Medtronic misses revenue estimates as TAVR position falters

Dive Brief:

Medtronic's quarterly revenues fell about $80 million short of Wall Street's consensus expectation, which execs attributed to "transient" challenges, many of which they said were recognized too late in the quarter to correct. At $7.717 billion, year-over-year revenue growth was 2.3% as reported and 2.6% on an organic basis.
Much of the fiscal third quarter disappointment stemmed from the Cardiac and Vascular Group, where transcatheter aortic valve replacement device sales grew below the U.S. market at about 13%, despite competitor Edwards Lifesciences reporting in January that it saw a roughly 40% increase in U.S. TAVR procedures.
Medtronic echoed other major medtechs in saying the novel coronavirus is most likely to impact its financial results through cancellation of medical procedures. CEO Omar Ishrak said China accounts for about 7% of Medtronic's overall business and all of its manufacturing there remains in operation. The company plans to provide an update on COVID-19's impact sometime later in the quarter.

Dive Insight:

Medtronic believes worse-than-expected topline growth can be linked in part to customers delaying purchasing ahead of new product launches, particularly in its implantable cardiac defibrillators and pain stimulation businesses.

Bob Hopkins, medical device analyst at Bank of America Merrill Lynch, pointed out that Boston Scientific also reported declines in its ICD business in the most recent quarter, but Mike Coyle, head of Medtronic's Cardiac and Vascular Group, said the company is not seeing signs of an overall market slowdown.

Coyle said Europe and the Middle East were key sources of ICD weakness during the quarter; the company announced Jan. 30 it received CE mark for new ICDs, and it expects those products to be available in the U.S. in the first quarter. The company also expected better sequential improvement in left ventricular assist devices, resulting in a low-single-digit decline in the heart failure business.

Ishrak said it was "another sluggish quarter" for the pain stimulation business thanks to a broad slowdown in the spinal cord stimulation market and some share loss. The company plans to begin a limited rollout of a new waveform technology gained in the recent acquisition of Stimgenics in the fourth quarter.

Medtronic pinned underperformance in U.S. TAVR on a failure to hire and fully train new sales reps far enough ahead of its receiving low-risk indication from FDA and a surge in new centers performing TAVR procedures. Medtronic said it plans to add 70 new field personnel to help the U.S. TAVR situation. Outside the U.S., execs said the TAVR business performed similar to the broader market.

In a similar trend, Medtronic's diabetes business grew internationally on adoption of its 670G insulin delivery system, but in the U.S., the company again reported losing share amid increasing competition.

Management slightly pushed back the expected U.S. timeline for introducing 780G, its so-called advanced hybrid closed loop system for diabetes management. Medtronic said it already filed for a CE mark and plans to file adult clinical data with FDA in March. That would push the device's expected approval beyond the end of its fiscal year. Analysts at Stifel estimated a six- to nine-month review in a note following the call.

On the glucose monitoring side of the business, where Medtronic's sensor technology has lagged competitors', diabetes group head Sean Salmon said it's working to improve its sensor pipeline with the goal of eventually securing an integrated, or iCGM, designation from FDA.

President and incoming CEO Geoff Martha noted plans to change certain operating mechanisms, internal metrics and incentives to avoid late-in-the-quarter surprises. Martha said the company may go into further detail at its investor and analyst day, scheduled for June 2 in New York City.

Despite the revenue miss, execs touted a 21% increase in free cash flow and bumped up fiscal 2020's diluted non-GAAP earnings per share guidance from between $5.57 and $5.63 to between $5.63 and $5.65.

In the fourth quarter, Medtronic said it's "comfortable" with analyst consensus that organic revenue growth will be roughly 4.5%, not taking into account potential impact from coronavirus. By unit, CFO Karen Parkhill said the company expects organic growth of 6.25% to 6.5% in Minimally Invasive Therapies, about 4% in Restorative Therapies, and 4.25% to 4.5% in Cardiac and Vascular. The diabetes unit is expected to be flat or decline slightly.

Shares in Medtronic were down 4% in morning trading.