Bloomberg News

Medtronic to Cut $1.2 Billion in Product Costs in 5 Years

November 29, 2011

(Updates with closing stock price in fifth paragraph.)

Nov. 22 (Bloomberg) -- Medtronic Inc., in the final year of a plan to reduce production costs of its medical devices by $1 billion, is planning a second effort that will strip out at least $1.2 billion, said Chief Financial Officer Gary Ellis.

Medtronic, the world’s biggest maker of heart-rhythm devices, cut expenses by 25 percent in the initial five-year program. That enabled Medtronic to maintain profit margins even as prices for pacemakers, defibrillators and spinal products fell worldwide, and will yield greater benefits in the next two quarters, Ellis said in a telephone interview.

At least another 25 percent from the costs will be trimmed over the next five years, reaping savings of $1.2 billion to $1.3 billion, Ellis said. Minneapolis-based Medtronic is making everything from logistics and shipping to sales more efficient, paving the way for pricing that will enable it to penetrate emerging markets where costs need to be even lower, Chief Executive Officer Omar Ishrak said.

“Twenty-five percent is the initial target,” Ishrak said. “We’re working on long-term programs right now that take cost out dramatically in the future.”

Medtronic rose 4.5 percent to $34.75 at the close of New York trading. The shares have fallen 6.3 percent in 2011.

Beat Estimates

Medtronic reported second-quarter earnings that beat analysts’ expectations as demand for the company’s defibrillators and spinal products fell less in the U.S. than anticipated. The results suggest that both markets are starting to stabilize, Ellis said.

Profit excluding one-time items in the three months ended Oct. 28 was 84 cents a share, exceeding the average estimate of 82 cents of 29 analysts surveyed by Bloomberg. Revenue increased 5.9 percent to $4.13 billion, the company said in a statement.

International sales, which account for 44 percent of revenue, rose in almost every product area, the company said.

“Overall, this was a very strong quarter,” said Derrick Sung, an analyst with Sanford C. Bernstein & Co. in New York. “It is significant that Medtronic is now finally growing above market, just slightly,” in U.S. defibrillator sales, he said in a note to clients today. “We expect the share gains to accelerate over the next few quarters” as demand for the company’s next-generation devices grows, he said.

The company reiterated its full-year earnings forecast of $3.43 to $3.50 a share. Revenue probably will increase 1 to 3 percent on a constant currency basis, Medtronic said.

Net income increased 54 percent to $871 million, or 82 cents a share, from $566 million, or 52 cents, a year earlier, when Medtronic had $321 million in legal, acquisition and other charges, the company said.

--Editors: Bruce Rule, Angela Zimm

To contact the reporter on this story: Michelle Fay Cortez in Minneapolis at mcortez@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net


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