Medtronic, Inc.
(MDT) has recently warned doctors that approximately 6,300 of the company’s implanted heart devices have battery drainage problem that might reduce the life-span of these batteries. Certain batches of Medtronic’s Concerto and Virtuoso devices manufactured in 2006 are affected with this problem. The company’s share reacted negatively to this news with the price declining roughly 2.8% to $37.90 at the end of Sep 11, 2009.

Concerto is a CRT-D (cardiac resynchronization therapy defibrillator) that enables the lower chambers of the heart to pump blood at the same time. Virtuoso is an ICD (implantable cardioverter defibrillator) that takes care of abnormal heart rhythms.

The affected batteries might have to be replaced a few months earlier than their normal life-time. The drainage problem has not resulted in any safety problems and there is no risk of a sudden power loss yet. Furthermore, no injuries have been reported to date. Medtronic will start sending warning letters to patients later this month.

We think that the battery manufacturing defect will only have a temporary impact on Medtronic’s operational performance. The long-term strong fundamentals of the company remain intact.

Medtronic is one of the world’s leading medical technology companies, specializing in implantable and interventional therapy devices and products. The company’s main competitors include St. Jude Medical (STJ) and Boston Scientific Corporation (BSX).

Medtronic’s management has a typical ‘ONE Medtronic’ approach that encompasses the following goals: drive sustainable long-term growth of 9%-11% through innovation; focus on operating margins — increase by 300 to 400 basis points; EPS growth of 11%-14% and return a minimum of 40%-50% of free cash flow to shareholders annually; and align the organization for consistent execution.
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