Medtronic (NYSE:MDT) is set to announce its Q4 earnings for fiscal 2013 Tuesday, May 21. We expect mid-single digit growth in revenues, even as its key Pacemakers & Defibrillators and Spinal franchises will continue to register a drop in revenues. However, continued 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 support to overall operating profit even after including the impact of new medical device tax.
Below we take a look at the important trends that could impact the company’s performance during the quarter.
Overall Revenues To Grow
Revenues from the Pacemakers & Defibrillators division will reflect weakness as pricing pressure coupled with lower procedural volumes is expected to weigh on growth as reflected in earnings of major competitors including Boston Scientific (Read Boston Scientific’s Interventional And CRM Segments Could Weigh On Results). Demand for implantable cardioverter defibrillators (ICDs) and pacemakers in the U.S. and Europe continued to remain dull. Hospitals have been managing their inventories very tightly and their bulk purchases could continue to decline on a year-over-year basis. However, its leads (that connect ICDs to heart) sales should exhibit positive growth following the ongoing troubles with another device maker St. Jude Medical. The lead-to-port ratio, which measures the number of leads sold relative to the number of ICDs or ports should also increase during the period.
In the Cardiovascular segment, we expect stronger sales of heart valves and heart stents to drive growth. While near term hiccups are there in the U.S. and European stent markets, the international markets are growing at an impressive rate. Its drug eluting stent (DES), Resolute Integrity has gained a strong traction worldwide. Further, Symplicity, a RDN device, continues to register decent growth in Europe and other international markets. We will be closely watching the earnings to get updates on FDA approval in the U.S., where Symplicity still remains an investigational device. Recently, the medical device maker reported impressive one year results from its Symplicity HTN-2 study. (Read our note Medtronic: A Look At The Cardiovascular Market for details on Symplicity).
The Spinal division could continue to witness a decline due to weaker demand for its main product Infuse, a bone graft paste used in spinal surgery (Read Medtronic: A Look At The Spinal Division). The continued adoption of Solera and the Atlantis Vision Elite cervical plates, however, will continue to lend some support. Continued strong demand for its surgical technologies products for navigated spine procedures is expected to boost the sales. We also expect moderate growth by the diabetes franchise, mainly on good sales of insulin pumps.
While we expect sales from the U.S. and Europe to remain under pressure, sales from other countries including the 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. dollars, 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.
Beginning in 2013, new medical device taxes have also come into effect following Patient Protection and Affordable Care Act, or ObamaCare. This will be the first quarter which will include the impact of the new medical device tax. However, with various cost cutting measures including job cuts in place, we expect overall operating profit to remain stable (Read Medtronic Earnings Meet Expectations But European Weakness A Concern). The medical device maker is planning to cut as much as $1.2 billion in costs in the next few years.
We have a $51 price estimate for Medtronic, which is a slight premium to the current market price.