Interview: Medtronic CEO Ishrak on the road ahead

Medtronic

When MassDevice.com last spoke with Omar Ishrak, the CEO of the world’s largest pure-play medical device company, he detailed a trio of goals for Medtronic (NYSE:MDT) designed to remake the company after his own image: Better execution, optimized innovation and a larger share of the global medtech business.

When we sat down with Ishrak this morning at the J.P. Morgan healthcare conference in San Francisco, there was little outward difference. But Medtronic has undergone substantial internal change on his watch, he explained, as his initiatives have aligned the company’s goals.

In a wide-ranging chat that covered the 1st 18 months of his time in the corner office, the climate for medtech investment, the FDA and the medical device tax, Ishrak said Medtronic has made a lot of progress, but stressed that there’s still a lot more to be done. What follows is an edited transcript of our conversation.

MassDevice.com: At last year’s conference, you outlined 3 priorities for 2012: Improving execution, optimizing innovation and accelerating the spread of your global footprint. You also stressed the importance of moving with speed and agility. How would you rate your progress in executing toward those goals during the past year?

Omar Ishrak: We made a lot of progress in the last year and in some ways we’ve reoriented the company in a little more strategic fashion. Those goals that were outlined were more operational priorities, and they remain, but we have also now, ever since our analysts’ meeting in June, rolled out a mid-term strategy and a long-term strategy for the company, baseline expectations of performance and long-term aspirations.

What remains constant in all of this is our ability to execute. I’d say that in the last 18 months since I’ve joined the company, we’ve had steady progress, we’ve by and large hit our external expectations in terms of what we said we were going to do. We’ve certainly hit our guidance for last fiscal year.

The 3 main reasons the execution performance is showing some improvement is primarily because the alignment of the team, the operational rigor and structure that was put in place soon after I joined, is having an impact in clearing priorities for the team and people working with each other in a complementary fashion. The management team is working together pretty cohesively now.

The 2nd reason is the products that were launched, 1st were launched more or less on time across the board. But more important than that, they have been successful commercially. So it’s not only the timely execution of new product launches, but that the conversion of new products into revenue that met or exceeded our expectations was obviously a very important factor in our ability to deliver performance.

The 3rd item is tied to the 1st one – a deeper level of accountability across the business in taking responsibility for our own performance, optimizing things that we can control and not blaming things we cannot control. Things like that happen, but by and large it’s just a mindset. We’ve got a lot of variables that we can control. [The economy] is an easy one to throw out there. But if there isn’t any opportunity in healthcare, where is there? People will need better healthcare across the world. If we can’t turn that into a business model for us, that’s our problem. That mindset changing was very important.

Having said that, we’ve got to show performance on a sustained basis over a much longer period of time, to win credibility externally and feel good about it ourselves. This is very early progress – obviously we’re somewhat pleased with what we’ve gotten so far, but we’ve got a long way to go.

In terms of globalization, continuing on the theme from last year, we solidified out strategies and understanding, with more granularity, of what the opportunities are in each country.

We certainly see a goal of doubling our exposure to emerging market business within the next several years. It was 10% in FY 2011; we want to take that up to 20% over the next couple of years. The point is that emerging markets are growing faster; soon they will occupy a bigger portion of our business.

Finally, on innovation, while talking about innovation last year we didn’t talk about economic value. We’ve really firmed up economic value as being one of the major thrusts that the company will have to make in the next several years – and eventually it will transform the company. Economic value, in simple terms, is projecting our value proposition in financial terms for our customers. So not only the clinical benefits, but the financial benefits of what we offer.

This is particularly challenging, because the cost of healthcare is incurred during a procedure. The benefit of that investment, if you like, is realized at later time and potentially in a different place. As a result, one can never really truly understand the costs. This open-loop approach to healthcare where the costs and benefits are not measured concurrently leads to more costs and an inefficient use of healthcare. It’s seen as a cost, rather than as an investment, when in fact it is an investment. There’s no question that this has to be addressed for healthcare costs to come down to a reasonable level without rationing, which is not the right thing to do.

We want to take a leadership position in this journey by working in a very granular fashion, identifying where the financial benefits are for our technologies and identifying them to our customers. If we’re successful in doing that, we feel we can get a disparate share of the market, because the value proposition is obvious to them.

We’re working with major hospital systems to run pilots to show benefits to their financial systems. Once those pilots are successful, we intend to scale them across those systems and eventually do even broader market expansion. In addition to that, for future products and across our entire business, we’re asking the questions about economic value before we spend any money on products. This whole approach is changing, to a large degree, the mindset and the thinking and the culture in the company.

MassDevice.com: Clearly China has been a focus of your tenure, with the Kanghui acquisition and deployment of significant resources there. How do you plan to build on the foundation there, and where else in the emerging world captures your attention?

OI: We’ve made significant investments in China and we continue to do that. The point about all markets is that every country is different and healthcare systems are different, the capacity and the culture within the country. We need to have strategies that are unique to those regions. In all cases, we’ve found that the opportunity among people who can afford the treatments we have today is enormous.

Kanghui and LifeTech are long-term growth strategies. Overnight, after the acquisition of Kanghui, our scale and critical mass in understanding the needs of the Chinese customer improved by orders of magnitude. We now have north of 50 engineers in Kanghui who spent a decade looking at the very specific needs of Chinese patients, in spine and trauma and so on. That expertise in a market that has a much larger population than in the West creates a platform for us that we think will be a long-term growth vehicle.

MassDevice.com: What’s your take on the funding environment? The economy seems to be recovering slowly and the VC community is still stepping cautiously when it comes to medtech. Do you see the chance for more VC investment this year? Or will smaller players turn to strategics, as many did last year, to gain the capital they need to develop new products?

OI: This is just an opinion, because were much more focussed on our own growth strategies. The clinical trial process and the regulatory process puts a constraint on how far smaller companies can go and how willing VCs are to fund them – because the time-frame for returns is much longer. I think that’s going to continue, to some degree. We need to make that process more efficient, but I think the extent of clinical trials is probably correct for safety purposes.

It’s not that [smaller companies] will go away; it’s just that there’ll be a much tighter selection mechanism. I think these things will work themselves out. If people have good ideas, they’ll find ways to get them out there. Maybe the screen on a good idea, the mesh is little finer, but if it’s a really good idea it will succeed.

MassDevice.com: How would you grade the FDA’s performance under the Obama administration? Is there more certainty around the regulatory climate, in your view?

OI: The FDA has made a real effort in working with industry to speed up the process, while making sure safety is correctly monitored. I think they’ve made a real effort to be transparent and reached out to work in collaboration with industry, to make sure we do trials and so on properly. We’ve been appreciative of the efforts they’ve made to reach out to us. In addition, they’re very open in looking at post-market surveillance methods. Hopefully we can work in an increasingly collaborative fashion. I think we’re making progress, I really do. There’s a genuine effort to speed things up.

MassDevice.com: How will Medtronic deal with the medical device tax, with hospitals already pushing back hard on pricing? What about its impact on the M&A scene? The tax will hit smaller companies who are just starting to commercialize – could that drive more M&A from the large-cap players?

OI: The tax affects everybody. We may have more capital, but believe it or not, it’s all used up. So this is extra money.

It affects everyone, not just small companies. I’m not sure that this is that big a variable, compared to the length of clinical trials. That’s a much bigger item than this. This is really small compared to that. It’s more or less known, it’s a known amount that can be quantified and once people have done that they can get over it. I’m not sure, from an M&A perspective or from a small company pressure perspective, that this is anywhere close to the clinical process.

MassDevice.com: The Infuse situation seems to have a life of its own, with even the U.S. Senate getting involved. The Senate report accused Medtronic of deliberately obscuring evidence of adverse events, promoting off-label use and manipulating study reports via payments to participating physicians. How do you respond to those charges?

OI: A lot of things have happened since then. We have transformed the spine business and our ethics right now are very high. Our standards are high, in terms of the way we do things. I don’t want to dig up the past here, but we feel that, by and large, we’ve done the right thing in the past. And certainly right now we’ve got very rigorous procedures in place, so we’re very confident about where the business stands today.

The U.S. Justice Dept. investigation is closed and that gives us some assurance that the actions that we’re taking are being noticed. But more important than that, from a process and procedure perspective, we intend to be transparent and we intend to work in the most ethical fashion possible in collaboration with our partners.

There’s no room for anyone in the company to cross the line on that. Our integrity and patient safety are our highest priorities in everything we do. I hold that personally very high on my value system.

Aside from that, the point is that allegations were made about usage of the product and its safety. We obviously have to take that very seriously. There wasn’t any hard evidence that anyone could act on. The only way to resolve this was to commission a completely independent study that would get the facts. That process takes some time, because it’s an academic process. People have gone through the data and written some manuscripts, which the steering committee has looked at. They’re in the process of publishing that. Right now we’re still looking at a few months away before something’s published. I think that will clarify things. Remember, this will be data, this will be academic, so there’s not going to be "yes or no" stuff here, but it will be data and people can make their on conclusions based on that. And so will we.

Right now, frankly, the Infuse business has declined significantly in the last year as a result of this uncertainty. The rate of decline has decreased, but in the last quarter, for example, it was still down. We want to do the right thing. There’s a lot of value in the product, but patient safety is more important than that. But patient safety cuts both ways – if there’s value in the product and it helps people, we want to make sure its available.

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