Medtronic Reports Strong Sales On New Products And Robust U.S. Performance

Medtronic (NYSE: MDT) recently reported its fiscal first quarter results, with operational revenue growth of 4% year-over-year (y-o-y) to about $4.27 billion, driven by growing acceptance of new products and robust sales in the U.S. as well as emerging markets. The company’s largest divisions, Cardiac Rhythm Disease Management (CRDM) and Cardiovascular, continued to grow in low single digits driven by sales growth of about 60% in Atrial Fibrillation (AF) and 10% in the pacemaker business. Other businesses such as Neuromodulation, Surgical Technologies and Diabetes also registered robust revenue growth, which offset declines in the Spinal division. International sales accounted for 45% of total revenues for the medical device maker, driven by 11% y-o-y growth in emerging markets. ^[1]

The company’s gross margin for the quarter was 74.4% on an operational basis, on the back of certain unfavorable price adjustments in Japan and expenses related to addressing product quality issues in Neuromodulation and Diabetes. Excluding the impact of these adjustments, the company stated that its gross margin could have been higher by about 40 basis points. For fiscal 2015, the company expects gross margins to be in the range of 74.5-75% on a constant currency basis due to the ongoing quality improvement expenses. In its earnings call, Medtronic also reiterated its intent to buy healthcare and medical supplies major Covidien (NYSE:COV) in a cash-and-stock deal valued at close to $43 billion. The company said that is was “fully committed” to complete the strategically important and financially attractive deal by the fourth quarter of calender year 2014 or early 2015. ((Press release, Medtronic, Aug 19 2014))

Our price estimate for Medtronic’s stock is currently around $60, implying a discount of about 5% to the market price.

See our full analysis for Medtronic Inc.

CRDM Reports Steady Sales Growth

Cardiac Rhythm Disease Management (CRDM), primarily consisting of defibrillators and pacemakers, is Medtronic’s largest division, accounting for about 30% of total sales. During Q1 FY 2015, operational sales in the division grew by 4% y-o-y to $1.25 billion as solid growth in Pacemakers (reported as Low Power) and Atrial Fibrillation (AF) offset declining implantable cardioverter defibrillator (ICD, reported as High Power) sales. Weak demand in the U.S. ICD market offset Medtronic’s relatively better performance in international markets, where its sales grew by 1% y-o-y driven by growing adoption of the Attain Performa quadripolar lead in Europe and Japan. Following the growing acceptance of its Attain Performa quadripolar (APQ) lead in Japan in the last two quarters, the company expects to launch this product in the U.S. in the next few weeks.

Growing acceptance of the Reveal LINQ system contributed to sales growth in the diagnostics business. In the AF division, sales grew 30% on a constant currency basis on account of solid growth of the Arctic Front CryoAblation System and launch of the Pulmonary Vein Ablation Catheter (PVAC) Gold system. Going forward, we expect sluggish U.S. sales to offset international market gains in the overall CRDM business. Medtronic’s global market share is unlikely to improve significantly unless its performance in the U.S. improves.

CoreValve TAVR and Drug Eluting Stents Drive Cardiovascular Sales

The Cardiovascular division, consisting of the Coronary, Structural Heart and Endovascular businesses, offers products such as stents, heart valves and renal denervation systems for treating hypertension. The Cardiovascular division, contributing over 20% of edtronic’s sales, grew over 3% y-o-y, registering sales of about $1 billion in the fiscal first quarter. Sales of drug eluting stents (DES) increased 2% on an operational basis to $279 million, driven by strong global sales of the company’s Resolute Integrity DES.

The Structural Heart business reported 8% sales growth, as the CoreValve Transcatheter Aortic Valve (TAVR) system continued its strong performance in international markets as well as the U.S. Following its recent settlement with Edwards regarding a patent infringement issue, Medtronic should be looking to ramp up its training facilities and further improve sales in the lucrative U.S. TAVR market.

Diabetes Sales Soar, Spine Continues to Suffer

Sales in the Diabetes division grew 12% y-o-y to $416 million, driven by solid uptake of the company’s MiniMed 530G system (with Enlite CGM sensor). The company states that MiniMed is the only system in the market which has a built-in automatic control mechanism to start/stop insulin delivery in the blood based on pre-determined insulin levels. Medtronic estimates that this product could drive sales significantly in the near term as it expands internationally focusing on the type-2 diabetes market.

Spine revenue declined 3% y-o-y to $743 million on account of declining sales in the Core spine business, Balloon Kyphoplasty Procedures (BKP) and Bone Morphogenetic Proteins (BMP) products. Spinal sales are expected to get a boost in the coming quarters as the company launches its recently approved Prestige LP next-generation cervical disc in the U.S. market and overhauls its anterior cervical plate portfolio this year.

Emerging Markets Remain Key

Emerging markets contributed about 28% of overall international revenues and saw robust growth of 11% y-o-y to $539 million. In emerging markets, Africa and the Middle East were again strong performers, with revenues growing 30%. However, there were strong headwinds in China and India, where sales declined in high single digits owing to challenges in distribution channels and inventory rebalancing.

The company expects sales from emerging markets, including Asia-Pacific, Latin America and South Asia, to continue to grow in the mid teens as it works on optimizing its business channels and establishes sustainable and broader business partnerships with national governments. The medical device major expects emerging markets to contribute 150 to 200 basis points to its overall sales growth in fiscal 2015. ^[1]

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1. Medtronic’s CEO Discusses F1Q 2015 Results – Earnings Call Transcript, Seeking Alpha, Aug 19, 2014 [↩] [↩]