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Morningstar | Medtronic Wraps Up Fiscal Year With Solid Results; No Change to Our FVE

Medtronic posted strong fiscal fourth-quarter results that largely met our full-year top-line expectations and nearly hit our expense projections on the nose. We expect to leave our fair value unchanged once we roll our model and make slight near-term adjustments to our projections. While revenue growth in the cardiovascular group fell slightly short of our expectations, this was offset by stronger-than-expected growth from the minimally invasive and restorative therapies groups. We remain confident in the firm’s wide economic moat, which is supported by continued adoption of innovative products, and a steady stream of new products in the pipeline across therapeutic areas.

Though Medtronic’s spine business has been characterized by a slow decline over this decade and we’ve long been pessimistic about this market, in general, we think the addition of the Mazor robot could change the script and spur sustained growth again for the spine unit. Similar to Stryker’s strategy with the Mako robot for hip and knee replacements, Medtronic acquisition of Mazor provides a market-leading footprint in the emerging area of spine robots. We think the robot will contribute to spine product pull-through and afford opportunities to shift practitioners over to higher-margin consumables. As we have discussed in the past with joint replacement robots, it is currently difficult to assess whether the spinal robot leads to better patient outcomes. It will take years to collect clinical data demonstrating the effect, one way or the other. Nonetheless, as with knee replacements, there is a sizable group of patients who are dissatisfied with their outcomes. We think this will contribute to appetite among spine surgeons to try out the technology. Adoption should also be bolstered by the secular shift from open surgeries to minimally invasive spine procedures, which are most likely to benefit from the real-time imaging and precision that robots offer.

We found a few other issues from the quarter intriguing. First, favorable registry data on Medtronic’s Symplicity renal denervation procedure for hypertension was shared last month. Three years after the procedure, decreases in systolic blood pressure (the number on top) have been sustained. This bodes well for the pivotal trial currently underway and we expect to see initial data next spring. Medtronic remains in the renal denervation lead, and we think the uncontrolled hypertension market could be $3 billion-$5 billion.

Second, we continue to think Medtronic’s risk-based contracting on its Tyrx antibacterial envelope has helped insulate the firm from competition. Although the fiscal fourth-quarter decline of 4.2% in U.S. cardiac rhythm management and heart failure was disappointing, we contrast this with the 12% domestic decline that Abbott saw in its CRM business last quarter. At this point, it appears that Boston Scientific is gaining CRM share, with Abbott bearing the brunt of the loss, and Medtronic less so.

Third, Medtronic is on track to implant its first in-human Intrepid transcatheter mitral valve replacement via transseptal delivery by the end of the year. The firm is already well into its pivotal Apollo trial, with transapical delivery (entering between the ribs and upward through the left ventricle). While the firm is ahead of most competitors from a timing standpoint, consensus among research thought leaders in interventional cardiology has been shifting toward transseptal delivery, based on the lower levels of successful outcomes we’ve seen with transapical transcatheter aortic valve replacements. Considering the bulkier stent-in-stent design of the Intrepid TMV product, we’ve been tempered in our expectations of how well the product can be re-engineered for transseptal delivery, which requires a number of very tight turns to navigate the left atrium to reach the mitral valve. For more detail on our analysis of transcatheter mitral valve technology, please see “Matters of the Heart: Revisiting Transcatheter Mitral Valve Devices.”