Medtronic New Coverage: $41 Price Estimate

Trefis has launched coverage of Medtronic (NYSE:MDT), a global developer, manufacturer and supplier of medical devices. The company is a world leader in pacemakers and defibrillators (cardiac rhythm disease management), as well as the spinal and neuromodulation businesses. Its main competitors are Johnson & Johnson (NYSE:JNJ), Boston Scientific (NYSE:BSX), Stryker Corporation (NYSE:SYK) and St. Jude Medical (NYSE:STJ).

We recently launched coverage of Medtronic with a $41 price estimate for the company’s stock, which is about 5% ahead of the current market price.

See our complete analysis of Medtronic.

We have divided Medtronic into the following divisions which account for its value:

• Pacemakers and Defibrillators – primarily produces pacemakers and defibrillators for the treatment of heart conditions.
• Cardiovascular – consists of medical devices for the treatment of disorders related to the heart or blood vessels.
• Spinal – consists of medical devices and implants for the treatment of conditions related to the spine and musculoskeletal system. It also includes biologic solutions for the dental and orthopedic markets.
• Diabetes – consists of diabetes management solutions that include continuous glucose monitoring systems, insulin pump therapy, and therapy management software.
• Neuromodulation – consists of medical devices for the treatment of chronic pain, and certain disorders related to movement, psychology, urology and gastroenterology.
• Surgical Technologies – consists of medical devices and therapies for treating ear, nose, & throat (ENT) and neurological problems along with image-guided surgery and intra-operative imaging systems that enhance surgical planning during certain surgeries.

Pacemakers & Defibrillators and the Cardiovascular division are the primary sources of value for Medtronic.

Pacemakers, Defibrillators and Physio-Control

Pacemakers and Defibrillators help in the treatment of abnormal heart conditions, while the Physio-Control division (which has been sold to Bain Capital) included manual and automated external defibrillators for the treatment of abnormal heart conditions during emergencies.

In 2011, this division accounted for approximately 30% of total sales and Trefis estimates that the company derives more than 28% of its value from the business. Medtronic has received FDA approvals for several new and innovative products, which should have a positive impact on sales. Additionally, the Center for Medicare & Medicaid Services (CMS), a government agency responsible for administering Medicare, reported that it would provide MRI coverage for Medicare beneficiaries who have FDA-approved MRI-safe pacemakers. As Medtronic holds the FDA approval for Revo MRI SureScan, the first MRI-safe pacemaker, its sales should receive a boost.

However, we expect that the division will be negatively impacted by a report from the Journal of the American Medical Association in January 2011, which reported that evidence-based guidelines were not met by approximately 20% of the recipients of implantable cardioverter defibrillators (ICD), resulting in a higher exposure to risk of death in the hospital compared to people who met the guidelines. This report could result in patient wariness related to ICDs and couple impact the overall market size.

Cardiovascular

Cardiovascular equipment helps in the treatment of disorders related to the heart or blood vessels occurring largely due to unhealthy lifestyles. It is comprises of three businesses: the coronary and peripheral business, the endovascular business, and the structural heart business.

In 2011, the cardiovascular division accounted for approximately 21% of total sales and Trefis estimates that the company derives more than 24% of its value from the business. We forecast an increase in Medtronic’s market share in the division as it has recently launched several improved products in all three segments of its cardiovascular business. These devices have mostly exhibited better treatment opportunities and are experiencing greater sales in the regions where they have been launched. Medtronic also acquired Ardian, a developer of catheter-based treatments for hypertension, for $800 million which should give the company a competitive advantage in the segment.

Understand How a Company’s Products Impact its Stock Price at Trefis