Make no mistake about it. The “Age of Omar” has begun at Medtronic, Inc.
From the first sound of his Bangladesh-accented voice, you knew Omar Ishrak, Ph.D., was going to be different from the insiders that have led Medtronic for the last quarter century. By the end of his first quarterly call with Wall Street analysts on August 24, this blunt and plain spoken CEO made it clear that the world’s largest medical device manufacturer had made some ill advised decisions in the past and he was going to shake things up.
Investors liked it. By the end of the day, the company’s stock value rose by $2.03 billion as its stock price rose by over 6% per share.
Unvarnished Criticism
Medtronic’s new chief was uncharacteristically critical of the company’s previous leadership by noting poor execution; an R&D investment strategy that delivered “unsatisfactory returns” and weak acquisition strategies which he promised to be a “lot more strict” in the future.
Ishrak described the path of the company’s troubled spine business as unacceptable and clearly signaled a new focus and strategy.
He didn’t mention his predecessor, Bill Hawkins, by name. In fact, also uncharacteristic of “corporate speak” with analysts, Hawkins wasn’t mentioned once during the call. There wasn’t even the obligatory: “We appreciate the job Bill did, etc., etc.”
Second Quarter 2012 – Flat Spine
Oh yeah, there was also a financial report to give for the first quarter of 2012.
The company reported an overall 7% increase in revenue. Reported Spine sales of $825 million were flat with currency adding 3% to revenue. Kyphon continued to struggle as sales fell 13% year-over-year. InFuse sales, after The Spine Journal’s hit job, were down 8%, and were decelerating by the end of the quarter.
|
Medtronic Spine |
1Q12 Sales |
% Change |
|
Total Reported Sales |
$825.0 |
flat |
|
Core Spinal |
$610.0 |
down 2% |
|
Biologics |
$215.0 |
4.00% |
Source: Medtronic, Inc.
Ishrak acknowledged the “acute pressure” related to the InFuse articles, as well as the “general ongoing issues with fewer procedures, pricing pressure and the increasing prevalence of physician-owned distributors.”
“This has been a difficult journey, but we are still a clear market leader and committed to winning in this market. We’re continuing to launch a series of key new products that we believe will have a big impact on our performance.” He was particularly happy with Osteotech’s contribution during the quarter.
Health Care Economic Value
The former GE executive described his growth strategy within the larger context of a changing health care environment.
He said there is continued pressure on global health care costs where present trends are clearly unsustainable, especially given the demographics in the developed world.
“It is therefore paramount that we…deliver better economic value…The biggest long-term opportunity will be to meet the needs of the billions of people that have no access to health care at all.”
Ishrak Targeting Major Emerging Medical MarketsIshrak noted that macroeconomic conditions in many developed countries have led to constrained health care budgets and increased pressure on utilization.
“This directly affects the financial health of our customers [and requires] medical technology that clearly demonstrates customer economic value at both the provider and payer levels.”
Medtronic, according to Ishrak, has not consistently given its customers “meaningful and succinct economic value propositions…Successfully demonstrating the clinical and economic value of our technology to our customers on a broad and consistent basis will result in our customers delivering better, more cost-effective patient care, while improving their profitability at the same time.”
The Ishrak Vision
As any good visionary leader, Ishrak laid out a simple three-prong strategy to deliver sustained growth:
Improve execution
Optimize innovation
Accelerate global efforts
Execution
Starting with himself, Ishrak said he will expect more accountability and follow-through on commitments, goals and deadlines at all levels. He noted the company’s current operating performance was unsatisfactory as earnings per share rose less than revenue growth.
Innovation
The company has made “significant investments” in R&D over the years with, “frankly, unsatisfactory returns. This is not acceptable, and clearly cannot continue and will require some major changes, ” said Ishrak.
New investment will have to have the kind of evidence which will clearly demonstrate to customers that Medtronic’s new technologies will improve their (the customer’s) overall profitability.
The company will also look for ways to squeeze new growth from existing therapies, both upstream and downstream, by using diagnostics to better select patients that need Medtronic’s products. Downstream, Ishrak wants to develop new business models around “connected care” and chronic disease management for patients who have Medtronic devices.
With longer regulatory cycles and more cost-sensitive buyers, Ishrak said Medtronic’s history of focusing on adding new high-end therapies won’t work.
“I want our businesses to significantly increase their focus on truly understanding how to expand penetration of our existing therapies. We need to understand, in granular detail, the barriers that prevent our products from becoming the standard of care. We must do this for every product in every major country and prioritize these opportunities by their economic value and also by the degree of difficulty in developing the evidence necessary to prove that economic value.”
Global Expansion
Medtronic employees better have their passports up to data because Ishrak says there is no doubt that the global health care opportunity is “immense, ” and will continue to grow. “We have a very clear view about this, and we’re not going to hesitate, ” he said.
The company will seek to create “potentially disruptive business models directed towards each of the major emerging markets. We will significantly increase our investment in local R&D, manufacturing and strategic partnerships in these regions. We will also be active in helping to build on health care infrastructure where needed.”
Emerging markets now represent 10% of Medtronic’s revenue and have grown nearly 20% annually for the past four years. “I believe this growth is sustainable, ” said Ishrak.
Costs are lower in emerging markets. He said his past experience taught him that as you invest in R&D in emerging markets, productivity is enhanced as the expertise gets up to speed. Ishrak is known for establishing GE Healthcare’s footprint abroad with medical diagnostic equipment, particularly in China
Company Portfolios
Addressing questions from analysts about the company’s current portfolios, Ishrak said, “I like what we have. I think we’ve got good diversification, a good mix of businesses in different state of evolution. And so I think we can work with what we have right now.
In terms of expansion, Ishrak reiterated his “Upstream/Downstream” vision of looking towards diagnostics in improving patient selection and leveraging on the implant in a patient through the life of the patient as opposed to simply during the implant procedure.
Tuck-In Acquisitions
The pending acquisitions of Salient Surgical and PEAK Surgical, said Ishrak, will allow the company to broaden its portfolio of innovative surgical products. He considers these acquisitions strategic tuck-ins that will have an impact on other business units, including Spine.
He said he won’t accept acquisitions because someone thinks the company is behind in the market and wants to fix the problem by buying a business with a long technology cycle.
“I mean we’ll selectively do some of that too, but…the two rules that I have around this are: One, I’m going to see a very clear value proposition. I want to see when the return will occur and what needs to happen to get that return. And second, a team that’s got a track record of delivering. So I can trust them to produce [results].
Medtronic, Spine and Ortho and Competitors
Ishrak was asked as the biggest player in spine what he thought of J&J’s strategy to expand orthopedic offerings due to more bundling, vendor consolidation and more hospitals contracting across all areas of orthopedics.
Replied Ishrak, “In terms of broadening that business, fine, I mean that’s not a bad long-term philosophy, but I need to see the team execute. I need to make sure that we execute with what we have and understand that [orthopedic] market, which is a very complicated market with all kinds of ramifications around conflict of interest, physician collaboration, how we go to market, how we even do innovation.”
“We need to make sure that we are grounded in all of those areas in a good rigorous process, which follows our basic principles of integrity and patient safety and so on…before we think of expanding it into other areas. And then it’s really as simple as that, we just walk before we run here. So have what we have and stabilize it first.”
The Spine Surgeon Customer
Ishrak seemed to draw back from his predecessor’s declaration of the “End of the Surgeon Champion, ” by describing the company’s focus on surrounding the spine surgeon with other technologies that the company already has.
“We’re going to use our Surgical Technologies business. We want to use our navigation business, which is a part of that and our spine implant business and collectively, we think we have a better solution for the customer, which is in many ways more efficient and provides direct economic value that the hospital buyer, in fact, will be sensitive to or responsive to.”
Omar Ishrak’s plain-spoken debut has encouraged and pleased Medtronic’s investors. Now we’ll see if his emerging honeymoon with Wall Street can translate into a re-directed, more confident and faster growing Medtronic.
