STJ ST. Jude Medical, Inc.

Recently, we upgraded Medtronic (MDT) to Neutral with a target price of $36.00.

Medtronic reported an adjusted EPS of 79 cents in the first quarter of fiscal 2012, in line with the Zacks Consensus Estimate and a penny lower than the year-ago quarter.  

Revenues were $4.049 billion in the quarter, up 7% year over year (up 2% at constant exchange rates or CER) and higher than the Zacks Consensus Estimate of $3.991 billion. Medtronic recorded 46% of its total sales from the international market during the quarter, which climbed 19% year over year (7% at CER) to reach $1.843 billion. As a result of the company’s focus on emerging markets, revenues from these regions increased 30% (25% at CER) to $408 million.

About 60% of its business is growing at 8% based on new products resulting in improvement in pricing and market share. Moreover, it is encouraging to note that the company recorded double-digit growth in several businesses including transcatheter valves, AF Solutions, Endovascular, Uro/Gastro and CGM. However, ICDs and Spinal, accounting for the remaining 40% of the business declined 6%. Despite several challenges, the company is undertaking initiatives to revive its top line. This includes penetrating international markets, portfolio expansion and restructuring initiatives, which should benefit the company over the long term.

However, Medtronic continues to witness several challenges for its core segments – ICDs and Spinal. In ICDs, the performance was affected by many factors including DOJ’s investigations and the JAMA article published in January 2011. To worsen the situation, the Spine Journal found that surgeons missed to mention some complications encountered with Medtronic’s bone-growth protein (rhBMP-2) in clinical trials. Following the publication of this article, sales of Infuse plunged sharply. The company also operates in a highly competitive environment with the presence of players such as Boston Scientific (BSX) and St Jude Medical (STJ).

To address various challenges, Medtronic over the past few years has been reallocating resources toward new therapies to drive growth. Meaningful acquisitions made over the last few quarters include Ardian, Invatec, Osteotech and ATS Medical. These businesses are already contributing to the company’s growth profile and expected to contribute much more going forward.

Moreover, in fiscal 2011, the company decided to restructure its business to align its cost structure to current market conditions so that it can buck up for the long-term growth. With regard to this initiative, approximately 2,100 positions have been identified that would be eliminated gradually.

The entire process is expected to be completed by the end of fiscal 2012, resulting in $225−$250 million in annual savings. The savings will be reinvested to drive operating leverage.

 
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