Medtronic PLC (NYSE:MDT) made waves across the medical world with the approval of its artificial pancreas recently. MDT stock didn’t rally on the news and is actually trading down from where it was prior to the Food and Drug Administration approval. Investors are either worried about future competition, think the device isn’t that big of a deal or they are missing a great medical breakthrough that could be worth a lot to even a large-cap company like Medtronic.
The FDA approved the Medtronic MiniMed 670G hybrid closed loop system months ahead of the anticipated Spring 2017 approval. This marks the first FDA-approved device that continuously measures glucose levels and delivers the appropriate dose of basal insulin.
The device is approved for all Type 1 Diabetes patients aged 14 or older and it can be worn for seven days at a time, while strapped to the body.
MDT hasn’t shied away from the importance of its diabetes division for future revenue growth. Earlier this year, Medtronic Diabetes Group President Hooman Hakami presented plans to make the division one of the strongest for MDT. The overall theme was the large market of 415 million people worldwide suffering from the diabetes epidemic. Around 50% of diabetic patients do not have glycemic control, making them a huge opportunity for Medtronic and its life-changing devices.
Last year, MDT acquired Diabeter, a diabetes clinic and research center company based in the Netherlands. At the time, this marked its first entry into the diabetic clinic market. Diabeter had four locations serving more than 1,500 patients.
The Medtronic Growth Story
While this wasn’t a transforming acquisition, it shows the emphasis Medtronic is placing on its Diabetes division and how it is trying to provide care for patients from diagnosis to treating the disease. I would have to believe that this acquisition was also done in an early attempt to get potential customers for the newly approved artificial pancreas.
The growth story for MDT stock and the artificial pancreas doesn’t stop with the MiniMed 670G either. Medtronic is fully committed to creating a fully closed loop system. Tests are underway for a device that can be worn longer, as well as tests on younger patients. The good news is the approved device was well received by patients and should see strong demand when sales begin in Spring 2017. Around 80% of participants in the study opted to continue using the MinMed 670G device.
From 2000 to 2014, MDT introduced 10 new products for its diabetes division. In the five-year period of 2015 to 2020, Medtronic estimates it will introduce 20 new products. This includes the artificial pancreas that was recently approved.
The diabetes division is a $2 billion business for MDT, but is expected to produce $4 billion in sales by 2021. Medtronic believes it can rapidly grow revenue through innovation, analytics, patient care and globalization. More than $670 billion was spent worldwide to treat and manage diabetes in 2015. If MDT can accomplish its goals and truly has a breakthrough device, MDT stock should be one of the best options in the field for the next five years.
In the first quarter, Medtronic saw revenue decline 1% due to one less week versus the prior year. Adjusted for the extra week and foreign exchange rates, revenue was up 5%. This includes the diabetes division seeing high-single digit growth, and leading the way in terms of growth for the company. All other MDT divisions saw mid-single digit growth.
Medtronic has laid out an ambitious plan for its diabetes division. This is one area of growth that will help reward patient shareholders and send MDT stock higher. Medtronic plans on producing $40 billion in free cash flow over the next five years. Half of that total will be distributed back to shareholders via dividends and buybacks. The other half will go towards acquisitions, debt reduction and financial flexibility.
Bottom Line on MDT Stock
Speaking of dividends, MDT stock is increasingly rewarding shareholders through this method. After paying out around 25% of its earnings-per-share in dividends, Medtronic is now giving shareholders around 40% of its annual profit. In 2016, the dividend was raised 25%, continuing a recent streak of raising the dividend.
For 38 years, MDT has raised its dividend, making it a member of the S&P 500 Dividend Aristocrats. Over the last 10 years, Medtronic has averaged a 15% raise to its dividend each year.
The artificial pancreas from MDT has the potential to face competition as early as next year. That competition is coming mostly from companies like Insulet Corporation (NASDAQ:PODD), Type Zero and Bigfoot Biomedical. Medtronic believes it’s two to three years ahead of the competition. Insuelt has a commercialization target for its device set for 2018. Johnson & Johnson (NYSE:JNJ) is also active in the artificial pancreas device field.
MDT is calling for revenue to grow in the mid-single digits annually. EPS are expected to increase by double digits each year and the company remains committed to its dividend, which increases the value of MDT stock.
Shares of Medtronic are up 7% in 2016 and are now trading within reach of their 52-week high. However, MDT stock is down 5% since the FDA approved the company’s breakthrough artificial pancreas. After a huge breakthrough like this and an early entry to a potentially crowded market, Medtronic stock should have swung higher.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.