Strong sales at Medtronic, but profit margins decline

Following a quarter of strong sales, but diminished profit margins, Medtronic officials on Tuesday suggested one key to future growth is contracts that link payments for medical devices to good patient outcomes.

Medtronic now has more than 1,000 hospitals operating under contracts for a certain combination of heart devices and "antibacterial envelopes" that lower payments to the medical device manufacturer depending on whether patients get infections, said Omar Ishrak, the Medtronic chief executive, during a Tuesday call with investors.

In addition, Medtronic has commercialized five other "value-based health care programs," Ishrak said, where a portion of the company's payment is tied to specific patient outcomes.

"Collectively, these five programs in addition to TYRX [antibacterial envelopes] cover over $615 million in mostly U.S.-based device revenue," he said. "Across Medtronic, we remain focused on leading the shift to health care payment systems that reward value and improve patient outcomes."

For the quarter ending Jan. 26, Medtronic PLC posted nearly $7.37 billion in revenue, an increase of 7 percent compared with last year after adjusting for currency impacts and a divestiture.

Excluding one-time factors, the medical device manufacturer posted earnings of nearly $1.59 billion, or $1.17 per share, which matched the per-share earnings estimate from analysts surveyed by Thomson Reuters.

Analysts said that the strong sales performance didn't fully show on the bottom line.

"A sticking point continues to be operating leverage," wrote Joanne Wuensch, an analyst with BMO Capital Markets, in a note to investors. "On the surface, operating margins declined."

Currency fluctuations apparently hurt profitability during the quarter, and there are questions as to whether the dynamic will continue in the near term, said John Boylan, an analyst with Edward Jones, in an interview. But Boylan said the company posted good results overall, and continues to have a strong pipeline of products in development.

Medtronic reiterated its financial guidance for the fiscal year, which ends in April. The company employs more than 84,000 people worldwide, including more than 9,000 in Minnesota.

Medtronic is one of the world's largest manufacturers of pacemakers and implantable heart defibrillators. The company's shares on Tuesday closed down about 2 percent, at $81.61.

Christopher Snowbeck • 612-673-4744 Twitter: @chrissnowbeck