08.05.13
$3.3 Billion
KEY EXECUTIVES:
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, Senior VP & Chief Financial Officer
H. James Dallas, Sr. VP, Quality and Operations
NO. OF EMPLOYEES: 1,350
GLOBAL HEADQUARTERS: Memphis, Tenn.
“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 and 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 strong, rising 11 percent overall and 21 percent in emerging markets (China, India, Brazil, Russia).
Driving part of the BRIC brethren growth were country-specific programs designed to better embed Medtronic’s products and presence in the burgeoning economies. In China, for example, the multinational collaborated with Hong Kong medical device manufacturer Shandong Weigao Group Ltd. to develop new orthopedic devices and treatments, while in Russia, company reps provided Medtronic product training to 5,000 clinicians.
Neither 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 currently 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, comparatively, swelled 10 percent.
Foreign lands were particularly lucrative for the company’s cardiovascular, diabetes, surgical technologies and spinal product segments. Non-U.S. spinal sales nearly matched the company’s overall international gains, growing a total of 12 percent for the year thanks partly to a final quarter swell of 11 percent (to $710 million). Emerging market spinal revenue surged 22 percent in FY12, lifting Restorative Therapies Group total proceeds by 4 percent to $7.7 billion. Such exemplary growth, however, did little to stem the continued hemorrhaging of spinal segment cash: Sales fell for the second consecutive year, slipping 4.3 percent to $3.26 billion.
Medtronic executives attributed the company’s lackluster Spinal returns to the postponement of elective orthopedic procedures as well as increased competition and shrinking reimbursement rates (a May 2011 decision by Medicare contractor Noridian Administrative Services to continue coverage in 11 states for spine stabilization procedures failed to positively impact sales). More specifically, they linked the 2 percent slide in core spinal sales ($2.46 billion) to the poor performance of its core metal constructs, Kyphon Balloon Kyphoplasty (BKP) products and Infuse, a genetically engineered material used in spinal, oral and dental graft procedures.
Infuse sales have steadily declined since a 2011 series of articles in The Spine Journal claimed that researchers with financial ties to Medtronic overstated the product’s benefits and downplayed its risks. One story accused researchers of slanting company-funded Infuse studies to favor its performance over a bone graft, the substance traditionally used in spinal fusions, and estimated the true incidence of adverse events to range from 10 to 50 percent, depending on the way in which the material is used. Side effects, according to the Spine Journal exposé, include male sterility, infection, bone loss and unwanted bone growth.
Medtronic bigwigs have admitted to reviewing studies of the company’s products before publication but they insisted that outside researchers determined both the significance and use of Infuse study data. Ishrak also noted the Spine Journal series did not question the quality of data submitted to the U.S. Food and Drug Administration (FDA) during the approval process, or the information available in each product package. “While the Spine Journal articles raise questions about researchers’ conclusions in their published peer-reviewed literature, the articles do not raise questions about the data Medtronic submitted to the FDA in the approval process or the information available to physicians through the instructions for use brochure attached to each product sold,” Ishrak said in response to the trade journal’s accusations. “Based on that data, we strongly believe that the safety profile reported to the FDA and summarized in the product label support the safe use of rhBMP-2 for the identified indications. We remain committed to ongoing study of the safety and efficacy of rhBMP-2, especially for applications not covered by FDA labeling.”
In an effort to quell all the criticism (and perhaps show conviction in its product), Medtronic enlisted Yale University researchers to conduct independent reviews of Infuse safety and efficacy. In June 2013, nearly two years after receiving $2.5 million in funding for the studies, researchers concluded that Infuse is no more effective than a graft and carries an increased risk of cancer.
The Yale review analyzed findings from two research groups—one at Oregon Health & Sciences University in Portland and the other at the University of York in the United Kingdom. The two groups were given detailed data from 17 spinal studies using Infuse on more than 2,000 patients, as well as safety reports given to U.S. regulators and other publications about the product. The Oregon review found that Infuse was similar to bone grafts in overall success, fusion rates and risks when used in lumbar spine fusion, though some published studies incorrectly touted its performance. “The review found ‘substantial evidence of reporting bias’ in the previous studies on the product,” officials at Oregon Health & Science said in a statement. “The review found that Medtronic-sponsored publications analyzed or reported results in biased ways to indicate that it was more effective.”
Medtronic, not surprisingly, claimed victory, contending the Yale analyses prove the product’s safety and effectiveness, and reinforce the risks that must be considered by patients and physicians. “The complex analyses laid out in the systematic reviews add to a better understanding of the benefits and risks outlined in our labeling for Infuse Bone Graft, which guides the safe and effective use of the product for patients in FDA-approved indications,” Rick Kuntz, M.D., senior vice president and chief scientific, clinical and regulatory officer, said in prepared remarks. “We will continue to conduct research on rhBMP-2 to further add to an increased understanding of the benefits and risks of this treatment option.”
The FDA approved Infuse in 2002 for use in the lower back, and the substance has been used to treat degenerative disc disease in more than 1 million patients. Infuse sales skyrocketed soon after its introduction, reaching nearly $1 billion annually before falling to $528 million amid the controversy. Industry analysts estimate the uproar shaved several percentage points off Medtronic’s spinal market share (which now hovers around 30 percent, down 10 points from 2008) and they expect the company to surrender more of its global stake to the Infuse rumpus and rival innovation.
Medtronic, however, is defending its domain with some innovation of its own. In FY12, the company amassed an arsenal of cutting-edge technology to regain spinal market share and trounce its competition. The firm’s armada of weaponry included the CD Horizon Fenestrated Screw Spinal System, CD Horizon BalanC Spinal System, Artisan Space Maintenance System, Aquamantys Mini EVS 3.4 Epidural Vein Sealer and T2 Altitude Expandable Corpectomy Device.
The latter two products debuted at the North American Spine Society’s 26th Annual Meeting in Chicago, Ill. The Aquamantys Vein Sealer is designed to optimize visibility and control epidural bleeding by enabling prophylactic compression and treatment of epidural veins before they begin to bleed. An insulated shaft enables simultaneous retraction and electrode use near sensitive tissue such as dura and nerve roots, and its 3.4 mm tip makes it ideal for use in procedures with small epidural access points, according to the company.
The T2 Altitude Expandable device features a self-locking mechanism that eliminates the need for placing a screw set during surgery. The device can be filled with bone graft after insertion and also after expansion, creating bone contact with the end plate and the opportunity for fusion to occur inside the device. In addition, the product gives surgeons the ability to insert the cage from a posterior, anterior or lateral approach, and it is compatible with Medtronic’s minimally invasive technologies as well as its neuromonitoring system (NIM-Eclipse).
Medtronic also is protecting its province with two new Kyphon products and several FDA- and CE Mark-approved inventions. The Kyphon Xpede Bone Cement is a quick-to-dough polymethylmethacrylate substance designed for spinal fracture treatment with minimally invasive Kyphon Balloon Kyphoplasty; according to the company, the material reaches a “doughy state” more than twice as fast compared with Kyphon HV-R Bone Cement and Kyphon ActivOs 10 Bone Cement. “I find that Xpede Bone Cement streamlines the balloon kyphoplasty procedure,” said Wade Wong, M.D., neurointerventional spine chief and clinical radiology/anesthesiology professor at the University of California, San Diego. “It is quick to dough and has a long working time, which provides me with increased control and ease of handling.”
The Kyphon Xpander II Inflatable Bone Tamp and Kyphon Inflation Syringe are designed to treat vertebral compression fractures, the most common osteoporotic fracture (an estimated 900,000 occur annually in the United States). New balloon material used in Kyphon Xpander II offers control during inflation and greater lifting force than its predecessor, the Kypon Xpander.
The FDA added to Medtronic’s innovation bank with 510(k) clearance of the Aquamantys SBS 5.0 Sheathed Bipolar Sealer (a device that seals both incised soft tissue and epidural veins through a mix of radiofrequency energy and saline) and the TSRH Spinal System pedicle screws for adolescent idiopathic scoliosis. European regulators followed suit with approval of a 16-electrode subcutaneous implant technique to treat chronic back pain. The system reduces back pain by delivering electrical impulses directly to the peripheral nerves causing the discomfort; in two clinical studies, patients treated with peripheral nerve stimulation experienced statistically significant back pain relief.
Also contributing to Medtronic’s cause 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.
KEY EXECUTIVES:
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, Senior VP & Chief Financial Officer
H. James Dallas, Sr. VP, Quality and Operations
NO. OF EMPLOYEES: 1,350
GLOBAL HEADQUARTERS: Memphis, Tenn.
“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 and 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 strong, rising 11 percent overall and 21 percent in emerging markets (China, India, Brazil, Russia).
Driving part of the BRIC brethren growth were country-specific programs designed to better embed Medtronic’s products and presence in the burgeoning economies. In China, for example, the multinational collaborated with Hong Kong medical device manufacturer Shandong Weigao Group Ltd. to develop new orthopedic devices and treatments, while in Russia, company reps provided Medtronic product training to 5,000 clinicians.
Neither 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 currently 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, comparatively, swelled 10 percent.
Foreign lands were particularly lucrative for the company’s cardiovascular, diabetes, surgical technologies and spinal product segments. Non-U.S. spinal sales nearly matched the company’s overall international gains, growing a total of 12 percent for the year thanks partly to a final quarter swell of 11 percent (to $710 million). Emerging market spinal revenue surged 22 percent in FY12, lifting Restorative Therapies Group total proceeds by 4 percent to $7.7 billion. Such exemplary growth, however, did little to stem the continued hemorrhaging of spinal segment cash: Sales fell for the second consecutive year, slipping 4.3 percent to $3.26 billion.
Medtronic executives attributed the company’s lackluster Spinal returns to the postponement of elective orthopedic procedures as well as increased competition and shrinking reimbursement rates (a May 2011 decision by Medicare contractor Noridian Administrative Services to continue coverage in 11 states for spine stabilization procedures failed to positively impact sales). More specifically, they linked the 2 percent slide in core spinal sales ($2.46 billion) to the poor performance of its core metal constructs, Kyphon Balloon Kyphoplasty (BKP) products and Infuse, a genetically engineered material used in spinal, oral and dental graft procedures.
Infuse sales have steadily declined since a 2011 series of articles in The Spine Journal claimed that researchers with financial ties to Medtronic overstated the product’s benefits and downplayed its risks. One story accused researchers of slanting company-funded Infuse studies to favor its performance over a bone graft, the substance traditionally used in spinal fusions, and estimated the true incidence of adverse events to range from 10 to 50 percent, depending on the way in which the material is used. Side effects, according to the Spine Journal exposé, include male sterility, infection, bone loss and unwanted bone growth.
Questions surrounding the safety and efficacy of Medtronic’s Infuse bone graft eroded spinal market share and sales in fiscal 2012. Specifically, Infuse sales plummeted 18 percent as company officials and researchers debated the integrity of numerous studies that touted the product’s benefits. Image courtesy of Medtronic Inc. |
In an effort to quell all the criticism (and perhaps show conviction in its product), Medtronic enlisted Yale University researchers to conduct independent reviews of Infuse safety and efficacy. In June 2013, nearly two years after receiving $2.5 million in funding for the studies, researchers concluded that Infuse is no more effective than a graft and carries an increased risk of cancer.
The Yale review analyzed findings from two research groups—one at Oregon Health & Sciences University in Portland and the other at the University of York in the United Kingdom. The two groups were given detailed data from 17 spinal studies using Infuse on more than 2,000 patients, as well as safety reports given to U.S. regulators and other publications about the product. The Oregon review found that Infuse was similar to bone grafts in overall success, fusion rates and risks when used in lumbar spine fusion, though some published studies incorrectly touted its performance. “The review found ‘substantial evidence of reporting bias’ in the previous studies on the product,” officials at Oregon Health & Science said in a statement. “The review found that Medtronic-sponsored publications analyzed or reported results in biased ways to indicate that it was more effective.”
Medtronic, not surprisingly, claimed victory, contending the Yale analyses prove the product’s safety and effectiveness, and reinforce the risks that must be considered by patients and physicians. “The complex analyses laid out in the systematic reviews add to a better understanding of the benefits and risks outlined in our labeling for Infuse Bone Graft, which guides the safe and effective use of the product for patients in FDA-approved indications,” Rick Kuntz, M.D., senior vice president and chief scientific, clinical and regulatory officer, said in prepared remarks. “We will continue to conduct research on rhBMP-2 to further add to an increased understanding of the benefits and risks of this treatment option.”
The FDA approved Infuse in 2002 for use in the lower back, and the substance has been used to treat degenerative disc disease in more than 1 million patients. Infuse sales skyrocketed soon after its introduction, reaching nearly $1 billion annually before falling to $528 million amid the controversy. Industry analysts estimate the uproar shaved several percentage points off Medtronic’s spinal market share (which now hovers around 30 percent, down 10 points from 2008) and they expect the company to surrender more of its global stake to the Infuse rumpus and rival innovation.
Medtronic, however, is defending its domain with some innovation of its own. In FY12, the company amassed an arsenal of cutting-edge technology to regain spinal market share and trounce its competition. The firm’s armada of weaponry included the CD Horizon Fenestrated Screw Spinal System, CD Horizon BalanC Spinal System, Artisan Space Maintenance System, Aquamantys Mini EVS 3.4 Epidural Vein Sealer and T2 Altitude Expandable Corpectomy Device.
The latter two products debuted at the North American Spine Society’s 26th Annual Meeting in Chicago, Ill. The Aquamantys Vein Sealer is designed to optimize visibility and control epidural bleeding by enabling prophylactic compression and treatment of epidural veins before they begin to bleed. An insulated shaft enables simultaneous retraction and electrode use near sensitive tissue such as dura and nerve roots, and its 3.4 mm tip makes it ideal for use in procedures with small epidural access points, according to the company.
The T2 Altitude Expandable device features a self-locking mechanism that eliminates the need for placing a screw set during surgery. The device can be filled with bone graft after insertion and also after expansion, creating bone contact with the end plate and the opportunity for fusion to occur inside the device. In addition, the product gives surgeons the ability to insert the cage from a posterior, anterior or lateral approach, and it is compatible with Medtronic’s minimally invasive technologies as well as its neuromonitoring system (NIM-Eclipse).
Medtronic also is protecting its province with two new Kyphon products and several FDA- and CE Mark-approved inventions. The Kyphon Xpede Bone Cement is a quick-to-dough polymethylmethacrylate substance designed for spinal fracture treatment with minimally invasive Kyphon Balloon Kyphoplasty; according to the company, the material reaches a “doughy state” more than twice as fast compared with Kyphon HV-R Bone Cement and Kyphon ActivOs 10 Bone Cement. “I find that Xpede Bone Cement streamlines the balloon kyphoplasty procedure,” said Wade Wong, M.D., neurointerventional spine chief and clinical radiology/anesthesiology professor at the University of California, San Diego. “It is quick to dough and has a long working time, which provides me with increased control and ease of handling.”
The Kyphon Xpander II Inflatable Bone Tamp and Kyphon Inflation Syringe are designed to treat vertebral compression fractures, the most common osteoporotic fracture (an estimated 900,000 occur annually in the United States). New balloon material used in Kyphon Xpander II offers control during inflation and greater lifting force than its predecessor, the Kypon Xpander.
The FDA added to Medtronic’s innovation bank with 510(k) clearance of the Aquamantys SBS 5.0 Sheathed Bipolar Sealer (a device that seals both incised soft tissue and epidural veins through a mix of radiofrequency energy and saline) and the TSRH Spinal System pedicle screws for adolescent idiopathic scoliosis. European regulators followed suit with approval of a 16-electrode subcutaneous implant technique to treat chronic back pain. The system reduces back pain by delivering electrical impulses directly to the peripheral nerves causing the discomfort; in two clinical studies, patients treated with peripheral nerve stimulation experienced statistically significant back pain relief.
Also contributing to Medtronic’s cause 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.