How Will Medtech's Titans Fare in 2016?

Recent earnings releases provide an indication of which major medical device OEMs will soar and which will struggle this year. 

Chris Newmarker and Brian Buntz

Edwards Lifesciences continues to enjoy huge success with TAVR, while St. Jude Medical and Boston Scientific scramble to get MRI compatible pacemakers and defibrillators on the market to stay competitive.

Those are but some of the highlights from the recent slew of earnings news from major medical device companies. Here are some of the highlights:

Edwards Lifesciences: Strong Demand for TAVR

Edwards Lifesciences ended 2015 with annual sales of about $2.5 billion, with an underlying growth rate of 17% that exceeded expectations. The news on February 2 helped Edwards stock shoot up about 8% in a single day, and it is still trading at more than $80 per share, after hitting an all-time high of $84.36 on February 4.

Much of Edwards' continued success comes from its continued success with transcatheter aortic valve replacement--a technology it helped pioneer. The company was the first in the United States to launch TAVR technology and has been able to maintain market share with the launch of Edwards' Sapien 3 valve in the United States. Transcatheter heart valves sales in 2015 were up 38%, to $1.2 billion, and Edwards has raised its 2016 transcatheter heart valves sales guidance by $100 million, to the $1.3 billion to $1.5 billion range.

"Many hospitals are responding to the increased demand by modifying their schedules to perform more procedures each week. We see this trend continuing as TAVR provides an attractive therapy option for a large number of untreated elderly patients. We expect these patients will be encouraged to seek treatment as indications expand, which is the primary driver behind our belief that the global TAVR opportunity will exceed $5 billion in 2021," CEO Michael Mussallem told analysts in a February 2 conference call, transcribed by Seeking Alpha.

For 2016, Edwards now expects its total sales to be between $2.60 billion and $2.85 billion, and increased expectations for sales have caused it to adjust its earnings per share guidance to between $2.57 and $2.67 per share.

Medtronic: Billions and Billions of Freed Up Cash

Medtronic for now appears to be making sure its financial house is order, a year after it closed on its roughly $50 billion purchase of Covidien. The company, which moved its official headquarters to Ireland through the deal but is still run out of Minnesota, announced last month that it will take the $9.3 billion in cash freed up from its mega merger with Covidien last year, and spend most of it on share repurchases and paying down debt.

Medtronic management wants to ensure that they retain the means to acquire young companies with cutting-edge technologies, Debbie Wang, a senior analyst at Morningstar who follows the company, told Qmed last month.

The increased "financial flexibility" will also allow Medtronic to engage in more M&A activity, on top of the $1.5 billion in deals it has done since the Covidien deal closed, and meet its dividend payout goals faster than previously communicated, CEO Omar Ishrak said in January at the annual J.P. Morgan Healthcare Conference in San Francisco.

The $9.3 billion came from $9.8 billion in overseas funds Medtronic was able to bring back into the U.S. to use. Because it moved its official headquarters to Ireland as part of the merger with Covidien, Medtronic only had to pay $500,000 in U.S. taxes on the $9.8 billion. It was a much smaller rate than the 35% corporate tax rate Medtronic would have had to pay if it was still headquartered in the U.S.

About 65% of Medtronic's free cash flow is now accessible for use; only about 35% was accessible before the Covidien deal, Ishrak said. Here's a list of 11 companies that Medtronic acquired or invested in last year.

Medtronic is also performing well: minus taxes and other Covidien deal-related one-time charges, it earned $1.03 per share in the quarter ended October 30. The profits beat the expectations of analysts polled by Thomson Reuters, who expected earnings of $1 per share. Revenue, at $7.058 billion, was in line with predictions, and only slightly down from the $7.097 billion that Medtronic and Covidien made during the same period last year.

The company has high hopes for its Micra leadless pacemaker. And the introduction of MRI-compatible implantable cardiovascular devices--including Medtronic's Friday announcement of FDA approval for MRI-conditional cardiac resynchronization therapy defibrillators for the treatment of heart failure--have given Medtronic an edge for now over competitors such as St. Jude Medical.

At this year's CES, Medtronic touted how it is working with IBM's newly formed Watson Health unit to develop a Watson-enabled app that enables a Medtronic device to continuously gather and analyze data in real-time. And the company announced this month that it is expanding its position in the diabetes technology niche by buying privately-held Bellco (Mirandola, Italy), which it describes as a pioneer in hemodialysis treatment. 

Stryker: A Big Acquisition

Stryker started out February by announcing a$2.775 billion acquisition of Cary, IL-based Sage Products, which manufactures a host of products meant to prevent so-called "never events" in ICUs and hospitals, including hospital-acquired infections.

The Sage acquisition goes along with Stryker's growth strategy, which CEO Kevin Lobo recently describedas being based on a diversified sales footprint bolstered by "healthy R&D investment and a focus and disciplined M&A effort."

The orthopedic device maker also appears to be embracing the potential of 3-D printing. Stryker plans to build a brand new, state-of-the-art 3-D printing manufacturing facility this year, though company has not yet disclosed where the 3-D printing plant will be built, or how much it will cost. The 3-D printing is used for new, innovative products including revision cones with geometry that can only be made with 3D printing, and a soon-to-be-launched 3-D printed titanium interbody device for spine.

"For the foreseeable future, at least the next three, four years or so, our focus is really on innovative new products and not replacing our existing products with 3-D printed products. The pipeline of innovative new geometries that can't be made without 3-D printing is the area of focus," Stryker chief financial officer Bill Jellison told analysts in January 26 conference call transcribed by Seeking Alpha.

Stryker also sees continued sales momentum for its Mako surgical robot arm.

Stryker earnings nearly tripled to $1.4 billion in 2015, and sales were up 2.8% to $9.9 billion. Stryker expects 2016 constant currency sales growth in the range of 5-6%.

Boston Scientific: New Product Launches

Cardiac rhythm management products such as pacemakers and defibrillators continue to drag on Boston Scientific's sales growth. Pacemaker and defibrillator sales were down about $100 million, to $1.8 billion in 2015. As is the same case with St. Jude Medical, Boston Scientific is behind its competitors when it comes to getting MRI-compatible devices approved in the U.S.

Boston Scientific had a net loss of $239 million in 2015 amid currency transaction headwinds, worse than a loss of $119 million in 2014. But sales increased to about 7.5 billion, from about $7.4 billion a year before. CEO Michael Mahoney sees momentum. He thinks Boston Scientific can continue to build its business through new product launches, including its Synergy bioabsorbable polymer drug-eluting stent system that received FDA approval last year.

"Our fourth quarter organic revenue growth of 5% was broad-based across businesses and regions, and was led by exciting new product launches, which continued global expansion and execution of our category leadership strategy. ... We anticipate that SYNERGY will represent approximately 50% of our [drug-eluting stent] revenue mix in the U.S. by the end of 2016," Mahoney told analysts on Thursday, in a conference call transcribed by Seeking Alpha.

Mahoney was optimistic about other new products:

The launch of the Watchman heart device also is ahead of schedule. However, the device--a left atrial appendage closure (LAAC) device meant to prevents strokes--faces limited Medicare coverage if a federal proposal goes through in the U.S. "As for U.S. reimbursement, we await a final [national coverage determination] decision from CMS by February 8, and we remain confident that Watchman will represent at least a $500 million worldwide market opportunity," Mahoney said.

BD: Banking on Partnerships

Becton, Dickinson and Co. stock is down about 12% so far this year, trading at around $135 per share, with the strong U.S. dollar causing a great deal of currency headwinds for the Franklin Lakes, NJ-based medical technology company. Including the impact of foreign currency, BD revenues are now expected to increase around 20% for the present fiscal year. This is a decrease from previously issued guidance of around 23% percent growth.  

BD, though, is banking on some important business partnerships to help it grow its medical device business in 2016.  BD, for example, has initiated a long-term collaboration for Fresenius to supply BD with a portfolio of competitive IV solutions in the U.S.

And a collaboration with Medtronic remains on track in which insulin infusion sets are expected product launch in the middle of the fiscal year 2016. "We believe this product will improve the consistency of insulin delivery by significantly reducing silent occlusions, simplify the user's experience, and increase a patient's overall satisfaction with insulin pumping," BD CEO Vincent Forlenza said in a February earnings call with analysts, transcribed by Seeking Alpha. 

St. Jude Medical: A Rocky Road

The maker of heart failure devices and more recently announced an earnings forecast that fell behind what analysts were predicting for the company. For the fourth quarter ended January 2, the company earned $113 million off $1.45 billion in sales, versus $245 million in profits off $1.44 billion in sales a year before. For the full year, the company earned $880 million off $5.54 billion in sales, versus $1.00 billion in profits off $5.62 billion in sales a year before.

Part of the tough situation is due to a temporary gap in St. Jude Medical's pacemaker and ICD portfolio: a lack of MRI-compatible devices available in the U.S. The situation has provided an inroad for Medtronic and other competitors already selling MRI-safe devices in the U.S. St. Jude is presently anticipating FDA approval of its MRI compatible pacemaker in the first half of 2016, and its MRI compatible ICD in the first half of 2017.

Meanwhile, St. Jude Medical's new CEO Mike Rousseau told analysts on Wednesday that the company's CardioMEMS heart failure monitoring system is an "important clinical advancement and will in fact change the way heart failure is managed." For now, though, St. Jude Medical is stuck trying to hammer out a new national coverage determination with CMS.

On a brighter note, sales at LVAD maker Thoratec, which St. Jude acquired for about $3.4 billion last year, grew 15% on a comparable constant currency basis for the full fourth quarter 2015.

Chris Newmarker is senior editor of Qmed and MPMN. Follow him on Twitter at @newmarker. Brian Buntz is the editor-in-chief of MPMN and Qmed. Follow him on Twitter at @brian_buntz.

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