For years, Medtronic has been one of the world's leading medical equipment companies. Today, following the acquisition of Irish company Covidien, also one of the world's largest companies in the field, it is probably the largest. After years of focusing on sophisticated implants, the $50 billion acquisition of Covidien has put Medtronic into almost every medical equipment subsector, from simple surgery support products to sophisticated products for electronic brain stimulation designed to combat neurological diseases.
Medtronic has been doing business in Israel for many years, and has had a development center in the country since 2006, when it acquired Odin Medical Technologies. It also acquired Ventor in 2009 for $325 million (although it closed down this activity) and Instent in 1996 for $200 million. Medtronic has a very active marketing company in Israel, invests in several Israeli venture capital funds, and sends representatives to the biomedical conference each year.
Dr. Stephen Oesterle is Medtronic senior VP medicine and technology. Since his first visit to Israel in 2007, which he says left him astonished and enthusiastic, he has been here dozens of times, and has become one of Medtronic's leading advocates of cooperation with Israel. It appears that learning more about Israel has not detracted from his enthusiasm.
"I recently lectured at NASA about the connection between weapons, satellites, and medical equipment," he says. "What they all have in common is that we build an expensive and sophisticated device, and then 'launch' it into outer space or into the body, and expect it to survive in a hostile physical environment and monitor what's taking place. We want to maintain communications with it, while using a minimum of energy. Many capabilities in these spheres in Israel come directly or indirectly from the army."
Oesterle notes that every change in health economy trends makes Israel even more relevant. "Over the past 3-5 years, Medtronic has realized that it must manage the entire course of the disease - diagnosis, treatment, and responsibility for post-treatment follow-up. Both diagnosis and post-treatment monitoring involve capabilities in which Israel leads the world.
"Another trend is the financing constraint for young medical equipment companies. This is also an opportunity for Israel, because Israel is used to doing more with less."
"Globes": Why is there a problem in the first place with financing in the medical equipment market?
Oesterle: "The health system simply has no money. The budget can no longer be increased, and the number of patients is growing. Companies must therefore demonstrate that their products have economic value. In order to do this, you need a larger and longer clinical trial, which has lengthened the time-to-market from an average of 4-6 years at the beginning of the millennium to 6-12 years at present. This time span is unsuitable for the classic venture capital model. The funds that have fallen into this trap in the past prefer now to invest in products with a shorter time-to-market, such as digital and cellular health products, and investment in classical medical devices has therefore waned.
Oesterle adds, "A lot of money has shifted to pharmaceutical development companies, because there is a trend in this area towards acquisitions at an early stage, long before the market is reached, so that an exit in biotechnology has become quicker, even though the time-to-market is still much longer. There will probably be no such trend in medical equipment."
Is there a way that young medical equipment companies can demonstrate economic value at an earlier stage?
"Not really, because economic value depends on the price, and the price is only settled when then you get to the market. The products are therefore developed under starvation conditions and more cheaply, as is already being done in Israel."
In the past, your CEO, Omar Ishrak, was quoted as saying that business in the emerging markets is no less important for Medtronic's growth than breakthrough innovation. Is that true?
"Emerging markets are important for our vision 'to alleviate pain, restore health and extend life.' Our vision doesn't say 'only for those who can afford it.' There are already several hundred million people in developing countries who can afford our complex products, but they or their doctors are unaware of these products, and there's no distribution infrastructure for them, so that's what we're addressing first. There are four billion more people, however, who can't afford our products. We should have made high-quality products at cheaper prices, so we're operating on two fronts: the innovation front for the developed countries and the value engineering front for the developing countries. In Israel, because it has faced challenges and shortages for years, whether in water, defense, or budget, this facet is understood, and that's why I'll also look here for such products."
How does the Covidien acquisition fit in with your strategic thinking?
"It was an unusual acquisition, because there is almost no overlap between Covidien and Medtronic. At the beginning, startup managers told me, 'It's a pity that you merged; now we've lost a company that could potentially acquire us,' but that's not really true, because we haven't discontinued any activity. In all the areas we acquired as two companies, we're continuing to make acquisitions as a single company, and at the same pace."
According to Oesterle, "We make mainly complex implants, while Covidien makes a variety of surgery-related equipment. When a company has diversity like this, it's more stable and resistant to challenges in a specific area. Our report will be much more stable."
Oesterle notes that Medtronic has specified growth targets in emerging markets. "Covidien was stronger than us in these markets," he admits, "because its products are less complex and expensive and for that reason, they'll be our spearhead there."
"Furthermore," he adds, "Covidien was the owner of three Israeli companies I always wanted. I always thought it would be worthwhile for us to acquire Given Imaging (developer of a pill taken orally for diagnosis of digestive problems), but it wasn't very synergetic with our business. Now we have it, and also Covidien's entire marketing platform for the digestive tract. superDimension (developer of a system for navigation within the lungs) was always a good technological match for us, but we weren't very active in the pulmonary field, and now we are. Oridion Systems, a small company from Jerusalem (developer of a system for diagnosing pulmonary diseases through analysis of exhaled breath) is so innovative. These are three jewels that were in Covidien, and which affected my desire to add Covidient to our family of companies."
So there's no plan to close down these companies.
"On the contrary; these companies can constitute a technological platform, and from a strategic perspective, at least, there is even a possibility of making them grow."
Published by Globes [online], Israel business news - www.globes-online.com - on May 13, 2015
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