Medtronic (NYSE:MDT) is set to announce its Q2 earnings for fiscal 2013 on Tuesday, November 20. We expect its key pacemakers & defibrillators and spinal divisions to register a decline in revenues. However, growth in cardiovascular, diabetes and surgical technologies businesses could more than offset the decline while the strengthening of the U.S. dollar will weigh to some extent. For the quarter, we expect overall margins to decline slightly mainly due to foreign exchange fluctuations even as Medtronic’s cost-cutting efforts will lend some support to the same. Below we take a look at the important trends that could impact the company’s performance during the quarter.
On a quarterly basis, the company may record a decline in sales for implantable defibrillators even as demand is stabilizing after being hammered by the U.S. Department of Justice’s investigation and a negative report from the Journal of the American Medical Association in January 2011. Further, the business environment also remains weak as witnessed in the Q3 earnings of Boston Scientific (NYSE:BSX), which reported a significant decline in revenue and profit. (Read Boston Scientific Earnings Disappoint As Sales Decline Steeply).
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However, the company’s defibrillator sales may continue to outperform (excluding the currency effect) the overall market. Also, it will be interesting to see if the company has been able to capitalize on the opportunity emerging from a product recall from its one of the largest competitors, St. Jude Medical.
The spinal division could also witness a decline due to weaker demand for its main product Infuse, a bone graft paste used in spinal surgery. However, we expect stronger sales of heart valves and heart stents in the cardiovascular segment to offset the revenue decline. We also expect continued strong performance by the diabetes franchise mainly on good sales of insulin pumps. Continued strong demand for its surgical technologies products could also boost the sales.
While we expect sales from the U.S. and Europe to remain under pressure, sales from other countries including emerging markets may continue to show robust growth, excluding the currency impact. We expect the contribution of emerging markets to the company’s overall revenue will continue to grow.
While Medtronic incurs most of its costs in U.S. dollar, sales are generated from several countries. A stronger U.S. dollar leads to a decline in sales even as costs remain the same. This consequently leads to a decline in gross margins. Hence we expect the company’s overall margins to decline slightly.
Long Term Outlook Strong
In the short term, the global economic slowdown and pricing pressure following healthcare reforms continue to pose a concern for the company. Further, an unfavorable currency could also continue to weigh on its reported sales in the near term.
But the longer term outlook for Medtronic is still sound, and we expect an upside to the stock if the earnings show some strength. Medtronic has received the FDA approvals for several new and innovative products, which should have a positive impact on its sales. Medtronic holds the FDA approval for Revo MRI SureScan, the first MRI-safe pacemaker. Its sales should receive a boost after the Center for Medicare & Medicaid Services (CMS), a government agency responsible for administering Medicare, reported that it will provide MRI coverage for Medicare beneficiaries who have FDA-approved MRI-safe pacemakers. In addition, new devices in the cardiovascular business have mostly exhibited better treatment opportunities and are seeing greater sales in the regions where they were launched.
Further, the recent acquisition of Chinese medical devices maker China Kanghui Holdings should bring some good news to the company. China Kanghui has a diversified portfolio of orthopedics, spine, and surgical instrumentation products along with strong local R&D and cheap manufacturing operations. The acquisition will help the company strengthen its foothold in the fast growing Chinese market and could help Medtronic arrest an expected decline in its spinal division. (Read Medtronic Pays Princely Sum For Greater China Access With Acquisition)
We believe that as the negative sentiment surrounding medical devices companies subsides, we could see some support for our $45 price estimate.