Medtronic Slumps after Earnings Report

A drop in U.S. defibrillator sales sparks worries about the company's growth

Medtronic (MDT) has grown its profits and sales of medical instruments overall during recent months. But the performance has been rocky in the company's largest product line, implantable cardioverter defibrillators (ICDs), which monitor heartbeats and can shock a racing heart back to normal. On Feb. 21, after the release of Medtronic's results during the quarter ended Jan. 26, the stock dropped 4.6% to $52.02 on heavy volume of 23.6 million shares.

The Minneapolis company's revenue amounted to $3.048 billion during the third fiscal quarter, a 10% increase over same period last year. Net earnings were $710 million, or 61 cents per diluted share, representing an 11% increase year over year. "Third quarter financial results reflect the strength of Medtronic's business portfolio, which is diversified by product line and geography, as well as improved operating leverage," CEO Art Collins said in a press release Feb. 20.

It had looked bleak after an embarrassing string of quality-related recalls at Guidant Corp. (GDT) hit the ICD market last year [see BusinessWeek, 10/9/06, "Boston Scientific's Double Bypass"]. But then Wall Street cheered signs that the ICD market was stabilizing when Medtronic announced in late November that its ICD-related revenue grew 14% year-over-year during the second quarter and that it held 56% of worldwide ICD market share (see, 11/21/06, "Medtronic: Investors Take Heart").

Now fate has turned on Medtronic again; its ICD revenue in the U.S. was $507 million during the January quarter, down 10% from the same quarter last year.

"MDT beat our estimates in vascular, diabetes and cardiac surgery, and ICD sales overseas also impressed," Standard & Poor's Equity Research analyst Robert Gold said in a research note. "But we are concerned by the 10% drop in U.S. ICD sales, suggesting market share loss, and we think ICD competitive pricing pressures are rising." Gold downgraded the stock to buy from strong buy. (S&P, like, is owned by The McGraw-Hill Companies.)

Medtronic's rivals include companies like St. Jude Medical (STJ) and Baxter International (BAX). Also, Boston Scientific (BSX) shelled out $27 billion for Guidant in a deal that closed Apr. 21.

The game is far from over. Medtronics on Feb. 20 provided fiscal 2007 earnings per share (EPS) guidance of $2.34 to $2.38, raising the lower end of its previously stated range of $2.30 to $2.38 EPS. But the company also said fiscal 2007 revenue will range between $12.2 and $12.4 billion, which compares to previous guidance of $12.2 to $12.6 billion.

"As we move through the remainder of this fiscal year and enter fiscal year 2008, we expect to see good operating momentum and positive contributions from a number of new product launches inside and outside the United States,” Collins said in the press release.