Medtronic Earnings Preview: Medtronic Micra TPS To Drive Company’s Near Term Growth
Leading medical device manufacturer Medtronic(NYSE:MDT) will report its Q2 earnings on December 3rd. (Fiscal years end with April.) We expect the company to see growth coming in from the increased adoption for its Transcatheter Pacing System in the Cardiac and vascular group, which constitutes 46% of overall revenue for Medtronic. In a recent clinical trial, Medtronic’s wireless pacemaker was proven to be significantly more effective than current options with a high degree of efficacy. [1] The seamless integration of the Covidien acquisition earlier this year will benefit the company’s growth in the near future. Furthermore, the company expects incremental revenue and improved margins in the second quarter, coming in from its newly formed joint venture with its largest distributor in Saudi Arabia.
Our price estimate of $70 for Medtronic is about 10% below the current market price.
See our complete analysis for Medtronic here
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Medtronic To Reap Benefits From Its Growth Strategy
The company is expected to benefit from its growth strategy which revolves around three aspects— therapy innovation, globalization and economic value. Medtronic’s R&D expenditure has hovered around 9% of sales since 2008 while revenue has grown steadily, underscoring the focus on innovation. The company will create economic value for itself by realizing the synergies from the seamless integration of Covidien, once the transaction is closed. Also, Medtronic is implementing “value-based payment models” like bundle payment initiatives that will further boost its economic value. In the globalization arm, the company has been witnessing encouraging trends in emerging markets, despite macro-economic turbulence in the region.
In the first quarter, the company failed to achieve its baseline goal of 150 to 200 basis points year-over-year revenue growth because of supply chain optimization in Saudi Arabia. [2] Revenues from Saudi Arabia are not reported separately, so the impact of the supply chain disruption on the broader emerging markets cannot be ascertained. Nevertheless, the disruption in the first quarter is likely to result in benefits in the second quarter.
In summary, we believe that Medtronic is taking significant and concrete steps in putting its three-pronged growth strategy to work. These steps can be directly linked to specific aspects of growth in the company’s business, which leads us to believe that the company’s growth strategy will yield results in the near future.
Widespread Adoption Of Medtronic’s Wireless Pacemaker To Drive Growth In Near Future
Unlike the traditional pacemakers that use a lead wire to connect to the heart, the Micra pacemaker is leadless and eliminates the complications that can arise if a lead wears out or breaks. Moreover, the device is very small and can be implanted through a catheter, eliminating the need of a surgical process and reducing the costs involved in implantation. Medtronic’s Micra is the world’s smallest pacemaker and is 30% smaller in size compared to its competitor St. Jude’s Nanostim which can give the company a competitive edge.
Medtronic got the CE mark for its wireless pacemaker earlier this year, and rolled-off the device’s sale in Europe. After successful clinical trial of the device for getting approval from the FDA, the company is expected to rapidly make its way in the US and other markets. We expect Medtronic to get a competitive advantage, by taking a lead in the leadless pacemaker market in the US, over St. Jude’s Nanostim as the later suffered setback due to deaths associated with the use of Nanostim that can delay its FDA approval.((Medtronic reports strong leadless pacemaker data, FierceMedicalDevices, November 10, 2015)). By being an early entrant into the leadless pacemaker market, Medtronic is expected to capture a large share of the nascent leadless pacemaker market, which according to some reports is expected to reach $700 million in 2016 of the $3.5 billion pacemaker market.
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Notes:- World’s Smallest Pacemaker, Medtronic Micra® TPS, Meets Global Clinical Trial’s Safety and Effectiveness Endpoints, Investor Relations Medtronic, Nov 9, 2015 [↩]
- Medtronic Fiscal 2016 First Quarter Earnings Call Transcript, Seeking Alpha, September 3, 2015 [↩]