Weak demand haunts Medtronic in fiscal 1Q

By Reuters
Posted Aug. 24, 2010 at 1:02 p.m.

Medtronic Inc. posted a surprising decline in quarterly sales and cut its forecast due to weak demand for its medical devices and pressure on prices, sending its shares down nearly 12 percent to a 15-month low.

The world’s No. 1 stand-alone medical device maker, a bellwether, reported quarterly profit in line with expectations, but weak sales and outlook weighed on the shares of rivals such as cardiovascular device companies Boston Scientific Corp. and St. Jude Medical and orthopedic device makers Stryker Corp. and Zimmer Holdings.
Analysts said results in two key Medtronic divisions, cardiac rhythm and spine, were particularly disappointing.

“This is very scary for the entire industry — you have utilization dropping and price deflation … and we’re probably not even close to the half-way point in this cycle,” said analyst Tim Nelson of FAF Advisors, an asset management firm.

In a telephone interview, Medtronic Chairman and Chief Executive¬† Bill Hawkins said he was especially surprised by the weakness in its spine unit, the company’s second-largest after Cardiac Rhythm Management, which makes implantable heart defibrillators, or ICDs, and pacemakers.

The decline in demand, Hawkins said, “was possibly exaggerated because of the (seasonally slow) summer months, but what we are hearing from hospitals and insurance companies indicates that it’s probably more.”

He said as hospitals continue to purchase physician practices they become increasingly focused on the profitability of procedures and have pushed back on prices.

“We get price through innovation. There’s a direct relationship with our pipeline, which is very full,” he said, noting that the company should be able to charge more for new products.
He acknowledged that the company did not benefit, as many had expected, from Boston Scientific’s temporary shipment halt of ICDs in the spring. Medtronic ended the quarter with a 47 percent share of the ICD market, the same as before Boston Scientific halted shipments.

Jan Wald, an analyst with Noble Financial Group, said the cardiac rhythm devices business fell short of his expectations.

Wald had expected weaker sales in the spine division “just because the spine market has been terrible for everyone.”

Medtronic cut its revenue growth outlook to a range of 2 to 5 percent for the fiscal year begun in April, from the 5 to 8 percent it forecast in June. It cut its earnings forecast to $3.40 to $3.48 per share from $3.45 to $3.55.

Medtronic’s full-year earnings per share forecast includes about 5 cents of dilution from the acquisition of Invatec and ATS Medical.

The company’s shares were down 10.4 percent, at $31.34, in early afternoon on the New York Stock Exchange after hitting a low of $30.85 earlier in the session. Shares of Boston Scientific were off 2.3 percent after hitting the lowest level since 1995, while shares of St. Jude were down 3.9 percent. Shares of orthopedic device makers Stryker and Zimmer were down 5.2 percent and 4.4 percent, respectively.

For the fiscal first quarter ended July 30, net earnings were $830 million, or 76 cents per share, up from $445 million, or 40 cents per share a year earlier, when the company took a charge for restructuring and litigation.

Excluding one-time items, earnings were 80 cents a share, matching analysts’ average forecast, according to Thomson Reuters I/B/E/S.

Revenue was $3.77 billion, down 4 percent from a year earlier and below the $3.95 billion expected by analysts.

Revenue was hit by unfavorable foreign currency exchange rates and one less week in the quarter than a year ago.

Sales in Cardiac Rhythm Management fell 8 percent because of slower market growth and increased pricing pressure on products.

Sales in its Restorative Therapies Group — comprising¬† Spinal, Neuromodulation, Diabetes and Surgical Technologies — fell 4 percent. A 6 percent gain in diabetes was offset by a 9 percent drop in spinal.

Hawkins told a conference call that emerging markets will be a driver for growth in the future. Emerging markets, just 7 percent of total sales, is expected to triple in the next five years, he said.

But FAF Advisors’ Nelson said that alone will not solve the underlying problem.

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