Medical equipment manufacturer Medtronic has officially announced its withdrawal from the ventilator business. This is a "difficult decision" for this healthcare giant.
On February 20th, Medtronic released a better than expected third quarter financial report. Among them, the demand for cardiovascular and diabetes equipment increased significantly. In this fiscal year, Medtronic has raised its annual profit forecast for three consecutive times. The company's stock price closed up 1.7% on the same day.
Increased product losses and high industry risks
In order to further improve the overall profit level of the company, Medtronic has made the latest decision to withdraw from the loss making respirator product line. This business belongs to Medtronic's Patient Monitoring and Respiratory Intervention (PMRI) business.
Medtronic stated that the company will retain the remaining product line within the PMRI business unit and merge it with another separate acute care and monitoring business unit (ACM). In addition to ventilators, Medtronic's PMRI business also includes networked bedside monitors, pulse oximetry sensors, and anesthesia equipment. These devices are used in hospitals and families, especially during the COVID-19 epidemic.
Medtronic predicts that in the fourth quarter of the fiscal year, adjusted expenses related to restructuring are expected to be between $350 million and $425 million.
"The ventilator business is not profitable, and the entire industry is facing significant risks," a senior executive at Medtronic told a reporter from First Financial. The risks he mentioned include the risk of product recalls. Philips's ventilator equipment has been recalled, causing a huge blow to the company and has yet to be fully resolved.
However, according to information from Medtronic, the ventilator business will continue for some time, but the company will no longer invest in the research and development of new products; The company is evaluating whether there will be personnel adjustments in the Chinese ventilator business department in the future and will introduce relevant plans in the future.
According to Medtronic's official website, there are two major brands of ventilators under its umbrella: Newport and Puritan Bennett series products.
The commercial decision of Medtronic to withdraw from the ventilator product business is not surprising, as the company has been brewing for a long time. As early as October 2022, Medtronic had already revealed plans to split its PMRI business unit. At that time, the company was considering splitting the department into a new company to streamline its investment portfolio and focus on areas with higher strategic priorities.
Over the past year, Medtronic has been evaluating how to dispose of its ventilator business, and new products have yet to be launched. Multiple factors have contributed to its final decision to withdraw.
First of all, after the COVID-19, the sharp reduction in demand for respirators was a direct trigger for Medtronic to withdraw from respirators. In the fiscal year 2023, Medtronic's ventilator business sales declined by more than 50% year-on-year.
Medtronic CEO Geoff Martha responded during a earnings conference call on why he ultimately retained other businesses in the PMRI department and only withdrew from ventilator products. He stated that the shift in this decision is due to changes in market dynamics.
Massa explained that in the past year, the profitability of ventilator products has become increasingly difficult, and growth has slowed down. This is mainly due to the market's shift towards low sensitivity ventilator products, and Medtronic's focus on high sensitivity products has lost its competitive advantage.
On the other hand, in terms of the patient monitoring equipment that was originally planned to be divested together, the competitive situation has turned around. Medtronic is gradually gaining the upper hand in competition with its main competitor Masimo in this field and has found a growth path. Therefore, after exiting the ventilator business, the company may invest more funds in the patient monitoring business.
Massa repeatedly emphasized that the decision to withdraw from the ventilator business is a very difficult decision. He also stated that this decision does not mean that the company will not add changes to other investment portfolios in the future.
Chinese manufacturers expanding their overseas market share
At present, Medtronic's respiratory machine products sold in China are all imported and not domestically produced. A person from a multinational enterprise in this field told First Financial reporters that Medtronic's market share in the ventilator market in China is gradually decreasing. They have also discussed the localization of related products, but ultimately did not implement it.
"To occupy a place in the Chinese market, localization is an inevitable step, and we are also carrying out localization," the person mentioned above told a reporter from First Financial News.
Although Medtronic has not responded to the direct connection between its withdrawal from the ventilator business and the Chinese market, industry insiders told First Financial reporters that the rise of Chinese medical device manufacturers has had an impact on multinational ventilator manufacturers and significantly squeezed their profits.
A senior industry insider told a reporter from First Financial News, "Medtronic's development pace in the field of ventilators has significantly slowed down in recent years. Many new products have not been released in recent years because they are not confident in the competitiveness of their products after they are launched, and they have been planning to withdraw for many years."
The above person analyzed to First Financial reporters that a major factor affecting the competitiveness of Medtronic's ventilator products is that China has mastered the core technology of ventilator product development in recent years, and is able to launch qualified products and export them to the world. "Once Chinese manufacturers have the technology and manufacturing capabilities, it will have a huge impact on global suppliers, and this impact is becoming increasingly apparent," he said.
This industry insider further stated that in recent years, Chinese medical equipment manufacturers represented by Mindray have made significant improvements in their products and have begun to occupy a large overseas market share. In China, some large tertiary hospitals have also accounted for about one-third of their domestic ventilator products.
Analysts believe that the split of Medtronic's ventilator business is a positive signal. Vijay Kumaz, an analyst at Evercore, an investment bank, pointed out in an investor report that this decision is a "significant positive factor". He said that, like many medical companies, one of the obstacles faced by Medtronic's growth and development is that its business is too large and complex, and a spin off will help Medtronic focus more.
Cardiovascular products are Medtronic's largest business segment, including heart rhythm and heart failure products. Massa previously stated, "Medtronic is preparing for long-term development in the cardiovascular field and will implement new operational models to create and disrupt large markets while occupying more market share."
At the beginning of 2022, Medtronic announced an investment of hundreds of millions of yuan in Shanghai Lingang to establish a core cardiovascular device related product line, marking a new era of domestic research and development and localization of foreign-funded high-end medical device products in China.
In addition, Medtronic is also the world's largest producer of insulin pumps, occupying approximately 70% of the global market share. The core component supplier of Medtronic insulin pumps is also located in China.