Highlights From MDT's Q3 Conference Call: U.S. Revenues up 5%, International Sales Up 13%; Guides Above for FY10

November 24, 2009 1:19 PM EST

Medtronic Inc. (NYSE: MDT) reports Q3 EPS of $0.77, ex-items, 3 cents better than the analyst estimate of $0.74. Revenue for the quarter was $3.84 billion, which compares to the estimate of $3.75 billion. Shares are flat on the session.

Highlights From MDT's Q3 Conference Call:

• Sees FY10 adj-EPS of $3.17-$3.22, versus the consensus of $3.15.
  
• (CEO) We reported Q2 revenue of $3.8 billion, which represents an 8% increase over the prior year after adjusting for a $60 million unfavorable impact from foreign currency.
  
• While we have felt an impact from the macroeconomic environment, our initiatives over the past couple of years to resolve outstanding IP litigation, reduce product costs and reallocate resources towards faster growing markets and geographies are clearly making a difference.
  
• Looking further out, we will deliver new technologies to close the loop to dramatically simplify the management of diabetes.
  
• Next, let me say a few things about quality. While we have had our issues there is nothing more important to us than quality. We were clearly disappointed to receive a warning letter in CRDM following the inspection of our CAPA Sigma field action in the summer. However, we are working diligently with the FDA to resolve this in an expeditious manner. At this time, we do not anticipate any impact to our customers or patients or to delivering on our pipeline commitments.
  
• Cardiac Rhythm Disease Management. Growth was inline with our expectations. I was particularly pleased with our ICD results.
  
• In the U.S. we did not experienced a slowdown in customer buying patterns. ASP pressure remained in the low single digit range consistent with what we have seen in previous quarters.
  
• In AF Solutions, I am very pleased with the progress we are making. Earlier this month we've reached the one year anniversary of our CryoCath acquisition.
  
• Turning to Cardiovascular. The business delivered another strong quarter, growth was balanced across all segments of the business. We gained momentum in our Coronary franchise continue to successfully integrate our transcatheter valve acquisitions and posted another quarter of exceptional growth in our Endovascular business. In Coronary our stent share remained strong.
  
• Turning to spinal and biologics. The overall market remains robust with growth of approximately 10% in the U.S. and low teens growth in international markets.
  
• Over the next 12 months, we will launch two new postero fixation systems.
  
• Looking at our business from a geographical perspective, our international sector delivered yet another quarter of strong double-digit growth.
  
• (CFO) Revenue in the U.S was $2.297 billion up 5% while sales outside the U.S were $1.541 billion increasing 13%.
  
• Q2 fiscal year 2010 was impacted by two items that we have reconciled for our non-GAAP results. First, we recorded $70 million gain related to the resolution of outstanding patent litigation with W.L. Gore & Associates related to selected patents in Medtronic's Jervis and Wiktor patent families.
  
• Second, $41 million of non-cash interest expense was recorded in Q2 in accordance with our adoption of the new convertible debt accounting rules.
  
• Pacing revenue of $498 million declined 2%. We were able to maintain share despite a slowdown in Japan where we continue to feel pressure from the previously announced Kappa Sigma field action. We are excited about the anticipated launches of EnRhythm MRI in the U.S. and Advisa MRI in the international markets this coming summer.
  
• Cardiovascular revenue of $696 million grew 18%, coronary revenue of $369 million increased 18% and we estimate that our worldwide unit share for all coronary stems is above 20%.
  
• International coronary grew 21%, reflecting the continued momentum of our Endeavor launch in Japan, which again contribute over $30 million in revenue this quarter.
  
• Structural Heart revenue of $206 million grew 11%, driven by 24% growth in international markets on the strength of our CoreValve transcatheter valve. CoreValve continues to maintain greater than 75% share in the transfemoral TCV market.
  
• Endovascular revenue of $120 million grew 28%. The impressive 43% growth in international markets was driven by ongoing success of our next generation Endurant abdominal stent graft.
  
• Core Spinal revenue of $642 million, with 2% driven by strength in our international business, which grew 10%. International results were aided impart by a full quarter of sales in our Weigao joint venture in China.
  
• Neuromodulation revenue of $384 million increased 12% driven by continued strength in deep-brain stimulation and gastro-uro. Revenue in our DBS business grew in the mid 20% range.
  
• Diabetes revenue of $300 million grew 11% driven by continued strength in our CGM franchise. Positive results from several studies, including the ONSET Trial and the REAL Trend Study, continuing to build evidence of the benefit of Sensor-Augmented Pump Therapy.
  
• Finally, Physio-Control revenue of $94 million increased 24%. Turning to the rest of the income statement, the gross profit margin was 76% compared to 75.3% in Q2 of fiscal 2009.
  
• Q2 R&D spending of $369 million represents approximately 9.6% of revenue compared to $326 million or 9.1% of revenue in Q2 of fiscal 2009.
  
• Q2 SG&A expenditures of $1.323 billion represented 34.5% of sales, compared to 35.4% of sales in Q2 of last year. SG&A expense benefited from our ongoing SG&A initiatives to leverage our facilities in IT expenses.
  
• Looking ahead, based on current FX rates, we anticipate hedging losses of 60 to $90 million per quarter over the remainder of the fiscal year with more impact in Q4 than in Q3. Taking this into account, we anticipate net other expense will be in the range of 190 to $220 million per quarter during the remainder of the fiscal year.
  
• As of October 30, 2009 we had approximately $4.7 billion from cash and cash investments. Looking ahead, we expect our cash to continue to increase; however, lower interest rates will negatively affect our return on the cash.
  
• We expect our fiscal year 2010 tax rate exclusive of one-time adjustments to be in the range of 21% to 22%.
  
• (Q&A) Two questions here, first, I just wanted to get a timing update on two issues, could you just talk a little bit about the timing of the potential hiring of new cardiovascular division head and when we might extract some news flow there. And then also, can you give us an update on the timing of your AF cryo data. And then I have a question on CRDM? (A)So, on the, the group EVP or President and we are moving along nicely and I will let you know as you soon as things are confirmed. But I am pleased by the interest, there is some very good people that I have been talking, but I will let you know when that happens. In regards to the AF, in terms of the clinical, in terms of the data, we are still hopeful that we will be able to have CryoCath for the first part of
  FY'11 and have the AFI by say this, the second quarter to second half of FY'11.
  
• And then just to follow up on your comments on CRDM, especially on the pricing front, given some of the previous commentary. Bill can I ask you just to kind of, walk through your comments on exactly where pricing was for both ICDs, and then separately pacemakers in the quarter? And how that might have differentiated from recent trend that you've seen? And just say, your comments on where you think pricing is going in the marketplace as well? That would be very helpful, thanks. (A)Starting with ICDs as I commented that for the quarter, we saw ICD prices and off and the low single digits. And this reflects the value of innovation, as we're able to bring forth new products like the attain family of heart -- left side of heart leads that helped us to offset pressures in other areas and net-net, we've been able to manage prices in that very low single digits on the ICD side.
  
• So then just to sum it up, your opinion on pricing is really that not much has changed in your CRDM business from what you have seen historically, is that a fair characterization? (A)That's overall a fair characterization except for the pacing side, I would say we've seen a little bit more impact on pacing recently, but as I mentioned, I think that in part reflects the fact that we haven't seen the - any new products come out of consequence in the last year or so and - but again historically what's enabled us to be able to manage prices has been that the timing of new products.
  
• Gary, could you start on the SG&A side, we've all been focused here over the last several quarters and in this quarters you did a particularly good job of generating leverage, so let's hope you could give us some incremental insights into the progress there? (A)Well as you said,Mike, we've been pleased with our progress on the operating leverage side both on the cost of sales and the SG&A where we continue to focus a lot of attention. As I mentioned in some of my comments there is a lot of programs there impacting SG&A that we've been driving across organization.We've been obviously focused on IT cost, consulting facilities, improving processes across the organization as we look at that and as you know we have had kind of a restructuring of the organization over the last couple of years 2008 and 2009 where we have reduced the resources in some of those functions and some of the areas and as a result that has taken the cost down and we are starting to see the benefits of that more here in this quarter as we kind of expected and we would expect that we will continue to see those benefits as we move ahead.So there is a lot of things obviously affecting the SG&A that we are trying to manage and so we are making a lot of progress in a lot of categories, the one that we're not as I mentioned in my comments is we have a little bit of a headwin that we are fighting right now on the legal expense side which is been higher for us over the last couple of quarters here as I mentioned in my comments 30% uplift, really related to this government scrutiny across the industry which is really a direct cost. So even with that, we've been able to as you see the 80 to 90 basis point improvement in SG&A, we're continuing to focus on as a company and we have the plans in place to deliver on that even sighting some of the headwins we are finding.
  
• Bill, just looking at what's on the table in the various Senate and House bills, do you expect the likely outcome with higher or similar reimbursement pressure across the Medicare and commercial side or at least over the next several years? (A)Well, if you look at in this whole healthcare reform both the House and the Senate, I would tell you that I think that the one stakeholder who is I think - everybody is participating here, but the hospitals to some degree have I think got to fair with the best [ph]. Their plan is to kind of bend the cost curve, so over the next 10 years, they will slow the rate, if you will, of increase. They're not going to cut, they just going to slow the rate of increase. And so, I mean, yes we will see pressure as we do every year as hospitals are looking to better manage their enterprise. But I don't think you're going to see anything sort of unusual or you'll see any inflection, because of the healthcare reform.
  
• And then my next question kind of follows up with Mike and Bob's question regarding a couple spine segments. So the kind of subterranean talk that we've been hearing pertains to the CMS questioning reimbursement for InFuse and/or kyphoplasty on an in-patient basis. Do you feel what the -- on InFuse side that the -- regulatory approvals that are in the queue will basically protect that franchise from any kind of chance or reimbursement? And is there anything going on with regards to kyphoplasty reimbursement in the U.S? (A)On InFuse, as I've mentioned, we have eight clinical studies underway to expand indications, the most important being the AMPLIFY, with posterior lateral indication, which I was said will be out. We hope in the first part of FY'11. So, I am pretty optimistic that the Biologics are in good shape going forward. We've got a lot in hopper there to really protect that franchise going forward.

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