- Restorative Therapies Group constitutes 38% of the Trefis price estimate for Medtronic's stock.
- Minimally Invasive Therapies Group constitutes 37% of the Trefis price estimate for Medtronic's stock.
- Cardiac Rhythm Management constitutes 19% of the Trefis price estimate for Medtronic's stock.
WHAT HAS CHANGED?
- Impact of Coronavirus Crisis On Medtronic Stock
The current coronavirus crisis has impacted Medtronic's sales, primarily due to a decline in number of procedures performed. Medtronic's stock is down by about 5%, underperforming the
broader indices, with the S&P 500 up 9% since early February (through Dec 21), after the WHO declared a global health emergency. Medtronic stock has taken a bigger hit compared to some of its peers, considering its higher exposure to the U.S. market (53% of total revenue), which has become the epicenter of the crisis with the highest number of COVID-19 cases in the world.
- Q2 Fiscal 2021 Performance
Medtronic posted 1% revenue decline in Q2 fiscal 2021, as a 7% growth in Minimally Invasive Therapies Group was more than offset by sales decline in other segments. The company's earnings of $1.02 per share reflect a 22% decline compared to $1.31 in prior year quarter, on an adjusted basis.
- Growing Diabetes Care Sales
Medtronic’s diabetes care sales grew at an average annual rate of 8.0% from $1.8 billion in fiscal 2015 to $2.4 billion in fiscal 2020, and they could grow to $2.6 billion in fiscal 2022.
The growth in the recent past has been led by higher sales of its MiniMed devices. This trend will likely continue with MiniMed 670G hybrid closed loop system, which is seeing strong demand in the U.S., and the company is expanding the products in international markets. 670G is the world’s first hybrid closed loop system that optimizes glycemic control for patients with type 1 diabetes.
- Decline In Minimally Invasive Therapies Group Sales
Minimally invasive therapies group revenue declined from $9.6 billion in fiscal 2016 to $8.4 billion in fiscal 2020. The decline earlier was due to the divestiture of the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses. However, in the recent quarters, the company is seeing higher demand for its patient monitoring products, along with sealing instruments, and advanced stapling products.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Medtronic's value that present opportunities for upside or downside to the current Trefis price estimate for the company's stock:
- Medtronic's Restorative Therapies Group: revenue has increased from $6.5 billion in 2014 to $7.7 billion in 2020, led by Brain Therapies, and Specialty Therapies. We forecast low single-digit annual growth in revenues to north of $9.4 billion by the end of our forecast period, led by a continued uptick in Brain, Spine, Specialty, and Pain Therapies. However, if the company sees growth at a faster pace in mid-single-digits, and revenues reach north of $11.5 billion, it would result in a 5% upside to our price estimate. If the company fails to see strong growth in the business, and sees revenue hover around the current range, it would translate into downside of around 5% to our price estimate.
Medtronic's Gross Profit Margin
- Medtronic's Gross Profit Margin: Medtronic's Gross Margin gradually declined from 76% in 2011 to 68% in 2020, due to increasing competition, reduced reimbursements and other pricing pressures. We forecast the company's gross margin to improve slightly from the current levels to 70% by the end of our forecast period. However, if the company manages to reduce costs, and improve pricing, and margins reach to historical highs of 75% by the end of our forecast period, it would translate into an upside of 15% to our price estimate. However, if the pricing pressure amid competition weighs on gross margins, and they decline further to around 65%, it would translate into a high single digit decline in our price estimate.
Headquartered in Dublin, Ireland, Medtronic plc. supplies self manufactured medical devices and therapies to treat more than 30 chronic diseases across 150 countries in the world. Medtronic operates in the following broad segments - Cardiac and Vascular Group (Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, Aortic & Peripheral Vascular), Minimally Invasive Technologies Group (Surgical Solutions, Patient Monitoring and Recovery), Restorative Therapies Group (Spine, Neuromodulation, Neurovascular, Surgical Technologies) and Diabetes Group. The company is a global leader in the Cardiac Rhythm Disease Management, Spinal, and Neuromodulation segments. Its main competitors are Johnson & Johnson, Boston Scientific, and Abbott.
Medtronic acquired Crospon, a endoscopic diagnostics company in Feb 2018. Crospon offers tools to diagnose, and measure gastroesophageal motility disorders. The deal was valued at around $45 million. Earlier in 2015, Medtronic acquired Covidien for approximately $50 billion.
SOURCES OF VALUE
Surgical & Patient monitoring products, Neurological products, Cardiac rhythm management devices, Cardiovascular products, and Diabetes products are the major sources of revenue for the company. This is explained by the following factors:
Relentless Portfolio Diversification
Medtronic continuously launches new and innovative products in the market to retain or increase its market share. In 2018, the FDA approved Medtronic's Remodulin to treat patients with Pulmonary Arterial Hypertension. It also secured an approval for Less-Invasive Heart Pump Implant Procedure for its HVAD system. These approvals should aid the future growth.
Acquisitions For Business Expansion
Through a few strategic acquisitions, Medtronic has expanded its business and increased market share. It acquired Crospon, a endoscopic diagnostics company in Feb 2018. Crospon offers tools to diagnose, and measure gastroesophageal motility disorders. Earlier in 2015, Medtronic acquired Covidien for approximately $50 billion. In the past, it acquired Ardian for $800 million and Osteotech for $123 million in 2011 to boost its Cardiovascular and Spinal sales, respectively.
Enterprise Excellence Program To Prove Beneficial
In Q3 FY18, Medtronic initiated a global restructuring program, which includes optimization of its processes, and is aimed to improve operating margins. The company expects annual gross saving of around $3 billion from 2022 under this program. This program should help the company increase sales through enhanced focus on high-growth areas, and also cut costs.
Medtronic is witnessing an increasing share of international sales that have mainly come from China, India, and Brazil. Medtronic's revenue from outside the U.S accounted for 47% of its overall net sales in FY 2019.
Healthcare Reform Could Impact Selling Prices
Stringent healthcare regulations have implemented checks on the pricing structure of medical device companies, which is expected to negatively affect the profits of the industry.