Medtronic Could Gain From St. Jude Issues, China Expansion

Medtronic‘s (NYSE:MDT) largest competitor in the Cardiac Rhythm Management (Pacemakers/ Defibrillators or CRDM) market, St. Jude, is facing the threat of another recall (Read Boston Scientific Could Benefit From St. Jude Medical’s Troubles). CRDM equipment helps in the treatment of abnormal heart conditions through the use of pacemakers and implantable cardioverter defibrillators (ICDs). Medtronic has also had some trouble in this business due to negative reports about its ICDs as St. Jude’s last year recalls lent little support. Since the division is the largest contributor to our $46 price estimate for Medtronic, below we take a look at how an improvement in its CRDM market share could impact our current price estimate.

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Medtronic’s share of the Cardiac Rhythm Management market declined from 56% in 2008 to 30% in 2011 as revenues declined due to stiff competition and certain negative reports regarding the use of implantable cardioverter defibrillators (ICDs). We expect further declines in the company’s market share, reaching close to 20% by the end of our forecast period mainly due to competition and significant growth in the market due to launch of new products.

St. Jude Medical generates about $1.8 billion from its ICD business (about $200 million from its U.S. ICD lead business). ^[1] If Medtronic, one of the largest lead makers in the U.S., manages to capitalize on the situation and grab a part of St. Jude’s ICD revenues, it could limit its ICD market share declines or even potentially improve its market share. As the segment is the largest revenue contributor and constitutes more than 25% of our price estimate, even a small outperformance with respect to our expectations will have a substantial impact on the company’s valuation.

Additionally, 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. As Medtronic holds FDA approval for Revo MRI SureScan, the first MRI-safe pacemaker, the company could leverage its first mover advantage and benefit from this development.

Further, Medtronic is looking to expand in the Chinese market, likely through acquisitions (see Medtronic Eyes M&A To Tap Chinese Market Growth). The medical device markets in emerging markets such as China have been seeing double digit growth. China’s medical equipment market is expected to grow by 20% annually through 2015, much higher than the 7% expected in developed markets. ^[2] So any move to make inroads in these markets should help Medtronic offset competitive pressures in developed markets.

Riding the aforementioned factors, if Medtronic is able to maintain its market share at current levels by the end of Trefis forecast period, this could translate into a fair value of $50, an upside of nearly 10% to our current price estimate of $46.

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1. St. Jude Medical 2011 10-k, SEC Edgar [↩]
2. Medical device producer announces M&A strategy, China Daily, August 11 2012 [↩]