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We recently reinstated our Neutral recommendation on Medtronic, Inc. (MDT - Analyst Report). While we are to-some-extent relieved with the signs of stability in the  core ICDs and spine markets, challenges still remain in the core Cardiac Rhythm Disease Management (CRDM) and pacing segments after several weak quarters, we are still concerned about Medtronic’s Biologics business, which remained sluggish and affected the company’s overall performance. The stock currently carries a Zacks Rank #3 (Hold).

Why at Neutral?

Medtronic reported fourth quarter 2013 adjusted EPS of $1.10, up 11% year over year and ahead of the Zacks Consensus Estimate of $1.03. Revenues came in at $4.459 billion, up 4% at CER and exceeding the corresponding Zacks Consensus Estimate of $4.388 billion.

Management confirmed that both the core ICD and spine market are gradually stabilizing, which will result in easier comparisons and should improve growth over the coming quarters. More significantly, for the first time in the last four and a half years, in the fourth quarter, revenues from ICD and core spine increased 2% at CER, which outperformed the market.

ICD growth was primarily due to the company’s progress with shock reduction and lead integrity alert technologies along with long-term lead performance leading to stronger market acceptance. In addition, the ICD implant volumes were sequentially stable for the fourth quarter in a row.

In fiscal 2013, the company witnessed an increase of 2 percentage points in its US core spine share. Moreover, its Solera posterior fixation system, Bryan artificial cervical disk, Atlantis Vision Elite cervical plate, and [ANP] interbody devices drove incremental revenues in this quarter. The company strongly believes that the recent product approvals and upcoming launches will also contribute to sustained future growth.

Medtronic’s Biologics business suffered from continuous declines in the sales of Infuse (following the publication of articles in The Spine Journal). Revenues from BMP (consisting of Infuse bone graft [InductOs in the European Union] sales) declined 21% year over year at CER during the quarter in the US.

Moreover, the results of the long awaited Yale study, which were published on Jun 17, may not be of any help to Medtronic. This adds to our concerns.As per the study, Infuse showed no signs of being more effective than iliac crest bone graft. We believe this unfavorable data from the Yale study can be a big blow for the Biologics product line in the coming quarters.

Other Stocks to Consider

While we prefer to remain on the sidelines on Medtronic, other medical devices stocks worth a look are China Cord Blood Corporation (CO - Snapshot Report), ResMed Inc. (RMD - Analyst Report) and Tornier N.V. (TRNX - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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