Medtronic Touts Product Launch Strategy, Emerging Markets Success
By Jof Enriquez,
Follow me on Twitter @jofenriq
Medtronic executives say the company is reaping cost synergies ahead of schedule related to its merger with Covidien, even as foreign currency headwinds and weakening in the spinal business continue to temper gains.
Related to the Covidien integration, Medtronic CFO Gary Ellis told analysts in an earnings call that the company expects to extend its original FY 2016 savings goal of $300 million to $350 million, and is on track for a minimum $850 million savings by the end of FY 2018.
"We haven’t lost our operational focus on delivering these synergies one bit and in many ways are a little bit ahead of our original commitments," Medtronic CEO Omar Ishrak said in the call. "But there are lots of moving parts there."
Unfavorable foreign exchange rates have mitigated some of the benefits of the cost synergy program, and resulted in lower operating margins for the third quarter. Medtronic reported foreign currency translation had a negative $344 million impact on global revenue, which increased 6 percent to $6.93 billion, below expectations of $6.99 billion. Third quarter net income rose 12 percent.
Overall, however, Medtronic's figures one year after buying Covidien seem to have allayed apprehensions from analysts.
"The merger went better than I would have expected," Ben Marks, president of Marks Group Wealth Management, told the Star Tribune. "I was a little nervous about it, which is why we trimmed our position a little bit. But I think that, a year into it, if there were some skeletons in the closet, so to speak, I think they would have appeared by now. So I think that is largely behind us."
Medtronic's cardiac and vascular device businesses posted 7 percent growth and generated $2.41 billion in revenue for the third quarter, according to the Star Tribune. The minimally invasive therapies group, primarily consisting of lower-margin Covidien devices, rose 5 percent to $2.29 billion.
However, sales of spinal implants fell 2 percent. Ishrak told the Wall Street Journal that poor product launches were partly to blame, as the company did not make or ship enough ancillary surgical tools, nor provided enough training for doctors to use new implants.
Ishrak told analysts, "underperformance is not acceptable. The thing is that market is still a very attractive market for us and we’ve got core expertise. So we’re going to get this thing fixed." He talked how changes in the field level and the overall leadership level will result in steady improvement for the business in the next few quarters.
Medtronic is adopting a new strategy in launching new products for lumbar fusion, the VOYAGER fixation system, the Elevate Expandable Cage, and oblique lumbar interbody fusion (OLIF) procedures.
"We are excited about the products. Our upstream marketing guys have done a good job, building a number of new products. And now we are focused on the downstream commercial execution, and the launch of those products," Geoff Martha, president of Restorative Therapies Group, said during the call. "The big change is launching them at scale. So making sure we have the right amount of assets and inventory to launch them at scale, which is a change."
Ishrak was optimistic on Medtronic's globalization strategy, particularly in emerging markets such as China. Revenue from emerging markets grew 14 in the third quarter, a result of "differentiated strategies in channel optimization, and in developing public and private partnerships."
"We believe strongly that the penetration of existing therapies into emerging markets represents the single largest opportunity in medtech over the long-term," Ishrak added during the call.
Ishrak also expressed confidence on prospects about the transcatheter aortic valve replacement (TAVR) market, which Medtronic expects to grow to approximately $4 billion by the end of 2020, and the continued success of its diabetes business, which grew 11 percent in the last reporting quarter.