Biotech Values

[DewDiligence]

MDT Shares Hammered on Tepid Sales and Outlook

[MDT’s quarterly numbers and outlook are closely scrutinized and not just because MDT is the world’s largest medical-device company. Another reason for the scrutiny is that MDT’s fiscal quarters end one month later than the calendar quarters used by other med-device companies, and hence MDT’s numbers provide a more recent window into the state of the industry. This explains why MDT’s results, which were weak in this instance, brought down other med-device stocks today to such a large degree.]

http://www.reuters.com/article/idCNN2424069920100824

›Tue Aug 24, 2010 1:01pm EDT
By Debra Sherman

CHICAGO, Aug 24 (Reuters) - Medtronic Inc (MDT) 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 as much as 10.5 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 its weak sales and outlook weighed on the shares of rivals such as cardiovascular device companies Boston Scientific Corp (BSX) and St. Jude Medical (STJ) and orthopedic device makers Stryker Corp (SYK) and Zimmer Holdings (ZMH).

Analysts said results in two key Medtronic divisions, cardiac rhythm and spine, were particularly disappointing. [MDT is not a major player in hip and knee implants.]

"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 Officer 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, better known as 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 demand higher prices for new products once they are launched.

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 share it had 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 percent to 5 percent for the fiscal year begun in April, down from the 5 percent 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.

WEAK RESULTS

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, the company's largest business, fell 8 percent because of slower market growth and increased pricing pressure on products.

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

"Despite a difficult quarter, the fundamentals of our business remain strong and we are confident that our diversified portfolio positions us well to deliver market-leading performance in the long run," Hawkins said in a prepared statement.

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