Medtronic CEO Geoff Martha laid out a major strategy shift at its biennial investor day on Wednesday, acknowledging the company has too often has been growing "below its markets" and that its market share is "not commensurate with our technology leadership."

Martha, on the job for roughly six months, described reorganizing the company into 20 decentralized and "empowered" operating units designed around specific therapy areas, with a goal of speeding growth at or above its weighted average market growth rate.   

The medtech giant will aim to increase its growth rate by deploying capital to faster-growing markets such as robotics, ischemic stroke, diabetes and neuromodulation. However, analysts who tuned in to Wednesday's event are taking a wait-and-see attitude on the restructuring.

Under the new scheme, business units will be divided into cardiovascular, medical surgical, neuroscience, and diabetes portfolios, which will have full profit and loss responsibility, control product development and clinical resources, set R&D priorities, as well as direct their own sales organizations in larger geographies.

Martha, who hinted at the reorganization on Medtronic's last earnings call, said there was a "need to make transformative, structural, and cultural changes" to give its businesses greater focus, empowerment and accountability. "Our matrix organization was too bureaucratic. Decision-making was spread across too many people and up and down too many layers, slowing us down dramatically," he told investors. 

Martha contends the medtech will be more agile, increasing the speed of decision-making, execution and innovation, while holding individual units responsible and rewarding growth. The operating concept is to go from a single $30 billion company to 20 $1.5 billion companies that are more nimble and focused on their end markets while "giving them control over their P&L and their go-to-market strategy, which they did not have before."

William Blair analysts said they agree with Medtronic's overall restructuring strategy, though they cautioned that "these tend to be softer targets that are harder for Wall Street to assess ongoing performance," in a note Thursday.

Needham analysts wrote they like the changes but the company needs to "show consistent execution to overcome investor skepticism given its track record." Jefferies analysts also opined that "while a shift in culture sounds promising" it is easier said than done for a company as "big and entrenched" as Medtronic.       

Martha said that the new operating model, which will be implemented across the company over the next several quarters, was tested in its Restorative Therapies Group, which accelerated organic revenue growth to 6% while also improving profitability in Martha's last full fiscal year as RTG president.

SVB Leerink analysts commended Martha for successfully accelerating sales growth to 6% from low-single-digits when he was running RTG, but said implementing these kinds of broad organizational and cultural changes across Medtronic is a "different story." 

Under the new structure, the 20 operating units will report to portfolio leaders who will be responsible for driving strategy, allocating resources, assessing performance, and growth "rather than being day-to-day operators," according to Martha.

'The challenge is not a light one'

At the investor event, Medtronic announced it increased long-term organic growth guidance to 5%-plus (up from 4%-plus) while maintaining its drive to 8% adjusted earnings per share growth with dividends growing in line with earnings.

Jefferies analysts were skeptical of this promise.

"Can revenue growth move to the 5%+ despite not having hit even 5% sustainably the last few years? The challenge is not a light one and while the pieces are there, [Medtronic] is unlikely to receive a lot of credit until there is proof," they warned in a note.

SVB Leerink analysts, however, credited Martha for instilling more confidence than they've perhaps ever had that Medtronic can achieve its new annual sales growth target over the long-range plan. Still, the analysts cautioned "organizational structure changes take time to implement and may not ultimately be successful." 

Martha admitted that previously Medtronic would develop new markets "only to cede share too easily when competitors would enter." However, he said the company is now looking to increase its competitiveness. "Gaining market share creates the fuel that we need to invest in new therapies and create these new high-growth markets."

Going forward, Martha said compensation structure will reflect the new approach. "We're still measuring these leaders on operating profit and free cash flow, but we're reworking our employee incentive plans to be more heavily weighted towards revenue growth and market share."

Medtronic will incorporate these metrics into the company's performance objectives for this fiscal year and intends to include them in next fiscal year's incentive plans.

In an SEC filing last month, Medtronic said the "Simplification Restructuring Program" is expected to incur total pre-tax costs of about $400 million to $450 million, with the majority to be recognized by the end of fiscal year 2022. At the same time, the medtech reported that the program is expected to result in cost savings starting this fiscal year, with annualized ongoing cost savings of about $450 million to $475 million realized by fiscal year 2023.