- One month ahead of its quarterly earnings report, Medtronic issued an update late Tuesday bracing investors to expect a significant hit to earnings as hospitals make smaller than usual end-of-fiscal-year orders and revenues from devices used in elective procedures fall sharply.
- Medtronic shed new light on how the pandemic's impact has evolved geographically. Since mid-March, weekly revenues in China have recovered from being cut in half compared to last year to showing declines between 20% and 40%. But around that same time, its much larger U.S. business began showing weekly revenue declines of 60%.
- A collection of lower-margin business lines accounting for about 10% of Medtronic's global revenues prior to the pandemic — including ventilators, patient monitoring devices, ECMO machines and diabetes supplies — have seen a spike in demand as healthcare systems worldwide respond to novel coronavirus cases. But much of its business remains tied to elective procedures or therapies, meaning its spine, pelvic health, pain, ENT, bariatric, hernia, GI, and atrial fibrillation device lines are among those especially prone to declines as long as pandemic response takes priority at hospitals.
While Medtronic has moved to boost ventilator production amid the pandemic, it's not a key source of revenue.
The company opted to open source its ventilator design, which it said three large-scale manufacturers have adopted, as it's ramped up its own production of the respiratory support devices alongside Elon Musk's SpaceX. Additionally, Medtronic has worked on relevant remote patient monitoring technologies and a symptom assessment tool.
Medtronic said in its update it's on track to make more than 1,000 ventilators per week by the end of June — a five-fold increase from pre-pandemic levels. The company received an HHS contract worth $9.1 million for 1,056 ventilators, or a little more than $8,600 per device. Medtronic said it has committed to not raising prices on the devices during the pandemic.
The expected drop in earnings this quarter relative to revenue can be attributed in part to continued investments in R&D, its sales force, and heavy manufacturing "to provide inventory to support the anticipated rebound in procedures during the expected recovery period."
As the largest pure medical device company, Medtronic exemplifies a pattern of sales declines seen across the industry responding to broad postponement of elective procedures. Among companies early to report first quarter earnings, Johnson & Johnson last week said late-March U.S. declines accounted for 30% of the drop in its medical device business, while Intuitive Surgical noted U.S. use of its da Vinci robot fell 65%.
"We expect other companies in the medical device sector will also see weak sales, generally consistent with Medtronic’s results, depending on product mix," Scott Tuhy, a senior vice president at Moody's Investors Service, said in an emailed statement.
The Trump administration is keen to allow elective surgeries to begin again, but that's contingent upon states or regions meeting criteria indicating outbreaks are under control and hospitals are well-resourced enough to support the additional procedures.
Medtronic's fiscal fourth quarter ends Friday, meaning its next earnings report will reflect an additional month of COVID-19 impact compared to companies following a more typical calendar. Aside from lost revenue from postponed procedures, the company said it expects "a decline in typical large, end of Medtronic fiscal year customer orders" as hospitals tighten their belts when it comes to capital equipment purchases and stocking inventories of devices used in elective procedures.
The update comes during Omar Ishrak's final week as chief executive officer before passing the torch to current president and former Restorative Therapies Group head Geoff Martha. The leadership transition was announced last August. Ishrak, who was named chairman of the board of Intel earlier this year, is staying on at Medtronic as executive chairman.
Medtronic's stock price has recovered to approximately end-of-February levels. The company said it has about $11 billion in cash.
Medtronic said some things are still business as usual: progress with regulatory agencies on other products in its pipeline "do not appear to be currently affected by the pandemic."