For nearly 21 months, Geoff Martha has presided over the world’s largest medical device maker as CEO during a time of great external tumult courtesy of Covid and major internal setbacks.
In the backdrop of this setting, Martha participated in the 40th annual J.P. Morgan Healthcare conference Monday, virtually explaining key decisions, accepting responsibility for a trifecta of bad news while also signaling that all will be well in the future at the Dublin-based medtech giant. Here are some key takeaways from his presentation and question and answer session.
Martha responds to setbacks and recalls galore
Medtronic has suffered setbacks in three businesses lately and Martha acknowledged that he feels accountable for those failures.
First, on Oct. 15, the company revealed that its renal denervation system to reduce resistant hypertension failed against a sham procedure. Previously, the company had expected that the efficacy of the Symplicity Renal Denervation System would be so strong that the trial could be halted early and thereby speed up regulatory approval of the device. Now full enrollment of the trial will be conducted and more data analysis will determine if the system does indeed lower blood pressure for patients who are taking three blood pressure medications and still suffering from elevated blood pressure.
This is not the first time that the renal denervation system has experienced an embarrassing setback. Back in January 2014, the company’s pivotal Symplicity HTN-3 trial did not meet its primary safety endpoint, with those on the control arm benefitting from a large placebo effect. Then in spring 2015, Medtronic said that it was attempting a second try with its next-generation renal denervation system launching two global studies. Through renal denervation, mild electrical pulses are used to stimulate renal nerves to reduce stubbornly-high blood pressure.
The second failure that Medtronic has undergone recently pertains to its Hugo surgical robotic system. On the Nov. 23 earnings call Martha had to acknowledge that the broader launch of the product is behind schedule, which will lead to lower revenue – the company had expected revenue of $50-$100 million in its current fiscal year if Hugo’s launch stayed on track. At the time, Martha said the problems stemmed from manufacturing and supply chain issues and was not a reflection of actual customer demand. On Monday’s call, Martha reiterated that customers are still interested.
The third disappointing news was a warning letter from the Food and Drug Administration in Medtronic’s diabetes division that the company announced in mid December. The letter charged that the Northbridge, California facility that functions as the headquarters of the diabetes business did not have a proper quality system in the areas of risk assessment, corrective and preventive action, complaint handling, device recalls, and reporting of adverse events.
Needless to say the bad news has lowered the share price. When Martha joined the company in April 2020, the share price was around $95. By July 2021, it had climbed to $133. On Monday afternoon, it closed at $105.61.
Earlier in the day, Martha took responsibility for the failures and addressed them head on in his prepared remarks .
“I feel a mix of disappointment and anger and feel deeply accountable for this,” he said.
Other than the above, Medtronic has also been forced to deal with a large number of recalls that include insulin pumps and other devices, that includes a Class I recall desginating FDA’s most serious category of recalls.
Why Medtronic just bought Affera
Before his presentation, Medtronic announced that it was acquiring Boston-based Affera, a cardiac ablation company for $925 million although with a $250 million contingency. Cardiac ablation is used to treat atrial fibrillation, which is an irregular heart rhythm that leads to palpitation, shortness of breath and fatigue. In his prepared remarks, Martha said that with Affera Medtronic gets its hands on cardiac mapping and navigation technologies for the first time, thereby making it more competitive with rival products.
During the Q&A J.P. Morgan analyst Robbie Marcus asked Martha to explain the rationale behind the acquisition given that Medtronic already has another pulsefield ablation technology. This is how Martha responded:
Look, afib is a huge market, growing condition and we have some good therapies but we had a gap in – we have a gap in map nav and that’s an important gap that we wanted to fill. It’s an important part of the procedure. It’s an important part of the clinical side, important part of the economics side and we feel Affera as much as it fills this gap, it gives us a best-in-class system. And on the PFA side (Pulsed-field ablation), I would argue that they have this focal catheter and it’s a very complementary offering to what we have.
Most business see financial recovery
Many of Medtronic’s devices are tied to elective procedures whose volumes were affected by Covid-19. But while it’s too early to determine how Omicron will affect business, Martha shared some information that will hearten any executive dreaming for a return to a more stable economic period.
“Out of our 20 businesses, 14 reached revenue levels last quarter that are at or above pre-covid levels two years ago,” Marth said.
While that is good news, Martha did add the caveat the the recovery has taken longer in the U.S. and Europe due to staffing shortages. And staffing shortages is a pain that almost every other business is currently facing and that is likely to aggravate given the transmissibility of the current Omicron variant that is spreading aggressively.
Some Medtronic businesses are on the chopping block
Medtronic has undergone a massive change under Martha in that operationally it appears to have reverted back to the decentralized structure that previous CEO Omar Ishrak eschewed for the group business model.
Under this model, Medtronic has 20 separate businesses compared with the four core group businesses in the past.
But that is not the only change that Martha is spearheading. Marcus pressed him on what Medtronic’s “portfolio review” means and which businesses are at risk of being chopped.
However, Martha was coy.
No, no I don’t want to get into those details, but yeah it is a little more front and center. The initial focus was really on the 20 operating units, and the culture change, and the 20 operating units really drives for us faster innovation. Now we are moving into an area where we are more focused on some of the foundational things, like operational excellence, end-to-end supply chain and quality…Insights from the new [operating] model is really helping us provide [info] on what it takes to win, what the market opportunities are, what are the dynamics, what are the challenges. That’s giving us insights on our portfolio analysis. I’d be surprised if over the next year, there aren’t some changes, but we don’t at this point if they are big, if they’re around the edges and we aren’t really prepared to get into at this point which businesses [will be cut.]