EXCLUSIVE: Medtronic’s strategy guru on the $43B Covidien buy

EXCLUSIVE: Medtronic's strategy guru on the $43B Covidien buy

The pending $43 billion merger of Medtronic (NYSE:MDT) and Covidien (NYSE:COV) triggered speculation that the combined medical device giant would scale back on its strategic investment program. After all, there’s a lot to digest in integrating a buyout of that size, the thinking goes, and the move likely takes 2 prolific acquirers off the board.

But the opposite is true, according to Geoff Martha, the Medtronic strategy & business development executive charged with managing the integration of Covidien.

In a June 24 interview at Medtronic’s headquarters in Fridley, Minn., (the same day Medtronic tapped him as its chief integration officer), Martha told MassDevice.com that the effect of the Covidien deal on Medtronic’s balance sheet – a massive infusion of some $12 billion to $14 billion in cash – frees the company to accelerate its acquisition program.

"It changes our outlook on minority investments and acquisitions, because this add have more cash, more balance sheet flexibility in the U.S.," Martha told us. "Where this helps is particularly in those companies that have gotten to a decent valuation in segments we want to enter. They’re still earlier-stage companies, maybe no revenue or just revenue in developed markets or just U.S., but they still have a big valuation because they’ve de-risked some sort of breakthrough therapy. This helps us with those, because we found ourselves making trade-offs in that area, where we had the organizational capability to do many of them but the balance sheet flexibility to do a few of them."

The Covidien deal includes a commitment to spending $10 billion over a decade on "technology investments" in the U.S. "in areas such as early stage venture capital investments, acquisitions and R&D," Medtronic said when it announced the merger June 15. Martha said that $10 billion "is incremental over what we would forecast Covidien and Medtronic to do on their own."

"Then in the minority investment portfolio, worst case it’s business as usual, but more likely, I think we’ll accelerate that as well," he said. "It all comes back to having the balance sheet flexibility. We are very comfortable at Medtronic in market development. You’ve got the technology piece, you’ve got the clinical piece and the distribution to scale it.

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"I would argue that both Medtronic and Covidien are very strong technology companies, but I think where Medtronic has significantly more scale is in the clinical side," Martha explained. "If you take our clinical comfort and our confidence that we can invest in a technology company and then design a clinical trial and work with the [key opinion leaders] to make it standard of care, I think it should increase the amount of overall minority investments that are being made."

To outsiders the deal seemed to come together with lightning speed, following a dinner meeting in April between Medtronic CEO Omar Ishrak and Covidien chief executive Joe Almeida. But Martha, a former Ishrak lieutenant from GE Healthcare hired in August 2011, told us that Medtronic had been looking at Covidien for some time before then.

"It definitely wasn’t something that came together over 3 months. It was something we’ve been thinking about for a while, but when they met at that dinner they got into a pretty deep conversation and realized that there’s an opportunity. Then from there, it did accelerate. You can’t have these type of conversations drag out. That April dinner was when it really accelerated up to signing," he said. "We’re always looking. We’ve looked at Covidien and others over the years since I’ve been here. From the day I got here, we’ve been looking at different opportunities."

Asked about the merger’s implications for the rest of the medtech world, Martha said that companies must now decide whether to buy into the view that developing a ground-breaking technology is no longer enough to ensure success.

"I think you’ve got to pick. Medtech grew up as a very technology-focused, product-focused industry, and that worked. If you had a product that had the clinical efficacy, it sold. It sold and physicians would pick it for the clinical reasons and it sold. Now, the bar’s gotten higher to economic value, added on to clinical value. Not every place, though. Getting economic value from just a product sometimes is difficult and you need to wrap that with solutions and services. In some cases, that takes a broader set of products," he said. "If you buy into that, then I would think you’d be looking to attach yourself to somebody that can do that. If you don’t believe that, and you think that this whole accountable care organization stuff is just another fad, then I think being more focused on technology is fine. So I think you’re going to have people either not making a decision and being confused or some proactively saying, ‘I’m going to be a very focused technology company and I’ll get bought by somebody bigger.’ If you’re a small- or mid-cap and you have a great product portfolio that is really differentiated, there’s room for that. The mid-caps that buy into our thinking are probably going to look for partnerships."

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