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The Growth Opportunity That Will Move Medtronic Ahead of Its Rivals

By Amar Khatri - Feb 20, 2020 at 8:40AM

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One key division offers strong demand and a solid long-term opportunity for investors.

One of the world's largest medical device companiesMedtronic (MDT 1.82%), has seen a more than 55% rise in its stock price over the past five years. 

The 71-year-old company serves more than 150 countries worldwide, with success in diagnostic tools for heart disease, surgery, restorative therapies, and diabetes. Over the past 12 months alone, the stock is up nearly 24%. Can this momentum continue?

There is one key division that may offer clues to Medtronic's long-term growth.

Diabetes Health Monitor

Image Source: Getty Images.

A major growth opportunity

Medtronic is broken down into four key divisions, as seen in the table below. 

Division Product Focus Percentage of Revenue, Year to Date (Q1-Q3 2020) Percentage of Revenue, FY 2019 Percentage of Revenue, FY 2018 Percentage of Revenue, FY 2017 Change (FY2017- FY2019)

Cardiac and Vascular Group

Heart failure, coronary heart disease, surgical tools

36.9% 37.7% 37.9% 35.3% 9.6%

Minimally Invasive Therapies Group

Surgical tools; therapies for lungs, stomach, kidneys

28% 27.7% 29.1% 33.4% (14.5%)

Restorative Therapies Group

Therapies for spine, neurological disorders, and pain

27.2% 26.8% 25.9% 24.8% 11.1%

Diabetes Group

Insulin pumps, blood sugar monitors (continuous glucose monitoring), therapy management software

7.9% 7.8% 7.1% 6.5% 24.1%

Source: Medtronic.

Of the four, the diabetes division shows the most promise for Medtronic investors. Diabetes affects roughly 30.3 million people, or 9.4% of the population, in the United States; worldwide, about 425 million adults live with the condition. Diabetes impairs the body's ability to process sugar, and patients must continually monitor their blood sugar levels and manage them with a hormone called insulin. 

At Medtronic, the diabetes division includes key products such as MiniMed insulin pumps and accessories, Guardian continuous glucose monitoring (CGM), and therapy management software. Worldwide, sales of insulin pumps and CGM across all manufacturers are expected to grow at a compound annual growth rate (CAGR) of more than 12%, and as the table shows, divisional revenue at Medtronic is up 24.1% since 2017 -- the highest increase of the four divisions. 

The company's most recent earnings report, for the third quarter of fiscal 2020, showed that Medtronic's strength is in the global market -- worldwide sales accounted for approximately half of the total, resulting in 16% growth year over year and offsetting some U.S. revenue challenges from increased competition. 

Global strength in CGM

The CGM market showed strong results in both integrated and stand-alone products. CGM products that are integrated with Medtronic's MiniMed insulin pump led sales, with a particular boost from new patient acquisitions in international markets. The stand-alone CGM market continues to show progress as well, with 50% growth in the third quarter; here, Medtronic competes with market leader DexCom (DXCM 4.16%) as well as emerging rival Abbott Laboratories (ABT 1.45%).

DexCom has an advantage over its competitors in the U.S. market, with growth coming from CGM orders by Medicare plans, durable medical equipment (DME) suppliers, and pharmacy orders. DexCom continues to expand in these areas, but there's still room to grow for rivals like Medtronic, too. New products with additional capabilities and accuracy may help Medtronic regain market share, and its position as UnitedHealthcare's preferred insulin pump provider should help it expand in the integrated CGM market both domestically and internationally.

Dominance in the insulin pump space

Medtronic's MiniMed pumps have been a major sales driver in the past, and the international markets provide growth opportunities that should offset a U.S. revenue decline brought on by increased competition. Medtronic already sells its insulin pumps in Western Europe and many emerging markets, and a key catalyst will come this week, when the company is set to present data on its new insulin pump at the International Conference on Advanced Technologies and Treatments for Diabetes. This data should advance the creation of a timeline for milestones and eventual approval of the new 780G insulin pump by the U.S. Food and Drug Administration (FDA). 

The 780G already has a European Commission mark of approval (CE mark) and has achieved conformity for products sold in the European Economic Area (EEA), and investors should gear up for more data in June, which will discuss results from a feasibility study for in-home use of the 780G to automate insulin delivery in patients with diabetes. Positive results from this study would allow the device to progress toward FDA approval, which would create an additional growth driver for Medtronic and improve its competitiveness in the market for insulin pumps.

Medtronic also has a plan in place to retain many of its current users -- the Next Tech Pathway program allows purchasers of the former 670G product to upgrade their device for free when the 780G arrives. This will be a key factor in improving U.S. sales and should allow Medtronic to stay at the forefront of the competition.  

Medtronic boasts roughly 60% of global market share in the insulin pump market, where it squares off against competitors such as Tandem Diabetes Care (TNDM 4.43%) and Insulet Corporation (PODD 3.91%). Its partnership with UnitedHealthcare (UNH 0.73%) is key here, and Medtronic can also expect growth from its continuing outcomes-based agreements with select healthcare providers such as Aetna; these value-based plans pay providers based on patient outcomes and quality of services performed, and Medtronic's participation could improve brand awareness and recognition among consumers and strengthen U.S. market share. 

A recent recall of two MiniMed products because of safety concerns may have short-term effects, but it's unlikely to change the long-term growth trajectory. The diabetes division makes up just 8% of Medtronic's revenue, and the potential financial consequences of litigation and replacement will be offset in the short term by revenue from the company's diversified portfolio of other products. When considering longer-term prospects, the growth of the insulin pump market in international markets along with integrated and stand-alone CGM sales will contribute to further revenue streams, offsetting declines in other divisions (including the minimally invasive therapies division). In addition, the release of new products such as the 780G pump will improve Medtronic's strength in the U.S. market, where it's currently struggling because of competitive challenges. 

Long-term opportunities

Medtronic's diabetes division offers a window into the company's long-term prospects. Currently, the division makes up less than 10% of the company's revenue, meaning there's significant opportunity for growth here -- especially with a CAGR of 12% for both insulin pumps and CGM. Given its solid partnerships and agreements with healthcare providers and the opportunities presented in international markets, Medtronic has an opportunity to remain the market leader in insulin pumps over the long term. As the company dominates in the diabetes segment, shareholders and healthcare investors should see results on both the company's top and bottom lines.  

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Stocks Mentioned

Medtronic plc Stock Quote
Medtronic plc
$91.38 (1.82%) $1.63
Abbott Laboratories Stock Quote
Abbott Laboratories
$110.22 (1.45%) $1.57
UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
$517.40 (0.73%) $3.77
DexCom, Inc. Stock Quote
DexCom, Inc.
$77.63 (4.16%) $3.10
Insulet Corporation Stock Quote
Insulet Corporation
$226.46 (3.91%) $8.52
Tandem Diabetes Care Stock Quote
Tandem Diabetes Care
$61.81 (4.43%) $2.62

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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