Up next for Medtronic: Changing the whole health care system

Someday soon, Brazil may decide to hire a private company to improve how heart-care patients are diagnosed and treated in its state-sponsored hospitals. Medtronic wants to be that company.

In the United States, a large employer may partner with a health care firm to guarantee better, cheaper outcomes for workers in its ­self-insured plan. The new Medtronic wants to help share that risk.

Minnesota's largest medical devicemaker last week moved its principal executive offices from ­Fridley to Ireland and completed a $49.9 billion acquisition of surgical supplier Covidien in an effort to achieve ambitious goals that its executives say weren't possible with its profile before the deal.

"As big as Medtronic is, as big as Covidien is, we feel you need to be bigger if you really want to be on the speed dial of the president of Brazil or the health minister of China," Geoff Martha, Medtronic PLC's top executive for the integration of Covidien, said in a recent interview.

Inside Medtronic, the deal has been treated more like a merger than an acquisition, because most of Covidien is expected to remain intact as an $8 billion surgical-supply business alongside Medtronic's three other legacy businesses: heart care, pain and spine, and diabetes.

The deal generated considerable political and shareholder resistance because it moves Medtronic's legal headquarters to Covidien's offices a few blocks from St. Stephen's Green in Dublin, raising tax inversion issues and generating potentially significant capital-gains taxes for some shareholders, not to mention injuring ­Minnesota hometown pride.

Medtronic vows to generate efficiencies of $850 million annually within three years by cutting administrative jobs and accelerating sales.

For example, executives say ­Covidien's experienced vascular products sales force will ramp up sales of Medtronic's newly approved Admiral drug-coated balloon for blocked leg vessels much faster than Medtronic could have done on its own. Medtronic also vowed to import or create 1,000 jobs in Minnesota and increase its investments by $10 billion in a decade.

Outwardly, the companies didn't appear to need merger partners. Medtronic's stock value has grown 83 percent in the past three years; Covidien's has more than doubled. But executives insist that such performance may not be sustainable in the long run, as health systems, employers and nations focus on cutting health care costs.

That's why Martha's merger to-do list includes not just financial goals, but something more audacious: transform the delivery of health care.

The deal has puzzled some observers.

"This one, I just don't get," said Alfred Marcus, a University of Minnesota business professor who focuses on corporate strategy. "They are in serious competition with Boston Scientific and St. Jude," and now risk distraction as they meld two sprawling operations.

Medtronic's competitors also remain skeptical.

Last week, the CEO of St. Jude Medical Inc., which reported revenue of $5.62 billion for 2014, told investors that the company is big enough to ­sustain sales growth while helping hospitals drive down the cost of care.

In an interview, Chief Financial Officer Don Zurbay said, "The idea of a transformational transaction just to get bigger doesn't really fit with our strategy currently. We think we're deep enough in the areas that matter."

Boston Scientific Corp., another devicemaker that employs thousands of Minnesotans, also downplays industry consolidation trends. Last fall, its CEO told analysts that his company doesn't see a growth benefit from bundling ­products across disparate health care niches.

And that's exactly what the new Medtronic is banking on.

Medtronic has long made most of its money from selling advanced cardiac devices like implantable defibrillators and pacemakers that use shocks to restore a natural heart beat, as well as ­gadgets that force open blocked arteries or help a heart-valve pump blood more efficiently. It also sells pacemaker-like devices that stimulate nerves to decrease pain, pumps that regulate insulin, and devices to fuse decaying vertebrae. Such devices require laborious and expensive premarket testing to gain approval from the Food and Drug Administration.

Covidien, on the other hand, has sold supplies used during and after operations like surgical staples, feeding and breathing machines, and devices to seal blood vessels. Though it has been moving in recent years toward more complex therapies for cancer, the company has focused on lower-priced products with less-rigorous FDA approvals and lower profits.

By offering all of these products in one big catalog, Medtronic believes it can stock an entire supply cabinet for a complex surgery, or most of it anyway. This positions the company to offer broad inventory management across an entire hospital, whether in the U.S., South America or Europe.

Stocking hospital shelves with products it trusts is one example of how Medtronic executives think they can pull off the financial trick of helping to lower overall cost growth in health care without cutting into profits.

And profits are on the horizon. J.P. Morgan analyst Mike Weinstein published a note to investors saying that under new financial models, Medtronic's net income is expected to jump to $6.1 ­billion two years from now, up 60 ­percent from in 2014.

"Transforming health care for us means that we have a large enough portfolio now that we are a relevant player to any major health system, any government. We are a big player. And we help them solve problems," said Medtronic's Martha. "They're still important metrics to us: how much did you sell, how much money did you make. [But] with health systems under so much budgetary pressure, that model flattens out and goes down. Countries are starting to run out of money, unless you can solve problems."

Early examples exist.

• In Europe, a subsidiary called Medtronic Hospital Solutions in 2013 started running a handful of hospital heart-catheterization labs, where the company's devices are used to open blocked arteries. It's agreed to modernize the labs and look for ways to cut costs. Medtronic also has spent $350 million to acquire the Italian cath-lab outsourcing company NGC Medical.

• Last March, Medtronic launched a two-year partnership with health insurer Aetna to identify patients whose costly chronic diabetes make them good candidates for Medtronic insulin pumps. The program's success will be measured by its impact on health and medication regimes and whether it reduced emergency-room costs and hospital stays.

• Chanhassen's CardioCom, which Medtronic acquired in 2013, uses technology to monitor patient health at home and telehealth services from nurses to keep patients from being admitted — or readmitted — to the hospital.

Still, it's a big gap between monitoring heart-failure patients in St. Louis Park and designing cardiac care programs in Sao Paulo.

Medtronic executives say they hope to make that leap in the next five years by negotiating more contracts that tie the company's fortunes directly to its clients, a strategy known as "risk-sharing" in the industry.

Through risk-sharing deals and various joint-ventures, Martha said, the company expects to align its interests with its stakeholders so that when it has a good quarter, so will the health care system that it is serving. And through incremental deals, company officials hope to start achieving their goal of transforming health care delivery.

"Over time, that's where we want to be," he said. "Five years out, you should see if we have the juice to actually transform health care. You'll be seeing the signs."

Joe Carlson • 612-673-4779

Twitter: @_JoeCarlson