BNET Briefing

Reality Check: Wall Street’s View of Medtronic

by Cait Murphy

Tags: The Decisive Moment, Innovation, Medtronic Inc., Hawkins, Leadership, Strategy, Management, Medtronic, Bill Hawkins, Raj Denjoy, Thomas Weisel, Medical Device, Cait Murphy

Think of Medtronic as a hardware store for stuff that goes inside the body. The $14.6 billion company makes things like stents and pacemakers and insulin pumps. And it is a service center, too, maintaining its devices, and listening to them through remote technology. It’s not sexy, unless you need the stuff — then it’s Marilyn Monroe.

As an economic performer, though, think Britney Spears. Like that troubled singer, last year Medtronic’s popularity took a dive. Its stock price tumbled from a peak of $55 down to $28 (it has since recovered to $37). And that was not exactly from a position of strength; over the past five years, Medtronic’s performance has lagged behind the market considerably.

The bad news was not just financial. There was public controversy over the company’s payments to its physician consultants. Then there was the patent litigation with Abbot over heart stents, a nasty, globe-spanning imbroglio that was settled in July, with Medtronic paying $400 million.

Like Britney, though, there are signs that the worst is over for Medtronic. On August 25, CEO Bill Hawkins announced quarterly results: Revenues rose 6 percent, and profits would have except for the Abbot charge. Wall Street approves of the decision to develop products for chronic conditions like depression and obesity and its strategy to move into areas where an aging population will need more care, such as diabetes. And Medtronic’s overseas operations are doing well.

Raj Denhoy, a senior research analyst at Thomas Weisel Partners in New York, has covered the medical device industry for 10 years. Here’s what he thinks of Medtronic.

Key Stats

Ticker: MDT
Founded: 1949 — literally, in a garage
Revenues (fiscal year ended April 24, 2009): $14.6 billion
Revenues from outside the U.S.: 40 percent
Rank on Fortune 500: 196
Net earnings: $2.3 billion
Employees: 38,000
Number of patients served each year: 7 million
Interesting fact about the company: The largest independent medical device company in the world, Medtronic has almost half the U.S. pacemaker market.

On Medtronic’s competitive position:

In two of Medtronic’s largest categories ― cardiac rhythm disease management and spine ― the company has seen its position erode. This is a factor of a real lack of meaningful innovation in the industry over the last half decade or so. There is a lot of parity. In a sense, Medtronic is a victim of its own success. It built these markets, and really innovated; then it hit a trough and the rest of the industry caught up. Now Medtronic is seeing erosion in segments where it once had market share of close to 50 percent. Their position has certainly softened from where it had been.

Innovation record:

Over the past 30 years, Medtronic has been one of the real leaders in medical device innovation; over the past five years, though, it has been somewhat challenged. But then, the industry as a whole has not seen a lot of great innovation over the past couple of years; there has not been the kind of new-category creation we saw 5 and 10 years ago. As a bellwether company, Medtronic feels it more than most. Right now, innovation is just really stalled.

Stock performance:

It’s not pretty. They suffer from being so successful early on. Back in the late 1990s, Medtronic commanded a PE multiple of greater than 50. It was a super-high-growth company that defined the whole category. Since then, there has been steady erosion. Its top-line growth has ragged, and the management has also struggled with giving believable guidance. Now its PE multiple is down to 11 or 12. Yes, they pay good dividends, but regardless of that, Medtronic has underperformed the group by a large margin.

Hawkins as CEO:

He was certainly dealt a rough hand. It’s tough to come into a company on the down slope after a lot of years of really good performance.

For the present, he is managing the P&L to try to get meaningful earnings despite anemic top-line growth. For the future, Medtronic is looking at device-based therapies for things like obesity that have not always lent themselves to that kind of treatment. He is putting a lot of bets down in new clinical areas.

Hawkins takes a lot of heat for things that are not directly his fault. The history books on him are not written yet.

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