Medtronic Earnings Preview: U.S. ICD Sales, Emerging Markets In Focus

Medical device maker Medtronic (NYSE: MDT) is scheduled to release its second quarter fiscal 2015 results on Tuesday, November 18. In the previous quarter, the company reported operational revenue growth of 4% year-over-year (y-o-y) to about $4.27 billion, driven by growing acceptance of new products and robust sales in the U.S. as well as emerging markets. The company’s largest divisions, Cardiac Rhythm Disease Management (CRDM) and Cardiovascular, continued to grow in low single digits driven by sales growth of about 60% in Atrial Fibrillation (AF) and 10% in the pacemaker business. Other businesses, such as Neuromodulation, Surgical Technologies and Diabetes, also registered robust revenue growth, which offset declines in the Spinal division. International sales accounted for 45% of total revenues for the medical device maker, driven by 11% y-o-y growth in emerging markets. ^[1]

When Medtronic comes out with its Q2 FY 2015 earnings, we expect sales growth to meet the company’s guidance of 3-5%. Most of the company’s major businesses are likely to sustain their growth momentum as new products have found strong acceptance. We also expect gross margins to remain below 75% as Medtronic’s cost saving efforts are offset by growing pricing pressures and product quality issues in some divisions.

Our price estimate for Medtronic’s stock is currently around $61, implying a discount of about 10% to the market price.

See our full analysis for Medtronic

CRDM: U.S. Sales In Focus

Cardiac Rhythm Disease Management (CRDM) – primarily consisting of defibrillators and pacemakers – is Medtronic’s largest division, accounting for about 30% of total sales. In Q1 FY 2015, operational sales in the division grew by 4% y-o-y to $1.25 billion as solid growth in Pacemakers (reported as Low Power) and Atrial Fibrillation (AF) offset declining implantable cardioverter defibrillator sales. Weak demand in the U.S. ICD market offset Medtronic’s relatively stronger performance in international markets, where its sales grew by 1% y-o-y driven by growing adoption of the Attain Performa quadripolar lead in Europe and Japan. Following the growing acceptance of its Attain Performa quadripolar (APQ) lead in Japan in the last two quarters, the company launched the product in the U.S. in September and it will be interesting to see whether this helped improve ICD sales in the U.S. in the three month period ending Oct 31, 2014.

In the AF division, sales grew 30% on a constant currency basis in Q1 FY 2015 on account of solid growth of the Arctic Front CryoAblation System and the launch of the Pulmonary Vein Ablation Catheter (PVAC) Gold system. Going forward, we expect sluggish U.S. sales to offset international market gains in the overall CRDM business. Medtronic’s global market share is unlikely to improve significantly unless its performance in the U.S. improves.

Cardiovascular: Consistent Sales Growth Expected

Cardiovascular consists of the Coronary, Structural Heart and Endovascular businesses, which offer products such as stents, heart valves and renal denervation systems for treating hypertension. The Cardiovascular division, contributing over 20% to Medtronic’s sales, grew over 3% y-o-y, registering sales of about $1 billion in the first fiscal quarter. Sales of drug eluting stents (DES) increased 2% on an operational basis to $279 million, driven by strong global sales of the company’s Resolute Integrity DES.

The Structural Heart business reported 8% sales growth, as the CoreValve Transcatheter Aortic Valve (TAVR) system continued its strong performance in international markets as well as the U.S. The company’s CoreValve system had a share of about 40% in the U.S. TAVR market by the end of August this year. Following its recent settlement with Edwards regarding a patent infringement issue, Medtronic should be looking to ramp up its training facilities and further improve sales in the lucrative U.S. TAVR market, which is expected to grow at 30% y-o-y.

Watch For Turnaround In Chinese Sales

Emerging markets contributed about 28% of overall international revenues and saw robust growth of 11% y-o-y to $539 million in the first fiscal quarter. In emerging markets, Africa and the Middle East were again strong performers, with revenues growing 30%. However, there were strong headwinds in China and India, where sales declined in high single digits owing to challenges in distribution channels and inventory rebalancing. The company expects sales in China to turn around in the coming quarters as it works out some existing issues in distribution and develops direct partnerships with healthcare providers.

Overall, Medtronic expects sales from emerging markets, including Asia-Pacific, Latin America and South Asia, to continue to grow in the mid teens as it works on optimizing its business channels and establishes sustainable and broader business partnerships with national governments. The medical device major expects emerging markets to contribute 150 to 200 basis points to its overall sales growth in fiscal 2015. ^[1]

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1. Medtronic’s CEO Discusses F1Q 2015 Results – Earnings Call Transcript, Seeking Alpha, Aug 19, 2014 [↩] [↩]