WSJ: Medtronic’s Looking Good

The Wall Street Journal takes a look at Medtronic (MDT) and likes what it sees:

Recalls and safety alerts roiled the market for implantable defibrillators last year. Fortunately for medical-device maker Medtronic of Minneapolis, the bad news mostly has hurt a rival, Guidant.
Recently, Guidant warned of a shortfall in its sales of these devices, which use jolts of electricity to treat a malfunctioning heart. Many of these lost sales seem to be going to Medtronic. And Medtronic might even benefit from the bidding war that’s erupted over Guidant.
Gary Ellis, the chief financial officer of Medtronic, says he isn’t surprised to see Boston Scientific offering $25 billion in an effort to beat the $21.5 billion bid that Guidant accepted from Johnson & Johnson. Those companies wouldn’t be offering such sums for Guidant, says Mr. Ellis, if they didn’t envision strong sales for devices sold by Guidant, Medtronic and a third manufacturer, St. Jude Medical.
Medtronic has been benefiting from its leadership in the implantable-defibrillator market. The stock, which ended 2004 below $50, recently was near $58 and looks as if it could rise further.
Medtronic trades for about 23 times expected earnings of $2.50 a share for calendar 2006, about the same multiple of future earnings as it did a year ago, and the company’s outlook is even better now.
Product defects have dogged every defibrillator maker in the past year, but the bad publicity mainly stuck to Guidant, allowing Medtronic to boost its market share to 55% from about 50%.
Medtronic has a diversified medical-device line. In the next year or so, it expects to launch new products into the growing markets for artificial spinal discs and automated insulin pumps. The company also might enhance its lagging line of cardiovascular devices, such as the tubular stents that prop open pinched heart arteries, if it can acquire Guidant product lines expected to be sold for antitrust reasons by the eventual winner in the bidding.
A public outcry followed the death in May 2005 of a 21-year-old man whose Guidant defibrillator didn’t work. Doctors complained that Guidant hadn’t warned of potential problems in the product’s circuitry. Since May, Guidant has issued safety alerts covering more than 100,000 units, but it isn’t alone. Medtronic alerted doctors to a potential battery problem in nearly 90,000 of its units, and doctors later replaced about 18,000 of the devices. Yet because Medtronic was more forthright, its reputation fared better than Guidant’s.
Medtronic’s CFO Mr. Ellis says the defibrillator market remains underpenetrated, and Medicare coverage should allow defibrillator sales to keep growing at 20% a year.
Medtronic’s spinal and diabetes businesses are expanding nearly as fast. Maybe that’s why J&J and Boston Scientific are so keen to get into Medtronic’s markets.

Posted by on January 1st, 2006 at 12:37 pm


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