(1) Describe, the competitive landscape Medtronic face in 2017;
(2) Critique its new strategy using lessons learned about value-based healthcare effectiveness;
(3) What are Medtronic’s core competencies and how can they use them for increased competitiveness?
(4) How can Medtronic address the specific challenges of countries emphasizing reduced healthcare spending and the slow adoption of innovative techniques and care models?
Medtronic: Navigating a Shifting Healthcare Landscape 9-718-471 R E V : J U N E 2 8 , 2 0 1 8 Professors Robert S. Kaplan and Michael E. Porter, Senior Fellow Thomas W. Feeley, and Senior Researcher Alee Hernandez prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. Professors Robert S. Kaplan and Michael E. Porter have been compensated for speaking at Medtronic sponsored events. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. R O B E R T S . K A P L A N M I C H A E L E . P O R T E R T H O M A S W . F E E L E Y A L E E H E R N A N D E Z Medtronic: Navigating a Shifting Healthcare Landscape We want to help drive change in the healthcare system. To be successful at this, we need business models where we benefit from taking on shared accountability to produce better outcomes. — Omar Ishrak, CEO of Medtronic Medtronic, the largest medical device producer in the world, had fiscal 2017 revenues of $29.7 billion (see Exhibit 1) and employed 91,000 people in 160 countries. Medtronic organized its product and service offerings in four large business groups (see Table 1). Exhibit 2 lists representative products offered by each of the four groups. Table 1 Product Group 2017 Revenue Percentage Cardiac and Vascular 35% Minimally Invasive Therapies 33 Restorative Therapies 25 Diabetes 6 Source: Medtronic company documents Medtronic conducted its global business through a regional structure; the Americas region had 60% of revenues; Europe, Middle East, and Africa, 23%; Asia Pacific, 12%; and Greater China, 5%. The U.S. accounted for 55% of total revenue. Medtronic was experiencing increasing pressures on its prices and profitability. Omar Ishrak, CEO since 2010, had to navigate the company through a rapidly challenging competitive environment of slower growth in core products and markets, rapid technological change, increased concentration of customers and competitors, and tighter regulation of its customer relationships. This document is authorized for use only by Kristopher Durham in Stratgic Thnkng & Decis Making - Spring 2021 at Wake Forest University Medical School, 2021. 718-471 Medtronic: Navigating a Shifting Healthcare Landscape 2 History Earl Bakken and his brother in law, Palmer Hermundslie, founded Medtronic, a medical equipment repair and sales company, in Minneapolis, Minnesota in 1949. Operating from a 600- square foot garage, they served local physicians, hospitals and researchers. The founders soon began to extend their offering by modifying existing medical devices to incorporate new technologies. The company’s first major product was a portable cardiac pacemaker. In 1952, Boston physician Paul M. Zoll had demonstrated how electrical stimulation could restart the beating of a stopped heart, but the repeated shocks from Zoll’s crude device were painful and it was not a commercial success. About the same time, University of Minnesota surgeon C. Walton Lillehei, a leader in the new field of open heart surgery, was looking for a way to pace the heart following surgery. Lillehei asked Bakken if he could develop an external portable pacemaker for post-surgical care that could be connected via wires implanted directly into the cardiac muscle. Bakken developed a battery- powered pacemaker that could be taped to a patient’s chest. By 1960, Medtronic had reduced the pacemaker’s size and power so that it could be implanted subcutaneously for long-term use. While a clinical success, the new device’s high price prevented widespread adoption. In 1965, the new Medicare legislation included coverage for pacemakers, and sales of Medtronic’s device took off. The company continued to grow during subsequent decades but financial performance was uneven. Under Dale Olseth, who took over as CEO in the 1976, and Winn Wallin, who became CEO in 1985, the company expanded globally and introduced new products, such as the first long-lasting lithium battery for pacemakers, and the first implantable drug pump for cancer pain. In 1989, Bill George was recruited from Honeywell to be the president and COO; he became CEO in 1991, a year when Medtronic first reached $1 billion in annual revenues. In 1990, a favorable Supreme Court ruling in a patent dispute with Eli Lily had opened the door for Medtronic to enter the market for defibrillators and other implantable cardiac devices. Medtronic used acquisitions to expand into devices for spine surgery, brain surgery, coronary artery stenting, cardiac surgery, and diabetes management (Exhibit 3 shows Medtronic acquisitions and partnerships since 2015). Medtronic’s innovative products included implantable pumps for pain management, insulin pumps for diabetes, and devices for cardiac catheterization and open-heart surgeries. Medtronic sales hit $2 billion in 1993 and $5 billion in 2000. It market capitalization increased from $1 billion in 1991 to more than $40 billion in 2001. George retired as CEO in 2001, and Medtronic’s revenues continued to grow under his successors. But in 2011, sales growth slowed to 1% and the stock price declined, and the board appointed Omar Ishrak as CEO. Ishrak had been head of Healthcare Systems at General Electric (GE) where he built the low-growth ultrasound business into an innovation and global leader. He had also led the development of market-leading anesthesia and patient monitoring devices, and enhanced the performance of diagnostic imaging modalities such as magnetic resonance (MR), computed tomography (CT), and positron emission tomography (PET). When Ishrak took over, sales of Medtronic’s core products of implantable pacemakers and defibrillators were declining, and sales in its three biggest market segments, heart rhythm, coronary artery, and spinal devices, had flat sales. Further, most of its sales (86%) were in developed markets, all of whom were implementing programs to reduce health care spending growth. Medtronic’s 60-year history of medical device innovation, product development, and sales growth were being challenged by payers focused on containing health care spending. Ishrak believed, however, that Medtronic’s high performance medical products and services, such as catheter-placed aortic valves and new systems for This document is authorized for use only by Kristopher Durham in Stratgic Thnkng & Decis Making - Spring 2021 at Wake Forest University Medical School, 2021. Medtronic: Navigating a Shifting Healthcare Landscape 718-471 3 managing patients with acute and chronic conditions, along with the company’s expertise in clinical care and reimbursement services could be used to demonstrate clinical and economic value. Health care, however, had traditionally been slow to adopt even proven technology innovations as clinical standards of care. A Changing Industry Landscape Medtronic faced multiple strong competitors in 2017. Johnson & Johnson competed with all four of its product groups. Abbott, Boston Scientific, and Edwards were major competitors in Cardiac and Vascular; Stryker and Zimmer in Restorative Therapies; Boston Scientific, C.R. Bard, Cardinal Health, and Baxter in Minimally Invasive Therapies; and Roche and Omnipod in Diabetes. Medical device manufacturers had to obtain FDA approval for each device, which included labeling as well as certification of the manufacturing process. Submitting a new device for approval started with biocompatibility data and safety data to demonstrate that no harm or adverse biological response would occur due to the materials used. Devices fell into three classes for further review. Class I devices, typically basic devices like hand-held surgical instruments, were subject to minimal requirements. Class II devices, including infusion pumps and motorized wheel chairs, had to demonstrate compliance with performance standards and be subject to post-market surveillance. Class III devices, which included implantable devices, were subject to the most intense evaluation, including human clinical studies. Exceptions for Class II and III devices could be obtained if the manufacturer could demonstrate that the new device was “substantially equivalent” to one already approved. Unlike pharmaceuticals, substantially equivalent devices did not require randomized clinical trials to demonstrate superior performance when compared to an existing, approved device. Historically, medical device companies had negotiated prices directly with hospitals or other provider organizations. Hospitals balanced the cost of the device with the Medicare DRG (diagnostic related group) payment or the fee-for-service payment from a private payer or Medicaid. Supplier contracts with commercial payers often included discounts, rebates and volume incentives. The medical device industry was subject to many regulations. Congress passed the Medicare Fraud and Abuse Statute, commonly called the Anti-kickback Statute, as part of the 1972 Social Security Amendments. The Statute prohibited “the offering, solicitation or acceptance of any type of gift or remuneration in exchange for rewarding referrals for businesses accepting federal healthcare payments.” The 1987 Medicare and Medicaid Anti-Fraud and Abuse Amendments expanded the statute and increased its violation from a misdemeanor to a felony. In 2009, the Departments of Health and Human Services and Justice created the Health Care Fraud Prevention and Enforcement Action Team (HEAT) to detect violations and prosecute offenders. In 1989, U.S. Congressman Pete Stark introduced legislation on self-referrals that eventually became Section 6204 in the Omnibus Budget and Reconciliation Act of 1989. This section, usually called Stark I, prohibited the referral of Medicare patients to clinical laboratories in which the physician or the physician’s family members had financial interests. In 1993, Congress passed “Stark II,”1 which extended the federal ban to ten additional health services, and also applied the extended ban to Medicaid. The Physician Payment Sunshine Act of 2013 forced all suppliers to disclose transfers of value of $10 or