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Medtronic CEO points to M&A 'firepower,' new products as diabetes sales drop

Despite coming in above guidance and Wall Street's expectations, Medtronic PLC's fourth-quarter organic revenue growth dropped to a 3.6% increase, as executives cited tough year-over-year comparisons and unusual slowness in the company's diabetes business.

In the previous quarter, Medtronic reported a 4.4% increase in organic revenue — the first time in four quarters that the company posted growth below 6.5%.

Medtronic's fourth-quarter EPS grew 8.5%, a result that Leerink analyst Danielle Antalffy called "good enough."

Antalffy wrote following the Dublin-based medical device company's May 23 earnings call that a steady flow of new product launches will be "critical to Medtronic's ability to offset headwinds and deliver on its FY2020 guidance."

'An anomaly,' again

The diabetes group has historically been one of Medtronic's top drivers: The first and second quarter of fiscal year 2019 saw revenue growth of 26.3% and 26.2%, respectively.

But growth slowed to 4.5% in the third quarter. CEO Omar Ishrak had expected that growth would "look more normal" in the fiscal fourth quarter ended April 26. Instead, the group posted just a 0.6% increase in revenue year over year, totaling $626 million. Ishrak called the slight increase an "anomaly" for the second quarter in a row.

During the call's question-and-answer session, Morgan Stanley analyst David Lewis asked how Medtronic was positioned amid a rapidly changing diabetes industry.

President of Medtronic's diabetes group, Hooman Hakami, said the international markets would be a "big portion of our growth," and emphasized an "incredibly exciting" pipeline that will be shared at the American Diabetes Association meeting in June.

According to Ishrak, Medtronic will likely file for a noninjective indication for its continuous glucose monitoring sensor in early 2020.

'Tremendous firepower'

Outside of diabetes, Medtronic drew attention to its pipeline, emphasizing that major product launches would be forthcoming in the next 24 months.

In particular, Ishrak said Medtronic's soft tissue robotics program was showing "great progress," and an initial launch would be coming in 2020, beginning first outside the U.S. Ishrak added that the robot will be shown in the fall during an analyst event.

Executives on the earnings call additionally pointed to international markets, which contributed 12% growth in the quarter and overall represented 16% of Medtronic's revenue.

On the M&A front, Ishrak and CFO Karen Parkhill said tuck-in acquisitions should be expected to continue, similar to recent deals like Medtronic's acquisitions of Mazor Robotics Ltd. and Nutrino Health Ltd.

"We've got tremendous firepower," Ishrak said.

Despite Parkhill's reassurance that growth would accelerate in the next fiscal year, Medtronic set guidance of 2% to 2.5% organic revenue growth for the first quarter of fiscal 2020.

"We expect our first quarter growth rate to be lower than normal on the heels of a better than expected fourth quarter," Parkhill said.

She added that the second half of 2020 will grow faster than the first quarter, due to the anticipated product launches. Foreign exchange, meanwhile, is expected to have a negative impact on full-year revenue of about 1% to 1.5%.