Medtronic CEO: Co­vi­dien deal will ac­cel­er­ate med tech in­vest­ment in the U.S.

Modern Healthcare - - Q&A -

Omar Ishrak is chair­man and CEO of Min­neapo­lis-based de­vice­maker Medtronic. The com­pany sur­prised mar­ket an­a­lysts in June in an­nounc­ing plans to pur­chase Ire­land-based sur­gi­cal sup­plier Co­vi­dien for $42.9 bil­lion. Un­der the deal, Medtronic will move its head­quar­ters to Dublin, join­ing a wave of com­pa­nies shift­ing their head of­fices to coun­tries with lower cor­po­rate tax rates, which has sparked anger in Wash­ing­ton. Ishrak joined Medtronic in 2011 from GE Health­care Sys­tems, where he served as CEO. Mod­ern Health­care reporter Jaimy Lee re­cently spoke with Ishrak about Medtronic’s ac­qui­si­tion strat­egy, how it’s work­ing with hos­pi­tal pur­chasers and why the Co­vi­dien deal makes sense for Medtronic. This is an edited tran­script.

Mod­ern Health­care: Why did you buy Co­vi­dien, which of­fers a very dif­fer­ent prod­uct port­fo­lio than Medtronic’s?

Omar Ishrak: The prod­uct port­fo­lio is very com­ple­men­tary. And the philoso­phies of the two com­pa­nies are very sim­i­lar. We’re look­ing to­ward ac­cel­er­at­ing our growth strate­gies, which are around in­no­va­tion and ther­apy, glob­al­iza­tion and eco­nomic value. We find that Co­vi­dien’s port­fo­lio en­ables us to ac­cel­er­ate our growth in all of these ar­eas. In ad­di­tion, the long-term sus­tain­abil­ity and the con­sis­tency of our fi­nan­cial ex­pec­ta­tions are fur­ther bol­stered by the ad­di­tion.

MH: How do the two com­pa­nies fit in the U.S. mar­ket?

Ishrak: One of the as­pects of change in the U.S. driven by the Af­ford­able Care Act is value-based health­care. Medtronic is a strong sup­porter of this tran­si­tion. The value propo­si­tion of Co­vi­dien’s tech­nolo­gies is they pri­mar­ily de­liver hos­pi­tal ef­fi­ciency while Medtronic’s chronic dis­ease ther­a­pies de­liver value in post-acute set­tings. When these two are com­bined, we’ve be­come an at­trac­tive part­ner and a sup­plier be­cause we can de­liver value both within and out­side the hos­pi­tal.

MH: Will this deal off­set the pric­ing pres­sure that de­vice­mak­ers are fac­ing?

Ishrak: Hos­pi­tals and other providers gen­er­ally are look­ing at longer time hori­zons. In that en­vi­ron­ment, we can, to­gether with Co­vi­dien, have the most as­sets to of­fer through which they can re­al­ize value. The pric­ing of spe­cific prod­ucts is a se­condary mat­ter. What mat­ters is the pric­ing of the over­all pack­age that will de­liver the out­come, in­clud­ing more than the de­vice. To do that we have to ex­pand our scope, and Co­vi­dien al­lows us to do that.

The other way in which the com­bi­na­tion of Co­vi­dien and Medtronic can help is that hos­pi­tals in­creas­ingly are be­ing or­ga­nized by clin­i­cal and func­tional line ad­min­is­tra­tors. In car­di­ol­ogy, a sin­gle car­di­ol­ogy line man­ager is re­spon­si­ble for the func­tion­al­ity of the car­di­ol­ogy de­part­ment. Physi­cians gen­er­ally work very closely with this line ad­min­is­tra­tor, but the line ad­min­is­tra­tor makes all the pur­chas­ing de­ci­sions. In that en­vi­ron­ment, a broad ar­ray of prod­ucts and ser­vices that cov­ers ev­ery­thing that line ad­min­is­tra­tor is look­ing for and that al­low the de­part­ment to func­tion more ef­fec­tively are the things that are of value. Pack­age deals done in that fashion are al­ready some­thing like 20% to 25% of our rev­enue.

To­gether with Co­vi­dien, we now have an en­try into the line ad­min­is­tra­tor for gen­eral surgery. There, with some of our sur­gi­cal tech­nolo­gies cou­pled with Co­vi­dien’s sur­gi­cal so­lu­tions, which are much big­ger than ours, we will have an ex­cel­lent po­si­tion as we try to en­ter that seg­ment.

MH: How has Medtronic part­nered with hos­pi­tals?

Ishrak: The ex­am­ple I just gave is a part­ner­ship, where we work with the car­diac line ad­min­is­tra­tor and be­come long-term part­ners to help op­er­ate that de­part­ment more ef­fi­ciently. The other type of part­ner­ship is where pri­vate pay­ers are work­ing with us through our of­fer­ings in post-acute set­tings through Car­dio­com, our

heart fail­ure man­age­ment pa­tient mon­i­tor­ing sys­tem. There we’re part­ner­ing with providers and pri­vate pay­ers to man­age pa­tients out­side the hos­pi­tal.

In Europe, we man­age cath labs for some­thing like 15 ma­jor hos­pi­tal sys­tems. There we en­ter into five- to seven-year con­tracts where we are re­spon­si­ble to­gether with the hos­pi­tal to de­liver good out­comes while op­er­at­ing the cath labs ef­fi­ciently. We at times pro­vide the cap­i­tal to pur­chase the cath lab. We pro­vide the de­vices and tools through which the hos­pi­tal can run more ef­fi­ciently. With Co­vi­dien, we now can ap­ply the same model to sur­gi­cal de­part­ments.

The U.S. model is a lit­tle dif­fer­ent. We don’t man­age cath labs, it’s car­dio­vas­cu­lar. It’s more like an agree­ment where we sup­ply a breadth of prod­ucts and build longterm part­ner­ships with dif­fer­ent sites where we pro­vide de­vice tech­nol­ogy and part­ner with physi­cians.

MH: Are you see­ing any sig­nif­i­cant shifts in the way that hos­pi­tals are pur­chas­ing?

Ishrak: Hos­pi­tals and oth­ers

“We’re look­ing to­ward ac­cel­er­at­ing our growth strate­gies, which are around in­no­va­tion and ther­apy.”

want to deal with part­ners who have scale and size, and some of that is pric­ing. But the move­ment to­ward valuebased health­care is much more im­por­tant. Health­care can­not be treated in iso­la­tion that you buy some­thing for a cer­tain amount of value and that’s fixed. Over time what you buy has value that is re­al­ized much later af­ter the ini­tial trans­ac­tion. Pur­chas­ing or­ga­ni­za­tions over time will adapt their think­ing to look at value much more quan­ti­ta­tively. We are quite will­ing to be part­ners in tak­ing fi­nan­cial risks be­cause we feel that our prod­ucts and tech­nolo­gies have real value, and we have clin­i­cal data to prove that. We’d like to work with providers who are will­ing to work with us to jointly de­liver on that value. Pur­chas­ing is go­ing to change to a much more value-based ap­proach than a sin­gu­lar trans­ac­tion­based ap­proach.

MH: Is Medtronic cur­rently in­volved in any agree­ments with U.S. hos­pi­tals where the com­pany is tak­ing on risk?

Ishrak: The De­part­ment of Vet­er­ans Af­fairs is a big cus­tomer of ours (through Car­dio­com) where we are ba­si­cally paid on a per­pa­tient ba­sis, and we es­sen­tially lose money if the out­come is poor. We’re de­vel­op­ing of­fer­ings, par­tic­u­larly in car­di­ol­ogy, where we will cre­ate con­tracts that will be de­pen­dent on per­for­mance or out­comes.

MH: What are you look­ing for in fu­ture deals?

Ishrak: Our strat­egy has been very con­sis­tent. We’ve iso­lated three ma­jor clin­i­cal ar­eas. One is car­dio­vas­cu­lar, one is neu­ro­mus­cu­loskele­tal, and the third is di­a­betes. Within these three ar­eas, we want to have the great­est breadth pos­si­ble. Some as­pects of Co­vi­dien help in that re­gard, such as the drug-coated bal­loon in pe­riph­eral vas­cu­lar. We look at dif­fer­ent com­pa­nies with dif­fer­ent unique tech­nolo­gies to help fill out our ex­per­tise in those three clin­i­cal ar­eas.

So we’re look­ing at pa­tient man­age­ment for heart fail­ure. That’s where Car­dio­com came in. We are look­ing at dif­fer­ent meth­ods for the care of di­a­betes pa­tients. We also have looked at ar­eas through which di­ag­nos­tics can be bet­ter per­formed in car­di­ol­ogy. We re­cently an­nounced the Cor­ven­tis ac­qui­si­tion. We in­tend to keep do­ing that with com­pa­nies and tar­gets around the world.

Fi­nally, we want to glob­al­ize our com­pany more, so we’re build­ing a very early foot­print in some of the emerg­ing mar­kets where we think value prod­ucts will start to be­come more im­por­tant. We did the ac­qui­si­tion in China a cou­ple of years ago for or­tho­pe­dics called Kanghui. We’ve also done a mi­nor­ity in­vest­ment in Lifetech, a car­diac com­pany in China.

MH: What is your re­ac­tion to the calls in Wash­ing­ton for leg­is­la­tion re­strict­ing cor­po­ra­tions from mov­ing their head­quar­ters abroad to lower tax bills.

Ishrak: Our Co­vi­dien trans­ac­tion was about strat­egy. It helps us ac­cel­er­ate our growth strate­gies and it helps us ful­fill our mis­sion. That was the pri­mary con­sid­er­a­tion. Hav­ing de­cided that Co­vi­dien is an at­trac­tive strate­gic part­ner, we then looked for the most op­ti­mum fi­nan­cial struc­ture through which we can make the com­pany most prof­itable, and the in­ver­sion struc­ture was the most at­trac­tive, but not be­cause the tax rates will change, be­cause our tax rates will not change. Co­vi­dien’s won’t change and Medtronic’s won’t change. Our tax rates are around 17% or 18%, and that’s not go­ing to change.

What’s go­ing to change is that the new Medtronic will have ac­cess to cash gen­er­ated by Co­vi­dien en­ti­ties out­side the U.S. The cash that’s gen­er­ated by Medtronic en­ti­ties out­side the U.S. even af­ter the ac­qui­si­tion still will be sub­ject to U.S. tax. The Co­vi­dien cash that’s gen­er­ated is not sub­ject to U.S. tax to­day and will not be un­der this new struc­ture. We in­tend to use that cash to in­vest in the U.S. in med­i­cal tech­nolo­gies that will broaden our fo­cus in clin­i­cal ar­eas where we’ve got ex­per­tise. We will in­vest in early-stage ther­a­pies in new clin­i­cal ar­eas. To­day, there’s only so far we can go in terms of in­vest­ment in the U.S. With the avail­abil­ity of the cash that’s gen­er­ated by Co­vi­dien on a world­wide ba­sis and the use of that in the U.S., that will re­ally ac­cel­er­ate our ef­forts to achieve that pur­pose.

We’ve made a for­mal com­mit­ment that we will in­vest at least $10 bil­lion in the U.S. in med tech over the next 10 years, and that’s be­yond any­thing that Medtronic and Co­vi­dien are do­ing to­day. If any­thing, we will strive to in­crease that as we go for­ward. That’s the best way of en­hanc­ing health­care in the U.S. That’s why we did this struc­ture, and from our per­spec­tive this is the right thing to do.

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