Updated August 23, 2011, at 10:00 a.m.
Profits for Medtronic Inc. (NYSE:MDT) ticked down during its fiscal first quarter, as new CEO Omar Ishrak makes his first substantial moves to reshape the company.
The Fridley, Minn.-based medical device giant reported profits of $821 million, or 77 cents per share, on sales of $4.05 billion for the three months ended July 29. That compares with income of $830 million, or 76 cents per share, on sales of $3.77 billion during the same period last year.
Analysts had expected earnings of 80 cents per share and weaker earnings for Medtronic’s $800 million spine division on the heels of a high-profile controversy over the safety of its Infuse bone growth product.
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The company’s operating performance during the first period of fiscal 2012 was “unsatisfactory,” Ishrak told analysts on a conference call. The company is sound, with a fine pipeline of products, but is run inefficiently, he said.
“For the revenue we had I was expecting some EPS growth,” he said. “We must look for new and creative ways to improve growth. … We need to understand, in granular detail, the barriers that block our products.”
As for his bid to usher the company further into the global marketplace, Ishrak said the moves are aimed at tuning up the Medtronic engine.
“I’m focused on delivering crisp and efficient operations,” he said. “My top priority is to align management team around single goal of growth.”
That extends to research and development, Ishrak noted. The company’s R&D spend is in line but not delivering enough growth, he said.
“The amount we’re spending is a reasonable amount right now, but we’re not getting the returns that this kind of spending deserves,” Ishrak said during the earnings call.
As expected, revenues for the core spine business were off nearly 5 percent, falling to $825 million compared with $829 million during Q1 2011. But the decline hit core spinal revenues rather than biologics sales, was only partially due to the Infuse foofaraw, to which the The Spine Journal devoted an unprecedented full issue in June.
Core spine sales dipped 5 percent to $610 million, but biologics sales rose to $215 million, up 2 percent on “revenue from the Osteotech acquisition, offset by accelerating declines in the sales of Infuse, especially following the recent publication of articles in The Spine Journal,” according to the company.
Sales of Medtronic’s bread-and-butter cardiac rhythm management products were up, rising 1.6 percent to $1.25 billion from $1.23 billion during the same period last year.* But sales of implantable cardiac defibrillators, a onetime workhorse for the company, dipped 8 percent to $697 million. Pacing revenues hit $508 million, up 1 percent. Medtronic said its overall CRM division’s sales “were affected by declining procedure volumes in the U.S. ICD market, which was partially offset by continued growth of AF Solutions and the continued roll-out of the Protecta ICD and Revo MRI pacemaker in the United States.”
“We estimate that the worldwide ICD market declined in the middle-single digits,” CFO Gary Ellis said during the call, adding that the company expects the CRDM business to continue to decline on a low-single-digit basis; the division’s remaining units should post growth rates in the high single digits for the rest of the year, Ellis said.
The company held fast to its guidance for the rest of fiscal 2012, predicting revenue growth between 1 percent and 3 percent and diluted earnings per share of $3.43 to $3.50. Free cash flow hit $1 billion during the quarter, Ellis said, and Medtronic could book as much as $4 billion by the end of the year.
“In order to drive growth, we will be focused on three key imperatives – improving execution, optimizing innovation, and accelerating globalization,” Ishrak said. “As a company, we need to better adapt to our changing environment. We will significantly change the way we prioritize products in our pipeline, placing the highest emphasis on our ability to demonstrate not just clinical value, but economic value at both the customer and societal level. Ultimately, our goal is to use technology to both improve the standard of care and reduce healthcare costs, providing greater access to our therapies for the billions of people who are currently underserved. When we do this, we believe growth will improve.”
The new chief executive revealed his move to reshape the company, first reported by MassDevice this morning, in an email sent to employees last week. The most dramatic moves concern expanding Medtronic’s global footprint by creating eight geographic regions: the U.S., Western Europe/Canada, Latin America, Greater China, Asia (including Japan), India, Middle East/Africa and Central and Eastern Europe.
“Our goal is for each of the eight Regions to have direct representation on the Business Unit leadership teams,” he wrote. “As such, we will be phasing out the International General Manager (IGM) roles. In areas where we do not have dedicated Business Units represented within the geographies we will work with the current IGMs, the Business Unit leaders and the geography leaders to develop a transition plan. More detailed information will be communicated by the Group EVPs to their respective organizations. New assignments for the IGMs will also be communicated soon.”
Wall Street’s initial reaction to the news was positive. MDT shares were trading at $31.85 as of about 9:50 today, up nearly 2.2 percent.
*Correction, August 23, 2011: Due to a reporter’s error, this stroy originally reported that CRM sales fell 1.6 percent; they instead rose by that amount. Return to the corrected sentence.