Medtronic beats profit expectations despite declining heart device sales

Declining sales of heart devices and the abrupt closure of an Illinois plant that sterilizes finished medical devices were among challenges that led to flat revenue performance at Medtronic PLC, but the Minnesota-run device company still beat profit expectations in its fiscal fourth quarter.

Medtronic reported adjusted diluted earnings per share of $1.54 for the quarter ended April 26, 7 cents above analysts' forecast. Operating profits, a closely watched measure at the complex global company, increased nearly 5%.

Given the challenges in heart device sales, product sterilization and continued regulatory uncertainty surrounding popular devices that use the drug paclitaxel to open blood vessels in the legs, analysts praised the adjusted-earnings results.

Analysts noted that the strong finish to Medtronic's fiscal year was a positive reflection on the company's strategy of having a broad-based business model in which sales softness in one area can be made up by strength elsewhere.

"Investors were expecting a relatively muted end to F19, and therefore should be pleasantly surprised by [Medtronic's] strong finish to the year," analysts with Credit Suisse wrote.

Overall, Medtronic reported adjusted net income of $2.08 billion on revenue of $8.15 billion for the fourth quarter of its fiscal year.

Medtronic shares rose 3.2% to $91.64 Thursday as the overall market saw another day of losses attributed to trade-war jitters.

Sales of heart-rhythm devices — traditionally Medtronic's largest individual-product category — declined to $5.9 billion for the year, becoming the only product category in the company to show a full-year sales decline after adjusting for currency. Sales of diabetes devices grew the most, rising 13% to $2.4 billion in sales.

Medtronic CEO Omar Ishrak said the fourth quarter was a "solid finish" to the fiscal year.

"Our organization overcame challenges and relied upon the diversification of our business to deliver another quarter of solid top- and bottom-line results, with excellent free cash flow generation," Ishrak said in a statement.

Medtronic issued revenue and earnings guidance for the coming year in line with expectations, with organic-revenue growth of about 4%, and adjusted-diluted earnings per share expected in a range between $5.44 and $5.50. Earnings per share for the just-concluded fiscal year was $5.22.

In the conference call with analysts Thursday, Ishrak emphasized a series of major product launches in coming years that will accelerate revenue growth over the next two years.

Ishrak also highlighted the fiscal-year-end launch of its Micra AV leadless pacemaker, a device so small it is delivered through the blood vessels and rests entirely inside the heart. Unlike the existing Micra pacemaker, the Micra AV will be usable by a majority of all pacemaker patients.

"The company continues to make significant progress on our pipeline," Ishrak said. "We expect our revenue growth to accelerate over the course of fiscal year 2020 and into fiscal year 2021."

One of Medtronic's major challenges in the quarter happened in Willowbrook, Ill., where state regulators on Feb. 15 abruptly closed down a Sterigenics plant used by Medtronic and many other device companies to sterilize their products before they are shipped to customers.

The plant was closed because of concerns that the toxic chemical ethylene oxide was leaking from the building and causing high rates of cancer in the surrounding community. Litigation is ongoing to determine whether the plant will reopen. Since the Food and Drug Administration regulates where and how devices can be sterilized, companies can't easily move operations elsewhere.

Ishrak said Medtronic staff had to scramble to find ways to fulfill customer orders for its minimally invasive therapies, including surgical stapling devices and vessel closure systems. Chief Financial Officer Karen Parkhill said Medtronic had used up a good deal of its inventory on hand to fill the demand, and it will cost $20 million to $30 million to restore that inventory in the near term.

The drug has been shown to be effective at preventing reopened vessels from closing again. But late last year, an analysis in the Journal of the American Heart Association found much higher mortality risks for patients five years after getting the drug, vs. groups of patients who did not get the drug. The FDA later confirmed a similar finding.

No biological explanation has been widely accepted for what might be driving the late mortality findings. An FDA panel is scheduled to recommend next steps.

"We believe the data is very strong, but it's important to understand that no studies have been sized to answer the question of mortality in this patient group," said Geoff Martha, president of Medtronic's restorative therapies group. But "everything we've seen from our own data sets, which are the largest in the industry, make us very confident."