Medtronic’s stock sat on the discount rack for years. Then, in August, a well-known activist investor finally took the bait, buying a sizeable stake in the nation’s largest medical device company and encouraging it to add two medical technology veterans to its board.

Elliott Investment Management is known for shaking up companies it believes aren’t reaching their full value potential. Speculation has swirled for months that the anchor of Minnesota’s medtech industry, plagued in recent years by slow growth, could be broken up into pieces.

More than a dozen former executives and long-time industry observers date Medtronic’s malaise back to its $50 billion merger with the health care supply company Covidien. The decade since has been marked by fewer marquee product releases, less investment in research and a stock price that has fallen flat.

CEO Geoff Martha said this analysis is deeply flawed. The medtech giant is in what he calls an “innovation super cycle,” and will soon unleash a series of significant devices that will reveal the value of its strategic long-game on innovation.

Elliott did not respond to multiple requests for comment but previously said it believes Medtronic innovations in attractive medtech markets have positioned the company for growth.

“The plan is not to break up the company,” Martha said.

Investors, analysts and Medtronic’s 10,000 Minnesota employees are watching closely. Martha and the company must prove the years of new product development were worth it — and the way to do that is with stronger profits.

The merger with Covidien, a company best known for low-tech supplies, was supposed to expand Medtronic’s global reach and free up funds for American investment.

But by late 2022, growth had stalled. That’s when Martha, who had been in the top seat more than two years, convened company executives in a Minnesota auditorium.

Martha, a former Penn State hockey captain, explained the source of Medtronic’s sluggishness by telling every leader in the room to look in the mirror.

Then, he singled out executives who had been with the company more than a decade, telling them to look in the mirror a second time — a casting of blame that shocked people in attendance, three people who attended told the Minnesota Star Tribune.

In a wide-ranging interview last week, Martha said Medtronic values longtime workers. Still, he said, employees — including the 14-year Medtronic executive himself — must acknowledge two things.

“One, the company needs to change,” Martha said. “And two, you need to be part of that change.”

Former executives told the Star Tribune that the marriage between Covidien and Medtronic was, at root, a cultural mismatch. Medtronic’s own data shows R&D spending at the high-tech device maker dropped since the deal.

Darrel Untereker, a former vice president of corporate research and technology, said Covidien’s catalog of low-tech products such as surgical staplers clashed with Medtronic’s long-running goal of producing high-tech products: “People in the traditional part of the company did not understand that.”

Martha blamed weaker profits in recent years on post-pandemic international trade trends. He predicted Medtronic is at the early stages of an innovation cycle that may show cautious investors that risks, such as investment in a robotic surgery system, will pay off.

But Wall Street is demanding more profitable growth.

Elliott, famous for orchestrating turnarounds at companies such as Starbucks, looks to shape Medtronic into a faster-growing organization with an eye on the future, considering more mergers and acquisitions, Martha said. A Wall Street analyst at JPMorgan has even suggested the roughly $122 billion company should be split into parts.

While Martha insists the plan is to keep Medtronic whole, executives are assessing the totality of its portfolio by asking one question, “What is the best way for us to drive our mission and performance at the same time?” he said.

The international manufacturer of high-tech life-saving implantable devices famously got its start in a northeast Minneapolis garage in 1949, when Earl Bakken and his brother-in-law founded Medtronic as a hospital equipment repair service.

Its big breakthrough came eight years later when Bakken invented the first portable, battery-powered pacemaker. The device was inspired by a power outage in a University of Minnesota hospital that exposed the problem with relying on wall-outlet power in keeping hearts beating in normal rhythm.

More than half a century after Bakken’s invention, then-CEO Omar Ishrak appeared on CNBC’s “Mad Money” in 2018. He held Medtronic’s novel pill-sized pacemaker, called Micra, between a finger and a thumb. He then held one of the founder’s sandwich-sized 1950s pacemakers between his hands.

“Here we are, 60 years later, the same company disrupts this industry over and over again,” Ishrak said on CNBC.

Ishrak’s tenure is best remembered for the $49.9 billion Covidien deal, which Martha led in a role designed specifically to help integrate the two companies without jeopardizing innovation or strong stock performance.

Martha said last week the deal allowed Medtronic to diversify, as 50% of income came from the cardiac rhythm management and spine businesses prior to the acquisition. The acquisition, which resulted in Medtronic’s on-paper headquarters moving to Ireland, allowed the company to forgo an additional tax and reinvest profits back inside the United States.

“We wanted to be a global juggernaut. And it worked for a decade. ... And then geopolitics changed, and it became a bit of a headwind recently,” Martha said. Medtech companies have announced investments in the United States following sweeping tariffs from the second Trump administration.

Chief Financial Officer Thierry Piéton said profits were hurt during the COVID-19 outbreak when China changed how it acquires and pays for products from medtech companies. Inflation, the value of the American dollar, and the decision to invest in the lower-margin diabetes business before spinning it off also put pressure on the bottom line.

Martha argues the Covidien deal itself isn’t the cause of the ongoing stock troubles.

Yet Medtronic’s companywide profit margin, which tracks profits while excluding the regular costs of doing business, has dropped from about 72% to 60% since the deal.

“Going in, Medtronic thought it would be a win-win: Medtronic would get Covidien’s growth and Covidien would get Medtronic’s margins,” said Rachael Scherer, a former stock analyst and retired Medtronic strategy executive. “And it actually worked in the opposite way.”

In the nearly $600 billion medical device industry, higher profits and stock price growth often depend on beating the competition to market through quick innovation and efficient sales.

Warren Watson, former vice president for cardiac rhythm management, said Medtronic became less competitive as it’s departed from active implantable devices such as pacemakers.

“The disposable, low-tech devices that Covidien did, it’s not in the sweet spot of what gives Medtronic its competitive superiority over and against everyone else,” Watson said. “And you can see the result in that almost everything that was acquired with Covidien is now gone. And it’s gone because it never fit the central strength that has made Medtronic historically successful.” A Medtronic spokeswoman notes most Covidien products are still being sold.

While the stock is up about 19% year to date, its price peaked at more than $134 in September 2021, and has fallen since then, hovering below $100 for three years running. Meanwhile, competitor Boston Scientific’s total market value now eclipses Medtronic’s despite having less than half the annual revenue of its rival.

Those who worked at Medtronic in the past decade say travel restrictions and growing pressure to hit quarterly performance benchmarks are now more common. Layoffs also became more frequent. Business units have grown more siloed, competing for resources, and Medtronic started operating more like a holding company than an enterprise with a cohesive identity, they said.

Michael Hill, a former Medtronic vice president of science, technology and clinical affairs, said the company has lost its way on innovation. Leadership changes in the 2010s, he said, triggered an era in which Medtronic started focusing on what he calls “finance games”: buying predictable companies and selling parts of its portfolio to fuel growth instead of banking on internal research and development.

Spending on research and development plateaued at 8.15% of total revenue in the last fiscal year, about 2 points lower than in 2007. Competitor Boston Scientific spent the equivalent of 9.64% of revenue on R&D in 2024.

Since Covidien, Martha said Medtronic has refocused R&D on “bigger things,” but he hopes to lift R&D expenditure as a percentage of sales closer to 10%.

Medtronic’s annual reports show the number of new patents, a marker of innovation, have declined in the last five years. However, Medtronic still issues the most patents per year of any medtech company, a spokeswoman said, and it is strategically managing its patent portfolio to focus on the technologies that will have the greatest impact on growth.

Hill said the company dedicated an outsized pool of cash to develop Hugo, the robotics system for performing surgeries on soft tissues like removing the prostate. Supply chain issues and manufacturing problems have hindered its rollout.

Untereker, the former vice president of corporate research and technology, said Hugo had “major issues” from the moment it came into the company from Covidien, “but it had this big potential.” JPMorgan analyst Robbie Marcus estimates Medtronic spends $500 million annually on the robot, which still has not received U.S. regulators’ approval.

While the company continues to invest in Hugo, multiple former leaders familiar with the matter said Medtronic decided to deprioritize internal development for pulse field ablation. PFA, a catheter-based procedure to treat atrial fibrillation with electric pulses, is driving growth in the medtech industry.

In 2022, Medtronic bought Affera and its system capable of performing PFA for $925 million to remain competitive in this market. A spokeswoman said the company should prioritize the best technology meeting patients’ needs.

At a longstanding annual holiday party last December, Medtronic executives welcomed patients to share their stories. An algorithm-enabled diabetes pump made a teenager’s life simpler. Recently FDA-approved adaptive brain stimulation helped a man control his Parkinson’s disease. The company’s hypertension device allowed a patient to control her high blood pressure without taking tons of pills.

“Everyone quit on hypertension,” Martha said. “In 2014, when the clinical trial data didn’t come back the right way, we stuck with it, and we’re going to pioneer this field. And then, others will follow.”

A market penetration of just 1% could generate $1 billion in revenue, Medtronic said.

The company remains profitable with growing revenue. It may have spent less on internal PFA development, but the business unit housing the technology surpassed $1 billion in revenue in the most recent fiscal year, Martha said.

Martha said the company has spent the last five years adjusting how it allocates capital internally “to focus on the most meaningful areas ... and now you’re seeing the growth come out, and it looks very durable to us.”

The CEO acknowledged that Hugo, the long-delayed robotics system, is risky. It now awaits FDA approval for urology surgeries after producing a 98.5% surgical success rate during a clinical trial. The system is set to compete with the da Vinci robot from Intuitive, whose systems now dominate the market.

Martha said, “You’re going to have employees, including my own management team,” who will debate: Is this the best product to invest in?

Marcus, the JPMorgan analyst, wrote in a note to clients that Medtronic must eliminate costly projects like Hugo, arguing the huge R&D expenditure makes it difficult to see it as a good return on investment.

But Evercore analyst Vijay Kumar said Medtronic would make a mistake giving up on Hugo. Hospitals don’t like giving 100% of their business to a single medtech company like Intuitive.

“It’s absolutely critical for the story,” Kumar said.

An activist investor with a history of advocating for executive ousters is now inside the tent at Medtronic.

Elliott’s No. 1 priority is for Medtronic to capitalize on its cycle of innovation, with several high-profile products about to launch, Martha said.

Martha is already working on streamlining Medtronic’s portfolio, recently spinning off the diabetes segment and shuttering the unprofitable ventilator segment.

Despite the sweeping changes, the CEO cited positive employee survey data showing workers are still proud to work for the Minnesota device maker. The spokesperson said key metrics of engagement, inclusion and innovation have improved since 2019.

Yet Martha said everyone at Medtronic must acknowledge the company’s financial performance has fallen below expectations.

“Is it uncomfortable? Absolutely. Do you have to evolve and change? Absolutely. Is everyone on board? No,” Martha said. “And the people that aren’t, in one way, shape or form, aren’t here.”

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