Medtronic PLC has been on a shopping spree since moving to new headquarters in Ireland last year.
Analysts are keeping a close eye on how well the medical device maker launches new products and integrates companies that it has been snapping up at a rate of more than one a month, starting with the $49.9 billion acquisition of surgical supplier Covidien just over a year ago.
The company's goal of steady growth in the mid-single-digit percentages "is largely predicated on recent and upcoming new product launches as well as the successful integration of Covidien — the largest acquisition in the company's history," analysts with Leerink Partners wrote in a recent analysis. "We're inclined to remain on the sidelines on [Medtronic] shares for now pending further clarity."
Medtronic, which has U.S. headquarters in Fridley, kicked off 2015 by completing its Covidien deal and moving company headquarters overseas. Since then it has unveiled a string of smaller acquisitions and investments, capitalizing on newfound financial flexibility stemming from the move to Dublin.
"We have more cash that is available to us to invest in the U.S. than if we were in the old structure of Medtronic," CEO Omar Ishrak said in a December interview. "The financial flexibility simply means we can keep the money to do what we need to do, including acquisitions."
Medtronic didn't make an executive available for an interview ahead of its scheduled earnings announcement Tuesday, when the company will report results for its fiscal third quarter — its fourth quarterly report since the Covidien transaction.
It will take even longer to see whether 13 acquisitions and three announced strategic investments since then prove worthwhile. That includes a $458 million acquisition of California start-up Twelve Inc., whose mitral valve replacement has been implanted in just a dozen or so patients.
Past Medtronic CEOs have led the company into some lackluster acquisitions. A $4.2 billion purchase of spinal surgery business Kyphon in 2007 provided disappointing growth relative to the price paid. And in early 2011 Medtronic shelled out $800 million for hypertension-treatment company Ardian, only to see the company's technology never make it to the U.S. commercial market.
"That was the issue with Medtronic beforehand. They made deals … only to see them underperform. That had been a track record of Medtronic prior to Omar [Ishrak] coming on board," said Wedbush Securities analyst Tao Levy. "But it sounds like he's put in place, I guess from his GE days, a lot more rigorous due-diligence process to make sure that they have a higher probability to make sure they are successful."
Ishrak came to Medtronic as an outsider in June 2011, leaving a job as CEO of GE Healthcare Systems to lead a company that some analysts saw as in need of revitalizing.
Since then mergers and acquisitions have transformed Medtronic into the world's largest stand-alone medical-device company, with projected revenue of $28.8 billion for the year that will end in April, according to estimates published by Thomson Reuters.
Dealmaking over the past year has reshaped Medtronic's balance sheet. For the three months ended Oct. 30, the most recent quarter for which data are available, Medtronic had $36 billion in debt on its books and $17.2 billion in cash and investments.
Chief Financial Officer Gary Ellis said in December that just $6 billion of that cash was considered "trapped" in overseas accounts — a sharp decline following an internal restructuring of the company in late September that made $9.3 billion in cash and securities available for general corporate purposes, including stock buybacks, debt repayment and acquisitions. The restructuring included paying about $450 million in taxes.
"Going forward, we will have more flexibility because with the addition of Covidien, now 60 percent of our cash is accessible, as opposed to 40 percent of our cash that is accessible today, and in fact from a bigger pool," Ishrak said last month at the JP Morgan Healthcare Conference in San Francisco.
Ishrak told the California audience that Medtronic applies strict guidelines to how it evaluates potential acquisition targets, insisting on a risk-adjusted rate of return in the midteens, and minimal-to-no dilution of earnings.
The approach has led to several types of acquisitions.
The Covidien deal was considered "transformational," bringing in roughly $10 billion in annual revenue and requiring the creation of a division within Medtronic to house most of its products. The majority of the deals since then have been much smaller "tuck-in" acquisitions of medical technology companies that fit within Medtronic's existing divisions.
The tuck-in deals include the $100 million acquisition of California-based Lazarus Effect, maker of a cover that fits over an existing Medtronic device used to remove blood clots from the brain after ischemic stroke. Another was the $150 million purchase of California-based Medina Medical, makers of a mesh device used to repair cerebral aneurysms.
In a departure from its traditional technology businesses, Medtronic has been spending money on entities that provide health care directly, including Dutch medical clinic Diabeter, which cares for about 1,500 patients with Type 1 diabetes, and CardioRed, a company that manages cardiac catheterization labs across Chile. Financial terms were not disclosed for those deals.
Other investments are harder to categorize, including a partnership with IBM's Watson Health to develop a novel "cognitive app" that can detect trends and patterns in diabetic patients' blood readings.
Wedbush's Levy said the market appears comfortable with the deals so far. "You can't go after too many, or you are setting yourself up for not being able to integrate the technologies properly," he said. "But this seems manageable."
Joe Carlson • 612-673-4779
Twitter: @_JoeCarlson
