Star Tribune

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Litigation takes a bite out of profit at Medtronic

The company estimated legal costs of $245 million, depressing earnings by 26 percent.

Article by: JAMES WALSH , Star Tribune

Updated: November 20, 2012 - 9:38 PM

What Medtronic Inc. CEO Omar Ishrak on Tuesday deemed a solid second quarter was marred by litigation costs related to a patent dispute.

The Fridley-based company's litigation charges stem from a $74 million jury verdict won by Edwards Lifesciences Corp. and affirmed last week by the U.S. Court of Appeals. The court said Medtronic infringed on a valid Edwards patent in the making of its CoreValve transcatheter aortic valve. Medtronic said it disagrees with the ruling, which is not expected to affect clinical studies regarding the device in the United States.

Medtronic estimated noncash litigation charges of $245 million, which pushed earnings down 26 percent to $646 million. Absent those costs, earnings would have climbed to 88 cents per share, officials said.

A growing share of Medtronic revenue comes from overseas. International sales accounted for 44 percent of sales in the quarter. Strong growth in countries such as Japan helped Medtronic overcome market headwinds and uncertainty in Europe, especially in southern Europe where the debt crisis has lent uncertainty to sales. In that way, Ishrak said Tuesday, Medtronic's worldwide reach helps insulate it from volatility.

"Our goal is, we deliver these financials on a consistent basis, that we build a business that can absorb some degree of challenges and headwinds," Ishrak said. "But we have to do that over several quarters and several years to gain credibility."

Second-quarter international revenue of $1.8 billion increased 1 percent, or 8 percent after adjusting for currency differences. Revenue from emerging markets -- China, India, Eastern Europe and the Middle East -- increased 14 percent to 11 percent of total revenue.

Overall, the med-tech giant reported second-quarter revenue of $4.1 billion, up 2 percent over the previous year. After adjusting for currency differences, total revenue was up 5 percent.

"We view the quarter as in line," said Matthew Taylor, an analyst with Barclays in New York, in a research note.

While being in several markets can help Medtronic withstand market challenges, Ishrak said such diversity can complicate piecing together accurate guidance. On Tuesday, Medtronic said it expects full fiscal 2013 revenue growth of 3 to 4 percent on a constant currency basis -- which means revenue should grow 2 to 4 percent for the second half of fiscal 2013. The company expects earnings per share to be $3.62 to $3.70.

Medtronic kept the guidance conservative based on the January 2013 implementation of a tax on the medical device industry and uncertain renewal of a research and development tax credit, said Chief Financial Officer Gary Ellis. The device manufacturer anticipates paying as much as $175 million each year to comply with the new tax, he said.

"We have to manage that as a headwind and cost," Ishrak said. "We can't invest in other things because we have to pay that tax."

While the 2.3 percent excise tax was conceived as the industry's contribution to a health care overhaul that would eventually provide more patients by expanding insurance coverage, the benefit to Medtronic isn't clear cut, he said. Those getting insurance may not need the company's products.

Bloomberg News contributed to this report. James Walsh • 612-673-7428

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