Medtronic Reports Strong Earnings, Covidien Integration Going Well

Medtronic (NYSE: MDT) reported better-than-expected fiscal fourth quarter results on Tuesday, June 2, with operational revenue growing 7% year-over-year (y-o-y) to about $7.32 billion, on a comparable and constant currency basis. This was the first quarter in which Medtronic’s earnings included the revenue generated by Covidien, which the company acquired for $43 billion in a deal that closed in January. ^[1]

The acquisition of Covidien has led to the formation of a new business division for Medtronic, the Minimally Invasive Therapies Group (MITG). This division, which is now the company’s largest, grew by 6% year over year to $2.38 billion. The company’s other major divisions, Cardiac Rhythm Disease Management (CRDM) and Cardiovascular, grew in double digits on account of 17% sales growth in the Pacemaker business and about 50% in Atrial Fibrillation (AF). Apart from a sluggish performance by the Spinal division, the company’s other businesses – inlcuding Neuromodulation, Surgical Technologies and Diabetes – also registered robust revenue growth. International sales accounted for 43% of total revenues for the medical device maker, driven by 11% y-o-y growth in emerging markets. ^[2]

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Minimally Invasive Therapies Group

The newly formed division includes the Surgical Solutions business and the Patient Monitoring and Recovery business. Surgical Solutions saw a strong performance in the quarter, driven largely by over 40% growth in Early Technologies. On the other hand, Patient Monitoring and Recovery (PMR) recorded a modest growth rate of just 2%.

CRDM: Robust Sales Maintain Growth Momentum

Medtronic’s now second-largest division – Cardiac Rhythm Disease Management (CRDM) – accounts for 18% of total sales. During Q4 FY 2015, operational sales in the division grew by 11% year over year to $1.3 billion, driven by strong performance in the U.S. and Japan. CRDM consists primarily of defibrillators and pacemakers; pacemakers (reported as Low Power) grew in the low teens, while Defibrillators (reported as High Power) grew in the mid-single digits. The Reveal LINQ insertable cardiac monitor, which was launched in 2014, continued to drive growth in Pacemakers by growing 40% sequentially, while double-digit growth in Japan boosted sales in the ICD market. Atrial Fibrillation (AF) performed strongly, with 30% year over year growth, driven by continued robust sales of the Arctic Front Advance CryoAblation System.

Cardiovascular: CoreValve Continues To Deliver Strong Performance

The Cardiovascular division, which consists of the Coronary, Structural Heart and Endovascular businesses, grew by 9% y-o-y to $1.19 billion. The Coronary and Structural Heart business reported 9% sales growth on account of 50% growth in sales of Transcatheter Valves. The CoreValve Transcatheter Aortic Valve (TAVR) system continued its strong performance in the U.S. The CoreValve Evolut R recapturable system, which recently received CE approval, also showed promising market acceptance. The company is targeting the first half of FY16 to receive FDA clearance for the Evolut system. Sales of drug eluting stents (DES) that were slightly down in Q3, picked up this quarter with the launch of Resolute Onyx DES in Europe.

Diabetes: Consistent Sales Growth, Small Acquisitions

Sales in the Diabetes division grew 8% y-o-y to $467 million, driven by solid uptake of the company’s MiniMed 530G system (with Enlite CGM sensor) in the U.S. and the launch of the next generation MiniMed 640G System in international markets. MiniMed, which focuses on the type-2 diabetes market, is the first system in the market that automatically controls the insulin delivery in the blood based on pre-determined insulin levels. The company also made a move to tap into the type-1 diabetes market by acquiring Diabeter, and also made minority investments in DreaMed and Glooko to expand its services within this division.

The company updated its guidance for its FY 2016 revenue and diluted cash earnings per share, expecting revenue growth of 4-6%, with diluted EPS of $4.30 to $4.40 in FY 2016. As the company has moved its headquarters to Ireland with the acquisition of Covidien, it also expects to get certain tax advantages as the corporate tax is lower in Ireland than the U.S. The company expects its FY16 non-GAAP nominal tax rate on a cash basis to be in the range of 16% to 18%. The company’s tax rate for the year 2014 was about 18%.

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Notes:

1. Medtronic Reports Fourth Quarter And Fiscal Year 2015 FINANCIAL RESULTS, Press Release [↩]
2. Medtronic’s (MDT) CEO Omar Ishrak on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha [↩]