Medtronic's Revolutionary Device To Control High Blood Pressure

| About: Medtronic plc (MDT)

The medical device industry went through a rough patch in recent years due to slumping cardiac device sales and industry-wide belt-tightening over the impending device tax. But device companies are an inventive bunch and they are hard at work turning things around with innovative products, acquisitions and expansions into emerging markets.

Medtronic (NYSE:MDT), as the world's largest medical device company, has a multitude of innovative products, one of which is a device called Symplicity for the control of high blood pressure.

The patients

The blood pressure market is enormous.

Hypertension drugs, led by Novartis AG's (NYSE:NVS) Diovan, totaled $13.9 billion globally in 2011, according to IMS Health, a market research firm. More than 42 million people take drugs to curb hypertension in the U.S. alone. 76 million Americans and about 120 million people worldwide have blood pressure over 140/90 mmHg, the threshold for hypertension and a major risk factor for stroke and heart disease. An estimated 10 percent get no relief from available drugs.

The body triggers high blood pressure in these patients in a way that is uncontrollable or difficult to control with medication. Treatment-resistant hypertension is defined as persistently high blood pressure despite treating it with three or more anti-hypertensive medications including a diuretic. It puts patients at risk of premature death from kidney disease and cardiovascular events such as stroke, heart attack and heart failure. Until now, doctors had no other options for such patients than adding more drugs.

The device

Symplicity works through a minimally invasive procedure. The doctor inserts a steerable catheter into the renal artery, and Symplicity's radio frequency energy electrode tip performs a series of two-minute ablations to arterial nerves. Once the process is completed, Symplicity goes out the way it came in, and there's no need for permanent implants. The procedure is called renal denervation.

One of the body's primary methods for controlling blood pressure involves the sympathetic nervous system which includes the major organs: the brain, the heart, the kidney and the blood vessels themselves. One key player in long-term blood pressure regulation is the kidney. Renal nerves communicate information from the kidney to the brain, and vice versa.

In people with hypertension, the renal nerves are hyperactive, which raises blood pressure. Quieting hyperactive renal nerves causes a reduction in the kidneys' production of hormones that raise blood pressure and may protect the heart, kidney and blood vessels from further damage.

The device was originally developed by Mountain View, CA-based Ardian which Medtronic bought in 2010 for $800 million cash, plus commercial milestone payments through 2015. Ardian was backed by venture capital from Morgenthaler Ventures, Advanced Technology Ventures, Split Rock Partners, and Emergent Medical Partners.

The device already had a European approval when Medtronic snapped it up, although in the US it is still undergoing trials. In August 2012, Medtronic presented positive safety and efficacy data from the Symplicity HTN-2 clinical trial. The 18-month data demonstrated that the Symplicity system continues to provide sustained blood pressure reduction in patients with treatment-resistant hypertension. There was no device-related serious adverse event or any new vascular complication.

Key to gaining entry to the U.S. will be the results of a Symplicity HTN-3 study, a large multi-center, randomized study led by George Bakris, director of the hypertension center at the University of Chicago. It will look at the experiences of 532 patients, half of whom will undergo renal denervation while the others have a sham surgery that mimics it. The results are expected in 2013 but FDA approval is not expected before 2015.

Medtronic is already working on a next-generation system and recently completed the first phase of a feasibility study. All nine patients were treated with 100% success in accessing the vessels and delivering therapy. The original Symplicity uses a single electrode to deaden nerves in the kidneys, and the new model has four, aiming to reduce procedure time for patients.

Some doctors urge caution using it widely before long term safety data is available on the procedure. They want to be certain that no long term damage is done to the kidneys as an unintended consequence of blocking the sympathetic nerves, a situation familiar from diabetes therapy. Researchers at this point have difficulty explaining the exact mechanism by which knocking out renal nerves improves hypertension.

The competition

Analysts estimate that as many as 30 competitors are developing similar technologies. To illustrate the heated interest, when Ardian went on the auction block in late 2010, one of three final bidders was drug maker Merck (NYSE:MRK). The fact that Merck, an expert in hypertension drugs but inexperienced in device-making, was willing to reach outside its core competence to pursue renal denervation is a sign of the technology's promise.

One rival is St. Jude Medical Inc. (NYSE:STJ), whose device earlier in 2012 also gained approval in Europe. Following closely are Covidien (COV), the privately held Vessix Vascular, ReCor Medical, and Kona Medical (NASDAQ:KONA). Late to the game is Boston Scientific (NYSE:BSX) where CEO Michael Mahoney said at a news conference that it has a plan for its RDN renal denervation system to start human trials in 2012.

ReCor Medical and Kona, unlike the rest of the group, are using ultrasound energy to deaden nerves in the kidney instead of radio frequency.

Investor's summary

Medtronic's first quarter revenue (the company's fiscal year ends on the last Friday in April) of $4,008,000,000 has increased by 2%. Growth was strong outside the US: in Central and Eastern Europe 21%, Greater China 15%, Middle East and Africa 14%, South Asia 12% and Latin America 11%. Western Europe and Canada grew 4%, and growth in U.S. was also 4%.

The gross margin in the first quarter was 75.7%, which favorably compares to the industry average of 57%. The company generated $1.2 billion free cash flow in the first quarter, defined as operating cash flow minus capital expenditures. The company has repurchased $470 million of its common stock or approximately 1% of the outstanding shares. The share price's 52 week range was $32.26 - 44.79 with a run-up since July and the market cap is $44.63 billion.

Medtronic has been headed by CEO Omar Ishrak since 2011 who came from General Electric (NYSE:GE) and has considerable experience with expansion into China. Medtronic has made two acquisitions in China in one month. It purchased a 19% stake in Chinese medical equipment maker Shenzhen Lifetech Scientific on Oct. 15 and in September it bought China Kanghui, a manufacturer of orthopedic devices, based in the eastern Chinese city of Changzhou, for $816 million cash. The purchase of Kanghui was the first step for Medtronic's localization in China as the Chinese company has an established marketing network in China's second and third-tier cities.

Medtronic's current dividend yield is 2.48% which compares to St. Jude Medical's 2.33%, Stryker's (NYSE:SYK) 1.61%, and Johnson & Johnson's (NYSE:JNJ) 3.39%. Boston Scientific pays no dividend. The company may or may not be able to sustain the share price's current run-up, but in the long run Medtronic is a solid, dividend paying investment. If you believe that the medical device industry will prosper in the coming years, I strongly recommend that you add Medtronic to your portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.