Devices & Diagnostics

Medtronic reports sluggish second quarter, lowers 2011 guidance

Medtronic Inc. (NYSE:MDT) is a company in transition as it seeks higher growth in China and new therapies like transcatheter heart valves while trying to “protect and optimize” its core cardiac rhythm disease management (CRDM) business. On Tuesday, the Fridley, Minnesota, medical device maker said its profits sank 34 percent in the fiscal second quarter from a year ago. So it lowered its fiscal 2011 profit and sales forecasts.

Medtronic Inc. (NYSE:MDT) is a company in transition as it seeks higher growth in China and new therapies like transcatheter heart valves while trying to “protect and optimize” its core cardiac rhythm disease management (CRDM) business.

On Tuesday, the Fridley, Minnesota, medical device maker slightly lowered its fiscal 2011 profit and sales forecasts due to its weakening spine and CRDM businesses, the latter hampered by problems with a key manufacturing facility.

“There has been a lot of reshaping of the (CRDM) business over the last few years,” CEO Bill Hawkins told analysts during a conference call. While still investing in pacemakers and implantable cardioverter defibrillators (ICD), “we’re not counting on it for the real upside growth.”

CRDM revenue during the second quarter fell about 1 percent to $1.25 billion from the same period a year ago, with ICD and pacemaker sales declining 1 percent and 5 percent, respectively. Overall, Medtronic earned $566 million, or 52 cents a dilute share, in the quarter ended Oct. 29, down 34 percent from $868 million, or 78 cents a diluted share in the year-ago quarter. Net sales rose 1 percent to $3.9 billion in that time.

So now, the company expects to generate annual profits of $3.38-to-$3.44 per share compared to its earlier estimate of $3.40-to-$3.48 per share. Excluding the impact of its recent acquisition of ATS Medical Inc. and an extra selling week in fiscal 2010, Medtronic expects EPS growth in fiscal 2011 of 8-to-10 percent, down from its previous guidance of 9-to-11 percent.

Medtronic said sales will grow up to 4 percent, down from its earlier prediction of 5 percent. Company officials blamed the results on a weaker global healthcare market, falling prices and greater hospital cost controls. But some of the company’s wounds were self-inflicted.

In September, the Food and Drug Administration sent the company a warning letter about its manufacturing facility in Mounds View, Minnesota. The letter is holding up key product launches like the Revo MRI-friendly pacemaker and Protecta defibrillator at a time when rivals St. Jude Medical Inc. (NYSE:STJ) and Boston Scientific Corp. (NYSE:BSX) are seizing some momentum in the market, analysts say.

“Market share trends are working against MDT in CRM,” David Lewis, an analyst with Morgan Stanley, wrote in a recent research report. “Both BSX and STJ have ongoing product rollouts driving unit share and positive mix, while MDT’s Protecta platform remains held up by the Mounds View warning letter, leaving MDT without a mix or unit share driver.

“Given the Mounds View warning letter is unresolved, the potential impact of new product launches on prospects for FY11 continues to diminish,” Lewis wrote. “Moreover, MDT has launched its new products in Europe, but at this point neither the Protecta ICD launch or the ongoing MRI compatible pacemaker roll-out appear to have been market share drivers there through 2Q10 for MDT.”

Hawkins emphasized the company’s continued focus on emerging markets and innovation. He offered details on China, which generates about $500 million in annual sales and is growing at about 20 percent a year. Medtronic recently opened a patient care center in Beijing and soon will debut its China headquarters in Shanghai.

The company also has heavily invested in new therapies, buying firms like ATS Medical (replacement heart valves) and Osteotech Inc. (biologic spinal products). On Monday, Medtronic said it would spend at least $800 million to acquire Ardian Inc., which is developing a catheter-based treatment for hypertension, or high blood pressure.

“In this new, changing healthcare environment, size and scale will be key to winning,” Hawkins said. “The underlying demand for our products is still there.”