Medtronic to stop manufacturing some devices in Colorado in pursuit of $850M in promised synergies

Covidien electrosurgical pencil used to perform electrosurgery--Courtesy of Medtronic

The $50 billion Medtronic-Covidien merger was strangely absent of disruptive plant and facility closures. Until now. Earlier this month, Medtronic ($MDT) revealed a plan to shutter Covidien's former headquarters in Mansfield, MA. Just learned are its intentions to relocate two manufacturing lines in Gunbarrel, CO, to an undisclosed location.

The moves come soon after investors became jittery over the possibility that Medtronic's adjusted operating margin were below expectation in Q3 FY 2016 due to a shortfall in synergies from the Covidien integration effort. Wall Street pushed the stock down 4%. Medtronic officials said the company remains on track to meet or exceed its $850 million synergy target, and insisted the miss was due to foreign currency headwinds.

The implications of the closures for Medtronic employees are unclear. As was the case with the Covidien HQ, the company did not reveal whether any of the 1,700 employees at the Gunbarrel facility (formerly owned by Covidien) will be laid off, while the 1,700 Mansfield employees will apparently be able to work remotely or from home.

Spokesman John Jordan told local news outlet the Longmont Times-Call that the Gunbarrel facility is an R&D campus, and "mature" devices are manufactured elsewhere. He told MassDevice that the affected devices are surgical energy return pads and electrosurgical pencils. The closure is part of a plan that's expected to be completed in 2019, he added.

Medtronic's integration agenda calls for achieving at least $850 million in synergies from the Covidien deal by the end of FY2018, include $350 million this fiscal year. CEO Omar Ishrak often touts his four-point plan: preserve, optimize, accelerate, and transform.

He's described several strategies to improve efficiency, including salesforce integration, removal of duplicitous positions and renegotiating prices with suppliers and vendors. So far, most of the savings have come from removing expenses related to sales, general and administrative expenses (SG&A). Future savings will come from the integration of corporate information technology, Ishrak said during the Barclays Global Healthcare Conference in March.

He also said that "some of the manufacturing benefits that you would normally get from the manufacturing consolidation of plants will start to occur a little bit here," adding, "We've got very little there (so far). We'll start to get some of that in FY 2017 and more in FY 2018."

Indeed the Gunbarrel move isn't the first manufacturing modification made as a result of the merger. In a bid to achieve those synergies, the company in December announced that it will build a €13 million ($14.3 million) facility in Galway, Ireland, to manufacture its fast-selling In.Pact Admiral drug-coated balloon for peripheral artery disease. About 100 employees (including some from other locations) will transfer to the facility, located in inverted Medtronic's new home country.

- read the article in the Longmont Times-Call