By Sriparna Roy and Puyaan Singh
(Reuters) - Medtronic (NYSE: MDT ) beat Wall Street estimates for third-quarter profit on Tuesday, partly helped by demand for its diabetes devices, but shares fell more than 5% in early trading as it saw softer sales in its medical surgical unit.
Lower purchases by its distributors in the U.S. hurt the company's medical surgical unit, along with ongoing competitive pressures in the surgical staplers market.
A couple of the company's large distributors stepped down their carried inventory levels below the normal levels, which cost the company "a couple hundred basis points" in the segment's revenue growth, CEO Geoff Martha said on a call with analysts.
Medtronic expects these dynamics to resolve starting fiscal year 2026, when the distributors reach their target inventory level, Martha added.
The segment, which makes surgical devices including robot-assisted ones, saw sales decline 1.9% to $2.07 billion, missing estimates of $2.13 billion.
On the other hand, quarterly sales at its diabetes segment grew 8.4% to $694 million, above estimates of $681.8 million, helped by adoption of the company's insulin delivery systems.
Sales of peripheral vascular devices, used to treat certain heart diseases, saw some volatility due to an impact from the Chinese government's volume-based procurement (VBP), under which the country buys medical devices in bulk at a sharp discount.
"We've worked through most of the VBP, but there is still a little bit left to go," said Martha.
The company's adjusted profit per share of $1.39 for the quarter beat analysts' estimate by 3 cents, according to data compiled by LSEG.
The beat was aided by better-than-expected performance on margins and a lower tax rate, said RBC Capital Markets analyst Shagun Singh.
The company also kept its annual profit forecast unchanged in the range of $5.44 to $5.50 per share. Analysts estimate the company's annual profit at $5.45.