Medtronic plc, of Dublin, blamed dampened demand for heart devices ahead of new product launches for its third-quarter revenue miss. Fiscal 2020 Q3 revenue totaled $7.72 billion, below Wall Street’s estimate of $7.81 billion, for organic sales growth of 2.6% vs. consensus and guidance of 4% or higher.
Shares of the company were down 3.98% to $112.66 at the close of the market on Feb. 18, 2020.
On the plus side, Medtronic said it is comfortable with current Street consensus for fourth quarter revenue growth of 4.5% and earnings per share (EPS) of $1.64, but warned of a potential hit from the new coronavirus, COVID-19.
“All of our manufacturing operations are up and running in China,” the epicenter of the outbreak, CEO Omar Ishrak said during an earnings call on Feb. 18. However, a slowdown in medical device-related procedures at Chinese hospitals has led to procedure delays. “We do expect this to have a negative impact on our fourth quarter financial results. But given the fluidity of this situation, the duration and magnitude of the impact are difficult to quantify at this time,” he said.
Challenges in CVG
Sales for the Cardiac & Vascular Group (CVG) rang in at $2.78 billion, below the consensus estimate of $2.86 billion), resulting in growth of just 1.8%. Missed targets within the group included cardiac rhythm and heart failure devices ($1.39 billion vs. $1.40 billion), coronary and structural heart ($948 million vs. $984 million) and aortic and peripheral ($478 million vs. $486 million).
“Revenue growth fell short of our expectations, driven in part by customers curbing their purchasing ahead of our new product launches,” primarily in CVG and the Restorative Therapies Group, Ishrak said. Also fueling the lower performance in CVG was the U.S. transcatheter aortic valve replacement (TAVR) business, which grew 13%, but was below the market growth rate. Ishrak attributed the slump to longer than expected times for new field personnel to reach full productivity.
In the Minimally Invasive Therapies Group, an upgrade to the enterprise resource planning (ERP) system in the U.S. and Canada also caused a “temporary slowdown in our ability to supply customers, which, in some cases, resulted in lost procedures and lasted longer in the quarter than we anticipated,” That upgrade is now complete, and the company is in the process returning to full supply, he added.
Wells Fargo’s Larry Biegelsen noted that diabetes sales of $610 million exceeded the consensus of $608 million and his organization’s $594 million forecast. Minimally invasive therapies and restorative therapies also outperformed expectations.
“MDT’s organic growth should accelerate over the coming quarters due to new product launches such as Micra AV, the surgical robot, Linq 2.0, the 780G diabetes pump, next generation Interstim, and renal denervation,” Biegelsen wrote in a research note.
Cowen analyst Joshua Jennings also was optimistic, citing an operating margin of 30.1%, above Street estimates of 29.2%, non-GAAP EPS of $1.44 and a cash flow increase of $2.1 billion, compared with the same period the previous year.
Despite the top-line shortfall, the quarter had its highlights. Medtronic received FDA approval of its Micra AV pacemaker with atrioventricular synchrony, as well as a second indication for In.Pact AV drug-coated balloon for arteriovenous fistulae in end-stage renal disease patients undergoing dialysis. “The Micra AV, which launched last quarter, is now in full steam and moving ahead well,” Ishrak said.
The company also scored an FDA nod for its Stealth Autoguide cranial robotic system, and CE mark approval for its Cobalt and Crome portfolio of Bluesync-enabled implantable cardiac defibrillators and cardiac resynchronization therapy defibrillators.
Turning to emerging markets, Medtronic recorded double-digit growth across all regions. Revenue from China and Southeast Asia grew 14%, while Eastern Europe jumped 17%, including 39% growth in Russia. Business in was also strong in South Asia, the Middle East, and Africa, up 13% each, and Latin America, up 12%.
Looking ahead, Ishrak noted additional approval and launches expected over the next few quarters. Among those are U.S. approval of the Cobalt and Crome devices, Interstim Micro and Interstim Surescan MRI leads and the Percept deep brain stimulation system. The company is also gearing up for the European launch of its Minimed 780G infusion pump and Diamondtemp ablation catheter, and plans to submit adult clinical data on the 780G with the FDA in March.
“The Diamondtemp ablation catheter CE mark, which we expect during the quarter, which would obviously be even more of a benefit in Q1 of next year, as well as we’re just in the early stages of the launch of the AV fistula indication for the Impact, … those will now get full quarter benefit during Q4,” said Michael Coyle, Medtronic’s group president for CVG.