Halted Clinical Trial Sends Medtronic’s Q3 Profits Plummeting

Medtronic Inc.’s failed renal denervation clinical trial cost the company quite a bit of cash in the third fiscal quarter.

Burdened with $200 million in charges for its stalled renal denervation program, net earnings for the three-month period ending Jan. 24 fell 23 percent to $762 million, or 75 cents per diluted share, according to the Minneapolis, Minn.-based device behemoth’s latest financial report. Third quarter net earnings and diluted earnings per share on a non-GAAP basis were $916 million and 91 cents, a decrease of 3 percent and 2 percent, respectively, compared with the same period in fiscal 2013.

Medtronic officials claim the $200 million in charges were a one-time hit. The company’s earnings, they insisted, would otherwise have been more in line with Wall Street expectations. “We believe this will be it,” said Gary Ellis, Medtronic senior vice president and chief financial officer.

Analyst Jeff Windau of Edward Jones Investments said most analysts were not put off by the one-time hit from renal denervation. “In the big picture, it’s a little bit disappointing,” he told the Minneapolis Star-Tribune of the suspended trials. “The technology had a lot of promise and growth potential. It’s not out of the picture yet, so we may still see it coming down the pipeline.”

Several other analysts, in notes to investors, said Medtronic’s earnings and revenue numbers were in line with or slightly better than expectations.

Windau said that was because “growth in their biggest groups was pretty well flat. I think, overall, the quarter was very neutral for the company.”

The company reported worldwide third quarter revenue of $4.163 billion, a 3.3 percent increase compared with the $4.03 billion reported in the third quarter of fiscal year 2013.

Third quarter international revenue of $1.89 billion jumped 4 percent on a constant currency basis or 2 percent as reported.  International sales accounted for 46 percent of Medtronic’s worldwide revenue in the quarter.  Emerging market revenue of $521 million increased 12 percent on a constant currency basis or 10 percent as reported and represented 13 percent of company revenue.

“In Q3, our overall organization delivered balanced growth, with strong performances in some areas offsetting challenges in other parts of our business,” said Omar Ishrak, Medtronic chairman and CEO. “We remain focused on building a track record of operational execution to deliver consistent and reliable results.”

The Cardiac and Vascular Group, which includes the Cardiac Rhythm Disease Management (CRDM), Coronary, Structural Heart, and Endovascular businesses, posted $2.11 billion in worldwide third-quarter sales, a 2 percent increase on a constant currency basis or 1 percent as reported. Group revenue performance was driven by growth in Structural Heart, Endovascular, Implantable Cardioverter Defibrillators (ICDs), and Atrial Fibrillation (AF) and Other, which included growth from Hospital Solutions and Cardiocom, partially offset by declines in Pacing. Group international sales of $1.21 billion rose 3 percent on a constant currency basis or 1 percent as reported previously.

CRDM revenue of $1.18 billion grew 2 percent on a constant currency basis or 1 percent as reported.  Third quarter revenue from ICDs was $655 million, an increase of 1 percent on a constant currency basis. In international markets, strong adoption of the Viva XT CRT-D drove growth in Western Europe and Japan. Pacing revenue was $439 million, a decline of 2 percent on a constant currency basis. AF Solutions grew more than 20 percent, driven by robust growth from the Arctic Front CryoAblation System, which increased more than 30 percent.

The Restorative Therapies Group, which includes the Spine, Neuromodulation and Surgical Technologies businesses, generated $1.6 billion in worldwide sales, an increase of 5 percent on a constant currency basis or 4 percent as reported. Group revenue was driven by growth in Surgical Technologies and Neuromodulation. Group international sales of $521 million increased 6 percent on a constant currency basis or 3 percent as reported.

Spine revenue of $744 million was flat on a constant currency basis or declined 1 percent as reported.  Core Spine revenue of $631 million was flat on a constant currency basis or declined 1 percent as reported.  Excluding sales of balloon kyphoplasty, Core Spine grew in the low-single digits on a constant currency basis both globally and in the United States. Bone morphogenetic protein revenue of $113 million declined 1 percent, as the business is seeing signs of sequential stability in underlying demand and faced a favorable comparison due to a supply constraint in the prior year period.