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Recently, Medtronic Inc. (MDT - Analyst Report) acquired privately held Cardiocom. The medical device major took over this developer and provider of integrated telehealth and patient services chronic diseases management for a total consideration of $200 million. The acquisition is an attempt by the company to rebuild itself as a health care service provider. However, the acquisition is expected to be neutral to Medtronic’s fiscal 2014 earnings.

According to Medtronic, the acquisition of Cardiocom is the first step toward its transition to a provider of broader healthcare services and solutions with meaningful clinical and economic value for hospitals, physicians, patients and payers. At the initial phase, the company aims to capture a significant share of the huge heart failure market. About 7.5 million people in the U.S. each year are affected by heart failure. This leads to annual expense of $39 billion from 1.1 million hospital visits. 

With the addition of Cardiocom’s line of products and services, Medtronic believes that it can now manage heart failure more efficiently. Cardiocom’s technological expertise and patient services will expand Medtronic’s reach among patients and thus reduce burden on hospitals, physicians, payers and patients. 

As per the Centers for Disease Control (CDC), 7 out of 10 deaths in America are from chronic disease which mostly includes heart disease, stroke, cancer, diabetes and arthritis. Currently, chronic diseases account for $3 of each $4 spending on health care or $7,900 per American.   We believe that the acquisition will help Medtronic reduce the costs incurred due to chronic diseases, which is highly important given the present scenario.

We are impressed with Medtronic’s decision to diversify its business in order to cope with the ever-changing medical and healthcare market. Further, the strong guidance for the ongoing fiscal boosts confidence. The company’s focus on portfolio expansion to boost revenues from emerging markets appears impressive. However, looming headwinds such as soft economic conditions, tough competition, segment pressure, and currency headwinds keep us on the sidelines.

Medtronic currently carries a Zacks Rank #3 (Hold). Other medical sector stocks that warrant a look are Cyberonics Inc. (CYBX - Analyst Report), Thoratec Corp. (THOR - Analyst Report) and Alere Inc. (ALR - Snapshot Report). All three stocks carry a Zacks Rank #1 (Strong Buy).

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