2013’s ‘How to Attract the Attention of a Medtronic’

33 min reading time

Medical Device Strategic Partnerships

Director of Corporate Development for Medtronic Mark Pacyna presented “How to Catch the Attention of a Medtronic” at the 10x Medical Device Conference.

Among his quotables:

“If you can’t improve outcomes, expand access, optimize efficiencies within the system, that opportunity will not get funded at Medtronic.”

“We’re worried – as a Medtronic – that there’s going to be less innovation out there because there’s less dollars chasing unique ideas.”

And did you know Medtronic has $500 million invested in small startups around the world?

Watch the video. Read the transcript. Learn, and share with your colleagues.

Joe Hage: Mark Pacyna is a Director of Corporate Development for Medtronic. I’m really happy to have him here and I’m especially interested in his presentation because for so many members of the group who are small to midsize, and are looking for more innovation, potentially capital, potentially a strategic partner, they are looking for ways to attract the attention of a Medtronic.

That’s exactly how we came up with the title. You can say Medtronic or Boston Scientific or name your great big medical device company that has deep pockets and, “Boy! If they bought me out wouldn’t that be great?”

So Mark’s going to take up through a little bit of the day of the life of the guy who’s on the other end of those emails and what it’s like to be deluged by them, some of which are wholly unprepared for the conversation. Others of whom are diamonds in the ruff. I think it will be very enlightening for us and Mark thank you very much for joining us today.

Mark Pacyna: Thanks Joe. Good morning everybody. I was really excited to be asked to come talk to this group today because Joe and I kind of were going back and forth on email around what the group needs and, kind of, just a different perspective of sitting on the other side of the table with one of the big strategics.

As you guys think about Medtronic, it sometimes is overwhelming. Quite frankly, when I think about Medtronic, it’s often times overwhelming. It’s a big company there’s lots of divisions.

And I think the best way to think about this and I could give it a little description of my role, we have a centralized group in our corporate function that looks at all of the mergers and acquisitions across Medtronic.

We also have a bunch of folks that are out there in our business units that are very much closer aligned with those strategies, what they’re doing and we partner with them on a day-to-day basis.

So it gives you a sense for, if there’s high-level ideas they come through our group, if there’s things that bubble up through the business unit it comes through them, and then it comes through our group. And so we go through that process jointly.

I’m going to go through a couple of things today that I think will help everybody understand kind of where Medtronic is going and how we see some of the trends, the evolving marketplace and how that’s impacting what we’re actually doing on the ground today.

So today, the first part that I’m going to start with is typically our strategy with current medtech model, so it’s what we’ve been doing for many, many years I think everybody else in this room is experts in their field here in this model.

Then I’m going to switch focus relatively quickly into how things have changed at Medtronic, what our new strategies are, and where we’re going. Because I think that’s going to be enlightening for the group. I think there were some really good discussions yesterday around different markets different model and I’d like to kind of highlight Medtronic’s thinking on those.

And then lastly, hit some of the things around the way my group, the corporate development group, looks at new opportunities and looks at the venture investing community, looks at startups, looks at partnering, licensing etc. and talk a little bit about kind of how we view those incoming opportunities from a group like this.

So with that, there’s really a number of things that we’re focused on. We have a relatively new CEO that came in about a year-and-a-half ago and really focused on market stabilization. So two of our biggest businesses as everybody knows, our spine business and our pacing business, has been relatively flat – lots of different pressures.

But there’s a lot of high growth platforms that we still have and product launches that we’re going through. So I’m going to highlight a few of the things that I think will be interesting to the group in terms of the standard model of that work we’ve always been running on. And our real goals are delivering mid-single digit growth, growing the bottom line faster than the top line, and then returning cash to our investors and shareholders.

High Growth Platforms

So even though two of our biggest markets have remained relatively flat, we do have a bunch of different platforms within Medtronic that are growing in double digits and are projected to do so.

The interesting thing here when you look at this slide is that there’s a number of things that were developed organically within Medtronic and there’s a lot of things here that were purchased outside. For those of you that have been in this industry for a long time, you see a lot of companies here that were acquired over time.

Next year and the following year we have a bunch of different product launches and with the sales and marketing breadth and depth that we have at Medtronic, this is going to really drive our growth.

You’ll see here that I’ll call out a couple of things that I think are really interesting. Most of these products were developed internally through our own R&D programs. But there’s three things on here that have come our way via an acquisition in the recent couple of years.

Number one the AMT inner body device that’s getting launched in our spine business was purchased last year out of a German company developing this technology for spine. And then the two big launches in fiscal year 2015 are Corevalve acquisition for transcatheter valves and our Symplicity Renal Denervation System that we purchased from Ardian a couple of years ago.

So we’re augmenting the R&D that we’re doing internally with lots of different technologies. These happen to be the biggest platform technologies that we brought in to Medtronic over the last couple of years. But it gives you a sense that it’s a mixture and Medtronic will continue to look at that as a mixture of both organic and inorganic growth.

One of the things I’m going to talk a lot about in the next section is the emerging markets. And I think there was some god discussion yesterday about emerging markets. It’s a huge focus for us right now.

I’m going to highlight a couple of things. It’s been growing 20 percent a year annually and we projected to continue to grow it 20 percent a year annually for us. And it’s a good geographic split so it’s not just one China or India or Latin America or Central and Eastern Europe. It’s everything that we’re investing and looking at.

And we expect it to add over $3 billion of incremental revenue to us in the next five years. And it’s 150 to 200 basis points of overall growth. I mean it’s a significant driver for us and we’re overinvesting in those sections.

So that was a very quick high-level overview. I skipped a couple of the other components to that. But one of the things I think a lot of people here, I don’t have a great slide for it is we’re also reducing cost significantly across the board and it’s just an ongoing effort that we have to take cost out of our platforms. And any way that we can do that efficiently and still maintain quality in the best clinical efficacy is important for Medtronic.

So I didn’t highlight that but I wanted to kind of tee that up as we go into the next phase of what is change over the last few years that we’re really evolving from Medtronic?

So I’m not going to talk about cash generation, obviously that’s important. But the two big things that I want to hit on are the globalization and what does that really mean to Medtronic today? And then economic value, and I know we’ve talked about clinical and regulatory. I think there’s a presentation here right after me around the value of clinical and I want to give everybody an idea of how Medtronic’s looking at clinical and economic value.

So everybody’s seeing the pyramid slide, premium products, value products underserve
d, and this is a particular of interest in the medical device segment.

Medtronic, you could argue that almost all of our sales, in fact, most of our sales are in the premium segment whether it’s here in the United States, Western Europe, or anywhere else in the world. And one of the things that we look at is the penetration of our therapies in those developed markets versus the fast-growing markets of the emerging markets.

So right now in the US, Western Europe we’re about 22 percent penetrated globally for our products. So there’s lots of room for growth there but we know the challenges for some of those. But in the developing markets it’s eight percent. And just moving that to where we are in the United States then, we’ll generate $5 billion of annual incremental revenue.

So I mean the opportunity is staggering and I think everybody in this room understands why that is.

The other thing is that there’s profitable business models that work in each of these markets and we’re working on those. But obviously more than 50 percent of our sales comes from the international markets and so there’s ways to take advantage of that.

The real big barriers that we see when we go anywhere else in the world are: awareness, infrastructure, training, and obviously, funding. Those are the barriers that we see, the barriers that we continue to work on.

One of the things that we are implementing globally across Medtronic is the idea of we’ve got to get, this is where my cost comment comes in, we’ve got to create lower infrastructure cost and lower product cost. Because we’ve got to find a way to take our products from the premium segment down into the value segment.

And it’s incredibly important. And it’s something that’s not just being done here with our US R&D; it’s being done everywhere in the world and we have R&D centers across the world right now focused on each individual market. That’s going to take that cost out.

What that does is it gives us access into the value segments in each of these markets and also that innovation is getting decentralized. And so each of those markets are given buckets to go innovate for those markets and then we anticipate that those innovations will make their way back to the United States and the other developed markets. So there’s lots of activity going around in terms of globalization and transforming it.

I wanted to pick a couple of markets and I know I’m probably going to get into trouble for not picking all the markets. But I would highlight that we have specific regional strategies in every single market. I wanted to highlight a couple that have been actionable in the last year and just give you a sense for how Medtronic is viewing things.

So in China, obviously, I think there was a good healthy discussion yesterday about China and why it’s important. Medtronic feels it’s incredibly an important market for us and our strategy is we’ve had a business in China for a long time. But we haven’t been able to penetrate the second-tier cities and we’re looking at developing the market more fully.

And last year, as an example of that, we made two investments in China, two pretty significant investments. We bought Kanghui Holdings which is a large the number one or number two orthopedic trauma spine business in China. And we also invested in Lifetech which is a structural heart vascular company there.

Both of those were pretty significant investments, both from a capital standpoint, but also from a long-term commitment to keep people and develop those markets fully while we’re on the ground there. We know that we need to be there and we know we need to be there in a big way.

And the China opportunity is significant. You can see here with $2 billion estimated revenue by our FYA team, for us it’s significant.

Conversely India is an incredibly interesting market for us as well. It’s less developed from a overall dollar standpoint but what’s really interesting for us in India is again we’ve been there a long time and it’s really a hot bed for business model innovation in medical devices. So as we talk about clinical and private pay basis, I mean, this is the place where patients are driving healthcare.

And we’re looking and learning and trying lots of different programs in India. Not necessarily buying big companies but trying different business models to understand how do you play and how does a patient-based healthcare system, how is that going to affect things?

Quite frankly I see that as one of the areas where the fastest business model innovation if something works there you can see that coming back into the US or other places relatively quickly.

So while we haven’t made big investments in terms of acquisitions or minority investments there, what we have done is seeded it with a lot of different programs to see what’s going to work from a business model standpoint.

So I’ve been with Medtronic eight years and over those eight years I kind of look at this slide and it’s a busy slide, but on the left-hand side for everybody, you know, when I started Medtronic was really focused on product, therapy cost, the physician or the purchasing manager was our customer. And our clinical value, obviously clinical trials were the key so can you prove clinically that this is as safe and more efficacious?

Today it’s a completely different world where the filters that we’re putting on all of our opportunities come through disease management, the pairs in governments are becoming more and more important, and the care continuum of solutions is as important if not more important today and as we go forward.

Now of course, I don’t think we’re on the far right side yet. I think we’re working towards that but we’re somewhere in the middle today and as that’s evolving I think it’s important for us to, in the room, I think all of us agree that is generally where it’s going. And I’m going to show how Medtronic is implementing some of those filters today where we’re going to be in a few years. That we’re evaluating both of our internal investments as well as anything that we look at from an external standpoint.

So this idea of economic value is something that, at the very simplest form, is a filter that we put on every single opportunity internally and externally at this point.

And basically it means if you can’t improve outcomes, expand access, optimize efficiencies within the system, that opportunity will not get funded at Medtronic.

The other point of this is that so it needs to address one of those universal healthcare needs, but it also has to develop and deliver a quantifiable financial benefit.

So as you think about your clinical strategies, as you think about regulatory strategies, as you think about from an R&D or a cost perspective, if you can’t address one of those things, these are the first things that our senior management team will look at in terms of the technology or an opportunity to partner with the company to make sure we drive this.

And not only that but the broader customer set are also looking at these same metrics. We heard it yesterday I’m sure we’re going to hear it later today. And if we can’t be better at all of this and incorporate it in everything that we do, we’re going to be, you know, Medtronic won’t look at those opportunities the same way.

So as I said when I kind of started, Medtronic is a big company. But I think the way I think about it is we’ve organized ourselves around three customer groups. Some of them are more formalized than others but if you think about Medtronic we really are a cardiovascular company on one side, where we have the cardiac line administrators and everything that goes along that line, organized there.

There’s also our neural and orthopedic group which is kind of our neural business and neurosurgeons or orthopedic surgeons, and then we have a diabetes fran
chise. And those are really the three main customer groups that we’re organized around today. We have lots of commercial synergies, technology synergies etc. across the line but I think it’s important to say here these are the three main groups of customers that Medtronic is organizing around.

So that gives you a sense for – a very, very quick sense – for where Medtronic is going, what some of our key strategies are. But I think what would be helpful today is spend another few minutes on what’s our M&A and investment strategy. Kind of give everybody some guidelines some guide posts as we look for opportunities. But then also to just open it up for questions because I think that would be just as valuable and helpful for the group.

So we heard yesterday from the funding breakout session around what’s going on in venture investing. And I think that the big thing that we’re really looking at for Medtronic for other healthcares is we’re not seeing the funding levels.

And these two charts are just basically saying that, what they were saying yesterday, which is the healthcare funding within the venture community is going down. And actually they’re raising less and less funds as they’re kind of getting to the end of their fund life cycles.

What that really means is that we’re worried as a Medtronic that there’s going to be less innovation out there because there’s less dollars chasing unique ideas.

And quite frankly that’s a big issues for us because we’re founded on innovating ideas, we’re founded on both our internal development programs but we’re not the only place that a lot of really good ideas are coming. And that is a concern for Medtronic.

So this is a trend that we’re trying to help by we have our own minority investment portfolio. So we have about $500 million actively invested in small startups around the world.

Last count it was 60+ companies that were funded. I’ll get into kind of that in a second. But this is where I think we’re seeing the strategic investors having to get involved more and more early and that’s why we’re having to get involved more and more early.

One of the biggest charts for me is on the left-hand side the level A series medtech investors is drastically down. So I think we’ve seen the angel investing community and other folks kind of pick up or the creative funding things that we heard yesterday pick up quite substantially over the last couple of years. But the folks being funded in our space is drastically down.

Now my perspective is most of the good ideas still have an overabundance of capital flowing to them but we never know where the next opportunity is going to come up and I think we’re missing out on innovation because of this funding gap.

The other thing is that because the funds are getting older and older they’re looking for shorter-term return and so they aren’t taking those chances. They don’t have the runway left in their funds to invest in something that’s going to take five-to-seven years to come to market and that’s also a problem.

So what is Medtronic doing about it?

So our M&A focus is really on a couple of things. We want to build around those customer groups that I just told you about. The cardiovascular, the neural and orthopedic service lines, and our diabetic franchise.

The other thing is we’re actively, as you saw, making investments in the globalization and in economic value and they’re both tied together. So if there’s opportunities that you see or that you want to work on that’s toward the value segment offerings, that’s integrated offerings, continuing care offerings, those things are all very important to Medtronic at this point.

And then from a filter standpoint obviously we still need to make money and we look at kind of a mid-teens hurdle rate. Venture capital guys are probably over 20 percent typically. We’re somewhere in the mid-teens that we look at from a hurdle rate standpoint. Minimal dilution from our earnings. Obviously the financial value proposition has to be very clear.

And then we do have a focus on continuing tuck-in acquisitions to round up those customer groups that I just talked about. When we say tuck-in acquisitions we’re really talking in $100 to $500 billion opportunities that fit with our current call patterns or customers in our sales force.

So the question is, what are the structures that are interesting to us? And quite frankly, all the structures are interesting to us. My group will deal with licensing. We manage the minority investment portfolio at Medtronic which typically and generally is aligned with the customer groups we’re talking about. I just mentioned the tuck-in acquisitions.

And then we’re really stage agnostic. Which means that we will do investments or acquisitions as early as series A and obviously as late as growth capital with the private equity guys later if the opportunity is the right opportunity?

So two last slides here on the criterias that we use for investment and these are some of the filters that we put things through. So our strategy is from an investment standpoint. We look at it as it’s promising technology meaning that it meets the needs of our existing markets or it’s a new market but that it’s complimentary. Or obviously from the globalization standpoint we look at that opportunity.

It’s typically higher risk so we’re willing to look at an investment but we’re not willing to buy things out immediately. Sometimes these are early stage or we’re making late-stage investment so we do come in occasionally around on a series A but, typically, it’s a little bit later than that.

And it’s not just the financial return, obviously we’re looking for a financial return, but the strategic fit is more important for us. And I think as Medtronic has evolved and the ecosystem has evolved that we’re looking at these opportunities where in the past Medtronic would be very passive with the investment.

But now I think that one of the things that we’re trying to do is provide more value both from a clinical or research standpoint, maybe some infrastructure leverage so the startups can leverage some of the Medtronic infrastructure. And I think that’s an interesting change and maybe something that you can as the CEOs and founders of startups it may be a more highly efficient use of your cash to leverage Medtronic infrastructure.

So we don’t like to have controlling interest. We’ll typically take some sort of board seat either that or an observer. Valuation is typically not driven by Medtronic but driven by one of the venture capital partners that would go in and around. The sweet spot for us is not the $250,000 to $500,000 or a million dollar, those are typically the series A, whether it’s venture capital or angels, who are kind of going in there.

We like to go in that $2 to $10 million range which means that proof of concept has typically been reached, we kind of have an idea that it’s interesting but it’s early. And then if it’s appropriate, it depends, sometimes we would like to have strategic rights to distribution or something that can get cash flow generation, the company, for Medtronic, or for the startup early. That obviously varies.

And then lastly, our criteria for acquisition. For the tuck-in acquisitions, it really has to augment either the core strategic technology or the market set we’re looking at. And it has to have a great feel with our business. One of the most complex things in the world is bringing in new technologies, sales force integration, all the things that are important to the execution of a deal. And so we look at that.

Obviously as a public company we want to minimize dilution, but really we need to be able to add value to these things, otherwise it’s just a purely financial transaction and that’s not what we’re doing. We need to be able to add value and add that.

Lastly,
we do look at white space. We do use our investment minority investment portfolio to look at white space. So look at places that we don’t actively have businesses but that we could have a potential either a technology fit in the future or a customer fit in the future. So we are actively looking at those things. We keep our eyes and ears open on the ground typically because we don’t have a business unit associated with white spaces then that would be our group that kind of monitors things that go on.

The last thing I’ll say is, and we’ll open up to questions is, the things that kind of I outlined here today it’s important for me and my group and for hopefully all of you. When you think there’s an opportunity for Medtronic, make sure it fits our strategy number one. So if it’s outside of our strategy it’s probably the quickest way to say a no.

Number two is, make sure that as you think about your products and how it fits into our portfolio, that it makes sense. So if we currently have products in the same category, for the most part, that’s probably going to be another quick no.

And then the last thing is help us we’ll help you get to the right people within our organization because it can be a large group. And one of the things that I think folks struggle with is who do I need to talk to at Medtronic. And so I’m happy to kind of linger afterwards and if there’s questions about how do you get to the right level and who do you get to the right folks, provide some of my guidance on that.

So with that, Joe, I’d open it up to questions.

Joe Hage: I’ll take the first one … I’m the guy with the mic. How many solicitations do you get a day?

Mark Pacyna: Well, so we have about 100 business development folks within Medtronic and I think on average I probably get four or five a day. So if you multiply that times 100 there’s probably 500 coming in a day.

Joe Hage: And how many of those 500 would you speculate are not spam, like, deserve your real considered attention?

Mark Pacyna: Well, I’ll say we consider all those, Joe, first and foremost.

Joe Hage: That’s a great answer.

Mark Pacyna: (Chuckles) But I think obviously when you’re talking about the volume that we’re talking about, a lot of it is that we’ve got long-standing relationships and the business development professionals have long-standing relationships with a lot of the individuals in here. And so that’s really where the best opportunities come from. That’s where, a lot of those inquiries come in which is updates less than, “Hey, we need you to buy us.” It’s, “Hey, let’s get together at the next conference and give you an update where we’re at.”

So I think a lot of that is kind of updates and kind of staying on top of stuff versus true actionable, you know, “You need to buy us tomorrow.”

Joe Hage: We, here, have the luxury of you being here and offering to help us and we’re grateful but what about the guy who isn’t part of the group, didn’t come to the conference, sees the name Medtronic on the building, wonders how to get in, where do they start? They don’t know your name; they don’t know any other people?

Mark Pacyna: Sure. Well I think that the most important thing is to start with the business unit that you’re looking to partner with. So if you’re looking at our vascular business, find somebody within our vascular business. It’s networking 101; get to the right folks. I think the thing that I found is most important is be respectful to time as we all I think are in this conference I have seen that already today and yesterday.

But be respectful of everybody’s time, find somebody within the business unit that’s interesting to you or work through the groups. That’s the best place to start because then you’re going to get a real answer and you’re going to get somebody who like me wants to help and wants to find the right person for you to talk to.

Sailesh Chutani: This is Sailesh Chutani. So I have a question about how are you thinking about emerging market opportunities and are you looking at imaging modalities for those markets? And what kind of impact is Omar [the CEO] having?

Mark Pacyna: Yeah, so I our CEO came from GE in their medical imaging group. He was an ultrasound guy and so he was one of the first guys that kind of really pushed on innovation for local markets. So he was one of the first guys within his watch at GE they developed some portable ultrasound machines. And that innovation and what they brought there to India, which is where it started, has come back to the US and all the developed markets.

And so I think that experience from his standpoint has been something that he has pushed and I think rightfully so for Medtronic to get out of its comfort zone and to go into those markets and invest in. Like I said in India it’s a business model innovation which is, what are the technologies that’s needed for a place like India? It’s different than Russia, Brazil, China, Indonesia, Mexico. You go down the list and every one of those has different needs. And unless you’re there, which is what Omar has been pushing our CEO, unless you’re there you don’t know.

And so I think I think you’re seeing us go to all of these places much more often in a much more meaningful way. And I think you’ve seen that in our investment strategy and what we’ve done with big dollars but also behind the scenes that’s what we’re doing.

Scott Nelson: First thanks for the presentation. It’s great having you come and present a lot of this great content. But a couple of questions regarding the current headwinds. We spoke a lot, a lot of this discussion yesterday was about the headwinds, the longer regulatory timeframes, they’re getting more expensive, reimbursements is getting harder to obtain, etc.

And specific to one of those slides you showed regarding two of those major acquisitions in Corevalve and Ardian that happened in 2009/2010, correct me if I’m wrong but those ideas for those devices were initially developed in late 90s early 2000s, something along those lines?

Mark Pacyna: Yeah.

Male Speaker (Audience): So we’re fast-forwarding 10 years. With the lack of VC interest now and as well as angel interest, do you think there’s going to be an innovation gap if we fast-forward to like 2020 or 2022 around that timeframe? And what does that mean for Medtronic in terms of trying to bridge the gap between series A and late-stage deals?

Mark Pacyna: So my personal opinion is that there’s already an innovation gap. So we’re already seeing a gap today. Because as you saw the pipeline of VC investors and series A guys has dried up over the last four years. So those extra dollars should have been manifesting itself on technologies today. Maybe not on the market but mature enough that you’ve got technical proof of concept, maybe they’re right to go into a PMA or an IDA trial. So we already have a gap today and that gap is only going to get worse from my standpoint.

Now a lot of good ideas are still getting funded but you’ve got a huge clinical and regulatory investment that Medtronic or other parties have to invest now to bring this to market. And so I think you’re seeing a lot of companies that have innovation and have gotten to a certain point coming to Medtronic earlier than we’ve ever seen to say, “Help us structure a deal now where we’ll take some of the upside off the table,” but we need help fund to get there.

So you’re seeing a lot more structured deals today with some of those early face companies that typically you would have seen the venture capital guys or somebody else invest in and not even go to Medtronic for that. And I think that has changed si
gnificantly over the last few years and that gap’s only going to get worse.

So I think you’re seeing us more selectively look at those types of acquisitions or stepped acquisitions or partnerships that we’re doing and I think you’re going to see a lot more of that.

Dov Gal: So just to clarify, you said before that you like to come with other VCs and not leading them round. With all the challenges that you mentioned regarding the VC money coming down, how do you reconcile this as a Medtronic. Would you come in as a lead investor and what stage of a medical device company would you come in?

Because I keep hearing before you have clinical data, you know, companies, VCs are reluctant to invest so can you elaborate on that?

Mark Pacyna: It’s a great question. So, this is going to be overgeneralizing because we come in at all different stages and we lead investment ourselves as well. But typically there’s still enough capital out there for the best ideas so that we don’t have to go by ourselves or lead rounds by ourselves.

So there is still a bunch of different venture capitals that have plenty of money and that are actively funding the best ideas. Typically we’ll go in with them. Typically is after series A so typically at series B we’re seeing some clinical proof of what’s going on whatever that technology might be is done already.

So for us to, you know, we’ve got enough internal programs that we’re trying to invest in to see where this could go or what this technology can do. And so we don’t typically invest in that series A where we’re still working on the clinical proof. It’s got a great idea, we’d like to be part of it. Typically we get those emails and calls every day and say, “we’ll meet you guys and keep us up-to-date.” But once we’re ready to go with a little bigger round of financing say that $2 to $5 million range, that’s when we would engage.

Todd Staples: Hi Mark. Nice presentation. I think I really keyed in on the pyramid that you showed with the premium versus the value in underserved markets. I think it goes without saying the vast majority of the focus for the company is probably on the premium markets when it comes to especially innovative technology that you’re bringing into the market.

Question I have for you is around sales channels. Obviously it’s a direct sales force in the US. What changes, if you can elaborate a little bit more, have you guys made with the training with the focus of the sales, focus on the field, and just the general way that you introduce new products into the marketplace? I know that’s going to change a lot with your comments about old world versus new world. How that actually is being rolled out in the field as far as implementing resources is really an important question I wanted to ask.

Mark Pacyna: It’s a very complex question for us because we have so many different channels. And I would say that we do have direct and distributor models in the United States and obviously outside of the US we have both channels still. And the way that we look at it is a lot of our distributor models though, are dedicated to Medtronic so they’re really more of a part of Medtronic to begin with.

The key though what – I appreciate your question – is, the economic value stuff that we’re talking about as we put that through our filter for our new technology company which means that when you’re looking at the clinical strategy there’s got to be some sort of economic component of the clinicals that go through this that we can prove the benefits.

The flipside of that is we’ve got a lot of products and technologies on the market today. So our sales organizations are the ones that are the first ones that are implementing a lot of the economic value effort. So when you’re going through not just the physicians but the purchasing managers, the cardiovasculars or the other line managers and then obviously the CFO of the hospital, those are where the economic value programs that are near-term are coming in with our products.

The products whether they’re clinical more efficient, you’ve got time savings. Those are the types of programs that we’re putting in place today from an economic value standpoint, it’s the near-term stuff that the sales organization is doing and that’s changing how we’re rolling out the sales organization. So not every sales rep has the ability to sell that way today.

So that’s the biggest thing is we have to retrain the sales organization to sell in a different manner and to be able to be comfortable with some of those things and give them the right tools to do so.

Barb Peterson: Hi Mark. My name is Barb Peterson, I own a consulting company here that does clinical regulatory and reimbursement work and we just did a deal with Medtronic for some of their clinical trial reimbursement.

But can you tell us how the changes in reimbursement are going to affect Medtronic, say, accountable care organizations? How are you guys embracing those kinds of entities? That would be great.

Mark Pacyna: Yeah, so we know that the environment is changing significantly we put a slide on there. But really what the accountable care organizations are doing for Medtronic is we think about the importance of whether it’s bundled payments, disease management, those things that we already have a lot of tools for we’re trying to make sure those tools are more integrated so that we can partner with those organizations more efficiently.

The perfect example is in diabetes we’ve got a couple of technologies that you tie into kind of a disease management. Continuous glucose monitoring, our pump business but there are a lot of other things that go into that business around managing the patient’s complication rates. And we’ve got networks and infrastructure to kind of manage those patients outside of a physician’s office or outside of the hospital.

And so we’re looking at programs across the line in all of our business to how do we look at those as a continuum of care and as a disease. Because then when you go to a Kaiser Permanente or you go to one of the other ACOs that are developing, you have an ability to partner with them on a different level then it’s just selling another widget too.

So that’s really what we’re doing now. It’s early and we’re still working on that but I think that’s something, as Medtronic kind of wrestles with it, we’re putting in place the ability to kind of go across the continuum of care with our therapies and not just the implants.

Tom Kramer: Hi Mark. I’m Tom Cramer with [Koblui] [37:56] Design. It’s kind of obvious that everyone’s averse to risk. Nobody wants to take the risk, the VCs don’t want to get in too early, Medtronic doesn’t want to do really series A until it’s clinical. The entrepreneur wants to take a risk but can’t because he doesn’t have money.

I’m making an assumption that Medtronic innovates to a certain degree internally and you’ve got projects internally that you’re taking risks on that don’t have clinical proof at this point but you’re making a choice to go ahead and invest and pursue those innovations.

So what can the entrepreneur do who is seeking that early preclinical data proof investment? What can he do to change your mind to get you to invest in him the way that you do in your own internal innovation?

Mark Pacyna: It’s a question that we wrestle with all the time, honestly. And really what you have to do is you have to make your program more attractive than our internal program. We have to trade off, I mean we have a lot of money but we don’t have an infinite supply of money. So you have to make your program more attractive to invest in than our internal program.

So that’s how you make the investment. It’s not that there’s increment
al funding just sitting out there for Medtronic, we’ve got our R&D budgets they’re all locked and loaded for multiple years typically because of the time period that we deal with.

So you’ve got to make sure that the business that you’re interested whatever it is is actually more a bigger opportunity than the one that we’re trying to pursue internally. And that’s really what the businesses do when we do invest. We’ve got $500 million invested in so they can invest that internally or they can invest it externally.

So the opportunity has to be good enough that we make that tradeoff. And it’s 101 but thank you.

Male audience member: Hi. We had DC representatives here yesterday who talked about the 2.3 percent tax on medical devices. Just I know Bill Hawkins before he left was a big proponent of the ACA. I just want to understand where the new CEO is and how Medtronic I know it’s costing you guys you estimated it’s going to cost about $150 million a year or something. Where does that stand within Medtronic?

Mark Pacyna: Well I think that we would be supportive. We’ve part of Advamed so we’re working closely with Senator Klobuchar on those same efforts. I think it is, the comments yesterday I was here for, I think it is impacting the industry significantly and so I think we’re supportive of the efforts to repeal that.

But we’re not counting on it quite frankly. No business can count on that and we’ve got to put plans in place to address that, take that cost out of our business. I think all the big companies I think Cook and everybody that spoke, NuVasive, we’re all doing the same thing. We all have to address that reality today and if it changes it changes.

Greg Davis: Mark, this is Greg Davis. Thank you for being here. A question for you, historically in the device business, most of the product has been designed and developed in the US. Can you talk a little bit about the decentralization of R&D and are there tensions has that created in the organization as things are looked at being developed in Singapore as opposed to the US and for different markets?

Mark Pacyna: So I can’t, quite frankly, speak all that eloquently on any tensions there are, but we just did open up our Singapore innovation facility. We’re looking at doing those types of things elsewhere but we’ve always done lots of research in other markets as well. So as much as that is changing more rapidly now, we’ve always had a huge presence in Europe, we’ve always had presence all over the globe on that side.

So I wouldn’t say that there is a huge tension right now because the focus in other parts of the world are really on those markets so you have to be there to efficiently and effectively know what those markets need. So I don’t see it as a huge tension within Medtronic.

Joe Hage: Walking to our next question. I took the long road.

Carl Rosner (Audience): Thank you. I’m Carl Rosner. I have a question that addresses a larger issue. There’s a lot of news coverage about the broken healthcare system and how are we going to reduce the healthcare cost and GDP which is approaching 20 percent, which is unsustainable. How does Medtronic look at that problem and how do you think that problem is going to be solved? Because it has to be solved.

Mark Pacyna: So I think it goes back to the economic value kind of discussion that we’ve been having this morning and what Medtronic view on it is we’re going to have to justify every single one of our products in terms of economic value. So the clinical value versus the cost and every single thing that we’re looking at today all of our R&D programs are focused on addressing that single question because we know we’re not going to be able to continue to get ASP increases and we’re not going to be able to continue to put out new products that just cost the system more money without providing more economic value in return.

So as much as that’s changing, you know, and Medtronic is trying to internalize that in terms of everything that we do we try to address that fact and that’s one of the things that our new CEO has really been pushing on is that even our internal programs where we’re saying it’s an incremental improvement over our current products if that doesn’t make sense from an economic standpoint that falls down in the priority list. So it’s changed everything that we do.

Now the broader of how it all plays together I don’t think I can probably comment effectively on that but our plans are that everything has to have more economic decision points for our customers so they’re doing it today. And so I think it’s only going to get worse in the future.

Joe Hage: Would you be able to share an anecdote or two about a recent success you’ve had with a company having approached you, gone through the process, and you decided to become a strategic partner. And perhaps another where you became a strategic partner and it didn’t integrate well, it didn’t go well, and were there characteristics of that, that we can learn from?

Mark Pacyna: Let me start with what doesn’t go well because I think it’s easier because of the things that I look at nine times out of 10 it doesn’t go anywhere.

So I think the biggest things are when a company comes to us and it’s just clearly not in our space. So for instance something that comes in aesthetics, it’s not something that’s consistent with Medtronic’s mission and it’s not something that we have a current business in.

So when you think about that it’s a great market, it’s growing fast, it’s a really unique market, it’s a differential business model than what we do with patient pay but it’s not something that we do every day. And so if a company comes to us with an opportunity that falls outside what we do, it really doesn’t go anywhere fast.

And so I think that’s the biggest kind of takeaway I would have is, you know, if it doesn’t fit, and they probably should have done more homework, it doesn’t go anywhere.

The other thing is we don’t really disclose who we’re invested in for the most part. So the partners that we do have are folks that typically have a longstanding relationship with Medtronic. That doesn’t mean we’ve invested for a long time that but that we know the management teams, we know the people, we know the technology, we know what they’re trying to do, and we’ve been monitoring that for a long time.

So most of the investments that we do make and most of the times are those that we’ve been monitoring for a number of years that we meet at the conferences, that have developed a relationship, that are working on things that are going to have the clinical benefits or getting to the stage where they’ve actually got the feasibility trials etc. done, and then that’s when Medtronic has fully engaged.

So there’s a number of those that we’ve recently invested in but we’ve known about these companies for years and monitoring those companies and seeing where they’re at. And when it’s the right time for both parties, that’s when we become partners.

Joe Hage: And a typical structure is how integrated does Medtronic management, you know, there’s investment of money and then there’s investment of resources and intellectual capital. Can you talk to that a bit?

Mark Pacyna: I would say that typically we’re not, we don’t put people on the ground. We can provide some consulting, some overarching perceptive on clinical trials but we won’t… and the investors and entrepreneurs don’t want us to be too involved. They want us to provide guidance but it’s really up to the company to drive that. So we don’t typically do that.

So the flipside is we made a couple of investments in China and obviously we’ve droppe
d in relatively big teams there so that we can learn and provide value to that company at the same time. So it just depends on the situation of how we do it. But typically from an investment standpoint we don’t put people into the company or do that, it’s more of a consultative board position that we would take.

Joe Hage: Can we assume that that is a similar strategy among other large multinational companies or is that Medtronic but expect something different of Boston Scientific?

Mark Pacyna: I would say most of the large players like us take the same stance.

Joe Hage: Thank you.

Dov Gal: I want to go back to Joe’s first question and if you can give a specific example of success, could you talk about Engager, do you see it as a success considering when you purchased it what you had to go through in clinical trials in order to launch in 2014?

Mark Pacyna: Right, you were going back to one of the things we have in our launch schedule. And I think this is more than just Engager, but it’s Corevalve, it’s Ardian all of them have required additional clinical investments to get through approvals and get to the stage of market launch, and technology developments etc.

But I think that one of the things that has evolved over the last three or four years and we heard about it over the last couple of days that it’s one of those things that continues to evolve. And unfortunately sometimes it takes longer than you want but really at the end of the day it’s a good technology. It’s a great technology.

So Ardian and Corevalve there’s a lot of life-saving technologies in that we just have to be prudent in terms of how many of those clinical and regulatory risks we take because it’s really expensive.

Fergus Fleming: Hi Mark. Just interested on the investments that Medtronic have made in patient management healthcare management systems to manage chronic disease in the community or in the post-op environment. Is there any strategy in that area?

Mark Pacyna: Well we actually have a lot of investment already today in our CareLink Platform for our cardiac pacing. I don’t know if you’re familiar with that but we have if they’re pacemakers they transmit data wirelessly back to physicians to manage those patients. And I think that’s been in place for a number of years but you’re going to see that continue to be built upon, that general model, and probably augmented with other things as we go forward.

So I think that’s probably the clearest example of that strategy and that strategy was put in place, gosh, seven to 10 years ago and it’s only picked up steam as we think about how this goes and how it transforms with the environment we’re in today.

(Inaudible)

Mark Pacyna: Yeah, I think it’s actually e-health and IT investments are probably one of the areas where 10 years ago we wouldn’t have looked at at all, five years ago we would have thought were interesting and today we think is potentially very complimentary to our current technologies. So I think you’ve seen that evolve over time and I think you’re going to see that continue to change with the ACO question and how that relates to the US.

But also, quite frankly, there are places in the emerging markets where you can skip some steps and maybe avoid some of the hospital visits etc. that you want to keep out and it’s a different business model completely. So I think you’re looking at two different ways to look at that and we’re actively engaged in that kind of debate.

Perry Mykleby: Hi Mark, I’m Perry. I’m curious to know if there’s ever been a situation where someone has brought an idea to you for a product and maybe the product itself wasn’t a fit but you were so enamored by the brand or the person that you got together either on an employee basis or you said that person has an intellect that we want to get involved with.

Mark Pacyna: Happens all the time, actually, and for those of us that have been in this industry for a while, I think it’s always best for us to develop and maintain good relationships with all these smart people that out there trying to think of what’s next. And often times you’ll see within our R&D groups especially and within those areas that they’re into Medtronic then they go back out of Medtronic, they invent something cool then they come back in and then they’re back out.

I mean it’s one of those things where it’s a small world and I think you see that there’s a lot of innovation that’s happening and whether it’s here or in Europe or in Asia wherever it might be, those people or those individuals are really unique and that’s something that Medtronic values.

Rick Gerace: Good morning, Mark. Again thank you for being here and sharing your experience and expertise. If you were looking more instead for an investment type of a relationship but maybe you had a product that was a fit and more to tap into the distribution network, how does that work and is there other opportunities for that?

Thank you.

Mark Pacyna: Yes, you’ve got a product that would fit our distribution channel and think it’s at the right stage to see if it’s a partner. So the best way is to come through my group or through one of our business development folks in the business unit. So take spine for example, if you’ve got a spinal product that’s interesting we’ve got a head of business development in our spine division that’s probably the best place to start.

So if you know that individual or don’t, that usually a lot of those incoming inquiries to me or to other folks in our group then get shipped right over to our business development folks. They’re the ones that have the strat plan, have the R&D pipeline plan, have the here-is-how-this-fits and are the ones that are tied to the business unit strategies more closely.

So if there’s ideas of an opportunity like that it can come to me and then it will get kind of triaged to the right place after that.

Joe Hage: Is there a team on the ground focusing almost exclusively on telehealth, telemedicine?

Mark Pacyna: I wouldn’t say that there is one team focused on that. We actually have many teams focused on, each disease stage is a bit different so cardiovascular is very different than diabetes management just in terms of the patient needs, the demographics and kind of what they do in and outside of the system.

So I think there’s many teams that are valuing that and we have many platforms that Medtronic can use across all of those. We talked about this CareLink Platform already but there’s many teams thinking through e-health.

Joe Hage: Okay, and considering we’ll rebroadcast this far and wide, are there any strategic areas – this may be a question that you can or can’t answer publicly – are there any strategic areas of particular interest that you would invite our viewers to by all means think of Medtronic in your consideration set when you’re…?

Mark Pacyna: I would encourage everybody if they think it’s a fit for Medtronic to come to us because the last thing we want to do is not be involved in a process if there is a fit. What my commitment typically is that we’ll get you a quick no if it doesn’t fit, but come to us if you think there is an opportunity.

Joe Hage: And again is there an email address or a page or someplace to start if you are uninitiated and you don’t know where to start?

Mark Pacyna: Yeah, so I think that there is not one direct place. I would highlight going to the business unit folks because those are really the first line folks for the vast majority probably 95 percent of the inquiries that come through o
ur best triage by that group. And so if you have a spine idea, go to the spine folks and I can help certainly with that but I would recommend and finding that person directly so that it’s a more efficient process.

Joe Hage: Ladies and gentlemen, Mark Pacyna from Medtronic.

Mark Pacyna: Thank you.

[Applause]

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