Earlier this year Medtronic CEO Geoff Martha hinted at big portfolio changes to come, leaving spectators to wonder if those changes meant divestitures, or a bigger breakup of the company. This morning we got our answer.
The Dublin, Ireland-based company plans to spin its patient monitoring and respiratory interventions businesses into a new company. Combined, these businesses generated about $2.2 billion in the company's last fiscal year, representing about 7% of total Medtronic revenue. Both businesses are currently part of Medtronic's medical surgical portfolio.
The separation is expected to be completed in the next 12 months to 18 months, which means they will continue to be part of Medtronic through at least the current fiscal year, and the announcement does not impact the company's guidance for fiscal year 2023.
Martha, who took the reins in April 2020 after Omar Ishrak retired, has already made a unique mark on the company in the short time he's been at the helm. The changes he's implemented have paved the way for what has been called the "new Medtronic" which appears to be a more nimble and competitive organization.
"Over the last 18 months, we've made significant changes to our operating model, moving to 20 focused operating units as well as making major enhancements to our culture and incentives. These changes have improved our pace of innovation and our competitiveness, as evidenced by recent product filings and approvals that came faster than expected," Martha said in April during the company's fiscal third-quarter earnings call. "And we're not finished driving change. We're accelerating improvements to our global supply chain and operations, leveraging our scale to further improve quality, increase product availability, and reduce costs."
True to his word, Medtronic is now executing on its portfolio management strategy in a substantial way. Martha said the separation will allow the company to focus its resources on opportunities better aligned with its long-term strategies, and it will position the new company (being dubbed NewCo, for now) to unlock value.
"NewCo will be a leading connected care company with a compelling leadership position, attractive margins, and potential for growth acceleration with increased investment and dedicated capital allocation," Martha said. "Looking ahead, we remain focused on active portfolio management with an ongoing process of evaluating potential additions and subtractions to further accelerate Medtronic's growth over the long-term."
Ryan Zimmerman, a medtech analyst at BTIG, noted in a report following the news that the spin-out makes sense and is consistent with Medtronic's intentions. At the same time, he said, this may not be the "shot in the arm" that investors longed for, as Medtronic's weighted average market growth rate (WAMGR) may only improve by 5-10 basis points.
"Larger slower growth and no-growth segments such as spine and diabetes remain and will continue to weigh on [Medtronic's] WAMGR," Zimmerman wrote.
The new company's patient monitoring portfolio will include Nellcor pulse oximetry, Microstream capnography, BIS brain monitoring, INVOS perfusion monitoring, and HealthCast connected care solutions. The respiratory portfolio includes Puritan Bennett ventilators, Shiley airway portfolio, McGrath MAC video laryngoscopy, DAR breathing systems, as well as PAV+, NIV+ and IE Sync ventilation software solutions designed to improve workflow and care delivery.
The combined business has a constant currency revenue growth profile and gross margin profile slightly below overall Medtronic and an operating margin profile slightly higher than overall Medtronic. The combined business also has a global commercial footprint and a team of more than 8,000 employees worldwide.
Hottest takeaways from Medtronic Q&A
During a call with sell-side analysts Monday morning, Martha called the spin-out a "next step" in its portfolio management process, but not necessarily a final step. So, expect to see more spinouts or divestitures in Medtronic's future as the company looks to further streamline its business.
As for bumping up its WAMGR, Martha encouraged analysts to think of this as part of an ongoing cadence of additions and subtractions that, when taken together, are going to move the weighted average market growth rate of the company. Scroll down for a list of Medtronic's acquisitions and divestitures under Martha's leadership to date.
Strategically, splitting with the patient monitoring and respiratory interventions businesses will allow Medtronic to focus on the opportunities that are most aligned with its long-term strategies, Martha said.
"The NewCo businesses aren't really part of a broader therapeutic ecosystem that we're most focused on, and they don't have the same synergies as our other businesses," he said. "[The businesses] have different criteria for future success, operating model, sales channels, capital investment requirements, and even talent. The planned separation will allow each organization to more narrowly focus on and deploy capital against and achieve its objectives."
As BTIG's Zimmerman noted in his report, diabetes is among the larger, slower growing businesses that remain in Medtronic's portfolio and continue to weigh on its weighted average market growth rate. It was clear from the Q&A that other medtech analysts are thinking along the same lines, as Shagun Singh, an analyst at RBC Capital Markets, tried to feel Martha out on his long-term thoughts about the diabetes business.
The CEO said the current priority with diabetes is to work with FDA to satisfy its concerns and get its regulatory submission for MiniMed 780G with the Guardian 4 sensor approved. Late last year, FDA slapped Medtronic with a warning letter after an inspection that concluded in July 2021 related to a recall of the company's MiniMed 600 series insulin infusion pump, and a remote controller device for MiniMed 508 and Paradigm pumps. The warning letter focused on the inadequacy of specific medical device quality system requirements at the company's Northridge, CA facility in the areas of risk assessment, corrective and preventive action, complaint handling, device recalls, and reporting of adverse events.
Aside from those regulatory issues, Martha said diabetes is an attractive space, the company has been heavily investing in that business, and "we like our long-term outlook" for it. He said the diabetes business is a good example of one that is part of a broader therapeutic ecosystem that Medtronic is focused on.
Medtronic portfolio 'additions and subtractions' under Martha's leadership
As mentioned above, Martha took the helm as Medtronic CEO in April 2020, and it wasn't long before the company began wheeling and dealing to enhance its portfolio. The following acquisitions have occurred under his leadership:
- Medicrea (announced July 2020, completed in November 2020)
- Avenu Medical (announced September 2020
- Ai Biomed (October 2020)
- Intersect ENT (announced August 2021, completed in May 2022)
- Affera (announced January 2022, completed August 2022)
- Medtronic reported in April 2022 it would buy some products from Acutus Medical
- Medtronic also laid the groundwork in July 2022 to potentially acquire CathWorks, an Israeli company set on transforming the way coronary artery disease (CAD) is diagnosed and treated.
This is the first major divestiture the company has announced under Martha's leadership. However, Medtronic announced a joint venture with DaVita in May 2022 that will create a new kidney device company consisting of Medtronic's renal care solutions business. The company will be co-owned by Medtronic and DaVita and led by an independent management team. Medtronic will contribute its renal care solutions current product portfolio (renal access, acute therapies, and chronic therapies) and product pipeline, as well as global manufacturing R&D teams and facilities. Both companies will provide an initial investment to fund the new company and future operating capital.