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Morningstar | Medtronic Posts Solid Third Fiscal Quarter; No Change to Our Fair Value Estimate

Medtronic posted solid fiscal third-quarter performance that largely spanned the product portfolio; we haven’t made any changes to our assumptions and are holding steady on our fair value estimate. With organic quarterly top-line growth up 4.4%, third-quarter sales grew slightly slower than in the previous four quarters, though the firm faced an unusually robust comparable in the prior-year period. As is typical for Medtronic, adoption of novel products more than offset declines in older products. The firm’s steady release of new products and ongoing investment in its pipeline underscore our confidence in Medtronic’s wide economic moat.

We view Medtronic’s Heartware left ventricular assist device as the softest spot in the quarter--down in the mid-teens--as rival Abbott recently received the destination therapy indication on its competitive product. The improvements to and data published on Abbott’s HeartMate 3 have helped attract practitioner attention. Additionally, new heart transplant guidelines may be leading more patients to choose extracorporeal membrane oxygenation over LVADs, in order to gain priority for transplantation. We suspect the guideline changes could be a significant factor in reordering practitioner and patient behavior because even Abbott’s heart failure business in the U.S. fell 3% in the fourth quarter. It’s not yet clear how long this new usage pattern will last, but we think it could take at least a few years to gather data on outcomes.

We’re eager to see large-scale clinical results on Medtronic’s TYRX antibacterial envelope for cardiac rhythm management devices, expected in mid-March. While smaller-scale studies have hinted at impressive reductions in infection, if results from the WRAP-IT trial are favorable and can demonstrate cost savings by avoiding complications, we anticipate wider adoption of the TYRX product, and associated product pull-through on traditional CRM devices.

For more in-depth discussion of TYRX’s potential and possible upside for Medtronic, please see our report, "Medtronic’s Embrace of Value-Based Payments Is Reinforcing Its Wide Moat."

Finally, we’re pleased to see Medtronic’s diabetes franchise has a closed-loop insulin pump coming into view. The concept of an artificial pancreas has been around for a long time in healthcare, and Medtronic’s 670g hybrid closed loop took one major step toward realizing the goal for type I diabetics. However, even the 670g required the pump user to intervene with the release of insulin following meals or exercising. Now, the next-gen 780g is expected in fiscal 2020, and it would take another significant step toward closing the loop--i.e., acting like a healthy pancreas that adjusts the release of insulin with minimal input from the patient. This means the management of insulin could be further tailored to individual patients, and theoretically, this would keep blood glucose in healthier ranges more of the time, which would minimize the long-term complications of diabetes. The firm’s deep expertise and expansive data that goes into creating the algorithms in this device, along with its integration of Medtronic’s Guardian Connect continuous glucose monitors, will make it difficult for competitors such as Tandem to become a serious threat.