The New Medtronic Is Beating Expectations

Medtronic is hearing some warm words from experts after reporting on results of the first quarter of its new fiscal year post-Covidien merger.

Chris Newmarker and Nancy Crotti

It is so far, so good for Medtronic since its $48 billion merger with Covidien in January. Medtronic plc beat analysts' predictions for its first quarter ended July 31, the medtech giant reported Thursday.

Medtronic plc earned $1.02 per share over the quarter, about a penny higher than analysts' estimates.  

Revenue, at $7.3 billion, was 12% higher than what Medtronic and Covidien both made a year ago. (It would have been about 6% counting the extra week in this year's fiscal year.) Analysts had predicted $7.06 billion in sales.

All four of the company's groups saw revenue growth, with the Cardiac and Vascular Group and Diabetes Group leading the way with 15% growth (high single digits when counting in the extra week).

Sales of the Reveal LINQ insertable cardiac monitor and the CoreValve transcatheter heart valve, helped boost worldwide sales. Medtronic CEO Omar Ishrak predicted that those products plus the IN.PACT Admiral drug-coated balloon, the Micra transcatheter pacing system, and the upcoming U.S. launch of Evera MRI-compatible implantable cardioverter defibrillator, would drive strong growth through the fiscal year. Patients with the new defibrillator would be able to have full-body MRI scans.

The integration of Covidien into Medtronic is going "extremely well," Ishrak told analysts during a Thursday earnings call. The company expects cost savings of at least $850 million by the end of fiscal 2018, with $300-350 million achieved during the present fiscal year.

"As I've mentioned before, we've organized our activities in four clearly defined areas: preserve, optimize, accelerate and transform. We've been successfully achieving our first and highest priority--preserve--as evidenced by the continued revenue growth across all of our groups and geographies," Ishrak said during the call, transcribed by Seeking Alpha.

It is worth noting, though, that Medtronic ended its first quarter with about $18 billion in cash and investments and $35.6 billion in debt. "We remain committed to returning 50% of our free cash flow, excluding one-time items to shareholders and also continue to target an A credit profile," said chief financial officer Gary Ellis.

The company was also stuck with a $407 million IRS settlement during the first quarter, and it took a $529 million hit on its revenue because of the currency valuations that have been plaguing many multinational companies.

The company's U.S. core spine business also faltered during the quarter with slower-than-expected product rollouts

Medtronic stock on Thursday fell in value more than 2%, to $69.98 per share, on the New York Stock Exchange. But the results received warmer praise from experts.

TheStreet's Jim Cramer described Medtronic as a very well-run company during a segment of CNBC's "Mad Dash," adding that the Covidien acquisition is starting to pay off and that the stock can go higher.

Zacks noted margin pressure and currency headwind, but also said: "The consolidated company has successfully demonstrated strong segmental performances reflecting successful integration and achievement of synergy targets. ... The Covidien acquisition is expected to bolster the long-term sustainability and consistency of the company's revenue growth expectations."

Medtronic has even gone on a buying spree after the Covidien deal. More than $1 billion in acquisitions included companies that make devices for neurostimulation, magnetic hearing implants, endovascular and thoracic endovascular aneurysm repair, RF tag technology to warn surgical teams of items left in patients, a disposable multi-sensor "vest" to capture electrical heart signals from the body surface, and adiabetes clinic and research center.

Ishrak noted during the earnings call that CMS in the U.S. is already proposing bundled hip and knee replacement procedures, and thinks Medtronic is well-positioned to take advantage of the trend when it reaches areas where the company is active.

"As bundle payments take hold, we expect to offer unique comprehensive solutions to healthcare providers, encompassing our devices, associated diagnostics and home-based patient monitoring programs, all wrapped in risk sharing business models."

Like what you're reading? Subscribe to our daily e-newsletter.

Chris Newmarker is senior editor of Qmed and MPMN. Follow him on Twitter at @newmarker. Nancy Crotti is a contributor to Qmed and MPMN.