Medtronic’s Hawkins and BSX’s Elliott Exit Stage Right As Medical Device Industry Shifts

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remain their largest businesses. In Fiscal 2010, pacemakers and ICDs made up 33 percent of Medtronic’s $15.8 billion in annual revenue and 27 percent of Boston Scientific’s $7.8 billion in annual revenue.

Beyond the numbers, I believe that medical devices have lost their cachet with politicians and the general public.

To help pay for healthcare reform, Congress taxed the industry $20 billion. Politicians are increasingly likely to cite medical devices, especially orthopedic products, as examples of wasteful healthcare spending. Pressured by Congress, the Food and Drug Administration is likely to tighten rules over approving medical devices, driven by the belief (right or wrong) that shoddy devices currently threaten the public’s safety.

For Medtronic and Boston Scientific, some of these wounds are largely self inflicted. Medtronic’s faulty Sprint Fidelis defibrillator wires, which the company recalled in 2007, cost the company dearly in terms of money and reputation. The company has also drawn flack for its allegedly cozy financial relationships with doctors. Critics, including Sen. Charles Grassley (R-Iowa), charge that Medtronic hires doctors as consultants in exchange for those physicians recommending its devices to patients, whether they needed them or not.

For Boston Scientific, its $27 billion acquisition of Guidant has been an unmitigated disaster. Earlier this year, the U.S. Justice Department filed a civil suit against the company, alleging Guidant caused healthcare providers to file fraudulent Medicare claims by hiding design flaws in its ICDs and pacemakers. And this comes on top of the $296 million Boston Scientific already paid to the feds last year to settle criminal charges over the same issue. For Uncle Sam, Boston Scientific settlement checks are apparently the gift that keeps giving.

In the face of all of this, Hawkins and Elliott have hardly stayed still. Under his “One Medtronic” initiative, Hawkins attempted to streamline operations to encourage efficiency and collaboration among the company’s disparate business units. To reduce its reliance on pacemakers and ICDs, Medtronic has made several “tuck-in” acquisitions over the past two years: $700 million for CoreValve.; $370 million for ATS Medical; $123 million for Osteotech, to name a few.

Elliott has also slashed costs and restructured operations. He sold the company’s neurovascular unit to Stryker, based in Kalamazoo, MI, for $1.5 billion. Boston Scientific has also snatched up promising technologies, paying $193 million upfront for replacement heart valve maker Sadra Medical and $193.5 million for Asthmatx, which is developing a catheter-based treatment for breathing disorders.

We won’t know for a long time whether any of these strategies pay off. But if Medtronic and Boston Scientific ever recapture their mojo, investors should thank Hawkins and Elliott for laying down the groundwork for future success.

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