In Focus

Medtronic Will Live To Be A Hundred

NOTE: Of all the companies that the Chicks own, I am the proudest of our recent acquisition. This past month you have been reading about the other companies that were up for our buy, all of them great companies, but to be honest, I would have been extremely disappointed had we not bought what I feel to be the best of them... Medtronic (MDT). (It's obvious which company got my vote.) Medtronic is based in my home state of Minnesota, but even if it were headquartered off the Amalfi coast, I would have had to cast my vote for the world's leading medical technology company. It's just that amazing.

Five years ago, my father had a heart attack. Until a heart problem hits your family, you really don't think about it. Daily activities such as walking, going upstairs, or weeding your flowerbed continue without a thought. You mow the grass, bring the kids to the park, and do the occasional lap in the pool. Your heart is fine, and you try to make it stronger by exercising. When you're in your thirties, you think you'll live to be a hundred. I can guarantee you, without companies like Medtronic, we won't. Without a working heart, you don't have life. Without Medtronic, many hearts will stop working. That's the bottom line.

My father lived, and still manages to kid me about my weight, my parenting techniques and my obsession with the computer. I have to remind him that at any time I could give him another heart attack so he had better be careful. Luckily for him, he's in Minnesota where some of the greatest research and clinical trials are being conducted by none other than Medtronic. But just who is behind this company, how did it start and why am I such a proud shareholder?

Back in 1949, Earl Bakken always had to wait for his wife, a medical technologist, to finish work at Northwestern Hospital in Minneapolis. He would chat with the doctors who soon discovered he was a graduate student working in electrical engineering. They began to ask him to repair small medical equipment, as there was no one in the hospital who could work on such small delicate devices. Eventually he had to enlist the help of his brother-in-law, Palmer Hermundslie. They recognized a need in the medical field, so soon after, Earl left his graduate studies and Palmer quit his job at a lumber firm. They set up their medical equipment repair shop in a 600-square foot garage in Northeast Minneapolis and called themselves, Medtronic.

It was a rough start, one month they grossed only $8.00! They decided to branch out (probably because of a need to put food on the table) and started representing medical equipment manufacturers. They sold these products throughout the Midwest. They got to know doctors and research staff members in the medical field who would often request Earl and Palmer to make them specific devices. Hence, a leap from a medical rep company to a medical technology company. By the end of the fifties they had manufactured almost 100 custom-made devices, one of them being the life-changing pacemaker.

Since then, they have become the world's leader in medical technology by servicing 54% of the heart disease market. They have improved upon the pacemaker a thousand times over, from it being a device worn outside the body which had to be plugged into an electrical outlet, to a small implant that can wirelessly send messages to its user and the tracking physician on the condition of the heart. It has changed the lives of people around the world. Imagine walking up the stairs, your heart is overworking and getting out of whack. Your pacemaker automatically senses this, gives your heart a little jolt and immediately the heart muscle's beat gets back on track and you can finish your flight of stairs. This is how far they have advanced the technology. The alternative is to keel over and die.

How does Medtronic stay on top of the industry? They spend more money on research than anyone else and they change or improve on their product every two years. When they introduce a product, they already have four revisions in the works -- a minor upgrade, a major upgrade, and two new technologies for the longer term. 70% of their sales come from products that are introduced in the previous two years. They don't sit around and rest on their laurels. Many a medical technology company fell by the wayside as they couldn't keep up with that kind of regeneration. Medtronic spends 10% of their sales on research, amounting to $500 million last year, and because of this, they have been able to branch out into more than just devices for the heart.

Ten years ago, a French neurosurgeon had a wild idea that if you stimulated certain parts of the brain with mild electrical jolts, it would aid in the treatment of Parkinson's disease. It is this kind of harebrained proposal that Medtronic jumps on, researches, runs clinical trials, spends a lot of cash on, and hopes to eventually make successful... as was this one. The French aren't as crazy as we think. The new device, the Activa, is implanted into patients' brains with Parkinson's disease and in its first clinical trials it has helped reduce stiffness and shaking in 75% of trial participants. Medtronic is now testing similar devices to help treat epilepsy, depression and obsessive-compulsive disorder.

More recently, they scooped up two smaller medical technology companies to add them to their ever-expanding line of new devices. Mini-Med, the leading maker of insulin pumps used by diabetics was bought out in cash for $3.3 billion, and Medical Research Group, which manufactures an implantable insulin pump, was added to Medtronic's line up for $420 million (also in cash). Look for Earl and Palmer's garage start-up to soon be the world's leader in improving insulin pumps and cornering yet another market.

I could go on and on about the company, but will write more after I sit in on their Annual Shareholders meeting at the end of August. All of the Chicks' Dozen criteria were met except for the Flow Ratio. This is due mainly to their two-year turn-around on making a new product. But somehow they still manage high gross margins, net margins, increase in sales, and lots of cash. As to where the company is going I can only imagine, but while I do, I'm going to go weed the garden and dream of living well beyond one hundred.