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Investment Overview for Medtronic (NYSE:MDT)
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Below are key drivers of Medtronic's value that present opportunities for upside or downside to the current Trefis price estimate for the company's stock:
Pacemakers/Defibrillators
- Medtronic's market share in Pacemakers/Defibrillators: This is the biggest source of revenue for Medtronic. We expect the company's market share to decline to below 21% by the end of our forecast period mainly on account of increasing pricing pressures and a report by Journal of Medical Association (JAMA), which reported that evidence-based guidelines were not met by approximately 20% of the recipients of implantable cardioverter defibrillators (ICD). This resulted in a higher exposure to risk of death in the hospital in comparison to people who met the guidelines.
However, Medtronic could retain its market share if there is a growing acceptance of its pacemakers and defibrillators in the market, offsetting the negative impact of the JAMA article and pricing pressures.Further, Medtronic is bracing itself to actively pursue inorganic route in the Chinese market. Emerging markets including China have been experiencing double digits growth. If the company is able maintain its market share at current levels by the end of the Trefis forecast period, this could translate into an upside of nearly 10% to our current price estimate.
Spinal
- Medtronic's market share in Spinal: We expect the company's market share to decline to below 28% mainly on account of a federal probe and certain negative reports published in The Spine Journal regarding the use of its INFUSE Bone Graft product.
However, Medtronic could protect its declining market share on account of the recent acquisition of Osteotech, a market leader in the growing biologic products market. Further, the company recently announced to acquire a Chinese medical devices maker China Kanghui Holdings that could strengthen its foothold in the rapidly-growing Chinese device market. China Kanghui has a diversified portfolio of orthopedics, spine, and surgical instrumentation products along with strong local R&D and cheap manufacturing operations. The acquisition could help Medtronic arrest an expected decline in its spinal division. In that case, the market share could remain slightly above 35% and there would be a potential upside of nearly 5% to our price estimate for the company's stock.
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Headquartered in Minnesota, Medtronic Inc. supplies self manufactured medical devices and therapies to treat more than 30 chronic diseases across 120 countries in the world. Medtronic operates in two broad segments - the Cardiac and Vascular Group (Cardiac Rhythm Disease Management & Cardiovascular) and Restorative Therapies (Spinal, Diabetes, Neuromodualtion & Surgical Technologies).
The company is a global leader in the Cardiac Rhythm Disease Management, Spinal and Neuromodulation segments. Its main competitors are Johnson & Johnson, Boston Scientific, St. Jude Medical and Stryker Corporation.
On January 30, 2012, Medtronic sold its Physio-Control business to Bain and Capital for approximately $487 million.
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Cardiac Rhythm Disease Management (Pacemakers and Defibrillators), Cardiovascular and Spinal are the major sources of revenue for the company. This is explained by the following factors:
Relentless portfolio diversification
Medtronic continuously launches new and innovative products in the market to retain or increase its market share. In 2011, it launched several improved products in the Cardiac Rhythm Disease Management, Cardiovascular and Spinal market with the expectation of greater acceptance of these products going ahead.
Acquisitions for business expansion
Through a few strategic acquisitions, Medtronic has expanded its business and increased market share. Following this, it acquired Ardian for $800 million and Osteotech for $123 million in 2011 to boost its Cardiovascular and Spinal sales, respectively.
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Diversification of portfolio
Medtronic is focused on continuous innovation and launch of better products in the market. It launched around 60 major products in the market in the year 2011 alone which is expected to give the company a competitive edge in the medical device industry.
Restructuring program to prove beneficial
In 2012, Medtronic initiated a global restructuring program which includes reduction of its workforce, greater profitable investment and withdrawal of its operations from slow growing areas. This program should help the company increase sales through enhanced focus on high-growth areas, and also cut costs.
Geographical expansion
Medtronic is witnessing an increasing share of international sales that have mainly come from China, India, and Brazil. This share of international revenues has increased from 7% in 2010 to 9% in 2011 and it expects it to increase to around 20% over 5 years, positively affecting total revenues.
Healthcare reform could impact selling prices
Stringent healthcare regulations have implemented checks on the pricing structure of medical device companies, which is expected to negatively affect the profits of the industry.
Reducing reimbursements
According to Zacks, healthcare reform which has resulted in an expansion of the publicly insured base has resulted in lower public reimbursements. Additionally, private insurance companies have become more cautious in providing reimbursements which is expected to affect the demand of medical devices and constrain revenues going forward.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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