Medtronic’s Results Were Solid Despite Business and Currency Challanges

Medtronic (NYSE:MDT) announced its second quarter earnings for fiscal 2013 on Tuesday, ^[1] registering a decline in its key pacemakers & defibrillators and spinal divisions, in-line with our expectations. However, growth in cardiovascular, diabetes and surgical technologies businesses more than offset the decline as overall revenue grew by 5% to $4.2 billion, excluding the currency impact. Gross margins declined slightly mainly due to foreign exchange fluctuations. Below we take a look at the trends observed during the last quarter.

See our complete analysis of Medtronic here

Strong Performance Despite A Strong U.S. Dollar

On a quarterly basis, the company recorded a 3% decline (flat growth excluding the currency effect) in revenue from pacemakers & defibrillators division due to a decline in overall demand for pacemakers and implantable defibrillators in the U.S. Hospitals have been managing their inventories very tightly, hurting the demand. However, the silver lining was that growth in the company’s worldwide defibrillator sales was flat (excluding the currency effect) outperforming the overall market. A product recall from its one of the largest competitors, St. Jude Medical, also helped the company.

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 continue to gain broader acceptance. Stronger sales of heart valves and heart stents in the cardiovascular segment, however, more than offset the aforementioned decline in revenue. In the segment, its drug eluting stent (DES) Resolute Integrity has seen a strong pick-up in demand following the launch in Japan recently.

Sales from surgical technologies division also continued to exhibit strong performance on increasing demand for navigated spine procedures. This has strengthened our view that the division will soon overcome the company’s diabetes franchise in sales even as the latter maintains moderate growth on the back of insulin pumps.

Sales from emerging markets continued to exhibit double digit growth (18%) excluding currency impacts and drove international growth. Still, the overall contribution of emerging markets to the company’s overall revenue stands at 11%, well below its target of 20%.

A strong U.S. dollar and pricing pressure continued to weigh on overall margins. While the company incurs most of its costs in U.S. dollar, sales are generated from several countries. A stronger U.S. dollar leads to a decline in sales even as costs remain the same. This, consequently, leads to a decline in gross margins.

Long Term Outlook Strong

In the short term, the global economic slowdown and pricing pressure following healthcare reforms continue to pose a concern for the company. Further, an unfavorable currency could also continue to weigh on its growth in the near term. But, Medtronic seems to be doing much better than its counterparts, including Boston Scientific, and we are optimistic about the company’s prospects on a number of factors.

The company received the FDA approvals for several new and innovative products, which should have a positive impact on its sales. Medtronic holds the FDA approval for Revo MRI SureScan, the first MRI-safe pacemaker. Sales should receive a boost after the Center for Medicare & Medicaid Services (CMS), a government agency responsible for administering Medicare, reported that it will provide MRI coverage for Medicare beneficiaries who have FDA-approved MRI-safe pacemakers. 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.

Further, the recent acquisition of Chinese medical devices maker China Kanghui Holdings should bring some good news to the company. 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 will help the company strengthen its foothold in the fast growing Chinese market and could help Medtronic arrest an expected decline in its spinal division (Read Medtronic Pays Princely Sum For Greater China Access With Acquisition). The surgical technologies segment is also well poised to increase market share with the acquisitions of Salient Surgical Technologies and PEAK Surgical.

We will soon update our $45 price estimate for the Medtronic to reflect the earnings.

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1. Medtronic Reports Second Quarter Earnings, Company Press Release, Nov 20 2012 [↩]