Medtronic Earnings: Sales Surge On New Products And Emerging Markets

Medtronic (NYSE: MDT) reported strong fiscal second quarter results on Tuesday, with operational revenue growing 5% year-over-year (y-o-y) to about $4.4 billion, driven by balanced growth across business divisions and geographies. The company’s largest divisions, Cardiac Rhythm Disease Management and Cardiovascular, grew in mid-single digits driven by sales growth of about 53% in Atrial Fibrillation and 11% in the Pacemaker business. Other businesses such as Neuromodulation, Surgical Technologies and Diabetes also registered robust revenue growth. International sales accounted for 44% of total revenues for the medical device maker, driven by 12% y-o-y growth in emerging markets. ^[1] ((Press release, Medtronic, Nov 18 2014))

The company’s gross margin on an operational basis was below expectations at 73.8%, on the back of higher sales of lower-margin Bone Morphogenetic Proteins (BMP) products and expenses related to addressing product quality issues in Neuromodulation and Diabetes. Excluding the impact of these adjustments, the company stated that its gross margin could have been higher by at least 40 basis points. For the second half of fiscal 2015, the company expects gross margins to improve to around 74.5% on a constant currency basis as its cost reduction program offsets the ongoing quality improvement expenses. In its earnings call, Medtronic also reiterated its intent to buy healthcare and medical supplies major Covidien (NYSE:COV) despite a recent notification by the U.S. Department of the Treasury and the Internal Revenue Service (IRS) discouraging tax-avoiding corporate inversion deals. The company said that is was “fully committed” to complete the strategically important and financially attractive deal by early 2015. ^[1]

Our price estimate for Medtronic’s stock is currently around $61, implying a discount of about 15% to the market price.

See our full analysis for Medtronic Inc.

Strong Pacemaker Sales Offset Weak U.S. ICD Demand

Cardiac Rhythm Disease Management, primarily consisting of defibrillators and pacemakers, is Medtronic’s largest division, accounting for over 30% of total sales. During Q2 FY 2015, operational sales in the division grew by 5% y-o-y to $1.32 billion as solid growth in Pacemakers (reported as Low Power) and Atrial Fibrillation offset declining implantable cardioverter defibrillator (ICD, reported as High Power) sales.

Consistent weak demand in the U.S. ICD market offset Medtronic’s relatively better performance in international markets, where its sales grew by 1% y-o-y driven by growing adoption of the Attain Performa quadripolar (APQ) lead in Europe and Japan. Following the growing acceptance of its APQ lead in Japan in the previous two quarters, the company launched this product in the U.S. in September. Management stated in the recent earnings call that the response to this product has been impressive. Meanwhile, sustained global demand for the Reveal LINQ system contributed to sales growth in the diagnostics business.

In the Atrial Fibrillation division, sales grew over 30% on a constant currency basis on account of solid growth for 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 Cardiac Rhythm Disease Management business. Medtronic’s global market share is unlikely to improve significantly unless its performance in the U.S. improves.

CoreValve Aggressively Expanding In The U.S. TAVR Market

The Cardiovascular division, consisting of the Coronary, Structural Heart and Endovascular businesses, offers products such as stents, heart valves and renal denervation systems for treating hypertension. The Cardiovascular division, contributing over 20% of Medtronic’s sales, grew over 4% y-o-y, registering sales of $966 million in the fiscal second quarter. Sales of drug eluting stents (DES) marginally improved in international markets and were stable in the U.S. on account of robust demand for the company’s Resolute Integrity DES.

The Structural Heart business reported 19% sales growth, as the CoreValve Transcatheter Aortic Valve (TAVR) system continued its strong performance in the U.S. The company is aggressively expanding its presence in the U.S. TAVR market following its recent settlement with Edwards regarding a patent infringement issue, and is now present in over 200 centers. Medtronic’s global TAVR sales grew over 60% y-o-y to reach $131 million in the quarter.

Sales Soar In Surgical Technologies, Diabetes

Surgical Technologies sales increased 10% y-o-y to $410 million on account of balanced growth in its Neurosurgery, Advanced Energy and ENT businesses. Visualase, a privately held company acquired by Medtronic in July this year, contributed about $3 million to overall sales and helped Neurosurgery’s top line grow in the upper-single digits. ENT sales also registered similar growth in the quarter and were aided by the launch of new products such as the M5 Microdebrider and NuVent sinus balloon. ^[2]

Sales in the Diabetes division grew 10% y-o-y to $430 million, driven by solid uptake of the company’s MiniMed 530G system (with Enlite CGM sensor) in the U.S. as well as emerging markets. MiniMed is currently the only system in the market which has a built-in automatic control mechanism to start/stop insulin delivery in the blood based on pre-determined insulin levels. Medtronic estimates that this product could drive sales significantly in the near term as it expands internationally focusing on the type-2 diabetes market.

Spine Shows Signs Of Recovery

The Spine division reported an improvement over its performance in the last couple of quarters, with sales increasing 1% y-o-y to $746 million. Sales improved on account of a recovery in the Core Spine business in the U.S. as well as in international markets. However, the Interventional Spine business, consisting primarily of Balloon Kyphoplasty Procedure products, reported a revenue decline of 5% y-o-y owing to weak international sales. Spinal sales are expected to get a boost in the coming quarters with the recent launch of several new products including the Divergence Anterior Cervical Fusion System and the titanium-coated Interbody Fusion Devices. The company is also in the process of launching its FDA-approved Prestige LP next-generation cervical disc in the U.S. market very soon. ^[3] ((Interbody Fusion Device -Press Release, Medtronic, Oct 20, 2014))

Solid Growth In Emerging Markets

Emerging markets contributed about 29% of overall international revenues and saw robust growth of 12% y-o-y to $554 million. In emerging markets, Africa and the Middle East were again strong performers, with revenues growing over 20%. Per company expectations, sales in China turned around to grow in double-digits in the quarter, as the company worked out its existing issues in distribution and developed direct partnerships with healthcare providers. However, challenges with distribution continued to impact sales in India and the company expects this to linger on for some time.

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 F2Q 2015 Results – Earnings Call Transcript, Seeking Alpha, Nov 18, 2014 [↩] [↩] [↩]
2. Visualase Press Release, Medtronic, July 28 2014 [↩]
3. Divergence -Press Release, Medtronic, Oct 21, 2014 [↩]