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Medtronic Earnings Recap

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Overall it was a solid quarter for Medtronic...

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Overall it was a solid quarter for Medtronic (MDT). Trends in ICD sales and market share gains across all segments were highlighted.

Good:

  • EPS beat by $0.03 and revs topped expectations - $3.08 bln vs. $2.969 bln First call estimate.
    • The company didn't raise guidance but reiterated FY '07 EPS and revs ranges that had been lowered back in August and only expect a slight improvement to gross margins next quarter.
    • The company notes it has been hurt this year by a "temporary" slowdown in the US ICD market and expects that to change. Medtronic sees the ICD market improving, albeit slowly.
  • MDT sees a rebound this upcoming fiscal year and thinks FY '08 returns to double digit growth and 10-15% growth over the next five years in ICDs.
  • The company noted it will continue to repurchase stock at opportunistic levels while also spending $75-$100 mln of additional investments over the next 12 months to reinvigorate ICD growth.
  • MDT expects its drug eluting stent product to receive FDA approval with a US commercial launch during the middle of '07 – note this product is expected to aggressively compete with Boston Scientific's (BSX) next generation Taxus stent.
  • MDT saw market share gains in all business lines and while noting it will not be raising prices.


Bad:

  • Medtronic noted the Europe/continental stent market was still contracting and at best leveling off.
  • Inventory levels have not necessarily bottomed out or improved at the hospitals despite hospital purchasing people indicating that implant rates have been stabilizing and have shown a renewed confidence.
  • No news is good news possibly on the reimbursements, however, it's possible analysts were looking for some positive trends from medicare and MDT didn't elaborate.


Upcoming Catalysts:

  • Nov 30th: FDA Spine Panel – MDT will not discuss the viability of spinal fusion, the discussion will focus more on the guidelines, however it noted increasing data has been supporting lumbar fusion.
  • Dec 7th and 8th: The stent panel discussion, however, should also focus more on guidelines, not efficacy.
  • Jan 19th: Half day analyst day.


Bottom Line:

MDT took share in all segments and indicated the ICD market has improved. The company reiterated momentum is building and most analysts seem enthused by the results on the call. Next year's Endeavor product (drug eluting stents) has already been mentioned positively at the cardiac care conference in DC recently and MDT indicated they are on schedule for FDA approval by mid year '07. This, combined with the ICD delivery therapy and monitoring product is a major advantage over its competition and I think it seems reasonable to expect Medtronic to continue to take share from BSX and St. Jude Medical (STJ). I would expect the group to be up on the positive trends as sentiment continues to improve.

Positions in MDT, BSX, STJ
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