Take a recession where many people have lost their health-care insurance and add in pressure to lower health-care costs, and you have a recipe for disaster. Medtronic's (NYSE: MDT ) first fiscal quarter revenue was up just 2% after adjusting for the longer quarter last year and currency fluctuations. Worse, the company dropped its revenue guidance from 5% to 8% growth down to just 2% to 5% growth year over year.
The poor prognosis from the medical-device maker caused a 10% drop in Medtronic's shares. Disaster might be an understatement.
Medtronic's fiscal quarters are one month delayed from the rest of the competition, so the results could foretell weaker sales by other medical-device makers Boston Scientific (NYSE: BSX ) , Johnson & Johnson (NYSE: JNJ ) , St. Jude Medical (NYSE: STJ ) , and Stryker (NYSE: SYK ) that it competes against directly. Even Intuitive Surgical (Nasdaq: ISRG ) is down in sympathy, despite the fact that it doesn't compete directly. It's still tied to hospital spending, however.
The summer months are always a bit slow as doctors and patients take vacation, but the worry is that many patients are delaying surgeries that don't need to be performed right away. For long-term investors, the delay isn't a major issue since the demand will just be higher once the patients decide they can't wait any longer; hearts and spines don't usually fix themselves.
The bigger issue is that the push for lower health-care costs may be ending the era of continually rising prices. In order to increase revenue, companies will need to launch new devices that add value to the patient.
Medtronic's forecast is disappointing for the industry, but some of the issues are specific to Medtronic. Boston Scientific wasn't able to ship its defibrillators for about a month earlier this year, but Medtronic doesn't seem to have captured any of the market share; the medical-device maker has a 47% share of the implantable defibrillator market, the same share it had before Boston Scientific ran into issues.
Should investors in medical-device makers be worried? Absolutely, but then we should all be worried about the economy. Unfortunately, we'll all have to wait another couple of months when third-quarter results are released before we'll know how bad it is for the rest of the industry.