By Joseph Walker
Medtronic Inc., which is preparing to complete a $43 billion
merger with Covidien PLC, said its revenue increased 4.1% in the
quarter ending in October, even as competitive pressures weighed on
sales of two important product lines.
The merger, combining two of the world's largest
surgical-implant and hospital-supply companies, remains on schedule
to close in early 2015, Chief Executive Omar Ishrak said on a
conference call with analysts. The companies plan to hold a special
meeting in January to seek shareholder approval of the merger.
Medtronic's planning teams are working to ensure the company is
able to reach its goal of reducing costs by a minimum of $850
million annually, before taxes, by the end of its fiscal year 2018,
Mr. Ishrak said
The company is looking to reduce costs by eliminating duplicate
facilities, "administrative redundancies and other back office
functions, " Mr. Ishrak said.
Medtronic reported earnings of $828 million for the quarter
ended Oct. 24, down 8.2% from $902 million a year earlier. Earnings
per share were 83 cents, down 6.7% from 89 cents a year ago. Profit
was hurt by a $100 million donation to the company's nonprofit
charity organization, the Medtronic Foundation, and $61 million in
costs related to the Covidien acquisition.
Excluding these charges, per-share earnings were 96 cents,
compared with 91 cents a year earlier.
Revenue rose 4.1% to $4.37 billion from $4.19 billion a year
earlier on the strength of sales growth in the company's pacemakers
and structural heart products.
Sales of Medtronic's implanted cardiac defibrillators, or ICDs,
fell 6% to $670 million, down from $713 million a year earlier.
Analysts said sales were hurt by competitive pressure from Boston
Scientific Corp. and St. Jude Medical Inc., rivals that have
increased their market share with new product launches. Medtronic's
Mr. Ishrak said the company continues to face lower selling prices
for its devices, which are used to treat irregular heartbeats, amid
pressure from hospital customers.
Shares of Medtronic rose 3.7% to $71.84 in midday trading on the
New York Stock Exchange.
Danielle Antalffy, an analyst with Leerink Partners LLC, said in
a note to clients that Medtronic's lower-than-expected ICD sales
may "indicate a slightly slower recovery in one of [Medtronic's]
largest businesses." The devices represent about 15% of Medtronic's
total sales.
Medtronic received U.S. regulatory approval in August for a new
type of defibrillator that it says reduces side effects, and which
analysts expect will help the company better compete against
rivals.
"The only way you mitigate that pricing pressure is to keep
coming out with new products and new features that people are
willing to pay for from a value perspective," Medtronic Chief
Financial Officer Gary Ellis said in an interview.
Sales of Medtronic's nonsurgical heart valves, which have been
one of the company's faster-growing product lines, were $131
million, unchanged from the $131 million the company reported in
the first quarter of this fiscal year. Some analysts had expected
sales to be as high as $160 million after competitor Edwards
Lifesciences Corp. reported sequential sales growth of 21.6% in the
quarter ended Sept. 30.
Mr. Ishrak attributed Edwards's growth to a recently launched
heart valve in the U.S. that comes in a greater variety of sizes,
which expanded the company's patient base. Edwards and Medtronic
are the only companies that sell the so-called transcatheter valves
in the U.S., and Mr. Ishrak estimated that Medtronic now has 40% of
the U.S. market.
Medtronic's market share will increase as the company expands
the number of hospitals trained in using its valves, Mr. Ellis
said. Roughly 200 hospitals are trained in using Medtronic's
valves, compared with 400 hospitals trained to use Edwards's
valves, he said. Medtronic expects to reach 400 trained sites by
next April or May, Mr. Ellis said.
Medtronic's plan to buy Covidien, based in Dublin, has drawn
scrutiny over a tax tactic criticized by U.S. government officials.
The acquisition plan involves Medtronic reincorporating from
Minneapolis to Ireland, which would lighten the company's tax
burden.
Medtronic backed its earnings outlook for the year and said
revenue would grow in a range of 4% to 5%. The company had
previously said it expected revenue growth of 3% to 5%.
Write to Joseph Walker at joseph.walker@wsj.com
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