Medtronic reports sluggish second quarter, lowers 2011 guidance

Medtronic Inc. Tuesday slightly lowered its fiscal 2011 profit and sales forecast due to its weakening spine and cardiac rhythm disease management businesses (CRDM), the latter hampered by problems with a key manufacturing facility.

The company, based in Fridley, now expects to generate annual profits of $3.38 to $3.44 per share compared to its earlier estimate of $3.40 to $3.48 per share. Excluding the impact of its recent acquisition of ATS Medical Inc. and an extra selling week in fiscal 2010, Medtronic expects EPS growth in fiscal 2011 of 8 to 10 percent, down from its previous guidance of 9 to 11 percent.

Medtronic said sales will grow up to 4 percent, down from its earlier prediction of 5 percent.

Judging from these results, Medtronic is clearly a company in transition as it seeks higher growth in China and new therapies like transcatheter heart valves while trying to “protect and optimize” its core CRDM business.

“There has been a lot of reshaping of the business over the last few years,” CEO Bill Hawkins told analysts during a conference call. While still investing in pacemakers and implantable cardioverter defibrillators (ICD), “we’re not counting on it for the real upside growth.”

CRDM revenue during the second quarter fell about one percent to $1.25 billion from the same period a year ago with ICD and pacemaker sales declining one percent and five percent respectively.

Medtronic officials blamed the results on a weaker global healthcare market, falling prices, and greater hospital cost controls. But some of the company’s wounds were self-inflicted.

In September, the Food and Drug Administration (FDA) sent the company a warning letter regarding its manufacturing facility in Mounds View. The letter is holding up key product launches like the Revo MRI-friendly pacemaker and Protecta defibrillator at a time when rivals St. Jude Medical Inc., based in Little Canada, and Boston Scientific Corp., based in Natick, Mass., but with major operations in Arden Hills, are seizing some momentum in the market, analysts say.

“Market share trends are working against MDT in CRM,” David Lewis, an analyst with Morgan Stanley, wrote in a recent research report. “Both BSX and STJ have ongoing product rollouts driving unit share and positive mix while MDT’s Protecta platform remains held up by the Mounds View warning letter, leaving MDT without a mix or unit share driver.

“Given the Mounds View warning letter is unresolved, the potential impact of new product launches on prospects for FY11 continues to diminish,” Lewis wrote. “Moreover, MDT has launched its new products in Europe, but at this point neither the Protecta ICD launch or the ongoing MRI compatible pacemaker rollout appear to have been market share drivers there through 2Q10 for MDT.”

Hawkins emphasized the company’s continued focus on emerging markets and innovation. He offered specific color on China, which now generates about $1.2 billion in annualized sales (about the equivalent of its quarterly CRDM revenue) and is growing about 20 percent a year. Medtronic recently opened a patient care center in Beijing and will soon debut its new China headquarters in Shanghai.

The company has also invested heavily in new therapies, buying firms like ATS Medical (replacement valves) and Oseotech Inc. (biologic spinal products). On Monday, Medtronic said it would spend at least $800 million to acquire Ardian Inc., which is developing a catheter-based treatment for hypertension or high blood pressure.

“In this new, changing healthcare environment, size and scale will be key to winning,” Hawkins said. “The underlying demand for our products is still there.”

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