Medtronic Mauled After Warning

The medical-device maker's shares drop more than 11%.
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Updated from 11:35 a.m. EDT

Medtronic

(MDT) - Get Report

was getting pummeled a day after the medical-device maker warned investors that it was in danger of seeing its quarterly sales fall short of analysts' estimates.

Lately, the shares were trading through a 52-week low, sinking $6.20, or 12.2%, to $44.73. Volume was more than six times heavier than normal Thursday.

According to preliminary results, revenue is expected to reach $2.9 billion in the quarter, a bit below the $2.98 billion analysts surveyed by Thomson First Call want to see. Medtronic estimated that sales of its implanted cardioverter defibrillators fell 6% to $675 million in the first quarter.

Gary Ellis, Medtronic's chief financial officer, said in a statement that though it's too early to precisely project first-quarter earnings, profits, excluding charges, of 53 cents to 55 cents seems "reasonable at this time." Wall Street expects 57 cents.

Following the downbeat outlook, other device makers were tumbling, as well.

St. Jude Medical

(STJ)

was losing $3.68, or 9.7%, to $33.14, and

Boston Scientific

(BSX) - Get Report

was off $1.26, or 7.2%, at $16.36.

Medtronic said Wednesday afternoon that sales within its vascular products segment were $281 million, up 37%. Cardiac-rhythm disease management revenue dropped by 1% to $1.25 billion. Pacemaker sales reached $460 million, up 3%, and revenue from emergency response systems grew 14% to $100 million. Sales also rose in its neurology, diabetes, cardiac surgery, spinal, and ear, nose and throat product segments.

The company said that "even though a number of businesses showed strong performance, overall corporate revenues came in below expectations due to a shortfall resulting from a decline in the U.S. ICD market."

Additionally, Medtronic said ICD reimbursements from the U.S. Centers for Medicare and Medicaid Services are expected to drop by 2.7%. For pacemakers and spinal products, reimbursements are likely to increase.

Investment research firm Lazard Capital Markets downgraded Medtronic's shares to hold following the warning. According to Alexander Arrow, the firm's medical technology analyst, Medtronic's three-point market-share loss in the quarter presents an extra challenge to the company's previous growth trajectory.

Lazard Capital Markets is independent of the investment banking business Lazard Ltd.

Jan Wald of AG Edwards the slowdown in ICD sales was not unexpected. "Although the focus of investors will clearly be on the

cardiac rhythm management segment's growth rate in the short term, investors should not overlook the fact that the quarter was weak generally. We would like to be able to call a bottom here and say the market will be better next quarter, but it takes time for education programs to work, so in the short-term, at least, we will continue to expect weakness in CRM growth."

Last year, device makers took a hit in the wake of extensive recalls by Guidant, which has since been acquired by Boston Scientific. Wald says education programs being conducted by the three major ICD players aimed at doctors implanting the devices will lead to some market growth this year, but it won't soon fully recover.

AG Edwards says an analyst, officer or household member has a long position on Medtronic's shares.

Morgan Stanley analyst Glenn Reicin reduced his price target for the stock to $50 form $65 and lowered his rating to equal-weight from overweight. Based on Medtronic's own estimates, Reicin lowered his full-year earnings estimates for the company through 2010.

"Originally, we thought Medtronic would benefit from Guidant's woes," the analyst wrote in a research note. "This, accompanied with stronger-than-expected Endeavor sales and strength in the company's spine business would make for a good combination. Unfortunately, Guidant's woes have impacted the entire market, and we find ourselves making valuation arguments."

As of June 30, Morgan Stanley held a position on $1 million or more of Medtronic debt securities. Within the last 12 months, Morgan Stanley has received compensation for investment banking services for the company.

Goldman Sachs also lowered its rating on Medtronic shares, to neutral from buy, and reduced its six-month price target to $52 from $61. Goldman does and seeks to do business with companies it covers.