Medtronic Valve Breakthrough Has Great Potential

Medtronic (MDT), the world’s largest medical device maker, received some important news that has been largely passed over as the market anticipated Apple (AAPL) and other headline earnings reports. The Food and Drug Administration cleared a heart valve made by Medtronic that can be placed without open-heart surgery. This is a first-of-a kind device and could delay a patient’s need for open-heart surgery and will likely reduce the overall number of surgeries for patients that would typically require multiple, potentially dangerous surgeries to replace heart valves.

The device, known as the Melody transcatheter pulmonary valve, is designed to be implanted into patients through a small catheter that’s inserted into the body. It replaces the pulmonary valve in patients born with a heart defect, and is the first heart valve approved for sale in the U.S. that be implanted without open-heart surgery.

“The FDA’s approval of Melody allows patients to undergo a much less invasive procedure to treat their heart condition,” said Jeffrey Shuren, the director of FDA’s devices division. The valve won’t cure a patient’s heart condition and over time will likely need to be replaced. — The Wall Street Journal 1/25/2010 (subscription required)

This particular valve will likely only be used in the treatment of about 1000 patients annually, but the introduction of this less evasive treatment has great possibilities for more pervasive heart problems. The new device will still be subject to further testing, but for now it appears to be a breakthrough worthy of mention. The trick would be to carry this new breakthrough over into other types of heart procedures. Last year, Medtronic purchased a company that sells aortic valve replacement systems in Europe and will seek FDA approval soon; clearly, the aortic valve would be a much bigger seller if Medtronic could implant the device without invasive surgery.

In addition to news of the approval, Medtronic announced it will buy one of its European competitors, Invatec for up to $500 million. Medtronic will initially pay $350 million but it could pay an additional $150 million depending on if certain experimental devices eventually receive approval. Invatec makes stents and balloons used to treat cardiovascular disease, and should provide another avenue for MDT to grow, particularly in Europe.

At Ockham, we continue to have a Undervalued stance on Medtronic as we believe the company’s underlying fundamentals are not being recognized by the market adequately, and as you can tell from our ratings history chart, we have felt this way for some time. According to our methodology, both price-to-cash earnings and price-to-sales are currently well below their historically normal range for this stock. In addition to their appealing valuation, MDT is showing some very promising growth aspects. News like today’s approval will not likely contribute substantially to growth in the next year, but are very encouraging to long term investors because they have great potential.

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