When a medtech management team leads with “We are Selling the Bundle” it is time to sell the stock. Medtronic illustrates the point.

I am wary of management teams who say,  “We are selling the bundle.”  This statement means that the company wants customers to buy from them because they have a broad product line. But the meager benefits to the customer are only paying fewer invoices and simpler receiving on the loading dock. What is that convenience worth?

The articulated ‘selling the bundle’ strategy is most important for what it leaves unsaid. It does not say, “We have the best products.” It does not say, “We have cutting edge technology.” It does not say, “Our devices will help you get the best outcomes for your patients.” It does not articulate important benefits such as throughput, patient satisfaction, or superior results.

With the strategy being to have a wide product line, there is little reason to purchase the company’s products except for price, and that is a slippery slope leading to price cuts and lower profit margins.

There is a role for the bundle when it is following in the wake of great technology. When Guidant’s Ginger Graham was teaching me about interventional cardiology, she explained how they first sold their high-performance balloon catheters and then they surrounded it with a complete suite of devices used in the procedure. Yes, they had a bundle. But the lead was a great technology that worked well for the physicians and drove better outcomes for patients. The remainder of the bundle was incremental revenue and margin harvesting, drafting in the technology superiority wake.

In its early years, Medtronic was an amazing company with market leading cardiac rhythm management devices. And company management carefully took the pacemaker profits to expand into other high-end markets such as spinal orthopedic hardware and neurosurgery equipment. Using a grocery analogy, Medtronic grew from a high-end purveyor of quality meats to a gourmet food store.

Industry pundits point to Medtronic’s acquisition of Covidien as a great transaction, but I heartily disagree. Covidien was spun out of Tyco, a serial acquirer that hit the wall in a scandalous way. Tyco executives had acquired several great medtech franchises such as US Surgical and Nellcor, then boosted their profitability by combining them while axing R&D spending.

When Medtronic acquired Covidien, the company ‘jumped the shark’ or lost its way as the strategy changed. Medtronic entered new markets such as minimally invasive surgery, pulse oximetry and monitoring, but the broad product line was uninspiring. The prevailing Medtronic mantra changed to “sell the bundle” and “be the single source for our customers.” But, shifting back to our grocery analogy, Medtronic had become a general merchandiser. And as the lead products aged with the bundle strategy running its course,  the revenue growth rate shrank and, as a result,  the stock multiple did as well. At this writing Medtronic’s low PE multiple is a sorry place for a venerable franchise.

Medtronic’s current CEO, Geoff Martha assumed the ‘Covidien Albatross’ and is engaged in the gallant fight to unwind the ossifying bonds of the bundle strategy. In the surgery business he worked to develop robotic technology to compete with Intuitive Surgical. He is spinning off patient monitoring with respiratory care, which is growing slower than the 5% corporate average. On a recent investor call he laid out the strategy of having a great lead technology in each area to pull related products into the hospital. This is the way forward and I hope he is successful.

The reality is that healthcare customers are smart and demanding. They want to do what is best for the patients. If there is a better device, physicians will find a way to buy it. ‘Selling the bundle’ on its own can  only carry a medtech company so far.