Medtronic Inc. (MDT) posted fiscal third-quarter net income that
soared above a prior-year tally weighed down by charges, while its
overall results appeared good enough to ease concerns about
problems in key product markets.
The medical-devices giant has been under pressure on multiple
fronts lately, with its top business - for implantable
defibrillators - ceding share to rivals amid fallout from a 2007
product recall. Medtronic's big business for spinal products also
has been challenged by an underperforming acquisition and a
regulatory warning that hurt sales of a bone-growth product.
While Medtronic's overall sales in the quarter fell short of
Wall Street's target, and the company lowered the upper end of its
full-year sales guidance, it also cited signs of stability in the
defibrillator and spinal markets amid worries of ongoing
deterioration.
The quarter was "not as bad as feared," Leerink Swann analyst
Rick Wise said in a note to investors.
Tuesday's report lifted Medtronic's shares, recently up 6.2% to
$34.83 despite a rough session for the broader market. BMO Capital
Markets analyst Joanne Wuensch called the gain "part relief rally
and part short covering," while noting that Medtronic was up
against lowered expectations.
For the quarter ended Jan. 23, the Minneapolis company reported
net income of $723 million, or 65 cents a share, up from $77
million, or 7 cents, a year earlier.
Excluding mostly legal and acquisition-related charges, earnings
rose to 71 cents a share from 63 cents. Analysts surveyed by
Thomson Reuters had forecast, on average, earnings of 70 cents a
share.
Net sales rose 2.6% to $3.49 billion and included a $110 million
negative hit from foreign currency rates. Analyst had targeted
sales of $3.51 billion in the quarter.
Medtronic is the biggest player in the roughly $6 billion market
for implantable cardioverter defibrillators, or ICDs, which provide
shocks to jolt hearts from dangerously abnormal rhythms. The
company had been losing share to rivals following the recall in
October 2007 of thin wires that connect ICDs to the heart. The
"Fidelis" leads were prone to fracturing and potentially causing
major problems.
William A. Hawkins, Medtronic's president and chief executive,
estimated the Fidelis recall overall probably cost Medtronic four
points of ICD market share, mainly in the U.S. But the company
estimated on Tuesday that its share did not change in the recent
quarter, when measured on a quarter-by-quarter basis.
"We have stabilized and are now back on the offensive," Hawkins
said in an interview. He highlighted a series of products the
company hopes will help it protect and increase its market
share.
Analyst Wuensch said in a note that her analysis indicated
Medtronic did lose more market share - its ICD sales sank about 4%
to $694 million, while rivals St. Jude Medical Inc. (STJ) and
Boston Scientific Corp. (BSX) both posted ICD sales gains in their
recent quarters. The periods, though, don't exactly overlap, and
there are differences in the number of selling days, Chief
Financial Officer Gary Ellis told analysts on the call. Medtronic
estimates its world-wide ICD share held stable around 47% to 47.5%
on a sequential basis, he said.
Sales in the overall heart-rhythm business, which also includes
pacemakers, slipped 4% to $1.17 billion.
Spinal Stability
The market for spinal-repair devices was another big question
mark for Medtronic heading into Tuesday's report. Two issues have
dogged the company recently, including worse-than-expected
performance in the Kyphon business Medtronic acquired in November
2007 and pressure on a bone-graft product called "InFuse."
The Food and Drug Administration issued a notice in July last
year regarding complications when the product is used in the neck -
it's approved for the lower back - and Medtronic disclosed three
months ago that it had received a Department of Justice subpoena
looking into so-called "off-label" InFuse usage. Doctors can use
products in ways not approved by the FDA, but companies cannot
market products for any unapproved uses.
Hawkins said on the call that Kyphon "very candidly has been a
bit of a disappointment for us," although he also said that
business is stabilizing. Likewise, he said the same about sales of
biologic spinal products, which includes InFuse. "We did not see
any further incremental contraction" in that business in the
quarter, he said.
Medtronic's overall spinal sales rose 3% to $832 million, while
biologics sales were little changed.
These are still below overall market growth rates, which implies
continued share losses. Hawkins indicated Medtronic's plan over the
next couple of years is to get back to growing with the market, if
not "getting back into a position where we can actually regain
share."
The spinal business is one area within Medtronic that could have
some economic vulnerability, as patients could potentially put off
surgery, Hawkins said. He also highlighted the diabetes and
surgical technologies businesses as having some potential
vulnerability, and said in general that he sees elective procedures
"as being increasingly impacted."
Among other businesses, sales of cardiovascular products rose
10% to $565 million. Still, U.S. sales of the company's "Endeavor"
drug-coated heart stent slipped again in the quarter amid strong
competition from more recently approved Abbott Laboratories (ABT)
and Boston Scientific stents. Endeavor was approved in the U.S.
about a year ago.
Looking ahead to the rest of the fiscal year, which runs through
April, Medtronic brought down the top end of its sales guidance and
now targets $14.6 billion to $14.7 billion. The company also
tightened its expected per-share earnings range to $2.91 to $2.95,
which includes two cents of dilution from a recent acquisition.
Analysts had targeted full-year earnings of $2.91 per share on
sales of $14.64 billion.
Hawkins also said Tuesday that the company is confident it can
grow double-digits per-share earnings over the longer term, which
outpaces expected sales growth.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728;
jon.kamp@dowjones.com
(Mike Barris and Katherine Wegert contributed to this
report.)