|Filed by Medtronic, Inc. (SEC File No.: 001-07707)|
|pursuant to Rule 425 under the Securities Act of 1933|
|and deemed filed pursuant to Rule 14a-12|
|under the Securities Exchange Act of 1934|
|Subject Company: Covidien plc|
|Form S-4 File No.: 333-197406|
|Date: October 28, 2014|
Medtronic S&T Conference: Keynote Speech and Q & A
Geoff Martha, Sr. Vice President,
Business Development and Strategy, and Chief Integration Officer
Id like to walk through the Covidien transaction and talk about how it really, the impact its going to have to the company, the impact its going to have, what I think the opportunities it creates for the Science and Technology community within Medtronic. And ultimately, what we think the impact will be for healthcare. Then Id like to leave it open for some Q&A because every time I address a scientific group, I always underestimate the amount of questions. Im going to leave open some ample time for question and answer.
So first, a little bit about the transaction here with Covidien. Throughout the Mission slide, because this is where it all started. Back in October of 2013 is the first time that the business development team brought forth the idea of a merger with Covidien to Omar. It was definitely, in my opinion, something that people werent expecting. Its clearly not a technology tuck in and its clearly not some of the places people thought we would go. But in my opinion, it was a statement on where healthcare is going and that we needed to get broader. We needed to get much bigger, more scale, as evidenced where healthcare is going and for us to position our company where it needs to be. And I was feeling pretty good about that presentation. And that part Omar got. But the place where I got picked off, and he told me to go take another look, was regarding the Mission. He said can we really innovate in the areas the Covidien is in. What kind of company is this? Is this a technology-oriented company? Is this a supplies company? Is there is opportunity for innovation? Because yes, I buy into we definitely need to get bigger as a company and have more scale so that we can be this partner of choice for big health systems and payers and governments around the world. I get all that. But if we cant innovate and the space is technology innovation, clinical innovation. If we cant innovate and we cant add value per the Mission, I dont want to talk about this anymore.
So obviously we went back and did a little more research and found out that absolutely, Covidien is a company that although there is a supplies component in the business, its about a little less than 20% of their total revenue that arguably is more challenging to think about how you innovate in that space. The bulk of the business is technology oriented and ripe for innovation. And as we go through a little bit of the portfolio today, I hope you see that. But thats where it all started.
Heres a snapshot of the portfolio of the new Medtronic that well have post-deal. As you can see, weve added, were sticking to this group strategy. In the new company and I think most of you know this. Omar sent out an org announcement a couple weeks ago. Were going to have four groups. The three that we have todaydiabetes, RTG, CVG, and were adding a fourth group, which we havent named yet so for lack of a better name, were calling it the Covidien group. And within that Covidien group, youve got some big buckets. One is the surgery piece. They have all kinds of unique products around the surgery space. Enablers that make the surgical procedures much more efficient. Their big strategy is to go from open surgery to minimally invasive surgery and theres all kinds of clinical and economic benefits by moving in that direction as you probably all know.
They also have a big respiratory and patient care, patient monitoring business in there. They have one of the leading ventilator businesses, franchises, in the world. And finally, the vascular therapies piece is the peripheral vascular and the neurovascular. Thats the piece that were actually going to innovate, the peripheral vascular piece into CVG and the neurovascular piece which treats stroke into RTG. So thats Covidien. In that respiratory and patient care piece is where weve bucketed the supplies business. And then you have the rest of Medtronic. As you can see, this totals up to about $27 billion of revenue so its a dramatic increase to Medtronic. The new, and whats unique about this transaction also is both companies, Medtronic and Covidien, are on a roll. Both companies are growing, theyre large industry players, outgrowing the industry. Covidien has been taking share from its chief competitor in surgery, J&J. Covidien has been taking share from J&J for the past 7 years or so and growing, outgrowing the market. And Medtronic, as you know, weve gone up to mid-single digit growth. Were back to taking share and things are good. And things look good out into the future.
So you have two companies that are in very good shape, outperforming the market, coming together. So youll have a $27 billion company growing and we feel confident about this at that mid-single digit growth with a diverse revenue stream. So were still big in cardiac rhythm management, but its a smaller percentage of the total pie. Same with spine and the surgical solutions business. We have some large pieces, some large wedges of the pie. But if we take, as Omar likes to say, we take a body blow in any one of these areas, we think we can withstand it and maintain that mid-single digit growth.
So we feel that just putting this portfolio together is a powerful portfolio that Day 1 has tremendous amount of value to Medtronic.
So a little bit about the strategic fit. Were going to break it down into the three core strategies of Medtronic. Im going to touch upon some of these and at the end, get into a little bit more detail. So one, therapy innovation. Like I mentioned, this is the core of what we do and whats interesting about Covidien is they bring us several new clinical areas to play in like lung cancer, Barretts esophagus, stroke. They make our peripheral vascular business much more scaled. They bring a whole new set of technologies that we can innovate around. This is an area that really, we questioned when we started looking at it. And how much is there in this area. Ill get into this a little bit more later in the presentation but theres quite a bit.
In globalization, were going to be combined, a very big player in the emerging markets. This gives us the scale that we think to make the necessary investments. And finally, Im going to get into economic value and what does that mean in this context.
A couple specifics regarding therapy innovation. I mentioned the peripheral business. We have a peripheral of CVG and Covidien has a peripheral business. They have a much larger sales force than us. Together, we have a very market leading portfolio of products, a very large and global sales force to push those products out. And a growing
space. In the neuro space, we picked up a stroke business which, for those of you that are familiar with RTG, thats pursuing this neuroscience strategy, one of the key missing pieces in that strategy is stroke. And looking outside the company from an inorganic perspective, theres not a lot of assets out there. And starting from scratch, it is very difficult in this market. So we picked up. Its still in the early innings of the stroke business for Covidien but we pick up a terrific asset here with huge growth potential that also fits very nicely into this RTG neuroscience strategy.
Finally, we talk about accelerating whether I missed I forgot to mention the adjacencies in surgery. So I mentioned surgery. So Covidien obviously, market leader, J&J and Covidien in surgery and we have within RTG, the Surgical Technologies group. Lots of interesting synergies there. For example, we have, Covidien has a market leading energy platform. This product group called Ligature. At Medtronic, we have the PEAK plasma ablate business. These two, theres almost no overlap in terms of the products but the technologies can be leveraged across each other. The channels can be leveraged. Just for clarification, were not talking about combining these two businesses at all. Again, were keeping them in their separate business groups but there are opportunities to cross sell these products, which Ill talk about later.
And then finally, Covidiens early stage technologies. This gets to the lung business that I mentioned. They have a lung cancer business. They have a Barretts esophagus business. Barretts esophagus also leads to esophageal cancer. These are pulling together some very early stage technologies, early stage clinical data. Again, high growth areas that we think we can add a lot of value to at Medtronic.
So around the therapy space, lots of interesting complementary and adjacent areas that we can work on.
I mentioned globalization. Well be, together, a $3.7 billion emerging markets business. That is massive in the emerging markets world. Growing at, I know Omar wants to grow 20% a year but were not quite there and neither is Covidien. But together, growing it around 15% a year. This is a huge growth driver for the company. And this kind of scale enables us to make the type of investments that we think will even accelerate this. Accelerate our emerging markets presence. Covidien has, like weve done in China, weve picked up, weve built an R&D center that you guys are familiar with, or at least I hope you are. Weve acquired some companies for local product development. Covidiens done the same. They have a very large R&D center in Shanghai. I was just there with Omar 2-3 weeks ago and theyve got about 250 engineers working on value products, primarily for China but also around the world. Its a very impressive facility and just a huge commitment from Covidien into developing value products for the emerging markets.
They also have one in Hyderabad, India. Its more of a capabilities R&D center versus developing specific products. Thats an area that we can leverage. So the emerging markets piece of this deal is a huge driver. If you think about it, Covidien products are more surgically based products versus ours that are interventional and implantable. In the emerging markets, theres a whole lot more ORs for their products than there are
cath labs and interventional suites for our products. So the governments in these emerging markets, when we go in to talk to them about a broad partnership which is part of our economic value strategy, this Covidien portfolio dramatically enhances our relevance to healthcare, to healthcare providers and to government officials and the Ministry of Health, whether you be in China, in India or you name it. Whatever emerging marketBrazil, Columbia, you name it. Weve got much more relevance with this portfolio with these health officials.
So that gets into that. And finally, the economic value or the solutions discussions. For us, economic value is something thats been evolving over the last few years. At the end of the day from my perspective, I think about economic value ultimately as Medtronic shifting from selling inputs to a process to selling outputs, or in some cases, outcomes. The outcome can be a clinical outcome. It can be a cost outcome. Like when were outsourcing cath labs in Europe. Were focused on a lower cost per patient to get through that cath lab. Were working on helping improve clinical outcomes as well but were signing up for lower cost per patient. These type of outputs versus selling a product and getting paid by the drink or by the product. That ultimately, the way I think about economic value, thats how I ultimately think about it. When you look at Covidien, they bring, like I talked about before, a lot of these surgical enabling products where the value of these products is accrued and realized in the hospital. Versus as youve heard Omar talk about in the past, our products, although the procedure to implant our products if you will, is in the hospital. The benefits, the clinical and economic benefits are realized once that patient leaves and that patient is a productive member of society or doesnt have to keep coming back to the hospital because weve positively impacted their condition.
But you put the two together and we have a much more powerful play across the care continuum. In the hospital, for the procedure, through the Covidien tools and solutions and then beyond once the patient leaves with our implantable devices, our diabetes pumps, what have you. And together, we have an opportunity to take these assets and put them together and build solutions for leading healthcare providers, payers, and governments around the world. And so far as weve gone out and talked to, even though the deal is not closed, weve talked to these providers, payers and government officials around the world. The relevance of this right here, it strikes them. They understand that now we are in a whole different league from their perspective in terms of what we can do for them in terms of helping them with their goals, whether you be a hospital or a government, as well as we can maybe we can impact patient outcomes because were looking at a broader, across that whole continuum.
So some very exciting opportunities here. So as you know, we actually signed the transaction. Give you an update. We signed the transaction on June 15th and well likely, weve talked about closing the transaction either in December or January. So were still trying to work through when exactly to do the transactional close and Covidien will be officially part of the Medtronic family. And there are things, whats holding that up, if you will. Whats driving this time delay is that we have to get regulatory approval for various countries all around the world. So governments all around the world have to look at this from a competitive standpoint and say, do we approve of this transaction so the big
ones are the U.S. government, the European Union and China are the ones that people look to but theres countries all over the world. Weve gotten approval in many countries but the big three that were looking for. Those three. And we anticipate getting U.S. approval toward the end of November. Were hoping for the EU approval sometime in early December. And China probably at the end of December. China is the toughest one to read. Its a fairly new process. Theyve only been doing this type of thing for about five years. Theyve only had maybe 200 deals go through their process. The process is a little bit more opaque than the Europe and the U.S. process. But according to their time frame, we will get this approved by the end of the year.
So we dont know exactly when the closing will be but call it at least 60 days if not longer away from today. So in that time frame, were doing integration planning. Were not actually innovating the two companies yet. We cant do that. But we are planning for a massive integration. Together, the two companies are going to be 87,000 employees. Thats huge. So like I mentioned, $27 billion of revenue, 150 countries around the world. Combining, bringing those two big companies together is an unbelievable task. Very complicated. There are things that I never even dreams of thinking about before that now I deal with every day.
So theres a couple hundred people on both the Medtronic side and the Covidien side working on this massive undertaking. Im going to talk about what were doing here. So when we think about the integration, weve got this framework that we use to guide our thinking. I think its important to walk through this. This whole preserve, optimize, accelerate and transform.
So preserve. The number one thing that we want to ensure that we accomplish in this integration is not to screw anything up. Like I said before, Medtronic on a roll, Covidien on a roll. Both mid-single digit growth. Looking at outperforming the market. A strong cadence of products that both companies are rolling out. The last thing we want to do is to distract and to disturb any of that. So when were talking through the integration here, the first thing on our minds is dont screw that up. And when youre talking about an integration of the size and scale that I just mentioned, thats not easy to do. People get distracted, people get worried about whats going to happen to me, my department, etc. So its not easy to do.
The second is to optimize. And what we mean by that is to right size the organization to move forward efficiently. Weve talked publicly in order to justify some of the price we had to pay to make this transaction happen. We have the ability to take out some costs. Predominantly, those costs that were taking out is what we would call back office costs around the world Think about it. In any country, we have two headquarters, a Medtronic facility, a Covidien facility. You name it. Whether it be in Australia or Indonesia, you name it. And so theres a lot of that consolidation. You dont need two customer service centers in certain countries. So predominantly back office overlap is whats coming out.
Getting back to the preserve. We have no cost take out targets for the front end of the business and for R&D for that matter. So if anybodys questioning our commitment to R&D, its the one and I can tell you factually, we have 13 or more functional teams looking at cost take out and theres not even a team for R&D on cost synergies. Because its not part of the strategy of the deal.
So if theres any kind of, in your departments, cost issues, dont blame me. Dont blame me.
In terms of accelerate, Im going to talk a little bit more about that in a second. We talked about it earlier but there are so many opportunities where 1 + 1 equals 3. The key, like I said in preserve, is to make 1+1 =2 and nothing less than 2. But if we can make 1+1=3 by accelerating each others growth plans be leveraging technologies across the two companies, sales channels, etc., clinical expertise, market development expertise, health economics. Theres so many opportunities where Medtronic can help Covidien; Covidien can help Medtronic if we collaborate properly. And again, without distracting our core strategic plans.
And then finally, transform. And this is the ultimate vision of the transaction is we feel like healthcare today is right for transformation. The current model has problems, whether youre in the developed world or in the emerging markets. In the developed world, healthcare is way too expensive. Its bankrupting Europe. Its bankrupting the U.S. Something needs to be done. In emerging markets, theres this massive access issue where so many people just dont have access to any kind of healthcare let alone quality let alone some of the more sophisticated stuff that we do. And now, with our breadth of our portfolio and the size and scale of the company, not only do we have an opportunity to transform healthcare, I think we have the responsibility to transform healthcare. And thats ultimately where were going and we believe that this transaction combined with the strong foundation we have in Medtronic, our brand, our credibility with clinicians, our credibility with governments around the world, health systems around the world, we can do this. And thats the longer range strategy. So in the short term, preserve and optimize. Lets get the costs of the company and infrastructure, right size to move forward in an efficient manner. Accelerate. Weve got some great opportunities right in front of us which we could talk about today to accelerate each others plans.
And then finally, over time. This isnt going to happen tomorrow or even the next day, transform healthcare. And thats the strategy of the company. Thats the strategy of this transaction. Theyre inexplicably linked. This isnt about taxes. Thats what you read about a lot in the press. In the U.S., for those of you outside of the U.S., you read a whole lot less about it. For those of you in the U.S., election season is upon us. The U.S. Congress has their mid-term elections next week. For the last couple months leading up to that, people are looking for election issues. And the concept of companies doing these inversion transactions has been an election issue and a lot written about it. And for us, I just wanted to talk about the structure for a second and what that does and why we did it. Its pretty simple. Were growing much faster outside the U.S. than we are in the U.S. Our OUS business is becoming bigger and bigger and bigger and the way the U.S. tax system works is that they tax you on profits you make in the U.S. and they tax you on profits you make outside the U.S.
So if we sell a product in Brazil, we get fully taxed by the Brazilian government for that. And then the U.S. government says, hey, were going to tax you, too, but only if you bring those profits into the U.S. So what happens is no large company, almost nobody brings those profits into the U.S. because the tax is so high. So a lot of U.S. multinationals have a lot of cash parked offshore that they could technically bring it in and pay a big tax but they dont because their investors say thats a very inefficient use of capital. So as part of this transaction, we have an opportunity to redomicile, in this case, Ireland. And what that does for us. Were not moving anybody there. We already have a big presence in Ireland. But were able to bring that cash, move it around, put it in the U.S. anywhere we want to put it, efficiently. The reality is, a lot of the R&D opportunities, as much as were trying to globalize, but a lot of them are in the U.S. Some of the acquisitions we want to do are in the U.S. I think thats tied to the U.S. having a very healthy venture capital system that kind of spawns. Whether the idea comes from Israel or Europe or whatever. In many cases, the venture capital comes from the U.S. and these companies start in the U.S. and our formula, if we dont invent it ourselves, we buy these early stage companies and then we apply the Medtronic R&D machine and clinical machine to make them standards of care and big products globally.
So this allows us to invest that money into the U.S. whereas before, we couldnt do that efficiently. And thats why the inversion structure. So from our perspective, were paying the same amount of taxes. We just get better use of our cash. And that cash is going to be made, weve talked about it publicly, in R&D and technology investments. Whether it be acquisitions or R&D projects, what have you. Thats going to be the preponderance of the use of the cash. So I hope this ties it together for you. The strategy of the company, how its tied into the strategy of this deal. The deal is tied into the strategy of the company. And then why we chose this inversion structure. Not because we wanted to be in the press. No one enjoys some of the negative press that weve taken on this structure but thats the reason that we did it is to have access to this cash. And the preponderance of it. Some of it will go back to investors but the bulk of it, we plan to use on some of these technology investments and acquisitions that are again, earlier stage acquisitions that need the help of people in this room and people that are joining via the web. We need that group to take these early stage companies and build them out into larger global companies.
You look back over the history of Medtronic and you go back to the 1999-2000 time frame where we did the Sofamor Danek acquisition, EB3 and the Minimed. Those three acquisitions were defining moments in the companys history. Each one of those companies had roughly 1,000 people at the time and had early stage products, early in their life cycle. Some of them were launched. Some of them were not launched but they were all really early stage. Over the last 14 years, Medtronic has taken these therapies and made them market leading therapies globally and weve poured billions into R&D. The U.S., the head count of these businesses is four times what it was when we bought them. Thats kind of what we do. We grow what we buy. It doesnt happen overnight. Its a long journey, as you know. Clinical trials, etc. But thats what we do. And thats what we want to use the cash for is to keep that engine going. So thats the comments around the deal overall.
Theres an integration team that we have. Theres this core IMO in the middle here, this Integration Management Office. Thats what I lead. Underneath that, we have four types of Integration teams organized by function, by region, by business, and then finally, we have growth acceleration which I want to talk about today. And this team has been doing all of this integration planning to figure out how we get these two companies together and think about it in terms of those four things. How do we preserve, how do we optimize, how are we going to accelerate growth and over time, how are we going to transform. Thats what weve been focused on.
What Id like to do is talk to you about some of the interesting ideas that weve got. Were early stage here but on the growth acceleration, what weve done is over the last couple of months, we have a small team of people that have interviewed about a couple dozen, probably 40 leaders around Medtronic and Covidien and said, from an acceleration standpoint, how do make 1+1=3. What are the key areas that we should focus on? This gets to some of the new areas that we can innovate. Out of those interviews, 50 credible ideas came out and weve picked four broad categories of things that we really want to invest in.
One is crisscross selling. Were not, with very few exceptions, were keeping Covidien pretty much in tact with exception of the peripheral vascular and neurovascular business. But there are unique technology platforms that we share. Theres specific products. And how do we, when we have products that can be put through different channels around the new Medtronic, how do we do that? Typically, big companies like Medtronic and Covidien and others arent really good at cross selling. So how do we build the infrastructure to cross sell, put the incentives in place for sales people, make sure you have the right infrastructure in terms of the supply chain and the IT to make this a seamless process so we can do some cross selling. Some areas that weve identified. I mentioned earlier before, the Surgical Technologies business and Covidien surgery business. For example, we have a large ENT channel in surgical technologies. Covidien has, in their energy products, some unique products that can be sold to those ENT physicians. And so can we put those through our ENT sales force? Again, we dont want to combine a bunch of businesses and cause a lot of disruption. So this would be cross selling.
Flipping it the other way, in Surgical Technologies are the peak acquisitions is Plasma blade. Again, that can be sold through Covidiens large surgery sales force. They have a massive surgery sales force. Them and J&J are the largest. By comparison, ours is much smaller. So by selling it through their sales force, we can pick up incremental revenue.
Another interesting example is involving CVG and the neuro business that comes from the neurovascular business that comes from Covidien. So the new LINQ monitor, which we just launched, which is just killing it, its just having a phenomenal, one of the greatest product launches in the last five years. Just congratulations to the team and anybody in the room that was on that project. What an awesome product. And it continues to power our results, just for Medtronic, quarter over quarter here recently.
But to sell that, the Crystal AF study and you guys know it better than me, showed that the LINQ is very good at diagnosing cryptogenic stroke and a whole channel that we dont even access is this neurology channel. Through the Covidien Neuro group, we can access that. Theres another example. Weve got 16 identified cross selling opportunities that are all in that same kind of type of level that I was just talking about.
Another area that we talked about, a second area in terms of the big four ideas that were looking at to accelerate growth and offers new opportunities is market development. The DNA of Medtronic is to create new markets. To invent some widget, to apply clinical data around that widget and then to make it standard of care to health economics and to drive it to standard of care in a particular market and then expand it globally. And thats what we do and youre seeing that play out right now in transcatheter valves. And how the company got started in pace making. So its something that were recognized of outside of Medtronic and you know this more than I, as a leader. And Covidien is just moving down into that PMA space and in that market development space in their early technologies group and we think we can apply a lot of our expertise to dramatically accelerate their ability to create new markets.
Like I mentioned, the Barretts esophagus therapy is new. They have this unique lung biopsy diagnostic and reception business which is new. And applying our market development capabilities to those type of assets is a very exciting opportunity.
So a third is near and dear to everybodys heart here is R&D collaboration opportunities. Like I mentioned, Covidien has made a big investment in R&D centers, scales R&D centers around the world, particularly in China and India. This is something Medtronic has invested in less so. So now all of a sudden, we have a Shanghai Innovation Center thats a couple years old thats been growing. But all of a sudden, down the street in Shanghai, theyre going to have a center thats five times as big. And in Hyderbad we have another center.
In addition to that, so we have these big shared R&D centers that the whole company could leverage. How do we do that? Do we focus on particular businesses? Do we focus on particular technologies? How do we manage this and how do we leverage this across the enterprise? These are questions that we need to get to the bottom of?
Then there are areas within Medtronic, like in Colorado, our NAV capabilities that are very critical to things that are going on in Covidien. Like their number one R&D program in terms of dollars spent is in robotics. To compete with the different, like youve heard about the Davinci robot and all these surgical robots. And Covidien thinks they have a unique strategy here. They think that not just building the robot but they have what they call the end effector. So all the surgical tools that they made would be fully integrated with these robots. So you have a capital and a consumable business model where the consumables, the surgical tools, are already have market leading positions around the world. Very interesting. One of the key things that they need to make this a success and differentiate it is navigation technology. And theres not a lot of companies that have that. Were one.
Independent of this transaction, they were out there looking for a nav partner. Well, now they have one. And how do we leverage our nav capabilities in Colorado to this massive program? And how do we make sure that we get the right people working on this Covidien robot program because its a massive program. What are the incentives like to put the best and brightest from nav onto something thats not in the RTG numbers? These are realities that we have to deal with and the folks in this room, were going to need your help on that. So R&D.
And then finally, the fourth one gets back to this economic value and this whole concept of integrated health solutions. How do we transform healthcare into, instead of Medtronic selling and guaranteeing the safety and efficacy of a product into a solution? So signing up to cost per patient. Signing up to outcomes. How do we do that? Now that we have, like I mentioned earlier, theres a broader portfolio of capabilities, we feel our opportunity is that much bigger. Our responsibility is that much greater to make this happen. The future of Medtronic rides on our ability to innovate. And not just innovate technology but weve got to innovate the business model. The business model of healthcare is broken. Technology isnt the only thing thats going to fix it. Its our differentiator. Thats our seat at the table is our ability to innovate around technology. Our ability to develop clinical data, partner with physicians. But we have to take it one step further into this business model innovation to fix the business model of health care which is absolutely broken everywhere in the world. And we are in a great spot to do this.
So Covidien, for example, we were getting some success in Europe and outsourcing cath labs. Covidien, because we have such a broad cardiovascular product line around the cath lab. As you know, were designing cath labs, financing them, running them, and then running all our products through them and getting increased market share by doing this. Our competitors are our suppliers in these instances. So Covidien has that same sort of broad product offering around operating theaters, through their surgical products. And theyve already done OR outsourcing deal with the same business that we just boughtNGC in Italy. Putting that deal together for them because we outsource ORs. Theres a whole lot more ORs than there are cath labs out there. And when you talk about emerging markets, thats what the emerging markets are interested in. More than anything else, I need basics, I need surgery, I need qualified, I need operating theaters and qualified surgeons. And some of the stuff that we do at Medtronic is a little further off for some of these countries. Like Africa, for example.
So new business models, patient management. We were experimenting that with Cardiocom in the U.S. We bought Cardiocom about a year and a half ago and its been a great success for us but its still small in the grand theme of things in terms of patient management and the opportunity we have there to follow patients with our devices and without our devices. And drive down the cost of healthcare that way and improve outcomes. Covidien has a big array of patient monitoring in the hospital and out of the hospital technologies. How do we apply that into our patient management strategy?
So you can see this last one around integrated health solutions is a big step for us but Covidien is really going to help us in that area as well. The four acceleration areas
where I think provide lots of opportunities for the Science and Technology community in Medtronic and in Covidien to partner and drive these things. We talked about market development. We talked about product development and R&D capabilities. The integrated health solutions. And cross selling.
So these are some of the areas that were focused on and I hope it gives you a sense for that it is a great time to be an engineer in Medtronic. To recap, I think theres oxygen coming from our growth that will provide the room to continue and maybe even increase. I know that talking to Mike Coyle yesterday, he is desperate to increase the R&D in CVG. I think that applies across all of Medtronic. Thats the life blood of the company.
With our growth, we have more flexibility to do that. With this transaction and our ability to make our cash flow a little bit more fundable, we can do some of that more in the United States where weve been hamstrung in the last couple of years. Weve got plenty of cash outside of the U.S. Its just the stuff in the U.S. We have new vectors on which to innovate. Covidien broadens our focus on the care continuum. We get more into the surgery. Were moving more to diagnostics. We get into the surgical procedures that precede, the longitudinal care that our devices provide. So a broader play in the care continuum. More of a focus on emerging markets and value based products. Lets face it. Covidien is under much more pressure than we are with value based competitors. So the sense of urgency around developing value products for them is greater than even for us right now. And hence, their investment in these R&D centers and China and in Hyderbad, India. So theres another vector.
Then finally, a fourth is this whole services solutions, integrated health strategies. So everywhere you look, were better positioned funded by our growth. Our ability to use our cash more flexible. And then all these new capabilities and opportunities we have across the care continuum, services and solutions, value products, you name it. Now, the question is, how do we do all this collaboration? And I dont have the answer to that right now. The idea is to identify the opportunities and I think weve done that and were going to vet those out and prioritize them. We cant do everything at once. We just cant. Thats going to be the hardest thing is to say, no. Sorry. Were deprioritizing this because were going to do this over here. We have to go through that process because it gets back to the whole preserve thing that I said. We cant chase this, as Brian Hanson, the leader of the Covidien group says, you cant keep chasing shiny objects that distract you. So were going to have to pick and choose and really follow this framework care preserve first and foremost.
But the whole idea where I look forward to engaging the Science and Technology community, the R&D counsel, Bakken Fellows, you name it, Technology Fellows is how are we going to collaborate? Whats the best way to do this? I dont know the answer but I think what I feel good about is weve set the table. Financially, were in a better position and then through this acquisition and everything else were doing, we have a whole lot more opportunities so work on together. So with that, Id like to pause and get some feedback, some questions.
Q: Geoff, on the transaction side, I know we were going to use our substantial offshore cash reserves as part of the Covidien acquisition. Thats no longer the plan. What happens to the cash overseas if we cant use it in these kind of transactions?
Geoff: Mike, thats a finance question. This is Science and Technology.
Q: Youre a deal guy, right? You can answer the question.
Geoff: So what happens to the cash? Its still there. We were hoping, from a financial standpoint, to solve a couple of things with this structure. One is to use the OUS cash. Put it to work. And the other is to, as we generate cash flow going forward, the cash flow that we generate, well generate about $7 billion a year. Thats a massive number. $7 billion of cash flow a year. Medtronic is already about $4.5, $5 billion. Covidien $2, $2.5 billion. Its about $7 plus billion a year. As more and more of that cash is generated in a way that we can use it anywhere. As we go forward, the cash flows are more flexible. That weve accomplished. So as we move forward, more and more of our annual cash flow generation will be fungible anywhere in the world. However, the cash we have on our balance sheet today is we were hoping to put that to work. Its not good financially to have $14 billion essentially sitting in a Swiss piggybank earning 2%. It really is not good. Investors do not like that. And so they come to us and say look, weve got all these ideas on what you can do with that $14 billion, starting with give it back to me, the investor.
And then when we talk to them about what it would take to give it back to them, we have to bring it to the U.S., pay a 30% tax, theyre like okay. Dont do that. Find a way to put that to work. So that challenge is still out there because that cash is building up. Look, you can do OUS acquisitions. You can build as much, you can put gold plated factories. Its hard to spend $14 billion. Its hard. So over time, were going to have to find a use for that. So quite frankly, we have not solved that problem with this structure.
So what were doing to fill the hole is were going to do a massive debt, raise a bunch of debt to cover the $14 billion. So its not ideal versus what we had when we signed the deal in June but because our transaction is real, the finances are really baked on the synergies, the revenue synergies that we have, putting to two businesses together, some costs we have and the back office overlap and the deal wasnt predicated on some funky tax models. Because of that, some of these actions that the U.S. Treasury has taken, we can work through that. Versus some of the other version deals that were based on tax have fallen on tough times.
Q: Thanks for the overview. The new organizational structure seems solutions-oriented, customer-oriented which is good. The technology community here tends to organize around skills and capabilities as a way of sharing and building expertise.
What recommendations do you have for this community before and after the deal closes to make sure we take advantage of the new combined skillsets of the broader organization?
Geoff: Thats one of the top things on my agenda. To be completely transparent, the first, since June, the focus has been whats the new org going to look like. How do we take out the costs that we need to take out right away so we provide people with certainty so they know, look, weve ripped the Band-Aid off if were cutting costs in finance, in Europe or whatever its going to be. We get that done right away and provide people certainty. Thats been the focus. Were now starting to shift in our planning exercises, I mentioned, more to the growth. One of those growth ideas if R&D collaboration around capabilities. How do we start to inventory the capabilities and assets that Medtronic has, that Covidien has, and where there is a good set for cross- pollination. Where are those opportunities for cross pollination? And really, one of the things that I dont think we can legislate or dictate from the center or from Omar is how that cross pollination takes place. Thats where I think we reach out to this community and partner and figure out the best way to do that. I know Im not as close to it as Omar and some of the group leaders but one of the things that Omar continually talks about how impressed he is about Medtronic. Because theres always the question of should we build these big R&D centers. Up to now, he said, look, Ive been hesitant to that. You should ask Scott Donnelly about that. He isnt here this afternoon. Scott ran GEs R&D center which is, they have five R&D centers now and some of the biggest in the world. Those things are, you dont see those as much anymore. These big global R&D centers are harder to maintain and justify. GE is one of the last that have them in that scale. He has a very definitive opinion as to the pros and cons. You should ask him about that.
I dont know that that was clear but he did run those centers for GE for a number of years. And was actually GEs healthcares head of R&D for Chief Technology Officer.
But Omar has been hesitant just to build those up and he said one of the reasons is the people in this room, the Science and Technology Conference and what happens afterwards has been so good at collaborating on its own organically. The concern was how much value do you get. So thats been the question mark in his mind. So the answer to your question. Im going to need your guys help. I think what we can do in the integration team and with the ExCom is to identify those areas. Weve taken a first shot at that from the integration team. Weve started to run that by the ExCom and were going to start to get these groups together and engage the scientific community, the engineers around Medtronic and Covidien to start to figure out the best way to do this because we havent figured out these R&D centers. Who do they report to? The answer is we dont know right now. If you asked me, I couldnt give you an answer. Thats one of the org questions that were trying to grapple with. Theyre scalable. Significantly bigger than what we have already and its not obvious to me at least, as to where they report and how we utilize those. Were doing that process. What are the capabilities of each of these centers? Where could they be used across the portfolio? Initial hypothesis and get the scientific community around Medtronic and Covidien. Select some folks from both sides to get together and help us figure this one out. Thats in the next couple of weeks. Again, it may seem like we have answer but were not even closing for a couple of weeks, a couple months actually, unfortunately. But were at that stage now.
Q: The business about transforming healthcare. Are there other companies doing that? If not, why arent they doing it and do you anticipate more players in that field?
Geoff: I think, the short answer, I havent seen other companies as aggressive in terms of talking about it as we have been. Were not doing it yet. Were taking steps. Just to add some credibility, the hospital solutions business in Europe has 15 contracts that are 5-7 years in length, hundreds of millions of dollars. These are becoming a material piece of Medtronic. Youve got the Cardiocom and patient management, our first acquisition, thats growing at 20% a year or whatever, nearing $100 million. Still small in the grand scheme of Medtronic but by far, the leading patient management business in the world in terms of device-enabled patient management.
Were making steps and we have lofty goals about transforming healthcare and were positioning the portfolio, giving ourselves a fighting chance by having this broad portfolio that we thinks gets us at the table with CEOS of payers, with CEOs of the largest health systems. They almost cant whether they like us not, they cant ignore us. The good news is a lot of them like us. Thats the beauty of Medtronic is the clinical relationships are long standing and they do like us. Ive had CEOs on the hospital solutions front come up and say, look. What I love about what Medtronic does is you have been able to bridge the gap between me, the C suite of a hospital, and my clinicians. You guys provide credibility for both of us. I trust you and so do our clinicians. Thats a unique position that most companies dont have. To answer your question, were on this journey and were talking a big game because we believe that it is the future and we believe that we can achieve this. But not many other companies are talking about it. I have two theories. One, most companies, its a ridiculous vision for most companies because they are one product. If youve got one transcatheter valve, how are you going to transform healthcare? You can make a huge difference to the treatment to that cohort of patients. But how the hell are you going to transform healthcare? How are you going to help them really truly lower costs? How are you going to drive access? You cant. You need a broad portfolio. And Medtronic, before this acquisition, I think we have a broad enough portfolio to have that vision. This just makes it even all the more credible and all the more realistic. But most companies out there just dont have that kind of portfolio. Even if youre a big imaging company like a GE or Phillips, youre a technology company. Youre not a healthcare company. These guys are technology companies that sell to healthcare. They dont have the physician relationships that we have. We are a technology company, we are a clinical company, and I think we could become a healthcare infrastructure company that when youre president of Brazil whos got a huge task ahead of her by the way, or Columbia or whatever, you say I want to call these guys to help me with my problems. Not many companies can do that. Thats number one is I think were very uniquely positioned.
I think J&J also has a unique opportunity to do this with their portfolio and theyve got a tremendous brand. Everybody knows J&J. I cant explain why theyre not doing it. But I think the big filter is they cant even dream about this.
We can actually dream about it. I believe we can do this. At first I was like really, Omar? But then as I see it and as I see what Rob is doing in hospital solutions and I see the reaction were getting, this is realistic but it all comes down to dont get fooled by these solutions. I mean, Accenture or McKenzie or whoever can come in and provide great solutions as well. If that were the case, they would be doing it. The problem is its not about the solution. Its about the technology that enables these solutions that differentiates us. So it all comes back to our products. Without the products, without the broad CVG portfolio, for example, of market leading products, hospital solutions would not exist. Without hospital solutions, we couldnt really credibly talk about transforming cost structure in hospitals in Europe. After a little over a year of some of our initial partners, were having significant impact on their financials in terms of lowering costs, improving efficiency. In some cases, there are clients that say weve even helped them on the clinical side. Thats where Robs going with that.
But it all comes down to our products. You cant do this without the broad products. Theres no healthcare system around the world thats going to jam products on physicians. The physicians need to want it. And we have to have this market leading portfolio of products that have these unique technologies and it all starts here.
I really mean it. The whole strategy is built on technology and innovation. Thats why I think we can make this claim.
Q: For a number of our Medtronic therapies and technologies, physician training and education is a big part of launching those therapies and its a great place to collaborate and retraining them. I havent heard a whole lot of talk about training and education centers. Globally, it looks like Covidien has been doing a lot of this. Has that been part of the discussion?
Geoff: It has. In our trip to Shanghai, they do have a lot of customer training centers. The one in Shanghai, its a separate building from the R&D center. They have two beautiful interventional suites. Its massive, four-story building, all for customer training, all collaborative rooms, environments to train. They have sophisticated computerized mannequins. They have them all around the world. In Brazil, they have it on a truck that drives around. Customer training is a huge piece of their business model as is ours. They figured out in emerging markets in particular where they have to train tons of physicians. They figured out an efficient way to do it and theyve made the big investment in that. I think the opportunity for us is there to leverage that. These facilities alone, the brick and mortar is impressive and I think we can definitely leverage these. Same story with joint R&D. How do we leverage the R&D centers? How do we leverage these customer training centers? Thats where we are in the integration is drilling down on that a little more. Clearly, thats an opportunity. They have it in their DNA.
One of the things weve learned about Covidien is theres a whole lot more similarities than there are differences between the two companies. Technology at the core. Customer. Physician collaboration. Physician training is a big piece of what they do.
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IMPORTANT ADDITIONAL INFORMATION
Medtronic Holdings Limited, which will be renamed Medtronic plc (New Medtronic), has filed with the Securities and Exchange Commission (the SEC) a registration statement on Form S-4 that includes the preliminary Joint Proxy Statement of Medtronic, Inc. (Medtronic) and Covidien plc (Covidien) that also constitutes a preliminary Prospectus of New Medtronic. The registration statement is not complete and will be further amended. Medtronic and Covidien plan to make available to their respective shareholders the final Joint Proxy Statement/Prospectus (including the Scheme) in connection with the transactions. INVESTORS AND SHAREHOLDERS ARE URGED TO READ THE PRELIMINARY JOINT PROXY STATEMENT/PROSPECTUS (INCLUDING THE SCHEME) AND OTHER RELEVANT DOCUMENTS FILED OR TO BE FILED WITH THE SEC CAREFULLY WHEN THEY BECOME AVAILABLE BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION ABOUT MEDTRONIC, COVIDIEN, NEW MEDTRONIC, THE TRANSACTIONS AND RELATED MATTERS. Investors and security holders are able to obtain free copies of the preliminary Joint Proxy Statement/Prospectus (including the Scheme) and other documents filed with the SEC by New Medtronic, Medtronic and Covidien through the website maintained by the SEC at www.sec.gov. In addition, investors and shareholders are able to obtain free copies of the preliminary Joint Proxy Statement/Prospectus (including the Scheme) and other documents filed by Medtronic and New Medtronic with the SEC by contacting Medtronic Investor Relations at email@example.com or by calling 763-505-2696, and will be able to obtain free copies of the preliminary Joint Proxy Statement/Prospectus (including the Scheme) and other documents filed by Covidien by contacting Covidien Investor Relations at firstname.lastname@example.org or by calling 508-452-4650.
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