Covidien
In the words of former Medtronic CEO Bill George, Medtronic’s combination with Covidien was a “near-perfect strategic fit.”
Bill George, who is a senior fellow at Harvard Business School, said that the deal accelerated Omar Ishrak’s commitment to make Medtronic a major player in emerging markets. Specifically, Covidien brought more than $5 billion in international sales to Medtronic, much of it from emerging markets.
He also noted that Covidien gave Medtronic the #1 market share in gastrointestinal, respiratory and advanced surgery for a number of chronic disease including multiple types of cancer. It also, said George, expanded Medtronic’s R&D investments by more than $2 billion per year.
Lastly, he explained, the deal was financially attractive (60% stock, 40% cash), accretive to earnings in its first full year and allowed Medtronic to redeploy $13 billion in cash trapped overseas.
Looking back, it is clear that buying Covidien turned Medtronic into an international cash machine with an estimated free cash flow of $7 billion per year.
Mazor Robotics
This tiny Israeli company, founded in 2001 by Professor Moshe Shoham and Eli Zehavi, was the first company to successfully tackle the complex problem of building a spine and neurosurgery robot.
Medtronic spine, in 1995, was the first company to successfully develop a navigation system for spine and neurosurgery.
Combined, Mazor’s robots and Medtronic’s StealthStation navigation create a powerful intelligent system that reduces surgical error rates, speeds up surgery and improves surgeon precision.
Based on the experience in surgery so far, it is no exaggeration to say that robotics plus navigation should eventually replace most free-hand surgery.
Furthermore, these systems are software driven platforms. Change the instructions, and they improve, cut costs and speed up surgeries for Medtronic’s other business units.
The cost of robotics plus navigation is high. The average user pays about $1 million per system.
But for Ishrak, a veteran of GE’s MRI and CT scanning capital equipment businesses, this is not a new problem. As he demonstrated with the frugally innovated Brivo, costs will come down.
Approximately 8% of U.S. spine centers have bought robotics plus navigation—whether the Medtronic or other systems.
Given the way in which these systems have driven market share gains for Medtronic, Stryker and Globus Medical, the incentives are locked in to make Medtronic’s robotics systems a near universal offering in the other business units.
