Medtronic Plans Expansion to Health Services, CEO Says

Medtronic Inc. (MDT) is looking beyond medical devices, seeking to expand within hospitals and connect directly with patients as it moves into a health-services industry projected to grow as Obamacare expands coverage.

The world’s biggest maker of devices to regulate the heart’s rhythm signaled its move last week with its $200 million acquisition of Cardiocom, which provides monitoring services to patients with chronic diseases. It is pursuing contracts with about a dozen large European medical centers to run their cardiac catheterization laboratories, where hearts are examined and stents are implanted to prop open arteries.

The new business model for the Minneapolis-based company coincides with growth in the aging population and projections that the U.S. health law will add more patients to the system. Providing services to help manage care, and proving that Medtronic’s devices offer cost-saving benefits, will gain more patients, Chief Executive Officer Omar Ishrak said.

“It’s a very much intentional strategy to build out a solutions company,” he said yesterday in a telephone interview. “In this transformation, it’s not that we are leaving stuff behind and going somewhere else. It’s that we are expanding what we have, beyond the episode of therapy itself. That way we can get full value for the benefits and make sure they are optimized.”

‘Value-Based Care’

Health-care spending is under intense scrutiny as costs rise amid weak economic growth. Medtronic has focused on quantifying the value of the company’s products since Ishrak took the helm of the medical device company in June 2011.

“Disease and patient management is definitely a way to go in the new era of health-care reform,” said Jason McGorman, an analyst at Bloomberg Industries in Princeton, New Jersey. “Health-care reform is a shift to value-based care, rather than quantity of care. Any way Medtronic can help improve outcomes is generally the way health care is moving. The trick for them is to capitalize on that in the right areas.”

Questions about quality and overuse of products where Medtronic has a leading position, including stents, heart rhythm devices like defibrillators and spinal products, led to price cuts and other pressure. Ishrak’s goal has been to prove the company’s technology can save money and improve health, for example by showing a device that synchronizes electrical activity may keep heart failure patients out of the hospital.

Heart Failure

With the Cardiocom acquisition, Medtronic plans to focus first on heart failure patients. Ensuring those patients get the care they need and improve their health will expand Medtronic’s reach beyond the 10 percent of patients who already have their products, he said.

“We can reach a broader set of patients who may or may not have had our devices,” Ishrak said. “We have no intention of forcing them to use our devices. We want to manage the entire disease state, and provide customers with the care they need to be as healthy as possible.”

Additional announcements on Medtronic’s strategy and a deeper move into patient services are planned, Ishrak said.

The move has the potential to reduce the company’s profit margins, particularly because devices are known for their high margins, McGorman, the Bloomberg Industries analyst, said in a telephone interview. Medtronic has recognized that the change in focus for health care is coming, “and it’s here to stay,” he said.

Quarterly Earnings

Medtronic yesterday reported fiscal first-quarter sales of $4.08 billion that missed analysts’ estimates on weaker demand for defibrillators and the InFuse bone-growth product. Profit excluding one-time items matched the 88 cents average estimate. Net income in the three months ended July 26 increased 10 percent to $953 million, or 93 cents a share.

The company declined 2.4 percent to $52.83 at the close yesterday in New York. Medtronic gained 29 percent this year through yesterday.

Ishrak said he isn’t worried the new moves will erode the company’s profit margins or slow its growth. He plans to use new technology to improve profitability and the size of the operation to streamline costs.

In hospital catheterization labs, Medtronic is automating the way products are acquired, smoothing the flow of patients through the system and crafting new payment options.

“That’s the kind of relationship we are building with big hospital systems,” Ishrak said. “We’re also looking at filling this capability out fairly soon.”

While Medtronic may look to do future acquisitions to build the business, it will also grow some portions in-house.

“Independent businesses do exist, but no one has the technical and clinical expertise that we have,” he said. “Coupled with an elaborate infrastructure to manage patients, that’s a pretty unique combination.”

To contact the reporter on this story: Michelle Fay Cortez in Minneapolis at mcortez@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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