Omar Ishrak, Chairman and CEO
Michael J. Coyle, Exec. VP & Group President, Cardiac and Vascular Group
Christopher J. O’Connell, Exec. VP & Group President, Restorative Therapies Group
Richard Kuntz, M.D., M.Sc., Sr. VP & Chief Scientific, Clinical and Regulatory Officer
Gary L. Ellis, Sr. VP & Chief Financial Officer
H. James Dallas, Sr. VP, Quality and Operations
NO. OF EMPLOYEES: 45,000
GLOBAL HEADQUARTERS: Minneapolis, Minn.
“The familiar is by far the most beautiful.” — Marty Rubin
Major change—the life-altering, gut-wrenching, anxiety-producing kind invariably linked to our everyday existence—can have quite an effect on the human psyche: The timid are threatened by it, idealists are encouraged by it and the fearless are inspired by it.
By and large, business leaders are part of the latter group, deeming change an opportunity for improvement. But some are more skeptical and seek solace in familiarity to cope with the uncertainty of new possibilities.
Omar Ishrak is a crossbreed. The 56-year-old exuded confidence when he was chosen two years ago to lead Medtronic Inc., yet he relied on his past experience to formulate a strategy to jumpstart growth at the underachieving medical device giant.
Ishrak’s approach to improving the company’s sub-par performance consists of three basic principles he used during his tenure at GE Healthcare: improving execution, accelerating globalization, and optimizing innovation. The last two ideologies are linked through the concept of “reverse innovation,” a term popularized by Dartmouth University professors Vijay Govindarajan and Chris Trimble, as well as Ishrak’s former boss, GE Chairman/CEO Jeffrey R. Immelt. The trio coined the phrase to define innovation that is released or used first in developing markets before spreading to industrialized nations.
“There is better growth opportunity in emerging markets when we address the value segment,” Ishrak noted in his FY12 annual letter to shareholders. “We are approaching this underserved segment by creating innovative new business models and lowering the cost of our products. The value segment is a big and exciting opportunity, and continued cost reduction programs will enable us to address [improved performance] while maintaining our margins.”
Though Ishrak’s strategy has yet to be fully implemented, it already is producing results. In FY12, ended April 27, 2012, net revenue grew 4 percent, capital climbed 45 percent, and shareholders received $2.5 billion in dividends/buybacks. International sales were particularly strong, rising 11 percent overall and 21 percent in emerging markets (China, India, Brazil, Russia).
Driving part of the BRIC brethren growth were such programs as India’s “Healthy Heart for All,” which identifies heart disease candidates through diagnostics and referrals, and treats those patients with Medtronic devices or therapies. Since its implementation nearly three years ago, the program has screened and treated thousands of Indian heart disease patients who otherwise would not have been diagnosed.
In nearby China, Medtronic is developing new orthopedic technologies for the local market at the R&D center it operates with Hong Kong medical device manufacturer Shandong Weigao Group Ltd., while in Russia, the firm is providing product training to 5,000 clinicians.
None of the initiatives involve new technology; rather, Medtronic is using business model innovation to enter markets formerly out of its reach. The efforts mimic those of Vodafone (M-Pesa mobile payment service in Africa), Dow Corning (Xiameter online channel) and Hilti (tool fleet management services), all of which used new strategies to power growth.
To implement those new business models, Ishrak revamped his executive team and their responsibilities. Bigwigs of Medtronic’s global operating regions and major countries, who previously reported to the company’s top international leader, now report directly to the CEO. Ishrak also added foreigners to Medtronic’s Executive Committee.
“The increased importance and visibility of our regional teams has led to a significant shift in investments to high-growth emerging markets,” the CEO told investors.
Medtronic’s emerging market sales account for just 10 percent of the company’s overall revenue, but that ratio could rise significantly in the next few years as Ishrak’s globalization plans take root. His vision, in fact, already has begun to manifest itself in the shifting proportion of domestic and international sales—over the last three fiscal years, U.S. revenue gradually has shrunk while overseas earnings have virtually exploded.
Domestic revenue fell 3.4 percent between FY10 and FY12 to $8.8 billion, while international sales jumped 17.5 percent to $7.3 billion during that same period, according to Medtronic’s latest annual report. Asia/Pacific revenue powered much of the growth, surging 28 percent since FY10 to $2.4 billion in FY12. Sales in Europe and Canada swelled 10 percent.
There’s still hope for the U.S. market, though. In FY12, Medtronic earned more than half of its $16.1 billion in total net sales within the nation’s borders, mostly on the success of its Resolute Integrity drug-eluting coronary stent, MR-Conditional pacemaker, Endurant AAA stent graft system and RestoreSensor neurostimulator.
Resolute’s fiscal fourth-quarter launch doubled the company’s U.S. drug-eluting stent revenue and market share in less than three months, helping boost total Cardiac and Vascular Group sales 4 percent to $8.48 billion. The Resolute Integrity DES is the first device of its kind approved for diabetics with coronary artery disease (CAD), a class of patients that comprises roughly 30 percent of the nearly 1 million percutaneous coronary intervention procedures performed annually in the United States. Such procedures are inherently more difficult in diabetics because their arteries are more narrow than those not afflicted by the condition.
The Endurant stent graft system also contributed to market share (5 points) and was the likely engine powering an 18 percent increase in endovascular and peripheral device sales in FY12. Other endovascular revenue-generators included the Endurant Abdominal and Valiant Captiva Thoracic Stent Graft System, which sold well overseas, and the integration of technology from the past purchases of both Ardian Inc. and ATS Medical Inc.
The hot seller within Medtronic’s Structural Heart division was the CoreValve transcatheter aortic heart valve, a minimally invasive treatment option for heart disease patients too sickly for or unable to survive open heart surgery. The procedure involves snaking a replacement valve to the heart through the femoral or left subclavian artery (historically, the only way to replace an aortic valve was through open heart surgery).
During the second quarter of FY12, Medtronic released results of a four-year study proving the long-term safety and efficacy of the CoreValve replacement system, noting the data establishes the device as a “sound and stable valve that holds up to real-world use.”
“Almost more important, however, is that these patients—most of whom were old and very sick at the time of enrollment—saw such positive outcomes, including dramatic improvements in the activity level they could withstand, despite being some of the first patients in the world to undergo TAVI [transcatheter aortic valve intervention],” investigator Peter den Heijer, M.D., said of the study results.
Robust overseas sales of the CoreValve system (it is not yet approved for use in the United States) contributed to a 9 percent rise in Coronary device proceeds. Structural Heart sales rose 12 percent to $1 billion and total cardiovascular device revenue jumped 12 percent to $3.4 billion despite the challenges posed by a lethargic economic recovery, pricing pressures, softening markets and increased hospital ownership of physician practices.
Those same headwinds stymied Medtronic’s cardiac rhythm disease management (CRDM) sales as the U.S. market struggled to free itself from the lingering stigma of a federal investigation and trade media scrutiny over the use of implantable cardioverter defibrillators (ICDs).
A January 2011 study published in the Journal of the American Medical Association found that 22.5 percent of patients typically fall short of the medical guidelines necessary to receive ICDs. These patients, the study’s authors argued, have a higher mortality rate than those who meet the criteria for the implants.
The revelation sparked a U.S. Department of Justice investigation into the legality of countless ICD procedures. The government currently is evaluating ICD insurance claims under the False Claims Act (an anti-fraud statute) to determine whether hospitals knowingly submitted false claims.
With the brouhaha still simmering, the U.S. ICD market faltered for most of FY12, leading to a 5 percent decline in defibrillation systems sales. Proceeds fell from $2.96 billion in FY11 to $2.82 billion in FY12, Medtronic’s annual report shows.
The shortfall was offset by a 4 percent rise in pacing systems sales ($1.9 billion) and 41 percent increase in atrial fibrillation/other revenue ($207 million), due mostly to robust demand of the company’s Arctic Front Cardiac CryoAblation Catheter System, a minimally invasive balloon-based technology that blocks the conduction of atrial fibrillation in cardiac tissue by delivering a coolant through a catheter. The freezing technology allows the catheter to better adhere to tissue during ablation, improving stability.
Likely feeding the demand for Medtronic’s Arctic Front system was the Achieve Mapping Catheter, which received U.S. Food and Drug Administration approval in the first quarter of FY12. Described by the company as an intra-cardiac electrophysiology diagnostic catheter, the device can be used to access pulmonary vein isolation during the treatment of paroxysmal atrial fibrillation.
The Achieve Mapping Catheter is deployed through the Arctic Front guide wire lumen, enabling clinicians to perform the Arctic Front procedure using a single transseptal puncture with minimal catheter exchanges. It is available in 15-millimeter and 20-millimeter loop diameters, enabling doctors to map electrical conduction between the left atrium and pulmonary veins in order to assess pulmonary vein potentials before, during and after cryoablation with Arctic Front.
Medtronic’s Restorative Therapies Group—composed of the Spinal, Neuromodulation, Diabetes and Surgical Technologies divisions—generated the same overall sales increase as its sister sector in FY12. Revenue rose 4 percent to $7.7 billion in spite of disappointing declines in core spinal and biologics sales, which led to a 4 percent slide in overall Spinal sales.
Executives attributed the company’s lackluster Spinal returns to the postponement of elective orthopedic procedures as well as increased competition and shrinking reimbursement rates. More specifically, they linked the 2 percent slide in core spinal sales ($2.46 billion) to the poor performance of core metal constructs and Kyphon Balloon Kyphoplasty (BKP) products, which succumbed to the same weak demand and competitive pricing pressures that decimated overall Spinal revenue.
The destruction would have been worse, too, without strong support from the Solera, Vertex Select and Atlantis Vision Elite cervical plates.
Biologics sales continued to be punished for the INFUSE bone graft controversy that erupted two years ago with a scathing series of Spine Journal articles that accused the company of bribing doctors to under-report risks associated with the product; around the same time, a U.S. Senate report claimed various studies promoting the bioengineered synthetic bone growth product likely were biased because they were written by Medtronic employees. INFUSE sales have yet to recover, plummeting 18 percent during FY12. The decrease caused biologics proceeds to tumble 10 percent, from $884 million in FY11 to $800 in FY12, though executives claim the company’s Magnifuse and Grafton products prevented a more dramatic decline.
Spinal’s abominable showing was more than offset by strong sales of neuromodulation, diabetes and surgical technologies products. Neuromodulation revenue rose 7 percent to $1.7 billion on the solid growth of the InterStim Therapy for overactive bladders, urinary retention and bowel control; Synchromed II drug pumps for pain and spasticity relief, and Activa PC and RC DBS systems for movement disorders. Growth also was positively affected by the third-quarter launch of the RestoreSensor.
CGM systems and international demand for the Veo and Enlite Sensor drove growth in the Diabetes division, where sales jumped 10 percent to $1.4 billion.
Medtronic’s entire portfolio of ear, nose and throat, power systems, and navigation products proved to be a worldwide hit in FY12, fueling a staggering 21 percent growth rate in the Surgical Technologies division. Sales shot from $1 billion in FY11 to $1.25 billion the following fiscal year. Also contributing to the growth were the August 2011 acquisitions of Salient Surgical Technologies Inc. and PEAK Surgical Inc. (together, the purchases totaled $585 million). Salient’s product lines help to seal soft tissue and bone during surgical procedures, while PEAK’s disposable cutting tools combine a scalpel with the bleeding control of traditional electrosurgery.
Executives said the twin deal represents Medtronic’s “commitment to innovation across the entire surgical continuum, from incision to closing” and marks its entry into such new markets as plastic/reconstruction, electrophysiology, oncology and large bone orthopedics.