Medtronic ( MDT )
announced its third quarter earnings for fiscal 2013 on Tuesday,
registering mid-single digit growth in revenues, in-line with our
expectations. Overall revenue grew by 4% to $4 billion, excluding
the currency impact. The medical device maker's key division,
pacemakers & defibrillators along with spinal franchise
continued to witness a decline in sales. However, growth in
cardiovascular, diabetes and surgical technologies businesses more
than offset the decline. Gross margins declined slightly
mainly due to foreign exchange fluctuations. Below we
highlight the key trends coming out of the earnings release.
See our complete analysis of
Revenues Grow, But European Weakness A Concern
On a quarterly basis, the medical device maker recorded a 1%
decline (excluding the currency effect) in revenue from pacemakers
& defibrillators division as pricing pressure weighed on growth
even as overall procedural volumes were stable during the period.
Bulk purchases from hospitals were down on a year-over-year basis
which impacted growth. Growing troubles for one of its largest
competitors, St. Jude Medical, helped Medtronic a bit. Growth in
its leads (that connect ICDs to heart) sales following fresh
troubles for St. Jude was expected. The lead-to-port ratio, which
measures the number of leads sold relative to the number of ICDs or
ports, continued to increase during the period.
While the demand for pacemakers was weak, sales got a little
support from the launch of MRI-conditional pacemaker in
Japan. However, what comes as a concern for the whole division is
that management is seeing more weakness in European markets as
procedural volumes decelerated in January. This could continue to
weigh on growth in the near term.
As expected, the spinal division witnessed a decline due to
weaker demand for its main product Infuse , a bone graft
paste used in spinal surgery even as ﻿new products are
gaining broader acceptance. Stronger sales of heart valves and
heart stents in the cardiovascular segment, however, more than
offset the aforementioned decline in revenue. Resolute Integrity, a
drug eluting stent ( DES ), saw a strong
pick-up in demand following the launch in international markets
including Japan. The stent has been performing well in the U.S.
market as well.
Sales from the surgical technologies division continued to
exhibit a strong performance on increasing demand for navigated
spine procedures. This justifies our view that the division will
soon overcome the company's diabetes franchise in sales even as the
latter maintains moderate growth on insulin pumps.
While the overall contribution of
emerging markets to the company's total revenue stands
at 12%, Medtronic is gradually moving towards its target of 20%.
Sales from emerging markets continued to exhibit double digit
growth (21%), excluding currency impacts, and drove international
A strong U.S. dollar and pricing pressure continued to weigh on
overall gross margins. However, operating profit jumped due to
various cost cutting measures undertaken to fend off expected slow
growth in the near term. The medical device maker is planning to
cut as much as $1.2 billion in costs in the next few years.
Long Term Outlook Strong
In the short term, a weak Europe and pricing pressure continue
to pose a concern for the medical device maker. Further, an
unfavorable currency could also continue to weigh on its growth. In
addition, beginning 2013, new medical device taxes have come into
effect following Patient Protection and Affordable Care Act, or
ObamaCare, and will weigh on operating profit.
However, the longer term outlook for Medtronic looks sound. The
company has been launching several new and innovative products at
continuous intervals, which should drive growth going forward.
Medtronic holds FDA approval for Revo MRI SureScan, the first
MRI-safe pacemaker. In addition, new devices in the
cardiovascular business have mostly exhibited better treatment
opportunities and are seeing greater sales in the regions where
they were launched. Recently, the medical device maker reported
impressive one-year results from its Symplicity HTN-2 study for its
renal denervation device (a radiotherapy-based system to treat high
blood pressure), Symplicity, which will strengthen its case to
secure FDA approval for the device (Read Medtronic: Good Symplicity Test Results But FDA
Approval Not Close )
Further, Medtronic is actively pursuing the inorganic route in
the Chinese market (Read Medtronic Eyes M&A To Tap Chinese Market
Growth ). The recent acquisition of Chinese medical devices
maker China Kanghui Holdings signifies its intention (Read
Medtronic Pays Princely Sum For Greater China Access With
Acquisition). Emerging markets, including China, have been
experiencing double-digit growth so any move toward making inroads
into these markets will only help Medtronic fend off weakness in
We are in the process of updating our price estimate for
Medtronic to reflect the Q3 results and recent trends.
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