ARTHUR COLLINS of MEDTRONIC - Keeping pace

The leading medical device maker has had a spectacular decade. Its new chief's simple challenge? Keep it growing.

By Justin Schack
July 2001
Institutional Investor Magazine

The leading medical device maker has had a spectacular decade. Its new chief's simple challenge? Keep it growing.

Succeeding a legend has never been easy. When Arthur Collins Jr. became chief executive officer of Minneapolis, Minnesota-based Medtronic on May 1, he followed William George, an executive who had done a remarkable job of running the world's leading manufacturer of medical devices. In a self-imposed ten-year term, George built Medtronic from $1 billion in sales in the fiscal year ended April 30, 1991 to $5.6 billion in the year ended April 27, 2001. Over that same period earnings grew from $133 million to $1.3 billion, and Medtronic's market capitalization leaped from $3.3 billion to $54 billion. A $100 investment the day George became CEO was worth $1,500 on the day he turned the reins over to Collins.

That is a tough record to match, especially in a softening economy, but Collins, 53, says he's ready to meet the challenge. After leaving Abbott Laboratories to join Medtronic in 1992, Collins played an major role in creating the company's sparkling record. He was president of Medtronic International, which now operates in 120 countries, before becoming president and chief operating officer of the parent company in 1994. There will, therefore, be no wrenching changes of direction.

Medtronic, says Collins, will continue to emphasize growth through a rapid-fire cycle of new product introductions based on heavy research and close work with doctors. The company invented the cardiac pacemaker in 1957 and still dominates that market. Over the years it has expanded its products to include implantable defibrillators and stents (used to widen arteries) and has become a leader in those markets as well. More recently, Medtronic has added devices for neurological and spinal care and for ear, nose and throat surgery. Part of its growth in recent years was due to a series of acquisitions to fill out and add product lines; that strategy, says Collins, will continue. He recently announced acquisitions that will get Medtronic into implantable insulin pumps for the treatment of diabetes.

Collins is a onetime naval officer and former management consultant with Booz, Allen & Hamilton. While in the Navy, he got an MBA from the Wharton School of the University of Pennsylvania, where he also taught undergraduates. Recently, Collins discussed Medtronic's prospects with Institutional Investor Staff Writer Justin Schack.

Institutional Investor: How do you follow an act like that of Bill George?

Collins: Well, to begin with, Medtronic is positioned today as well as it's ever been positioned. We have a number of different growth platforms. These new therapies we'll be bringing forward are actually addressing populations that are larger than the population for our business to date. We're moving into some very large market segments that we haven't participated in before.

Like what?

Heart failure, for example, is the single largest Medicare category by a factor of two in the U.S. It's been estimated that up to $40 billion is being spent to treat heart failure in the U.S. each year, and it affects a little over 5 million Americans. We've just released some data from the American College of Cardiology that demonstrates that taking a pacemaker and pacing both sides of the heart can significantly improve the condition of heart failure patients.

Atrial fibrillation is another one. This is where the upper chambers of the heart - the atria - either beat irregularly or too fast. It was thought to be somewhat of a benign condition, but now information is available that you're at a much higher risk of having a stroke. There are about 2 million Americans that suffer from atrial fibrillation. We just introduced a product in the U.S. that is our newest family of implantable cardio fibrillators to treat AF.

Medtronics has performed very well the past decade. Still, are there things you woud like to change?

I've been involved with Bill - in a number of positions - on the strategy, whether internal or acquisition, so in one sense this is a seamless transition. Now, having said that, the nature of Medtronic is that we are constantly reinventing ourselves. If you went back five years, under Bill's leadership, we are doing things much differently today. We're in different markets and approaching businesses differently. So will there be change? Sure.

Seventy percent of your sales last year came from products less than two years old. How do you do that?

I think it's the nature of our industry. Unlike pharmaceuticals, the development cycle is much shorter. You're working very closely with clinicians, you're coming up with better approaches, and you're integrating those much more rapidly. We invest heavily in research and development - generally, at or above 10 percent of our revenues. We're spending over half a billion dollars a year.

What makes cycle time so fast?

The underlying technology is moving very rapidly. A pacemaker or an implantable cardiac fibrillator is a sophisticated computer. As computing power with integrated circuits has increased, we've been able to pack more in.

Your income has grown faster than your revenue. Has there been a focus on cutting costs as well as on growing?

I don't think you can save your way to prosperity, so you've got to keep the top line up there. But we've spent a lot of time trying to streamline the manufacturing process; we have common manufacturing approaches for different products. And at the same time, we're improving our quality, because if you have the quality, that translates back into profitability. But I want to continue to invest in research and development, because that's the lifeblood of the business.

You've made a number of acquisitions. How do you make them work?

We've had our share of failures. But what we learned first of all is to do a proper job of identifying the target and making sure you understand why you're acquiring it. We found that it's much better to go after either a No. 1 company in the industry or a very attractive technology or growth vehicle rather than to buy an also-ran and try to fix it up. Companies that do that generally find out that there was a reason why it was an also-ran. In those areas that need change, try to do it very rapidly because no one likes to be in a state of uncertainty.

How much of your business comes from outside the U.S.?

It's about a third of the business now. Maybe five years ago we used to be right around 40 percent. Two things have happened. One is the strengthening of the dollar, which has had a significant impact on revenues. Last year we had a $149 million negative impact on the top line simply because of currency. The other thing that has moved the international share down has been that many of the companies that we've acquired had a much larger U.S. business compared with international. Now, we believe that in our industry it's very important that you operate in all the major geographic markets. I think we'll see that currency-neutral sales outside the U.S. should grow somewhat faster than sales in the U.S.

Which are your strongest, or most promising, overseas markets?

Outside the U.S., Western Europe is our single largest geographic revenue-generating area. After Western Europe we would go to Asia-Pacific. Clearly, the major country there is Japan. Even though they come off a small base, our business in Asia-Pacific, outside of Japan, is growing very rapidly on a percentage basis.

What's the impact on Medtronic of a slowing economy? People don't stop getting sick.

We would much rather operate in an economic period of growth than in an economic period of stagnation or recession. Having said that, you're right. In the businesses we're in, people will continue to get sick and have a need for our products in good and bad economic times. So it has not had a significant impact on the demand for the product.

How do you see Medtronic going forward with you as CEO?

We will continue to apply our technology in the treatment of chronic disease and will continue to expand in a thoughtful manner. That'll be somewhat of an internal growth, but we'll continue to acquire. We're not a conglomerate. So we're going to acquire to shore up an area that we think we need to improve in, to logically expand to the next step or to leverage a skill set that we already have. The Xomed acquisition [devices for ear, nose and throat surgery] was probably the furthest afield of any of the ones that we've done. But that one allowed us to leverage some of the technology we have now to lead into the ear, nose and throat market. So they've all been done for a strategic reason, not just to get bigger.