BREAKINGVIEWS-Medtronic maladies call for more precision surgery

By Robert Cyran

NEW YORK, May 21 (Reuters Breakingviews) - Medtronic MDT.N would be better off with more targeted rehab than surgery. The manufacturer of everything from pacemakers to catheters plans to amputate its diabetes business, which only contributes 4% of operating profit. It’s a sensible idea, but will only provide a limited remedy for weak growth and shareholder returns.

The $110 billion medical device company unveiled its strategic shakeup on Wednesday, saying it intends to separate the division making insulin pumps and glucose monitors within 18 months, preferably by starting with an initial public offering. It’s a consumer-facing business, whereas Medtronic largely targets doctors and hospitals. As a standalone entity, the diabetes unit, with some $2.5 billion of sales, also should be able to reset investment priorities as it contends with anti-obesity drug competition.

Although the self-care is welcome, spinoffs have been broadly lackluster and this one fails to treat Medtronic’s more serious symptoms. Its revenue for the fiscal year ending in April was $33.5 billion, representing just 2% annual growth on average since 2016. Hospital consolidation hasn’t helped. There were about 1,900 mergers between 1998 and 2021, according to the American Hospital Association trade group, a trend that has persisted and enabled these enlarged operators to squeeze out better terms from suppliers.

The pressure has afflicted stockholders. Medtronic’s total return, including reinvested dividends, is about 40% over the past decade, compared to more than 240% for the S&P 500 Index .SPX. Worse, it’s badly lagging some of its biggest rivals. Abbott Laboratories ABT.N has roughly matched the broader market, while Boston Scientific BSX.N has returned twice as much.

Splitting off the diabetes division should provide a little relief. If nothing else, it will provide an uplift to profitability and allow the parent company to deploy capital into new, higher-margin medical devices.

The lukewarm reception from investors suggests they want a more comprehensive exam and prescription from CEO Geoffrey Martha. Medtronic has suffered from a range of quality control problems and recalls, which require more clinical approaches to resolve. Developing new products more quickly, making production lines more efficient and buying promising technology, as Boston Scientific has done, would go a longer way to better financial health. If Martha’s plan is overly dependent on surgery, an activist investor might have a harsher second opinion.

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CONTEXT NEWS

Medtronic said on May 21 that it plans to carve out its diabetes business, which makes insulin pumps and glucose monitors, to simplify the company. The medical device manufacturer is aiming for an initial public offering of a 20% stake, followed by a split-off, and expects the separation to be completed within 18 months.

The company also estimated adjusted earnings per share for its fiscal year ending April 2026, would be between $5.50 and $5.60, less than the $5.83 anticipated by analysts, according to estimates collected by LSEG.

Goldman Sachs and BofA are advising Medtronic on its strategic options for the diabetes arm.