The long awaited issue of Medtronic’s (MDT) warning letters from the US Food and Drug Administration (FDA) has finally been resolved. The letters were issued in relation to its Mounds View facility (received in November 2009) and manufacturing facility in Juncos, Puerto Rico (June 2009).
The resolution of the warning letters is significant for Medtronic as this paves the way for the US launch of Revo MRI SureScan pacemaker and Protecta ICDs. The Mounds View manufacturing facility is taken as the headquarters of the company’s largest business segment – Cardiac Rhythm Disease Management (CRDM). The Puerto Rico facility serves as the manufacturing location for the Neuromodulation, Diabetes and CRDM businesses.
Medtronic’s CRDM segment has been recording declining revenues due to slower market growth and pricing pressure. In the third quarter of fiscal 2011, this segment generated $1,221 million in sales, down 1.8% compared to the year-ago period’s $1,243 million. Revenues are derived primarily from Pacing Systems and Defibrillation Systems, which were $450 million (down 2.0% year over year) and $735 million (down 2.8%), respectively.
The US ICD market declined in low-single digits with pricing recording mid-single digit decline. However, Medtronic expects the pricing scenario to improve with the launch of Protecta in the US and expansion of CRT-D indications in the US.
While Protecta is yet to be launched in the US, it continues to perform very well in Europe, which had a positive impact on market share and pricing scenario. Moreover, the company has submitted results from its RAFT trial to the FDA, which revealed that CRT-D therapy has lowered the mortality rate in symptomatic heart failure patients.
Overall the market for the pacing systems declined in mid-single digits in both the domestic and international market during the last reported quarter. The decline in the US pacing business was due to pricing pressures. Medtronic is satisfied with the initial launch of Revo MRI SureScan pacemaker (FDA approval in February 2011) and expects the product to drive market share in addition to improvement in pricing.
We expect the successful launch of Revo MRI pacemaker along with a probable launch of Protecta in the US in the near future to help generate higher revenues from the CRDM segment. Medtronic expects its fourth quarter CRDM growth rate to come down by 500 basis points based on difficult comparison. In the fourth quarter of last year, Medtronic benefited from the shipment halt of its competitor, Boston Scientific (BSX).
We maintain our ‘Neutral’ recommendation on the stock, which also corresponds to the Zacks #3 Rank (hold).
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