Medtronic Earnings: Disappointing Q2’17 Results Drive Down The Company’s Stock Price

Medtronic (NYSE: MDT) reported its Q2’17 earnings on November 22nd. (Fiscal years end with April.) The company’s stock price has plunged by 8% post the earnings announcement, due to lackluster performance. Medtronic’s revenues increased by only 4% in Q2, as compared to the company’s target growth of 6% for the quarter. The company’s management admitted to the disappointing Q2 results and said that delays in product launches and shipments in the CardioVascular and Diabetes segments resulted in slower revenue growth in Q2. Nevertheless, the company’s non-GAAP and GAAP operating margins improved by 50 basis points and 150 basis points, respectively.

Multiple Factors Plagued Medtronic’s Growth In Q2

Usually, Medtronic’s diversified product offering helps it offset any shortfall in a particular segment. However, the company said that there were multiple issues it faced in Q2 that affected its results in the quarter. Further, some of the issues faced by the company might well be expected to affect its growth in the near term. Below we discuss in detail the key reasons underlying the somber performance of Medtronic in Q2:

A) Slow growth In Cardiac-Rhythm Management Group: Medtronic’s CardioVascular Group revenue growth was 3% in Q2, below the company’s previous targeted growth rate between high and mid single-digit range. It should be noted that cardiovascular group constitutes around 34% of the company’s overall revenue. Thus, a slowdown in this segment drags down the overall results for Medtronic.

Though Medtronic claims to have gained market share in the U.S. in the implantable cardioverter defibrillator (ICD) market, its revenue declined from the segment. The company attributed the declines in the segment to a decline in the ICD market in the U.S.

Further, Medtronic said that its ICD revenues declined in the U.K. too, due to a change in the procurement model of ICDs by the National Health Service in the region, which limited bulk purchases, temporarily disrupting buying patterns. The company expects these factors to continue to weigh down its cardiac rhythm management sales in FY’17.

B) Delay in product launches in Coronary and Structural Heart Division: Medtronic claimed that it witnessed temporary market share losses in Q2 in the coronary and structural heart segment, due to a delay in new product launches that could compete with other existing products in the market. For instance, the company’s Resolute Onyz Drug Eluting Stent (DES) is not yet available in key markets such as the U.S. and Japan, where other competitive DES products were already present.

C) A Gap in the product approval and shipment of MiniMed 670G: In Q2, Medtronic received the U.S. FDA nod for its MiniMed 670G system, which is the first Hybrid Closed Loop insulin delivery system. This is a significant development by the company as far as its diabetes segment is concerned. However, the company had not expected the approval of the product so early. Due to this, there is a gap between the approval and shipment of the product. So, despite the approval of MiniMed 670G being a significant development for Medtronic, it has not contributed to the sales in Q2.

Medtronic’s Product Pipeline Remains Robust

Though Medtronic’s performance in Q2 was dull, it should be noted that it was mostly due to delays in product launches and shipments. However, the company’s product pipeline is quite robust. So, despite the fact that some factors will continue to affect the company’s growth in the near term, new growth catalysts will spur growth going ahead. The company remains confident that it can manage to sustain a growth of 250 to 350 basis points of its new therapies growth vector over the longer term.

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