Healthcare M&A MedTech

Medtronic execs see quick recovery, increased M&A

If Medtronic’s troubling Q4 report offers a snapshot of a company hit hard by COVID-19, the next image in the sequence may show a faster-than-expected recovery and increased merger-and-acquisition of smaller companies.

In the quarterly call on Thursday morning, Medtronic CEO Geoff Martha and CFO Karen Parkhill expressed optimism that the company’s businesses already are showing signs of a rebound in the month of May.

At the same time, Medtronic executives believe the broader financial pressures on the industry will create attractive opportunities to acquire companies that will add to its growth rate.

Martha said he expects recovery in the Northeast United States will lag behind other regions because the “fear factor is higher.” But other regions are moving forward. “We are seeing early signs of the recovery,” he said. “Maybe it’s too early to extrapolate throughout the year, but it’s faster than we had anticipated especially in Europe and the U.S.”

Parkhill delivered a global overview. In China, Medtronic sales in Feb and March declined by 46%. In April, sales were down 21% and May, so far, is recording declines in the “high teens.” In April, sales in Western Europe countries were down 32%. In May, the drop is approximately 20%. “In the US, the picture is a bit clouded when we look at April because of our bulk purchases,” Parkhill said. “We’re seeing procedural improvement across the US. In May, we’re seeing a decline of about 30% which is better than what we had in April.”

Martha said anecdotally, the evidence of a U.S. rebound is there. “We’re getting texts and calls from big health system CEOs and purchasing people basically indicating a faster than anticipated recover in many parts of the U.S.,” Martha said. “Basically, they’re saying. `Are you guys ready? Buckle up.’”

Analysts asked if Medtronic might begin using its resources to acquire more businesses. Martha agreed the company’s strong financial position coupled with the likely decline in prices for outside businesses makes this an opportune time to acquire businesses that can add to the company’s growth.

Martha said Medtronic won’t wait for the dust to settle to begin acquiring companies. “We believe healthcare and medtech, the areas we’re in, are going to come back, and we believe by our Q4 that our revenue growth on a two-year stacked basis will be back to normal levels of profitability.”

“We feel this is a hit, a difficult financial impact for everybody, but we do feel bullish for the market and for us as well so we won’t hold back,” he said. “We’re looking mainly for tuck-in deals that are going to create long-term improvements to our weighted average market growth rate and to allow us to better position ourselves strategically.”

Martha said Medtronic will look at deals of all sizes. “I like them to be in the medium, $1 billion size, because they would have a bigger impact on our growth rate.” He expects the impact of COVID-19  will make  prices of potential acquisitions “more attractive.”

Barclays analyst Kristen Stewart asked if COVID-19 is creating new opportunities for Medtronic that might alter its acquisition strategy, perhaps putting a greater emphasis on cardio or telehealth companies. Martha said he didn’t see a sizable change in how the company will acquire other business. But it’s investing heavily in remote and virtual technologies.

“We’re going to be making more investments on remote capabilities of our products and our business model, quite frankly,” Martha said. “So whether it’s remote programming of our devices, remote monitoring of our devices, remote case support. We’ll look at digital, medical education.” Martha said layering on remote and digital tools is a way for Medtronic to leverage its size to add value across all its businesses.

“I don’t know if that needs to be M&A. There are some opportunities we’re looking at that may be around the whole idea of remote. They could be organic investments and partnerships with large and small tech companies.” Martha said he was “blown away” by the use of remote and virtual technology augmented Medtronic’s own offerings.

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