Medtronic Recalls Infusion Sets, Still a Buy

Medtronic, Inc. (MDT) (Analyst Report) has recently initiated a recall of its infusion sets due to manufacturing defects. Infusion sets are thin tubes that deliver insulin from insulin pumps to diabetes patients. The defective Quick-set infusion sets are not allowing insulin pumps to properly vent air pressure, thereby supplying inaccurate doses of insulin to patients. This has often resulted in serious injury or death.

Medtronic has estimated that about 60,000, or 2% of the 3,000,000 infusion sets with customers are affected. The affected infusion sets have reference numbers MMT-396, MMT-397, MMT-398 and MMT-399 and lot numbers starting with ‘8’. These sets were sold mostly in the U.S.

Medtronic has requested customers to return these defective sets. The company in turn is replacing these sets with new ones without charging customers anything.

We believe that this recall of infusion sets will only have a minimal impact on Medtronic’s bottom-line. The company is one of the world’s leading medical technology companies, specializing in implantable and interventional therapy devices and products. Medtronic reported its full fiscal year 2009 results with revenue of approximately $14.6 billion.

Medtronic has a deep product pipeline and a strong R&D program that positions it for long-term organic growth, not relying purely upon acquisitions. The company’s main competitors include St. Jude Medical Inc. (STJ) (Analyst Report) and Boston Scientific Corporation (BSX) (Analyst Report).Medtronic’s management has a typical ‘ONE Medtronic’ approach that encompasses the following goals: drive sustainable long term growth of 9%-11% through innovation; focus on operating margins – increase by 300 to 400 basis points; EPS growth of 11%-14% and return a minimum of 40%-50% of free cash flow to shareholders annually; and align the organization for consistent execution.

Medtronic reported strong fiscal year 2009 results with revenue growth witnessed across all its seven business segments. It also reported a margin expansion and an increase in bottom-line. The company had a strong free cash flow in excess of $3 billion at the end of the fiscal year.

Based on the company’s performance we have assigned a Buy rating on the stock.