But the quarterly report only tells half the story. Let's look at the five most interesting things that CEO Omar Ishrak discussed during the medical-device maker's earnings conference call.
The spine business will hopefully strengthen
Medtronic's most noticeable weakness during the quarter was its spine business, which posted a 3% year-over-year decline to $743 million, mainly due to weak sales of its Core Spine and BMP (bone morphogenetic protein) products. Core Spine suffered due to inventory rebalancing and the timing of new product launches, while demand for BMP products waned due to physicians using smaller kits on fewer patients.
Although Medtronic's weakness in this space was comparable to equally weak results from industry peers Stryker and Zimmer Holdings, Ishrak assured investors that plans for the spine business to post positive growth by the end of this fiscal year "remain on track." The CEO also noted that new products could generate fresh demand: "In addition to our recently approved Prestige LP artificial cervical disc, we are expecting to completely refresh our anterior cervical plate portfolio and launch new interbodies with advanced materials and functionality over the coming quarters."
New cardiac devices are making a difference
Medtronic's cardiac rhythm and heart failure business achieved 4% sales growth during the first quarter -- a level that hadn't been seen since the "core implantables market slowed down four years ago," according to Ishrak.
Ishrak attributed that growth to the Reveal LINQ miniaturized implantable cardiac monitor, or ICM, which was launched globally in February. The device is roughly one-third the size of a triple A battery -- about 80% smaller than comparable ICMs.
Ishrak also mentioned the upcoming launch of the Attain Performa quadripolar lead system in the U.S., along with pipeline products including the Seek cardiac diagnostic patch, CoreValve Evolut R Transcatheter Valve, Resolute Onyx drug-eluting stent, IN.PACT Admiral drug coated balloon, and Micra leadless pacemaker.
Newer products like these, along with the Reveal LINQ, could keep sales growth steady at Medtronic's cardiac and vascular unit, which accounts for over half of the company's revenue.
The Covidien acquisition is about reinvestment, not inversion
Medtronic's $42.9 billion offer for Dublin, Ireland-based Covidien (NYSE: COV ) is widely considered a tax inversion bid similar to Actavis' acquisition of Warner Chilcott.
Ishrak emphasized that this wasn't the case, pointing out that Medtronic "will continue to pay federal, state, and local income taxes on all U.S. earnings, as well as our social security taxes, property taxes and the medical device tax. Cumulatively, these taxes represent more than 45% of U.S. income and we expect to pay a similar rate post close."
Ishrak also declared that the acquisition would not take jobs away from Americans, but rather create more by freeing up the company's international profits for reinvestment in the U.S.:
We have a proven track record of creating U.S. jobs with our past acquisitions. For example, with Sofamor Danek, AVE and MiniMed, we have created nearly 10,000 U.S. jobs since acquisition. More recently with Cardiocom, we have more than doubled the work force in just 12 months. We also expect additional job creation with our recently completed acquisitions of Visualase and Corventis, two U.S. based companies. Our level of U.S. job creation will only accelerate following [the Covidien] transaction.
Ishrak said acquiring Covidien would give Medtronic a competitive edge abroad with a combined $3.7 billion emerging markets business, which would "sustain double-digit growth over an extended period of time."
Double-digit growth will hopefully return to China and India
Emerging markets are definitely a sore spot for Medtronic, which reported notable weakness in both China and India during the quarter. However, Ishrak assured investors that the lull was temporary: "Our Greater China region grew 6% as we dealt with some near term challenges in the distributed channel and management changes. We expect China to put to return to double-digit growth for the remainder of the fiscal year."
Ishrak also made a similar promise for India, albeit with a longer time frame: "India also had a difficult quarter declining 7% as we face disruption from distributor terminations and inventory rebalancing. We're executing a definite plan for optimizing our India distributed channels but this will take the remainder of the fiscal year before we return to double-digit growth."
Returning both China and India to double-digit growth would be a big boost for Medtronic's international revenue, which only rose 2% to $1.94 billion , yet accounted for 45% of the company's top line.
New diabetes devices are on the way
The brightest spot of Medtronic's quarterly report was its diabetes group, which reported 12% revenue growth to $416 million thanks to strong demand for its MiniMed 530G system with Enlite.
The MiniMed 530G is a first-generation wearable "artificial pancreas" that consists of an insulin pump and a continuous glucose meter, or CGM. The pump automatically halts insulin delivery when glucose levels drop below a preset threshold. Ishrak noted that MiniMed devices helped Medtronic simultaneously gain market share in both insulin pumps and CGMs during the quarter.
Ishrak also said Medtronic was "preparing to launch the MiniMed 640G and MiniMed 620G in international markets in Q2." The 640G will reportedly be able to predictively shut off insulin delivery before low thresholds are met. Launching these next-generation devices in foreign markets is crucial, since Johnson & Johnson and Dexcom's competing device, the Animas Vibe, has already been approved in Europe, Australia, and Canada.
The Foolish takeaway
Ishrak clearly highlighted Medtronic's strengths in new medical devices, while directly addressing investor concerns about the company's soft spots.
If Medtronic can straighten out its spine business, launch new medical devices to stay ahead of the competition, revive its Chinese and Indian markets, and convince Americans that the Covidien deal isn't really about taxes, the company could be poised to keep growing over the next few years.
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