Top 30 Showcase : MedTronic
Medtronic plc
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07.26.17
$28.8 Billion
KEY EXECUTIVES:
Omar Ishrak, Chairman and CEO
Karen L. Parkhill, Exec. VP and CFO
Gary L. Ellis, Exec. VP of Global Operations and Information Technology
Bradley E. Lerman, Sr. VP, General Counsel and Corporate Secretary
Michael J. Coyle, Exec. VP and Group President, Cardiac and Vascular Group
Hooman C. Hakami, Exec. VP and Group President, Diabetes Group
Bryan C. Hanson, Exec. VP and Group President, Minimally Invasive Therapies Group
Geoffrey S. Martha, Exec. VP and President, Restorative Therapies Group
Robert ten Hoedt, Exec. VP and President, EMEA
NO. OF EMPLOYEES: 88,063
GLOBAL HEADQUARTERS: Dublin, Ireland
One of the most beloved movie endings ever filmed almost never made it onscreen.
The script for the 1971 musical fantasy “Willy Wonka and the Chocolate Factory” originally ended with Grandpa Joe shouting, “Yippie!” and then fading to black. But Emmy award-winning director Mel Stuart wanted a better closing line, and reportedly phoned writer David Seltzer from the set to request a more memorable finale.
Seltzer could only come up with one idea, though it was a bit cliché. In the film’s final scene—cherished by millions of fans worldwide—the eccentric title character announces he is giving his entire factory to Charlie Bucket, a kind-hearted, honest, but poor boy who lives with his widowed mother and four bedridden grandparents in the slums of an unnamed European city. As Charlie’s disbelief turns to gratitude, Wonka hugs the boy, then tells him, “But Charlie, don’t forget what happened to the man who suddenly got everything he always wanted.”
“What happened?” Charlie asks, amazed.
“He lived happily ever after,” Wonka replies, smiling.
Of course he did. It is a movie, after all.
Hollywood is notorious for its happy endings, but such closure is not as readily found off-screen. Fairy tales and their all-is-well finales are pure fiction; the real world doesn’t work that way—it’s cold, inconsistent, and oftentimes unfair. It offers no guarantees on contentment.
Joy can be particularly elusive in business, even for companies that follow Wonka’s guide to eternal euphoria. Apple Inc.’s Cinderella-like evolution, for example, should theoretically ensure the multinational technology firm lives happily ever after. But since ascending to the Most Valuable Company throne six years ago, Apple has grappled with a litany of serious issues—among them the death of co-founder Steve Jobs, concerns about its innovative prowess, declining iPhone sales, underwhelming products (think Apple TV and the Apple watch), and stagnating stock value.
Certainly not the enchanted future Tinseltown would have dreamed up.
Medtronic plc is experiencing similar dream disillusionment as it settles into its new role as the planet’s top medtech firm. Bolstered by the integration of a historic $50 billion acquisition, Medtronic garnered $28.8 billion in fiscal 2016 sales to surpass rival Johnson & Johnson for top industry billing and bragging rights. It was a crowning achievement, as transformative for the company as it was impressive in both size and scope.
Perhaps more important than the prestige of Medtronic’s achievement, however, is the opportunity it provides the 68-year-old multinational firm to improve healthcare worldwide. “...the full integration of Covidien—acquired in late FY2015—has greatly expanded our global reach and impact,” Chairman and CEO Omar Ishrak wrote in his introduction to the 2016 Integrated Performance Report. “More than 65 million people benefited from Medtronic technologies—two every second—as we helped our customers deliver more seamless, integrated care for patients across the healthcare continuum.”
Two people every second.
Not too shabby for an enterprise that began in a 600-square-foot-garage and grossed a mere $8 in its first month of operation.
Indeed, Medtronic’s journey from humble beginnings to world domination is a remarkable feat that deserves recognition. On the Silver Screen, it would represent the perfect ending to the traditional rags-to-riches story, save for the post-credit affirmation of the company’s everlasting joy.
But perfection is an anomaly in the real world, muddling efforts by true larger-than-life entities like Apple and Medtronic to secure a happy ending. Certainly, Medtronic’s prospects for eternal bliss dimmed moderately in FY16 due to product recalls, a consent decree, slumping spinal and neuromodulation sales, and lingering discord over its controversial bone fusion technology.
Two of Medtronic’s five product recalls affected devices the company inherited in its blockbuster deal for Covidien plc. One of those field actions stemmed from a “wider-angle bend” in the firm’s Shiley neonatal and pediatric tracheostomy tubes, which are inserted into the windpipe during tracheostomy procedures to help patients breathe and remove lung secretions. The defect injured 12 patients but caused no deaths.
The Class I Shiley recall affected 8,192 U.S. units in eight product lines, including cuffed and cuffless versions of the tubes, as well as those packaged in disposable bedside trays. It was the third Class I action in five years for the Shiley portfolio, a product family that Medtronic currently touts as a “market-leading line of tracheostomy solutions.” In 2010, Covidien recalled 52 different versions (more than 400,000 units total) of Mexican-made Shiley tubes over complaints about air leaks, then pulled 330,000 units from the market two years later due to gripes with connections and “functions of the inner and outer cannula,” according to the U.S. Food and Drug Administration’s (FDA) database.
Medtronic’s other Covidien-related product recall involved battery packs used with the Covidien Oridion labeled Capnostream 20 and 20p patient monitors, external devices used in both clinical and home settings to assess respiratory status and identify changes in breathing. The packs were associated with a higher risk of thermal damage—a defect the company eventually traced to a manufacturing change instituted by a third-party contract manufacturer. Medtronic received seven reports of thermal damage out of the 9,817 recalled battery packs, with one recorded fire that resulted in minor burns to the user.
In between the two Covidien-induced recalls, Medtronic pulled from the market 6,912 loading system units for its CoreValve Evolut R transcatheter aortic valve replacements (particulates presence), 650 Puritan Bennett 980 ventilators (software glitch), and nearly 100,000 Insync III Model 8042 pacemakers. Medtronic acknowledged potential power failure issues with three models of the latter device (8042, 8042B, and 8042U) but noted a relatively negligible mishap rate, between 0.16 and 0.6 percent (affecting 65 to 162 devices worldwide). Defects ranged from incorrect heart pacings and fluctuations in longevity to early elective replacement warnings and inaccurate power-flow readings from leads. Although the company received one report of a patient death, authorities could not link it to the power failure issue.
The SynchroMed II implantable drug pump also proved troublesome for Medtronic in fiscal 2016, but not by reason of recall (although that outcome would have been preferable for the company). Instead, Medtronic agreed by consent decree to end all production and sales of the device until it corrects “major violations” of quality system regulations at the pump’s Columbia Heights, Minn.-based manufacturing plant. The FDA had repeatedly apprised Medtronic of problems at the facility, issuing the company three warning letters based on five inspections (2006-2013) that exposed inadequate processes for identifying, investigating, and correcting quality problems; design change documentation failures; and design specification deficiencies.
ANALYST INSIGHTS: Medtronic continues to deliver on the promises made at the time of the Covidien acquisition. The $800 million annual savings has largely come to pass. The company has market share leadership in a majority of categories of high-value devices. While the transition was bumpy for some divisions and unclear for their supply chain partners, Medtronic has made it through the acquisition to the other side. Watch for additional moves to ensure dominance in their selected markets, along with a willingness to shed the remainder of their non-strategic assets.
—Tony Freeman, President, AS Freeman Advisors LLC
Medtronic signed the FDA/U.S. Justice Department consent decree without admitting liability. Ishrak and Thomas Tefft, senior vice president and president of the company’s Neuromodulation division, were specifically named in the edict and thus are also party to the agreement. In a news release announcing the decree, executives vowed to enhance the Neuromodulation quality system and implement “design changes...to address issues the company previously communicated.”
“We are committed to the highest level of quality, and have pursued significant efforts in recent years to enhance the performance of the pump and to address the FDA’s expectations,” Tefft said in prepared remarks. “We are confident that our efforts to date will contribute to the timely and thorough completion of these activities while preserving access to this important therapy in the interest of patients, their caregivers, and physicians.”
The SynchroMed II drug infusion system is approved to treat chronic intractable pain, severe spasticity, and cancer. Since its 2003 debut, however, the pump has generated more than its fair share of problems for Medtronic, triggering five Class I recalls and eight Product Advisories (company letters cautioning doctors of potential device malfunctions).
Since signing the FDA decree in late April 2015, Medtronic management claims the company has made steady progress toward resolving the SynchroMed II’s manufacturing issues. Yet drug pump sales remain abominable as the company works to get back in the FDA’s good graces. “As expected, we face challenges in our Neuromodulation division,” Ishrak said during a fiscal 2016 earnings conference call last year. “While we continue to make progress against our FDA Consent Decree commitments, we are still experiencing double-digit revenue declines in our drug pumps. Our revenue has been relatively stable sequentially for four quarters, so we expect drug pump growth to be roughly flat going forward.”
The damage, though, has already been done. Medtronic’s plummeting drug pump sales contributed to a 3 percent decline in Neuromoduation division revenue (to $1.92 billion), howbeit the dropoff also was spawned by the January 2016 divestiture of the company’s intrathecal baclofen drug as well as lower pain stimulation and flat deep brain stimulation proceeds. The division’s overall loss was partially offset by Gastro-Uro revenue growth, which benefited from increasing InterStim Therapy demand.
Spine was the only other product franchise that underperformed in FY16 (period ended April 29, 2016), posting a 2 percent sales slide to $2.92 billion. Medtronic attributed the declivity to dwindling core spine and interventional revenue, both of which succumbed to global pricing pressures. Solid bone morphogenetic protein (BMP) growth in the United States partly neutralized the shortfall, but that gain was itself negated by falling BMP revenue overseas due to an InductOs shipping hold in Europe.
BMP’s strong U.S. showing, however, failed to exempt the product from additional scrutiny. A front-page story in the Minneapolis Star Tribune last April detailed the circumstances surrounding Medtronic’s “misfiled” report on treatment complications with its bone fusion product, Infuse. The newspaper claimed the company informed the FDA of over 1,000 Infuse-related “adverse events” more than five years after they occurred.
Medtronic, naturally, criticized the article, claiming it made “false insinuations” and failed to include important information about a retrospective chart review (RCR) of Infuse data and the company’s remedial actions. “...the article suggests Medtronic attempted to conceal information about the RCR, including information about adverse events reported in the data. This suggestion is false...” the company contended in direct response to the Star-Tribune story. “Medtronic has acknowledged that at the time the RCR was discontinued back in 2008, it was not properly archived and the information collected was not fully assessed for reportability to the FDA. We have taken a number of steps to update our clinical policies and our training to enhance our reporting practices.”
While hardly overblown, the company’s Star Tribune spat nevertheless attracted the attention of U.S. Sen. Al Franken (D-Minn.), a member of the Senate Health, Education, Labor and Pensions Committee, and ardent medtech industry advocate. In a surprising departure from past viewpoints, Franken asked both Medtronic and the FDA for detailed information about patient injuries, including the severity of the trauma and their relationship to Infuse. He also requested an accounting of approved and off-label treatment uses.
“The information portrayed in the [Star Tribune] article suggests that Medtronic conducted a study of its Infuse device, and for five years, failed to report thousands of complications related to the device to the FDA,” Franken wrote in an April 12, 2016, letter to the FDA oulining his requests. “This lack of information potentially skewed the risk profile of the device, which may have affected the treatment of thousands of additional patients.”
Franken’s assertion is at the crux of a new class-action lawsuit filed against Medtronic by thousands of patients treated with Infuse. The suit alleges product liability and fraud over the company’s Infuse Bone Graft LT-Cage Lumbar Tapered Fusion Device System, a thimble-like titanium product that keeps bone graft at the fusion site, maintains proper height between vertebrae, and stabilizes the spine during fusion. Court documents accuse Medtronic of employing an illegal, false, and deceptive marketing scheme to promote the sale of Infuse for off-label uses.
ANALYST INSIGHTS: What’s next? With the Covidien acquisition now three years away, and after shedding the Covidien legacy medical supplies business, what is the device behemoth’s next move? Most likely more acquisitions, maybe even another blockbuster. Stay tuned.
—Mark Bonifacio, Founder & President, Bonifacio Consulting Services
With a happy ending in Spine marred by declining revenue and recurrent Infuse controversy, Medtronic was forced to look elsewhere for a fairy tale-like finale to its fiscal 2016 finances. And it found such closure in all other product franchises.
In fact, the gains realized in Medtronic’s seven other reporting divisions more than compensated for losses in Spine and Neuromodulation, thanks to the full integration of Covidien. In the Restorative Therapies Group alone, the more than four-fold increase in Neurovascular net sales (345 percent to $587 million) single-handedly annihilated any negative impact the two backsliding sectors may have had on overall company revenue, which mushroomed 42.3 percent. Likewise, the losses had no effect on Medtronic’s FY16 net income or operating profit, which surged 32.2 percent and 40.5 percent respectively.
One of four product franchises formed from the Covidien acquisition, the Neurovascular division outshined its Group brethren through strong sales of the Solitaire FR mechanical thrombectomy device, Pipeline Flex (United States and Japan), and Pipeline Flex with Shield technology (Europe). The Pipeline Flex is a flow diversion device used to treat large and giant wide-necked brain aneurysms that are attached to parent vessels measuring between 2.5 and 5 mm in diameter; the version with Shield technology includes a surface synthetic biocompatible polymer.
Surgical Technologies also helped offset the poor performances in Spine and Neuromodulation, increasing revenue 8 percent to $1.77 billion. Growth in this division was driven by power systems such as Aquamantys, which uses transcollation technology to provide hemostatic healing of soft tissue and bone; and PEAK PlasmaBlade, as well as Midas Rex products, monitoring devices, and O-arm imaging systems.
The gains realized in Surgical Technologies and Neurovascular revenue in fiscal 2016 not only annulled the losses in the two contracting franchises, they also pushed Restorative Therapies Group total sales up 7 percent to $7.2 billion. The Neurovascular division’s birth was primarily responsible for the increase, though an additional selling week in the first quarter of FY 16 also helped, according to Medtronic.
Besides breeding the Neurovascular franchise, the Covidien purchase also sired the Aortic & Peripheral Vascular, Surgical Solutions, and Patient Monitoring & Recovery divisions, the latter two of which are housed within the newly created Minimally Invasive Therapies Group. Its fiscal 2016 performance was practically legendary, with total Group revenue quadrupling (skyrocketing 301 percent) to $9.56 billion.
Fostering the Minimally Invasive Therapies Group sales surge were staggering revenue spikes from its two product divisions. Surgical Solutions proceeds increased more than fourfold, or 307 percent, to $5.26 billion, due mainly to robust demand for the Endo GIA Reinforced Reload device (a stapler) with Tri-Staple technology, the LigaSure Maryland Jaw 37 cm laparoscopic sealer and divider, and the Valleylab FT 10 energy platform—a suite of electrosurgical tools and advanced vessel sealing products equipped with LigaSure technology. The company’s gastrointestinal diagnostic product platform also helped drive sales growth.
The 293 percent jump in Patient Monitoring & Recovery proceeds (to $4.3 billion) was beholden to strong U.S. sales of respiratory and patient monitoring equipment (sensors, airway products, acute ventilator systems); patient care and safety devices (electrodes, compression, SharpSafety, dialysis products); and nursing care goods (incontinence, enteral feeding, wound care products).
The newborn Aortic & Peripheral Vascular division posted an equally impressive showing in fiscal 2016, bolstering revenue 52 percent to $1.63 billion on strong sales of the IN.PACT Admiral drug-coated balloon, Valiant Captiva TAA stent graft, Aptus Heli-FX endoanchor, and Endurant IIs Abdominal Aortic Aneurysm three-piece system, an endograft ideal for patients with challenging distal aortic and iliac anatomy.
Like its siblings, the Aortic & Peripheral Vascular division’s extraordinary earnings rubbed off on its parental unit, leading to a 9 percent sales hike (to $10.1 billion) in the Cardiac and Vascular Group. Small but nonetheless solid gains in Cardiac Rhythm & Heart Failure and Coronary & Structural Heart revenue also helped boost proceeds, as the two divisions improved sales 4 percent and 2 percent respectively.
Cardiac Rhythm & Heart Failure achieved growth ($5.46 billion in total sales) from strong sales of the Arctic Front Advance Cardiac CryoAblation Catheter system, Reveal LINQ insertable cardiac monitor and Evera MRI SureScan ICD (implantable cardioverter defibrillator). Launched in the second quarter of FY16, the Evera SureScan defibrillator allows ICD patients to undergo full-body magnetic resonance imaging (MRI) scans in any position. The device is paired with the Sprint Quattro Secure MRI SureScan DR4 leads, which is proven safe for MRI use.
Coronary & Structural Heart revenue ($3.1 billion total) received a lift from the CoreValve Evolut R recapturable system’s U.S. and Japanese performance, the Resolute Onyx drug-eluting stent’s European acclaim, U.S. demand for the Resolute Integrity drug-eluting stent, and the debuts of the Non-Compliant Euphora and Semi-Compliant Euphora balloon dilatation catheters.
Medtronic experienced a bit of déjà vu in its Diabetes Group, where net sales increases and growth drivers mimicked the previous fiscal year. Proceeds, for example, swelled 6 percent—as they did in FY15—to $1.86 billion, riding the coattails (once again) of the MiniMed 530G System with Enlite sensor, and the MiniMed 640G System with the Enhanced Enlite sensor. The company, however, made a significant effort in FY16 to break the monotony for 2017 by fortifying its bid to become a more comprehensive diabetes solutions provider.
ANALYST INSIGHTS: Omar Ishrak has made a positive impact on revenue and EBITDA thru “pulling the right levers” since taking over Medtronic. Acquisitions, Cash-Flow and Portfolio Management will continue to be a key emphasis in the months to come. Watch for Medtronic to continue to defend its market position by furthering its leadership in “risk-sharing” agreements with its customers.
—Dave Sheppard, Co-Founder and Principal, MedWorld Advisors
Medtronic’s anti-boredom measures included new partnerships with electronics giant Samsung, analytics startup Glooko, and fellow medtech behemoth Becton, Dickinson and Company (BD). The alliances are intended to improve access to diabetes technology, as well as provide diabetics and their caregivers with secure, seamless, and timely access to integrated diabetes data.
Medtronic and Samsung agreed to co-develop Android smartphone apps that pull data from Medtronic’s insulin pumps and continuous glucose monitoring devices. The apps provide diabetics with convenient access to their blood glucose data through Samsung mobile phones and wearable devices.
The Android apps are designed to work with Medtronic’s pocket-sized MiniMed Connect device, which transmits data from the MiniMed 530G and Revel insulin pumps to a corresponding smartphone app for the patient, and to a remote web display for providers. Medtronic claims that MiniMed allows patients to better manage their condition through enhanced connectivity with their healthcare teams.
The company’s deal with Glooko integrates Medtronic’s CareLink platform with Glooko’s secure, cloud and mobile-based diabetes management platform. Patients who use CareLink to view insulin and glucose data can use Glooko’s platform to examine additional data—including food, medication, fitness, and biometrics—that is vital to managing the disease. Glooko’s system also gives the data to healthcare providers so that interventions, such as adjusting insulin doses or identifying high-risk patients, can be made to prevent hospitalizations.
The collaboration with BD calls for Medtronic to commercialize a new, BD-manufactured insulin infusion set with FlowSmart Technology for type 1 diabetics. The FDA-approved infusion set features a side-ported catheter design to reduce silent occlusions, and the smallest insertion needle (30 gauge) to minimize insertion pain and trauma.
“While the market remains competitive, we feel strongly that our diabetes business is well-positioned to drive sustained growth around our broader-based efforts,” Ishrak told analysts on a FY16 earnings conference call. “That is one aspect of growth in diabetes. I think we are very excited about what we can do about overall [diabetes] patient management through our agreements.”
Partnerships, however, are just one of the ways in which Medtronic is attempting to improve disease management. Through the firm’s 14 acquisitions in FY16 (totaling $1.5 billion), the firm also seeks to better control cardiac disorders, vascular abnormalities, respiratory conditions, and surgical error. The purchases included:
CardioInsight Technologies, developer of a system (Ecvue) that combines electrical data from the body’s surface and 3D anatomical data to create images of the heart’s electrical activity. The Ecvue system has been used in more than 1,400 patients in the United States and Europe.
Aptus Endosystems Inc., a Sunnyvale, Calif.-based company that specializes in advanced technology for endovascular aneurysm and thoracic endovascular aneurysm repair. Aptus also developed the TourGuide Steerable Sheath for delivering peripheral vascular products. The sheath has tip deflection technology for navigating challenging anatomies, which the company claims reduces the need for multiple catheters.
RF Surgical Systems Inc., developer of a system to detect retained surgical items (gauze, sponges, or towels) that could be left inside the body after a procedure.
Twelve Inc., a Redwood City, Calif., startup developing a transcatheter mitral valve replacement product.
Medina Medical, a Menlo Park, Calif.-headquartered firm that makes a self-expanding mesh device to treat weakened blood vessels in the brain.
Lazarus Effect, innovator of a mesh cover for stent retrievers of blood clots. The product is described as a “novel nitinol ‘mesh cover’ that folds over a stent retriever device during clot retrieval and ‘candy wraps’ the stent with the clot inside.” It is designed to trap extra thrombi not captured by the stenting device in the clot retrieval process, thereby improving outcomes of this interventional procedure.
Aircraft Medical, a Scottish manufacturer of video laryngoscopes, a device that simplifies challenging intubations. By allowing clinicians to visualize a patient’s throat during intubation, video laryngoscopes increase the likelihood of first-attempt success and minimize potential damage to the patient’s throat and windpipe. Aircraft Medical’s expanded line of product choices have sought to address a number of different challenging clinical scenarios to increase success in both routine and problematic intubations.
Bellco, a privately held Italian firm that offers blood purification treatments for patients suffering from renal failure, multiple organ failure, and sepsis. The company also provides acute dialysis machines for patients with end-stage renal disease.
