Medtronic: Tapping the Brain for Profit

The implantable Medtronic Soletra sends electrical pulses to the brain.

Over the next several years, Medtronic's pacemakers became more advanced. Soon, the devices were tiny enough to insert into patients. Another cardiac blockbuster came in 1993 with the release of an implantable defibrillator. Medtronic's profits ballooned. Net earnings jumped from $119 million in 1990 to $1.1 billion in 2000. Over the same period, the value of its shares surged 20-fold. Today, the company has a market value of $60 billion.

Slowdown. But as Medtronic's size swelled and the pacemaker and implantable defibrillator markets matured, the company's growth sputtered. Annual revenue growth declined to 10 percent in the past fiscal year from twice that in 2003. Earnings grew just 6 percent, to nearly $3 billion, after rising 16 percent in 2003. Medtronic's stock price moved sideways. Hawkins was promoted to his current perch last August.

Medtronic has branched further outside its core cardiac arena than its top competitors—Boston Scientific and St. Jude Medical—and is currently the only company with a commercially available DBS device. Beyond neuromodulation, Medtronic produces devices to treat diabetes, spinal disorders, and other cardiac conditions. "The key to their future growth is to hold serve in their key markets where they have dominant market share...and then try to drive greater market growth and pick up market share in areas like neuro," says Gregory Simpson, an analyst at Stifel Nicolaus.

The company recently cut 1,100 jobs but added positions to faster-growing divisions, such as neuromodulation. Still, the cardiac rhythm unit, which pulled in nearly $5 billion of revenue for fiscal year 2008, dwarfs neuromodulation, which did $1.3 billion in sales. Simpson says he's confident that Medtronic will be able to maintain dominant market share in cardiac rhythm and should meet its goals for neuromodulation.

Epilepsy on deck. But Medtronic will need more patients to undergo brain surgery. It's moving to make DBS devices smaller and more effective while investing in less invasive surgical technologies. Also, the company is seeking government approval to use DBS to treat some patients with obsessive-compulsive disorder, plans a clinical trial of DBS for depression this year, and hopes to introduce a DBS treatment for epilepsy as early as 2010. "Innovation is the lifeblood of our company," Hawkins says.

Citigroup analyst Matthew Dodds expects DBS to remain a treatment of last resort. "It is very invasive," he says. "If you have intractable epilepsy or you have intractable depression, you'll get it done." Still, in part because Medtronic has other powerful therapies—such as spinal stimulation for chronic back pain—Dodds expects the neuromodulation unit to grow 13 percent a year over the next four years.

Jaimie Henderson, director of stereotactic and functional neurosurgery at Stanford University School of Medicine, thinks DBS procedures will become increasingly common: "There have been enough stories about it on the news that it is no longer a strange concept."

While Medtronic hopes Henderson is right, it is also pursuing growth through its diabetes and spinal units while looking to expand overseas sales. But it's the graying U.S. population and its need for Medtronic's products that could hold the most promise. "We're in a plethora of chronic diseases," Hawkins says. "So as the population ages, there's tremendous headroom for growth in this company." With opportunities like that, Medtronic—on the verge of 60, a baby boomer itself—isn't planning on retiring anytime soon.