q1 as well [but] we have line of sight to these things abating, especially by the second half of our fiscal year.”
Covid-linked disruptions are likely to permanently change supply chains, said Martha. Given the “new environment and geopolitical situation,” he said Medtronic is now building more resiliency into its operations to better “balance efficiency and resiliency,”
Adding resiliency will involve “some incremental cost,” Martha said, but he said the changes would generate savings that outweigh that cost.
At the root of the problem is the fact that Medtronic’s M&A-driven growth resulted in what Martha called a “pretty fragmented approach” to supply. “Because we're fragmented, there's a lot of opportunity for cost savings, just from centralizing,” Martha said.
“We decided to centralize our supply chain to really drive some more standards, leverage our scale. The idea there is to get significantly more cost-of-goods-sold productivity over time than we had over the last 20 years,” he said.
Martha said he plans to increase R&D spending in part by trimming expenses across the company to free up cash. Medtronic’s R&D spending is below the target it set last year. Martha said he expects 2023 to be “a bit of a transition year” because of inflation.
Inflation, pricing, R&D
Rising inflation has medtech companies considering how and if they can pass their extra costs on to customers. Medtronic has assembled a centralized pricing team to model the effects of pricing changes and guide new pricing strategies, said Martha. Across the industry, said Martha, medtech firms are reversing the mindset that has them build regular low-single-digit price decreases into forecasts.
“Excluding maybe the China [volume-based purchases], we expect to reverse that this year,“ Martha said. “You're taking a little risk, but I think it's necessary. We're spending time on this, putting together a centralized pricing team to help do the modeling and guide us and help us facilitate the strategies.”
Martha also used the investor event to provide an update on Medtronic’s robotics program and on the feedback the company has received from real-world use in Europe and demonstrations in the U.S.
“We're bullish on it but I want to make sure of two things. One, if we can incorporate some of these tweaks that we heard from the European surgeons. These aren't major design changes but some tweaks. And two, I want to make sure from a supply chain perspective, it's ready to go because it does have a lot of chips. It has a lot of things in it that are in short supply right now. So, we don't want to launch it and have to pull it back,” Martha said.
Martha said he remains confident the robotics project will justify the company’s investment and pointed to the potential to drive growth by going from open to minimally invasive to robotic surgery.
“Being a player in robotic surgery, soft tissue robotic surgery, is important for the overall health of your surgery business,” Martha said. “Surgeons want to work with somebody that has the complete portfolio.”
China’s move to volume-based purchases is one of several changes in the world’s most populous country that may hurt Medtronic’s surgical innovations unit in the coming years, Martha said.
“The market is still going to grow double digits, and it's going to grow double digits for a long time. But there is more risk coming from some of the pricing and coming from just overall geopolitics,” in the Chinese market, said Martha. “I still am bullish on investing in China, but you do have to consider the risks and that does impact how we make those investments.”