Organic growth

Sam Jaffe - July 01, 2002

Medical device powerhouse
Buying into other organs
Acquire and innovate
Growth in neurology


CEO and Chairman Arthur Collins Jr.





In the 1966 film Fantastic Voyage , five researchers are miniaturized and sent into the bloodstream of an ailing genius to dissolve a blood clot that is inaccessible to conventional surgical repair. The crew must make its way through nearly every organ of the human body to get to the clot threatening the patient's life.

Back out the melodrama and eliminate the distraction of Raquel Welch as one of the researchers, and the plot of Fantastic Voyage could describe Medtronic Inc.'s intention to colonize every part of the human anatomy. The company's success to date has centered on the heart: It invented the first wearable, external battery-powered pacemaker, and remains the major supplier of the internal cardiac pacemaker. Its future prosperity, however, depends on diversifying its products so it can apply its technology to other diseased parts of the human anatomy. Like the crew of the movie, Medtronic must travel to unexplored frontiers of the human body.

Medical device powerhouse

Founded in 1949 in a Minneapolis garage, Medtronic is the undisputed leader in the medical devices market. In 1960, the company produced the first implantable pacemaker, and it continues to innovate in that market. Today, Medtronic has annual sales of $6.4 billion, approximately 28,000 employees operating in 120 countries and a stock market capitalization in mid-June of $52 billion. From 1985 to 2001, the company achieved a compound annual growth rate of 18.4% for revenues and 24.6% for earnings. For investors, the ride has been thrilling: Medtronic shares have risen 1900% on the heels of five stock splits between 1991 and 2001.


Medtronic's Marquis, InSync and Kappa are all implantable cardiac rhythm management devices.



At the heart of this impressive growth is Medtronic's command of more than half of the $3-billion cardiac pacemaker and defibrillator markets (see story, "Electronics that get under your skin ,"). But Medtronic can't maintain its target of 15% revenue growth over any five-year period by merely ticking along with the aging population of cardiac patients. That market is saturated. Most Western patients in need of pacemakers already have one. Only patients with emerging heart problems are candidates for the devices and while supplying new demand is important, it cannot fuel double-digit growth.

CEO and Chairman Arthur Collins Jr., who has been at the helm of the company since 2000, knows this. In 2000, the company announced its Vision 2010 initiative, an attempt to predict the state of health care in the world over the next decade and to chart Medtronic's response. The report's primary conclusion? That chronic diseases, which currently consume almost 80% of the nation's health care budget, represent enormous market potential for implantable devices that offer cost-effective alternatives. "We realized that we have the seeds for technologies that can treat many of these diseases better and more cost effectively than today," says Robert Ryan, Medtronic's chief financial officer.

Thus, the company has embarked on an ambitious program of expansion and innovation to implant itself into markets far beyond the heart. Medtronic has broadened its focus to include not only products, but services, focusing on not just the heart, but on every part of the body.

Buying into other organs

One prong of its plan is strategic acquisitions. The company has spent more than $10 billion to acquire more than a dozen companies since 1998 (see box below). Clearly, these acquisitions are an attempt to give Medtronic a foothold in a variety of therapy opportunities and to relieve its cardiac business unit of shouldering the lion's share of the company's fortunes.

The key to the future of any cardiac device company is to expand into new disease-management areas, according to Mark Landy, an analyst for Boston, MA-based Leerink Swann & Co. "Medtronic is the only company [in the medical devices industry] that is going forth and conquering other markets on a major scale. The others are far behind," he says. These acquisitions create platforms for new Medtronic revenue streams. While the pacemaker has long been a proven method for treating heart problems, similar devices are starting to be used in the fields of urology, spinal surgery and even neurology.

"Each of [these new markets] is a much smaller portion of the company's revenue base now, but they hold huge promise for the future," adds Dan Lemaitre, an analyst with Merrill Lynch & Co., New York. "Medtronic has pioneered these markets or used acquisitions . . . to gain a significant foothold."

"What the strategy has done is to build additional growth platforms that will continue to allow us to operate in larger and larger markets."—Arthur Collins Jr., CEO and chairman, Medtronic


Also fueling Medtronic's diversification has been the company's ambitious research and development arm. "Medtronic throws more money back into R&D than anyone else in its industry," says Jordan Schreiber, manager of the Merrill Lynch Health Care fund, Princeton, NJ. In 2002, Medtronic laid out $646 million for R&D, representing more than 10% of its revenue that year. Its R&D spending has been remarkably level over the past five years. As a result, Medtronic has been rolling out a steady stream of new products that it can integrate with acquired products or products from partnerships. And it has been successfully meeting its goal of 15% revenue growth.

For example, in May Medtronic gained access to drug compounds and coating technologies from Abbott Laboratories Inc., Abbott Park, IL, for its stents, wire mesh cages that are used to prop open recently unclogged arteries. Not only will the partnership strengthen Medtronic's credibility in the interventional vascular market, but Abbott Labs will market the full line of Medtronic stent delivery systems. Under the agreement, Medtronic maintains exclusive market rights to its proprietary modular stents.

Acquire and innovate

The company also has been successful in modifying acquired products and applying them to new markets. Last year, Medtronic paid $3.3 billion for MiniMed Inc., Northridge, CA, which makes insulin pumps for diabetes. MiniMed owns 80% of the U.S. insulin pump market and its neurological and diabetes business contributed $1 billion in revenue to Medtronic last year.

Analysts applauded this move because the upside of participating in the multibillion-dollar diabetes management industry is so great. "Medtronic is eventually looking at a huge market in continuous insulin infusion [for diabetes]," says Landy of Leerink Swann. And right now, Medtronic, thanks to its MiniMed purchase, is the 800-pound gorilla in that market.

Medtronic also modified the pump's original design, turning it into an implantable drug pump that feeds drugs directly to an organ or affected tissue. Although it's been approved by the U.S. Federal Drug Administration so far for only two drugs (morphine for pain management and baclophen for spasticity), the company is sponsoring more than 15 trials for other potential uses. Its most promising use is inside the skull or the spinal column, where it can deliver large molecule drugs that couldn't otherwise cross the blood-brain barrier.

Today, the company consists of five business units, all within the medical devices universe, to systematically engage different parts of the human anatomy. "What the strategy has done is to build additional growth platforms that will continue to allow us to operate in larger and larger markets," says Collins.

Preliminary evidence shows that Medtronic's strategy is reaching its goals. In 1998, more than 78% of the company's revenues came from cardiac-related products, according to Landy. In FY 2002, cardiac-related (cardiac rhythm management and cardiac surgery) products were 54% of the total revenue. Cardiac rhythm management products account for about 46% of the company's revenues, vascular treatments account for 14% and cardiac surgery products account for 8% (see pie graph above). Neurological and diabetes account for 16% and spinal and ear, nose and throat devices generate about 16% of overall revenues.

What's more, today about two-thirds of revenue is generated by products and upgrades introduced in the last two years, says Collins. Almost all of Medtronic's new lines of businesses are variations of the pacemaker intended for specific disease sites or parts of the body. With the exception of the company's line of stents, all of its new products are implantable electronic devices that feed electronic impulses to stimulate specific nerves or organs.

The company also has launched into services with its CareLink Network, which debuted in March. The network is an Internet-based system that allows patients to gather information from their implanted device by holding a small antenna over their device and then transmitting this information to the network over the phone. Doctors can then analyze the data from the device, via a secure Web site.

But with such torrid growth comes some growing pains. The company's stent division hit an enormous roadblock last fall when an arbitration panel ruled that Medtronic's delivery device for its most popular stent infringed on a patent owned by Boston Scientific Corp., Natick, MA. As a result, the stent business, which at the time accounted for about 12% of Medtronic's overall revenue, saw sales dip by 20% over six months.

"Each of [these new markets] is a much smaller portion of the company's revenue base now, but they hold huge promise for the future."
—Dan Lemaitre, analyst, Merrill Lynch & Co.


The urinary incontinence market represents another business opportunity. Today, the big decision for most sufferers of this chronic problem is what brand of adult diapers to use. But Medtronic recently has proven that its implantable solution, again essentially a modified pacemaker, is effective in treating urinary incontinence by sending electrical impulses to the sacral nerves, which influence bladder function. "Medtronic's technology may offer cures for markets such as incontinence where treatment today has mostly been palliative (alleviating symptoms)," says Merrill Lynch's Lemaitre.

Growth in neurology

But perhaps the most promising new line of products for Medtronic is in the neurological field, in which the potential for medical devices is just beginning to be explored. Exhibit A for this proposition is Activa. A modified pacemaker implanted into the chest, Activa has leads that are threaded up into the brain. By stimulating parts of the brain, it can suppress tremors and other symptoms associated with advanced Parkinson's disease, allowing sufferers to live with the otherwise debilitating disease. Medtronic estimates that about 85,000 Parkinson's patients and 5,000 Essential Tremor patients in the United States are candidates for treatment with Activa. Until a cure comes along, devices such as Aptiva, now in full marketing phase, may be the best hope for people with chronic neurological diseases. Landy believes that in the next five years neurology products could become a bigger market for Medtronic than its celebrated cardiology line.

The new strategy based on Vision 2010 builds on a corporate culture that Medtronic co-founder Ed Bakken, who invented the first wearable, transistorized pacemaker in 1957, inspired when he crafted the company's mission statement in 1960—a company totally dedicated to restoring people to full life and health. And Bakken has benefited from that corporate challenge in more ways than one. Last year, Bakken was implanted with a Medtronic Kappa 700 pacemaker after he discovered he had sinus bradycardia (slow heartbeat).

But now, Medtronic is delivering that promise to more than just heart-disease sufferers. Under Collins' stewardship, Medtronic is being transformed into a conglomerate whose operating units reach into every part of the human body to deliver value to patients and, happily enough, to Medtronic shareholders.

Sam Jaffe ( is a freelance writer in Philadelphia. Tam Harbert ( is Electronic Business' national editor in Washington, DC.


Physio-Control International Inc., Redmond, WA
External manual and automatic defibrillators to treat sudden cardiac arrest.
AVECOR International Inc., Minneapolis
Disposable components for extracorporeal bypass circuit used in major surgery.
Midas Rex L.P., Fort Worth, TX
High-speed, pneumatic-powered neurological instruments.
Sofamor Danek Group Inc., Memphis, TN
Internal fixation devices, vertebral disc removal systems, image-guided surgical navigation products used in spinal and cranial surgery.
Arterial Vascular Engineering Inc., Santa Rosa, CA
Coronary stents, balloon catheters, guidewires, guiding catheters for angioplasty.
Xomed Surgical Products Inc., Jacksonville, FL
Surgical products and instruments used by ear, nose and throat surgeons.
XRT Corp., St. Paul, MN
Minimally invasive intravascular radiation therapies.
PercuSurge Inc., Sunnyvale, CA
Distal protection devices and other products used to prevent or treat complications in coronary angioplasty.
MiniMed Inc., Northridge, CA
Systems for treatment of diabetes.
Medical Research Group Inc., Northridge, CA
Implantable insulin pump and long-term insulin monitor.
VidaMed Inc., Fremont, CA
TUNA® (transurethral needle ablation) system using radio-frequency energy to treat enlarged prostate or benign prostatic hyperplasia.
Endonetics Inc., San Diego, CA
Systems for diagnosis and treatment of gastroesophageal reflux disease.
Paceart business from GE Medical Systems Information Technologies, Fairfield, NJ
Clinical data management systems for cardiology.