Moving beyond devices: Medtronic at critical juncture as technology, competition evolve

Medtronic is at an inflection point, one that could determine its place in the health care field for the next generation and expand the boundaries of medical device technology.

Chief Executive Geoff Martha is pushing the company to take advantage of technological advances, such as in robotics and broadband, and changing dynamics in where and how people work. He and other top executives presented a new strategic plan with a dizzying number of pieces.

"Medtronic will no longer be known as just a medical device company," Martha said when it was announced last month. "We're going beyond devices to help technology serve more people in more ways."

Medtronic, headquartered in Ireland with operational headquarters in Fridley, restructured into 22 small units to take out bureaucratic layers and spur innovation. It raised its research and development spending to $2.7 billion this fiscal year, from $2.5 billion last year.

It just launched a rebranding effort to emphasize innovation. It also has reached gender equity in pay in the United States.

For all the pieces to work, Martha said in an interview, the company must foster a culture that values equity, sustainability and teamwork.

"The burden of disease brings deeply personal costs. There are deep societal costs as well," Martha said. "If we're not going to take a leadership role, then who? Businesses need to step in and lead."

Streamlined for speed

Medtronic got a lesson in those costs as the coronavirus pandemic unfolded last year.

In the early months of the pandemic, it became clear Medtronic needed to make more ventilators. The company would need to become quicker and more collaborative and use its R&D muscle to keep up with the demand and protect health care workers.

Bob White, president of the medical surgical portfolio, said Medtronic soon realized it would have to innovate differently and more collaboratively to meet the need. The company increased production fivefold at its plant in Galway, Ireland.

After Elon Musk tweeted that he would help, Medtronic reached out and SpaceX started making a needed part. The company also worked with chipmaker Intel to develop remote monitoring and programming capabilities so health care workers would not need to go in a patient room for every adjustment.

Medtronic worked with other partners to put together plans for the Coventor, a simpler ventilator that got designed and obtained Food and Drug Administration approval in less than 30 days.

The company figured out how to outfit the 400-bed Javits Center in New York City over Easter weekend. People who worked in other units asked to help out. Internal approvals were streamlined.

"Work that would have taken months took weeks, work that would have taken weeks took days," White said.

"The speed with which we operated taught our teams that we could move faster," he added. "The teams don't want to go back."

Besides collaborating with other companies, the pandemic allowed Medtronic to work more closely with socialized medical systems in Europe and with developing markets in African nations.

The United Kingdom had a huge backlog of people scheduled for colonoscopies because in the early days of the pandemic, non-emergency procedures were postponed.

Medtronic had an alternative called the Pillcam that was getting regulatory approvals. The device is exactly what it sounds like: a tablet with a tiny camera and sensors inside that a patient swallows while wearing a recording device on the wrist. The data is sent to the patient's practitioner. Then if there are any signs of lesions or polyps, a more invasive colonoscopy can be done, Martha said.

That kind of direct collaboration with a government to meet specific needs is an area that could be expanded, he said.

The goals ahead

In its last fiscal year, Medtronic served 72 million patients. The goal is to increase that number to 85 million by fiscal year 2025.

This growth is a necessary component if Medtronic is to reach another target. It wants 20% of revenue to flow from products and therapies released in the prior 36 months. Currently, that number is 17%.

To get there, Medtronic must not only focus its R&D dollars, it must also continue a robust acquisition strategy and improve quality control so the devices are ready for market sooner.

The need to have many products in the pipeline is evident in two recent developments. Medtronic in October learned it would need to wait until a clinical trial involving its new Symplicity Spyral renal denervation system is completed before moving further toward commercialization.

Executives hoped interim results would be positive enough that Medtronic could advance the device, which is inserted in renal arteries to lower blood pressure. Now it might be 2023 before the device goes to market.

On the other hand, the company passed a huge regulatory hurdle this fall in the European Union on its Hugo robotic-assisted surgical system. Technology for that product came out of Covidien, the Irish company Medtronic bought in 2014 in one of medtech's biggest acquisitions. Medtronic said only 2% of surgeries in Europe are done using this type of technology, so it is a huge opportunity.

Now comes the work of getting payments approved, more hospitals signed up and a more robust training program in place. Martha said advances in broadband, specifically 5G, will allow the company to not only train more people remotely but perhaps eventually have surgeons off-site directing surgeries.

New advances, new challenges

The advances in computing power that allow for data to be collected and transferred — and the artificial intelligence field — will help transform what types of products Medtronic will produce in the future.

So will miniaturization — as in the Pillcam — and robotics, as the Hugo system uses.

New frontiers will come with more challenges. The company has had several high-profile voluntary recalls over the past few years. While it is working to address the problems that arose with those products, it also is building a new accountability and quality-control structure, said Noel Colon, Medtronic's chief quality officer. The goal: decreasing customer complaints by 10% over the next few years.

Advances also will force Medtronic to work more with tech giants such as Google and Apple, which he said are also becoming competitors in the "periphery spaces," Martha said.

But without an aggressive strategy using technology to create products for the next generation, Medtronic will not grow at the pace it needs to. Already, Martha and his predecessor, Omar Ishrak, predicted that Medtronic would only hit 5% growth with its current portfolio — and pre-pandemic, it wasn't always hitting that mark.

One of the company's previous CEOs, Bill George, now a professor of management practice at Harvard, recently wrote about a chance Medtronic had in 1991 to buy a company with emerging cardiovascular technology. He declined, deciding there were some patent and regulatory issues that were too risky.

Those issues came to be, yet a competitor bought the company and it took Medtronic 20 years to catch up, he wrote.

Today, Medtronic's competitors are coming from places like China, Martha said. Venture capital and government support are readily available that could take a company serving the Chinese market and expand it to compete on a global level.

Equity and sustainability

Medtronic also is competing more and more with large technology companies for talent. That is adding urgency to to the company's equity and sustainability goals.

Medtronic joined a growing number of companies pledging net-zero carbon emissions by 2050. It also set goals on reducing packaging and water waste.

Equity goals include having 45% of managers globally be women and 30% of managers be ethnically diverse by fiscal year 2026. At the end of fiscal 2020, 39% of managers were women, and 23% were ethnically diverse.

All those goals are tied to business goals. Investors are looking at sustainability measures, plus the European Union and California have environmental regulations that will go into effect over the next few years. Studies show that businesses that have management teams that are diverse both in gender and race perform better.

But how workers see the company is also part of the strategy.

"They want to work for a company that stands for something," Martha said.

Turnover is at 13%, said Carol Surface, chief human resources officer. However, the company said interest measured by applications for open positions is up 40%, and 50% for career engineering jobs.

Response from the investor community was generally strong to Medtronic's new goals.

Analysts from BTIG wrote recently: "While it may take time for MDT to achieve its targets, some of which we view as aspirational, the collective efforts should support value creation longer-term."

'You have to foster belonging'

A recent McKinsey Global Institute study of Fortune 500 firms found that only 37% of companies that had put into place restructuring plans actually achieved them.

Medtronic started talking about change before the pandemic, and it made progress on several fronts such as pay. .

"I think that a lot of companies discover that change can happen very quickly," said Mario Moussa, a Pennsylvania consultant who works with companies on cultural change. "But we're creatures of habit. It can go right back" to the traditional methods.

Creating new "rituals" and engaging workers in what works and what doesn't is key to forward momentum. That employee engagement, he said, will "validate that you respect their work." Employees need to feel comfortable to perform their best, he said.

White, the chief of the company's medical surgical business, said cultural work will keep Medtronic's strategies moving forward.

"You have to be intentional," he said. "You have to foster belonging. For me, that's about fostering voice."