Medtronic, Inc



| Medtronic plc |(MDT-NYSE) |$78.3* |

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Note to Readers: This report contains substantially new information. Subsequent reports will have changes highlighted.

Reason for Report: 3Q18 Earning Update

Prev. Ed.: Dec 1, 2017; 2Q18 Earning Update (broker materials considered till Nov 30, 2017)

Brokers’ Recommendations: Positive: 66.7% (14 firms); Neutral: 33.3% (7); Negative: 0% (0) Prev. Ed.: 11;8; 0

Brokers’ Target Price: $91(↑$0.8 from the previous report, 19 firms) Brokers’ Avg. Expected Return: 16.2%

*Note: Though dated Mar 2, 2018, share price and broker material are as of Mar 1, 2018

*Note: A Flash update on ‘3Q18 Earnings’ was done on Feb 23, 2018.

Portfolio Manager Executive Summary

Medtronic plc (MDT) is one of the world’s prominent healthcare solutions companies, which provides medical technologies, services and solutions across the globe. The company enjoys a significant position in most of the businesses in which it competes. Medtronic’s operations are widespread with activities in over 160 countries and having more than 85,000 employees. The company was formed through the combination of the legacy Minnesota-based medical technology giant Medtronic, Inc. and Ireland-based Covidien plc, on Jan 26, 2015.

Of the 21 firms covering Medtronic, 66.7% (14 firms) assigned positive ratings and 33.3% (7) provided neutral ratings. No firms issued a negative rating on the stock.

Positive or equivalent outlook (14/21): Per the bullish firms, Medtronic posted encouraging 3Q18 results with earnings beating estimates as well as market expectations. These firms are particularly upbeat about the company’s stellar performance in Pain Therapies, Minimally Invasive Therapies Group, Coronary/Structural Heart and Diabetes businesses. Notably, these businesses surpassed expectations of the bullish firms in 4Q18. The firms also believe that value-based healthcare programs across the Cardiac and Vascular group have contributed to the top line. The bullish firms are also upbeat about Medtronic’s cost-control programs, product launches, improving foreign exchange rates along with benefits from U.S. tax reforms. They believe the company is well-positioned to deliver strong performance based on these factors. Moreover, they are impressed with Medtronic’s strong annual free cash flow balance which will help it cash in on merger and acquisition opportunities.

These firms also believe that the company is adequately utilizing opportunities in the high-potential emerging markets. For FY18, the bullish firms expect growth to come on the back of impressive products such as benefits from intermediate-risk approval in transcatheter aortic valve replacement (TAVR) along with the latest Evolut PRO TAVR, ongoing rollout of Resolute Onyx DES, leadless transcatheter pacing system — Micra — extended destination therapy indication in left ventricular assist device (LVADs) and MiniMed 670G pump in Diabetes with better sensor supply. Moreover, these firms are optimistic about the company’s recently-launched enterprise excellence plan. However, these firms are concerned about the company’s postponement of launch of the robot-assisted surgery platform.

Neutral or equivalent outlook (7/21): For majority of the neutral firms, Medtronic’s 3Q18 earnings and revenue figures were encouraging. However, these firms apprehend that the company will find it difficult to drive margins. Moreover, per these firms diversified business model and recent launches have helped the company counter the headwinds to some extent. However, Medtronic has been facing tough comparisons with competitors’ products, which might impede growth in the days ahead. It is believed these headwinds across Medtronic’s portfolio are going to affect the company’s top-line performance in the rest of FY18. Moreover, these firms are sceptical about Medtronic’s ability to manage costs in order to offset pricing pressure, deal with the MedTech excise tax and attain stable margins. Also, the neutral firms prefer to stay on the sidelines until they get further visibility about the company recovering from lost market share in Cardiac Rhythm Management (CRM) and Spine and increasing market share in other businesses on new product launches.

Mar 2, 2018

Overview

Headquartered in Dublin, Ireland, Medtronic plc (MDT) is one of the world’s leading medical technology companies, aimed at alleviating pain, restoring health, and extending life for millions of people worldwide. The company was formed post the closure of the $50 billion merger between Minnesota-based medical device major Medtronic, Inc. and Ireland-based leading surgical technologies and global healthcare solutions major Covidien plc on Jan 26, 2015.

Medtronic, Inc. and Covidien plc have now become wholly-owned subsidiaries of Medtronic plc, with its principal executive offices based in Ireland. However, the operational headquarters of the combined company remains in Minnesota.

The combined company, with officially joint forces of over 98,000 employees across more than 160 countries and annual revenues of $29.71 billion in 2017, will now expedite the legacy Medtronic's three fundamental strategies of therapy innovation, globalization and economic value. The company’s website is .

The combined company’s primary products include those for cardiac rhythm disorders, cardiovascular disease, neurological disorders, spinal conditions and musculoskeletal trauma, urological and digestive disorders, diabetes, and ear, nose, and throat conditions, respiratory monitoring systems, surgical solutions and vascular therapies

The firms identified the following factors for evaluating the investment decision:

|Key Positive Arguments |Key Negative Arguments |

|Medtronic is one of the leading players in the CRHF segment. A strong |Medtronic faces increasing competition from Stryker and Boston Scientific in|

|pipeline and the potential launch of many products in the future should |the spinal and CRHF markets respectively. |

|strengthen it further. | |

|On completion of the Covidien acquisition, Medtronic has emerged as the |The firms are also concerned as the company’s core businesses are struggling|

|world's premier medical technology and services company. |with pricing pressure. |

|Medtronic rewards its shareholders in the form of regular dividends and share|Medtronic earned 46.9% of total revenues in 3Q18 from international |

|repurchases. Moreover, the company has lately raised its cash dividend by 7%.|operations, which makes it highly exposed to the risk of fluctuation in |

| |foreign exchange. |

Note: Medtronic’s fiscal year ends on Apr 30.

Mar 2, 2018

Long-Term Growth

The firms believe that despite a tough competitive scenario, Medtronic has the advantage of enormous resources, incremental sales synergies and multiple options within the medical devices industry. The company holds a significant market share in the cardiology and spine markets, as well as targeting other specialty markets. With the acquisition of Covidien, management of the combined company currently aims at driving strategies, diversifying the company’s growth profile and increasing its financial flexibility over the long term.

Post the Covidien acquisition, management is focused on delivering state-of-the-art healthcare innovation, addressing the inequity in healthcare access globally, and emerging as a leader in the changing value-based healthcare landscape. Notably, in 3Q18, Medtronic successfully completed the $850-million Covidien synergy commitment.

Medtronic also launched its Enterprise Excellence Program at the J.P. Morgan Healthcare Conference held in January 2018. Management expects to generate $3 billion in annual growth savings by the end of fiscal 2022 from the restructuring initiatives listed under the program. Notably, Medtronic aims at enhancing margins and increasing investments on strategic growth initiatives through this program. Per management, this program to maintain efficiency and accelerate long-term business growth has a three-fold strategy —

Global Operations – targeting integration of manufacturing and supply systems and enhancing delivery, cost, quality and cash flow over the period.

Functional Optimization – focusing on enhancing productivity and employee experience by leveraging and improvising on global operating models and systems.

Commercial Optimization – aiming to enhance the productivity and customer experience by optimizing certain processes, systems and models.

Interestingly, the program will be managed by a central Program Management Office. Moreover, per management, the program will result in incremental restructuring expenses of around $1.6 billion to $1.8 billion over the next five years. However, half of the charges are projected to fall under the employee-related costs category.

 

Mar 2, 2018

Target Price/Valuation

|Rating Distribution |

|Positive |66.7%↑ |

|Neutral |33.3%↓ |

|Negative |0.00% |

|Avg. Target Price |$91↑ |

|Digest High |$99.00↑ |

|Digest Low |$80.00 |

|No. of Analysts with Target price/Total |19/21 |

|Upside from Current |16.2% |

|Maximum Upside from Current |26.4% |

|Minimum Upside from Current |2.2% |

Risk factors to the target price comprise a competitive scenario, economic and legal issues, and foreign currency movement.

Recent Events

On Feb 20, 2018, Medtronic reported 3Q18 results. Highlights are as follows:

➢ Adjusted EPS in 3Q18 came in at $1.17, up 4.5% year over year (y/y).

➢ In 3Q18, revenues totaled $7.37 billion, up 1.2% y/y and up 7% at constant exchange rate (CER).

➢ For FY18, the company maintains revenue growth expectations in the range of 4-5% and adjusted EPS growth in the band of 9-10% at CER.

Other Events

On Feb 26, 2018, Medtronic announced the receipt of expanded FDA approval for the Guardian Sensor 3. Per management, the receipt of the expanded approval will allow users to wear the sensor on the upper arm. This will lead to enhanced efficiency, accuracy and flexibility.

On Feb 26, 2018, Medtronic announced FDA nod and U.S. launch of the Resolute Onyx 2.0 mm Drug-Eluting Stent (DES). The new stent is the smallest in size in the market presently. The Resolute Onyx DES is available for use in all sizes in the United States, Europe and in countries that recognize the CE Mark.

On Feb 21, 2018, Medtronic broadened the MiniMed portfolio with the introduction of MiniMed Mio Advance infusion set. This latest offering from the company’s Diabetes business will be made commercially available in Canada, Hong Kong and certain countries in Europe in fourth-quarter fiscal 2018. However, the company plans an expanded launch of the same in 2018.

On Feb 15, 2018, Medtronic presented positive data from an at-home pediatric study on patients aged between seven and 13 years. Notably, the data is based on MiniMed 670G system and was demonstrated at the Advanced Technologies & Treatments for Diabetes’ 11th International Conference in Vienna, Austria.

Revenues

Total revenues were $7.37 billion in 3Q18, up 1.2% y/y (up 7% at CER). Foreign currency fluctuation favorably impacted revenues in 3Q18 by $177 million.

Management believes that segmental and regional growth in all lines as well as strong operating performance, largely based on the company’s synergy programs from the Covidien integration, drove revenues in 3Q18.  

Geographic Scenario

Post the Covidien acquisition, Medtronic currently reports in three geographic regions: United States, Non-U.S. Developed, and Emerging Markets. Medtronic includes Puerto Rico in the U.S. line (consistent with legacy Medtronic), whereas legacy Covidien used to consider Puerto Rico in its Non-U.S. Developed line. Medtronic includes Israel, Greece and Korea in the Non-U.S. Developed line (consistent with legacy Medtronic), while legacy Covidien included these countries in its Emerging Markets line. Medtronic’s definition of Emerging Markets is consistent with how the legacy Medtronic defined its Emerging Markets division.

Medtronic raked in 53.1% of total revenues from the domestic market in 3Q18, down 4.9% y/y to $3.91 billion. In the non-U.S. developed markets, the company garnered $2.36 billion, reflecting an improvement of 7.8% y/y (up 5% at CER). This region represented 32% of the company’s total revenues in 3Q18.

Revenues from emerging markets recorded 11.8% y/y (up 12% at CER) growth to $1.10 billion, representing 14.9% of Medtronic’s total revenues in 3Q18. Moreover, the growth in emerging markets was in line with management’s long-term growth expectations.

Globally, Medtronic continues to expand access to its products and services. In addition to ongoing traditional market development, management has plans of structuring partnerships with both governments and the private sector, as well as optimizing its channels. The company believes that these initiatives will not only lead to long-term leadership in emerging markets but will also make way for sustained market outperformance.

The company witnessed double-digit growth in Southeast Asia, Eastern Europe, Latin America, and the Middle East and Africa and China.

Outlook: For FY18, Medtronic continues to expect revenue growth of 4-5% at CER. However, the company revised its foreign currency fluctuation estimation, which is now projected to have a positive $480-$500 million impact on fiscal results compared with $275-$375 million estimated earlier. Moreover, for 4Q18, Medtronic expects currency translation to have a favorable impact of $300-$320 million on revenues.

Per the bullish firms, based on strength in CRM, Spine, Diabetes and Neuromodulation businesses, Medtronic is well-positioned to deliver encouraging top-line performance.

Segments

According to Medtronic, the combined business has been divided into four major groups – Cardiac and Vascular Group (CVG), Minimally Invasive Therapies Group (MITG) (formerly referred to as the Covidien Group following completion of the Covidien acquisition), Restorative Therapies Group (RTG) and the Diabetes Group.

Further, the Peripheral Stents, Directional Atherectomy and Chronic Venous Insufficiency (CVI) businesses of the former Peripheral Vascular business of Covidien have been combined with CVG's Aortic and Peripheral Vascular business. The remaining businesses of the Peripheral Vascular division, namely Compression, Dialysis and Other Peripheral product lines, have moved to MITG’s Surgical Solutions group. The Covidien’s Neurovascular business has been integrated into RTG as an independent business unit.

1. Cardiac & Vascular Group (CVG)

The Cardiac and Vascular Group (CVG) includes the Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, and Aortic & Peripheral Vascular divisions.

Revenues at the CRHF division increased 6% y/y (up 4% on a CER basis) to $1.46 billion in 3Q18. Per management, growth in this division was driven by Arrhythmia Management, led by high-teens growth in atrial fibrillation Solutions at CER, amplified penetration of the Micra transcatheter pacing system, and strong uptake of the TYRX absorbable antibacterial envelope. This apart, strong demand for the company's suite of quadripolar cardiac resynchronization therapy-pacemakers (CRT-P) along with growth in Mechanical Circulatory Support drove Heart Failure division revenues.

On Nov 20, Medtronic announced the receipt of FDA approval and commercial launch of its portfolio of Azure pacemakers with BlueSync technology. According to the company, this technology enables secure, automatic and wireless remote monitoring via the Medtronic CareLink Network. Security controls implemented and validated on BlueSync-enabled devices include access restrictions to protect integrity of device functionality and end-to-end encryption to protect patient data.

B. Coronary & Structural Heart (CSH)

This division includes therapies to treat coronary artery disease (CAD), and heart valve disorders. CSH’s products include coronary stents and related delivery systems, including a broad line of balloon angioplasty catheters, guide catheters, guide wires, diagnostic catheters, and accessories as well as products for the repair and replacement of heart valves, perfusion systems, positioning and stabilization systems for beating heart revascularization surgery, and surgical ablation products. Principal products include: Transcatheter Heart Valves (THVs), Percutaneous Coronary Intervention (PCI) stent products and surgical valve replacement and repair products for damaged or diseased heart valves.

CSH revenues were up 18% (14% at CER) to $886 million on the back of low-30s constant currency growth in transcatheter aortic valves as a result of strong uptake of the CoreValve Evolut PRO platform and expanded FDA approval to include patients at intermediate risk. Moreover, the continued uptake of the Resolute Onyx drug-eluting stent in the United States and Japan drove the Coronary business.

In TAVR, Medtronic recorded growth in the mid-20s in the United States and low 40s in international markets in 3Q18.

On Nov 2, Medtronic presented positive data demonstrating the encouraging clinical performance of the Evolut Transcatheter Aortic Valve Replacement (TAVR) platform at the Transcatheter Cardiovascular Therapeutics (TCT) Annual Meeting.

In addition, six-month data from the Evolut PRO System highlighted the importance of its exclusive valve design. Notably, the CoreValve Evolut TAVR platform comprises the CoreValve, CoreValve Evolut R and the CoreValve Evolut PRO systems. Interestingly, all of the products have received CE Mark and FDA approval for the treatment of severe aortic stenosis patients at an intermediate or high surgical risk.

On Nov 1, Medtronic announced favorable data demonstrating the effectiveness of the self-expanding Intrepid transcatheter mitral valve replacement (TMVR) system for treating patients with severe, symptomatic mitral valve regurgitation at the Transcatheter Cardiovascular Therapeutics (TCT) Annual Meeting. The results were also published in the Journal of the American College of Cardiology (JACC).

C. Aortic & Peripheral Vascular (APV)

This division, which includes a portion of the Covidien Peripheral business, consists of a comprehensive line of products and therapies to treat aortic disease (such as aneurysms, dissections, and transections) as well as peripheral vascular disease (PVD). This division’s products include endovascular stent graft systems, peripheral drug coated balloon (DCB), stent and angioplasty systems, and carotid embolic protection systems for the treatment of vascular disease outside the heart. Principal products include Endovascular Stent Grafts and Peripheral Vascular Intervention (PVI) products (including percutaneous angioplasty balloons and peripheral stents).

APV revenues registered 7% growth (up 5% at CER) to $457 million, driven by continued adoption of the Valiant Captivia thoracic stent graft systems.

Peripheral Vascular was driven by double-digit growth in percutaneous transluminal angioplasty and drug-coated balloons. Moreover, solid contributions from VenaSeal closure system drove high-single digit growth in endoVenous.

On Jan 30, 2018, Medtronic announced positive data from the IN.PACT SFA Japan Study demonstrating the effectiveness of IN.PACT Admiral drug-coated balloon in peripheral artery disease (PAD).

On Jan 26, 2018, Medtronic announced the start of the investigational device exemption (IDE) study for the Abre venous self-expanding stent system. The ABRE IDE Study will also provide a pragmatic evaluation of the safety and performance of the Abre stent in patients with iliofemoral venous outflow obstruction. Moreover, the multi-center, single arm study will register around 200 patients with deep venous disease from up to 35 sites through the United States and Europe. Furthermore, Medtronic will use the data from the study to apply for the U.S. pre-market approval (PMA) application.

On Jan 24, 2018, Medtronic announced the launch of the ENCHANT (ENdurant CHEVAR New Indication Trial) study. The post-market, non-interventional, multi-center, non-randomized, single-arm study will register around 150 patients across 25 sites in Europe and Russia. The study will also provide a pragmatic evaluation of the safety and performance of a ChEVAR procedure using the Endurant II/IIs stent graft system.

2. Minimally Invasive Therapies Group (MITG)

The Minimally Invasive Therapies Group, formerly referred to as the Covidien Group following completion of the Covidien acquisition, has been categorized into the Surgical Innovations and the Respiratory, Gastrointestinal & Renal divisions following the divestiture of the Patient Care, Deep Vein Thrombosis (Compression) and Nutritional Insufficiency (Enteral Feeding) businesses.

Revenues at this segment declined 16% y/y (increased 6% on a CER basis) to $2.04 billion in 3Q18 on high-single digit growth in SI, and low-single digit growth in RGR, both at CER.

In the United States, revenues from MITG were down 30% y/y (up 4% y/y on CER basis) to $862 million and revenues in the non-developed market decreased 4% y/y (up 2% y/y on CER basis) to $807 million. In the emerging markets, revenues rose 9% y/y (17% at CER) to $372 million.

A. Surgical Innovations (SI)

Revenues from the SI division increased 7% on a CER basis to $1.38 billion. The improvement on a CER basis was driven by new products in Advanced Stapling and Advanced Energy, including endo stapling specialty reloads, the Signia powered stapler and LigaSure vessel sealing instruments.

On Jan 30, 2018, Medtronic announced collaborating with Royal Philips to develop and market the LungGPS Patient Management Platform for better management of patients with lung nodules. This data management platform will help patients right from the diagnosis stage to long-term survivorship.

B. Respiratory, Gastrointestinal & Renal (RGR)

The growth was led by a low-double digits growth at CER in GI and Hepatology on the back of solid contributions from diagnostics, GI therapeutics, and ablation product lines. Moreover, strong uptake of Nellcor pulse oximetry sensors as high incidence of influenza in the United States led to a low-single digits growth at CER in Respiratory and Patient Monitoring.

3. Restorative Therapies Group (RTG)

During FY17, Medtronic realigned its divisions within the Restorative Therapies Group (RTG), which included a movement of revenue from certain product lines in RTG to CVG's Aortic & Peripheral Vascular division. The Restorative Therapies Group currently includes the Spine, Brain Therapies, Specialty Therapies and Pain Therapies divisions.

In 3Q18, revenues at this segment increased 7% y/y (up 5% at CER) to $1.94 billion. The improvement was driven by low double-digit growth in Brain Therapies, mid-single digit growth in Specialty Therapies and high-single digit growth in Pain Therapies, at CER. However, revenues from the Spine business remained flat at CER on a year-over-year basis.

In the United States, revenues from RTG increased 5% y/y (same at CER) to $1.30 billion while that in the non-U.S. developed markets rose 12% (5% at CER) to $429 million. In the emerging markets, revenues increased 13% y/y (up 9% at CER) to $215 million.

A. Spine

In the Spine division, which now includes the Core Spine, BMP and Kanghui businesses, Medtronic’s revenues rose 1% (flat on a CER basis) to $661 million in 3Q18. Notably, a low-single digit decline in Core Spine was more than offset by mid-single digit growth in bone morphogenetic protein (BMP) at CER.

Per management, the combination of enabling technologies like imaging, navigation, powered instruments, nerve monitoring and Mazor Robotics with spine implants has spurred growth in this division.

Per the firms with the neutral stance, changing hospital buying patterns, hospital and vendor consolidation along with tendering process have been increasing pricing pressure within the Spine business of the company.

On Jan 9, 2018, Medtronic announced the enrollment of first patient for its Vectors Post Market Clinical Study. The study will evaluate patients suffering with chronic intractable pain and are subjected to spinal cord stimulation (SCS) treatment managed with the Evolve workflow. Notably, the Evolve workflow operates on Medtronic’s SCS systems, including Intellis.

On Nov 6, Medtronic announced the receipt of CE Mark for the Intellis platform for both Spinal Cord Stimulation (SCS) and Peripheral Nerve Stimulation (PNS) for treating various types of chronic pain. Notably, the world's smallest fully implantable SCS neurostimulator — Intellis — enhances the treatment experience with better battery performance that can power the Evolve workflow.

B. Brain Therapies

At the Brain Therapies division, which now includes the Neurovascular and Neurosurgery businesses, Medtronic’s revenues increased 13% (10% on a CER basis) to $585 million. Neurovascular grew in the high-teens on a constant currency basis, driven by strength in stroke portfolio. Neurosurgery grew in the low-double digits on a constant currency basis, led by robust sales of the StealthStation S8 surgical navigation system and O-arm 2 surgical imaging system.

On Jan 16, 2018, Medtronic announced the receipt of FDA approval for the Riptide Aspiration System under the Neurovascular unit within the broader RTG business. This adds a valuable tool to the company’s Acute Ischemic Stroke (AIS) product portfolio.

According to Medtronic, the Riptide Aspiration System is designed to retrieve thrombus (or blood clot) through the Arc Catheter and restore blood flow in patients experiencing blockage of an artery in the brain, known as an ischemic stroke.

On Jan 11, 2018, Medtronic announced study results showing the superiority of Medtronic ITB (Intrathecal baclofen) Therapy to conventional medical management (CMM) for the reduction of severe post-stroke spasticity (PSS) in adults. Notably, the results from the ‘Spasticity In Stroke-Randomised Study’ (SISTERS) trial were published in the Journal of Neurology, Neurosurgery & Psychiatry (JNNP).

C. Specialty Therapies

In the Specialty Therapies division, which now includes the Pelvic Health, Advanced Energy and ENT businesses, Medtronic’s revenues rose 8% (up 6% on a CER basis) to $398 million. Notably, with a high-single digit growth, Pelvic Health and ENT contributed to the division. This was however partially offset by low-single digit declines in Transformative Solutions, all on CER.

D. Pain Therapies

In the Pain Therapies division, which now includes the Pain (Spinal Cord Stimulation and Drug Pumps) and Interventional Spine businesses, the company’s revenues rose 10% (8% on a CER basis) to $300 million in 3Q18. Pain Therapies saw growth on solid uptake of Intellis platform for spinal cord stimulation, as well as strength in drug pumps.

On Jan 10, 2018, Medtronic announced FDA approval of a new clinician programmer for use with the SynchroMed II Intrathecal Drug Delivery system. This is an implantable pump that provides targeted drug delivery for chronic pain and severe spasticity. Notably, targeted drug delivery is considered an alternative to oral treatment for chronic pain and helps in reducing systemic opioid.

4. Diabetes Group

The Diabetes Group constitutes the Intensive Insulin Management (IIM), Non-Intensive Diabetes Therapies (NDT), and Diabetes Services & Solutions (DSS) divisions. The Diabetes segment develops, manufactures, and markets advanced, integrated diabetes management solutions that includes insulin pump therapy, continuous glucose monitoring (CGM) systems, and therapy management software.

In 3Q18, revenues at this segment rose 17% (up 13% y/y on a CER basis) to $584 million The company benefited from positive uptake of new sensor-augmented insulin pump systems in the United States as well as in the international markets along with enhanced production capacity for the same. Notably, the company has already served over 20,000 patients with its MiniMed 670G system in the United States. Interestingly, Medtronic expects double-digit growth at the segment in 4Q18, courtesy of consistent performance of MiniMed 670G system in the United States along with enhanced sensor supply capacity.

This apart, management is also satisfied with higher consumable revenues from Animas Corporation’s (one of the Johnson & Johnson Diabetes Care Companies) users in 3Q18. Moreover, they have stated that the company is progressing well with the smooth transition of Animas users.

Additionally, Medtronic has been gearing up for the international launch of the MiniMed 670G and the U.S. launch of CGM system Guardian Connect with sugar IQ in late 2018 and its new professional CGM iPro 3 in 2019. In this regard, the company also announced favorable results supporting the use of CGM on patients with type 2 diabetes in October 2017.

IIM revenues rose in the high-teens at CER. However, the company witnessed 15% growth in new patient count in the United States. This growth was led by the solid uptake of MiniMed 670G system in the United States with the Guardian sensor 3 CGM. In addition, the division delivered low-twenties digit constant currency growth in international markets on account of continued strength in the MiniMed 640G system.

NDT declined in the mid-single digits on a CER basis. The division suffered from the competitive pressures along with the shift in company’s focus on the MiniMed670G launch.

DSS grew in the mid-single digits at CER. The growth was led by consumables benefitting from rise in installed base and enhanced patient utilization.

Moreover, the firms with a bullish stance believe that Medtronic has been witnessing sensor growth as it continues to shift its customer base to sensor-augmented pumps from stand-alone pumps in 3Q18.

Margins

Gross margin was 70.3% in 3Q18, up 140 bps y/y on a 3.3% rise in gross profit to $5.18 billion.

Adjusted operating margin expanded 10 bps year over year to 28.9% owing to a 5.3% rise in research and development expenses (to $558 million) along with a 4.6% uptick in selling, general and administrative expenses (to $2.49 billion). Other expenses in the reported quarter totaled $140 million compared with $46 million in the year-ago quarter.

Medtronic’s adjusted nominal tax rate was 15.6% in 3Q18, considering the U.S. tax reform. Per management, tax rate is expected between 15% and 16% for 4Q18.

Outlook: Medtronic has not provided any guidance for FY18 margins.

Earnings per Share (EPS)

Medtronic reported 3Q18 adjusted earnings per share (EPS) of $1.17, up 4.5% y/y (after adjusting for certain one-time items including the impact of restructuring charges, intangible asset amortization, divestiture-related items and acquisition-related items). On a CER basis, Medtronic’s 3Q18 adjusted EPS came in at $1.18, after adjusting for the 1-cent impact from foreign currency translation.

Without one-time adjustments, the company reported a net loss of $1.03 per share, compared with 59 cents in the previous year. This included a $2.2-billion net tax expense related to the U.S. tax reform.

Outlook: For FY18, the company has reiterated its adjusted EPS guidance at the range of 9-10% at CER. Currency translation is likely to have an adverse impact of 4 cents compared with the earlier expectation of a negative effect of 2 cents. Moreover, currency translation is expected to affect 4Q18 earnings per share by 2 cents.

Mar 2, 2018

|Analyst |Sweta Jaiswal |

|Copy Editor |Parijat Sen |

|Content Ed. |Urmimala Biswas |

|No. of brokers reported/Total |19/21 |

|brokers | |

|Reason for Update |3Q18 Earnings Update |

|Lead Analyst |Urmimala Biswas |

|QCA |Urmimala Biswas |

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