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| Medtronic CEO Omar Ishrak |
Medtronic ($MDT) has tied its long-term growth to three pillars: strong U.S. sales driven by innovation, double-digit growth in emerging markets and Covidien ($COV). But last quarter, the medical device giant didn't deliver on emerging-market revenue growth as it encountered difficulties with distributors in India and China. It expects to return to double-digit gains in both countries this fiscal year.
Still, U.S. growth was strong enough to propel Medtronic to an upside surprise; it beat on both earnings and revenues during the most recent quarter. For the quarter ended July 25, Medtronic reported EPS of $0.93 excluding restructuring charges and acquisition-related items, above the $0.92 consensus figure. It had $4.3 billion in revenue, again ahead of the $4.25 billion that Wall Street expected.
"We believe mid-single-digits growth in the U.S. can be sustained over the coming quarters based on the momentum of our new products. Therapy innovation contributed over half of our global growth this quarter," Medtronic chairman and CEO Omar Ishrak said on a conference call about the earnings results. "When combined with our focus on globalization and economic value, further enhanced by our pending acquisition of Covidien, we're well-positioned to further improve our competitive position long-term growth profile."
The company's strongest performing units were diabetes and neuromodulation. Diabetes gained 12% to $416 million over the same quarter a year ago, driven by the strong performance of the MiniMed 530G Enlite, an insulin pump that automatically stops delivery if glucose levels fall below a predetermined threshold. Neuromodulation also added 11% to $479 million, which included growth across a number of products. All revenue growth figures are in constant currency.
Overall, revenue growth for Medtronic was 4% for the quarter. During its recent quarterly report, Covidien had an identical revenue growth rate of 4% year over year. But, unlike Medtronic, its fastest growing business is its largest: surgical solutions, which was up 7% of the prior year's quarter with $1.3 billion in revenues. Medtronic said it expects to pay $125 million this fiscal year for the U.S. excise tax on medical devices, an increase of $13 million over the prior year.
Outside of the U.S., Medtronic reported an increase of only 2% to $1.94 billion, while U.S. revenue grew 6% to $2.3 billion from the same quarter a year ago. Emerging markets increased by 11%, down from 14% growth the prior quarter.
Ishrak attributed these shrinking emerging-market gains to difficulties in China and India, where revenue growth was 6% and -7%, respectively. He characterized the issues with China as "distributor channel and management changes" but said he expects the country to "return to double-digit growth for the remainder of the fiscal year." In India, he said Medtronic "faced disruption from distributor terminations and inventory rebalancing." He expects that optimization of these distributor channels will return to double-digit growth by the end of the fiscal year.
On China, Ishrak added that he doesn't expect the country's recent emphasis on locally manufactured medical devices to be a challenge. He noted that Medtronic recently completed an agreement with LifeTech that would allow it to manufacture pacemakers in China as well as Covidien's strong manufacturing and R&D capabilities in China.
Medtronic used the call to reiterate its commitment to and timeline for the Covidien acquisition, which is still close by year end or in early 2015. Ishrak minimized the tax impact of the inversion aspect of the deal and said the company is not modeling outcomes in various legislative scenarios but remains focused on the existing legal parameters for the deal.
He noted that the company will continue to pay taxes on U.S. earnings; along with Social Security, property and the excise tax Ishrak pegged the tax payment at 45% of U.S. income. He said the company expects to pay a similar rate after the Covidien deal closes.
- here are the release and the webcast