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VOL. 123 | NO. 227 | Wednesday, November 19, 2008

Medtronic Q2 Profit Sinks On Hefty Legal Charge

By MATTHEW PERRONE | AP Business Writer

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WASHINGTON (AP)Medtronic Inc., the world’s largest medical device maker, reported Tuesday that legal expenses and declining foreign exchange rates weighed down its fiscal 2009 second-quarter profit.

Even excluding the legal fees, the Minneapolis-based company’s performance fell shy of Wall Street forecasts, partly because of lower-than-expected sales of pacemakers, spinal implants and other devices. Medtronic’s Spinal and Biologics Business is based in Memphis.

Earnings for the period fell 14 percent to $571 million, or 51 cents per share, compared to $666 million, or 58 cents per share, a year earlier. Sales rose 14 percent to $3.57 billion from $3.12 billion.

Eliminating $187 million in charges, mainly from a patent dispute over stents with rival Johnson & Johnson, the company said it earned 67 cents per share.

Analysts expected 71 cents per share in profit, according to polling by Thomson Reuters. Such estimates generally exclude one-time costs and gains.

“Clearly, this was a tough quarter, and the environment is changed a bit,” Chief Executive Bill Hawkins told analysts. “We have seen some things that we didn’t anticipate coming about in the last three months or six months.”

Sales outside the U.S. rose 18 percent to $1.37 billion, helped by a $65 million boost from the weaker dollar. But that gain from currency exchange rates fell by more than half compared with $150 million in the last quarter.

Medtronic, its medical device peers and other sectors have benefited from a weaker U.S. dollar boosting the value of foreign sales. But the U.S. dollar has regained some strength, and Medtronic told investors Tuesday its full-year earnings and revenue could come in $400 million lower than expected as a result.

Medtronic now projects fiscal 2009 revenue of $14.6 billion to $15 billion, down from previous guidance of $15 billion to $15.5 billion.

The company also lowered the range of its earnings-per-share guidance to between $2.90 and $2.98 from between $2.94 and $3.02. The lower guidance also includes a charge to write off obsolete inventory and the impact of the recently closed CryoCath Technologies acquisition.

Analysts polled by Thomson Financial expected earnings of $2.99 per share on revenue of $15.17 billion.

Sales from the company’s largest unit, cardiac rhythm management, rose 8 percent to $1.24 billion, mainly on a boost in sales of implantable defibrillators. The devices send electrical shocks to regulate heart rhythms.

But analysts focused on lower-than-expected pacemaker sales, which grew a meager 2 percent to $506 million. Leerink Swann & Co. analyst Rick Wise said those numbers were $20 million below his estimates. And while the company’s spinal implant business grew 26 percent to $829 million, Wise said that was still $50 million lower than expected.

Wise blamed the performance on difficulties integrating spine repair company Kyphon, a former competitor that Medtronic acquired last November.

But Hawkins said that criticism isn’t accurate.

“It wasn’t even integration; no excuses, but we just didn’t perform well,” Hawkins said in an interview. “Our salespeople were perhaps distracted because of different things that were going on.”

Hawkins said a civil lawsuit brought by the U.S. government against Kyphon has been a challenge for the business.

In May, Medtronic agreed to pay $75 million to settle the allegations that Kyphon had defrauded Medicare by telling doctors to bill the government for overly expensive treatment. Medtronic admitted no wrongdoing.

Sales at the company’s cardiovascular business grew by 22 percent to $596 million. The unit sells angioplasty products and stents, which are mesh-wire tubes used to prop open arteries after they have been cleared of fatty plaque.

Shares of Medtronic have fallen roughly 27 percent since the beginning of the year as the broader stock market has declined amid a hemorrhaging economy and credit crisis.

Health care companies are generally considered a safe investment during economic downturns because medicine is less discretionary than other products. Medtronic management reiterated that the company’s diverse, life-saving products will help it weather a recession better than many other companies – even if that isn’t yet reflected in its stock price.

“The medical device industry will be one sector that continues to grow in this environment,” said Chief Financial Officer Gary Ellis. “But right now I think there’s so much uncertainty in the marketplace that you’re not seeing that benefit play out in the stock market – though ultimately I think it will.”

___

AP Business Writers Damian Troise in New York and Tom Murphy in Indianapolis contributed to this report.

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