Medtronic Second-Quarter Profit Falls on Litigation Costs

Medtronic Inc., the world’s biggest maker of heart-rhythm devices, said second-quarter profit fell 26 percent on legal costs related to a patent dispute.

Net income in the three months ended Oct. 26 decreased to $646 million, or 63 cents a share, from $871 million, or 82 cents, a year earlier, the Minneapolis-based company said in a statement. Profit excluding a $245 million charge for litigation costs and other items was 88 cents a share, matching the average of 23 analyst estimates compiled by Bloomberg.

Revenue increased 1.8 percent to $4.1 billion. The company’s drug-coated Resolute Integrity stent, used to keep open heart arteries, bolstered sales after it was introduced in Japan during August. The recently introduced Restore Sensor helped boost revenue of spinal cord stimulators, said Derrick Sung, an analyst with Sanford C. Bernstein & Co. in New York.

“We view the quarter as in-line,” Matthew Taylor, an analyst at Barclays Plc in New York, wrote in a note to clients today.

Medtronic rose 2 percent to $42.66 at the close of New York trading. The shares have gained 12 percent this year.

The company reaffirmed its earnings forecast for fiscal 2013 of $3.62 to $3.70 a share.

Future Sales

The market for heart rhythm devices and spinal products that comprise half of Medtronic’s revenues is no longer plummeting, said Chief Executive Officer Omar Ishrak, in a telephone interview. Defibrillator implants rose about 5 percent, a rate that hasn’t been seen in some time, said Chief Financial Officer Gary Ellis. That bodes well for future sales since the revenue follows implants, he said.

“Our performance in these markets has been good,” Ishrak said. “We have taken share in both of these markets.”

Medtronic kept the guidance conservative based on the January 2013 implementation of a tax on the medical device industry and the uncertain renewal of a research and development tax credit, Ellis said.

The device manufacturer anticipates paying as much as $175 million each year to comply with the new tax, Ellis said.

“We have to manage that as a headwind and cost,” Ishrak said. “We can’t invest in other things because we have to pay that tax.”

While the 2.3 percent excise tax was conceived as the industry’s contribution to a health care overhaul that would eventually provide more patients by expanding insurance coverage, the benefit to Medtronic isn’t clear cut, he said. Those getting insurance may not need the company’s products.

New Tax

From a business management and planning perspective, the company is planning to account for the tax as a cost that isn’t passed along to customers, Ishrak said. In reality, there may be cost-sharing, depending on the product and situation, he said.

“How exactly pricing plays out, we will see,” Ishrak said. “The dynamics are brand new for this market.”

Medtronic expects to return cash flow to investors with dividends and buybacks, Ishrak said on a conference call.

The legal costs were from a patent dispute with Edwards Life Sciences Corp. that centered on Medtronic’s CoreValve System, one of the company’s transcatheter aortic valves. A federal appeals court earlier this month affirmed an April 2010 federal district court ruling in Delaware that Medtronic’s system infringed a single patent held by Edwards, according to statement from Medtronic.

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