Medtronic Finishes Fiscal 2022 as Anticipated; No Change to Our FVE on Tempered View of 2023

Business Strategy & Outlook:

Medtronic’s standing as the largest pure-play medical device maker remains a force to be reckoned with in the med-tech landscape. Pairing Medtronic’s diversified product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered Medtronic’s position as a key partner for its hospital customers. Medtronic has historically focused on innovation, designing and manufacturing devices to address cardiac care, neurological and spinal conditions, and diabetes. All along, the firm has remained focused on its fundamental strategy of innovation. It is often first to market with new products and has invested heavily in internal research and development efforts as well as acquiring emerging technologies. However, in the postreform healthcare world where there are higher hurdles for securing reimbursement for next-generation technology, Medtronic has slightly shifted its strategy to include partnering more closely with its hospital clients by offering greater breadth of products and services to help hospitals operate more efficiently. By partnering more closely and integrating itself into more hospital operations, Medtronic is well positioned to take advantage of more business opportunities in the value-based reimbursement environment, in our view. In particular, Medtronic has been pioneering risk-based contracting around some of its cardiac and diabetes products, which company thinks is attractive to hospital clients and payers alike.

Company has always appreciated Medtronic’s diverse portfolio, where certain waning product lines would be offset by growth in other categories. The addition of devices and consumables used in the surgical suite should further stabilize potential speed bumps in individual product lines. The COVID-19 disruption added more near-term turbulence, especially with supply chain issues and delays in nonpandemic patient volume, but the company remains confident that underlying demand for many of these therapies and Medtronic’s ongoing innovation should prevail over the longer term.

Financial Strengths:

Medtronic’s financial health deteriorated somewhat after financing a significant portion of the Covidien merger with new debt issuance. Covidien shareholders owned about 30% of the combined entity at the time of the merger, which allowed the combined entity to invert to Covidien’s Irish domicile, lowering its tax rate and enhancing its ability to access overseas cash. At the end of January 2016, Medtronic owed $36 billion in debt, or around 4 times adjusted EBITDA, which is up from around 2 times historically. Since then, the firm has paid off approximately $14 billion of the debt. The firm ended fiscal 2022 with debt to adjusted EBITDA around 3 times, which is manageable, but slightly higher than the 2.5 times that is common in the medical technology industry. Nonetheless, the firm generates strong cash flow that can be put toward tuck-in acquisitions. Beyond its debt obligations and M&A, the firm aims to return a minimum of 50% of its annual free cash flow to shareholders but has been in the 60% to 100% range in recent years, primarily through its dividend and peripherally due to opportunistic share repurchase

Bulls Say:

Medtronic has historically held roughly 50% share in its core heart devices. It’s also the market leader in spinal products, insulin pumps, and neuromodulators for chronic pain.
Medtronic’s pipeline contains treatments for atrial fibrillation, mitral valve disease, and renal denervation for hypertension. If these new therapies prove effective, Medtronic could dominate three more potentially large markets.
Medtronic often finds novel ways to apply familiar technologies, like using the implantable electronic stimulation in pacemakers to address fecal incontinence and chronic pain

Company Description:

One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its portfolio includes pacemakers, defibrillators, heart valves, stents, insulin pumps, spinal fixation devices, neurovascular products, advanced energy, and surgical tools. The company markets its products to healthcare institutions and physicians in the United States and overseas. Foreign sales account for almost 50% of the company’s total sales.

(Source: Morningstar)

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