Medtronic shares jump on signs its markets are improving

Tue Nov 20, 2012 11:49am EST

(Reuters) - Medtronic Inc (MDT.N), the world's largest maker of medical devices, reported lower quarterly earnings as legal and other expenses ate into profits, but signs that its key heart and spine markets were stabilizing sent its shares higher on Tuesday.

Medtronic, a maker of implantable heart pacemakers and defibrillators, insulin pumps and devices used in spinal surgery, said its net earnings were $646 million, or 63 cents per share, in its fiscal second quarter that ended October 26, down from $871 million, or 82 cents per share in the year-ago period.

Excluding one-time items, earnings were 88 cents per share, matching analysts' average forecast.

Quarterly revenue increased 2 percent to $4.095 billion.

Yet revenue from its two biggest businesses, heart rhythm management and spine, was flat to lower.

The bright spot in the quarter was provided by indications that these two markets - which together make up about half of its total revenue - were stabilizing, said Chief Executive Omar Ishrak in a telephone interview.

"Signs of stabilization in (cardiac rhythm management) and spine have been encouraging. In those markets, we have gained share," he said.

Cardiac Rhythm Disease Management revenue, which includes sales of pacemakers and defibrillators, was flat at $1.23 billion, excluding the impact of foreign currency, or down 3 percent including the currency impact.

Sales of implantable heart defibrillators were the highest they have been in 10 quarters and sales of leads rebounded to levels not seen since the company recalled its Fidelis lead 5 years ago.

Spine revenue was $782 million in the quarter, 5 percent lower excluding foreign currency translations, or down 7 percent including the currency impact.

Ishrak said his biggest disappointment in the quarter was China's results.

"Chinese growth was 11 percent.. That could have been better," he said.

Medtronic's recent acquisition of Chinese orthopedics device maker Kanghui Holdings should help bolster growth, he added.

The company reiterated its outlook for earnings of $3.62 to $3.70 per diluted share for fiscal 2013. The company said it expects revenue growth of 3 percent to 4 percent, excluding the impact of foreign currency for fiscal 2013. The company had previously provided a revenue growth outlook of 2 percent to 4 percent.

A CONSERVATIVE OUTLOOK

Ishrak characterized the outlook as conservative, noting there are many uncertainties in the United States and in Europe that could trip up the company's performance in the remainder of its fiscal year.

He expressed concern about a decline in medical procedures in Europe, the potential for pricing pressure on its medical devices, the possibility of sequestration and the impact of the Affordable Care Act in the United States.

"There's a lot of uncertainty," Ishrak said.

Analyst Jeff Jonas of Gabelli Health and Wellness Trust Mutual Fund, which owns Medtronic shares, called the quarter "solid" and sees the company as being conservative in its forecast.

"They are not assuming anything gets better in the second half (of Medtronic's fiscal year)," he said.

Josh Jennings, an analyst with Cowen & Co., said the outlook is reasonable given all of the challenges around the world, including a slowdown in economic activity in Europe and the United States, which would likely lead to fewer medical procedures.

"The two anchors that have been pulling down top-line performance are spine and the ICD franchise....and declines in those divisions are moderating and that should continue," said Jennings, who has an "outperform" rating on Medtronic shares.

Medtronic shares were up 57 cents to $42.38 in midday trading on the New York Stock Exchange.

(Reporting By Debra Sherman; editing by John Wallace, Maureen Bavdek and Gunna Dickson)

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