Medtronic: Spine Sales Falter in Q1; Covidien Acquisition Update

Medtronic Inc. reported first-quarter earnings that exceeded analyst expectations.

Excluding one-time items, Medtronic earned 93 cents a share for the quarter (ended July 25). Revenue grew 4 percent to $4.27 billion. Analysts, on average, expected earnings of 92 cents a share on revenue of $4.25 billion, according to Thomson Reuters.

U.S. revenue rose 6 percent to $2.3 billion—the company’s largest U.S. sales gain in five years.
International revenue of $1.9 billion increased 2 percent on a constant currency basis or 3 percent as reported. International sales accounted for 45 percent of Medtronic’s worldwide revenue in the quarter.
Emerging market revenue of $539 million increased 11 percent on a constant currency basis or 9 percent as reported and represented 13 percent of company revenue.

“Our first quarter results are a solid start to fiscal year 2015,” said Omar Ishrak, Medtronic chairman and CEO. “Our growth was broad based across businesses and geographies.”

The company’s orthopedic business (part of the Restorative Therapies Group, which includes the Spine, Neuromodulation, and Surgical Technologies businesses) faltered in the quarter.

The group had worldwide Q1 sales of $1.6 billion, representing an increase of 3 percent on both a constant currency and reported basis. Group revenue performance was driven by growth in Neuromodulation and Surgical Technologies, offset by declines in Spine. International sales of $531 million climbed 7 percent on a constant currency basis or 8 percent as reported.

Spine revenue of $743 million declined 3 percent on both a constant currency and reported basis, with decreases in Core Spine and bone morphogenetic proteins (BMP) offsetting growth for the Interventional Spine business. Core Spine revenue of $552 million declined 2 percent on a constant currency basis. Going forward, company officials claim that new product launches will result in improved performance. Interventional Spine revenue of $81 million grew 4 percent on a constant currency basis. BMP revenue of $110 million declined 11 percent on a constant currency basis, although the company did see sequential stability in underlying demand for BMP.

Neuromodulation revenue of $479 million increased 11 percent on a constant currency basis or 12 percent as reported, driven by solid growth in the firm’s pain stimulation, deep-brain stimulation, and gastroenterology/urology sectors. The business continues to see traction from the RestoreSensor SureScan magnetic resonance imaging (MRI) system, growth in Activa deep brain stimulation systems as a result of both the continued referral development in the United States and international momentum from EARLYSTIM clinical trial data, and strong implant rates for InterStim Therapy, officials noted.

Surgical Technologies revenue of $381 million grew 5 percent on a constant currency basis or 6 percent as reported with steady growth across all three businesses: ENT (ear, nose and throat), Neurosurgery, and Advanced Energy. The acquisition of Visualase Inc. was completed at the end of the quarter, a MRI-guided laser ablation technology for neurosurgery, adding to the Restorative Therapies Group’s suite of neuroscience solutions.

Medtronic reiterated its outlook for fiscal 2015 profit of $4 to $4.10 a share, excluding special items, and revenue growth in the range of 3 percent to 5 percent adjusted for currency fluctuations.
The company’s overall net earnings fell to $871 million, or 87 cents a share, from $953 million, or 93 cents a share, a year earlier.

Other Sectors:
The Cardiac and Vascular Group includes the Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, and Aortic & Peripheral businesses. The group had worldwide sales in the quarter of $2.25 billion, an increase of 3 percent on a constant currency basis or 4 percent as reported. Group revenue performance was driven by growth in Low Power, Structural Heart, Aortic & Peripheral, and Atrial Fibrillation & Other—which included growth from Hospital Solutions and Cardiocom—partially offset by declines in High Power and Coronary. Group international sales of $1.23 billion declined 1 percent on a constant currency basis and grew 1 percent as reported.

Diabetes revenue of $416 million grew 12 percent on a constant currency basis or 13 percent as reported. Medtronic bigwigs said growth in the quarter was driven by strong performance in the United States from the MiniMed 530G with Enlite, which automatically stops insulin delivery if glucose levels fall below a predetermined threshold.

Medtronic-Covidien Deal Faces U.S. Scrutiny
U.S. regulators are seeking more information regarding the proposed deal between Medtronic and Covidien plc.

The U.S. Federal Trade Commission (FTC) requested “additional information and documentary material” from Medtronic on Aug. 6, according to a Form 8-K filing with the U.S. Securities and Exchange Commission. It is the second request for information sent to Medtronic from the FTC. The company has not specified the type of information the agency is seeking.

The filing states the request extends the waiting period for the customary antitrust review for an additional 30 days after the companies comply with the FTC, unless it is extended voluntarily by both parties or terminated earlier by the FTC.

“We intend to cooperate fully with the FTC, and we continue to expect the deal to close in the fourth quarter of 2014 or early 2015,” Medtronic spokesman Fernando Vivanco told theBoston Globe. “We do not intend to comment on the specifics of the FTC’s request.”

Covidien spokesman Peter Lucht also told theGlobe, “We’ll cooperate with the FTC, and still expect to close within the timetable that was previously announced.”

Medtronic in June announced plans to purchase Covidien for $43 billion in cash and stock and redomicile from the United States to Ireland in a process called a tax inversion.

The deal is one of the biggest in the recent wave of inversions involving large American companies in the healthcare sector. The trend has drawn concern from U.S. lawmakers, the U.S. Treasury Department, and the White House.

President Barack Obama has encouraged government officials to curb the practice of allowing U.S. companies to pay lower corporate taxes by relocating overseas.

“We don’t want to see this trend grow,” Obama said, according to Bloomberg. “We don’t want companies who have up until now been playing by the rules suddenly looking over their shoulder and saying, you know what, some of our competitors are gaming the system and we need to do it, too.”

In an interview with Modern Healthcare, Medtronic CEO Omar Ishrak said the deal to acquire Covidien is a fundamental business strategy and not a tactic to dodge taxes. Ishrak said that Medtronic is “developing new ways for hospitals and device makers to be partners in the evolving value-based healthcare environment.”

A handful of pending measures in Congress, as well as additional penalties under existing tax policies to be enforced by the Treasury Department, may make it more difficult for American firms that plan to move their tax base abroad.