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We have reaffirmed our Neutral recommendation on Medtronic (MDT - Analyst Report) with a target price of $44.00.

During the first quarter of fiscal 2013, the company reported adjusted earnings of 85 cents per share, up 8% year over year and in line with the Zacks Consensus Estimate. Revenues were $4.008 billion, up 1.6% year over year (up 5% at constant exchange rates or CER), nominally missing the Zacks Consensus Estimate of $4.015 billion.

We are encouraged to note that the core markets of US implantable cardioverter-defibrillator (ICDs) and Spinal improved during the reported quarter. As per the company’s estimates, the worldwide ICD market declined in the low-single digits. This was accompanied by a 4% decline in the US ICD market, the lowest decline witnessed in the last six quarters. Medtronic’s US ICD business was down 3% in the reported quarter, better than the market. Moreover, the 4% drop in pricing was consistent with the previous quarter. The US core spine market was flat with modest improvements over the past three quarters.

We are impressed with the company’s efforts to augment/diversify its product range. We are optimistic that over the long term, stability in the US ICD market along with a deep pipeline/portfolio that includes – CoreValve, Resolute Integrity, Atrial Fibrillation, renal denervation and peripheral businesses – will be the driving factors for the company going ahead.

Medtronic has witnessed robust growth in the transcatheter valve business on the back of CoreValve. While the product is CE Mark approved, the company is working on its launch in the US, scheduled in fiscal 2015. Over the long term, the Viva/Brava family of next-generation CRT-D devices that received CE Mark approval in August 2012 should boost the CRDM segment. Moreover, the Diabetes business should benefit with the anticipated FDA approvals of the MiniMed 530G insulin pump and Enlite sensor by the end of fiscal year 2013.

The launch of the Resolute Integrity in the US helped the company triple its market share over the past two quarters (market share increased by 7 percentage points in the reported quarter). Besides, international market share should increase further with the launch of Resolute Integrity in Japan in August.

Meanwhile, emerging markets continue to remain a key focus area for the company. Management is targeting to achieve 20% of its revenues from the emerging markets by fiscal 2015−16.

However, several headwinds remain such as macroeconomic uncertainties resulting in lower procedure volume. Growth in Europe during the reported quarter varied with double-digit growth in France, the UK and Ireland, partially offset by softness in Southern Europe. The company also faces tough competition from players such as Boston Scientific (BSX - Analyst Report) and St Jude Medical (STJ - Analyst Report). 

Our neutral recommendation is backed by a Zacks #3 Rank (‘Hold’) in the short term.

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