Yesterday afternoon, Medtronic (NYSE: MDT) chief financial officer Gary Ellis participated in a live chat with Fool.com readers. (You can read the full transcript here.)
In preparation for the chat, we sent Gary and his team questions in advance. However, during the event, the volume of reader questions was so high (and the quality so good) that we didn't get to much of our pre-chat Q&A. Instead, we're presenting it below. Enjoy!
The Motley Fool: Where are you finding the best areas for investment?
Gary Ellis: We continue to invest in emerging technologies and emerging markets, where we have seen significant growth over the past few years and see great opportunities in the long run.
TMF: As you expand globally, what is the quality of local competitors, and how have you seen the quality of competitors change over time?
Ellis: We do see increased local competition, especially in emerging markets like India and China. Our strategic joint venture with Weigao in China is one example of how both companies benefit from their respective strengths -- our unparalleled size and scale and Weigao's excellent reputation and strong presence in China. The JV is an integrated sales and channel management platform that provides a full-range of quality products as well as after-sales services to hospitals, surgeons and patients. Our local market expertise, and working with those who also have that expertise, is vital to our operations globally.
TMF: You spend quite a bit on R&D. How do you determine where to allocate your R&D dollars and how do you measure that you're getting sufficient "bang for your buck"?
Ellis: During our last fiscal year, we spent $1.5 billion in research and development, which is nearly the sum total of all of our major competitors' R&D budgets combined. Not only are we bringing forward important advances -- such as an MRI-safe pacemaker -- we are also working to address treatment challenges in novel ways. For example, we are leveraging our drug delivery expertise to find new ways to treat neurological diseases like Alzheimer's and Huntington's disease.
TMF: Having great products is vital to success in the medical technology industry. You have those. You also need to be able to sell those products better than your competitors sell their products. Can you elaborate on Medtronic's advantages in the sales process, or highlight opportunities for improvement?
Ellis: We challenge ourselves to think from our customers' perspective -- What do they and their patients need? How can Medtronic provide what they need better than anyone else? With these principles in mind, and with a commitment to service, we are proactively finding ways to address customer and patient needs. For example, we are looking at ways to provide more holistic solutions to hospital administrators by leveraging our expertise across multiple businesses.
TMF: The "One Medtronic" initiative has been a success in unifying the company. What things do you do to keep innovation alive at such a large company?
Ellis: We're taking ideas from social media and applying them internally to help drive innovation across our company. We have a virtual community set up where we can put out challenging questions to a broad group of our employees, to see if there are solutions that we haven't thought of, or learnings from other businesses we can leverage. Externally, we have portals set up in Europe and the United States which make it easier for scientists, inventors, and physicians to submit their ideas to Medtronic. Principled collaboration with the academic and medical communities is an important part of the process of developing innovative medical technology.
TMF: What are the three key areas that Medtronic must be successful at in order to grow and prosper in the future? (Follow-up: How does the management team spend its time in relation to these three activities, and how are incentives built to align Medtronic's employees with these goals?)
Ellis: The most important idea which will drive our future growth is innovation. Whether it is innovation in our products, in our business model or in how we better serve our customers, innovation is consistently rewarded in the marketplace. Our focus on chronic disease management is a strategic lever for Medtronic as well. With an aging population worldwide, an increase in chronic diseases like diabetes and heart failure and rapid convergence in information technology, medical technology, and consumer technology, there has never been a greater need for our products, nor has there ever been greater opportunity for Medtronic.
TMF: Bettering the human condition while earning a fair profit is at the heart of Medtronic's mission. How do you determine what a "fair profit" is for a new product?
Ellis: We are focused on ensuring the global access, availability, and affordability of our products. We work with customers worldwide to make sure that everyone who needs a Medtronic product will receive one. In our Medtronic Mission, we commit to making a fair profit on our operations in order to meet our obligations, sustain our growth, and reach our goals. This allows us to invest even more into research and development -- nearly as much as the rest of our competitors combined -- to create the innovative solutions of the future.
TMF: Medtronic has received ample flak in the media for paying doctors to use and endorse its products. What is your message to shareholders who may be concerned about ethics at the company?
Ellis: Principled collaboration between physicians and the industry is vital to creating innovative products and therapies that transform countless lives each year. By providing unique clinical insights and helping industry identify new avenues for therapy development, physicians play a critical role in advancing innovation. When a physician provides services to or on behalf of industry, it is appropriate to pay him or her for those services. If a physician generates intellectual property that we purchase or license, it is appropriate to pay for that intellectual property. In both these instances, it is important for industry to pay a fair amount -- "fair market value" -- and to preserve the integrity of the physician-patient relationship. In order to achieve this, we believe that the collaboration between doctors and industry must be based on solid principles and that all parties in that relationship should work to remain transparent about the relationship.
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