Best Left TO Its Own Devices Medtronic, the No. 1 name in medical gadgetry, is as reliable as one of its pacemakers.
(MONEY Magazine) – Medtronic's new CEO Art Collins has a tough act to follow. His predecessor, William George, transformed Medtronic from a simple pacemaker manufacturer into the world's largest diversified medical device maker, increasing revenues from $1.2 billion in 1992 to $6.4 billion last year. Earnings over the past decade improved by an average of 25% a year.
But if anyone has the pedigree to continue such success, it's Collins, who spent eight years as chief operating officer before jumping into his new role last May. So far, the Collins era looks equally promising. Medtronic has a pipeline filled with treatments for underserved, yet profitable markets. Its Activa device, for example, which uses electronic stimulation to alleviate many of the symptoms associated with Parkinson's disease, recently received approval from the Food and Drug Administration, and its InSync system is one of the only nonpharmaceutical treatments for heart failure, a condition that affects more than five million Americans. Still, competition is fierce. Medtronic lags Johnson & Johnson in the race to produce a drug-coated stent, which is expected to all but replace today's stents (devices used to prop open weak arteries). MONEY writer Adrienne Carter sat down with Collins at the company's Minneapolis headquarters to discuss Medtronic's plans.
Q. Some health-care stocks have been hit because they have few products in development. How is Medtronic positioned?
A. The fundamentals at Medtronic today are as strong as they have ever been. We just announced our fourth-quarter revenues, which were up 18%. And our new product pipeline is as full as it's ever been.
Q. What is Medtronic's long-term growth strategy?
A. We have always used biomedical engineering to address large chronic disease states. Most recently, we have expanded into several large markets. Some have been accessed through internal development. A good example would be congestive heart failure. Another would be Parkinson's disease. Some have been accessed through very selective acquisitions. A current example would be moving into diabetes through the acquisitions of MiniMed and mrg. We're not a conglomerate, so we don't go into areas we don't know. We're leveraging our core technology, the electronic stimulation used in pacemakers, to treat many more conditions.
Q. How has that strategy paid off?
A. If you look at the momentum that we have in the business currently, compared with four years ago, the momentum is much stronger. We have also improved our market share. In our largest business, cardiac rhythm managment, which makes up about 46% of Medtronic's revenues, we have increased market share in all major segments--pacemakers, implantable cardio defibrillators and other related products. We have also expanded into new therapies; the most dramatic of those is for congestive heart failure. In cardiac rhythm management, we are the world leader, with in excess of half the market in each of the segments in which we operate. The only major segment in which market share is not as high is in our vascular business, where we're working through some issues associated with intellectual property.
Q. What have been the problems in the vascular division?
A. Last fall we withdrew an angioplasty catheter from the market after an arbitration panel found that it infringed upon a Boston Scientific patent. In the next two quarters, revenue growth in the vascular division will be hit hard. Earnings in that business were down 16% last quarter. Vascular represents 14% of total revenues, so it's an important business, and we are confident we will strengthen it.
A. We have a replacement product under development and expect to introduce it in the first part of the next calendar year. We also brought in new leadership. Bill Hawkins, the new vascular president, has 25-plus years of experience. He's only been with us for five months, but he's already made significant improvements to streamline operations.
Q. Medtronic's vascular division has also taken criticism for falling behind in the race to produce a drug-coated stent. How do you respond to that?
A. We did not move as rapidly as Johnson & Johnson. We're now rectifying that. We're hard at work to get a product through clinical trials and into the market that we think has the potential to be an improvement over Johnson & Johnson's first-generation product. We estimate that sometime in 2004 is realistic for our product.
Q. Will it be hard to break into the market at that point?
A. At one point Johnson & Johnson owned the coronary stent market. You've seen everyone's market share move up and down. Market share can swing very rapidly.
Q. What sort of growth can we expect from Medtronic in the future?
A. We're looking for a minimum of 15% growth a year in the top and bottom line over any five-year period.
Q. Which major markets have the biggest potential?
A. Heart failure could be a $1 billion business in the next five years. Implantable defibrillators is an underserved market. We believe the neurological market is underdeveloped. Diabetes is also a very large medical problem. The response has been very strong on our new insulin pump, the Paradigm pump. But only 15% of the market has been penetrated, so we have a major job ahead of us to communicate the benefits of our product.
Q. With a P/E of 28, Medtronic is one of the priciest health-care stocks around. Does Medtronic justify such valuations?
A. For investors, the stock is only important on the day you buy it and the day you sell it. If we're doing the right things to sell products and grow the earnings over time, the stock price will take care of itself.