Devices & Diagnostics

At JPM, Medtronic CEO talks value-based care, pushes back on criticism of M&A strategy

Omar Ishrak highlights a few products with which Medtronic hopes to succeed in value-based care and responds to criticism about how it approaches high-growth companies from an acquisitions.

By Arundhati Parmar on January 08, 2018

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Medtronic CEO Omar Ishrak has always spoken forcefully about value-based care and his Monday morning presentation at the annual J.P. Morgan Healthcare conference was no different.

In his opening presentation to an investor audience, he highlighted one major product to show how the Irish medtech company is pursuing value-based care. And in a follow-up after the presentation, he described how VBC is the reasonable and logical path forward no matter how chaotic the steps to get there may seem.

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“We found that therapy optimization is the area where we have had the most success in value-based care because here the technology, the value that is created by the technology and the result that’s realized through the outcome are directly connected to each other,” Ishrak told investors. “The area where we have had the greatest success and which we are very excited about, especially in the last year, is Tyrx.

Tyrx is an antimicrobial envelope that encapsulates implantable cardiac electronic products such as a pacemaker or defibrillator and elutes drugs to prevent infection that often occurs after implanting such devices. Over time the mesh device is fully absorbed into the body leaving no trace behind.

Medtronic acquired the technology when it bought New Jersey-based Tyrx for $160 million plus milestone payments in 2014. The product is sold in conjunction with the company’s cardiac devices and Medtronic has provided a guarantee that it will reduce infection. Otherwise, it will pay up to hospitals who buy the device.

And the message seems to be getting through per this slide that Ishrak showed. Click on the image for the full version.

Between the third fiscal quarter of 2017 to the second fiscal quarter of 2018, Medtronic has gone from having risk-based contracts in 0 accounts to almost over a 1,000. More significantly at one large healthcare institution the potential infection-related costs avoided  over a year by using the device is $6.4 million.

“This is a successful model [of value-based care] which we think we are in the early stages of implementing and will continue to grow. [Another product that is winning traction in the marketplace of value-based care is the drug-coated angioplasty balloon from Medtronic, Ishrak said]

Last year, a senior Medtronic executive described Tyrx as a very successful product with good adoption but one ironically without any reimbursement.

So which are some of the 1,000 accounts that are currently using Tyrx when they implant Medtronic’s cardiac devices?

In the follow-up to the presentation, Michael Coyle, executive vice president and group president of Medtronic’s Cardiac and Vascular Group pointed to HCA. Without naming others, he said that “I would say that any large ICD-implanting account, most of them, have basically decided to take advantage of that.”

Ishrak implied that the Tyrx’s success is largely tied to the fundamental driving force in healthcare: you pay for a desired outcome.

“Whatever uncertainty there is [in the marketplace] sooner or later this is a fundamental truth,” he said. “There’s no question in my mind that you pay for outcomes and create outcomes that add value is the right thing to do.”

The Tyrx acquisition was made prior to Medtronic’s announcement to buy Covidien in June 2015 and one audience member took issue with the company’s M&A strategy since then. He said that Ishrak has often declared that he wants to be “disciplined about acquisitions” and called out Medtronic for staying on the sidelines and not paying for growth-stage companies after buying Covidien.

“Now, to buy growth, it’s extremely expensive,” the audience member stated. “Are you guys just not going to pay for growth? Is that a fair way to look at your M&A strategy?”

Ishrak responded this way:

“Firstly, it’s incorrect because we have spent $3.7 billion in acquisitions since Covidien … and they are almost all technology-based,” he countered.

He added that Medtronic needs to fully understand how one takes a promising technology and then convert that to scale.

“So that’s what I mean by discipline,” Ishrak said.

Photo:  Hong Li, Getty Images