Medtronic (NYSE:MDT) is one of the largest medical device makers globally with a leadership position in the Cardiac Rhythm Management (CRM) market. CRM products help in the treatment of abnormal heart conditions by the use of pacemakers and implantable cardioverter defibrillators (ICDs). Medtronic currently commands around 30% market share in the $18 billion CRM market even as it is well below its historical market share of 55% in 2008. The medical device maker has been conceding market share due to stiff competition for current products and new product launches by competitors. A report of overuse of ICDs in the large U.S. market amid pricing pressure has also been weighing on its revenues from ICDs, which constitute a significant portion of overall revenues from the CRM division.
While we expect overall revenues of the CRM division to grow going forward, Medtronic’s market share will continue to decline as growth in the CRM market is expected to outpace on new innovative products where Medtronic lacks presence. Below we discuss the outlook for the division in detail.
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ICDs: Subcutaneous-ICDs And Emerging Markets To Drive Overall Market Growth
The expected growth in ICD sales (a significant part of the CRM market) will mostly be driven by the launch of new advanced Subcutaneous-ICDs (S-ICDs) and increasing demand from emerging markets.  S-ICDs do not require a transvenous lead to connect ICD to the heart and are expected to replace conventional ICDs over the next couple of years. As concerns are being raised about the safety of leads, hospitals could opt for advanced S-ICDs. One of Medtronic’s largest competitors, Boston Scientific, has already launched the device in the U.S last quarter and has seen a strong traction. (Read Boston Scientific Revised To $8 On Acquisitions, New Products & Cost Cutting Efforts)
While Medtronic will benefit from the emerging markets’ demand, as it has seen in its recent earnings, a decline in total procedures for ICD implants and expected adoption of S-ICDs in developed markets will likely put some pressure on overall demand for its traditional ICDs. Medtronic has no concrete plans to develop its own S-ICDs. Medtronic’s revenues from ICDs stood just below $3 billion in 2012, nearly 55% of revenues from the CRM division. Therefore, the expected loss of revenues from lower sales of traditional ICDs will hurt Medtronic’s market share even as the adoption of S-ICDs is not expected to be as rapid due to the lack of population diversity in clinical data.
Medtronic, however, could benefit from fresh troubles for one of its largest competitors, St. Jude Medical. The FDA had raised serious concerns about the latter’s “Durata” leads last November.  St. Jude has already seen a major recall of its “Riata” leads. St. Jude generates about $200 million from its U.S. ICD lead business, which could be up for grabs due to aforementioned troubles.  Given that Medtronic is the market leader in the U.S., it stands to benefit from it in the near term until the demand for lead-less S-ICDs picks up.
Pacemakers: New Product Launches To Lend Support
Another major constituent of the CRM market is pacemakers. Medtronic is the first company to launch an MRI-safe pacemaker in the U.S. called Revo MRI SureScan. With the Center for Medicare & Medicaid Services (CMS) agreeing to provide MRI coverage for Medicare beneficiaries who have FDA-approved MRI-safe pacemakers, Medtronic will certainly benefit from it. About 400,000 pacemakers are installed each year in the U.S.  and the expectation is that around 20% of them will comprise of Revo MRI SureScan  (Boston Scientific and St. Jude Medical are also developing MRI-compatible pacemakers). Assuming an average cost of $7,500 (in the range of $5,000 to $10,000) this could add $60 million in revenues for the device maker. Taking other markets including Europe into account, the figure could easily surpass $100 million. However, this will not be enough to boost market share in a $18 billion market. Further, pricing pressure for its core pacmakers will partially offset growth from the new MRI-safe pacemakers.
The recent launch of Arctic Front Advance cardiac cyroballoon, the first type of next generation device for atrial fibrillation treatment, has seen strong growth in the U.S. and Europe. However, the revenue contribution of atrial fibrillation products to overall CRM revenues is a meager 5%.
Potential Acquisition Could Trigger Upside
Medtronic is actively pursuing the inorganic route in the Chinese market. (Read Medtronic Eyes M&A To Tap Chinese Market Growth) Emerging markets, including China, have been experiencing double-digit growth. So, any move toward making inroads into these markets can help Medtronic fend off weakness in developed markets. Further, S-ICDs have not yet been proven safe and effective in a diverse patient population. Since ICDs are critical lifesaving devices, physicians would want to wait for more data before getting more comfortable with the use of S-ICDs. Should this be the case, Medtronic may see a limited decline in market share. This could trigger an upside to our $51 price estimate for Medtronic as the CRM division is the largest revenue and value source for Medtronic, according to our estimates.
- Global Implantable Cardioverter Defibrillators Market 2011-2015, Research and Market, April 2012 [↩] [↩]
- St. Jude Medical shares slide 13 percent on FDA report, Reuters, Nov 21 2012 [↩]
- Pacemaker and Defibrillator Lead Extraction, American Heart Association [↩]
- New wave of MRI-safe pacemakers set to ship to hospitals, Scientific American, Feb 16 2011 [↩]