Medtronic: Alzheimer's Pump Technology Could Drive Shares Higher Into 2014

| About: Medtronic plc (MDT)
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Medtronic (NYSE:MDT) recently announced that it is looking for pharmaceutical industry partners to couple its pump technology with Alzheimer's medicines. The technology is said to be an effective complement to medicines battling Alzheimer's, as it will be pushed directly into the brain. The company said that it is confident that the product will have wide acceptance in the market. It further added that less than 1% of intravenous drugs have the ability to cross the blood-brain barrier. Medtronic's drug concept promises to deliver the drugs straight into the brain, which would yield better concentrations.

Based on the latest figures from Alzheimer's Disease Research, there are nearly 36 million people who are suffering from Alzheimer's disease or other dementia. The organization expects these figures to grow to nearly 66 million by 2030 if breakthroughs are not discovered. Furthermore, it is expected to reach 115 million by 2050. Total payments for healthcare and long-term care are projected to increase from $200 billion in 2012 to $1.1 trillion in 2050. This implies a compounded growth of 11.84% over the next 38 years. For the U.S. figures alone, there are estimated 5.4 million suffering from the disease. This would likely increase to 15 million by 2050.

Presently, there is no known cure for Alzheimer's disease and current medicines only improve the patient's symptoms rather than treating the underlying condition. There are few companies who have taken a shot at developing a drug targeted to treat Alzheimer's disease. Having said this, this niche should provide significant upside for any major pharmaceutical companies given the demand and supply gap.

Pfizer (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ) attempted to develop a drug called Bapineuzumab. The drug was created to counteract the buildup of plaque in the brain. After several late-stage trial tests done, the results suggested that the drug failed to enhance the cognitive or functional performance in performance in patients with mild to moderate symptoms of the disease. The drug was highly anticipated and touted as the first drug to battle the advancement of Alzheimer's disease. Pfizer and Johnson & Johnson decided to end their collaboration.

Meanwhile, Eli Lilly (NYSE:LLY) is developing solanezumab, its own Alzheimer's disease drug candidate. According to a press release from the company, "Solanezumab did fail to meet its primary endpoints in its two phase 3 EXPEDITION trials in patients with mild-to-moderate Alzheimer's disease. But an extension study of the drug, called EXPEDITION-EXT, is continuing as planned. The next steps for solanezumab have not yet been decided and will be determined after discussions with regulators."

This leaves Roche Holding as the frontrunner for Alzheimer's drugs. It has more than doubled its size of clinical trials of its experimental drug, Gantenerumab, in patients who have not yet developed dementia. Roche is optimistic that it will see positive results despite this project being high-risk. It also has three other drugs in clinical tests, including crenezumab, which has been chosen as a government-backed trial in a group of Colombians with a genetic mutation leading to Alzheimer's in their 40's.

Recent Quarterly Financials Implies Short-Term Macroeconomic Headwinds

For the first quarter of 2013, Medtronic's reported earnings of $0.85 per share. This is an increase of 8% compared to the same period last year. Revenues amounted to $4.008 billion, also up by 1.6% year-on-year. According to the company, worldwide implantable cardioverter-defibrillator (NYSE:ICD) market has declined in the low-single digits. Going forward, this segment is expected to remain flat with modest improvements over the last three quarters. But, management remains optimistic over the long run. Meanwhile, it has experienced robust growth in the trans-catheter valve business. Also, its diabetes business will benefit with the anticipated FDA approvals of its MiniMed 530G insulin pump and Enlite sensor by 2013.

It experienced weakness in the Southern European region. It plans to move into emerging markets in the future as it detours from tough competition from medical devices players such as Boston Scientific (NYSE:BSX) and St. Jude Medical (NYSE:STJ). Management sees 20% of revenues from the region. It has inaugurated its Innovation Center in Shanghai last month in line with its strategy to create local product research and development in the emerging markets region. The center will also collaborate with the global teams, local physicians, universities, and research institutes.

For the next 5 years, analysts expect the company to grow its earnings by 4.91% a year. This is in line with the company's forecasted earnings growth for the year. Analysts expect the company to earn $3.65 per share this year.

This is relatively better than its competitor, Boston Scientific. The latter is expected to post earnings per share of $0.42, implying a decline in earnings of 4.50%. For the next 5 years, Boston Scientific is forecasted to grow its earnings by 5.33% a year. Meanwhile, St. Jude Medical is forecasted to post earnings per share of $3.43. This implies a growth of 4.60% compared to the same period last year. Over the last 5 years, analysts expect St. Jude Medical to grow its earnings by 9.21% a year.


The stock is currently trading at 10.8 times forward earnings and 2.6 times book. For the last 5 years, the stock has an average price to earnings ratio of 16.7 times and price to book value of 3.3 times. Since 2002, it has traded between 13 times to 42.9 times earnings. It also has a dividend yield of 2.3%, higher than its average 5-year dividend yield of 1.9%.

In contrast, Boston Scientific is valued at 14.2 times earnings and 1.1 times book. St. Jude Medical trades at 11.4 times earnings and 1.2 times book. It also carries a dividend yield of 2.1%. Overall, medical devices companies have experienced weakness in its volumes from increased competition and tough economic environment. That being said, they have tailwinds such as higher demand from baby boomers and increased demand to address emerging diseases.

Even major pharmaceutical companies are not spared. Johnson & Johnson is valued at 12.4 times earnings and 3.2 times book. It also has a dividend yield of 3.4%. Pfizer trades at 9.9 times earnings and has a dividend yield of 3.5%.

I believe that Medtronic shares will experience a bump in the short term as it faces adverse effects from the tough operating environment. In the long-term, I have confidence that Medtronic will deliver superior shareholder returns. At these levels, it is attractive to accumulate Medtronic shares, especially for investors with a long-term focus. Based on the above reasons, I think Medtronic will trade at new highs close to $46 by 2014.

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.