In order to further strengthen its position in the emerging markets, Medtronic (MDT) has opened its new regional headquarters in Shanghai, China. This will enable the company to better cater to the needs of this region through local product development.
During the third quarter of fiscal 2011, Medtronic’s international operations generated $1.7 billion in revenues, a growth of 5% compared to the year-ago period. International operations accounted for 43% of total revenue. Barring Japan, which recorded a decline of 7% annually, the other regions of Greater China (29%), Middle East and Africa (13%), Latin America (28%), other Asia (8%) Canada (1%), Europe and Central Asia (6%) recorded robust growth.
Emerging markets have been the key focus area of the company in the past few quarters. Revenues from this region recorded a 26% growth ($350 million) during the last reported quarter and represents 9% of total revenue. In 2008, Medtronic had made a 15% equity investment in Weigao Group of China, which is a leading medical devices player and also formed a joint venture with Weigao. The company also opened its first patient care centre in Beijing in August 2010.
Based on strong growth in India, Brazil and China, where health care has become a national priority, revenue contribution from emerging markets is expected to exceed 20% over the next five years. In addition to establishing its new China headquarters in Shanghai, a manufacturing facility in Singapore will be opened later this fiscal, to take advantage of the immense potential of the region.
Recommendation
Medtronic recorded a 3% growth in revenues during the third quarter although sales continued to decline in its largest segment, CRDM. However, breaking the trend of the past few quarters, the Spinal segment recorded higher revenues. This segment should benefit gradually from the recent product launches and an improvement in the economic scenario.
Meanwhile, Medtronic is increasing its focus on emerging markets and emerging therapies and expects these to be major growth drivers going ahead. However, the company operates in a highly competitive environment with the presence of players such as Boston Scientific (BSX) and St Jude Medical (STJ) among others and is exposed to the risk of currency movement.
We maintain our Neutral recommendation on the stock which also corresponds to the Zacks #3 Rank (Hold).
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