Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Medtronic first quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the conference over to Ryan Weispfenning, Vice President, Investor Relations. Sir, you may begin.
Thank you. Good morning and welcome to Medtronic's fiscal year 2020 first quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic Chairman and Chief Executive Officer, and Karen Parkhill, Medtronic Chief Financial Officer, will provide comments on the results of our first quarter, which ended on July 26, 2019. 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 a revenue by division summary. We also issued an earnings presentation that provides additional details on our performance and outlook. During today's earnings call, many of the statements made may be considered forward-looking statements, 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. For this call, unless we say otherwise, rates and ranges are given on a constant currency basis, which compares to the first quarter of fiscal year 2019 after adjusting for foreign currency. References to organic revenue growth exclude the impact of material acquisitions and currency. Reconciliations of these and all non-GAAP financial measures can be found in the attachment to our earnings press release or on our website at investorrelations.medtronic.com. 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, I'm now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak. Omar?
Thank you, Ryan, and thank you to everyone for joining us. This morning, we reported solid quarterly results, and we are off to a good start to the fiscal year. Despite tough comparisons, we delivered revenue growth, operating margin, and EPS all ahead of street expectations. Q1 revenue grew 3.5% constant currency with outperformances in CVG, MITG, and RTG, while diabetes matched our expectations. This reflects the success in the market of our innovation and the benefit of our business and geographic diversification. Our adjusted operating margin expanded 90 basis points including currency and 70 basis points constant currency as we continue to see the benefits of our Enterprise Excellence initiatives, particularly on the SG&A line. On the bottom line, we grew diluted EPS 7.7% or 9.4% at constant currency, despite a 230 basis point headwind on EPS growth from the increase in our non-GAAP nominal tax rate.
Let's discuss some of the more important drivers of our performance, starting with our Minimally Invasive Therapies Group, which delivered another strong quarter and surpassed our expectations, growing 4.8%. Through diversifying our sterilization supply network, we overcame the challenges related to a supplier's sterilization facility shut down in February, returning to full sterilization capacity during the quarter. In surgical innovations, advanced stapling grew mid-single digits and advanced energy high single digits. This was driven by new innovations in our Tri-Staple and LigaSure franchises, including our new EEA circular stapler with Tri-Staple technology and our LigaSure Exact Dissector. Respiratory, GI, and renal also had a strong quarter, led by double-digit growth in GI solutions and mid-single-digit growth in respiratory and patient monitoring. In CVG, we grew 1.4%, which was ahead of our expectations.
CVG's growth continues to be tempered by challenges in drug-coated balloons, LVADs, as well as CRM replacement devices, given the longer life batteries we launched several years ago. Regarding DCBs, we're encouraged by our better-than-expected performance as our case volume increased following the FDA panel in June. We were also encouraged by the path forward outlined by the FDA in their letter to physicians earlier this month. In CRHF, our pacing business is strong, growing 5% as our disruptive innovation, the Micra single-chamber transcatheter pacing system, is taking share and expanding the market. Our U.S. single-chamber pacemaker share is now over 65%, with our revenue share over 80%. In TAVR, we saw both the market and our growth accelerate to the mid-teens in Q1 on the back of the low-risk data presentations at ACC.
CMS published the final TAVR NCD memo in June, and we expect this will result in approximately 200 new TAVR centers in the U.S. We're already in active negotiations with about half of these centers, which are ready to start as we aim to become their preferred partner in TAVR devices. In CVG, it is also worth noting the double-digit growth contributions from our Valiant Navion thoracic stent graft, our VenaSeal closure system, and also our TYRX absorbable antibacterial envelope, which continued to accelerate post the rapid data presentation at ACC. In addition, both our Reveal LINQ insertable cardiac monitor and Arctic Front cryoablation products grew in the high single digits.
In diabetes, we grew 5.4%. This was despite our U.S. business declining mid-single digits because of competitive challenges and the difficult comparisons versus the prior year when our U.S. business grew 33%. Our international business, which represents approximately half of our diabetes revenue, grew 20%. The MiniMed 670G, which drove strong growth in the U.S. last year, is now experiencing that same strong consumer demand internationally as we launch into new markets. We now have approximately 200,000 people using the 670G system globally. In addition, we experienced strong adoption of the Guardian Connect smart CGM system, which grew in the high 80s. In RTG, we had another strong quarter, growing 4.6% as we successfully offset declines in our Pain Therapies
This is led by our Mazor X Stealth navigated robotic system, which not only is meaningfully outpacing the competition, but is also resulting in strong pull-through of our other market-leading and differentiated capital equipment. Sales of our StealthStation navigation system grew over 20% this quarter, and our O-Arm surgical imaging system grew close to 30%. In Q1, our organic spine revenue growth was the highest in nine quarters. In addition, when you combine our spine division sales with the sales of our capital equipment from our brain therapies division used in spine surgery, our spine division grew 4.7%, with our U.S. spine business growing at 6%. This is how our competitors report, and it represents a strong indication that our strategy of offering our enabling capital equipment with our spine implants is working as we are growing well above the spine market growth.
Now, turning to emerging markets, which represent 16% of our revenue. We continue to drive strong growth in these markets as we optimize the distribution channel and in some markets, localize R&D and manufacturing. In Q1, we grew emerging markets 12%, with strength coming from markets around the globe. China grew 11%, Eastern Europe 23%, including 28% growth in Russia, and the Middle East and Africa grew 15%. In addition, South Asia grew 13%, Southeast Asia 12%, and Latin America grew 9%. Our strategy of emerging market diversification around the world is working, as evidenced by our consistent delivery of double-digit growth every quarter, overcoming economic cycles over the years in these different countries. As a result of this quarter's outperformance and confidence in our outlook, we raised EPS guidance this morning. Q1 was clearly a good quarter, despite several headwinds and otherwise tough comparisons.
As we look forward, we're even more excited about what lies ahead as we expect the investments we've made in our pipeline to begin to pay off with multiple pipeline catalysts, accelerating revenue growth and value creation for our shareholders. In CVG, upcoming launches include a TAVR low-risk indication, which we just received last week, our next-generation Evolut PRO+ TAVR valve, and our DCB AV fistula indication. CVG also has several launches coming up in CRHF, including the Reveal LINQ 2.0 insertable cardiac monitor, the DiamondTemp ablation system in Europe, and our Micra AV pacemaker. In MITG, we're excited to host analysts in Hartford next month at one of the world's leading robotic centers, where the analysts will experience a robotic-assisted surgical procedure that is part of our development and clinical testing process using our soft tissue robotic system.
In RTG, we're launching the Midas Rex MR8 drill platform this quarter and continue to advance our pelvic health pipeline, having started the regulatory approval process for InterStim II with MRI Recharge Free System and our InterStim Micro with MRI, which is three cc in volume and rechargeable. We expect to launch both of these products next spring. In addition, we have next-generation products in neurovascular and spinal cord stimulation, all of which are launching or preparing to launch in the next couple of quarters. In diabetes, we've submitted our non-injunctive labeling application to the FDA. We're preparing for the launch of the MiniMed 780G, our advanced hybrid closed-loop system with Bluetooth connectivity in the second half of this fiscal year. We're also making good progress on our pivotal trial for Zeus, our next-generation iCGM sensor that will reduce finger sticks by 95%.
There are, of course, several more product launches that we're preparing for across the company. I won't cover them all today, but I will say that we are making great progress across the portfolio, and we'll keep you updated as we progress through this fiscal year. I'll leave you with what I noted last quarter: That we expect our growth rate to accelerate over the course of FY 2020, with the second half growing faster than the first as we anniversary recent headwinds and bring multiple new products to market over the next several quarters. Moreover, we expect our top-line momentum to build in FY 2021, with each of our four groups having the potential to accelerate revenue growth next fiscal year as we get the increasing benefit of the FY 2020 product launches, as well as the benefit from the products slated to launch in FY 2021.
Let me now ask Karen to take you through a discussion of our first quarter financials. Karen?
Thank you. As Omar mentioned, we delivered first quarter revenue growth of 3.5% and adjusted EPS was $1.26, growing 7.7%. While we came in $0.08 above the midpoint of our guidance, it's worth noting that $0.02 resulted from better than expected FX, which, at current rates, will give back over the balance of the year. The other $0.06 was operational outperformance, including better than expected revenue and operating margin expansion and a modest benefit from tax. Our adjusted operating margin was 28.2%, reflecting improvement of 90 basis points with currency or 70 basis points constant currency. We delivered a very strong improvement in SG&A as we continue to implement and drive efficiencies and improvements across the company under our Enterprise Excellence program.
In addition, we are seeing the benefits of the recent inclusion of operating margin as a component of our annual incentive plans across our groups and regions, which is driving increased focus on this important metric across the organization. In the first quarter, we successfully executed a EUR 5 billion debt offering and used the proceeds to reduce U.S. dollar-denominated debt. This followed the similar EUR 7 billion transaction we executed in the fourth quarter. The combined EUR 12 billion issuances carry a weighted average coupon of less than 1%. The result of the combined fourth and first quarter transactions is an annualized reduction to our net interest expense of over $300 million, a savings that will benefit Medtronic for years to come.
Our adjusted nominal tax rate was 15.1%, lower than expected due to the increased benefits associated with the finalization of taxes owed on certain returns and changes in operational results by jurisdiction. Generating strong free cash flow remains a priority across the company. First quarter free cash flow was $1.2 billion. We continue to target an 80% conversion rate above our peer average over our long range plan. We remain committed to disciplined capital deployment, balancing investment in R&D and tuck-in acquisitions with returning a minimum of 50% of our annual free cash flow to our shareholders in the form of dividends and net share repurchases. In the first quarter, we returned over $800 million, or 70% of the cash we generated, resulting in a total shareholder payout of 50% on adjusted net earnings.
We also increased our dividend by 8% in June, making this our 42nd consecutive year delivering a dividend increase. In fact, our dividend has grown by 77% over the past five years. Before turning the call back to Omar, I would like to update our annual revenue growth and EPS guidance. For the fiscal year, we continue to expect organic revenue growth to be approximately 4%. While the impact of currency is fluid, if recent exchange rates hold, foreign currency would have a negative impact on full year revenue growth of approximately 80-120 basis points. Looking at annual organic growth by group, we now expect CVG to grow 2.5%, a 50 basis point increase from our prior expectation of 2% plus or minus. For RTG, we continue to expect growth of 4%-4.5%.
For diabetes, we're comfortable at the lower end of our 6%-8% range. For MITG, we now expect growth of 5%, an increase versus our prior expectation of 4.5%-5%. We expect our second quarter organic revenue growth to look similar to the first quarter, with currency having a negative impact of 70-130 basis points at recent rates. By group, we expect organic growth in CVG and RTG to look similar to the first quarter, for diabetes to grow low single digits as we await new product launches, and for MITG growth to accelerate to 5.5%-5.75%, driven by new products. As I noted last quarter, we continue to expect our total company organic revenue growth to accelerate north of 4% in the second half of the fiscal year. Turning to margins.
We continue to expect operating margin expansion in the full fiscal year of approximately 40 basis points on a constant currency basis, driven by our Enterprise Excellence initiatives. For the second quarter, we would expect a more modest improvement in operating margin offset by a slight currency headwind as we invest ahead of multiple new product launches. Given our recent EUR debt offerings that I mentioned earlier, we expect our non-GAAP interest expense to be in the range of $170 million-$180 million per quarter for the remainder of the year. In addition, we continue to expect our adjusted nominal tax rate to be in the range of 16%-16.5% per quarter for the remainder of the year, which when combined with our Q1 non-recurring benefit, would imply an annual range of 15.8%-16.2%.
We remain focused on optimizing our underlying operating tax rate over time as U.S. tax reform regulations are finalized. With respect to earnings, we are increasing our fiscal year 2020 EPS guidance to a range of $5.54-$5.60, a $0.10 raise from the prior range of $5.44-$5.50. This includes a negative $0.10 impact of currency at recent rates, with a slightly worse impact over the balance of the year, offsetting a better than expected benefit in the first quarter. For the second quarter, we expect EPS of $1.27-$1.29, including a $0.02 currency headwind at recent rates. Now I will return the call back to Omar.
Thanks, Karen. Let's now move on to Q&A. In addition to Karen, our four group presidents, Mike Coyle, Bob White, Geoff Martha, and Hooman Hakam i, are also here to answer your questions. We want to try to get to as many questions as possible, so please help us by limiting yourself to one question, and if necessary, a related follow-up. If you have additional questions, please contact Ryan and our investor relations team after the call. Operator, first question, please.
Your first question comes from the line of Bob Hopkins with Bank of America. Please go ahead.
Great. Thank you and good morning. Just wanted to first say congrats on a really strong quarter and see if I could get some commentary about two product areas. First, on diabetes. I noted that you were nicely in line this first quarter, have switched the guidance to the low end of the range. Just curious if you could talk about that a little bit. The other product question I had was just on the robotic-focused analyst day for September 24th. Really looking forward to that day and getting all the details. I was just wondering if in front of that day, you would be willing to give us at least a little directional sense for just launch timelines in the U.S. Is that more than a year away? Within a year? Thank you. Those are the only two questions I have.
I'll let Hooman and Bob comment a little bit. First of all, on the diabetes, I know we sort of toned down the numbers a little bit, but that doesn't remove our excitement regarding the upcoming launches here. The advanced hybrid closed loop with Bluetooth connectivity in particular towards the end of the fiscal year is one that we're zeroing in on, and the clinical trials and so on are in progress. We've had more competitive pressure than we'd like in the U.S. in the first quarter. Taking that into account, we decided to be prudent about what our guidance should be. Let's not take anything away from the product launches that we're anticipating in the second half. Those are on time, and we'll see what they result in, but we're pretty excited about them.
I don't know, Hooman, if you want to add anything to that or.
Sure. Bob, thanks for the question. Maybe first a little bit of color on the dynamics that drove Q1 and that I think also sort of drive the guidance. If you recall from ADA, the quarter was pretty much in line with what we talked about at ADA. We anticipated strong OUS growth. Check. In the U.S., we expected consistent consumables and CGM revenue from the install base. Check. We said that we expected to renew our patients coming out of warranty in line with historical rates. We were able to do that. We said the most volatile thing was really the conversions in the U.S. of patients coming from MDI, and that also sort of factored in. We're able to balance all of that and deliver in Q1. As far as the rest of the year goes, it's largely as Omar stated.
It's a function of the pipeline, which remains on track versus what we discussed at ADA. In Q2, we did expect to get some reimbursement for 670 in Germany, and we were hoping that that would be an incremental contributor to offset some of the U.S. pressure that was discussed. We're now assuming we don't get this, and we'll get it next quarter. For all of the reasons mentioned, this is why we're maintaining the range, but leaning toward the lower end of the range.
Bob?
Yeah, sure. Bob, thanks for the question regarding the robot. We are excited, as Omar mentioned, to have the investment community experience a pre-clinical validation lab in Hartford next month. The reason we're doing it there is it's certainly part of our pre-clinical testing and experience, and it's actually you'll get to see it in action versus just on a stage. It's a really important event as we continue to gather pre-clinical data and experience on our system. In addition, during the day, there'll be panels with us, Medtronic executive management. We'll have some expert surgeons there as well. I know that Ryan sent the save the date out recently, and the invite will be coming from Ryan over the next couple of weeks. As it respects to your question, Bob, we've not changed our commitment on our launch timelines to launch the product.
You specifically asked about the U.S., of course, we're going to launch outside the U.S. in FY 2020. This is a team that continues to hit its milestones. We're excited about the program, we're looking forward to seeing you next month.
Okay. Thank you.
Your next question comes from the line of David Lewis with Morgan Stanley.
Good morning. Just two for me, one for Karen and one for Geoff. Karen, just thinking about the guidance this second quarter. I think last quarter you suggested 4% growth for the second quarter. Now you're sort of suggesting something closer to 3.5%. Is the relative change simply diabetes and you still need some momentum improvement, frankly, sequentially to get to that number? What drives that confidence? Just for Geoff, just on surgical robotics, sorry, on spinal robotics, you definitely saw a significant change in relative growth versus market sequentially. Things definitely improved in the core spine business. Just kind of, can you grow above market and core spine this year? If you could give us the Mazor system placement number in the quarter, that'd be great. Thanks so much.
Yeah, good morning, David. Thanks for the questions. In terms of 2Q, excited about the growth acceleration that we intend to drive in the second half. In 2Q, we're seeing some U.S. softness in diabetes that we talked about. We're seeing some pain market issues. Beyond that, we're very excited about the acceleration that we're going to drive. It's just the first quarter. We're focused on delivering as we move through the year.
Hey, David, it's Geoff. Regarding the spine question, yes, we're definitely seeing strong momentum. Mazor's been a huge addition to our surgical synergy strategy, and it's having a pretty significant network effect, I'll call it, within RTG. One, as you pointed out on the implant side and can we grow above the market? Look, we're expecting to grow above the market here. We think that the whole enabling technology and robotics strategy, that's where the market's going. It's going to cause the market to consolidate around a few players, and we intend to lead that and take share now and going forward. As for the other impact, by the way, that the robotics Mazor's having is on the rest of our capital equipment portfolio, which it's not something I completely expected. I mean, our standalone StealthStation for spine, and neurosurgery, as well as our O-arm, both grew over 20%.
O-arm actually grew close to 30%. These are products that have been in the market for a while, and I think this is the impact of having a larger capital sales force and a lot of excitement around these products. As for the placement, the number of units sold, I guess I've been told that I've been maybe given too much information in the last few quarters on this topic. I'm pretty excited about it. I can just tell you at this point, we're doing really well. I'll just leave it at that. We're doing really well above our expectations.
Your next question comes from the line of Robbie Marcus with JP Morgan.
Thanks for taking the question and congrats on a good quarter. Karen, maybe we could start with a question on the P&L. This is the first time SG&A has been down year-over-year since first quarter 2017. You mentioned the Enterprise Excellence program. What exactly is driving the declines, and how sustainable are they?
Thanks for the question, Robbie. Yes, we were pleased with our SG&A performance, which clearly drove our operating margin expansion of 70 basis points on a constant currency basis. On SG&A, we are very focused on driving Enterprise Excellence programs to drive further leverage and efficiency. We also introduced, at the beginning of this year, an incentive comp metric down into the organization on operating margin. I think that metric is also helping to drive good cost control well down into the organization.
Okay, on the guidance for the balance of the year, you had a nice beat on the top line in the first quarter. You have a number of product launches hitting towards the back end of the year. Can you help us just maybe with cadence for the balance of the year, how you're thinking about the 4%? How conservative is that number still given you're only at a first quarter here and some of the big product launches and how we should think about those impacts to the top line? Appreciate that.
Yeah. No, thanks for that question, too. I would say, look, we just finished our first quarter. We had a strong first quarter. We're really excited about the acceleration that we're going to drive in revenue growth throughout the year, particularly in the back half. That growth is really focused on strong product launches. The exact timing of approval and launch is hard to predict, but we're excited about launching those in the back half that will drive the acceleration. At this stage, that back half is going to have to be a decent amount higher than we had in the first half to end the year at 4%. We're excited about that.
Let me just also emphasize, Robbie. Look, we laid the formula out. We had a good first quarter. The second quarter, we actually have the advantage of some of these comparisons being better, in service and solutions in the LVAD and other areas. There's some growth there as well. In terms of product launches, everything that we said is still.
Completely in line, and they're coming through. We just got the low-risk TAVR approval. That is something that we were expecting, actually, a little later. We got a little earlier. All the other programs are completely in line. We're very excited about them, but it's only the first quarter, so we won't be guided at the beginning of the year. Look, there's no hesitation on our part about the quality of these launches, when they're coming out, how excited we are about them, so that there may be no sort of confusion about that at all. Just take it in the context of this is the first quarter.
Very clear. Thank you.
Thanks, Robbie. Next question, please proceed.
Your next question comes from the line of Vijay Kumar with Evercore ISI.
Hey, guys.
Vijay, you're on mute.
Yep. No, I'm on. Congrats on a really nice print here. Just two quick ones on the guidance here, Karen. If we step back to early part of this year, a lot of confusion around tax regulations, EPS headwinds, and I think you guys were very clear about LRP not changing. Correct? With the guidance raise this morning, at the high end, we're looking at 7% plus on the EPS. Can you walk us through what the implications is, because is the LRP going up because execution is coming in better for this year? As a follow-up, I think tax regs, we were expecting some clarification June, July timeframe. Any clarity on what the tax regs read out and implications for the medium term? Thank you.
No, thanks for the question, Vijay. Our long-range guidance on the bottom line is 8%+ over the long-range timeframe, and that has not changed and will not change. Yes, in terms of the new guidance on EPS, largely driven by the beat we had this quarter and our ability to lower our interest expense, which helps to offset that tax rate increase. Our guide is above 7% on a constant currency basis, on an actual basis for EPS, on the high end. In terms of whether or not this year over the long-range plan, we'll get to the 8%, we'll see. We're confident in our guidance right now. On tax regs, certain regulations have been finalized. There are numerous regulations to still be finalized. We do anticipate all of the regulations to hopefully be final prior to the end of our fiscal year.
We will continue to focus on opportunities to optimize our tax rate. Where the regs are final, we are beginning to take action to optimize. I would say it's very early and too early to tell what our tax rate will be on a long-term basis going forward. In the meantime, we expect our tax rate for the remainder of the year to be in that range of 16%-16.5%. We did have some favorability in the first quarter by some non-recurring items. That helps drive our year tax rate to what we guided to about 15.8%-16.2%. Hope that's helpful.
Thanks, guys. Yes, very helpful. Thank you.
Thanks, Vijay. Next question, please.
Your next question comes from the line of Chris Pasquale with Guggenheim.
Thanks. A couple of product-specific questions. First, on Pain Stim, can you quantify the inventory destocking you saw there, and whether you think that that process fully played out in 1Q, or will it continue to be a drag?
Go ahead, Geoff.
Yeah, sure. I'm not going to quantify it specifically, but yeah, we had a really strong Q4, first of all, and that contributed to some of this, and then the market slowdown also contributed to it. I don't think the destocking will be a continued drag. The market slowdown has obviously, I think, caught the severity of it, has caught us and our competitors a little bit by surprise, and that, to me, is the bigger issue.
On the DCB front, can you just update us on the expectations for that franchise going forward? Do you think utilization has bottomed now, post the physician communication? If use is limited to high-risk patients, what does that mean for the growth potential of the business going forward? Thanks.
Mike, go ahead.
Back in March, when the original FDA notification went out, where they basically were saying for most patients, the risk would outweigh the benefits. We saw a fairly significant contraction that was about a 50% reduction in U.S. volumes versus what they had been before, and on a global basis, it was in the low 40s. Obviously, as we came out of the panel meeting, there was a lot more data that was presented. Updates on patient follow-up, where we got to almost 95% follow-up on our patient base, which improved the safety profile of the devices. Some very significant incremental data was presented from claims-based analysis and very large data sets that basically showed that the signal went away in these large numbers.
We were very encouraged by what we viewed as an incrementally constructive FDA notification here that basically said that for certain high-risk patients who are at risk for reintervention, that in fact the benefits of DCB technology outweighed the risks. We have now seen, instead of the reduction that we had indicated, something more like a 40% U.S. reduction, low 40s, and on a global basis, that's down into the low 30s reduction. We think it's stabilized. It's actually improving since those data were put out. We think as more data becomes available, this is going to shift from a discussion of class effect, to basically the individual performance of the individual products.
We are very encouraged by that because we have very significant randomized controlled data sets, in the U.S. FDA support for SFA, for the Japan study, we have our global registry data, as well as some new data sets that are going to be released in other indications. Our AV fistula indication, the data is going to be presented at the upcoming CIRSE meeting next month. We are very encouraged that the more data that is coming out is basically focusing on the efficacy of these products and also showing that the signal that was of concern as more data becomes available is becoming less of a concern. We expect there to be an improvement, but obviously we won't see a return to growth until we get to the second half of the fourth quarter.
Okay, thanks, Chris. Take the next question, please, Regina.
Your next question comes from the line of Raj Denhoy with Jefferies.
Thank you. Good morning. I wanted to ask a couple questions on TAVR if I could. You mentioned there's been a couple developments recently, both the low-risk approval and then the NCD. I guess on those fronts, on the low-risk approval, I'm curious what your expectations are for what that'll do to market growth. Secondly, for the NCD, you did mention you're in negotiations with a number of the new centers now that are looking to come online, and I'm just curious upon what basis those negotiations are going. Has there been any discussion of price or anything in terms of how those centers are choosing who they're going to go with here in terms of their TAVR programs?
Mike?
We would estimate that if you throw in the bicuspid indication, which we expect will be an area of focus with additional data availability, that the low-risk patient population basically expands the available market by about 50%. That with the addition of the NCD, where we expect to see approximately another 200 centers come online, it obviously is going to give an opportunity for an acceleration of growth from where it was, let's say, last quarter, which was for us around 12%, up into the mid-teens and maybe a little bit higher than that. That basically is really being supported by these new indications for use. In terms of the basis of negotiation with the NCD sites, they're really no different than what we've had with the preexisting sites in terms of the compelling clinical evidence around these products.
It basically makes any center that wants to be a full-service aortic valve center, they need to be able to do both surgery as well as transcatheter valves. As a result, this is more about training and education and getting them up to speed on optimal techniques for use of these products, and that's exactly what we're focused on.
Great. Thank you.
Thanks, Raj. Next question, please, Regina.
Your next question comes from the line of Joanne Wuensch with BMO.
Good morning, everybody, and very nice quarter. There are a number of new products that are launching over the next 12 to 18 months. Can you please give us a highlight of which ones are you the most excited about? Also in the same vein, you've got two major medical meetings coming up with NASS and TCT. What should we expect to see there, and will any of those new products be there? Thank you.
Okay, I'm going to take that. Thanks, Joanne. First, like you point out, there's a number of new products coming out and there's many, but I'm going to go through a few of these that I think are the most exciting. First of all, our general surgery robotics system, which you'll see live and in person in September 24th. I promise you that'll be an exciting and eventful event for you. We're excited about that. Now beyond that, the Micra AV. Look, we've got 80% share in the single-chamber market, covering only 15% of the pacemaker population. That's going up to 55% of the population, and I'm not going to preempt the 80% share, but that's at least what I expect. That's a product I'm really excited about. The LINQ 2.0 , which is a second-generation diagnostic device, has got a five-year battery life.
The Evolut PRO+ which is now coming on the heels of the low-risk TAVR approval. The diabetes MiniMed 780G, that's got Bluetooth connectivity. It's an advanced hybrid closed-loop system as a second generation of the closed loop based on our experience and the database that we have on patients already. The InterStim Micro, which is a rechargeable device, 3 cc in volume for public health, which we're expecting approval in the second half. The DiamondTemp ablation catheter, which has got temperature sensing, which is some unique technology which we'll launch in Europe in the second half. There's the Percept PC system too, which has sensing capability the first time in this kind of a system, and a great platform for the first time a closed loop system in DBS.
In addition to these launches, like you mentioned, some of these meetings and we're expecting to sort of share some data as well. The U.S. pivotal trial results for the IN.PACT AV fistula access program for dialysis patients. I mean, that's one we're going to share. The Symplicity renal denervation program. We expect some exciting results out of that, and the data for that we'll share. The DiamondTemp AF ablation catheter, I just mentioned that. That's a leapfrog technology because of temperature sensing, like I mentioned. We launched that in Europe, but we'll share data on that in the upcoming meetings here. Finally, the diabetes system. We also expect to complete enrollment of the patients in the next few weeks. Specific to those two specific events, Mike, do you have any comments on that?
Well, as it relates to TCT, I think that's a little bit sooner than some of these data sets are going to be available. I think I would steer you more towards meetings later in the year and into early next year. Around the AHA time, we'll be talking about the MARVEL 2 data, which is the Micra AV performance. As we get into next year, as we look at ACC, we would expect to be able to present the off-med components of the Symplicity SPYRAL study . As Omar mentioned, between here and there, we will also have the IN.PACT Admiral AVF data. There should be very meaningful data sets coming, but they're more going to be later in the year and into next year.
NASS, Geoff.
NASS, yeah, we are planning to talk to you guys about a number of things. First, in CoreSpine, we have a number of launches, probably the biggest of which this year is this corpectomy device, we're calling it T2 STRATOSPHERE. We've got OLIF Single Position. Then of course, the Titan, which we just closed. The integration's going very well. We'll walk you through how that's going to impact our overall portfolio. I'd say, think of Titan as a surface technology platform that's going to apply to our existing broad-based spine portfolio. We'll also talk more about surgical synergy and robotics, as I mentioned earlier, and how that rollout is going.
Our roadmap for new features that we're going to be adding to the enabling technology, specifically kind of all the enabling technology, specifically robotics, because we do have a very specific roadmap that goes out over the next two years, all meant to basically drive procedural improvement, both from a health economic standpoint and a clinical outcome standpoint. Finally, biologics. We have a general manager we put in charge of our biologics business about a year and a half ago, and he's really done a good job in investing not only in INFUSE, but our broader bio portfolio, which we can talk to you more about that, which I think is kind of underrated right now. It's actually helping drive some of our growth. Finally, one thing that's not NASS related, and I think Omar ran out of breath before he got to.
We did on Pain Stim, we have a next generation Intellis device, which we haven't spoken about before, that we can talk about later in the year at NANS. This gets back to not NASS, but obviously the broader product launches we're excited about. We haven't really talked about this, at NANS this year, we'll be talking about that as well as some new stim pattern work we've been doing. Of course, our 12-month Vectris data we'll be talking about at NANS as well. Because I think this Pain Stim market is super sensitive to innovation. The market's in a little bit of an innovation lull versus where we were in the past 18 months. I think it's going to be launches like this will get that market going again.
Thank you so much.
Thanks, Joanne.
Thanks, Joanne. Next question, please, Regina.
Your next question comes from the line of Kristen Stewart with Barclays.
Hi, thanks for taking the question. Congrats on a good quarter. Not surprised for Omar's ability to speak without stopping, given he's climbed Kilimanjaro. Just want to circle back on the product front. Two kind of product added categories I just want to dive a little bit deeper into. On the InterStim Micro side, you had mentioned that that's FY 2020. I think you had also mentioned, I guess, a rechargeable version. I just want to clarify that I understand that product a little bit more. Is that going to be a smaller device? What's kind of just the confidence around getting both of those products out in FY 2020? I have one follow-up.
First, it is rechargeable, and it's 3cc, so it is smaller. Geoff, you can have some more color.
Yeah, I think we've begun, Kristen, the regulatory process on both the current InterStim II device, the primary cell, but adding MRI capabilities to that. The bigger one will be obviously the rechargeable device that, as Omar mentioned, is very small. This we're anticipating happening, the initial launch in Europe in the spring and a little later in the U.S., but so when you say FY 2020 in Europe, and then U.S. would be late FY 2020 or early FY 2021. Because look, we're submitting a PMA supplement. We don't think we need a separate clinical trial. We've been talking about this with the FDA to confirm our thinking. We're really excited about this, and the combination of our smaller size, I'll talk about the rechargeable, the Micro.
The smaller size, the 3cc, the overdrive battery technology, and the MRI capability, it really is a big advantage for us, no matter what the competition is saying on this. This is the same technology combo platter that's powering Intellis, whose performance has surprised many of us and propelled us back to leadership in SCS.
The other device was just the same size of InterStim today, but just a MRI-safe version.
Exactly.
Yeah.
Look, one of the things that I think is important is that, and I think people are starting to realize this, but rechargeable is not meant for every patient.
A primary cell and rechargeable, and a very small rechargeable, I think is going to cover a much broader spectrum of patients than just the rechargeable.
Okay, perfect. Just broadly, I guess, with Micra AV, that seems to be more the significant launch. You guys or I guess, Omar, you were just saying that you were hoping that you could see an 80% share in that market category as well. How are you just feeling about bringing that to market? Also maybe just talk about the extravascular ICD as well, and just the timelines there. I think you were supposed to be starting or did start your pivotal studies with that product. Thanks a lot.
Yeah. Without being biased towards one thing, I will tell you that this is the one product that I'm certainly most excited about because of the, if nothing else, the symbolism that Medtronic was started as a company which invented the pacemaker market, and here we are 60 years later, disrupting that market with a device that is way ahead of any competition. The 80% share is actual fact and the 15% that we cover. An expectation that kind of share trend should continue over time is quite realistic. I'll let Mike add some more color to this.
Well, remember, there are two aspects of this. One is obviously the procedural penetration, and then there's also the price increase that we get over the device, which is essentially, in the single-chamber market is about 3x, the prevailing pricing in the standard device system. The reason you see a procedural share including our traditional single-chamber systems in the around 65% range and then having an 80% revenue share is because of that step-up in price. Now, as we move into the Micra AV, we basically have been to date, really confined to patients who needed ventricular pacing who also had atrial fibrillation. Now, any patient with AV block, intact conduction in the, or normal rhythm in the atrium, becomes a candidate for this device. The available market goes from 15% up to 55%, 60%.
That's why we view it as a big opportunity to drive share. The real benefits of this technology are, even though pacemakers are relatively safe for implant, almost all the complications come from either the pocket or the lead. By being able to put a device directly into the heart, and having a 10 to 12-year battery life, this really offers significant clinical advantages to patients, and that's why we're excited about it.
EV-ICD, she asked.
The EV-ICD, we are beginning the pivotal trial associated with that. We haven't talked a lot about that trial design, but it is getting underway now.
Yeah. Thanks, Kristen. Next question, please.
Your next question comes from the line of Matt Taylor with UBS.
Excuse me. Good morning. Thanks for taking the question. I just wanted to start with a quick follow-up on that AV question. Mike or Omar, is there anything different about AV versus single chamber in terms of the speed of the launch? I mean, you have people trained on single chamber now, you have reimbursement in place. Could this uptake actually be faster than single chamber?
Well, I'll let Mike answer that. I think it is a new concept, though, so that requires some buy-in maybe. I don't know, Mike.
Well, on the one hand, the procedural aspects of this are very similar. They're almost identical to the single-chamber device. Of course, as you point out, we've done the training associated with this. There are a number of physicians who basically said they don't do enough single-chamber devices to make it worth their time to do the training. Now, we get this device in, we're going to see more physicians coming on stream who want to learn the technique, which is going to be helpful to us, not just in this new indication for use, but even in the traditional single-chamber pacing. That will be helpful.
There are some aspects of the patient follow-up that are different, and we're going to be spending, as we did with the initial launch, a lot of time making sure that the physicians are trained on what to look for, both in the implant procedure and in the discharge process. So we are going to be very careful in terms of rolling out updated training even to those who have been trained before. To your point, I think it should have a marginally faster adoption rate than what we saw with single chamber.
Okay, thanks. Just on surgical robotics, I was hoping you could maybe talk about the strategy as it relates to Mazor and how that informs what you might do with the soft tissue surgical robot, and are you thinking about using robotics anywhere else?
Well, you want me to take it first, Omar?
Yeah, please.
Look, it's a great question. The work that Geoff and his team have done with Mazor absolutely is influencing how we think about our commercialization approach with the soft tissue robot. As Omar's mentioned many times in the past, Medtronic's uniquely positioned with high-value consumables. If you think about our leading position with end effectors in the surgery space and that trusted brand that we have with surgeons, the ability to pair those instruments with our robot is incredibly important. Of course, we've been training surgeons on surgery for over 60 years, and we've pioneered innovations in that space. When we look at what Geoff and team have done with RTG from a service capability, from a commercial model capability, I think we're very much aligned and learn from that piece.
Yeah, let me also add, answer the question regarding other areas. Let me tell you that in virtually every area that we have a procedural presence, we will look at robotics because that's how it's going to be. We're learning from our current experience, but I can tell you that the data analytics capability, we're just beginning to evolve. Combination with a robot, with other capital equipment, especially ones for visualization and for navigation that we're showing with Mazor, is not going to be restricted to spine alone. Planning procedures, planning the procedure upfront, and then using that to guide the robot in specific ways, that's a core capability that we're starting to develop with Mazor. We will translate across into surgical robots at some time in the future. The procedure is different.
There's some core areas where we're learning, which will apply to virtually every area that we've got procedures. I can tell you it's a big area of focus for us, both organically as well as inorganically. One that we expect to be leaders over the long term, not just in one procedure, because across all procedures, and be the company who rewrites the way surgery is done in the next decade. Make no mistake, this is a core area for us, and you'll see much more of about robots than just the two that you're looking at today in the future.
Great.
One area that short term that we are moving into would be other cranial procedures.
That's right, yeah.
We have the Mazor Renaissance, which is indicated for cranial procedures, Medtronic, we're launching another cranial, a smaller cranial robot. These robots will be used for lead placement, for example, in deep brain stimulation procedures, EEG placement for epilepsy as well as tumor resection, so tumor resection itself. Those are two different robots applied to various cranial procedures, brain procedures as well.
Thanks for all the color.
Thanks, Matt. Next question please, Regina.
Your next question comes from the line of Matt Miksic with Credit Suisse.
Thanks for taking the question. I had just a couple of product-related follow-ups. The first for Mike on TYRX, the antibacterial mesh product for CRM. The rapid results obviously didn't get the same attention that low-risk TAVR did at ACC. Yet this could be over time, another potential share gainer for this business. Just wondering, Mike, if you could give us a bit of an update on what's been happening since the data was presented, what kind of response have you gotten, maybe what are the next steps and drivers we can look at over the next 12 months or so. Then I had a follow-up for Geoff.
We've been very pleased with TYRX performance since the ACC presentation of the rapid data. We have seen meaningful acceleration of its adoption as a result of those data. This past quarter, we were in mid-30s growth for the product. As you point out, it not only helps us in terms of revenue per procedure, and we view the at-risk patient population to represent a little over half of the patients, because it applies to essentially large devices, so ICD, CRT devices in initial procedures as well as all replacements, including pacemaker replacements.
As a result, it's helping us not only in terms of our overall revenue share, but we actually are seeing in the high-risk patients them selecting Medtronic because they want to use the TYRX product, and that's helping us with initial implant share across our portfolio, especially on the high power and on the CRT side of things.
In terms of guidelines or things that we may be able to look for over the next 12 months or so?
Well, we are working with the data sets and the professional societies to see if we can get this into indications for use. We also are expanding the application of the envelope to other parts of the Medtronic business, including the neurostimulation devices, both for deep brain as well as for pain, as well as for pelvic health. It's helping us in both regards. I'm not yet ready to address timing of any indication or guidelines expansion, we are working that.
That's great.
Also to reemphasize that TYRX is a core technology that we've essentially developed. While that in itself is one thing, what it pulls along with it, in terms of our devices, is something that'll become a true differentiator for Medtronic in the long term. We're investing in that area to make sure that we can sort of broaden the usage of TYRX over time. That's a key technology area of focus for us, which we think we're well differentiated in.
It also has helped us immensely in our value-based healthcare programs from the standpoint that having performance guarantees is something that our customer base really is looking to as us having skin in the game as they shift to at-risk sort of arrangements with payers. We now have over $1 billion in revenue associated with essentially performance guarantee programs, and $800 million of that is tied to TYRX.
That's super. Thank you. Then for Jeff, if I could, on spine and pain. The spine implant growth over 2% in the U.S. and 2% worldwide. That does look like it's ahead of market growth to me at this point. Jeff, if you could maybe just provide a little bit of color. Obviously, you're happy with the placements in the quarter, but maybe a color as to how the pull-through dynamics work on the systems you've placed over the last few quarters. On pain, I know you mentioned during the prepared remarks, it's still kind of a softer market or a tough market to sort of project. Maybe some sense of when that settles out and we get a better sense of spinal cord stimulation and what that market's really growing at. Thanks.
Okay, Matt, I'll take the spine one first. To kind of break it down, we've talked about the use of spine robotics and the linkage with our implants and how as the utilization of Mazor goes up, we'll get more pull-through. We're in the early stages of that. If you're looking at three kind of metrics on that, we're getting the robot sales, that's kind of the socket race. We're doing very well there, as indicated. When they use Mazor, our customers are using Medtronic, and that attachment rate is close to 70%, and that's going to go higher as we get more of the Mazor X Stealth Edition out there, where the navigation is into Mazor. Remember, when we talk about placements, also, we've got a bunch of Mazors out there that we're upgrading to Stealth Edition.
Our attachment is really strong. What we're really driving here is the utilization, and that involves a lot of training. That's what we're doing. We've got all kinds of demo labs and training labs at different customers. We've built up a whole new 100-person component of our sales force that's like a SWAT team that goes into these accounts, and works with the surgeons, with our team, the surgical staff, and like I said, our reps to train everybody and get them comfortable doing robotic procedures. We're in the early innings of that, and as that increases, you're going to get more pull-through. What we're seeing now is that these robots are getting us into competitive accounts and giving us something to engage on with surgeons. The C-suite, quite frankly, are very engaged in this for a variety of reasons.
We're using this to get into competitive accounts. Once we're in there and we walk in with our good service, our broad portfolio, which now includes Titan, that's having a more immediate impact. There's an initial impact as we get into competitive accounts, and then there's a longer-term impact as we drive utilization. Like I said, this strategy has a long runway ahead of it, and we're in the very early stages, and we're already seeing impact. For spinal cord stimulation, look, I'm kind of a little embarrassed for the industry that our competitors and ourselves don't have a more specific answer as to what is driving in the short term. Look, I tell you, I think this is a very innovation-sensitive market, and we had a lot of innovation come out in a pretty condensed period of time from us and our competitors.
Now it's come down a little bit. In seeing that, we've made some trade-offs on RTG and have accelerated our spinal cord stimulation and prioritized our spinal cord stimulation pipeline. Like I said, we're accelerating the next generation Intellis into this fiscal year. I don't want to get into too much of the features. We want to talk about that at NANS and what that means. It is a next generation device. Behind that, we have, in the next year behind that, a new primary cell device coming out, which like I said, in pelvic health, the same applies for spinal cord stimulation. Then in addition to all that, we're working on closed loop for spinal cord stimulation.
We have a very active program on closed loop, or you may have heard it's called ECAPs out in the market space. We've got that coming as well. That's a little further out. We've got a pretty robust pipeline that we'll have a pretty regular cadence, and I think that's going to drive the market. I do think this market should be a high single-digit grower based on all the demographics as well as the opioid crisis here in the U.S. and a few other markets.
Thank you.
Thanks, Matt. We'll take the last question, please, Regina.
Your final question will come from the line of Danielle Antalffy with SVB Leerink.
Hey, everyone. Good morning. Thanks so much for taking the question. Congrats on a really solid quarter. Karen, I wanted to follow up on a question Robbie asked regarding SG&A. It does feel like you are seeing benefits from including operating margin as a component of the annual incentive plan. Just wondering if you could parse out exactly where you are in rolling out that process across the organization. If you can quantify where you are relative to where you expect to be longer term as it relates to that, parse out how much that's contributing to this quarter's operating margin expansion versus some other dynamics, i.e., the product pipeline or improving product mix. That's all I have. Thanks so much.
Sure. Thanks, Danielle. We introduced operating margin in our incentive comp at the total company level last fiscal year. This fiscal year, we drove it down into the organization. It's hard to parse out the benefits of that, but I would say we do have strong cost control around the company that started last fiscal year and has continued into this fiscal year. We're also purposely driving greater efficiencies across the company as we work to leverage our size and scale in our back offices and our customer service centers, and across our enabling functions. Those programs are all driven as part of Enterprise Excellence, and we are clearly seeing the results. We are tracking the savings, and you're seeing it now show up in our margin expansion.
Okay. Thanks, Danielle.
Okay. Let me close this out. First, thanks for your questions, but before I completely close it, I want to say just a couple of more sentences. We talked a lot about our product pipeline today. Let me just remind you that almost everything we talked about is actually in the second half of FY 2020. This momentum is not going to stop going into FY 2021. As was noted earlier, if I had more breadth, I could probably continue into what we'll launch in FY 2021. It's not going to stop. I really mean it, and we all mean it when we say that today we have the strongest and the broadest pipeline that we've ever had in our history. You'll see that thing play out in the upcoming quarters. It's with great excitement that I really want to close this call out.
On behalf of the entire management team, I'd like to thank you for your continued support, your interest in Medtronic, and we look forward to updating you on our progress on our Q2 earnings call, which we'll be holding on Tuesday, November 19th. Thank you all very much for your interest. Thank you.
This concludes today's call. You may now disconnect.