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VOL. 127 | NO. 42 | Thursday, March 01, 2012

Rumors Target Medtronic Spine Biz

By Aisling Maki

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Medtronic Inc.’s weak third quarter Spinal sales reported last week reignited speculation that the global medical device giant could eventually sell its Memphis-based Spinal & Biologics Business.

The St. Paul (Minn.) Pioneer Press reported Feb. 21 that Medtronic’s tepid earnings, coupled with comments made by Medtronic CEO Omar Ishrak during last week’s Q3 conference call, indicated the company might consider selling its Spinal unit.

The article said Ishrak’s comments implied a dramatic change of some sort is needed in the spine business when he said, “While we continue to believe in the potential of this market, we urgently need to see meaningful signs of improvement from our current initiatives. If we do not, we will need to reassess our strategy and approach for this business.”

The speculation is nothing new. Rumors of a possible sale of the company’s Spinal unit, headquartered at 1800 Pyramid Place, began swirling this past summer, when an article in The Spine Journal claimed surgeons on the company’s payroll failed to disclose complications that arose during clinical trials of its Infuse bone-growth protein product.

On July 5, a report from Forbes questioned whether the Infuse controversy would lead to Minneapolis-based Medtronic selling its Spinal business, saying a note from Lawrence Biegelsen, a senior analyst at Wells Fargo Securities, had suggested the possibility of a sale.

According to the report, Biegelsen listed several possible outcomes that could result from The Spine Journal papers, with one being the potential sale of the entire spine business.

And in a July 6 blog post, Twin Cities Business magazine also reported Biegelsen’s prediction that Medtronic could potentially sell its spine business amid scrutiny of Infuse.

According to the post, Biegelsen said he thought “investors would generally welcome the decision to divest the spine business if the price is right.”

In an emailed response to a message left with Medtronic’s communications department Tuesday, Feb. 28, the company stated: “Medtronic is the global leader in the Spine business, which we believe has significant growth potential despite the difficult current market conditions in the US. Our entire focus is executing strategies to accelerate growth and help increase patient access to life changing therapies. Nothing has changed with respect to this commitment.”

Despite the negative publicity and speculation about the possibility of a Spinal unit sale, Morgan Keegan & Co. Inc. analyst Jan Wald said he thinks divestiture would be the least likely option.

“I think all options are going to be explored, or could potentially be explored, one of which might be selling the Spine unit,” Wald told The Daily News. “But when pushed on that a little bit, I think there would be other things that could be done before that option was actually taken. … That’s probably one of the last strategies that they would employ.”

The medical device industry as a whole has been beleaguered by a decrease in procedure volumes and delayed reimbursement, mostly driven by the recession.

Despite an aging American population, losses of jobs, homes, investments and retirement accounts in recent years have resulted in the postponement of medical procedures generally labeled elective, such as knee and hip replacements.

Although Medtronic last week reported Q3 worldwide revenue was up 2 percent to $3.9 billion, the company fell short of analysts’ consensus projection of $4 billion in sales.

Medtronic saw emerging market growth, with international sales accounting for 45 percent of its Q3 worldwide revenue.

International revenue totaled $1.78 billion, an increase of roughly 7 percent as reported, and emerging market revenue increased 15 percent as reported to $395 million.

While International Spine sales increased 7 percent as reported, U.S. Spine revenue of $784 million fell 9 percent as reported.

Core Spine revenue of $596 million – which includes core metal constructs, interspinous process decompression devices and balloon kyphoplasty products – declined 6 percent on a constant currency basis.

And revenue from Biologics – also based in Memphis – was $188 million, a 20 percent decline on a constant currency basis, driven by declines in U.S. sales of Infuse and partially offset by revenue growth in other Biologics.

“I am pleased that a majority of our business mix continued to report strong, consistent revenue growth in the upper single digits,” Ishrak said in a statement last week.

“However, this was masked by continued challenges in our U.S. (implantable cardioverter defibrillator) and Spine performance. Stabilizing these businesses along with delivering on our key strategic imperatives of improving execution, optimizing innovation and accelerating globalization should position us well to deliver long-term sustainable growth.”

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