Second-quarter profits for Medtronic Inc. (NYSE:MDT) plunged 34.8 percent, largely due to its settlement of a slew of lawsuits over its defective Sprint Fidelis pacemaker leads.
Last month the company agreed to pay $268 million to settle the lawsuits without admitting any liability. Medtronic pulled the leads in October 2007, but not before they were implanted in an estimated 268,000 patients. Because of fractures in the wires, defibrillators could either fail to deliver the shock needed to regulate a haywire heartbeat or send unneeded shocks. The defective leads are implicated in more than 100 deaths, although Medtronic has said that only 13 fatalities had the leads as a “possible or likely contributing factor.”
The settlement made up the bulk of a $278 million (or 26 cents per share) charge during the three months ended Oct. 29. Medtronic reported profits of $566 million, or 52 cents per diluted share, on sales of $3.90 billion during the quarter. That compares with profits of $868 million, or 78 cents per diluted share, on sales of $3.84 billion during the same period last year — a top-line increase of 1.7 percent.
In addition to the Sprint Fidelis settlement, second-quarter profits also took a hit from the $370 million acquisition of ATS Medical Medtronic closed in August, which resulted ina $16 million ( per share) charge during the quarter. (Late yesterday Medronic announced another acquisition, an $800 million buyout of cardiovascular device maker Ardian Inc.)
“Overall, we saw relative market stability from July through October in a challenging market environment with more consistent performance in our businesses, resulting in sequential share gains in ICDs, pacemakers, spine, and drug-eluting stents,” president and CEO Bill Hawkins said in prepared remarks. “While macroeconomic challenges remain, we continue to advance our pipeline, drive growth in emerging markets and with our emerging therapies, and remain focused on leveraging our size and scale to reduce our cost structure. This positions us well for solid, market-leading performance in the long run.”
As it seeks higher growth in China and new therapies like transcatheter heart valves while trying to optimize its core cardiac rhythm disease management businesses business, the company is going through a transition.
“There has been a lot of reshaping of the business over the last few years,” CEO Bill Hawkins told analysts during a conference call. While still investing in pacemakers and implantable cardioverter defibrillators, “we’re not counting on it for the real upside growth.”
CRDM revenue during the second quarter fell about one percent to $1.25 billion from the same period a year ago with ICD and pacemaker sales declining one percent and five percent respectively.
Medtronic officials blamed the results on a weaker global healthcare market, falling prices, and greater hospital cost controls. But some of the company’s wounds were self-inflicted.
In September, the Food and Drug Administration sent the company a warning letter regarding its manufacturing facility in Mounds View, Minnesota. The letter is holding up key product launches like the Revo MRI-friendly pacemaker and Protecta defibrillator at a time when rivals St. Jude Medical Inc. (NYSE:STJ), based in Little Canada, Minnesota, and Boston Scientific Corp. (NYSE:BSX), based in Natick, Massachusetts but with major operations in Arden Hills, Minnesota are seizing some momentum in the market, analysts say.
“Market share trends are working against MDT in CRM,” David Lewis, an analyst with Morgan Stanley, wrote in a recent research report. “Both BSX and STJ have ongoing product rollouts driving unit share and positive mix while MDT’s Protecta platform remains held up by the Mounds View warning letter, leaving MDT without a mix or unit share driver.”
“Given the Mounds View warning letter is unresolved, the potential impact of new product launches on prospects for FY11 continues to diminish,” Lewis wrote. “Moreover, MDT has launched its new products in Europe, but at this point neither the Protecta ICD launch or the ongoing MRI compatible pacemaker rollout appear to have been market share drivers there through 2Q10 for MDT.”
Hawkins emphasized the company’s continued focus on emerging markets and innovation. He offered specific color on China, which now generates about $1.2 billion in annualized sales (about the equivalent of its quarterly CRDM revenue) and is growing about 20 percent a year. Medtronic recently opened a patient care center in Beijing and will soon debut its new China headquarters in Shanghai.
“In this new, changing healthcare environment, size and scale will be key to winning,” Hawkins said. “The underlying demand for our products is still there.”
Medtronic said it expects sales growth of between 2 percent and four percent for the rest of fiscal 2011, with diluted earnings per share of $3.38 to $3.44.
MDT shares were up 0.29 percent to $34.70 in pre-market activity.
Material from MedCity News was used in this report.