Medtronic’s planned acquisition of Covidien, a $43 billion deal that should have shaken the ground plenty hard under the feet of St. Jude Medical’s executives, hasn’t had that much of an effect on their thinking.
In fact, it’s not clear the deal will change a single thing over at St. Jude, Minnesota’s other medical device powerhouse.
If Medtronic wants to create a more broadly diversified company that rivals Johnson & Johnson’s medical device business in size, well, St. Jude executives aren’t planning to try to match it.
St. Jude says it will stick to what it’s been doing, what Executive Vice President John Heinmiller called “an innovation strategy” focused on a handful of diseases that are costly to treat. It wants its product portfolio to be deeper, not broader.
If this sounds like at least one of the state’s medical device giants is someday going to be proven dead wrong, it’s way too soon to say so.
Medtronic isn’t giving up on innovation, of course, and the colossal deal may be right for Medtronic, a move to become even more important to health care systems and government policymakers. That St. Jude’s thinking is different doesn’t make it flawed.
Besides, it wants to be a lot bigger and more important, too, but to the health care providers treating some costly medical problem, and maybe not to some country’s minister of health.
This conversation with Heinmiller was far from the first time a St. Jude executive had been asked what’s different now that Medtronic is buying Covidien.
A couple of days after Medtronic’s mid-June announcement, St. Jude’s CFO Don Zurbay decided to address the topic head-on when he presented at a Wells Fargo Securities investor meeting. The questions have since kept coming, including during St. Jude’s quarterly investor conference call last Wednesday.
Some curiosity on the part of investors is easily understandable. These are head-to-head competitors, with St. Jude’s headquarters in Little Canada only about 20 minutes’ drive down the freeway from Medtronic’s campus in Fridley.
Yet when the deal closes with Covidien, at more than $27 billion in revenue, Medtronic will be almost five times bigger than St. Jude.
But St. Jude certainly doesn’t seem to be intimidated. St. Jude is itself a member of the Fortune 500, but it seems to regard itself as the only small company on that list. Big companies are the competitors you go after for market share with innovative products.
St. Jude, on the other hand, has big company expense budgets. It’ll spend about $700 million this year on research and development and has the capital to make acquisitions of interesting technologies or start-up companies. It just announced one, the purchase of a small company, NeuroTherm, for about $200 million.
Growth through new product innovation may not come as easily as it once did, Heinmiller said, but “we come from the perspective that we have plenty of opportunities. It’s really about execution.”
It wants to be the go-to player for products used to treat a handful of conditions that cost a lot to treat or control. A great example is atrial fibrillation, a rhythm problem with the heart that gets more common as people age. St. Jude sells catheters and other products for a treatment called ablation.
“We’ve got such a strong, comprehensive, broader than anybody else atrial fibrillation program,” CEO Dan Starks said on the conference call last Wednesday, when Morgan Stanley’s analyst asked whether he now feels pressure to get a lot bigger. “You can just see how all of this makes us a very interesting key partner who has earned a seat at the table in an environment of health care reform.”
He wryly noted that St. Jude competes head-to-head with Johnson & Johnson in this market, and customers never seem to ask St. Jude about the availability of surgical sutures.
St. Jude hasn’t just faced questions about consolidation in its industry, of course, it’s also had to explain that it’s not planning to pick up and move to Europe, now that Medtronic plans to end up an Irish-registered company for tax reasons.
These corporate inversions, when a U.S. company ends up reincorporating in a lower-tax-rate European jurisdiction, have become almost common. It’s what’s kept Medtronic’s deal in the headlines since mid-June.
St. Jude’s effective tax rate in the just announced quarter was 18 percent, vs. the 35 percent statutory U.S. rate. It’s lowered its tax bill largely by moving manufacturing and other operations outside the U.S., where statutory tax rates are lower.
That common strategy also tends to leave undistributed profits piling up abroad that could be subject to U.S. tax, in addition to the taxes already paid abroad, when the company brings the profits back home.
St. Jude has about $1.6 billion in cash as of its most recent quarter end, pretty much all of it outside the United States. St. Jude reminded its investors and analysts in last Wednesday’s call that it plans to get some of that cash back home early next year.
So St. Jude doesn’t see much sense in doing a corporate inversion. That almost certainly hasn’t kept investment bankers from banging on St. Jude’s door, anxious to pitch their list of targets for a deal that would get St. Jude’s corporate registration over to Europe.
It’s an easy pitch to make. Stock valuations are high. Money is as cheap to borrow as it’s ever been. The securities analysts suddenly appear to be more forgiving about any short-term dip in reported earnings-per-share as a result of a big acquisition.
St. Jude isn’t all that interested.
“We want to keep ourselves in the position of where we don’t have to do anything,” Heinmiller said. “We don’t have a tax problem. We don’t have a balance sheet problem. We’re not looking at the world where we at St. Jude Medical have to do a transaction or otherwise we are disadvantaged somehow.”
Besides, he added, when talking about big cross-border mergers, “there’s just a ton of risk.”