Insights

Medtronic is a medical technology (MedTech) company with a device portfolio that includes pacemakers, defibrillators, heart valves, stents, insulin pumps, spinal fixation devices, neurovascular products, surgical tools, etc. These medical devices are highly engineered products that require advanced medical engineering capabilities and deep medical science know-how. Further, efficient management of such products requires advanced manufacturing capabilities and a knowledgeable and well-connected salesforce. These attributes have helped Medtronic evolve into a platform business for highly engineered medical devices.

As the largest medical device company globally, Medtronic’s mission is “to contribute to human welfare by the application of biomedical engineering in the research, design, manufacture, and sale of products to alleviate pain, restore health, and extend life.” To truly serve this mission requires the company to be prepared to stray away from Wall Street’s myopic focus on earnings and profitability. The last few years seem to have been just such an episode wherein the company has intensified its investments in innovation.

Indicative of improved capital allocation policies, the company is increasingly allocating its capital towards internal projects supplemented by bolt-on acquisitions. The last four years have seen a meaningful uptick in reinvestment with significant increases in R&D investment and capital expenditures. The chart below shows that R&D and Capex as a percentage of sales have increased meaningfully. Further, the company is focused on improving its innovation efficiency and expects to reduce the time to launch new products from 4 years to 2.5 years.

Source: Company data & MAEG

As against engaging in large, transformative deals, Medtronic has refocused itself on bolt-on acquisitions. We think it is a highly sensible approach as these tuck-in acquisitions capitalize on the company’s strength as a MedTech platform. It also allows Medtronic to plug gaps in its portfolio. Since FY 2021, the company has announced/completed nine acquisitions for a combined consideration of $3.3 billion.

Further, the company is streamlining its portfolio by divesting unrelated and/or low-growth businesses. Recent announcements of separation of the Patient Monitoring and Respiratory Interventions business (less than 10% of revenues) and contribution of the Renal Care Solutions business in a NewCo with Davita are efforts in that direction.

While Medtronic increased its investments in R&D and capital expenditures and the pace of tuck-in acquisitions, its strong free cash flow has allowed it to reduce total debt and share count via buybacks while paying about 60% of its earnings as dividends.

To improve its agility and response to the market, the company shifted to a highly decentralized organizational structure with 19 business units with complete control over their P&L, product development, and sales force. To ensure its business units are focused on enhancing their competitive positioning, it added market share as a performance criterion in addition to revenue growth, profit, and free cash flows in its executive compensation practices. The chart below shows that these changes are bearing fruit.

Source : MDT Presentation – 40th annual J.P.Morgan healthcare conference, Jan 2022