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Medtronic (MDT) is a force to be reckoned with in the medtech landscape. Pairing its diverse product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered Medtronic’s position as a key partner for its hospital customers. The company is often first to market with new products and has invested heavily in internal research and development as well as acquiring emerging technologies. In the postreform healthcare world where there are higher hurdles to securing reimbursement for next-generation technology, Medtronic’s strategy now includes partnering more closely with its hospital clients by offering a greater breadth of products and services to help hospitals operate more efficiently. By integrating itself into more hospital operations, Medtronic is well positioned to take advantage of more business opportunities in the value-based reimbursement environment, in our view.
Key Morningstar Metrics for Medtronic
- Fair Value Estimate: US$112
- Star Rating: 4 Stars
- Economic Moat Rating: Wide
- Uncertainty Rating: Medium
Economic Moat Rating
Medtronic’s wide economic moat is rooted in its dominant presence in highly engineered medical devices to treat chronic diseases, including those beyond its historical stronghold in heart disease. Medtronic’s strongest moat source is intangible assets, including intellectual property and carefully nurtured relationships with physicians. We expect Medtronic to continue its record of innovation, based on its extensive patent portfolio. Also, switching costs are associated with specific products, such as cardiac rhythm management devices and transcatheter aortic heart valves. In the spine area, Medtronic’s moat is strengthened by high switching costs for surgeons. The addition of Covidien deepened Medtronic’s competitive advantages, as the acquired company’s medical-device segment enjoys brand recognition, technological innovation, and substantial scale.
Fair Value Estimate for Medtronic Stock
Our fair value estimate is $112 per share, though we anticipate adjusting this once Medtronic spins off its patient monitoring and respiratory interventions businesses in late calendar 2023 or early 2024. Overall, we assume the recent uptick in medical utilization following the pandemic should continue through fiscal 2024. We expect ongoing hospital labor constraints will prevent significant expansion of provider capacity through the midterm but anticipate the expected launches of renal denervation, extravascular cardiac rhythm devices, and pulsed field ablation should support 4% top-line growth through fiscal 2028. We continue to expect gradual margin expansion over the longer haul to account for the shedding of more legacy Covidien businesses, efficiency programs, and higher-margin new products. However, near-term inflationary and supply chain pressures are likely to damp margin gains in fiscal 2024.
Risk and Uncertainty
With baby boomers hitting Medicare age, there could be future cuts to Medicare reimbursement for device-related procedures, which would translate into financial pressure for Medtronic’s hospital customers. Securing price premiums for new technology is no longer a given; this now depends on favorable clinical data. Increasing regulatory attention and interest in conducting more extensive clinical trials and aftermarket studies could increase development costs for Medtronic. Periodic product recalls and liability and inventory write-downs are occasional sore spots for the industry. Investigations of products and their marketing remain a risk in the medical-device business.
Medtronic Bulls Say
- Medtronic has historically held roughly 50% market share in its core heart devices. It’s also the market leader in spinal products, insulin pumps, and neuromodulators for chronic pain.
- The company’s pipeline contains treatments for atrial fibrillation, mitral valve disease, and renal denervation for hypertension. If these new therapies prove effective, Medtronic could dominate three more potentially large markets.
- Medtronic often finds novel ways to apply familiar technologies, like using the implantable electronic stimulation in pacemakers to address fecal incontinence and chronic pain.
Medtronic Bears Say
- As smaller companies introduce new insulin pump technology, Medtronic may face a stiffer fight to maintain its leadership in this arena.
- Medtronic’s devices are indirectly subject to Medicare reimbursement rates; increasing pressure on payments could hurt profitability.
- Over the years, Medtronic has issued a number of voluntary product recalls. Although the fatalities associated with these problems have been few, recalls generally require time, effort, and potentially legal settlements.
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