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VOL. 126 | NO. 164 | Tuesday, August 23, 2011

Analysts Expect Weaker Medtronic Spine Earnings

By Aisling Maki

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Medtronic Inc. will report the financial results for the first quarter of its 2012 fiscal year on Tuesday, Aug. 23.

Based in Minneapolis, Medtronic is the world’s largest manufacturer of medical devices. The company’s Spinal and Biologics Business is in Memphis at 1800 Pyramid Place.

The company’s report will include a summary of financial information for Medtronic’s first quarter, which ended July 29.

Industry analysts have steadily lowered their expectations for the company, whose top three device categories have been afflicted by economic headwinds and medical concerns. Implantable heart pacers, spinal implants and stents account for 60 percent of the company’s $16 billion in annual sales, and all are growing at low-single-digit rates.

“The largest part of Medtronic’s business is really the CRDM (Cardiac Rhythm Disease Management) business,” said Jan Wald, Ph.D., a Morgan Keegan & Co. Inc. senior analyst who follows the health care and medical devices industry. “Spine is not a small, insignificant portion of the business, and so how it does really affects the overall performance of Medtronic. What we’ve seen so far from other companies is the weak market for the CRDM business, and we’ve seen weak numbers for spine businesses.”

Wald points out that procedure volume is down in both of those businesses, and the primary reason companies give is that people are putting off elective procedures.

He said he anticipates Medtronic’s Spinal and Biologics Business, the company’s second largest, to continue to be “a very slow growth environment – 1, 2 or 3 percent – with procedural volumes probably still weak.”

Medtronic’s spine business took a massive publicity blow in June after The Spine Journal, a scientific, peer-reviewed journal of the North American Spine Society, published a series of articles claiming surgeons on Medtronic’s payroll failed to disclose complications that arose during clinical trials of INFUSE, a bone-growth protein whose purpose is to stimulate bone formation.

The Wall Street Journal in June reported that 15 of the surgeons who conducted clinical trials on the bone-growth protein over the last decade received at least $62 million combined from Medtronic for unrelated work.

That article also said the Senate Finance Committee was investigating whether the payments received by the surgeons were a factor in their decision not to report the health complications.

In a statement released June 28, Medtronic’s new chairman and CEO Omar Ishrak – who on June 13 took over executive leadership of the company from retiring chairman and CEO Bill Hawkins – acknowledged that the Spine Journal articles raise questions about the researchers’ conclusions in published peer reviews.

But, he said, the articles don’t raise questions about the data submitted to the U.S. Food and Drug Administration during the approval process or the information available to doctors using the product. Ishrak said his company remains committed to the ongoing study of the safety and efficacy of the bone-growth protein, especially in regards to applications not covered by FDA labeling.

Earlier this month, Medtronic announced a $2.5 million grant to Yale University to independently review the safety and effectiveness of a bone-growth protein product.

But sales are expected to fall as skeptical physicians turn to other products.

“We expect that number to be hit, and we expect it to be down,” Wald said. “It’s hard to say how far down. Medtronic is doing the best they can, I think, to defend itself against the charges in that journal, but nonetheless, I think it’s going to have an impact. Overall, we’re expecting relatively weak numbers from the Spine Division.”

As for Ishrak, Wald said he brings two major assets to the table.

“What he brings, from everything I’ve been able to gather, is experience in developing markets, which is an important area for Medtronic,” Wald said. “All the places where medical assets are beginning to form, with resources to put towards health care, are very important areas. He had a lot of experience with that at General Electric, and he’s more in touch with Washington and policy than Medtronic has been.”

Ishrak, the former head of GE’s health care unit, is only the second CEO in Medtronic’s 60-year history to come from outside the company.

"The downside is he's not a device guy, and he doesn't know the business," Wald said. "I'm sure he's going through intensive training, but that's going to take him a little bit of time to work through."

The hire was praised by industry observers, who said a new approach was needed at Medtronic.

During his 16-year career at GE, Ishrak helped grow the company’s fledgling ultrasound business into the world market leader, and as president of the health unit, he expanded the $12 billion business into developing markets such as China and India.

But Wald said Ishrak certainly has his work cut out for him.

“I think it’s still kind of an ugly environment out there for med-tech companies,” Wald said.

The Associated Press contributed to this report.

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