Medtronic Earnings Preview: Key Businesses In Focus

Medical device maker Medtronic (NYSE: MDT) is scheduled to release its third quarter fiscal 2015 results on Tuesday, February 17. In the previous quarter, the company reported operational revenue growth of 5% year-over-year (y-o-y) to about $4.4 billion. The company’s largest divisions, Cardiac Rhythm Disease Management (CRDM) and Cardiovascular, continued to grow in low single digits driven by sales growth of 11% in the Pacemaker business and about 53% in Atrial Fibrillation (AF). 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]

When Medtronic comes out with its Q3 FY 2015 earnings, we expect revenue growth to meet the company’s guidance of 4-5% on a constant currency basis. Most of the company’s major businesses are likely to sustain their growth momentum as new products have found good acceptance. In December 2014, Medtronic raised $17 billion in the largest corporate debt sale of the year to finance its $43 billion acquisition of Covidien. Going forward, this acquisition is likely to improve operational efficiency by offering various healthcare and diagnostic products and services as a package to customers.

Our price estimate for Medtronic’s stock is currently around $64, implying a discount of about 15% to the market price.

See our full analysis for Medtronic

CRDM: U.S. Sales Likely To Pick Up

Cardiac Rhythm Disease Management (CRDM) which consists of defibrillators and pacemakers is Medtronic’s largest division and accounts for about 30% of total sales. In 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 (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.

However, the U.S. ICD market is expected to pick up in the near term, with Medtronic’s newly launched products such as the CRT Quadripolar Leads, for which the FDA granted approval last quarter. ^[2] It will be interesting to see how much this helped improve ICD sales in the U.S. in the three month period ending Dec 31, 2014.

In the AF division, sales grew 30% on a constant currency basis in Q2 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 Cardiac Rhythm Disease Management 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% of Medtronic’s sales grew over 4% y-o-y to about $966 million in the second fiscal quarter. Sales of drug eluting stents (DES) marginally improved on improving demand for the company’s Resolute Integrity DES.

The Structural Heart business reported 19% sales growth last quarter, as the CoreValve Transcatheter Aortic Valve (TAVR) system continued its strong performance in international markets as well as the U.S. 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. Medtronic’s global TAVR sales grew over 60% y-o-y to reach $131 million in the fiscal second quarter.

Emerging Markets To Maintain Growth Momentum With China Turnaround

Emerging markets contributed about 29% of overall international revenues and saw robust growth of 12% y-o-y to $554 million in the fiscal second quarter. In emerging markets, Africa and the Middle East were 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 more time.

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.

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1. Press Release, Medtronic, Nov 18 2014 [↩]
2. Press Release, Medtronic, Dec 11 2014 [↩]