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Medtronic Amassing AI Capabilities With Acquisitions

Medtronic this week continued its expansion into the artificial-intelligence surgery space, a push it’s mainly pursued through acquisitions.

The newly acquired company, Medicrea, uses AI to ease pre-operative planning and tailor implants for spine surgeries. It marks Medtronic’s seventh acquisition this year.

The purchase is part of a strategy to drive revenue growth through so-called “tuck-in acquisitions”—buying smaller companies and integrating them into the existing structure—and adding emerging technologies like AI and data analytics to the company’s medical device portfolio, Medtronic officials have said.

“We want to pull in some of these digital technologies to change our offerings,” Geoff Martha, Medtronic’s CEO, said on a call discussing the company’s quarterly earnings with investment analysts in August. “In addition to the devices, we want to pull in data and analytics.”

Martha was not available for an interview by deadline.

But in August, Martha highlighted Medtronic’s recent acquisition of Digital Surgery and plans to purchase Medicrea and Companion Medical as examples of the company’s efforts to build up that focus. Digital Surgery, Medicrea and Companion Medical apply AI and analytics to support soft-tissue surgery, spine surgery and diabetes care, respectively.

A targeted focus on AI isn’t just taking place at Medtronic. There’s a growing ecosystem of medical device companies applying AI to surgery, including incumbents and new startups.

“The convergence of data with the technology of medical devices is something that’s been underway for a period of time now,” said Raj Denhoy, an analyst with Jefferies. “It’s a theme that’s playing out everywhere. I wouldn’t say Medtronic’s doing anything that’s hugely unique from anyone else at this point.”

But Medtronic arguably is “in a particularly strong position”on account of its existing work selling pacemakers with algorithms that detect atrial fibrillation and diabetes management tools that involve analytics, said Debbie Wang, an analyst with Morningstar.

It has “familiarity with amassing and then using proprietary data,” Wang said. “In some ways, it seems like this move into digital and AI is perhaps just the next step.”

The Digital Surgery, Medicrea and Companion Medical acquisitions—all announced or completed this year—total $1 billion in total consideration, according to Martha.

“We’re going on the offensive as a company through an increased cadence of tuck-in acquisitions,” Martha said in August. “Most of what we’re buying (are) technology-oriented tuck-ins, which are all somewhere on their path to commercialization or have just been commercialized.”

Medtronic has been pursuing tuck-in acquisitions for the past several years, said Vijay Kumar, an analyst with Evercore ISI. He estimated that the company spends $1 billion to $2 billion in tuck-in acquisitions each year.

“They’ve been pretty active,” Kumar said.

Medtronic, which is releasing earnings for the second quarter of its fiscal 2021 next week, has reported year-over-year revenue declines for the past two quarters, primarily due to the COVID-19 pandemic and associated declines in procedure volumes at customer sites.

Medtronic posted $6.5 billion for its most recent quarter; the company’s 2021 first quarter that ended in July.

That revenue decline—down 13% year-over-year—hasn’t been worrying for investment analysts.

“Because Morningstar looks at these companies over the long haul, we’re not particularly concerned,” Wang said. “All of these companies are struggling with the decrease in procedure volume.”

Competitors like Johnson & Johnson reported $4.9 million in medical-device revenue for 2020’s second quarter, down 33.9% year-over-year; Abbott reported $2.4 million in medical-device revenue, down 21.2%. The second quarter of 2020, which ended in June, is the closest comparison period for Medtronic’s fiscal 2021 first quarter.

Martha, who joined Medtronic in 2011 and previously led the restorative therapies group, took the helm as the company’s CEO this past April after former CEO, Omar Ishrak, retired.

One of Martha’s core focuses since taking on the CEO role has been an emphasis on increasing market share across segments Medtronic sells products—such as minimally invasive therapies and diabetes—and keeping pace with markets as they grow.

Even while Medtronic has grown year-over-year, it’s in recent years lost market share to competitors, Denhoy said. He contrasted Medtronic’s typical annual growth to companies like Boston Scientific Corp. and Stryker Corp., which he said traditionally have had a stronger focus on innovation.

Before this year, Medtronic had targeted growing revenue by 4% each year, which it didn’t always hit.

Boston Scientific, by contrast, in 2019 reported 9.3% revenue growth and Stryker reported 9.4% revenue growth for the full year.

More aggressively pursuing acquisitions and investing in emerging technologies could play an important role in growing specific markets, Denhoy said. An acquisition like Medicrea could help make Medtronic’s offerings more competitive in the spine segment, building on the company’s acquisition of Titan Spine last year and Mazor Robotics in 2018.

“Whether they can prove successful I think is the big question,” Denhoy said. “The proof’s going to be in the pudding. If they can actually get their growth … to 5-plus percent as they’ve outlined, the stock will work. But it’s going to take some work.”

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