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Tickers in this Article: MDT, EW
The CE Mark approval for leading medical devices player, Medtronic's (MDT) Affinity Fusion oxygenation system has strengthened its Structural Heart portfolio. The system is meant to function like temporary lungs by oxygenating and removing carbon dioxide from blood during various open-heart surgical procedures. While it is not yet available in the US, the company is working to get it approved. The approval of the device would benefit a huge patient base. As per estimates, approximately 1 million patients would undergo cardiopulmonary bypass globally this year.

Revenues from Structural Heart have been growing over the past few quarters and came in at $280 million during the last reported quarter, which was up 7% at constant currency. Growth was driven by strong international sales of the CoreValve transcatheter aortic heart valves, partially offset by reduced sales of surgical heart valves in the US due to competitive pressures and challenging market conditions.

While the CE Mark approval of the Affinity Fusion oxygenation system is encouraging, Medtronic's Structural Heart segment is working to develop the CoreValve portfolio in the US. This is significant since Edwards Lifesciences (EW) is already present in the US market with its Sapien transcatheter heart valve. 

In August 2012, Medtronic completed the enrollment of high-risk patients in the CoreValve US pivotal trial. More than 1,500 patients have been enrolled with severe aortic stenosis in two studies - high or extreme risk - for aortic valve surgery. The company also received conditional approval from the US Food and Drug Administration to study the CoreValve system on patients at intermediate risk for open-heart aortic valve replacement. Intermediate risk patients represent a huge potential as according to estimates the patient size in this category is almost twice the existing patient population that has been studied so far in the pivotal study.

We are encouraged by Medtronic's focus on portfolio expansion along with its aim to boost revenues from emerging markets. This becomes essential as sales from defibrillators and spinal implants have been on a declining trend over the past few quarters. Meanwhile, Medtronic continues to target returning 50% of free cash flow to shareholders. However, unfavorable currency and macroeconomic uncertainties in Southern Europe adversely affected sales during the recently reported first quarter.

We have a Neutral recommendation on Medtronic. The stock retains a Zacks #3 Rank (Hold) in the short term.

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