08.04.14
$3.1 Billion
KEY EXECUTIVES:
Omar Ishrak, Chairman & CEO
Richard Kuntz, M.D., Sr. VP & Chief Scientific, Clinical and Regulatory Officer
Gary L. Ellis, Sr. VP & Chief Financial Officer
Geoffrey S. Martha, Sr. VP, Strategy and Business Development
Stephen N. Oesterle, M.D., Sr. VP, Medicine and Technology
Luann M. Pendy, Ph.D., VP, Global Quality
Christopher J. O’Connell, Exec. VP & Group President,
Restorative Therapies Group
Douglas J. King, President, Spine
Libo Yang, President, Kanghui
Mark J. Fletcher, President, Surgical Technologies
NO. OF EMPLOYEES: 6,900
HEADQUARTERS: Memphis, Tenn.
Three seconds.
It’s become the go-to metric lately for decision-making, website loading, first impressions, and love declarations. Scientific research also has shown the timespan can effectively distract the human mind and spoil productivity.
Medtronic Inc. has long used the clock to measure its own success, gauging its annual progress not only in dollars but in moments of time as well. In FY13 (ended April 26, 2013), the company improved upon its mission to alleviate pain, restore health and extend lives by gaining an additional second, impacting millions of patients worldwide.
“As I reflect on our results, I am pleased to announce that we have achieved an important milestone in our Mission: Every three seconds, someone somewhere in the world benefits from a Medtronic product,” Chairman/CEO Omar Ishrak told shareholders at the end of his fiscal 2013 annual report. “Over the past 12 years, we have lowered this metric by seven seconds, which impacts millions of additional lives, an enormous accomplishment.”
Enormous, indeed: Medtronic’s three-second product benefit metric translates into 18.19 patients per minute, 26,197 per day and 9.562 million for FY13—or the entire population of New York City “and then some.”
The company’s fiscal-year accomplishments weren’t too shabby either—sales jumped 2.5 percent (5 percent on a constant currency basis) to $16.6 million and non-GAAP diluted earnings per share grew 8 percent to $3.75, or 300 basis points faster than revenue. In addition, Medtronic generated $4.4 billion of free cash flow, roughly half of which was used to distribute more than $1 billion in dividends and repurchase more than $1.2 billion of common stock.
International sales were particularly solid, rising 7 percent on a constant currency basis (2 percent as reported), with revenue in emerging markets (Brazil, Russia, India, China) surging 17 percent, according to the company’s annual report. In the fourth quarter of FY13, emerging markets generated 12 percent of revenue—a testament, no doubt, to Ishrak’s laser-like focus on BRIC economies.
That focus intensified in fiscal 2013 with the $816 million acquisition of orthopedic device provider China Kanghui Holdings Inc. The purchase was basically a no-brainer for Medtronic: Kanghui’s product pipeline in trauma, spine and joint reconstruction broadens its reach in general orthopedic surgery and complements its own offerings in spine, neurosurgery and neuromodulation. In addition, Kanghui gives Medtronic an impressive cache of future customers—a government think tank report predicts China will become the world’s most aged society by 2030—as well as a vast distribution network in which to sell its products.
Kanghui also bolsters Medtronic’s growing presence in the Middle Kingdom, helping the firm fulfill Ishrak’s long-term emerging markets vision. The company inched closer to realizing that goal in FY13 by opening its Shanghai Innovation Center—the firm’s first research and development facility outside the United States and Europe. The move creates local product R&D in China and increases Medtronic’s on-site engineering staff to more than 250 total.
Medtronic has pledged to hire and train an additional 1,000 skilled workers in China over the next five years, several hundreds of whom will develop new medical technologies within the Innovation Center. The facility also will function as an incubator for Chinese doctors to commercialize novel ideas into clinical solutions.
“We are far from finished in growing our international capabilities and footprint,” Ishrak said in Medtronic’s FY13 annual report. “Our primary near-term focus is to capitalize on the enormous opportunity in the global premium segment, which we have identified as a $5 billion annual opportunity. We will continue to pursue this opportunity by driving penetration of our existing and new therapies, raising patient and physician awareness of our offerings, and supporting the development of infrastructure and training of physicians where necessary.”
Ishrak certainly delivered on his near-term promise, further infiltrating foreign and domestic markets with the FY13 launches of the RestoreSensor SureScan MRI spinal cord stimulation system (for chronic pain) in Europe and the CD Horizon Solera spinal implants/surgical instruments in the United States and other global markets.
Both products were fairly well-received, but neither made much of an impact on sales. Revenue slid 4 percent to $3.1 billion due to revenue declines in bone morphogenic protein (BMP) and core spine devices. The two product classes fell 15 percent and 2 percent respectively, as continued pricing/competitive pressures, shrinking reimbursements and volatile exchange rates neutralized a finally stablized U.S. spine market.
Bigwigs attributed the 2 percent decline in core spine sales ($2.6 billion) to weak demand for balloon kyphoplasty (BKP), a minimally invasive procedure to repair spinal fractures. While Medtronic executives are confident the BKP market will stabilize, the company has relinquished a significant share of kyphoplasty market revenue to CareFusion and Stryker Corp. Nevertheless, the firm continues to build a bigger platform of interventional spine products off its core Kyphon balloon business.
“We’ve obviously been suffering through some declines in Infuse and BKP over the past couple years,” Chris O’Connell, head of the company’s Restorative Therapies business, recently told analysts. “…we’ve been working very hard to try to stabilize, and actually as we look forward, we think there is a very nice story developing.”
Ideally that story would be the rebound of its troubled BMP division, KO’d by a scathing series of Spine Journal articles that accused Medtronic of bribing doctors to under-report risks associated with Infuse, its controversial bone morphogenetic protein-2 (BMP-2) product used in certain kinds of spinal fusion surgeries.
Company-sponsored clinical trials for Infuse found no side effects directly linked to the drug, a recombinant form of BMP-2. But the 2011 Spine Journal query found the incidence of adverse events ranged from 10 to 50 percent, depending on the use.
Exacerbating the cause célèbre was a U.S. Senate report that claimed various studies promoting the bioengineered synthetic bone graft substance likely were biased because they were written by Medtronic employees.
The one-two punch all but coldcocked Infuse sales, sending revenue plummeting from a high of nearly $1 billion several years ago to $528 million in fiscal 2013.
“In every technology, in every field there is a pendulum that swings back and forth,” Daniel Resnick, M.D., Congress of Neurological Surgeons president and professor/vice chairman of Neurological Surgery at the University of Wisconsin School of Medicine and Public Health in Madison, told a spine trade journal earlier this year. “There was tremendous enthusiasm for BMP and it was viewed by some as a wonder implant. We are on the backswing right now where people are figuring out when it’s clinically- and cost-effective and necessary to use.”
Eventually, the technological pendulum will come to a rest. In the meantime, though, Medtronic will have to compensate for the BMP sales shortfall with other spinal products. A mix of old favorites and new introductions helped partially offset the loss in BMP revenue in FY13, including the launches of AMT implants, the Capstone Control, and Bryan ACD instrument set as well as the continued adoption of Solera, Atlantis Vision Elite, and other biologics products.
The Solera 5.5/6.0 system released globally in July 2012 extends the capability of the 4.75 system, offering surgeons the ability to customize the spinal construct to match patient needs. The ACD instrument set, which debuted three months later, was designed specifically for use with the Bryan cervical disc, approved by the U.S. Food and Drug Administration in 2009 to treat single-level cervical disc disease (radiculopathy and/or myelopathy). The instruments reportedly eliminate the need for unwieldy mainframes or derricks as well as the complicated measurements needed to affix the mainframe to operating tables.
“The new instrumentation is very user friendly, very easy, very intuitive,” gushed Rick Sasso, M.D., founding member/president of the Indiana Spine Group who was involved with the ACD’s design and testing.
The Capstone Control system—released two weeks after the ACD instruments at the North American Spine Society’s (NASS) 27th annual meeting—is an interbody device that can be inserted and rotated longitudinally, significantly reducing the amount of neural retraction that typically occurs with the impacted spinal fusion technique, according to the company. Risks of the device include possible neurological impairment.
The Capstone system was one of several products unveiled at the NASS event in October 2012. Its fellow rookies included the Wave platform of devices (with expandable implants for posterior lumbar interbody fusion surgeries) and the Anchor FS facet fixation system, a minimally invasive posterior screw system for the lower back. The latter product is comprised of a streamlined, single-use instrument set and various cannulated screws for a diverse range of anatomies.
Medtronic prevented a further sales slide in its spinal franchise with a laser-like focus on enabling technologies, including O-Arm imaging, StealthStation surgical navigation, and Powerease powered surgical instruments.
The O-Arm imaging system and StealthStation navigation platform are complimentary technologies, optimized for use in spine, orthopedic and trauma-related surgeries. The O-Arm system provides real-time, intra-operative imaging of the human anatomy with high-quality images and a large field-of-view in both two and three dimensions. By integrating it with StealthStation navigation, surgeons can perform less invasive procedures and confirm the precision of advanced procedures before the patient leaves the operating room.
In addition to its new product releases, Medtronic beefed up its spinal lineup with the debut of two advanced surgical procedures. The Cervical FacetliftsM ID/S technique indirectly decompresses the neural foramen and stablizes the cervical spine by placing structured allograft spacers, Cornerstone Facet MicroGrafts, into the posterior cervical (neck) facet joints. Medtronic executives claim the FacetliftsM ID/S procedure increases the volumetric area of the exiting nerve root that may be compressed but consequently could limit the bending direction of the cervical spine.
The Olif25 procedure, on the other hand, allows for psoas preserving access to the L2-L5 levels and incorporates the company’s surgical platform of access, interbody, neuromonitoring, navigation, fixation and biologic options. This technique leverages traditional anterior lumbar interbody fusion principles with the in-situ convenience of the less invasive lateral approach. Using an oblique lateral trajectory away from the posterior nerves within the posas muscle, the Olif25 procedure is an alternative to approaches dependent upon neuromonitoring to traverse the posas muscle. In addition, the Olif25 procedure allows for easier access around the iliac crest at L4-Lf, and it is a step toward more reproducible lateral access to the L5-S1 disc space, according to the company.
KEY EXECUTIVES:
Omar Ishrak, Chairman & CEO
Richard Kuntz, M.D., Sr. VP & Chief Scientific, Clinical and Regulatory Officer
Gary L. Ellis, Sr. VP & Chief Financial Officer
Geoffrey S. Martha, Sr. VP, Strategy and Business Development
Stephen N. Oesterle, M.D., Sr. VP, Medicine and Technology
Luann M. Pendy, Ph.D., VP, Global Quality
Christopher J. O’Connell, Exec. VP & Group President,
Restorative Therapies Group
Douglas J. King, President, Spine
Libo Yang, President, Kanghui
Mark J. Fletcher, President, Surgical Technologies
NO. OF EMPLOYEES: 6,900
HEADQUARTERS: Memphis, Tenn.
Three seconds.
It’s become the go-to metric lately for decision-making, website loading, first impressions, and love declarations. Scientific research also has shown the timespan can effectively distract the human mind and spoil productivity.
Medtronic Inc. has long used the clock to measure its own success, gauging its annual progress not only in dollars but in moments of time as well. In FY13 (ended April 26, 2013), the company improved upon its mission to alleviate pain, restore health and extend lives by gaining an additional second, impacting millions of patients worldwide.
“As I reflect on our results, I am pleased to announce that we have achieved an important milestone in our Mission: Every three seconds, someone somewhere in the world benefits from a Medtronic product,” Chairman/CEO Omar Ishrak told shareholders at the end of his fiscal 2013 annual report. “Over the past 12 years, we have lowered this metric by seven seconds, which impacts millions of additional lives, an enormous accomplishment.”
Enormous, indeed: Medtronic’s three-second product benefit metric translates into 18.19 patients per minute, 26,197 per day and 9.562 million for FY13—or the entire population of New York City “and then some.”
The company’s fiscal-year accomplishments weren’t too shabby either—sales jumped 2.5 percent (5 percent on a constant currency basis) to $16.6 million and non-GAAP diluted earnings per share grew 8 percent to $3.75, or 300 basis points faster than revenue. In addition, Medtronic generated $4.4 billion of free cash flow, roughly half of which was used to distribute more than $1 billion in dividends and repurchase more than $1.2 billion of common stock.
International sales were particularly solid, rising 7 percent on a constant currency basis (2 percent as reported), with revenue in emerging markets (Brazil, Russia, India, China) surging 17 percent, according to the company’s annual report. In the fourth quarter of FY13, emerging markets generated 12 percent of revenue—a testament, no doubt, to Ishrak’s laser-like focus on BRIC economies.
That focus intensified in fiscal 2013 with the $816 million acquisition of orthopedic device provider China Kanghui Holdings Inc. The purchase was basically a no-brainer for Medtronic: Kanghui’s product pipeline in trauma, spine and joint reconstruction broadens its reach in general orthopedic surgery and complements its own offerings in spine, neurosurgery and neuromodulation. In addition, Kanghui gives Medtronic an impressive cache of future customers—a government think tank report predicts China will become the world’s most aged society by 2030—as well as a vast distribution network in which to sell its products.
Kanghui also bolsters Medtronic’s growing presence in the Middle Kingdom, helping the firm fulfill Ishrak’s long-term emerging markets vision. The company inched closer to realizing that goal in FY13 by opening its Shanghai Innovation Center—the firm’s first research and development facility outside the United States and Europe. The move creates local product R&D in China and increases Medtronic’s on-site engineering staff to more than 250 total.
Medtronic has pledged to hire and train an additional 1,000 skilled workers in China over the next five years, several hundreds of whom will develop new medical technologies within the Innovation Center. The facility also will function as an incubator for Chinese doctors to commercialize novel ideas into clinical solutions.
“We are far from finished in growing our international capabilities and footprint,” Ishrak said in Medtronic’s FY13 annual report. “Our primary near-term focus is to capitalize on the enormous opportunity in the global premium segment, which we have identified as a $5 billion annual opportunity. We will continue to pursue this opportunity by driving penetration of our existing and new therapies, raising patient and physician awareness of our offerings, and supporting the development of infrastructure and training of physicians where necessary.”
Ishrak certainly delivered on his near-term promise, further infiltrating foreign and domestic markets with the FY13 launches of the RestoreSensor SureScan MRI spinal cord stimulation system (for chronic pain) in Europe and the CD Horizon Solera spinal implants/surgical instruments in the United States and other global markets.
Both products were fairly well-received, but neither made much of an impact on sales. Revenue slid 4 percent to $3.1 billion due to revenue declines in bone morphogenic protein (BMP) and core spine devices. The two product classes fell 15 percent and 2 percent respectively, as continued pricing/competitive pressures, shrinking reimbursements and volatile exchange rates neutralized a finally stablized U.S. spine market.
Bigwigs attributed the 2 percent decline in core spine sales ($2.6 billion) to weak demand for balloon kyphoplasty (BKP), a minimally invasive procedure to repair spinal fractures. While Medtronic executives are confident the BKP market will stabilize, the company has relinquished a significant share of kyphoplasty market revenue to CareFusion and Stryker Corp. Nevertheless, the firm continues to build a bigger platform of interventional spine products off its core Kyphon balloon business.
“We’ve obviously been suffering through some declines in Infuse and BKP over the past couple years,” Chris O’Connell, head of the company’s Restorative Therapies business, recently told analysts. “…we’ve been working very hard to try to stabilize, and actually as we look forward, we think there is a very nice story developing.”
Ideally that story would be the rebound of its troubled BMP division, KO’d by a scathing series of Spine Journal articles that accused Medtronic of bribing doctors to under-report risks associated with Infuse, its controversial bone morphogenetic protein-2 (BMP-2) product used in certain kinds of spinal fusion surgeries.
Company-sponsored clinical trials for Infuse found no side effects directly linked to the drug, a recombinant form of BMP-2. But the 2011 Spine Journal query found the incidence of adverse events ranged from 10 to 50 percent, depending on the use.
Exacerbating the cause célèbre was a U.S. Senate report that claimed various studies promoting the bioengineered synthetic bone graft substance likely were biased because they were written by Medtronic employees.
The one-two punch all but coldcocked Infuse sales, sending revenue plummeting from a high of nearly $1 billion several years ago to $528 million in fiscal 2013.
“In every technology, in every field there is a pendulum that swings back and forth,” Daniel Resnick, M.D., Congress of Neurological Surgeons president and professor/vice chairman of Neurological Surgery at the University of Wisconsin School of Medicine and Public Health in Madison, told a spine trade journal earlier this year. “There was tremendous enthusiasm for BMP and it was viewed by some as a wonder implant. We are on the backswing right now where people are figuring out when it’s clinically- and cost-effective and necessary to use.”
Eventually, the technological pendulum will come to a rest. In the meantime, though, Medtronic will have to compensate for the BMP sales shortfall with other spinal products. A mix of old favorites and new introductions helped partially offset the loss in BMP revenue in FY13, including the launches of AMT implants, the Capstone Control, and Bryan ACD instrument set as well as the continued adoption of Solera, Atlantis Vision Elite, and other biologics products.
The Solera 5.5/6.0 system released globally in July 2012 extends the capability of the 4.75 system, offering surgeons the ability to customize the spinal construct to match patient needs. The ACD instrument set, which debuted three months later, was designed specifically for use with the Bryan cervical disc, approved by the U.S. Food and Drug Administration in 2009 to treat single-level cervical disc disease (radiculopathy and/or myelopathy). The instruments reportedly eliminate the need for unwieldy mainframes or derricks as well as the complicated measurements needed to affix the mainframe to operating tables.
“The new instrumentation is very user friendly, very easy, very intuitive,” gushed Rick Sasso, M.D., founding member/president of the Indiana Spine Group who was involved with the ACD’s design and testing.
The Capstone Control system—released two weeks after the ACD instruments at the North American Spine Society’s (NASS) 27th annual meeting—is an interbody device that can be inserted and rotated longitudinally, significantly reducing the amount of neural retraction that typically occurs with the impacted spinal fusion technique, according to the company. Risks of the device include possible neurological impairment.
The Capstone system was one of several products unveiled at the NASS event in October 2012. Its fellow rookies included the Wave platform of devices (with expandable implants for posterior lumbar interbody fusion surgeries) and the Anchor FS facet fixation system, a minimally invasive posterior screw system for the lower back. The latter product is comprised of a streamlined, single-use instrument set and various cannulated screws for a diverse range of anatomies.
Medtronic prevented a further sales slide in its spinal franchise with a laser-like focus on enabling technologies, including O-Arm imaging, StealthStation surgical navigation, and Powerease powered surgical instruments.
The O-Arm imaging system and StealthStation navigation platform are complimentary technologies, optimized for use in spine, orthopedic and trauma-related surgeries. The O-Arm system provides real-time, intra-operative imaging of the human anatomy with high-quality images and a large field-of-view in both two and three dimensions. By integrating it with StealthStation navigation, surgeons can perform less invasive procedures and confirm the precision of advanced procedures before the patient leaves the operating room.
In addition to its new product releases, Medtronic beefed up its spinal lineup with the debut of two advanced surgical procedures. The Cervical FacetliftsM ID/S technique indirectly decompresses the neural foramen and stablizes the cervical spine by placing structured allograft spacers, Cornerstone Facet MicroGrafts, into the posterior cervical (neck) facet joints. Medtronic executives claim the FacetliftsM ID/S procedure increases the volumetric area of the exiting nerve root that may be compressed but consequently could limit the bending direction of the cervical spine.
The Olif25 procedure, on the other hand, allows for psoas preserving access to the L2-L5 levels and incorporates the company’s surgical platform of access, interbody, neuromonitoring, navigation, fixation and biologic options. This technique leverages traditional anterior lumbar interbody fusion principles with the in-situ convenience of the less invasive lateral approach. Using an oblique lateral trajectory away from the posterior nerves within the posas muscle, the Olif25 procedure is an alternative to approaches dependent upon neuromonitoring to traverse the posas muscle. In addition, the Olif25 procedure allows for easier access around the iliac crest at L4-Lf, and it is a step toward more reproducible lateral access to the L5-S1 disc space, according to the company.
Covidien Purchase Gives Medtronic a Tax Break Omar Ishrak chose his words carefully. The newly christened chief executive was fully aware of the scrutiny that awaited him as he shared his plans to reverse Medtronic Inc.’s sagging fortunes three summers ago. He fully expected his comments to be digested, analyzed and possibly criticized by medtech trade journalists, bloggers and business consultants alike. As President/CEO of GE Healthcare Systems, Ishrak was accustomed to such public scrutiny. Thus, he revealed only the basic recipe for long-term growth: globalization, innovation and smart acquisitions. “[Acquisitions] need to have a very clear value proposition which are financial in nature and very granular in their content...” he said shortly after joining the Minneapolis, Minn.-based company, “and we need plans in place that we can deliver on those value propositions.” Realizing those words could someday come back to haunt him, Ishrak has been cautious with Medtronic’s pocketbook. He’s been true to his word, only orchestrating deals with explicit value propositions. Case in point: the $816 million purchase of orthopedic implant maker China Kanghui Holdings Inc. in 2012. The acquisition helps Medtronic achieve its globalization goal and capture a sizeable chunk of the Asian medical device market, an industry estimated to grow 39 percent to $228 billion next year. While there is no mistaking the significance of the China Kanghui acquisition to Medtronic’s bottom line, the deal pales in comparison to the multinational’s most recent conquest, the $42.9 billion purchase of rival Covidien plc. The merger clearly is strategic in nature: If approved, it will turn the two companies into one of the largest medical device providers in the industry, with 87,000 employees in more than 150 countries. The deal also would free up $14 billion in overseas profits—so-called “trapped cash”—Medtronic is hoarding from its non-U.S. subsidiaries. That cash, in turn, could then be used to benefit investors through share repurchases and dividends. Perhaps more importantly, though, the marriage allows Medtronic to sidestep Uncle Sam’s 35 percent corporate tax rate (one of the world’s highest) by relocating its “executive” headquarters to Covidien’s home base in Ireland (called an “inversion”), where companies pay an average 12.5 percent levy. The firm would still maintain its Twin Cities command post, its home since its 1949 founding in a Minneapolis-area garage. The deal would give Covidien shareholders 30 percent ownership in the new company. It is, by far, the largest of such deals, far surpassing Kraft’s $19.5 billion takeover of the British confectioner Cadbury, according to Standard & Poor’s Capital IQ. Healthcare companies have become particularly fond of inversion deals in recent years as they attempt to duck the one-two combo of America’s high corporate tax rate and the 2.3 percent medical device levy imposed under the Affordable Care Act. “Although this is an inversion deal, it’s not about lowering taxes,” Ishrak insisted in a telephone interview with The New York Times after the Covidien deal was announced. “The difference is that through this combination, Medtronic can get access to the free cash flow that Covidien generates and deploy it in the U.S. There are larger technology acquisitions, innovations and R&D [research and development] that we have not been able to do.” To qualify as an inversion, shareholders of the acquired company must receive stock amounting to at least 20 percent of the resulting entity. Covidien’s effective tax rate was 14.7 percent in 2012, and rose to 21.1 percent last year due to the settlement of outstanding tax matters by its former parent company Tyco, the company said in regulatory filings. Medtronic reported an effective tax rate of 18.4 percent in its 2013 fiscal year, ended April 26, 2013. The difference between Medtronic’s effective tax rate and the U.S. statutory rate of 35 percent was due primarily to keeping earnings from its foreign operations outside of the United States, though the company also benefited from domestic tax breaks such as the research and development tax credit. Taxes, however, are not the only motivating factor behind the merger. Experts note the deal also helps Medtronic transform itself into a one-stop supply shop for hospitals. Acquiring Covidien will “further enhance [Medtronic’s] footprint, scale, and product offerings with its hospital customers,” Derrick Sung, an analyst with Sanford C. Bernstein & Co. LLC, said in a research note to clients. —ODT Staff |