Change of pace at Medtronic

  • Article by: JANET MOORE , Star Tribune
  • Updated: May 26, 2010 - 10:44 AM

The question facing Medtronic now is whether a very large, market-leading tech company is wily enough to harness new ideas and innovate as it looks to develop a new generation of products.

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Medtronic was formed as a partnership in April 1949 by Earl Bakken and his brother-in-law Palmer Hermundslie.

Photo: Provided by Medtronic

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First there was an idea nurtured in a garage. Then the idea grew into a high-flying global empire. And then, as key products matured, everyone wondered, what's next?

It sounds like a textbook study of any large technology company -- and it has certainly been the script for Medtronic Inc.

After pioneering pacemaker technology, the Fridley-based company diversified into a $15 billion behemoth marketing medical devices for conditions well beyond failing hearts, from bad backs to diabetes and other chronic diseases of our time.

The question facing Medtronic now is whether a very large, market-leading tech company is wily enough to harness new ideas and innovate -- a question of consuming interest to the company's 8,000 employees in Minnesota.

"A lot of companies get to a certain critical mass, and innovation starts to slow," said William Hawkins, Medtronic's chairman and chief executive.

But, says the bespectacled bioengineer, not Medtronic. He's put in place a framework to foster new inventions, and he's vowed to commit the "necessary resources to make that future a reality."

Formidable distractions loom. Sales of Medtronic's traditional money-makers -- heart defibrillators and spine surgery devices -- have slowed considerably. No clear blockbuster product has emerged in their wake, and Medtronic faces tough competitors.

Health care reform and potentially cumbersome changes in the way medical devices are approved and reimbursed linger, as well.

"It's hard for any large organization to be nimble,'' said Stephen Parente, a finance professor at the University of Minnesota's Carlson School of Management. "You have so many people, so many products spread across so many geographies."

Hawkins articulated a strategy last year that he calls "One Medtronic" that integrates the disparate parts of his company -- from diabetes to brain stimulators to the tried-and-true pacemaker -- into a functional core that he says is bent on relentless "execution and innovation."

"When I first came onboard, I challenged the organization: Are we going to continue to be a portfolio company or are we going to really reconnect as One Medtronic?" Hawkins said in a recent interview with the Star Tribune. "How do we make the whole greater than the sum of the parts?"

Easier said than done, says Leerink Swann analyst Rick Wise. "He's saying, 'We're a huge global company and here's a reminder that we need to think entrepreneurially across all businesses.' It makes sense to me, but it's not easy to do."

The 56-year-old Hawkins has faced challenges before. Within months of assuming the chief executive's position, he launched a painful recall of a popular defibrillator wire, and his tenure has been dogged with controversy over the company's consulting relationships with doctors.

But beyond those challenges, macro factors play in Medtronic's favor. Markets in emerging countries are growing in the double digits. The nation's aging baby boomers increasingly need its devices. And experts say the promise of regenerative medicine -- stem and gene therapies to repair or replace failing organs in the body -- may prove a lucrative new frontier for the company.

Innovative? Sure. But will Medtronic capitalize on its own aspirations?

"That's the defining question of its time," said Tim Nelson, an analyst at FAF Advisors. "It's hard to grow when [Medtronic] is as big as it is. Either they can turn around their core businesses and get them on the pathway back to former glory or find new growth engines."

But don't look for a blockbuster product, Wise warns. "We're not in an era of grand slam home runs for large med-tech companies."

The Next Big Thing

Innovation is where Dr. Stephen Oesterle comes into the picture. A cardiologist who was on the faculty at Harvard Medical School, Medtronic's senior vice president of medicine and technology logs about 250,000 airline miles a year in search of promising new medical technologies.

Innovation is often incremental. In March, for example, Medtronic won Food and Drug Administration panel approval for a new pacemaker compatible with MRI scans. Most pacemaker patients are warned against getting the common diagnostic scan because it may interfere with the device's pacing therapy.

Medtronic's 53-year-old pacemaker technology is also being used to electrically stimulate other parts of the body to treat diseases and conditions. The company pioneered deep-brain stimulation -- electrically stimulating parts of the brain to treat Parkinson's disease, as well as the spinal cord to treat chronic pain. The company is testing similar devices to treat depression, heart failure, epilepsy and incontinence.

"Everything in the body is electrically active," Oesterle said. "We can pace anything."

Still, experts say the clinical science in this area needs to be further developed. "In the next 25 to 50 years, it could be neuro dominating headlines, like cardiology has in the past 50 years," Wise said. "It's fascinating, but it's all early."

In addition, promising technologies to treat diabetes have evolved in recent years, advances that will likely lead to the long-awaited development of an "artificial pancreas" that would produce insulin.

Medtronic has taken a step in that direction with its Paradigm Real-Time System, the only integrated insulin pump and continuous glucose monitoring system on the market for the 6 million Americans who are insulin-dependent.

The system receives glucose readings every five minutes from a sensor worn on the body, and the information is conveyed wirelessly to the pump, allowing patients to make an adjustment.

The company is testing products to proactively recommend insulin dosages, edging closer to a system that mimics the function of the pancreas. "This is very, very hard to do," Nelson said. "If they can get there in incremental steps, it could mean huge growth."

Longer-term, Medtronic will likely play a definitive role in combining med-tech with the emerging field of biotechnology. In recent years, the company has quietly invested in several biotech companies, including Massachusetts-based Alnylam Pharmaceuticals, which is exploring new ways of treating disease by manipulating RNA.

"I think a lot of people would be surprised to hear Medtronic is involved in such a thing," Oesterle said. "But that's the beauty of the scale of our company."

As Oesterle points out, most of biotechnology involves proteins, protein suppression, genes or cells. "Most of them require an infusion technology or some form of targeted control local delivery," he said. "That's usually a combination of pumps and catheters and navigational tools, all the things we think we're as good at as anyone."

In the meantime, one of the more rudimentary avenues of growth can simply be found beyond domestic borders. About 40 percent of the company's annual revenues now come from outside the United States, a number expected to grow.

Hawkins is particularly bullish on emerging med-tech markets such as China, which is growing 25 percent annually.

"You're seeing an emerging middle class in countries like Brazil, China and India that can pay market rate for products," said Parente, from the Carlson school, who has served as an adviser to the company.

External forces

One pressing issue that may affect innovation for Medtronic is the possibility the FDA will tinker with its 510(k) program, a common regulatory pathway to commercialize medical devices. Companies need only prove to the FDA that a device be "substantially equivalent" to another currently on the market.

Critics contend the process is too lenient, leaving industry insiders fearful the FDA may require more clinical studies in the future.

While large companies like Medtronic can financially weather new regulatory demands, it's tougher for the fledgling start-ups that are frequently the seedbed of innovative devices. Often, these companies prove attractive acquisition targets for bigger fish like Medtronic.

"I fear this will impact the smaller companies' and venture community's willingness to take on risk and their ability to invest in new technologies," Hawkins said.

In addition, with health care reform, reimbursement of medical devices by Medicare and private insurers will increasingly be tied to evidence proving a product is cost-effective. Medtronic will also face an annual excise tax of roughly $150 million to $200 million beginning in 2013 to help pay for reform.

Med-tech companies have argued that innovation will suffer as their money is siphoned off by the government and not plowed back into development of new products.

"For us to really continue market leadership we have to make sure we have the right balance of innovation across all businesses," Hawkins said. "Look, I'm a bioengineer, one of the few in the industry leading a company who is not a lawyer or a financial person. I've maintained throughout my career that innovation has gotten us to where we are now, and will get us where we need to go in the future."

Janet Moore • 612-673-7752

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