Medtronic Earnings Will Highlight Improving Sales Outlook Despite Pricing Pressures

Medtronic (NYSE:MDT) is set to announce its Q3 earnings for fiscal 2013 Tuesday, February 19.  While we expect its key pacemakers & defibrillators and spinal divisions to continue to register a drop in revenues, the growth in cardiovascular, diabetes and surgical technologies businesses will more than offset the decline. For the quarter, we expect gross margins to weaken slightly, mainly due to pricing pressure and foreign exchange fluctuations. However, Medtronic’s cost-cutting efforts will lend some support to operating profit. Below we take a look at the important trends that could impact the company’s performance during the quarter.

See our complete analysis of Medtronic here

Overall Revenues To Grow

On a quarterly basis, the medical device maker may record a decline in sales for implantable defibrillators as U.S. Hospitals have been managing their inventories very tightly, hurting the overall demand. However, the demand is stabilizing now as noted in the Q4 earnings of Boston Scientific (NYSE:BSX) (Read Boston Scientific Revised To $8 On Acquisitions, New Products & Cost Cutting Efforts). Lead-to-port ratio, which measures the number of leads sold relative to the number of ICDs or ports, should increase during the period.

The spinal division could continue to witness a decline due to weaker demand for its main product Infuse, a bone graft paste still used in spinal surgery even as new products continue to gain broader acceptance. We expect stronger sales of heart valves and heart stents in the cardiovascular segment. While near term hiccups are there in the U.S. and European markets, international markets are growing at a stupendous rate. Its drug eluting stent (DES) Resolute Integrity is seeing a strong pick-up in demand following its launch in Japan recently. We also expect continued strong performance by the diabetes franchise, mainly on good sales of insulin pumps. Continued strong demand for its surgical technologies products for navigated spine procedures could also boost the sales.

While we expect sales from the U.S. and Europe to remain under pressure, sales from other countries including emerging markets may continue to show robust growth, excluding the currency impact. We expect the contribution of emerging markets to Medtronic’s overall revenue to continue to grow.

Pricing Pressure Could Weigh On Gross Margins

We expect gross margins to remain under pressure due to stiff competition and pricing pressure in developed markets. Further, Medtronic incurs most of its costs in U.S. dollar whereas 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 impacts gross margins. However, with various cost cutting measures including job cuts in place, we expect overall operating profit to jump.

Long Term Outlook Strong

While business sentiment is improving, near term hiccups are there. Beginning in 2013, new medical device taxes have come into effect following Patient Protection and Affordable Care Act, or ObamaCare, and will weight on operating profit. However, we foresee another round of cost cutting measures being announced to fend-off the impact.

The longer term outlook for Medtronic looks sound, and we expect upside to the stock if earnings show some strength. Medtronic has been launching several new and innovative products at continuous intervals, which should drive the growth going forward. Medtronic holds the 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 developed market.

We will update our price estimate for Medtronic post earnings release.

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