Reality Check: Wall Street's View of Medtronic
Think of Medtronic as a hardware store for stuff that goes
inside the body. The $14.6 billion company makes things like stents and
pacemakers and insulin pumps. And it is a service center, too, maintaining its
devices, and listening to them through remote technology. It's not
sexy, unless you need the stuff — then it's Marilyn Monroe.
As an economic performer, though, think Britney Spears. Like
that troubled singer, last year Medtronic's popularity took a dive.
Its stock price tumbled from a peak of $55 down to $28 (it has since recovered
to $37). And that was not exactly from a position of strength; over the past five
years, Medtronic's performance has lagged behind the market
considerably.
The bad news was not just financial. There was public controversy
over the company's payments to its physician consultants. Then there
was the patent litigation with Abbot over heart stents, a nasty, globe-spanning
imbroglio that was settled in July, with Medtronic paying $400 million.
Like Britney, though, there are signs that the worst is over for
Medtronic. On August 25, CEO Bill Hawkins announced quarterly results: Revenues
rose 6 percent, and profits would have except for the Abbot charge. Wall Street
approves of the decision to develop products for chronic conditions like
depression and obesity and its strategy to move into areas where an aging
population will need more care, such as diabetes. And Medtronic's
overseas operations are doing well.
Raj Denhoy, a senior research analyst at Thomas Weisel Partners in
New York, has covered the medical device industry for 10 years. Here's
what he thinks of Medtronic.
On Medtronic’s competitive position:
In two of Medtronic’s largest categories ―
cardiac rhythm disease management and spine ― the company has seen its
position erode. This is a factor of a real lack of meaningful innovation in the
industry over the last half decade or so. There is a lot of parity. In a sense,
Medtronic is a victim of its own success. It built these markets, and really innovated;
then it hit a trough and the rest of the industry caught up. Now Medtronic is
seeing erosion in segments where it once had market share of close to 50
percent. Their position has certainly softened from where it had been.
Innovation record:
Over the past 30 years, Medtronic has been one of the real
leaders in medical device innovation; over the past five years, though, it has
been somewhat challenged. But then, the industry as a whole has not seen a lot
of great innovation over the past couple of years; there has not been the kind
of new-category creation we saw 5 and 10 years ago. As a bellwether company,
Medtronic feels it more than most. Right now, innovation is just really
stalled.
Stock performance:
It’s not pretty. They suffer from being so
successful early on. Back in the late 1990s, Medtronic commanded a PE multiple
of greater than 50. It was a super-high-growth company that defined the whole
category. Since then, there has been steady erosion. Its top-line growth has
ragged, and the management has also struggled with giving believable guidance.
Now its PE multiple is down to 11 or 12. Yes, they pay good dividends, but
regardless of that, Medtronic has underperformed the group by a large margin.
Hawkins as CEO:
He was certainly dealt a rough hand. It’s tough to
come into a company on the down slope after a lot of years of really good
performance.
For the present, he is managing the P&L to try to
get meaningful earnings despite anemic top-line growth. For the future,
Medtronic is looking at device-based therapies for things like obesity that
have not always lent themselves to that kind of treatment. He is putting a lot
of bets down in new clinical areas.
Hawkins takes a lot of heat for things that are not directly
his fault. The history books on him are not written yet.
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