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How Medtronic Sets The Pace


The Corporation: STRATEGIES

HOW MEDTRONIC SETS THE PACE

Its heart devices have spawned a host of new products

By the time Maurice Long put in an appearance before a Food & Drug Administration panel last year, he could joke about the wires running from his brain to a pacemaker-like device implanted in his chest. The contraption had ended the debilitating tremors that cut short his career as a financial-services executive and reduced his life to that of a hermit on his Hutchinson (Kan.) farm. Now, Long could keep his hands still. He could even play golf.

Just by sitting still, Long, 73, provided powerful testimony for the FDA panel. Last August, it approved Activa, a device made by Medtronic Inc., for widespread use in controlling tremors. Then, in April, Medtronic won European clearance to market the device to treat the shaking and other symptoms of Parkinson's disease. Today, the Minneapolis company is hoping that more testimonials will sway U.S. regulators and eventually open a worldwide market of 300,000 Parkinson's patients.

Stories like Long's are stirring. But for Medtronic, the stakes in the success of this new product are also dramatic. Best known as the leading supplier of heart pacemakers, Medtronic badly needs to crank out new applications of that maturing technology if it's going to extend an enviable record for earnings growth--a compounded annual rate of 25% over the past five years."EXCITING." Over the past two years, those gains have slowed sharply as Medtronic's pacemaker share has been eaten away by hard-charging rival Guidant Corp. William W. George, who joined Medtronic as chief operating officer in 1989 and became chief executive officer two years later, is counting on a host of state-of-the-art pacemaker products--along with Activa and other devices from its fast-growing, $400 million neurology unit--to help push sales to $6 billion in five years. Medtronic's revenues in the fiscal year ended Apr. 30 rose 7%, to $2.6 billion; net income was up 12%, to $594 million.

Anticipation of those breakthroughs have helped push Medtronic shares up 24% since January, to about 57. "What's exciting about this stock is its product innovation," says Jane R. Davenport, vice-president at Montag & Caldwell Inc., which holds a $750 million position.

A close look at Activa's development shows how Medtronic has institutionalized the process of innovation. Since its founding in 1949, the company has nurtured and invested in ideas from a worldwide network of doctors. But as pacemaking competition heated up in the early 1990s, Medtronic intensified a search for new ways to use its core implantation and stimulation technologies. "We looked at diseases with no treatment or for which drugs didn't work," says George. But he also directed an overhaul of product-development efforts, tightening their focus and forcing shorter delivcery times.

Now, proposals are judged on their medical value but also against tough financial measures, including affordability. That's crucial in today's managed-care environment, says Medtronic President Arthur D. Collins Jr. "The onus is on the provider of the product to demonstrate it is not only good but cost-effective," he says. "There is a belief that technology is just adding cost to the system."

Medtronic's selection process can be brutal, but it offers avenues of appeal. For staffers who can't get over the initial hurdles, there's the Quest program, which frees up employee time to work on out-of-the-box ideas. Once approved, three-quarters of Quest ideas fail. However, the program can also salvage ideas such as Reveal, a heart-monitoring device that hit the market earlier this year after nearly being short-circuited several times.

Winning projects emerge through a mixture of perseverance, serendipity, and back-channel support. And in Activa's case, the product would never have survived without the passion of an outsider.

Since the 1970s, neurosurgeons had been experimenting with electrical stimulation of the spinal chord to alleviate pain. But only drug therapy or brain surgery were being used to treat the tremors that accompany diseases such as Parkinson's. In 1985, French neurosurgeon Alim-Louis Benabid was experimenting with electrical stimulation of a Parkinson's patient's brain to help determine which tissues he should cut away. He was stunned by what he saw. "As I increased the frequency, the tremor stopped," he says. "I saw the patient's shaking hand stop."

What Benabid had done was show that tremors could be manipulated through different electric frequency levels. In early 1987, working on his own at the University of Grenoble in France with what was essentially a jerry-built Medtronic pacemaker, Benabid performed his first implant of what eventually became the Activa. The device was placed just under the skin in the patient's chest, with wires running to the thalmic region of the brain. The results seemed promising--and came as evidence was growing that conventional drug therapy had diminishing benefits.TRICKY ISSUES. But Benabid recalls that Medtronic's interest in funding his research was lukewarm at best. The market seemed minuscule--maybe 60,000 people worldwide. Among the doubters was John A. Meslow, the president of Medtronic's neurology unit. "Remember, it took seven hours of surgery, and who knew whether physicians would get operating time or any payers to pay," says Meslow, who later became a key supporter. "Could Benabid's results even be duplicated?" The ethical issues were tricky, too: To some, rooting around the brain and leaving wires there conjured up Frankenstein-like images.

When it came time to whittle 42 neurology prospects down to six that would get company backing, Benabid's tremor-control device didn't make the cut. Benabid was frustrated, but he continued to lobby. As more doctors picked up the procedure, operating time was cut in half and costs were greatly reduced. And the increased interest showed Medtronic that it may have underestimated the number of patients who might benefit.

Scott R. Ward, then head of the neurology group reviewing new ventures, pushed to have the device presented to the executive committee even though it hadn't made the initial cut. After viewing dramatic videos that showed patients entering surgery with uncontrollable shaking and emerging without a sign of tremors, the committee cleared a place on its funding list.

The new device had now crossed enough thresholds that it was given a team of seven Medtronic employees to guide it through product launch. Headed by Noreen Thompson, director of neurostimulation movement disorders, the team was charged with training doctors, educating patients, and arguing for insurance companies' approval. It was a tough sell. Activa, like all of Medtronic's neurology products, addresses a quality-of-life issue. And insurers won't pay up as readily as for life-saving pacemakers.

To build momentum, Thompson focused on the "thought leaders" among European and Canadian doctors--top-flight surgeons who were willing to perform the surgery, publish the results in professional journals, and otherwise spread the word. As FDA consideration neared, Thompson compiled a list of 200 neurosurgeons capable of implanting the device. Marketing, sales, and reimbursement experts began to visit them and conduct workshops. At every stop, they showed the breathtaking videos.

In early '97, the product was far enough along that Thompson's team began planning for the actual launch. Some officials suggested a gold-plated $16,000 price tag. "It took about three minutes to convince them it wasn't going to work," laughs Barbara Veath, the company's reimbursement specialist. However, Medtronic wanted a strong margin to begin to recoup its multimillion-dollar investment. In the end, the device was priced at about $10,000. The procedure cost hospitals another $10,000 or so for surgery time, room costs, and other expenses. Of the total, Medicare or private insurance typically picks up about $15,000; the rest is absorbed by hospitals or patients.

But the FDA had yet to give its nod. Investigators wanted to know how patients would fare years after they had received the implants. Medtronic pointed to Benabin's early patients in France who were doing fine after seven or eight years. But the patient videos, which had been so successful at winning internal Medtronic support and doctors' interest, failed to wow the FDA. Among those who were unimpressed was Dr. Daniel A. Spyker, a senior FDA official with medical device responsibility. "In God we trust," says Dr. Spyker, "but everybody else has to bring data."NAIL-BITER. In August, 1996, four months after Medtronic submitted its application for approval, a long list of questions came back from the FDA. The team that had prepared the application scurried to rework and reanalyze reams of data. In March, 1997, as the final panel hearing took place in Washington, Thompson gathered with about 20 colleagues at Medtronic headquarters to listen via audio hookup. By this point, the team had spent more than two years shepherding the device. "We were chewing our nails, cheering, cursing," Thompson recalls.

The outcome, announced preliminarily after the hearing, was a partial win. Activa was approved for tremor applications--but only for implanting in one side of the brain at a time. Before it could gain approval for both sides and for implanting deeper in the brain to control other Parkinson's symptoms, further clinical studies would be necessary.

There was no time for celebration or disappointment. Medtronic officials now faced tedious, word-by-word negotiating with the FDA on labels and manuals for doctors and patients--a five-month-long process. Then came the actual rollout. In a fashion typical of the understated culture of the Upper Midwest, the neuro team didn't celebrate until the company's annual holiday party. Patients like those in the videos were invited to give live testimonials. There wasn't a dry eye in the house, says Paul Citron, vice-president for science and technology.

Medtronic hopes to get U.S. approval of Activa for Parkinson's symptoms in 12 to 36 months and is searching for a wide range of new applications. Tops on Medtronic's hit list: Alzheimer's, epilepsy, Lou Gehrig's disease, and dystonia, a debilitating contraction of the muscles that affects young children. Some see a future where Medtronic's devices will have sensors in the brain that detect the onset of seizures and also trigger the delivery of drugs to disrupt them.

Medtronic CEO George craves the growth these innovations promise but recognizes the price it may exact. "Size and creativity are inversely related," he says. "We can't achieve our growth objectives unless we stay nimble and break ourselves into teams. Everyone--sales, manufacturing, engineers, me--we all need to be out among doctors and in the operating rooms, staying in touch. It's a lot easier when you're small." Maintaining that edge will be critical if Medtronic is to satisfy patients such as Maurice Long--as well as its investors.By Richard A. Melcher in MinneapolisReturn to top


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