What Medtronic Needs to Beat the Stryker-MAKO Merger

Medtronic (MDT -1.65%) will release its quarterly report on Tuesday, and investors have enjoyed the medical-device maker's run to seven-year highs in its stock price recently. Yet with a wave of consolidation hitting the medical-equipment industry after Stryker (SYK -0.80%) bid to buy out MAKO Surgical (MAKO.DL), many believe that Medtronic will need to respond in kind to retain its leadership role in the space.

Medtronic has been a major player in the cardiac industry, with its rhythm-device managers and defibrillators having long been drivers of growth for the company. Yet recently, competitors have tapped into other key segments, such as Stryker's move into the neuromodulation business, and they've found growth opportunities that Medtronic hasn't yet tapped to their full potential. Can Medtronic overcome reluctance among hospitals and other medical professionals to spend up for equipment in a rapidly changing environment for the health-care industry? Let's take an early look at what's been happening with Medtronic over the past quarter and what we're likely to see in its report.

Stats on Medtronic

Source: Yahoo! Finance.

Will Medtronic earnings start rising more sharply?
In recent months, analysts have gotten a bit less excited about Medtronic earnings, cutting October-quarter estimates and full-year fiscal 2014 projections by a penny per share. The stock hasn't halted in its upward run, though, climbing another 8% since mid-August.

Medtronic didn't come into the quarter on the strongest of notes, with a mixed July quarter report in which the medical-device giant boosted its net income by 10% despite seeing a 3% drop in sales. Weakness in its core cardiac-device segment really hurt Medtronic's overall results, with flat sales in the rhythm-management division and a drop for implantable defibrillators. But a boost in sales in key emerging-market economies helped offset particularly bad conditions in the U.S. and Europe.

But Medtronic has started to move in interesting directions. Its buyout of Cardiocom in mid-August signaled its intent to diversify beyond its pure device business to offer remote health-care monitoring services, potentially leaving itself less vulnerable to potential cuts from Medicare and other government health-care programs. Medtronic's hope is that by offering telehealth-related services, it can help hospital customers avoid the readmission penalties that they'd otherwise face under the Patient Protection and Affordable Care Act.

Smart strategic thinking could help Medtronic fend off competition. For Stryker, its purchase of MAKO Surgical made sense in that MAKO's emphasis on joint-related robotic surgical procedures meshed well with Stryker's specialty in creating reconstructive implants and surgical equipment. Without a current robotic device that specializes in heart-related ailments, there's no natural fit that Medtronic could go after in response. With cardiac rival Boston Scientific (BSX 0.32%) having bought the electrophysiology business of C.R. Bard last week, though, Medtronic has to make sure that its own cardiac-rhythm diagnostic offerings continue to show strength even under competitive attack.

In the Medtronic earnings report, watch to see how the company continues to respond to dynamic conditions in the industry. With so much in flux in the health-care industry, Medtronic needs to be proactive to stay ahead of Stryker, Boston Scientific, and its other rivals going forward.

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