Medical Device Daily National Editor

Medtronic (Minneapolis) yesterday issued its earnings report for 1Q09 (ended July 28), reporting revenue of $3.706 billion, a 19% increase over 1Q08 revenue of $3.127 billion, and 72 cents in earnings per share – the latter ahead of analysts' expectations of 69 cents EPS.

Adjusted earnings were $813 million and 72 cents EPS, increases of 14% and 16%, respectively. As reported, net earnings for the first quarter were $747 million, or $0.66 per diluted share, an increase of 11% and 12%, respectively, over the same period in the prior year. Currency translation had a positive impact of $157 million to 1Q revenue, the company said.

Analysts were not particularly awed by the report, some suggesting it showed progress for the company in staying on track in producing profits, but indicating also a certain wait-and-see attitude concerning the company's full fiscal year.

However, in an early morning conference call yesterday, Bill Hawkins, company CEO – and newly named chairman of the company, effective tomorrow, to replace Art Collins (Medical Device Daily, June 30, 2008) — showed no hesitance concerning the report's significance, saying that it indicated another strong quarter and "further demonstrating our commitment to deliver market-leading performance."

He called the increase an indicator of "momentum" from the company's FY08 report, putting the company in good position for the rest of the fiscal year. He cited, in particular, "a 25% increase in operating income."

If the report does point to another good year for Medtronic, it shows that the company is being relatively impervious to the turmoil and downturn marking both U.S. and global economies.

It would be easy to generalize here, that healthcare as a sector is able to swim against the current currently eroding other sectors of the economy – or that people continue to need healthcare, no matter what other cutbacks they may have to make in their lives.

But the company's results may be fairly particular – that it is an organization with both strong products and solid management performance.

This past May the company took the unhappy step of reining in employee costs, unveiling plans to cut 1,100 jobs worldwide this year to realign operations, especially where growth had slowed somewhat in its cardiovascular and spinal sectors, while adding positions in its neuromodulation business. The moves also will involve shifting some operations to Mexico.

However, the current report indicates rebounding strength in the spinal and cardiovascular products sectors – also indicating the company's wisdom in putting its emphasis on two strong, and traditional, med-tech staples.

The company's spinal revenue provided the best news overall for the quarter, growing 33% to $859 million, driven largely by products from Kyphon (Sunnyvale, California), and showing the wisdom of the company's purchase of that firm last November for $3.9 billion (MDD, Nov. 7, 2007).

In particular, Kyphon – itself a recent active acquirer of med-tech companies – contributed $161 million in quarterly revenue. And excluding its contributions, the growth in spinal would have been just 8%, the company noted.

Medtronic said the result in this sector shows effective push-back to increasing competition in the "core" spinal category.

Another important growth driver was sales of the company's recently released Endeavor drug-eluting stent (DES) – the first second-generation DES approved in the U.S. and taking market share from the initial products in that sector — the company reporting a 173% increase in sales, and a total of $81 million in the U.S.

Some analysts noted a potential shadow cast on the entire DES sector following last week's report in the New England Journal of Medicine indicating the use of drug treatment as just as effective, or better than, the use of DES devices for the treatment of chronic coronary pain.

This is not big news for the sector, however, given previous reports of medical/drug treatment as effective, and so far not impacting either the reimbursement environment or patient awareness.

Also not constituting big news are the continuing patent battles between Medtronic and other major makers of the DES devices.

The company also reported coronary vascular revenue of $349 million, a growth of 41% globally. Revenue from endovascular products increased 26%, driven by the sale of thoracic products in markets outside the U.S. and new product launches in the U.S.

Cardiac rhythm disease management (CRDM) revenue was $1.303 billion, growing 6%. Revenue from implantable cardioverter defibrillators was $764 million, up more than 5%. Pacing revenue of $526 million in the quarter increased 7%. Outside the U.S., CRDM revenue grew 19%, driven by growth in ICD product lines, the company said.

A continuing speed bump for the company is an ongoing problem in its Physio-Control (Redmond, Washington) unit, which over the past several months has been unable to resolve the FDA's concerns about quality issues.

In May, Physio-Control signed a consent decree with FDA that prohibits the manufacture, distribution and export of specified AEDs at or from its facility in Redmond until the devices and facilities have been shown to be in compliance with the FDA's current Good Manufacturing Practice (cGMP) requirements.

Before the problems at the facility, Medtronic had reported that it planned to spin off Physio-Control (MDD, Dec. 5, 2006), but those plans have most likely been put on indefinite hold.

Medtronic said that Physio-Control is continuing to attempt to resolve these issues so that it can resume "unrestricted" product distribution. That business still was able to post revenue of $95 million for the quarter.

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