Two Positives and Two Negatives From Medtronic’s Fiscal Q2 Earnings

Medtronic reported strong, but mainly expected, fiscal second quarter financial results Tuesday with revenue of $4.19 billion in the three months ended Oct. 25, up 2.9%, or $4.09 billion in the same quarter a year ago. Analysts had expected revenue of $4.18 billion.

Profits at the Minnesota device maker jumped 40% to $906 million, or 89 cents per share compared with a net income of $646 million, or 63 cents in the same, year-ago comparable period. Last year’s fiscal second-quarter results were weighed down by a $235 million litigation expense.

In the fiscal second quarter, adjusted earnings per share of 91 cents beat analyst expectations estimates by a penny.

Here are three positives and three negatives that emerged from the earnings in the fiscal Q2:

U.S. ICD Market is Stabilizing

This is not just good news for Medtronic, but other ICD makers such as St. Jude Medical and Boston Scientific. Analyst Danielle Antalffy at healthcare investment bank Leerink Swann, believes the U.S. ICD market grew around 3 percent in the previous quarter, the first quarter of growth since the first quarter of 2010.

Globally, Medtronic garnered revenue of $713 million in ICDs, up from $689 million a year ago. That represents a 3.5% increase. In the U.S, ICD revenues climbed to $427 million in the quarter, from 411 million a year ago, a 3.8 percent increase.

“We certainly stabilization in initial implants for ICDs, which is a good sign,” said Mike Coyle, Executive Vice President & Group President, Cardiac and Vascular Group at Medtronic, on a conference call to discuss results. “Obviously [It’s] something that we’ve been looking for.”

He also added that average selling prices have been flat compared to the same period a year ago when ASPs were declining 4% to 5%.

Strong Sales of CoreValve Overseas
CoreValve may not have launched in the U.S. yet, but the transcatheter aortic valve replacement product line is proving to be a strong revenue contributor to Medtronic’s international revenue. The company doesn’t break down CoreValve revenue but overall Structural Heart sales was $281 million, up from $271 million, in the same period last year.

The strength continued even though Medtronic suffered a temporary loss in the legal battle with Edwards Lifesciences in Germany when a court ruled that Medtronic had infringed on that California device maker’s patents. That halted CoreValve sales in Germany since late August. Analysts believe Medtronic flooded the market with CoreValve as hospitals increased inventory in anticipation of a halt in sales of the product,

However, last week, a higher, appellate court overturned that decision and Medtronic is resuming CoreValve sales in Germany.

Spine Business Takes a Turn for Worse
The Spine business showed some strength last quarter, but this time around the story was markedly different.

Even Core Spine, which is apart from the company’s controversial and declining BMP or biologics business, struggled. Core Spine revenue fell to $636 million in the quarter, down 1% from $649 million in the same period last year.

Overall revenue in Spine fell 3% to $746 million, from $782 million. Analysts had expected total Spine revenue to be $754 million.

“The U.S. Core Spine market continues to decline in the low single digits ….” said Medtronic CFO Gary Ellis on the call with analysts, adding that the revenue garnered in Core Spine was below internal expectations.

Slowdown in China and Other Global Locations

This quarter Medtronic saw “a bunch of different regions slow down” by coincidence and for different reasons said Omar Ishrak, Chairman and CEO.

Emerging market revenue grew 13% to $513 million accounting for 12% of overall revenue at Medtronic. In the past, Ishrak has declared publicly that he wants emerging market revenue to contribute 20% to Medtronic’s overall revenue in the future.

“While this performance is respectable and these markets continue to contribute a large portion of our overall company growth, our overall results were well short of targeted levels,” Ishrak admitted in prepared remarks. “Across our emerging market regions, there have been several region-specific challenges, including product registration issues and distributor conversions, which have held back our growth. We experienced overall slower growth this quarter with the largest sequential slowing occurring in Greater China and Central and Eastern Europe.”

Later however, in response to an analyst's’ question, Ishrak said he expects growth to reaccelerate in these markets very quickly because the “fundamental demand of the end market remains strong.”

Medtronic defines emerging markets as Asia Pacific (except Australia, Japan, Korea, and New Zealand), Central and Eastern Europe, Greater China, Latin America, the Middle East and Africa, and South Asia.

[Photo Credit: iStockphoto.com user MCCAIG]

 
-- By Arundhati Parmar, Senior Editor, MD+DI
[email protected]