How to fix a great American businessNovember 5, 2012: 5:00 AM ET
Medtronic CEO Omar Ishrak has made Wall Street happy by creating good old-fashioned value for his products.
By Geoff Colvin, senior editor-at-large
FORTUNE -- It's a ticklish task: arriving as an outsider CEO at a great organization that's underperforming. That's the job Omar Ishrak faced in June 2011 when he left General Electric's health care business, which he ran, to succeed William Hawkins as chief of Medtronic, the world's largest medical device company. Medtronic (MDT) had been part of America's corporate aristocracy, a knockout performer for decades, but growth had stalled, important products were maturing, and the stock was sinking when Ishrak got there. Now the stock is up 45% from its 2011 low, and Wall Street has given Ishrak, 56, mostly good reviews. He talked recently with Fortune's Geoff Colvin about the effect of the Affordable Care Act, selling $25,000 devices on value, adjusting a famous corporate culture, and more. Edited excerpts:
Q: Weak economies in the U.S. and the developed world put pressure on everyone. How do you respond?
A: We respond by being very precise about the value we are providing and pricing our products according to the value.
Who are your customers?
Hospitals are our primary customer. In certain businesses, such as diabetes, the patients are directly our customers, though hospitals and endocrinologists have a big say in what they purchase. But it varies -- the stakeholders can be much, much broader. It could be insurance companies, governments, and physicians who make the clinical decisions.
When we're talking about a product that can save a person's life, and that may cost $25,000, like an implantable heart defibrillator, how do you talk about economic value?
In a number of ways. The value is not only saving the person's life, but also the quality of life that the person leads after he has the device. In addition, you can demonstrate economic value in that repeat visits to the hospital are a big cost. Rehospitalization is a big cost after surgery. Just the operating time will be a big factor in economic value. So it's important to think of economic value in the context of the person you're talking to. A hospital's context may well be different from an insurance company's, and we have to be able to translate economic value to each of the stakeholders.
Almost half your business now comes from outside the U.S. What are your best markets?
The largest market for us today outside the U.S. is Europe, which is substantial. Beyond Europe, it's the emerging markets, and China is by far the largest -- about 40% of our entire emerging-market sales. We intend to grow the others because the population of China is still well under half that of the total emerging market. So there's a big opportunity outside China as well, where the markets are different but need our products.
Looking 10 years down the road, will emerging markets be the most important driver of your business?
The developed markets still retain importance. Within the next decade, in terms of true new ground that's broken in improving outcomes and clinical knowledge and technology -- really leading-edge technology -- the developed world will be a massive contributor. Having said that, the emerging markets are so big, and the growth of their own technical and clinical capability is so quick, that I would have to agree with you and say that, yes, the emerging markets are in fact the most important ones.
One of your initiatives is to make patients more aware of Medtronic devices and therapies. What's the thinking behind that?
This is around emerging markets. Say we do a market study of the opportunity we have with our existing products in a patient-pay system or a system that is patient-pay but supplemented by government reimbursement. We find that the opportunity for us to reach the same levels of adoption we already have in developed markets for the same products is very big. It's actually something like $5 billion a year for us, and our total emerging-market revenue is now $1.6 billion, so it's a big opportunity. There are people who have certain conditions, and the therapy for those conditions is well established, and they can afford it, so it's just providing the therapies to those people. It should be obvious.
Yet the adoption rate among that population is only about 5%. So if it's so obvious, why hasn't it happened? One of the biggest barriers is awareness among patients and physicians that a certain condition can be treated. The patient or even the physician may think there is no cure if a person has reached a certain age, while in fact it's well established, over decades in some instances, that a person can be given a certain type of therapy, a device in our case, and maybe extend their life for another 20 years. That's why patient education is so important.
How will the Affordable Care Act affect Medtronic?
The Affordable Care Act in many ways tries to improve outcomes, increase access, and lower cost, so as long as we can portray what we do in those terms and provide value, I'm not sure it truly affects us. We work in health care systems that are different all around the world, so we cannot customize our corporate strategy to any one system. Whatever the Affordable Care Act brings toward us, we've seen somewhere. As long as we can structure our offerings in such a way that the value proposition is well understood and clear, we can work in that environment.
You said early in your tenure that Medtronic's returns on its R&D investments were not acceptable. Every company would like to make smarter R&D decisions. How are you doing it?
R&D productivity boils down to two things. It's what you work on, and it's the level to which -- and the speed and consistency with which -- you execute. The first factor is the bigger one. In a health care environment where economic value and globalization have growing importance, the selection of projects is very important, and thoughtful selection will lead to greater productivity.
We're trying to do that by using an economic value filter before we spend significant money. If the economic value is well understood, two things occur. First, the chances of success increase. Second, we can be aware of the total funding requirements and the nature of the funding. It may mean specific types of testing and evidence gathering which, if not thought through earlier, you will not fund, and you will come up with a product and won't have all the material to commercialize it.
You arrived as CEO a little over a year ago from GE (GE). What have you learned about coming in from the outside to run a famously strong culture?
The culture is one of the main reasons I joined Medtronic. It's highly customer-focused and highly mission-centric. Here is a company with a mission that hasn't changed in 50 years, and it's a great motivation for people to stay. Recognizing that culture upfront is extremely important.
Medtronic has leading market share in virtually every business we're in, and not by a little bit -- by a significant amount. Medtronic has good margins and has protected those margins through a significant downturn. You've got to respect an organization that can do those things, and you've got to find out what enables an organization to do that before you make too many changes.
For sure, there are issues. We're not growing as fast as we were, and that has to be addressed. But you cannot do that by risking the fact that we're market leaders in all these business units around the world. In our case it was the deep domain expertise and the deep customer focus that each of our business units and all our employees have that has to be protected before you go around and make changes.
But you've said you want to adjust that culture because in some sense you are changing the business model. How will you do that?
Here are the things we keep. We keep our focus on quality and our mission. We keep our relationships with our physician customers. We keep our ability to create clinical value. Those are core expertise areas fundamental to our historical success.
What we add on top of that are two things. One is a comprehensive, structured, detailed understanding of how clinical value translates to economic value in the context of all the stakeholders we serve. That is something new. It's innovative in its own way. It hasn't been done before, certainly not in health care, and I doubt even in other industries at the level of comprehensiveness we're looking at. The other thing we add is what we've done in developed countries. The mission is for all people around the world, not just in the U.S. and Europe. We have to live that mission and figure out how to grow, grow, grow.
This story is from the November 12, 2012 issue of Fortune.
The Leadership series This is the latest interview with a top executive by Fortune senior editor-at-large Geoff Colvin. See video excerpts of this interview at fortune.com/leadership -- plus find Colvin interviews with Union Pacific CEO Jack Koraleski, GM's Dan Akerson, Dow CEO Andrew Liveris, Chicago Mayor Rahm Emanuel, and many more.