The waters around the good ship Medtronic Inc. (NYSE:MDT) have been a bit frothy these days.
The world’s largest pure-play medical device maker has had a busy 2011: The Fridley, Minn.-based company announced a new CEO (Omar Ishrak) to replace the retiring William Hawkins, spiked a $2 billion contract with one of the largest group purchasing organizations in the hospital industry and is one of three combatants in a battle royale over market share in the suddenly chilly cardiac rhythm management market.
That’s a full plate, even for a company with the appetite as big as Medtronic’s.
CFO Gary Ellis took some time to talk out of his busy day as Medtronic’s man on the spot (Ishrak will not begin his tenure with the company until mid-June) to speak with MassDevice about the CRM market and the cancellation of the supply deal with GPO Novation.
MassDevice: I’m hoping you can provide us a little more perspective on cardiac disease rhythm management business. Talk me through the JAMA study and how the DOJ investigation are affecting procedure volumes on the ground.
Gary Ellis: Overall, what we think is happening is that the JAMA article came out and said that about 20 percent of patients were outside the guidelines. Now, when you really dug into that, “outside the guidelines” just meant that maybe instead of waiting 40 days, they waited 30 days to implant. It wasn’t that the patients didn’t need the device. But that, on top of the fact that the DOJ is investigating these hospitals to ensure that people aren’t over-prescribing ICDs, has caused more nervousness in the implanting community than we in the industry, or even the physicians, expected initially.
We think it’s still short-term in nature, because the fact of the matter is that the study itself didn’t indicate that these patients shouldn’t get a device. If anything, it’s more a question of deferring people getting ICDs versus not getting them in the future. However, it’s clearly delaying procedures at this point. We think it’s a short-term issue, that it will recover back to normal procedural growth, but it’s clearly had an impact over the last few months and we expect that to continue, at least for the foreseeable future, over the next few months.
MassDevice: Was the study a surprise? It seems like the industry has been scrambling since it came out.
Ellis: When the study first came out, I think most people pooh-poohed it and almost ignored what the impact would be overall, because I think people looked at the study and said, ‘The conclusions are faulty and the reality is isn’t going to change our overall implant procedural volume,’ and that’s what we were hearing from physicians.
I think from an industry perspective, people were thinking it was going to have a minimal impact, if anything. I think we still believe that long-term, but obviously it does have more of an impact in the short-term and I think, coupled together with this DOJ investigation, people are just a little more cautious now because of that threat out there with the DOJ’s investigation. So they’re making sure they’re following the guidelines. If those require a patient to wait 40 days before they implant, physicians are waiting 40 days. We’ve heard that from physicians and we heard it at the Heart Rhythm Society meeting.
Our perspective is that it will come back but it’s going to have an impact on the marketplace right now.
MassDevice: Obviously analysts and shareholders want to know how you’re going to account for this, but how do you deal with what is essentially physician apprehension? Is there anything you can do to encourage more procedure volume?
Ellis: No, I don’t think so. Not with this issue. I think obviously this is one that people are just starting to get themselves comfortable with, where the DOJ is ongoing. I just think it’s going to take time to work itself out.
Our focus right now is getting out the new products that we think will add value and improve overall value for the patients themselves, with the Protecta ICD unit and the Revo MRI SureScan. So we’re going to focus on getting new products out there and showing the value with that. We think this aspect of the market will recover, but it’s just going to take a little bit of time for people to feel comfortable with it.
MassDevice: Have you seen any erosion in Medtronic’s market share, especially since St. Jude reported a 9 percent increase in its CRM sales during the first quarter?
Ellis: We don’t believe we have lost any market share. There’s obviously been a lot of noise in the market because of the Boston Scientific shipment hold last year, and it’s all in one quarter for us and split for St. Jude and Boston Scientific between their Q1 and Q2 earnings. So it’s hard to evaluate that. We think because of the slowing of the market we had more of an impact [on sales], because when it came out we had more time of impact from that than when they [put out earnings], and that impacted our bulk purchases a little more than they experienced in the February-March time frame. We’ve had a little more of the impact [in Q4 results].
We look at the implant data that we have; there’s really only three competitors and we track relatively closely and have a good idea of what the implant data are, and we look at our revenue data and we’re basically holding share. Over the last several quarters, we’re basically holding share in ICDs. We actually picked up a little share sequentially in the international areas, and some of our new products offset some of what has occurred with St. Jude in the past.
St. Jude I think has gained share, but I think if you look at it closely they’ve picked up share from Boston Scientific overall. Medtronic has basically maintained.
MassDevice: Let’s touch briefly on the Novation deal. Other players have been quick to pounce on the vacuum left by your exiting the account. Are you seeing an impact from that?
Ellis: We knew based on all the noise that there would be a lot of questions on that, so we went account-by-account, Novation versus non-Novation, and I would tell you there is minimal impact on implants at the various Novation hospitals. There’s no difference in the level of bulk purchasing contracts versus non-Novation contracts, so at this point in time, up through the current period, we’ve really seen minimal to no impact from the Novation agreement being canceled.
I’m not saying there’s not one account here or there that you could see some impact, and we continue to work through each one of those individually, but overall we’ve really seen very little impact from that decision. We continue to work with Novation to try and come up with contract terms that we could feel comfortable with. Whether that’s doable or not, we’ll have to wait and see. There’s been no impact on our results at this point.