Medical device firm Medtronic Inc. turned in a solid quarter of growth and saw its stock price quickly rise Tuesday in what could turn out to be its last earnings report as a U.S. company.
Fridley-based Medtronic is speeding toward its $42.9 billion acquisition of Dublin-based surgical supplier Covidien — a deal that will relocate the combined health care giant in low-tax Ireland. Despite opposition from U.S. tax officials, the deal is slated for a Jan. 6 shareholder vote.
Legal hurdles still remain for the tie-up, including getting antitrust approval from three major entities and prevailing in litigation seeking to upend the deal. But if Medtronic executives were concerned about those factors, they didn't show it in comments to investors and reporters on Tuesday. After all, the proposal has already survived a change in U.S. tax law designed to make corporate inversions like Medtronic's more Âexpensive.
"We've stated quite consistently and clearly that we are completely committed to the deal," Medtronic Chief Executive Omar Ishrak said in an interview Tuesday. "We feel the economic benefits of the deal far outweigh the Âpenalty. We have done that analysis, we have been clear about our strategy going forward and we have taken action to execute that Âstrategy."
No antitrust problems seen
Medtronic and Covidien both draw from large product portfolios, but executives see little risk of antitrust problems because they say the firms' products offerings don't overlap. One exception is the category of drug-coated angioplasty balloons, but Covidien announced last month that it would sell its Stellarex line to Colorado-based Spectranetics to allay concern about reduced competition. It's not clear whether regulators could require other divestitures as a condition of approval.
The Federal Trade Commission and China's antitrust authorities have launched in-depth investigations of the merger, but executives say that was expected. The deal can't be closed without approval from those countries and the European Union.
"They are on track and they are right in line with our schedule," Gary Ellis, Medtronic's finance chief, said of the antitrust entities. "We're having obviously constant communication, and we are not aware of any outstanding issues. But until you get their approval, it is still outstanding."
A combination of the two companies will create a massive global health care player. Medtronic's high-tech medical devices generated $17 Âbillion in revenue in its most recently completed fiscal year, and Covidien's general health care and surgical supplies drummed up $10 billion in that time. Medtronic employs about 49,000 people in 140 countries, and Covidien has 38,000 in 150 Âcountries.
Ishrak on Tuesday reiterated the companies' commitment to cut $850 million in expenses from the combined company, with the cuts coming from what Ishrak called "back-office" expenses like duplicative facilities and administrative staff.
"The entire 850 is from non-customer facing areas. And that is important. Both Medtronic and Covidien are executing to our strategies, and we don't want to disrupt that," he said. "We feel good about the list of items we've already drawn up from which we can get the $850 million. We have risk-assessed those items, and are confident that we can meet that financial objective."
Analysts on Tuesday agreed that Medtronic was executing in many of the areas where it needs strong performance, notably in the realm of new-devices.
S&P Capital IQ analyst Jeffrey Loo noted that Medtronic's 5 percent earnings-per-share growth in the quarter ended Oct. 24 was in-line with analysts' expectations, and was driven largely by product launches. The company recorded earnings of 96 cents per share on $4.4 billion in revenue.
New devices contribute
About 3 percent of the quarter's earnings growth came from recently released devices, which Loo said was a good sign moving forward because one could expect that those will contribute in future quarters as well. "For any company in the device space, you are going to have to innovate to grow," he said.
The structural heart division saw 19 percent revenue growth compared to the same quarter last year, driven mainly by a strong U.S. launch of Medtronic's line of catheter-delivered aortic valve replacements, CoreValve, last spring. Revenue in the company's division of low-power cardiac devices grew 11 percent, driven by what Medtronic officials described as a strong global launch of the Reveal Linq insertable cardiac monitor in the most recent quarter.
All told, Medtronic reported net income of $952 million, representing 4 percent growth, after adjusting for $60 million Covidien-related transaction expenses and a $100 million pretax donation the company made to its foundation.
Medtronic, now entering its third fiscal quarter of 2015, updated its revenue outlook for the year, though that outlook does not include the effects of the Covidien deal. The company expects revenue growth of 4 percent to 5 percent, and non-GAAP diluted earnings of $4 to $4.10 per share.
Medtronic shares gained $3.28 on Tuesday, closing at $72.47, up 4.7 percent.
Joe Carlson • 612-673-4779
Twitter: @_JoeCarlson
