Medtronic (NYSE:MDT) announced its fourth-quarter earnings for fiscal 2013 on Tuesday, reporting 4% growth in revenues that reached $4.45 billion. While its spinal franchise continued to see a decline in sales, what comes as a positive surprise is that its largest division, Pacemakers and Defibrillators, beat market expectations with its positive growth after struggling for many quarters due to shrinking demand and pricing pressure. Medtronic’s stock shot up 6% on this news and has since surpassed our price estimate of $51. The growth in cardiovascular, diabetes, and surgical technologies businesses were in line with our expectations.
Gross margins declined slightly due to pricing pressure in some of the businesses and foreign exchange fluctuations. However, non-GAAP net earnings were up 8% following rigorous cost-cutting measures. Below we highlight the key trends coming out of the earnings release.
Revenues Grow, Growth in Pacemakers and Defibrillator a Major Positive
On a yearly basis, the medical device maker recorded a 3% increase in revenue from the Pacemakers and Defibrillators division. Defibrillators sales grew by 2% due to pricing improvements in the U.S., even as overall procedural volumes were stable during the period. We were anticipating revenues to decline as its major competitors including Boston Scientific (NYSE:BSX) continued to struggle with pricing pressure (see also "Boston Scientific's Earnings Show Improving Outlook"). This implies that Medtronic has done a good job and gained some market share during the period. This could lead to upside in our price estimate. Procedural volumes growth in the international markets also lent support.
Pacemakers sales grew 5% mainly due to 13% growth in the international markets. The Advisa pacemaker, a second-generation MRI-safe pacemaker, has gained strong traction in Japan. However, the pacemaker demand in the U.S. remained a little weak as witnessed through a decline in revenues from the country. Growth in its leads (that connect ICDs to heart) sales following ongoing troubles for St. Jude Medical was expected. The lead-to-port ratio, which measures the number of leads sold relative to the number of ICDs or ports, continued to increase and reached the highest level in the last couple of years. The launch of Arctic Front Advance cardiac cyroballoon, the first type of next generation device for atrial fibrillation treatment, has seen strong growth in the U.S. and Europe.
As expected, the spinal division witnessed a decline as its main product Infuse, a bone graft paste used in spinal surgery, continued to struggle. In 2011, a series of articles in the Spine Journal alleged that Infuse poses greater risks than earlier reported to the FDA and many doctors were paid/bribed to under-report these risks. However, the pace of decline is slowing down. Furthermore, new products in the divisions are gaining broader acceptance. Stronger sales of heart valves and heart stents in the cardiovascular segment lifted total revenues.
Resolute Integrity, a drug-eluting stent (DES), continued to see strong demand in the international markets including Japan. The stent performed well in the U.S. market as well. The renal denervation device (a radiotherapy-based system to treat high blood pressure), Symplicity, continued to register modest growth in the international markets. In the structural heart part of the Cardiovascular franchise, transcatheter valves were one of the major growth drivers with mid-teens growth. Sales from the Surgical Technologies division continued to exhibit near double digit growth on increasing demand for navigated spine procedures. We expect sales from the Surgical Technologies division to surpass that of the diabetes division from next quarter even as the latter maintains moderate growth on insulin pumps.
While the overall contribution of emerging markets to the company's total revenue stands at 12%, Medtronic is gradually moving towards its target of 20%. Sales from emerging markets continued to exhibit double-digit growth (14%) and drove international growth. A strong U.S. dollar and pricing pressure on some of the products continued to weigh on overall gross margins. However, various cost-cutting measures including job cuts were undertaken during the last year, and this was reflected in a decline in R&D and SG&A expenditures as a percentage of revenues. The medical device maker is said to axe 2,000 more jobs worldwide as it plans to cut as much as $1.2 billion in costs in the next few years. We expect the device to garner a similar response as it did in international markets.
Furthermore, in the recently concluded CoreValve ADVANCE study, its CoreValve's survival rates were among the highest ever reported. This should help Medtronic maintain the growth momentum in the Cardiovascular franchise. The medical device maker has also filed an investigational device exemption (IDE) application with the FDA for Symplicity HTN-4 as it seeks to expand the indication to include uncontrolled hypertension patients. The company recently reported impressive one-year results from its Symplicity HTN-2 trial (see also "Medtronic: Good Symplicity Test Results But FDA Approval Not Close"). With various cost-cutting measures in place, the company will be able to absorb the impact of the new medical device tax.
We are in the process of updating our price estimate for Medtronic to reflect the Q4 results and recent trends.
Disclosure: No positions.