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Will Solid Diabetes Arm Drive Medtronic's (MDT) Q4 Earnings?

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Medtronic plc’s MDT Diabetes Group has been on a solid growth trajectory of late, on encouraging contributions from majority of the sub-segments.

We expect this strength to reflect in fourth quarter and fiscal 2018 results, which are scheduled to release before the opening bell on May 24.

Click here to know how the company’s overall Q4 performance is likely to be.

Diabetes in Focus

Medtronic’s Diabetes Group presently comprises 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.

We note that management expects double-digit revenue growth in the Diabetes Group in the fourth quarter of fiscal 2018. Per management, consistently strong adoption of MiniMed 670G system in the United States along with enhanced sensor supply capacity will drive the upside.

Consequently, the Zacks Consensus Estimate for Diabetes Group revenues of $621 million indicates a rise of 21.3% from the year-ago quarter. Also, our estimates for Diabetes Group revenues in the United States of $362 million reflect a rise of 19.5% from a year ago.

Medtronic PLC Price and EPS Surprise

 

Medtronic PLC Price and EPS Surprise | Medtronic PLC Quote

 

In the last reported quarter, the segment recorded improvement in sales and benefited from increased uptake of the 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 MiniMed 670G system has served over 20,000 patients in the United States.

This apart, management is optimistic about the uptick in consumable revenues from Animas Corporation’s (one of the Johnson & Johnson Diabetes Care Companies) users in the third quarter of fiscal 2018. Moreover, they have stated that the company is progressing well with the smooth transition of Animas users. We expect the trend to continue in the yet-to-be reported quarter as well.

During the fourth quarter of fiscal 2018, Medtronic proceeded with initiatives to boost the performance of its MiniMed portfolio. In February, the company expanded its product portfolio with the addition of MiniMed Mio Advance infusion set. The latest offering in the Diabetes business was planned to be made commercially available in Canada, Hong Kong and certain countries in Europe in fourth-quarter fiscal 2018.

In the same month, the company announced that the FDA has approved a new arm indication for the Guardian Sensor 3 continuous glucose monitor (CGM) used with the MiniMed 670G insulin pump. Notably, the Guardian Sensor 3 is the company’s latest and most accurate CGM. Per Medtronic, this is the only sensor to have received an FDA nod for controlling automated insulin delivery via a hybrid closed loop system, the MiniMed 670G.

This new arm indication for the Guardian Sensor 3 offers more convenience and flexibility to patients. It is available in the United States for use with the MiniMed 670G system. We believe these developments will be beneficial to the company’s Diabetes Group portfolio, which should get reflected in the yet-to-be-reported quarter results.

Let's see how things are shaping up in these sub-segments before the fourth-quarter release.

IIM revenues rose in the high-teens at CER in the third quarter of fiscal 2018. However, the company witnessed 15% growth in new patient count in the United States. This growth was led by solid uptake of MiniMed 670G system in the United States with the Guardian sensor 3 CGM. In addition, the division delivered low-20s digit constant currency growth in international markets on account of continued strength in the MiniMed 640G system.

Given the developments with regard to the MiniMed 670G system, we expect top-line contributions from the continued uptake of this product to rise and get reflected in the soon-to-be reported quarter results.

DSS grew mid-single digits at CER as consumables benefitted from rise in installed base and enhanced patient utilization. The improvement in this business is expected to continue.

Zacks Rank & Stocks to Consider

Medtronic currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader medical sector are Intuitive Surgical ISRG, Illumina, Inc ILMN and Amedisys, Inc. AMED. While Intuitive Surgical and Illumina sport a Zacks Rank #1 (Strong Buy), Amedisys carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Intuitive Surgical has a long-term expected earnings growth rate of 12.1%.

Illumina has a long-term expected earnings growth rate of 20%.

Amedisys has a long-term expected earnings growth rate of 17.5%.

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